FEDERAL COURT OF AUSTRALIA

Grundy v Wattyl Australia Pty Ltd [2002] FCA 1480

BANKRUPTCY – appeal from a decision of the Federal Magistrate – Federal Magistrate dismissed an application for review of a sequestration order under Federal Magistrates Act 1999 (Cth) s 104 – not an application for annulment under Bankruptcy Act 1996 (Cth) s 153B – application for review out of time – five months delay – insufficient explanation of delay to justify granting an extension of time – legal advice – advice by employee of Trustee – ignorance – illness – setting aside the sequestration order under the power to review would cause prejudice – appellant’s knowledge of prejudice

PRACTICE AND PROCEDURE – appeal from a decision of the Federal Magistrate – Federal Magistrate dismissed an application for review of a sequestration order – five months delay – whether extension of time should be granted – insufficient explanation of delay – prejudice

CONSTITUTIONAL LAW (CTH) – judicial power of commonwealth – Federal Magistrates Court – delegation of powers to registrars – decisions of registrar reviewable by Court – time limit for application to review – validity – power to extend – court appeal or review - The Constitution (62 & 63 Vict. c. 12) Ch III – Federal Magistrates Court Rules 2001, r 20.01

The Constitution (62 & 63 Vict. c. 12) Ch III

Bankruptcy Act 1966 (Cth) s 153B

Federal Court of Australia Act 1976 (Cth) s 24

Federal Magistrates Act 1999 (Cth) s 104

Federal Magistrates Court Rules 2001 rr 20.01, 20.02, 35.03

Harris v Caladine (1991) 172 CLR 84 cited

Harrington v Lowe (1996) 190 CLR 311 cited

PHILLIP GRUNDY v WATTYL AUSTRALIA PTY LTD

N 249 0F 2002

DOWNES J

28 NOVEMBER 2002

SYDNEY

THE COURT ORDERS THAT:

1.                  Appeal dismissed with costs.

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

REASONS FOR JUDGMENT

1. On 13 September 2001 Registrar Tesoriero in the Federal Magistrates Court made a sequestration order against the estate of the appellant, Phillip Grundy, based on a judgment debt of $8,495.05.

2. By application for review filed on 25 February 2002 in the Federal Magistrates Court the appellant sought an order setting aside the sequestration order or, to use the words of the application, that it “be annulled”, together with an order exempting him from fees and charges and compensating him for costs.

3.      The sequestration order was made on a creditor’s petition originally returnable on 9 August 2001. On that day the appellant attended at Court. He says he made an arrangement with the solicitor for the respondent, Wattyl Australia Pty Ltd, that some accommodation would be made to enable him to pay the debt, that it would not be necessary for him to attend on the adjourned day and that, at least by implication, the petitioning creditor would not then seek a sequestration order. The adjourned day was 13 September 2001. On that day the petitioning creditor applied for, and was granted, a sequestration order.

4.      The ground of the application for review was that the appellant had been misled by the petitioning creditor, by its solicitor, into thinking that no sequestration order would be sought on 13 September 2001 and that he need not attend court on that day. If the appellant’s claims are true then he was at best misled and possibly the victim of a fraud. In these circumstances, had he attended at Court on 13 September, it is unlikely that a sequestration order would have been made. If the appellant’s claims had been promptly raised thereafter, and accepted, there is reason to believe that the sequestration order would have been set aside and virtually all of the costs of the bankruptcy administration avoided. However, this is not what happened.

5.      On his own admission the appellant learned of the sequestration order between one and two weeks after it was made. He says the trustee sent him a form of statement of assets and liabilities for him to complete and return. In due course he completed the document and sent it in. The administration of his estate in bankruptcy proceeded. He was aware of this. For example, the trustee wrote to him on 16 October 2001 and 5 November, 2001. The latter letter drew attention to the fact that no application had been made to set aside the bankruptcy. The letter informed the appellant that the trustee was aware that the appellant owned a house property. The letter put forward proposals to avoid the trustee “dealing with the house property.”

6.      It was not until more than five months after the making of the sequestration order that the applicant made the application for review. That application may have been an application to a Federal Magistrate to review the decision of Registrar Tesoriero to make a sequestration order, or it may have been an application for annulment of the sequestration order, or it may have been both. The appellant appeared in person and was apparently unable to articulate precisely the basis upon which he put his claim.

7.      Applications in the Federal Magistrates Court for review of a decision of a registrar must be made promptly. The rules require them to be made within 21 days (Rule 20.1) and listed for hearing within 14 days (Rule 20.2). There is power to extend time. With the exception of the review of certain decisions of registrars under the Family Law Act 1975 (for which applications must be made within 28 days) all other applications for review must be made within 7 days.

8.      An important basis for the procedure for review of decisions of registrars is to avoid contravention of Chapter III of the Constitution. Chapter III vests the judicial power of the Commonwealth in courts comprised of judges. However, in Harris v Caladine (1991) 172 CLR 84 the High Court of Australia held that certain jurisdiction, powers and functions of courts could be delegated to non-judicial officers provided that the judges continued truly to constitute the court and carry out the bulk of its judicial functions and further provided that the decisions of the officers of the court were subject to appeal or review by the judges. It was argued in Harrington v Lowe (1996)190 CLR311 that a limitation of seven days for the making of an application for review was a contravention of Chapter III. The High Court rejected that argument for three reasons. The first was the provision for applications to extend time. Secondly, the court relied upon provisions for orders dispensing with compliance with time provisions. Thirdly, the court relied upon provisions for review by the court of its own motion.

9.      It follows that provisions for the review of registrars’ decisions are very important, but time limitations, even very short time limitations, provided they are not absolute, are permissible. Indeed, the rationale for short time limits would seem to be the achieving of certainty at an early point of time without compromising the requirement for review. This is confirmed by the requirement that review applications be promptly heard.

10.  Bankruptcy administration must begin promptly. If bankruptcy administrations are to be at risk of termination months after they have begun, with issues as to how intervening costs incurred by the trustee are to be met, problems could arise with respect to the proper administration of bankrupt estates. The present application was made more than four months out of time. In the interim the trustee had incurred substantial costs in connection with the administration of the estate.

11.  The first issue in the present case is whether the application was an application for review of the registrar’s making of the sequestration order pursuant to s.104 of the Federal Magistrates Act 1999 or an application for an annulment of the bankruptcy pursuant to s.153B of the Bankruptcy Act 1966. Although the application contains the word “annulled” the form on which it was written was the form for an application for review under s.104 of the Federal Magistrates Act. It did not satisfy the requirements for an application for an order annulling a bankruptcy under s.153B of the Bankruptcy Act. For example, an application under that section would require the giving of notice to creditors. That did not happen. It seems to me that the application before the Federal Magistrates Court was an application for review under s.104 of the Federal Magistrates Act.

12.  By s.24 of the Federal Court of Australia Act, 1976 there is an appeal from judgments of the Federal Magistrates Court to this court. This is such an appeal.

13.  In his reasons for decision, Federal Magistrate Raphael primarily dealt with the application as an application for review rather than as an application for annulment. He noted that the application was out of time and that an extension of time would be necessary. He noted that the applicant’s explanations for delay were the applicant’s ignorance as to the original debt, the responses given to him by the trustee to his suggestion that he make an application to set aside the sequestration order, unsatisfactory legal advice which he received, and hospitalisation. The Federal magistrate said he would require much more to persuade him to grant an extension of time.

14.  The Federal Magistrate then went on to deal with the submission which had been put to him that the proper application for the appellant to have made was an application for annulment pursuant to s153B of the Bankruptcy Act. The administration of the bankrupt estate had commenced and expense had been incurred during the time before the application for review was made. He noted that annulment applications permitted orders taking account of and making provision for expenditure incurred in the administration of the bankrupt estate prior to the making of the application.

15.  The Federal Magistrate went on to dismiss the application on the grounds that it was out of time and no satisfactory explanation for the delay had been provided. This must have been an order on the basis that the matter before him was an application for review pursuant to s.104 of the Federal Magistrates Actcoupled with an application to extend the time for the making of the application. It is true that he also went on to say that to the extent that the application was an application for annulment he would also dismiss it on the grounds that the requirements of the rules, and particularly those of rule 35.03 requiring notice to be given to creditors, had not been complied with. However, that was not the reason he gave for dismissing the application. He noted that what he was doing did not prevent another application for annulment being made.

16.  I have been informed that such an application has now been made and, further, that it has been heard in this court by Conti J. However, his Honour has deferred giving a decision until the outcome of this appeal is known.

17.  I must also note that Moore J, in this Court, granted a stay of proceedings on the sequestration order in so far as it permitted or required the sale of the appellant’s property at Mount Vincent. The trustee was restrained from selling the property. Upon his giving an undertaking to vacate the property if the appeal was dismissed the trustee was required to permit the appellant to enter and occupy the property. The costs of the application were ordered to be costs in the appeal.

18.  The real question before me is whether the magistrate adequately dealt with the application for review or whether he put that to one side in favour of a finding that the only proper way for the appellant to agitate the issue of the making of the sequestration order was an application for annulment. If he did not I must also consider whether the magistrate otherwise erred in dealing with the application.

19.  I have found that the application was an application for review. Two issues therefore arose. The first was whether an extension of time should be granted. The second was whether, if the extension was granted, an order setting aside the sequestration order should be made.

20.  It seems to me that this is how the Federal Magistrate dealt with the matter. He primarily considered these issues in paragraphs 6 and 7 of his judgment as follows:

“6. As Mr Grundy hasn’t made an application for extension of time and hasn’t supported such an application with an affidavit setting out why he believes time should be extended it would be difficult for me to consider that matter today. Mr Grundy, in his submissions to me, referred to his affidavit and indicated that the reason why the matter was delayed was a combination of his own ignorance as to the original debt, the alleged responses by the trustee to his suggestion that he make such an application, to unsatisfactory legal advice and to hospitalisation.

7. I do not think that in the circumstances where an application for review has been delayed for five months evidence in this form is satisfactory and I would require much more from the debtor to persuade me to grant an extension of time.”

21.  The Federal Magistrate had begun by saying that it would be difficult to deal with the matter that day. This was apparently because there was no evidence before him in proper and admissible form. He proceeded, however, as if what he had been told, although not in the form of proper evidence, had been proved and, upon forming the view that even if those matters had been properly proved this would not make out a case for an extension of time, he determined that the application should be treated as an application for an extension of time and that, so treated, it should be dismissed. This is why he later said that he dismissed the application because it was out of time and that no satisfactory explanation of the delay had been provided.

22.  After dealing with the question of delay the Federal Magistrate went on to consider whether an application for annulment was the proper way for the appellant’s concerns to be agitated. However, he did this after he had determined that the application for review should be dismissed for independent reasons. Moreover, he considered the question whether the appropriate way to raise the matter was by application for annulment in the context of issues of prejudice associated with the cost of administration which will inevitably be incurred where there is delay in seeking to set aside a sequestration order.

23.  In the result the Federal Magistrate dismissed the application because he did not think that the delay in bringing the application had been explained and as a result no extension of time should be given. He took comfort, although not relying upon it, in the fact that prejudice to others would result if an order were made setting aside the sequestration order under the power to review, whereas safeguards would be available if an annulment were made.

24.  In proceeding in this way I do not think that the Federal Magistrate erred. The delay in making the application for review was very substantial. There was little explanation for it other than the ignorance of the appellant and advice he was being given, including advice from his own legal advisor, that the application would be likely to fail. In a real sense, the applicant took a considered decision not to apply for review. That he subsequently changed his mind is no explanation of delay. Although the applicant is unrepresented he did seek legal advice on his prospects of bringing a challenge to the bankruptcy. Whether the advice he was given was good advice or not I cannot say. However, relevantly, the applicant is little different from a represented party who takes advice not to appeal, acts on it, and much later changes his mind. Such circumstances do not generally constitute an explanation for delay.

25.  In determining whether a court should exercise a discretion in favour of granting an extension of time, explaining the delay is not the only issue. Where there is no prejudice to other parties delay will more readily be excused. In the present case, however, there is real prejudice. This is because the trustee has incurred substantial administration costs which must be provided for. It is not easy to see how they could be charged to the petitioning creditors by an order for costs in the application for review even if that was thought to be an appropriate order. In any event, if it is accepted that a prompt application for review, if upheld, would have meant that little expense would have been incurred in carrying out the administration, then it can be said that it was the delay which caused the incurring of expense in administration as much as the making of a sequestration order which should not have been made.

26.  I have read the account of the appellant set out in his affidavit of 25 February 2002 as to the events which took place between his receiving notice of the making of the sequestration order and his making of the application for review. I have also read the affidavit he filed in the stay proceedings and the written submissions he has filed in this appeal. I have also heard his oral submissions in support of the appeal which paid particular attention to the question of what explanation there was for delay in filing the application for review.

27.  The appellant says, in effect, that he was advised by an employee of the Trustee that making an application to set aside the sequestration order would be unwise having regard to the costs that would be incurred and the likelihood of success. He apparently received similar advice from a barrister retained to advise him. These matters do not amount to satisfactory explanations for delay. The act of furnishing a statement of affairs to the Trustee also does not assist. Although Mr Grundy pointed to the remoteness of the place where he was living at the time, illness that he had suffered, a general lack of understanding and confusion as to what was the best way to assert his claims as well as other matters in support of his case that the delay could be explained, I regret that I do not think that they are adequate to explain a delay of more than five months given the costs that have been incurred by the trustee and the appellant’s knowledge that costs were being incurred.

28.  In all the circumstances I consider that the Federal Magistrate was correct to dismiss the application for review.

29.  Since an application for annulment has now been heard in this court, I do not need to deal with the decision of the Federal Magistrate also to dismiss the application to the extent that it should have been treated as an annulment application. In any event, it has not been suggested that the Federal Magistrate erred in that regard.

30.  I should add that the allegations which the appellant makes are serious allegations. They have not been answered by the solicitor against whom they are made. If they are true they are not without potential remedy notwithstanding the result of this appeal before me.

31.  I should also mention that it is a sad aspect of this case that although the amount of the debt upon which the sequestration order was made was little more that $8,000.00 it seems that the costs of the Bankruptcy are now of the order of $60,000.00. When one takes into account that the total amount of unsecured debts of the appellant are only slightly in excess of $20,000.00 the resulting situation seems quite unfortunate. A system of bankruptcy administration which can lead to costs significantly more than the total debts of the bankrupt, particularly where the bankrupt has assets worth more than his debts, does not appear to be serving the ends of justice. I can only say that if any of the charges levied in connection with the administration are unreasonable there are no doubt bases upon which they can be challenged. However, these are not matters for me.

32.  In all the circumstances I consider that the appropriate order is that the appeal should be dismissed with costs.

33.  I note, however, that the Trustee has given an undertaking to the Court that notwithstanding the dismissal of the appeal it will conduct itself as if Orders 1 to 3 of the Orders made by Moore J on 14 May 2002 continue in force until the application before Conti J for an order annulling the bankruptcy is determined.

Associate:

Dated: 28 November 2002