FEDERAL COURT OF AUSTRALIA

Wilson, in the matter of Wilson v Official Trustee in Bankruptcy [1999] FCA 1760

BANKRUPTCY – application for annulment of sequestration order – where sequestration order made thirteen years prior to application for annulment – whether judge hearing creditor’s petition wrongly declined to extend time for compliance with bankruptcy notice – whether application to set aside judgment on which bankruptcy notice was based had been instituted prior to time for compliance with bankruptcy notice expired – whether no amount owing to creditor – whether alleged failure of creditor to enforce security would deprive creditor of the right to enforce the debt – whether bankruptcy notice invalid as claiming more than the debt owing

WORDS & PHRASES – “instituted”

Bankruptcy Act 1966 (Cth), s 153B, s 41(6A), s 41(5)

Greenhill, ex parte Myer (NSW) Ltd (1984) 5 FCR 84, not followed

Corney v Brien (1951 ) 84 CLR 343, cited

Emerson v Wreckair Pty Ltd (1992) 33 FCR 581, followed

IN THE MATTER OF ERNEST ARTHUR WILSON AND PATRICIA LORRAINE WILLIAMS

ERNEST ARTHUR WILSON and PATRICIA LORRAINE WILLIAMS v

OFFICIAL TRUSTEE IN BANKRUPTCY and DONALD WIGGINS, KEVIN WIGGINS AND THE ESTATE OF AUSTIN AND RENE WIGGINS

N8139 OF 1999

EMMETT J

9 DECEMBER 1999

SYDNEY

THE COURT ORDERS THAT:

1.         The application be dismissed.

2.         The applicants pay the costs of the proceedings of the Official Trustee in Bankruptcy.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     On 17 February 1986, a sequestration order was made against Patricia Lorraine Williams (“Ms Williams”).  The petition was presented on 21 October 1985 by Austin Wiggins, Rene Wiggins, Donald Wiggins and Kevin Robinson (“the Wiggins”).  The petition was based on failure to comply with a bankruptcy notice that had been served on 3 August 1985.  The act of bankruptcy was failure to comply with the bankruptcy notice on or before 24 August 1985.  The petition was heard on 9 December 1985 when, on the application of Ms Williams, the court adjourned the hearing to 17 February 1986.  When the order was made, Ms Williams was legally represented.

2                     On 23 April 1986, a sequestration order was made against Ernest Arthur Wilson (“Mr Wilson”) upon a petition presented on 9 April 1986 by the Wiggins.  That petition also relied on an act of bankruptcy, being Mr Wilson's failure to comply, on or before 14 March 1986, with a bankruptcy notice served on 21 February 1986.

3                     The judgment, on which both bankruptcy notices were based, was a judgment of the District Court at Penrith in the sum of $60,511.40 entered on 25 March 1985 against Mr Wilson and Ms Williams jointly.

4                     Ms Williams and Mr Wilson have both now applied for an annulment of their bankruptcies under section 153B of the Bankruptcy Act 1966 (Cth) (“the Act”).  Section 153B provides:

“If the Court is satisfied that a sequestration ought not to have been made, […] the Court may make an order annulling the bankruptcy.”

The argument before me has proceeded principally in relation to the estate of Mr Wilson.  The sequestration order made in respect of Mr Wilson's estate was made by Neaves J.  A number of separate grounds have been advanced on behalf of Ms Williams and Mr Wilson.  They have not been represented and the advocacy on their behalf has been ably conducted by Ms Williams.

5                     Other proceedings have been commenced by Ms Williams and Mr Wilson concerning proofs of debt that have been lodged in their bankruptcies.  One of those matters is before me and others have been foreshadowed.  There is also a matter presently before the Full Court in which Ms Williams and Mr Wilson seek leave to appeal from summary dismissal by Beaumont J of other proceedings arising out of their bankruptcies.  Ms Williams has also articulated various complaints concerning the conduct of the Trustee during the course of the bankruptcies.  Those matters are not presently before me. 

6                     In order to explain the various grounds relied on by Ms Williams, it is necessary to explain the background of the relationship between Mr Wilson and Ms Williams, on the one hand, and the Wiggins, on the other. 

7                     On 6 April 1979, a memorandum of agreement was entered into between Mr Wilson and Ms Williams as purchaser, on the one hand, and Donald and Helen Wiggins as vendor, on the other.  The agreement related to a leasehold interest in the hotel premises known as Gardiners Inn at Blackheath.  By the agreement, Donald and Helen Wiggins agreed to sell and Ms Williams and Mr Wilson agreed to buy that lease together with the hotel licence, goodwill, and furniture as described in the agreement.  The purchase price was $65,000 which was to be paid as to $30,000 in cash.  The balance of $35,000 was to be paid by way of loan advanced by the Wiggins.  The Wiggins were to make a loan of $35,000 at interest of 12 per cent per annum payable by weekly payments of $150 over 36 months and the balance to be repaid at the expiration of that period of 36 months.  One of the provisions of the agreement was that the purchaser would paint the hotel inside and out prior to 1 January 1980.  The vendor agreed to allow the purchaser $10,000 towards that work.  The significance of that will become apparent in due course.

8                     On 13 August 1979, a bill of sale was entered into between Mr Wilson and Ms Williams, as mortgagors, and the Wiggins, as mortgagees.  The bill of sale was to secure the loan made pursuant to the sale agreement.  The bill of sale was given in respect of the lease, the licence, and other goods and chattels in and about the hotel.  There was subsequently default on the part of Ms Williams and Mr Wilson in the payment of the instalments in respect of the loan.  It is asserted, however, that substantial payments were, in the meantime, paid. 

9                     The judgment entered in the District Court at Penrith related to the claimed outstanding amount in respect of the loan together with interest.  The amount of the judgment, according to a certificate issued by a Registrar of the District Court on 3 May 1985, was for $58,100 and costs of $357.50.  Interest continued to accrue on the judgment debt at the rate of 13.5 per cent per annum.

10                  The bankruptcy notice, which was addressed to Mr Wilson and Ms Williams jointly, cited a claim of $58,457.50, together with interest at 13.5 per cent which, at 28 June 1985, amounted to $2053.90, making a total of $60,511.40.  That was claimed to be due under the judgment of the District Court and payment was required within 21 days.  Under the terms of the bankruptcy notice, payment was to be made to the Registrar of the District Court at Penrith.  It appears that the judgment was entered by default, no attempt having been made to file a defence to any summons that was served.  No steps were taken by Ms Williams in relation to the bankruptcy notice or the petition before the sequestration order, although, as I have indicated, Ms Williams was apparently represented at the time.

11                  However, after the bankruptcy notice was served on Mr Wilson, some steps were taken in respect of the judgment debt.  A notice of motion, dated 27 February 1986, was prepared by Peter R. Murphy & Co of Bondi Junction on instructions from Mr Wilson.  The notice of motion sought orders that the judgment be set aside and that the defendants be allowed in to defend.  The notice of motion was filed in the proceedings in which the judgment had been entered.  It was headed:

“In the District Court

of New South Wales

at Penrith”

The certificate of judgment, although it was expressed to be in the District Court at Penrith, was also endorsed “Issued at Katoomba”.  It appears that, in circumstances that are not totally clear, the notice of motion was forwarded to the Penrith Registry of the District Court. A question arises as to when it was sent.  The notice of motion was returnable on 28 April 1986.  A copy of the notice of motion in evidence before me is endorsed “District Court, Penrith, Asst Registrar Katoomba, 2/4/86”.

12                  There is also in evidence before me a letter from the District Court Office at Penrith addressed to the Registrar, Katoomba District Court.  The letter, dated 19 March 1986, is headed with particulars of the proceedings against Mr Wilson and Ms Williams and says:

“I forward the abovementioned process which was mistakenly sent to this office.”

The letter is signed by the Clerk of the Court.  The letter is endorsed, “Received 27 March 1986, Court House Katoomba”. 

13                  On 10 March 1986, Mr Wilson lodged an application to this Court for an order for an extension of the time to comply with the bankruptcy notice on the ground that proceedings to set aside the judgment had been instituted by him.  In support of that application, an affidavit was filed by Mr Wilson in which he said as follows:

“1.       I am the applicant for an extension of the time for complying with the Bankruptcy Notice on the grounds that proceedings to set aside the judgment on which the Bankruptcy Notice was issued has been instituted by me.  Annexed hereto and marked with the letter “A” is a copy of a Notice of Motion to the District Court holden at Penrith, proceedings No. 10 of 1984, together with a copy of my affidavit annexed hereto and marked with the letter “B” sworn 27 February 1986. 

2.         I have instructed my solicitor to file the application and I am instructed by Mr James Williams Lyons that such application has been forwarded to the Registrar of the District Court at Penrith for the purpose of allocating a date for the hearing of this application. 

3.         I accordingly request this Honourable court to grant the extension requested herein.”

14                  The matter came before Neaves J on 23 April 1986.  His Honour noted that it was common ground between the parties that there was pending in the District Court at Penrith an application by Mr Wilson that the judgment on which the bankruptcy notice was founded be set aside and that he be allowed in to defend the proceedings.  His Honour recorded that an issue arose whether the proceedings to set the judgment aside had been instituted by Mr Wilson before the expiration of the time fixed for compliance. 

15                  After hearing evidence, including evidence from Mr Wilson and the submissions of counsel for the parties, Neaves J concluded that Mr Wilson had not shown that the proceedings had been so instituted.  Accordingly, his Honour concluded that the condition precedent, upon which the jurisdiction of the court to extend the time for compliance with the bankruptcy notice depended, had not been established.  His Honour, therefore, refused the application for an extension of time to comply with the bankruptcy notice.

16                  There was also argued before Neaves J the question of whether or not the amount claimed by the Wiggins as the debt owing was, in fact, owing in the amount claimed.  There was evidence before Neaves J, in the form of a further affidavit by Mr Wilson that Mr Wilson had made various payments to the Wiggins in reduction of principal and interest.  He, therefore, denied that he and Ms Williams owed the Wiggins the sum of $58,457.50, the subject of the default judgment.  That affidavit was sworn 27 February 1986 and was sent to the District Court at Penrith.

17                  In view of his Honour's refusal to extend the time for compliance with the bankruptcy notice, his Honour concluded that an act of bankruptcy had been committed.  His Honour considered that that situation could not be affected by the fact that it was then asserted that the amount of the judgment was in excess of the amount which was actually owing.  Mr Wilson apparently agreed, for the purposes of the proceedings before Neaves J, that the amount owing to the Wiggins exceeded $20,000.  Mr Wilson was cross-examined on his affidavit.  He said that the schedule of payments set out in his affidavit was derived from records that he had handed to his solicitors.  However, those records were not produced and the making of the payments was not evidenced by any documentation.

18                  His Honour concluded that it was clear from the evidence that Mr Wilson may well be mistaken, at least as to a payment of $16,748.16 shown as having been made on 13 August 1979, in asserting that all the payments were in reduction of the principal and interest under the bill of sale.  His Honour observed, therefore, that the most that could be achieved, even if the application to the District Court were totally successful, would be a reduction in the amount of the judgment debt.  His Honour, therefore, rejected a submission made on behalf of Mr Wilson that the Court, in the exercise of its discretion, should not make a sequestration order, but should allow Mr Wilson an opportunity to pursue to finality the pending application in the District Court.  His Honour, in the light of Mr Wilson's oral evidence as to the admitted indebtedness and as to the absence of available assets or funds from which that indebtedness could be satisfied and in the absence of any positive proposal for payment, was not prepared to accept Mr Wilson’s submission.  Accordingly, his Honour made the sequestration order. 

19                  In the application before me, much reliance has been placed on the fact that, in the course of the administration of the bankruptcies, the amount in respect of which the Wiggins debt has been allowed has been significantly reduced.  In particular, total payments from August 1979 to August 1985 of $19,300 have been allowed against the amount of the original loan.  Adjustment was also made by reducing the amount of the loan from $35,000 to $25,000 by reason of the offset of the sum of $10,000 for painting costs referred to in the agreement for sale. 

20                  Re-calculation, according to a letter from the Trustee of 9 August 1993, results in an amount of $19,328.93 provable in the estate.  Ms Williams and Mr Wilson rely on the amount now allowed as provable in respect of the debt due to the Wiggins as an indication that, in truth, the amount of the judgment debt exceeded the amount owing.  That is to say, the Wiggins were not entitled to judgment in the full amount of the debt.  The sum of $35,000 for principal should have been reduced by the amount of the payments referred to by the Trustee and by the amount of $10,000.

21                  It was said that, in those circumstances, the judgment was obtained by fraud.  The fraud, as I understand the contention, appears to be based on the affidavits of debt that would necessarily have been filed in the District Court on behalf of the Wiggins asserting that the amount was due and owing.  A similar affidavit of debt was filed in support of the sequestration orders. 

REFUSAL TO EXTEND TIME FOR COMPLIANCE WITH BANKRUPTCY NOTICE

22                  The first ground relied on that I shall deal with concerns the failure by Neaves J to extend the time for compliance with the bankruptcy notice.  His Honour concluded that he had no jurisdictional basis for doing so, having regard to his conclusion that the application to set aside the District Court judgment was not filed in time.

23                  Section 41(6A) of the Act provides as follows:

“Where before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice

(a)       proceedings to set aside the judgment or order in respect of which the Bankruptcy Notice was issued have been instituted by the debtor or

(b)       an application has been made to the Court to set aside the bankruptcy notice

the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.”

24                  The question before Neaves J was whether or not proceedings to set aside the judgment, in respect of which the bankruptcy notice was issued, had been “instituted” by Mr Wilson prior to 14 March 1986.  It appears that his Honour was not prepared to accept the evidence, which I have read from Mr Wilson's affidavit, as giving rise to an inference that proceedings had actually been “instituted”.  The only additional evidence that is before me, that was not before Neaves J, is the letter from the Registrar of the District Court at Penrith to the Assistant Registrar at Katoomba of 19 March 1986.  That, of course, itself is outside the time within which the application to set aside the judgment should have been made.  The additional evidence does not conclusively establish that the proceedings were “instituted” prior to 14 March 1986.

25                  Counsel for the Trustee contended that proceedings were not “instituted” until the notice of motion was “filed” in accordance with the rules of the District Court.  For reasons that are not totally clear to me, the application to set aside the judgment was required to be filed in the District Court at Katoomba, since that is apparently where the initial summons was issued on behalf of the Wiggins.  Counsel for the Trustee relied on the fact that the stamp endorsed on the notice of motion indicates that it was not, in fact, filed at the Katoomba Registry until 2 April 1986. 

26                  I would be disposed to conclude that the date on which the Registry actually endorses something as “filed” is not conclusive as to the time when proceedings are “instituted”.  However, it does appear that it was a requirement of the Rules of the District Court that an application was only effective once “lodged” at the Registry in question.  On the material before me, albeit that it is in an incomplete state, it seems to me that the proceedings had not been “instituted” before the motion was received by the District Court at Katoomba.  On that basis, there was no jurisdiction for Neaves J to have entertained the application for an extension of time to comply with the bankruptcy notice. 

27                  However, his Honour was also asked to adjourn the bankruptcy petition or to decline to make a sequestration order to allow the debtor, Mr Wilson, to pursue to finality his pending application in the District Court.  His Honour declined to do that, as I have already indicated.  Precisely the same considerations would have arisen for his Honour, had his Honour concluded that there was jurisdiction to extend the time for compliance with the bankruptcy notice.  For the reasons that his Honour declined to allow the application to proceed to finality, his Honour, would have clearly declined to have extended the time for compliance with the bankruptcy notice.

28                  His Honour’s rationale was that Mr Wilson had acknowledged that he owed at least $20,000 to the Petitioner and that the most that could be achieved would be a reduction in the amount of the judgment.  Mr Wilson apparently also acknowledged that he did not have the funds or assets available at that stage to pay even the amount of $20,000 and had advanced no proposal for payment even of that amount.  In those circumstances, his Honour would have been justified, in his discretion, in refusing to extend the time for compliance.

29                  In the circumstances, I am not satisfied that, on the first ground, there is any basis for saying that the sequestration order ought not to have been made because of an error in relation to the extension of the time for compliance with the bankruptcy notice. 

EFFECT OF “FRAUD” ON AMOUNT OF DEBT OWING

30                  The second ground relied on by Ms Williams in support of her and Mr Wilson's application concerns the amount of the debt.  It was contended that, because of the postulated fraud in relation to the affidavit of debt, no amount should be taken to be owing.  Even today, however, it was conceded that at least a sum in the order of $7,000-$8,000 would be owing.  That figure is arrived at after deducting from the figure of $19,000 or so, referred to by the Trustee, an amount of interest attributable to the sum of $10,000.  No calculation in detail was available but, on the assumption that the interest would have been approximately $10,000 or $11,000, that would have reduced the debt only to $7,000.  That, of course, is significantly less than $20,000.  None of that evidence, however, was put before Neaves J. 

31                  I do not see any basis for concluding that there was no debt owing by Mr Wilson and Ms Williams to the Wiggins as at the time of the sequestration order.

FAILURE OF CREDITOR TO ENFORCE SECURITY

32                  Next it was argued by Ms Williams that a failure on the part of the Wiggins to enforce their rights under the bill of sale in some way discharged them from their indebtedness.  That contention, it seems to me, is based on a misconception.  Reliance was placed on principles whereby the conduct of a creditor that impairs a security will either discharge a guarantor or will result in a reduction of the liability of the guarantor. 

33                  The principles of suretyship are not uncomplicated.  It is indeed a principle of equity that a surety will be discharged, or will be entitled to credit, in respect of any impairment by the principal creditor of security available to the principal creditor.  However, no such principle applies as between creditor and principal debtor.  That is to say, if a secured creditor has security, his failure to enforce that security will not, in any way, affect the liability of the debtor to pay the secured debt.

34                  Accordingly, even it be the fact that the Wiggins failed to enforce the security that they had under the bill of sale, that would not, in my view, of itself in any way affect the entitlement of the Wiggins to be paid the amount of the secured debt. 

NON-COMPLIANCE WITH BANKRUPTCY ACT BY TRUSTEE

35                  In her written submissions in support of the application, Ms Williams also referred to provisions of the Act which, it is contended, have not been complied with by the Trustee.  As I have indicated, those matters do not appear to me to bear on the question of whether or not the sequestration order ought not to have been made.

WHETHER BANKRUPTCY NOTICE CLAIMED MORE THAN DEBT OWING

36                  The final matter relied on by Ms Williams concerns the amount claimed in the bankruptcy notice.  It is a general principle that a bankruptcy notice that claims more than is owing may be regarded as invalid.  The strict consequences of such a principle are ameliorated, to some degree, by the operation of section 41(5) of the Act.  Section 41(5) provides as follows:

“A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount, in fact, due unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.”

The contention on behalf of Ms Williams and Mr Wilson was that, in the light of the subsequent reduction in the amount of the proof of debt by giving credit for payments that have been made by Mr Wilson, it is clear that the amount claimed in the bankruptcy notice exceeded the amount actually owing. 

37                  I do not regard that discrepancy, however, as relevant to the principle to which section 41(5) is directed.  Section 41(5), in my view, is concerned with a claim of a bankruptcy notice for an amount greater than is, in fact, owing under a judgment.  There is no suggestion that the bankruptcy notice claimed more than was owing under the default judgment in favour of the Wiggins.  The complaint is that the default judgment was entered for an amount greater than the amount of the debt that was actually owing.

38                  Reliance was placed on a decision of Morling J in Re Greenhill ex parte Myer (NSW) Ltd (1984) 5 FCR 84.  Morling J held that an overstatement in the bankruptcy notice of the amount actually due rendered the notice invalid.  In that case, the judgment had been entered, apparently erroneously, for some $200 in excess of the amount actually owing.  If that decision is correct, then it would add considerable force to Ms William's contention.  However, with the greatest respect to his Honour, I am not persuaded that it is a correct recognition of principle. 

39                  A bankruptcy notice must require the debtor to pay the judgment debt, in accordance with the judgment.  The pre-existing obligation, which the judgment is intended to enforce, will have merged in the new obligation created by the judgement - see Corney v Brien (1951) 84 CLR 343 at 353-354.  It may well be that there would be good grounds for setting aside a judgment that was entered for an excessive amount.  Further, it may be that this Court, as a Court of Bankruptcy, would go behind a judgment in order to determine whether there was, in fact, anything due.  Following the entry of a judgment, however, the amount due by the judgment debtor to the judgment creditor, and the amount for which execution might issue, is the sum stated in the judgment.  Where a bankruptcy notice claims that amount, it cannot be said that it claims an amount that exceeds the amount in fact due.  By reason of the judgment itself, the amount of the judgment is due.

40                  Upon an application to a court exercising jurisdiction in bankruptcy to set aside a bankruptcy notice, the court should not go behind a judgment where the grounds upon which the judgment is challenged are such that, if accepted, they would only support a finding that the amount of the debt be reduced, and would not support a finding that there was, in truth, no debt at all - see Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 at 589.  That decision of a Full Court of this Court is binding upon me and, it appears to me, that it would preclude a judge, on hearing a bankruptcy petition, to go behind the judgment if the only purpose for doing so would be to show that the amount of the judgment should be reduced, not to show that no amount was owing.  It may be relevant, if the amount of the judgment should be reduced to an amount below the minimum amount that supports a petition.  However, that is not the case here.

41                  I consider that, on the basis of the principles stated in Emmerson v Wreckair, the final ground relied on in support of the application to annul the bankruptcy also fails.  That is to say, I do not consider, on this ground, that the order ought not to have been made. 

42                  It follows, in my opinion, that the application under section 153B of the Act should be dismissed with costs.

Associate:

Dated:              15 October 1999