FEDERAL COURT OF AUSTRALIA

Rafaraci v Pearce & Heers [2003] FCA 1307

BANKRUPTCY - Creditor's Petition - Bankruptcy Notice - application under s 153B of the Bankruptcy Act 1966 (Cth) to have Sequestration Order annulled - improper service of District Court Statement of Claim giving rise to judgment debt - improper service of Bankruptcy Notice and Creditor's Petition - s 153B of the Bankruptcy Act 1966 (Cth) not limited to circumstances where there has been an abuse of process - broad discretion - Sequestration Order set aside due to non-receipt of originating process.

Bankruptcy Act 1996 (Cth) s 153B

Bankruptcy Rules

Federal Court Rules

Willshire-Smith Re; Ex parte Randle & Taylor Services Pty Ltd (1994) 48 FCR 371 at 374-5 followed

Craig v Kanssen [1943] KB 256 followed

Re Marsh; Ex parte Marsh v Paramount Leisure Products Pty Ltd (1991) 32 FCR 482 followed

Hill v BP Australia Ltd [1998] FCA 1303 followed

William v Spautz (1992) 174 CLR 509 followed

Zodiac Investment Pty Ltd v Brelsford (A Bankrupt) [1999] FCA 1582 followed

Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 followed

Edelsten v Deputy Commissioner of Taxation (NSW) (1989) 86 ALR 257 followed

Henrich v Commonwealth Bank of Australia [2003] FCA 539 followed

Cottrell v Wilcox [2002] FCA 1115 followed

VINCENZO RAFARACI v PEARCE & HEERS, INSOLVENCY ACCOUNTANTS AND SHOP-A-DOCKET PTY LTD

N 7310 OF 2003

TAMBERLIN J

SYDNEY

14 NOVEMBER 2003

IN THE MATTER OF VINCENZO RAFARACI

THE COURT ORDERS THAT:

1.         The application for annulment under s 513B is granted.

2.         Compliance with the requirements of O 77 rr 42, 43 and 44 of the FCR is dispensed with.

3.         The second respondent pay the applicant’s costs and those of the first respondent in this application and of the stay application.

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

IN THE MATTER OF VINCENZO RAFARACI

REASONS FOR JUDGMENT

1                     This is an application for annulment of a Sequestration Order made against the applicant, (“Rafaraci”) on 1 October 2003.  The application is brought pursuant to s 153B of the Bankruptcy Act 1996 (Cth) (“the Act”).

2                     The principal issue is whether service was properly made in relation to the District Court Statement of Claim giving rise to a judgment debt, and also in relation to the service of the Bankruptcy Notice and the Creditor’s Petition in the bankruptcy proceedings.

3                     Rafaraci was made bankrupt pursuant to a Creditor’s Petition issued on 6 August 2003.  The debt relied on was a failure to pay an amount of $7,616.98 pursuant to a judgment in the Magistrates Court of Brisbane on 10 July 2002, together with interest.  The act of bankruptcy relied on was a failure to comply with a Bankruptcy Notice issued on 30 June 2003. 

4                     Rafaraci says that none of the above documents were properly served on him as required by the relevant legislation, prior to the making of the Sequestration Order.

background

5                     In February 1999, an Italian restaurant business, known as “Vee Jaes” was commenced by a Mr Marturano in partnership with a third party who left the business.  In August 2000, Rafaraci entered into partnership in the business with Mr Marturano.  In March 2001, Mr Marturano left the business and it was continued by Rafaraci after a failed attempt to sell the business.

6                     During early 2002, Rafaraci received a telephone call from Mr Edwards of Independent Recovery Services (“IRS”) regarding monies claimed to be owed to its client, the second respondent (“Shop-A-Docket”).  Mr Edwards was seeking payment of a debt said to have been incurred for advertising services provided to the business in the amount of $6,000.  Rafaraci denied that it was his debt but in the interests of settling the matter later made an offer of $4,000 and was told that it was likely it would be accepted.

7                     On 13 May 2002, a Statement of Claim was filed by Shop-A-Docket in the Queensland Magistrates Court against Rafaraci and Mr Marturano.  This was claimed to have been served on 1 June 2002, but Rafaraci denies this.  An affidavit of service of the Statement of Claim was made by Mr Davidson, a licensed commercial agent, on 5 June 2002.  He deposed that the Statement of Claim had been served on 1 June 2002, by speaking at the relevant address to a person and asking if Rafaraci was at home.  He said that the person he spoke with said he was Rafaraci and was handed the document.

8                     On 10 July 2002, a default judgment was issued in the Queensland Magistrates Court, requiring Rafaraci and Mr Marturano to pay $7,003.90 plus interest of $477.16 and costs of $858.

9                     On 3 March 2003, Rafaraci registered the business name of the restaurant under his sole name. 

10                  A Bankruptcy Notice addressed to Rafaraci was issued on 30 June 2003.  It is alleged that this Bankruptcy Notice was served at Rafaraci’s home on 3 July 2003.  On 8 July 2003, Mr Davidson deposed to an affidavit of service of the Bankruptcy Notice.

11                  On 25 July 2003, the alleged act of bankruptcy was committed.  On 6 August 2003 a Creditor’s Petition was issued, verified by a credit controller at Shop-A-Docket, Ms Simmonds.  An affidavit said that paragraphs 1, 2 and 3 of the Petition were within her knowledge true.  Those paragraphs relate to the amount of the debt and the decision of the Magistrates Court, together with a statement that there was no security held and that the respondent debtor was personally present in Australia.

12                  The Creditor’s Petition as issued was noted with a court stamp affixing the return date for 3 September 2003.  This date was subsequently altered by an officer of the court to 1 October 2003.

13                  The affidavit verifying paragraph 4 of the Creditor’s Petition, together with affidavits and the Creditor’s Petition were filed on 8 August, 2003.

14                  It is alleged that service of the Creditor’s Petition was effected by Mr Davidson on 9 September 2003.  He prepared an affidavit of service of 12 September 2003.

15                  On 22 September 2003, Rafaraci was telephoned by IRS asking for Mr Marturano, and was told that there was judgment and debt.

16                  There were subsequent negotiations between Rafaraci and IRS in an attempt to reach an agreed figure. 

17                  On 27 September 2003, Rafaraci wrote to IRS, claiming that he had never been served process in the Magistrate’s proceeding, and that the judgment of the Queensland Court had been improperly obtained. 

18                  On 1 October 2003, the Creditor’s Petition, according to the amended date stamped on it, was returnable.  On that date Rafaraci was served with a bundle of documents at 7.00 pm.  Prior to service of these documents, he had received a telephone call from Mr Andrew Heers, a partner of the Court appointed Trustee, the first respondent (“Pearce & Heers”).

19                  On 2 October 2003, Rafaraci received a letter from the Federal Magistrates Court advising of the bankruptcy, and he met with an agent of Pearce & Heers, and denied service.  On that date, Rafaraci’s bank accounts were frozen.  Further negotiations and discussions followed.

20                  The present application was made returnable before me on 21 October 2003.

service

21                  Rafaraci denies service of the Statement of Claim issued by the Queensland Magistrates Court, and also the alleged service of the Bankruptcy Notice and the Creditor’s Petition.  Shop-A-Docket, for whom Mr Beverly appears, contends that the Court should accept the affidavit and oral evidence of Mr Davidson, the process server, that proper service had been made of all three documents.

22                  At the hearing, oral evidence was given by Mr Davidson, and Mrs and Mrs Rafaraci, and there was extensive cross-examination.  The Court has a broad discretion. 

23                  The question which arises on an annulment application made pursuant to s 153B of the Act, is whether the Sequestration Order ought to have been made on the true facts.

24                  The due enforcement of default judgments by processes of the Act are of great importance to the status of an alleged debtor.  It is therefore critical that the requirement of service of originating and other essential processes should be established with sufficient certainty, on the balance of probabilities, to warrant the making of the order in an appropriate case.  Failure to duly serve process goes to the essence of the conception of due process.  If Rafaraci’s evidence is accepted, then he has been deprived of a hearing in the Queensland Court, there has been no act of bankruptcy, and he was also deprived of a hearing on the Creditor’s Petition.  Apart from certain ex-parte proceedings, the concept that an order can validly be made against a person who has had no proper notification of the intention to apply for it is foreign to basic principle.  The Bankruptcy Notice in this case is founded on a default judgment.  If it is proved or admitted that the originating proceedings were not served, the judgment must generally be treated as invalid, and any enforcement proceedings as wrongly based. If it can be shown that a default judgment founding the Bankruptcy Notice was entered, although necessary process was not served, the Court should not in the exercise of its discretion make a Sequestration Order.  If an order is made without proper service it should be annulled: see Willshire-Smith Re; Ex parte Randle & Taylor Services Pty Ltd (1994) 48 FCR 371 at 374-5; Craig v Kanssen [1943] KB 256 at 62 and Re Marsh; Ex parte Marsh v Paramount Leisure Products Pty Ltd (1991) 32 FCR 482; Hill v BP Australia Ltd [1998] FCA 1303.

25                  On the whole of the evidence in this matter, particularly in the light of additional evidence adduced from Mr Davidson and Rafaraci during the course of cross-examination, I am not satisfied that the Statement of Claim in the Magistrates Court, the Bankruptcy Notice, or the Creditor’s Petition were served on Rafaraci as required by the Bankruptcy Rules.  In reaching this conclusion, I have given weight to the following considerations:

(a)        There were substantial inconsistencies in the evidence of Mr Davidson between his affidavits, and the statements which he made both in chief and in cross-examination at the hearing, as to what he said and did on service of the three documents in question. His record keeping procedure was unsatisfactory.  In particular, in relation to service of the Statement of Claim in the proceedings in the Queensland Magistrates Court, Mr Davidson said in his affidavit that he handed the document personally to Rafaraci.  However, his oral testimony and his handwritten notes do not state that the document was handed to Rafaraci.  Mr Davidson said that there had been a statement by a person at the address for service, to the effect that Rafaraci lived at the premises, but that he was in the shower, and that another person was seen coming to the door.  That person was not served.  Mr Davidson’s two versions of the service of the Statement of Claim are significantly inconsistent and cast significant doubt on the reliability of his recollection in relation to the service to such an extent that I am not satisfied that service of the Statement of Claim was effected as required.

(b)        In addition, in relation to the Statement of Claim, Mr Davidson was unable to identify, in Court, Mr and Mrs Rafaraci as the persons he saw at the premises.

(c)        There are also discrepancies in Mr Davidson’s evidence regarding the service of the Creditor’s Petition, particularly in relation to the original expiry date for the Creditor’s Petition, which was noted in an annexure to one of his affidavits as being in September 2003. Two affidavits have been proffered in both of which Ms Simmonds purports to verify on oath two versions of the Creditor’s Petition, which differ in that on the latter Creditor’s Petition, the expiry date is expressed to be 1 October 2001, and not 3 September 2001, as originally endorsed.  An attempt to explain the discrepancy was made, but in my view this was quite unsatisfactory.  The affidavit of Ms Simmonds verifying the Creditor’s Petition as that which was served, was sworn on 6 August 2003, but it purports to identify and verify a Creditor’s Petition in respect of which the expiry date was varied after 6 August 2003, to 1 October 2003.

(d)        Mr Davidson testified as to the large number of documents which he served on a regular basis, and admitted the inaccuracy noted above in relation to his affidavit concerning the Statement of Claim.  He also stated that there were discrepancies as to what was said on service.  These inconsistencies cast substantial doubt on the reliability of his recollection.  In view of this, I am not persuaded that the Bankruptcy Notice was duly served.

(e)        I have also taken into account the denials of Rafaraci and Mrs Rafaraci.

26                  On the balance of probabilities, in the present matter, due to the significant discrepancies in the evidence in relation to the service, I am satisfied that it has not been proven that at the time when the default judgment was entered the Statement of Claim had been properly served.  Nor am I satisfied that the Bankruptcy Notice or Creditor’s Petition had been properly served.

27                  In all the circumstances, this is a case where in the exercise of my judicial discretion the Sequestration Order should be annulled pursuant to s 153B of the Act.  Mr Beverly, on behalf of Shop-A-Docket, submitted, in substance, that s 153B may only be used where it can be established that there has been an abuse of process.  This submission, if accepted, would unduly limit the operation of s 153B.  There are many reasons why a Court might grant an annulment pursuant to s 153B.  These include circumstances where there has been an abuse of process: see Zodiac Investment Pty Ltd v Brelsford (A Bankrupt) [1999] FCA 1582 Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589; Edelsten v Deputy Commissioner of Taxation (NSW) (1989) 86 ALR 257, but are not limited to these circumstances.  It is well established that, in the exercise of its discretion under s 153B, a Court must first consider whether the Sequestration Order should have been made, and then whether, in light of all the circumstances of the case, the Sequestration Order should be annulled: see Henrich v Commonwealth Bank of Australia [2003] FCA 539 per Mansfield J at [7], citing with approval Gibbs J (as he then was) in Re Williams (1968) 13 FLR 10 at 23.  See also Cottrell v Wilcox [2002] FCA 1115.  No other considerations have been advanced which persuade me that I should not annul the bankruptcy.

procedural objection

28                  Mr Beverly, submits that I should not make an order of annulment in this case because Rafaraci has failed to satisfy the strict requirements of O 77 rr 42, 43 and 44 of the Federal Court Rules (“the FCR”).  Those rules provide as follows:

“Order 77 Rule 42

Requirements of application

(1)       The application must set out the grounds on which the annulment is sought.

(2)       The application must be served on the trustee at least 28 days before the hearing date fixed for the application.

Order 77 Rule 43

Notice to creditors – Form 155

(1)       The applicant must notify each creditor, known to the applicant, of the bankrupt, or estate of the deceased person, of the application.

(2)       The notice must be in accordance with Form 155.

(3)       The applicant must serve the notice on each creditor at least 14 days before the hearing date fixed for the application.

Order 77 Rule 44

Report by trustee

(1)       The trustee must prepare a report, for the periods before and after the bankruptcy, or the administration of the estate of the deceased person.

(2)       If the report is in relation to a bankrupt, the report must include information about:

            (a)        the bankrupt’s conduct; and

            (b)        the bankrupt’s  examinable affairs; and

            (c)        the administration of the bankrupt’s estate.

(3)       If the report is in relation to the estate of a deceased person, the report must include information about the administration of the deceased person’s estate.

(4)       The report must be in the form on an affidavit and be filed and served at least 5 days before the hearing date fixed for the application.”

29                  In relation to O 77 r 42, Pearce & Heers has entered an appearance, and, subject to seeking consequential orders, has submitted to the determination of the Court in relation to the question of service.  Pearce & Heers made no submissions in relation to these matters.  The creditor has had a full opportunity to present its case and I am prepared in these circumstances to dispense with compliance with this rule.

30                  With respect to O 77 r 43, in the particular circumstance of this case, I am prepared to waive compliance with this rule because the failure to duly serve both the documents are fundamental, and lead to the consequence that the Sequestration Order ought never to have been made.  Shop-A-Docket and Pearce & Heers have had a full opportunity to oppose the application.  Indeed, if creditors were notified, it is difficult to see what they could say to oppose the annulment.  There has been a fundamental failure to serve essential documents.  It is not in dispute that there are several persons or bodies claiming to be creditors, and I note that Pearce & Heers received a Statement of Affairs, which included lists of secure and unsecured creditors, from Rafaraci on 7 October 2003.  On 8 October 2003, Mr Mark Pearce, a partner of Pearce & Heers, wrote to Rafaraci stating that he had disclosed creditors in a total amount of $2,151.55 in the Statement of Affairs, as at 1 October 2003.   This figure excluded a debt of an unknown amount to the Commissioner for Taxation.  Mr Pearce stated in that letter that he would write to all disclosed creditors and request submissions of Proof of Debt forms.  Although the matter was heard on two occasions, the last being 7 November 2003, no creditor sought leave to appear in the proceeding.  Accordingly, in the particular circumstance of this case, I consider that compliance with O 77 rr 43 and 44 should be dispensed with, and I so order.

31                  Pearce & Heers, in an amended submission filed on 3 November 2003, does not support either Rafaraci or Shop-A-Docket.  In the event that an order is made annulling the bankruptcy, Pearce & Heers seek orders that the trustee’s remuneration regarding the administration of the bankruptcy, and the costs of the application, including legal costs, should be paid by the bankrupt.  It seeks orders that the trustee should be entitled to apply the funds currently held in the bank account of the estate, in part payment of the trustee’s costs and expenses.  An order is also sought that the Court should defer the decision for fourteen days, to give Rafaraci an opportunity to make arrangements for payment of the balance of the outstanding remuneration to the trustee, and that the trustee’s rights, pursuant to s 154 of the Act, be preserved with regard to these amounts.

32                  These orders are opposed with some vigour on the part of Rafaraci.  It was said in substance that Pearce & Heers was a party to an abuse of process in this matter.  In order to establish abuse of process it must be proven that the “predominant” purpose of the moving party was an improper one.  The onus of satisfying the Court that there was an abuse of process lies with the party alleging it, and is a heavy one: see William v Spautz (1992) 174 CLR 509.  In this case, there is no evidence that these proceedings have been brought for an improper purpose.  Accordingly, I am not satisfied that there has been an abuse of process.

33                  The position of Pearce & Heers, as trustee, in the event of an annulment, is covered, in particular, by s 154 of the Act, and I do not propose to make any special order in relation to Pearce & Heers’ costs and expenses.  I am not satisfied, on the material before me, that Pearce & Heers is disentitled to recover the amounts provided for by the Act.

34                  In relation to the costs of the application for annulment and the proceeding for a stay, I consider that the costs of Pearce & Heers and of Rafaraci should be paid by Shop-A-Docket who appeared and unsuccessfully opposed the granting of the application.

conclusion

35                  My conclusion is that the application for annulment under s 153B should be granted. Compliance with the requirements of O 77 rr 42, 43 and 44 of the FCR is dispensed with.  The second respondent is to pay the costs of the applicant and the first respondent of this application and of the application for a stay.

Associate:

Dated:              14 November 2003