FEDERAL COURT OF AUSTRALIA

Maxwell-Smith v S & E Hall, in the matter of Maxwell-Smith [2004] FCA 840

BANKRUPTCY – application for annulment of sequestration orders – bankrupt's non-attendance at hearing when sequestration order was made – facts not known to person making the sequestration order – denial of procedural fairness – sequestration order ought not to have been made – applicants may have been solvent at the time sequestration order was made – sequestration order annulled

Bankruptcy Act 1966 (Cth) ss 153A, 153B, 154(1)(b)

Bankruptcy Rules r 11(2)

Clements v Independent Indigenous Advisory Committee [2003] FCAFC 143 referred to

Hardaker v Phair trading as Proctor Phair & Associates, in the matter of Hardaker [2002] FCA 1176 referred to

Maxwell-Smith v S & E Hall Pty Ltd [2003] FCA 953 referred to

Miller v Bondi Securities [1994] FCA 654 cited

Minister for Immigration and Multicultural and Indigenous Affairs v SCAR (2003) 198 ALR 293; [2003] FCAFC 126 referred to

Official Trustee; In the matter of the Estate of Smith [1999] FCA 1755 cited

Re Anasis; Ex parte Total Australia Ltd (1985) 11 FCR 127 referred to

Re Coyle (1993) 42 FCR 72 cited

Re Dennehy; Ex parte Dennehy (1895) 16 LR(NSW) (Bank & Pro) 40 cited

Re Ditford; Ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347 cited

Re Finn; Ex parte Amoco Australia Ltd and Official Receiver in Bankruptcy (1982) 41 ALR 487 cited

Re Gollan; Ex parte Gollan (1992) 40 FCR 38 applied

Re Williams (1968) 13 FLR 10 cited

Stankiewicz v Plata [2000] FCA 1185 discussed

Sullivan v Department of Transport (1978) 20 ALR 323 referred to

EUGENE MAXWELL-SMITH AND INGE MAXWELL-SMITH v S & E HALL PTY LTD IN THE MATTER OF EUGENE MAXWELL-SMITH AND INGE MAXWELL-SMITH

N 198 OF 2004

MOORE J

2 JULY 2004

SYDNEY

THE COURT ORDERS THAT:

1.         The bankruptcy of Eugene Maxwell-Smith resulting from the sequestration order made on 15 September 2003, be annulled.

2.         The bankruptcy of Inge Maxwell-Smith resulting from the sequestration order made on 15 September 2003, be annulled.

3.         The applicants and the Trustee have liberty to apply on seven days notice.

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

REASONS FOR JUDGMENT

1                     This is an application to annul the bankruptcies of Mr Eugene and Mrs Inge Maxwell-Smith ("the applicants").  A Registrar of this Court made the sequestration orders on 15 September 2003.  I will refer to the events immediately preceding the hearing before the Registrar in more detail later in this judgment.  On 10 September 2003 I gave judgment in an appeal against a judgment of a Federal Magistrate ("the appeal") dismissing an application by the applicants to set aside a bankruptcy notice (Maxwell-Smith v S & E Hall Pty Ltd [2003] FCA 953).  It is convenient to set out some of the relevant history by repeating an account given in that judgment.  It was to the following effect.

2                     The Federal Magistrate gave judgment in relation to the application to set aside the bankruptcy notice on 22 April 2003.  Revised reasons for judgment were published on 5 May 2003.  The bankruptcy notice was issued on 4 December 2002 and was served on the applicants on 13 February 2003.  The notice was based on a judgment of the Local Court of 20 May 1999 which was, in turn, based on a certificate assessing costs arising from orders made by the Supreme Court of New South Wales on 8 December 1998 and entered 19 May 1999.  In the Supreme Court, the applicants sought a declaration that they had been denied natural justice by the Consumer Claims Tribunal ("the Tribunal") when acting as the Building Disputes Tribunal.  The grounds on which a decision of the Tribunal can be challenged by way of appeal or judicial review were very limited under the Consumer Claims Tribunal Act 1987 (NSW).  The applicants were unsuccessful and were ordered to pay the defendant’s costs.

3                     In its decision of 29 August 1997, the Tribunal dealt with a dispute between the applicants and the respondent, S & E Hall Pty Ltd ("the builder") who had built a home for the applicants at Tura Beach, Merimbula.  The bankruptcy notice (with which the Federal Magistrate was dealing) was served by the builder.  The builder ultimately became the petitioning creditor.  Part of the case of the applicants before the Tribunal was that some of the building work was defective.  This was accepted by the Tribunal (at least as to some of the work) and it allowed a sum of $596.50 for the work to be rectified.  This sum was offset against an amount the Tribunal assessed was due to the builder.  One feature of the building that the applicants said was not built satisfactorily was a skylight.

4                     The essence of the complaint made by the applicants in the appeal was that the defective work had, since the Supreme Court proceedings, been assessed as costing, and in fact had cost, considerably more than the amount determined by the Tribunal.  The work had cost $9,590.  This was said to be illustrated by a report prepared by the Department of Fair Trading dated 4 August 1999 ("the Departmental report"), which, for example, had accepted that the rectification of the skylight would require reconstruction of a complete new skylight, which had been quoted as costing $4,500.  It also had accepted, by way of further example, that patching up and re-painting a kitchen ceiling adjacent to the skylight damaged by water would cost $610.  The Departmental report had accepted that both these matters (and other matters) were justified as general defects.  I should note that the applicants complained in the appeal (perhaps with some justification on the material furnished in the appeal which includes video footage of the damage which was presented to the Tribunal) that the repair of the water-damaged ceiling had not been a matter addressed by the Tribunal and no allowance (by way of offset) had been made.

5                     On the applicants’ analysis, because it emerged that the cost of rectifying the defective work considered by the Tribunal exceeded (by a significant margin) the allowance the Tribunal made, it was apparent that the Tribunal’s decision was fundamentally flawed.  Accordingly, had these matters been known to the Supreme Court, it could have and perhaps would have reached a different conclusion with the result that the costs order would not have been made.  I should make it plain in this judgment, that when I made the same observations (in the preceding two sentences) in the appeal judgment of 10 September 2003, I was not expressing my own conclusions about the Tribunal's decision and what had happened in the Supreme Court.  Rather, I was only setting out the analysis of the applicants and the conclusions they had reached.

6                     The applicants submitted in the appeal that in these circumstances, the Federal Magistrate should have gone behind the judgment debt and, in particular, should have done so on the footing that to leave the judgment untouched would cause a substantial miscarriage of justice: Corney v Brien (1951) 84 CLR 343.  In the appeal judgment of 10 September 2003, I dealt with this submission in the following way at [7] and following:

The power to set aside a bankruptcy notice is a discretionary one: see, for example, Farrugia v Farrugia (2000) 99 FCR 16 at 23-24.  The principles which apply in an appeal from the exercise of a discretionary power are well settled: see, for example, House v R (1936) 55 CLR 499.  It is clear to me from paragraph 9 of his reasons for decision, that the Federal Magistrate was aware of, and dealt appropriately with, the point that the [applicants] were making.  His Honour said:

It is possible that the Tribunal was mistaken in its assessment of the cost of the rectification work.  However, the fact that the Tribunal may have been in error in assessing that cost is not a reason to go behind the judgment of the Supreme Court, let alone the subsequent costs determination enforced in the Local Court.  The Supreme Court found that there was no legal error in the proceedings before the Tribunal justifying that Court in interfering with the decision of the Tribunal.  Nothing that has been advanced before me today by Mr Maxwell-Smith supports a conclusion that I should go behind the decision of the Supreme Court, or the Local Court.  Mr Maxwell-Smith cannot in these proceedings re-open the issue dealt with in the Tribunal.

In my opinion, the approach taken by the Federal Magistrate was an approach open to his Honour and is not attended by error of the type discussed in House v R (above) at 504-555.  That is, his Honour did not act on a wrong principle, did not allow extraneous or irrelevant matters to guide or effect him, did not mistake the facts and did not fail to take into account some material consideration.

In any event, the underlying approach of the [applicants] in inviting the Federal Magistrate to go behind the judgment founding the bankruptcy notice is almost certainly misconceived.  The costs order was made in the administrative law proceedings brought by the [applicants] in the Supreme Court.  A process of assessment of the costs payable under the order was undertaken under the Legal Profession Act 1987 (NSW) resulting, it can be inferred, in the filing of a certificate of an assessor in a Local Court.  By operation of s 208J of that Act, the certificate (once filed) can be taken to be a judgment of that Court.  There is, in effect, nothing to go behind insofar as the Local Court is concerned.  Indeed the [applicants] appeared to disavow any interest in the process of certification and filing when I raised it with them, even though that process has the appearance of converting an order of the Supreme Court into an order of the Local Court.

Insofar as the Supreme Court order is concerned, it was an order requiring the payment of an unspecified amount as costs.  It is not an order for the payment of a sum arising from a contested hearing (or even a consent order) where the underlying legal or factual foundation (or both) for the order might, in an appropriate case, be scrutinised by a court exercising bankruptcy jurisdiction to determine whether the sum was, in truth (as a matter of fact and law), owing.  It was that type of case that was considered by the High Court in Corney v Brien (involving a default judgment for an amount allegedly due for the sale of a tractor).  A court exercising bankruptcy jurisdiction does not have a general power to consider the “fairness” of the liability on which the bankruptcy notice is founded.  In the present case the Supreme Court determined the proceedings brought by the applicants on the material before it (as it was duty bound to do).  Because, by reference to the material, the [applicants] failed to obtain the orders they sought, they were ordered to pay the defendant’s costs.  Again there is really nothing, in substance, to “go behind” in relation to the costs order in the Supreme Court.

The [applicants], in their written submissions, also alleged bias on the part of the Federal Magistrate on the basis that his Honour, before the parties had put their submissions, said words to the effect that he gave the [applicants] very little chance of success with their application.  While the comment (accepting for present purposes it was made) may have been taken to indicate a predisposition on the part of the Federal Magistrate, it would not have been taken by a fair-minded observer to evidence a closed mind.

The [applicants] have not established a ground for setting aside the judgment of the Federal Magistrate.  Accordingly the appeal should be dismissed with costs.  However I also propose to ascertain whether I should make an order requiring the parties to mediate.  The [applicants] believe they have been, in effect, the victims of a gross unfairness.  Not only do they complain about what happened in the Tribunal, but they also point to their liability under costs orders in this Court in relation to proceedings concerning (as I understand it) the legal efficacy of a bankruptcy notice which was ultimately not relied upon in a later application for sequestration orders based on a creditor’s petition because the notice was viewed by the petitioning creditor (the respondent) as defective.  Whether the [applicants'] complaints are justified or (scilicet) not is not a matter about which I should express a view.

However the applicants presently appear to be heading down a path of further litigation in which liability for costs may arise which they have no capacity to manage or meet.  Indeed that point may have already been reached.  They also face the possibility of sequestration orders being made.  The [applicants] informed me that their only significant asset was their retirement home (the building of which was the subject of the dispute before the Tribunal), they are pensioners and their income is thus limited.  It would be unfortunate if some further attempt were not made to resolve all issues between the parties.  However, it would probably not be productive to order mediation in this matter unless the parties agreed to engage in the process.  It is for this reason I have made orders requesting the parties to advise whether they agree to mediation, and generally restricted the entry of these orders until this position is made clear. 

7                     It can be seen that, in the appeal judgment, I intended to dismiss the appeal of the applicants to set aside the bankruptcy notice but to put in train a procedure which, if agreed to by the parties, might have resulted in a settlement of the dispute between them through mediation.

8                     The orders I made were in the following terms:

1.         The appeal is dismissed.

2.                  The appellants pay the respondent’s costs of the appeal.

3.                  The parties write to my Associate within 14 days from today indicating whether they agree to mediation taking place.

4.                  Subject to the parties agreeing to mediation as provided by order 3, the matter be the subject of mediation on the following basis:

(a)               The matter be referred to a Registrar for a further directions hearing on a date to be fixed. The matter is referred with a view to reaching a mediated settlement or, failing that, a clarification of issues and appropriate further directions.

(b)               The Registrar conducting the directions hearing may exercise all necessary powers of the Court set out in s 35A(1) of the Federal Court Act and O 10 of the Federal Court Rules.

(c)                All discussions before the Registrar are to be on a “without prejudice” basis.

5.         Subject to further order, orders 1 and 2 are not to be entered within one month of today.

9                     I should mention that I made order 5 so that the parties would have the opportunity, in a mediation if it took place, to agree to revisit the orders (and, potentially, agree that they be varied or set aside and some new order made concerning the bankruptcy notice) without the status of the orders being affected by entry (even accepting that under O 35 r 7(2)(f) of the Federal Court Rules, an entered order can be varied or set aside if the party in whose favour the order was made, consents).

10                  The following represents findings of fact made on the evidence in the annulment application.  On 2 September 2003 a letter was received by the Registry (the letter was dated the same day) from Mr Maxwell-Smith.  In the letter he noted that the creditor's petition concerning him was "scheduled for a directions hearing on 15th September 2003".  He also noted, correctly, that I had reserved judgment on 1 September 2003.  He went on to say:

Under these circumstances, we request that the directions hearing is put on hold until the judgment by Justice Moore is made.

Consideration should be given that the self representing respondents in the creditors petition live 8 hours drive from the Sydney Court Building and mail regards the judgment may be delayed for several days.

A Deputy District Registrar responded by letter dated 3 September 2003.  It included the following:

Whether you are granted a further adjournment is a matter in the discretion of the Court.

Your letter has been placed on the Court file.  I suggest that you attend either in person or by telephone on 15 September 2003 if you wish to make any further submission to the Court.

There was some evidence from the applicants which suggested they did not receive this letter.  However during the hearing of the annulment application, Mr Maxwell-Smith (appearing for both himself and his wife) made certain observations that left me with real doubt about the applicants' evidence suggesting that this letter was not received.  I am not affirmatively satisfied it was not received.  On 10 September 2003, a letter was a faxed to my associate by the solicitors acting for the builder indicating their client did not agree to mediation.  There is no notation on the letter to indicate that a copy was to be sent to the applicants.

11                  A copy of the appeal judgment was forwarded to the applicants by mail which they received on either 13 or 14 September 2003.  On 16 September 2003, a letter was received by the Court from the applicants (written by Mrs Maxwell-Smith and dated 14 September 2003) indicating a willingness to participate in mediation and also indicating that she was attempting to convince the Commissioner for Fair Trading to act on their behalf in the mediation.  The letter was in the following terms:

Clare O’Neill – Associate

Chambers of Justice Moore

Level 20 Law Courts Building

Queens Square – Sydney 2000

Dear Clare,

Re; Appeal E. & I. Maxwell-Smith v S.& E Hall

Thank you for sending the decision from Justice Moore by express mail.

However, it is difficult to understand that after finding that the Tribunal made a fundamental error, the decision was still made in favour of the guilty party the Builder Hall.

The additional stress of failing in the appeal caused a total breakdown of my husband.

I am now forced to take over and act on behalf of both of us.

We accept the proposal of mediation and I am attempting to convince David O’Connor the Commissioner for Fair Trading to act on our behalf in this mediation.

Yours sincerely

Inge Maxwell-Smith

8 C Surf Crt

Tura – Beach 2548

At this time Mrs Maxwell-Smith was acting on her and her husband's behalf, because her husband was then not well.  On 16 September 2003 my associate spoke by phone with Mrs Maxwell-Smith.  On that day my associate wrote to the applicants informing them that the orders made concerning mediation did not operate to require mediation because the builder had declined to participate.  Mrs Maxwell-Smith was in Sydney on 15 and 16 September 2003 to deliver the letter of 14 September 2003 agreeing to mediation and to organise the mediation.  Mrs Maxwell-Smith did not become aware that the sequestration order had been made until 17 September 2004 when she spoke to her husband by phone. 

12                  While the applicants did not give direct evidence that they did not receive the letter of 10 September 2003 from the builder's solicitor (declining to participate in mediation) before 16 September 2003, the clear inference from the evidence as a whole is that the applicants were not aware that this letter had been sent until, at the earliest, 16 September 2003.  In an affidavit of the solicitor acting for the builder, he deposed to sending the letter to my associate but made no mention of sending a copy to the applicants.  As noted above, there is no notation on the letter indicating that a copy was being sent to the applicants.  Nothing is said in the evidence of the applicants that they were sent it.  Mr Maxwell-Smith, who was cross-examined about some matters in the annulment application, was asked no questions suggesting he had received it.  Moreover, the conduct of the applicants between 10 September 2003 and 16 September 2003 was, in my opinion, entirely consistent with them not having seen the letter.

13                  I am satisfied that the letter of 14 September 2003 (set out above) was written without knowledge of the attitude taken by the builder to mediation.  I am also satisfied that Mrs Maxwell-Smith's trip to Sydney on 15 and 16 September 2003 was taken for the purpose she stated, namely to let the Court know of her and her husband's attitude to mediation and to take steps to organise someone to represent them in the mediation.  While it is a logical possibility that this was all an elaborate charade on the part of the applicants who came to know shortly after 10 September 2003 of the attitude of the builder to mediation, I do not accept that the evidence should be viewed this way.  Though the applicants appear to be committed to setting aside the effect of all that has happened in the last seven or so years (including the consequences of their own actions) and, as noted below, have not fully cooperated with the Trustee, my impression of both of them is that they are honest individuals.

14                  I should add that the failure of the builder's solicitors to send the letter is at odds with what I understand to be a universal practice of lawyers sending a copy of any written communication to a judge to the other parties in litigation.  It must be accepted that the communication in question was unusual in the sense that it was in response to an order requiring such a communication.  Nonetheless one would have thought the solicitor should have sent a copy to the applicants at the same time it was sent to my associate.

15                  Even if a finding that the letter of 10 September 2003 was not received by the applicants was not made (and it remained an unresolved question of fact), it is nonetheless clear that the applicants were, at the time the sequestration orders were made, intent on bringing about mediation and believed it could occur.  They did not believe, between 13 September 2003 (the earliest they would have know of my judgment) and 15 September 2003, that while the possibility of mediation was alive, it was necessary to guard against the prospect that the sequestration order would be made on 15 September 2003.  It was for that reason that they did not attend the hearing on 15 September 2003.

16                  The applicants' evidence is, and I accept, that they believed (though mistakenly) that the order restricting entry of orders 1 and 2 for 30 days was intended to prevent a sequestration order being made within that period.  Their evidence was, and I accept, that in the period immediately following receipt of my judgment, their focus was on being involved in mediation and having someone represent them in it.  Had the applicants know that the builder had refused to participate in mediation it is probable, in my opinion, they would not have taken the course they did of not appearing before the Registrar.  Indeed, Mrs Maxwell-Smith gave evidence, which I accept, that she could have attended the hearing had she known it was going ahead.

17                  The evidence of what occurred before the Registrar is limited.  As noted above, the applicants did not appear at the hearing on 15 September 2003.  I should add that there is nothing in the material before me to suggest that the hearing on 15 September 2003 was simply a "direction" hearing, as suggested by the letter from the applicants of 2 September 2003.  Having regard to an affidavit sworn by the solicitor acting for the builder, the Registrar was aware of the correspondence between the applicants and the Court of 2 and 3 September 2003.  What the Registrar did not know was that the applicants were unaware that there would be no mediation (and that their attempt to set aside the bankruptcy notice in the appeal had failed completely in the sense that the orders had been made and could not be varied or set aside as a result of agreement reached in any mediation).  The Registrar also did not know that the applicants had not received the letter indicating that the builder would not agree to participate in mediation.

18                  The annulment application is made on two bases.  The first is that the applicants were denied procedural fairness when the sequestration orders were made.  The second, while put in terms of fairness, is in substance, a challenge to the judgment debt on which the bankruptcy notice was founded.  This second basis can be dealt with briefly.  The applicants believe that it is entirely unfair that they were required to pay the builder the amount determined by the Tribunal in circumstances where the determination was, they believed, obtained by fraud and, in any event, failed to recognise the full significance (and cost of rectifying) the faulty building work of the builder.  However, as I endeavoured to explain in the appeal judgment, the bankruptcy notice was based on a debt flowing from a costs order made by the Supreme Court.  That order arose directly from the acts of the applicants in bringing proceedings in the Supreme Court seeking to challenge the determination of the Tribunal, which proved to be misconceived.  Whether the Tribunal was right or wrong in deciding the building dispute in the way it did does not matter for present purposes.  Even if the applicants believed profoundly that the Tribunal was wrong when they commenced the Supreme Court proceedings, it does not alter the fact that they were misconceived.  Events surrounding the determination by the Tribunal and the subsequent litigation in the Supreme Court do not provide any foundation for concluding that the sequestration orders ought not to have been made, which is the statutory test established by s 153B of the Bankruptcy Act 1966 (Cth) ("the Act").

19                  I now consider whether the first basis of challenge, denial of procedural fairness, has been established.  I noted above that when the Registrar made the sequestration orders she did not know the applicants believed nothing of substance would happen at the hearing on 15 September 2003 (including the making of sequestration orders) because mediation was still in prospect.  Had the Registrar known this, it is probable, in my opinion, she would have been in a situation where she should have adjourned the hearing: see Sullivan v Department of Transport (1978) 20 ALR 323 at 343 per Deane J. That is because she would probably have concluded (and in my opinion, should have concluded, had all the relevant facts been known to her) that the applicants had not appeared, and put whatever they wanted in opposition to a sequestration order being made, because they believed that their challenge to the bankruptcy notice had not been exhausted as there was still the prospect of mediation which might resolve the entire dispute including the creditor's petitions.  While there is no evidence suggesting a notice of opposition was filed in either of the two proceedings (being the two creditors petitions, one in relation to Mr Maxwell-Smith and the other in relation to Mrs Maxwell-Smith) that would not have prevented grounds of opposition being raised on the day (r 11(2) of the Bankruptcy Rules) or the matter being adjourned.

20                  The applicants were denied procedural fairness even though the Registrar did not know the applicants were unaware that the builder had declined to participate in mediation: see, by analogy, Minister for Immigration and Multicultural and Indigenous Affairs v SCAR (2003) 198 ALR 293 at [37] and Clements v Independent Indigenous Advisory Committee [2003] FCAFC 143 at [33] and following.  It can be described as an unwitting denial of natural justice: see Re Anasis; Ex parte Total Australia Ltd (1985) 11 FCR 127 at 133.  In any event, an annulment application should be determined by reference to relevant facts as they would have been known when the sequestration order was made.  That principle was recently referred to by a Full Court in Stankiewicz v Plata [2000] FCA 1185 at [19] which followed Gibbs J in Re Williams (1968) 13 FLR 10 at 23 where his Honour said:

… the Court is entitled to consider not only the case as disclosed at the time the [sequestration] order was made, but as it would have been disclosed had all the true facts been before the Court on the making of the order.  If the Court is satisfied that the order ought not to have been made, it is not bound as a matter of course to annul the order, but must consider in the light of all the circumstances of the case whether the order ought to be annulled.  (Citations omitted)

The Full Court at [20] also cited with approval Gummow J in Re Ditfort; Ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347 at 350 where his Honour said that:

The “true facts” which are considered in deciding whether the sequestration order ought not to have been made include those now known then to have existed, but exclude those facts which have occurred since the order was made.

The notion of considering the true facts, including facts not known to the person making the sequestration order, usually applies to facts concerning the financial situation of the bankrupt (facts pointing, for example, to solvency).  However, I see no reason, in principle, why existing but unknown facts (relevant to procedural issues bearing upon whether a sequestration order should be made) cannot be considered in deciding whether that order should be annulled.  In Stankiewicz v Plata (supra) the Full Court observed at [22]:

The bankrupt’s complaint appeared to be that the Registrar should have adjourned the hearing scheduled for 11 March 1998, until a date when he had recovered from his illness.  We are prepared to assume, without deciding, that an erroneous refusal to adjourn a creditor’s petition might be sufficient of itself to establish that the order “ought not to have been made” for the purposes of s 153B of the Bankruptcy Act. 

21                  I am satisfied, for these reasons, that the sequestration orders ought not to have been made.  However such a conclusion does not necessarily lead to annulment orders.  The Court has a residual discretion not to make such orders.  However, four points need to be made.

22                  First, counsel for the builder contested the application on the basis that the Registrar was correct in making the sequestration orders and no case had been made out that the sequestration orders ought not to have been made.  The submissions were directed to the first ground for annulling the sequestration order (see [18] above).  However, no submission was put that if the applicants established the sequestration orders ought not to have been made, the Court should nonetheless, as a matter of discretion, not make orders annulling them.

23                  Secondly, the Trustee led evidence about the conduct of the applicants during the administration of their estates which pointed to an attitude of antipathy on their part and a desire not to cooperate fully in the administration.  Because no submissions were made by the party opposing the application, the builder, that the discretion should not be exercised against making annulment orders, it is probably strictly unnecessary for me to deal with this material.  Nonetheless I make the following observations about the exercise of discretion.  While the applicants have failed to recognise or acknowledge the consequences of their own actions in repeatedly pursuing litigation which has failed (with resultant costs orders that are, in effect, unimpeachable), their conduct should not be characterised as totally inexcusable having regard to their belief (which may possibly have some foundation in fact - though it is not for me to express a view one way or the other) about the unfairness of the Tribunal's determination and the unfairness, as they would see it, visited on them by the making of the sequestration orders.  That is not to suggest, of course, that the applicants were absolved, because of their beliefs, from meeting all obligations imposed on them as bankrupts by the Act while the sequestration orders were on foot.  They were plainly required to comply with the Act in these circumstances.

24                  Thirdly, counsel for the Trustee acknowledged in submissions that probably the applicants were solvent when the sequestration orders were made.  Counsel for the builder did not dispute this proposition.  There is, however, insufficient evidence before me to make a positive finding that the applicants were solvent.  Counsel for the Trustee quite properly pointed out that the annulment application was not brought on the basis that the sequestration orders ought not to have been made having regard to the applicants solvency at the time they were made.  Nonetheless, that the applicants may well be solvent (and may well have been solvent when the sequestration order was made) would militate against exercising the discretion to refuse the relief they seek.  It is settled that the fact of insolvency, if not excluding an exercise of the discretion (see: Re Coyle (1993) 42 FCR 72 at 77 and Official Trustee, In the matter of the Estate of Smith [1999] FCA 1755) weighs heavily against an exercise of the discretion:  Re Dennehy; Ex parte Dennehy (1895) 16 LR(NSW) (Bank & Pro) 40 at 47;  Re Finn; Ex parte Amoco Australia Ltd and Official Receiver in Bankruptcy (1982) 41 ALR 487;  Miller v Bondi Securities [1994] FCA 654.  Similarly there are authorities which suggest that a bankrupt whose assets exceed his or her debts at the date of the sequestration order ordinarily would be entitled to an annulment of the bankruptcy at least if the bankrupt gives undertakings to pay the costs of the petitioning creditor and the Trustee's costs of administration.  These authorities were referred to by the Full Court in Stankiewicz v Plata (supra) at [29] which assumed, without deciding, the authorities were correct.

25                  Fourthly, the applicants did not seek a review of the Registrar's exercise of powers under the Act (in making the sequestration orders) and it was many weeks before these proceedings were commenced.

26                  Having regard to these matters, I would not have exercised the discretion to refrain from making the annulment orders if counsel for the builder had invited me to do so.

27                  In this application, the applicants appear to challenge collaterally the costs, charges and expenses of the Trustee, including his remuneration.  However, s 154(1)(b) creates a statutory entitlement or charge enforceable by the Trustee which I have no power to modify or alter.  That section relevantly provides:

If the bankruptcy of a person (in this section called the former bankrupt) is annulled under this Division:

…

(b)   the Trustee may apply the property of the former bankrupt still vested in the Trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the Trustee;…

(emphasis original)

It may possibly be that, as a matter of construction, the reference to costs, charges and expenses as well as remuneration should be treated as amounts reasonably incurred in the administration of the estate.  Such a construction might be apt because, arguably, the section is not intended to confer on the Trustee a right to apply the former bankrupt's property for costs, charges and expenses arising from activities the Trustee should not have engaged in as part of the proper administration of the bankrupt's estate.  In the present case, having regard to the material before me, I am not satisfied that any aspect of the administration of the bankrupts' estates could be characterised as conduct the Trustee should not have engaged in, including appearing in these proceedings represented by counsel.  It will, of course, be open to the applicants to discuss with the Trustee, a scheme of the type raised by the Trustee's counsel at the hearing, namely the creation of some type of security over their home to enable the satisfaction of amounts due to the Trustee.  Consistent with authority, the Trustee is entitled to his costs of this application: Re Gollan: Ex parte Gollan (1992) 40 FCR 38.

28                  There remains the question of the amounts owing to the builder, which are debts the builder sought to prove and were accepted by the Trustee.  There appear to be no other creditors.  There are authorities that predate the enactment of s 153B of the Act indicating that an annulment order should only be made when the debts of the bankrupt have been paid in full.  That precondition to annulment is reflected in s 153A which creates a mechanism for annulment without the intervention of the Court but which requires the payment of all the bankrupts' debts.  However, I am not aware of any authority which holds that an order should not be made under s 153B unless it is made conditional on the payment of the bankrupt's debts.  Perhaps more importantly, the power is not conditioned in this respect by s 153B or the Act more generally.  At its highest, the discretion to make an order is not ordinarily exercised unless all of the provable debts have been paid in full:  see Hardaker v Phair trading as Proctor Phair & Associates, in the matter of Hardaker [2002] FCA 1176 at [19].  In the circumstances of this case, I do not propose to make any orders about the provable debts of the builder.  However the applicants must accept that those debts are taxed costs for legal proceedings they have been involved in and often initiated by them.  Unless those debts are satisfied, one can reasonably expect the applicants will continue to be involved in further legal controversy, with the real prospect of incurring future legal costs. 

29                  I propose to order that the bankruptcy of each applicant be annulled.  I will give liberty to apply on seven days notice to the Trustee and the applicants if consequential orders need to be made.

Associate:

Dated:              2 July 2004

The Applicants appeared in person.