FEDERAL COURT OF AUSTRALIA

BANKRUPTCY – application for annulment of a sequestration order made by another single judge – whether Court should resist the making of a sequestration order where the bankrupt is hopelessly insolvent and there is little prospect of a dividend to creditors – examination of the principles underlying the bankruptcy laws.

ROBERT HUDSON JNR v

STEPHEN WILLIAM MICHAEL WHALAN & ANOR

NG 7610 of 1998

HILL J

SYDNEY

18 august 1998

THE COURT ORDERS THAT:

1.         The application be dismissed.

2.         The Applicant pay the costs of the Respondents and the Official Trustee.

EX TEMPORE REASONS FOR JUDGMENT

Before the Court is an application brought by Mr Robert Hudson Junior, a bankrupt, seeking the annulment of a sequestration order made by Tamberlin J against him on 19 May 1998. 

In order to put the matter into context it is useful to have regard to some of the matters set out in the affidavit of Mr Whalan of 14 August 1998.  Objection was taken to the reading of that affidavit on the basis that it was not relevant to the issues before the Court.  Although there is some substance in that submission, it does set out the background of the proceedings that have taken place to which the Bankrupt was a party and I propose to use it for that purpose but no other.

The bankruptcy petition on which the Bankrupt was made bankrupt was based upon a bankruptcy notice issued by the petitioning creditor, the First Respondent, on 8 April 1997.  In due course an application was made to set aside that bankruptcy notice.  It came for decision before Lindgren J.  The arguments put to his Honour were dismissed but his Honour raised for the first time the questions whether there had been a misstatement in the bankruptcy  notice, whether the provisions of s 41(5) of the Bankruptcy Act 1966 ("the Act") had been complied with and whether, if there was a misstatement, it invalidated the notice or whether it was capable of being cured under s 306 of the Act.

Having raised these matters, his Honour then resolved them adversely to the Bankrupt.  Application was then made to a full court of this Court to appeal the decision of Lindgren J.  That appeal was heard on 11 March 1998 by a Full Court comprising Branson, Tamberlin and Kiefel JJ.  In an ex tempore judgment their Honours unanimously rejected the appeal and agreed with the reasons of the learned trial judge.

On 20 March 1998 the Bankrupt filed an application for special leave to appeal in the High Court.  It is not necessary to consider in any detail the grounds upon which leave to appeal was sought.  Suffice it to say that at least the grounds referred to now before me raised the correctness or otherwise of the matters concerning the alleged misstatement in the bankruptcy notice of $2.  The application for special leave has not been heard.  It is unlikely ever to be, unless the bankruptcy is annulled.  The Trustee has no intention to prosecute it and it is, to say the least, doubtful that the Bankrupt himself has standing to do so.

Ultimately the petition came on for hearing before Tamberlin J on 19 May 1998 after, it is said, numerous adjournments.  His Honour rejected an application for an adjournment of the petition made to him that day and gave ex tempore reasons for so doing.  It should be stressed that on that occasion, at least, the Bankrupt was represented by legal advisers and the application for adjournment and perhaps also the making of a sequestration order was the subject of argument.

Having refused the adjournment Tamberlin J proceeded to make a sequestration order, refusing (presumably it must have been requested) a stay in regard to the operation of his Honour's orders.  No appeal has been brought from his Honour's decision.  An appeal would now be considerably out of time.  Instead on 9 June 1998 an application was filed by the Bankrupt for annulment of the sequestration order.  It initially was grounded upon a number of matters including a suggestion that Tamberlin J should have disqualified himself because he had previously sat on the full court appeal from the judgment of Lindgren J.  That matter has, however, now not been pressed.

There has been prepared and read to the Court a report of Mr Caddy, the Official Receiver on behalf of the Official Trustee in Bankruptcy, dated 25 June 1998.  That report discloses that the Bankrupt had in his statement of affairs said he had three assets: a 1970 Holden motor vehicle valued at $500, a wordprocessor and fax machine valued at $500 and a bank account of $16.28 totalling in all $1016.28.  None of those assets has, so it would seem, been yet paid or transferred to the Trustee.

The Bankrupt, in his statement of affairs, disclosed he had liabilities of $280.  That omitted the debt of the petitioning creditor which, together with outstanding costs, not all of which have been taxed, seems likely to be in excess of $20,000.  Investigations which the Trustee in Bankruptcy has made reveal three further creditors totalling $14,150 although no creditors have yet lodged proofs of debt and there is no evidence one way or the other as to whether any advertisement has yet been circulated to creditors.

The report also discloses that the Bankrupt was in receipt of a pension from the Department of Social Security and that he had stated the cause of his bankruptcy to be:

“Political ... Failure by courts to recognise Magistrate Cocks had erred in Primary case from where this bankruptcy evolved.  And deliberate action by creditor/s in waiting until, I became so far out of time for an appeal against the costs orders of Magistrate Cocks.  And their failure to mediate.” [sic]

It is unnecessary, and I think largely irrelevant, for me to explain the matter involving Magistrate Cocks and the so called primary case, other than to say it is clear that what began as an action, no doubt politically motivated and on a political matter, has ended up with the Bankrupt owing, subject to the bankruptcy, a considerable sum of money. 

In essence, two submissions have been put on the part of the Bankrupt in support of the claim that the bankruptcy should be annulled because the order of sequestration made by Tamberlin J ought not to have been made. 

The first of them is that, in the application for leave to appeal to the High Court, the Bankrupt has two points described by his counsel as, "tenable points", these being the points which I have already outlined.  He concedes that these points were not taken directly by the Bankrupt in the proceedings before Lindgren J but says, in any event, at that stage he was unrepresented and that should not be held against him.  I certainly do not do so.  After all, the points were raised and discussed by Lindgren J and dealt with by a full court of this Court.

It is somewhat invidious to ask a single judge to form a view that points which the full court of this Court have unanimously dismissed are tenable, even if I thought they were, and I do not.  However, there is another problem.  The application for special leave arguably cannot be proceeded with unless the Trustee determines so to do.  The Trustee does not intend to do so, I am told.  That decision would be capable of review.  I refrain from determining whether the Bankrupt does have standing.

The Trustee’s response, if in truth the Trustee has standing rather than the Bankrupt, is hardly surprising given the deficiency of assets in the Bankrupt’s estate irrespective of any view one may take of the chances of success.  A submission, therefore, that the sequestration order ought not to have been made, having regard to the outstanding leave to appeal application, does not seem to have a great deal of point to it and having regard to the fact that the Bankrupt was unsuccessful on the appeal from Lindgren J to a full court.

There is one matter which should be noted before I proceed to the second submission.  Whether or not in an appropriate case a court may have jurisdiction to annul a sequestration order made by another single judge on the basis that some error in that decision may have appeared or some act of discretion involves some error, it can hardly be thought to be anything but an extremely rare case where this procedure could be adopted.  Where an adjournment is refused and a sequestration order made and errors are said to arise in the making of the sequestration order or in the exercise of discretion, the appropriate course is an appeal to a full court of this Court from the judgment.  No doubt there are many occasions where an application for annulment will be made notwithstanding that a bankrupt is unable to pay all his debts in full at the time of the making of the sequestration order.  The obvious example is the case where an order is made without notice to the debtor who is ultimately made bankrupt.  But where a sequestration order is made after full argument by a debtor who is legally represented and no question of the underlying judgment having been obtained by fraud arises, it would be extremely difficult for a single judge to conclude that the sequestration order ought not to have been made.  Indeed, it would be invidious to ask one single judge to effectively double guess another single judge in this way.  Rather, such matters should be agitated in an appeal which, if successful, will see the sequestration order set aside.  I should say that I do not propose, in this case, to decide whether it is a possible course which can be taken, contenting myself merely to observe that I am aware of no case cited in the reports where such a course of action has been taken in a case such as the present.  However, I propose to proceed on the basis that the jurisdiction to annul a bankruptcy might, in a case such as the present, be exercised.

The second submission commences with the factual material referred to in the Trustee's report which indicates that, if matters stayed the same at least, there could be no dividend to creditors.  The Bankrupt concedes that it might be in his interest to accept the sequestration order and await a statutory discharge or earlier discharge on application.  The Bankrupt does not wish to be or remain a bankrupt and says it is not in the public interest for him to be so.  Rather it is said that the annulment would disadvantage no one and advantage his creditors by restoring their general rights against him.

Although perhaps not accepting completely what I put to counsel, he could really not escape the proposition that his submission was that in a case where creditors were unable to obtain a dividend and it could not be inferred that they ever would, then a sequestration order should not be made.  There was, it was said, no point, at least in the present case, that the Bankrupt be made or kept bankrupt.  I was asked to infer from the Trustee's report that there was nothing to investigate and no likelihood of further assets coming to light including, for that matter, potential after acquired property.

It was submitted that such assets as there were would ultimately do no more than reimburse some of Trustee's expenses and that it was not the policy of the Act that people who could not pay more than a small portion of debts they owe should be made bankrupt but that both the bankrupt and creditors should be freed of the bankruptcy and left presumably to their own devices.  It was said that if public funds were wasted on continuing the bankruptcy then that was undesirable.  Annulment would leave the Bankrupt in control of his assets giving him and his creditors an element of freedom.  It would, however, also leave an insolvent debtor loose in the community to incur more indebtedness, other credit or, should he desire, trade.

With respect, I cannot accept the submission even if I were prepared to draw inferences from the Trustee's report.  I do not think it is fair to do that.  It is obvious enough from the Trustee's report that a full investigation has not yet been undertaken.  All the report does is set out the circumstances in June 1998.  It is difficult to draw inferences from it as to what the situation may be today, let alone what after acquired assets may be available.

What is clear in this present case is that the Bankrupt was at the time of the sequestration order, and for that matter still is, hopelessly insolvent.  On the figures of the Trustee at least, which I am told are not accepted by the Bankrupt although no grounds or factual evidence is put for that, he has liabilities of in excess of $40,000 with assets of approximately $1,000.

The case was one, which before Tamberlin J, amounted to the petitioning creditor having proven the circumstances which founded the grant of a sequestration order.  It is true that there may be circumstances where the Court may not make a sequestration order although a petitioning creditor’s debt has been made out in the relevant amount.  An example is where the debtor is clearly solvent.  But it would certainly not seem to be appropriate to make a sequestration order in a case where the petitioning creditor’s debts are made out and all other prerequisites to the making of the order have been met, but it is said that the debtor is so hopelessly insolvent that the creditors will not get anything as a result of the making of the order.

One really has only to point that out to indicate the difficulties which the argument poses.

The case law makes clear that underlying the bankruptcy laws are three principles.  These are firstly, that the assets of the bankrupt be collected in order that they may be rateably distributed amongst creditors and the balance, if any, returned to the bankrupt.  The second is that the bankrupt be freed from indebtedness and able to start afresh.  Conversely to this, of course, is the undesirability that an insolvent person be left loose in the community as being insolvent in circumstances where further creditors may ultimately be put into some jeopardy.  The third policy - perhaps not relevant in the present case - is the desirability that the conduct and affairs of a debtor be subject to some scrutiny.  Essentially, the submission on behalf of the Bankrupt is that, if a person does not want the slate to be wiped clean but rather to be put out into the community with a large insolvency including a judgment debt which might remain for some 20 years, that is a matter for the debtor.  It is said that because the wiping of the slate clean is for the sake of the debtor and not the creditors, therefore, the debtor's wishes may or perhaps must be respected.

But the policy, as I have stated it, is one not merely for the benefit of the debtor, but also for the benefit of the community and, in particular, creditors and future creditors.  An insolvent debtor released into the community by the non-making of the sequestration order may either seek to prefer one creditor to the other, an action which would conflict with the rateable distribution in bankruptcy, or incur further indebtedness which would merely increase the insolvency because the previous indebtedness revived by the annulment would itself contribute to the insolvency together with such new debts as the debtor might then incur.

In my view, the present case is not one of which it can be said that the sequestration order made by Tamberlin J ought not to have been made.  To the contrary, in the present case, with respect, his Honour was correct in making a sequestration order and no evidence has been put before me that in any way would justify a submission to the contrary.  It follows that the application should be dismissed and the Applicant pay the costs of not only the Respondents but also the Official Trustee. 

Counsel for the Respondents submitted that an indemnity cost order would be appropriate because the present proceedings were hopelessly misconceived and unarguable perhaps even to the point of being vexatious.  There is a great deal of validity in that submission, however, in the circumstances where the making of an indemnity cost order would in all probability be in any event futile and perhaps exacerbate litigation between the parties, I propose to content myself with the usual order as to costs.

Associate:

Dated:              1 September 1998