FEDERAL COURT OF AUSTRALIA

MacDonald, in the matter of MacDonald v Official Trustee in Bankruptcy

[1999] FCA 1303

BANKRUPTCY - competency of application by discharged bankrupt for annulment - petition may be amended so as completely to state act of bankruptcy - petition so amended later than six months after act of bankruptcy not presented out of time - discretionary factors - relevance of criminal prosecution for breach by bankrupt of post-bankruptcy obligations

Bankruptcy Act 1966 (Cth), ss 33, 40(1)(g), 44(1)(c), 47(1)(a), 52(1)(a), 153A, 153B, 154, 188, 306

Bankruptcy Amendment Act 1991 (Cth)

Re Oates; Ex parte Deputy Commissioner of Taxation (1987) 17 FCR 402, applied

Quinn v Official Trustee (1996) 63 FCR 136, applied

IN THE MATTER OF NEIL ALLAN MACDONALD

NEIL ALLAN MACDONALD v OFFICIAL TRUSTEE IN BANKRUPTCY

NG 7961 of 1998

MADGWICK J

15 SEPTEMBER 1999

SYDNEY

THE COURT ORDERS THAT:

1.                  The application is refused.

2.                  The applicant is to pay the respondent's costs.

REASONS FOR JUDGMENT

HIS HONOUR

1                     This is an application by a discharged bankrupt for the annulment of his bankruptcy pursuant to s 153B of the Bankruptcy Act 1966 (Cth) ("the Act") on the ground that the sequestration order ought not to have been made.  The case raises questions of whether it is competent for a discharged bankrupt to make such an application, whether there were legally insuperable barriers to the making of the sequestration order and whether, if there were, the Court should exercise its discretion to undo the bankruptcy.

Competence of the proceedings

2                     The Bankruptcy Amendment Act 1991 (Cth) repealed the former s 154 and substituted the present s 153A and s 153B which read:

"153AAnnulment on payment of debts

(1)               If the trustee is satisfied that all the bankrupt's debts have been paid in full, the bankruptcy is annulled, by force of this subsection, on the date on which the last such payment was made.

(2)               The trustee must, as soon as practicable after that date, give to the Official Receiver a written certificate setting out the former bankrupt's name and bankruptcy number and the date of the annulment.

(3)               The Registrar must enter in his or her records the fact that the bankruptcy has been annulled and the date of the annulment.

(4)               For the purposes of this section, if a debt has been proved by a creditor but the creditor cannot be found or cannot be identified, the debt may be paid to the Official Receiver and, if so paid, is taken for the purposes of this section to have been paid in full to the creditor .

(5)               If money is paid to the Official Receiver under subsection (4), the Official Receiver must pay that money into the Consolidated Revenue Fund and the provisions of subsections 254 (3) and (4) apply in relation to that money as if it had been paid into the Consolidated Revenue Fund by a trustee under subsection 254 (2).

(6)       In this section:

            "bankrupt's debts" means all debts that have been proved in the bankruptcy and includes interest payable on such of those debts as bear interest, and the costs, charges and expenses of the administration of the bankruptcy , including the remuneration and expenses of the trustee.

153B Annulment by Court

If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor's petition , that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver , the Court may make an order annulling the bankruptcy."

3                     The former s 154 gave the Court a like power to that now given by s 153B of the Act.  In Re Oates; Ex parte Deputy Commissioner of Taxation (1987) 17 FCR 402 Sheppard J decided that a discharged bankrupt could apply for an annulment.  As counsel for the applicant points out, the correctness of that decision has never been questioned and it was referred to with apparent approval in Quinn v Official Trustee (1996) 63 FCR 136 at 139 by a Full Court of this Court.  The Full Court said: "There are obvious reasons of policy justifying a construction which would enable a discharged bankrupt to apply for an annulment".  In my opinion the application is competent.

An insolvent debtor bows to the inevitable

4                     On 26 February 1991 a bankruptcy notice, founded on a judgment debt of $11,470 plus interest in favour of the petitioning creditor, was served on the applicant.  On 30 July 1991 a creditor's petition was presented and on 16 September 1991 it was served on the applicant.  The petition was fixed for hearing on 14 October 1991.  On that date both the petitioning creditor and the applicant were legally represented before the registrar dealing with the matter.  On the applicant's application, by consent, the petition was adjourned to 22 October and the applicant was ordered to file and serve before that date an affidavit as to his assets and liabilities and the reasons to support any further adjournment application.  The applicant's legal representative, according to the Registrar's note, "made reference to a Part X arrangement, however it is unclear whether s 188 has been signed".  Section 188 of the Act provides for a debtor, desirous of having his or her affairs dealt with under that Part, to sign an authority enabling a registered trustee or the debtor's solicitor to call a meeting of the creditors.  On 22 October the proceedings were again adjourned to 19 November 1991, the applicant being required then to attend "to be examined", in context it is clear enough, as to his claims to have the matter adjourned.  Those claims included an assertion that the applicant had the means to pay the debt alleged against him.  On 19 November 1991 the Registrar made the sequestration order.  Again, the applicant was legally represented.  The Registrar was satisfied with those matters required by s 52 of the Act including that the debt was still owing.

5                     The inference is that the debtor was insolvent to a degree that could not be overcome within a reasonable period.  No suggestion was made before me that the debtor was not then insolvent. 

The attacks on the sequestration order

6                     It was argued that

(1)               The petition was invalid because, as served on the applicant, it did not allege an act of bankruptcy: there was no allegation in it that the applicant had failed  to satisfy the  Court that  he had  a counterclaim, set-off or cross-demand of the kind described in s 40(1)(g) of the Act;

(2)               Although the Registrar had purported to amend the petition, it was "grossly misleading" and was not a petition within the meaning of the Act;

(3)               There was no verification of the amended petition as required by s 47 of the Act and the absence of such verification was fatal to the creditor's petition and such omission could not be cured;

(4)               Given the amendment to the petition, the petition was presented out of time:  an act of bankruptcy was first alleged in the amended petition; the amendment made on 19 November 1991, more than the permissible 6 months (s 44(1)(c)) after the

            occurrence of any such act; the bankruptcy notice had necessitated compliance with s 40(1)(g) by 19 March 1991, 21 days after it was served.

7                     It appears that the Registrar had observed the absence from the petition of the allegation that, in addition to non-payment of the debt in accordance with the requirements of the notice, the debtor had not made an application to set aside the bankruptcy notice or asserted a counter claim etcetera.  Rule 22 of the then Bankruptcy Rules required, among other things, that the Registrar should, before the hearing date for a petition, indicate in a certificate any respect in which, in his or her opinion, a provision of the Act or Rules had not been complied with.  On 14 October the Registrar brought to the attention of the parties such a certificate.  It noted, along with other matters, that para 4 of the petition, where the nature of the act of bankruptcy should have been set out, was not in the "usual form".  On 19 November, before making the sequestration order, the Registrar noted that para 4 had been amended to insert the date of the act of bankruptcy and that she was dispensing with "verification and service of the amended process".  This notation had significance beyond its bare terms: without proof that the judgment had not been set aside and that there was no assertion of counterclaim, there was no act of bankruptcy asserted in the petition.

Incomplete statement of act of bankruptcy in petition - is amendment possible?

8                     It is true that, by omitting the allegation of a failure to satisfy the Court as to a counter-claim etcetera, the petition in its unamended form did not specify an act of bankruptcy, as it was required by s 47(1)(a), r 12(2) and form 5 to do:

"The act of bankruptcy is to fail to comply with the requirements of the notice or to satisfy the court that [the debtor] has a counter-claim &c.  The creditor must allege and prove that the debtor has failed on both counts … The defect is a matter of fundamental substance":  (Re Abrahamson; Ex parte Crisp & Gunn (1978) 34 FLR 217 at 221)

9                     However the question is whether the omission of a reference to the debtor's failure to comply with the bankruptcy notice in all relevant respects prevented the amendment of the petition.  Section 33(1)(b) empowered the Registrar "at any time [to] allow the amendment of any process, proceeding or notice under this Act".  That would enable the amendment of a petition unless some definite, contrary intention is to be found elsewhere in the Act's express provisions or to be implied from its purposes.  Section 47(1) imposed certain requirements in respect of a petition.  It provides:

“(1) A creditor’s petition:

(a)       shall be in accordance with the prescribed form;

(b)              shall be verified by the affidavit of a person who has knowledge of the facts; and

(c)               shall be served as prescribed.”

10                  Rule 12(2) provided that a petition "shall be in accordance with Form 5".  Form 5 contained the following:

"The debtor, within 6 months before the presentation of this petition, committed the following act (or acts) of bankruptcy (here set out the nature and date or dates of the act or acts of bankruptcy relied on)."

11                  Section 43 of the Act gives the Court jurisdiction to make a sequestration order at the suit of a creditor where a debtor has committed an act of bankruptcy.  Among other things, this can only be done "on a petition presented by a creditor".  Pursuant to s 44, a creditor's petition may not be presented unless, among other things, "the act of bankruptcy on which the petition is founded" was committed within six months before the presentation of the petition.  Under s 52(1)(a) the Court is to "require proof of [among other things] the matters stated in the petition" before making a sequestration order.  It was plainly assumed in the framing of s 52 that the petition would contain an allegation of an act of bankruptcy; there is no express reference in s 52 to a requirement of proof of the jurisdictional fact of an act of bankruptcy.  Section 49 of the Act permits the Court to allow the substitution of another creditor as the petitioner if thought proper.  If a sequestration order is not made within 12 months of the date of presentation of the petition, ordinarily the petition lapses: s 52(4) and (5).  Thus;

(a)                there is a substantive requirement, having its sources otherwise than in s 47(1)(a) and Form 5, that the petition be founded on and assert an act of bankruptcy; and

(b)       matters of importance, not only to the debtor and the creditor who has purported to present a petition, but to other creditors as well, depend on the fact of that purported presentation.

Both of these considerations militate against a view that a petition might not be amended so as to complete an incompletely stated act of bankruptcy. 

12                  There is much to be said for the view that s 47(1)(a) does no more than what it says, namely, imposes a certain requirement of form as to a petition.  That was the view taken over 100 years ago in In re Collier; Ex parte Dan Rylands (1891) Morr 80, a not dissimilar case.  In this regard, there is a contrast with the Act's treatment of the form of bankruptcy notices.  Section 41(1) provides that a bankruptcy notice shall be in the prescribed form.  That is similar to s 47(1)(a) in the case of a petition.  However, s 41(2) goes on to specify certain matters that the prescribed form must contain, including the requirement that the debtor pay or secure payment of the subject judgment debt.  Without such a provision, the "requirements of the notice" of which s 40(1)(g) speaks (but which it does not define), would not have been fixed.  Thus it is proper to see at least certain aspects of what was contained in the prescribed form of the original bankruptcy notice as a crucial element in the definition of the act of bankruptcy founded on non-compliance with the notice.  There is no equivalent of s 41(2), as to the contents of the form of the petition, in s 47 or anywhere else. 

13                  In my opinion, there is no reason to read down the potential application to a petition of s 33 in a case such as this.  There may be other cases where the purported petition should be regarded as quite incompetent and beyond any power of amendment.  Here, the Registrar had power under s 33 of the Act to permit the amendment which was made. 

14                  Even so, I should add specifically, with s 306 in mind, that the defect or irregularity was merely formal and the proceedings were not invalidated by it.  Clearly there was no substantial injustice caused by it.  As no "objection on [the ground of the invalidity of the proceedings]" was made before the Registrar, no question of the invalidation of the proceedings on account of such formal problems then arose.  Such objection has only been taken now and I assume, without deciding, that it can still be taken.

15                  Likewise, in those circumstances there was nothing misleading about the amended petition, notwithstanding that by oversight the original paragraph 4 was not crossed out.

16                  As to the point that it was necessary that the petition be served personally on the debtor: see s 47(1)(a) and r 15, r 15 is supplemented by r 112.  The latter allows for service of amended process to be dispensed with, by order of the Court.  That is what the Registrar did.

Verification

17                  It was next argued that there was no verification of the amended petition as required by s 47.  Unsurprisingly, there seems to be no power in the Court to waive that requirement.  However, the submission is not borne out by the facts.  Although the original para 4 of the petition omitted an allegation concerning the non-satisfaction of the Court that there was a counter-claim etcetera, the affidavit which verified the petition specifically included verification that the debtor had not furnished proof to the Court of any such matter.  Thus the crucial facts were verified notwithstanding that they did not appear in the petition until later.  On any reasonable view, the contents of the amended petition were verified.  If it is necessary to apply s 306, which I doubt, that section clearly can and should be applied.  I note that no objection to the amendment nor any resistance to or verification of the amended petition was made at the time it was permitted and ordered by the Registrar, even though the debtor was represented.

Was the petition presented in time?

18                  Finally, it is said that the petition was presented out of time.  This depends on the view that before the amendment, there was no petition.  It is inherent in my earlier reasoning that I reject this view.  Further, the policy considerations underlying s 44(1)(c) do not require that, in that paragraph, the word "petition" is to be read in the narrow way that the applicant's submission requires. 

19                  It is not the presentation of the petition, but non-compliance with the requirement of the bankruptcy notice, that is the event which creates the act of bankruptcy.  One purpose of the six month time limitation upon the presentation of a petition is to harmonise the date of commission of the act of bankruptcy with the relation-back period established by s 122.  Another is to prevent creditors from lying by and encouraging debtors to arrive at a false view of their commercial position.  The Act evinces no policy that a petition from which, doubtless through oversight, an important passage has been omitted, should not yet serve to mark the time from which the relation-back period is to be established.  If anything, the Act shows a contrary policy.  In the case of an incomplete petition, the debtor has nevertheless been warned of his or her peril.  There is no injustice in continuing to give effect to the intention of the Act that the commencement of the relation-back period should coincide with the commission of the act of bankruptcy.

Discretionary issues

20                  It follows from the above that none of the suggestions as to why the sequestration order ought not to have been made is, in my view, well founded.  Accordingly, I can now deal shortly with the issue of whether, assuming I am wrong, the Court should, in its discretion, which was treated before me as an undoubted one, intervene. 

21                  The applicant is motivated to make the application because he faces prosecution by the Director of Public Prosecutions for, in substance, allegedly failing to disclose assets to the Official Receiver, as he was required by the Act to do.  That motivation seems to me to be irrelevant.  His case for having his bankruptcy annulled is not improved because he is said not to have obeyed his post-bankruptcy obligations.  Neither, however, is it worsened on account of that consideration.  If he ought not to have been made bankrupt, he ought not to have been subjected to those obligations.  A consequence of bankruptcy is that new obligations entailing criminal liability for their breach are imposed on the bankrupt.  That, along with removing a stain on one's reputation, is a reason common to all bankrupts favouring annulment of that status if it should never have been imposed.  It is clear, nevertheless, from authority, that the bankrupt's post-bankruptcy conduct, whether he faces criminal censure for it or not, is relevant to the exercise of the Court's discretion. 

22                  There is no need for me possibly to embarrass the administration of justice by passing on the actual matters that may form the subject of a criminal trial.  In relation to other matters, the applicant's undenied performance, as recounted by the now Official Receiver, tells against him.  He was far from frank, apparently sought to hide assets and managed corporations when he ought not to have done so.

23                  What is also of relevance, it seems to me are the circumstances of the making of the order and the bases on which it may be said (contrary to my conclusions) that the sequestration order ought not to have been made.  It is clear from the facts in para 4 above and from the Official Receiver's report that the applicant was hopelessly insolvent and that he did in fact commit the act of bankruptcy upon which the petitioning creditor sought to proceed.  The attacks made on the sequestration order are of entirely technical kinds.  There are good and frequently rehearsed reasons why, when considering whether, in the first instance, an allegedly insolvent person ought to be made bankrupt, strict compliance with the law should be expected of those who would have that status inflicted on another.  That legislative and judicial policy extends to strict compliance with formal matters, where there might otherwise be an element of injustice:  cf s 306.  But those considerations have less relevance when it is clear, from events occurring and evidence acquired after the making of a sequestration order, that every consideration of substance lay with the creditors.  The applicant left creditors lamenting losses amounting to over $600,000.  He did commit an act of bankruptcy.

24                  Further, there is no new fact on which the attack on the sequestration order was based.  Every point taken was perfectly apparent or able to have been taken before the order was made.  The applicant was legally represented.  He was able to assert every legal right he had.

25                  There was, to borrow a phrase from the criminal law, no substantial miscarriage of justice.  Accordingly, as a matter of discretion, I would also refuse relief.

Disposition

26                  The application is refused.  The applicant is to pay the Official Receiver's costs.

Associate:

Dated:              15 September 1999