ACN 126 081 445 v Adorni

[2013] FCCA 2267

FEDERAL CIRCUIT COURT OF AUSTRALIA

WARREN MCKEON DICKSON PTY LTD
ACN 126 081 445 v ADORNI [2013] FCCA 2267

Catchwords:
BANKRUPTCY – Application for an order under s.146 of the Bankruptcy Act 1966 (Cth) – factors relevant to the exercise of the power conferred by s.146 – interest of debtor where estate is solvent to have order made under s.146 – whether order under s.146 should be made to provide debtor to obtain legal advice about setting aside sequestration order – order made under s.146 on the basis that no dividend be paid until after specified date.

Legislation:

Bankruptcy Act 1966 (Cth), ss.140, 145, 146, 153A

Federal Circuit Court of Australia Act 1999 (Cth), s.104(2)
Federal Circuit Court (Bankruptcy) Rules 2006, r.2.03

Official Trustee in Bankruptcy; in the matter of Shaw [1999] FCA 968

Re Sturt; Ex parte Official trustee in Bankruptcy (2001) 117 FCR 1

Applicant: WARREN MCKEON DICKSON PTY LTD ACN 126 081 445

Respondent: BEVERLEY ADORNI

File Number: SYG 2717 of 2012

Judgment of: Judge Manousaridis

Hearing date: 20 December 2013

Date of Last Submission: 20 December 2013

Delivered at: Sydney

Delivered on: 23 December 2013

REPRESENTATION

Solicitor for the Applicant in interim application: Ms Kelly

Respondent appeared in person

ORDERS

1. As from 21 February 2014, the costs, charges and expenses of the administration of the bankruptcy of the respondent, and the distribution of dividends amongst creditors who have proved their debts in the estate, shall proceed in accordance with Part VI Division 5 of the Bankruptcy Act 1966 (Cth) as if the respondent has filed a statement of affairs and those creditors have been stated to be creditors in it.

2. The respondent is entitled to any surplus funds remaining after the payment of dividends to creditors.

3. The parties have liberty to apply on such notice as the circumstances may warrant, such liberty to include liberty to the respondent to apply for leave to apply out of time for a review of the making of the sequestration order on 16 April 2013 and, if such leave is granted, to apply for a review of the making of the sequestration order.

4. The costs of, and incidental to, this application be paid out of the bankrupt estate of the respondent.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT SYDNEY

SYG 2717 of 2012

WARREN MCKEON DICKSON PTY LTD ACN 126 081 445

Applicant

And

BEVERLEY ADORNI

Respondent

REASONS FOR JUDGMENT

Introduction

1. Before the Court is an application by the trustee in bankruptcy of the estate of Beverley Adorni for an order under s.146 of the Bankruptcy Act 1966 (Cth) (Act) that the distribution of dividends among the creditors of Ms Adorni’s estate who have proved their debts proceed in accordance with Division 5 of Part VI of the Act as if Ms Adorni has filed a statement of her affairs, and that those creditors have been stated to be creditors in it.

Background

1. On 16 April 2013 a sequestration order was made against the estate of Ms Adorni. The act of bankruptcy on which the sequestration order was based was Ms Adorni’s failure to comply with a bankruptcy notice. The bankruptcy notice demanded payment of a judgment debt that was recovered by default by Warren McKeon Dickson Pty Ltd (WMD), a law practice. The judgment, in turn, was based on a claim for the payment of legal fees WMD rendered to Ms Adorni.

2. On 23 April 2013, Mr James McPherson, an accountant and associate of the trustee’s accounting practice, arranged to post the sequestration order to an address which a search of the White Pages revealed may have been the house at which Ms Adorni resided. In addition to informing Ms Adorni that a sequestration order had been made against her estate, the letter informed Ms Adorni that she was required by subsection 54(1) of the Act to make out and lodge with the Official Receiver a statement of her affairs in the prescribed format. The prescribed form was attached to the letter.

3. On 24 April 2013, Mr McPherson attended a meeting with Ms Adorni at the premises of Westpac Banking Corporation at 275 George Street, Sydney. In a file note Mr McPherson prepared after the meeting, Ms Adorni is described as “an elderly woman (74 yo) with apparent significant health issues”. At the meeting, Mr McPherson handed to Ms Adorni the letter of 23 April 2013 together with the form of statement of affairs. On 29 May 2013, the trustee sent another letter to Ms Adorni but the trustee received no reply.

4. The trustee has thoroughly investigated Ms Adorni’s estate. The trustee sent pro forma letters to more than thirty financial institutions, only three of which responded. Two responses identified a number of deposit accounts Ms Adorni held. The trustee wrote to the Australian Tax Office which confirmed there was no tax liability owing by Ms Adorni. The trustee sent letters to other institutions including energy and telephone companies.

5. Further investigations revealed Ms Adorni was the registered proprietor of four properties, only one of which is subject to a registered encumbrance. The debt the encumbrance secured, however, had been repaid. On 6 August 2013 the trustee advertised in the Company Notices section of The Australian newspaper inviting creditors to lodge proofs of debt.

6. As a result of her investigations, the trustee became aware of two creditors. One is the petitioning creditor, WMD, and the other is the Commonwealth Bank of Australia. WMD has lodged a proof of debt of $22,433.98. The Commonwealth Bank of Australia has not, indicating that it claims no interest in Ms Adorni’s estate.

7. The current state of Ms Adorni’s estate, as revealed by the trustee’s investigations, can be stated shortly: the trustee holds cash in the sum of $183,484, and the total proven debts are $22,433.98. The creditors of the estate can be paid in full without the trustee having to sell any of Ms Adorni’s properties. And, I infer, the cash held by the trustee is sufficient to pay the expenses of the administration of the bankruptcy.

Course of application

1. The trustee’s application was filed on 10 October 2013 and first came before me on 4 November 2013. On that day, I set down the application for hearing before me at 2.15pm on 10 December 2013.

2. On 10 December 2013, Ms Kelly appeared on behalf of the trustee. I had the matter called but Ms Adorni did not appear. Ms Kelly then identified, and I formally read:

   a)the affidavit of the trustee, Katherine Elizabeth Barnet, made on 9 October 2013;

   b)the affidavit of James McPherson made on 9 October 2013; and

   c)the affidavit of Amelia Heather Kelly made on 6 November 2013.

3. In addition, I admitted as an exhibit the folder of documents which were identified by the trustee in her affidavit as “exhibit “EX1””.

4. After these steps were completed, Ms Adorni appeared and requested that I adjourn the application. Ms Adorni asserted a number of matters about her bankruptcy. Ms Adorni also complained about the fees WMD had charged her and which formed the basis of the judgment debt which the bankruptcy notice demanded Ms Adorni pay. Ms Adorni claimed WMD had no right to charge the fees and hence had no right to obtain the sequestration order against her estate based on Ms Adorni not having paid the default judgment WMD obtained against her.

5. I directed that the application be adjourned to 10.15am on 20 December 2013. I also directed that Ms Kelly, in open court, provide to Ms Adorni each of the affidavits which I had read, together with exhibit “EX1”. After that occurred, I informed Ms Adorni that if, when the matter is next before me, the only ground on which she intended to rely for opposing the orders the trustee seeks were that Ms Adorni does not owe WMD the debt which formed the basis of the sequestration order, I might on that occasion make the orders sought by the trustee.

6. When the matter was called on 20 December 2013, Ms Kelly appeared for the trustee, and Ms Adorni again did not initially appear. After the matter was called, I discussed with Ms Kelly the possibility of making the orders the trustee sought, but on the basis that they do not take effect until sometime in February 2014. I indicated that the purpose of my so ordering would be to afford Ms Adorni an opportunity to obtain legal advice about whether she had any reasonable grounds for setting aside the sequestration order on the ground that Ms Adorni did not owe the debt to WMD.

7. At this point, Ms Adorni appeared. After I adjourned for five minutes to allow Ms Adorni to recover from her trip to the Court, I asked Ms Adorni what her attitude was to the trustee’s application. Ms Adorni said she wanted an adjournment. Ms Adorni said she wanted the adjournment to enable her to obtain legal advice noting, however, that it was very difficult for her to obtain such advice. She also said she was suffering from various medical conditions and that she was due to undergo surgery on 30 January 2014.

8. I asked Ms Adorni whether she had an opportunity to read the affidavits that were given to Ms Adorni on 10 December 2013. Ms Adorni said she did not have time to do so.

9. During the hearing, Ms Adorni narrated to the Court in some detail the dealings she had with WMD and the reasons why she believed WMD was not justified in charging the fees for the non-payment of which WMD obtained default judgment. When Ms Adorni concluded her narration, I informed Ms Adorni that I was of the view that the trustee was entitled to the orders which she was seeking in this application. I informed Ms Adorni that I was of the opinion that it was in Ms Adorni’s interests that the orders be made because it was likely to minimise the costs of the bankruptcy and hasten Ms Adorni’s discharge from bankruptcy.

10. I also informed Ms Adorni, however, that I had considered the complaints she raised about WMD. I informed her that these complaints were matters which, at the latest, she should have raised at the time the creditor’s petition was heard. I informed Ms Adorni that, even after the Registrar made the sequestration order, Ms Adorni could have raised these matters on an application to a judge of this Court for a review of the Registrar’s decision, but that such application had to be made within 21 days from the day on which the sequestration order was made. I noted, however, that it may still be possible to obtain the Court’s permission to make such application of review out of time.

11. I informed Ms Adorni that I did not intend to suggest that Ms Adorni had any reasonable prospects of setting aside the sequestration order. However, I said I was of the opinion that she should have an opportunity to seek legal advice about whether she had any reasonable grounds for doing so. I indicated to Ms Adorni that I proposed to give Ms Adorni that opportunity by making the orders sought by the trustee to take effect towards the end of February 2014.

12. The hearing of 20 December 2013 concluded by my adjourning the matter to 10.00am on 23 December 2013 for the purpose of delivering my reasons of judgment on the trustee’s application. I indicated that I would be making the orders sought by the trustee, but on the basis that they not take effect until sometime in late February 2014.

13. I propose to make such orders, and these are my reasons for making them.

Principles governing the exercise of s.146 of Act

1. Section 146 of the Act provides:

   Where a bankrupt has failed to file a statement of his or her affairs as required by this Act, the Court may, on the application of the trustee, upon such terms as it thinks fit, order that distribution of dividends amongst the creditors who have proved their debts shall proceed in accordance with this Division as if the bankrupt had filed a statement of his or her affairs and those creditors had been stated to be creditors in it.

2. Section 146 “is intended to facilitate the distribution of dividends among the creditors of the bankrupt in circumstances where the trustee has not had the benefit of a statement of affairs prepared by the bankrupt”.[1] The purpose of s.146 of the Act is “to give the Court the means of ensuring that the absence of a statement of affairs does not prejudice those with an interest in the bankrupt’s affairs”.[2]

   [1] Re Sturt; Ex parte Official trustee in Bankruptcy (2001) 117 FCR 1 at [14] (Sackville J).

   [2] Official Trustee in Bankruptcy; in the matter of Shaw [1999] FCA 968 (Gyles J).

3. Relevant factors to the exercise of the discretion conferred by s.146 of the Act include whether creditors have been informed of the application for an order under the section,[3] and whether the trustee has taken steps to ascertain the identity of creditors other than those who have come to the trustee’s attention by filing a proof of debt.[4]

   [3] Re Sturt; Ex parte Official trustee in Bankruptcy (2001) 117 FCR 1 at [19] (Sackville J)

   [4] Re Sturt; Ex parte Official trustee in Bankruptcy (2001) 117 FCR 1 at [19] (Sackville J)

4. In my opinion, it is not necessarily only the interests of creditors that are relevant to whether an order should be made under s.146 of the Act. Also relevant are the interests of the bankrupt, at least where, as is clearly the case with the estate of Ms Adorni, the value of assets of the bankrupt’s estate exceed the value of the bankrupt’s debts. Where the value of the estate’s assets exceed the value of the debts, it is in the interests of not only the creditors but also the debtor that the trustee, “with all convenient speed, declare and distribute dividends amongst the creditors who have proved their debts”.[5] Not only will this reduce the costs of the administration of the bankruptcy; it will pave the way for the trustee to declare and distribute a final dividend under s.145 of the Act. That, in turn, will pave the way for the bankruptcy to be annulled pursuant to s.153A(1) of the Act which provides:

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

   [5] Section 140(1) of the Act.

Relevance of dispute of debt

1. As I say earlier in these reasons, Ms Adorni claims that WMD was not entitled to charge her the fees which formed the basis of the judgment debt which, ultimately, was the debt on which the sequestration order was based.

2. Whether or not that debt is disputed, however, is not relevant to the application under s.146 of the Act that is before me. The latest time at which Ms Adorni should have claimed she did not owe the debt was when the creditor’s petition was heard. At that point, Ms Adorni could have attempted to oppose WMD’s petition on the ground that, even though WMD has obtained a judgment against Ms Adorni, Ms Adorni is not indebted to WMD.[6] Ms Adorni could also have attempted to oppose WMD’s petition on the ground that she has a claim against WMD in an amount equal to or greater than the amount the respondent owes the creditor.[7] Ms Adorni, however, did not make any such claim.

   [6] The circumstances in which a court can go behind a judgment are extensively discussed in  McDonald, Henry & Meek Australian Bankruptcy Law & Practice Thomson Reuters, current edition (Update 167), at [52.1.23]

   [7] See McDonald, Henry & Meek Australian Bankruptcy Law & Practice Thomson Reuters, current edition (Update 167), at [52.2.22]

3. The only possible avenue available to Ms Adorni to set aside the sequestration order based on a claim that she is not indebted to WMD or that she has a claim against WMD in an amount equal to or greater than the debt owed to WMD is for her to apply for a review of the Registrar’s decision under s.104(2) of the Federal Circuit Court of Australia Act 1999 (Cth) (FCCA). Ms Adorni, however, faces at least one potential obstacle to her being able to do this: the time for filing an application for review is long past. If Ms Adorni wishes to apply for a review out of time, she will need the Court’s permission to do so. That follows from r.2.03 of the Federal Circuit Court (Bankruptcy) Rules 2006 which provides that “[s]ubject to any direction by the Court or a Judge to the contrary, an application under subsection 104(2) of the [FCCA] Act for review of the exercise of a power of the Court by a Registrar  . . . must be made by application for review within 21 days after the day on which the power was exercised”.

4. Ms Adorni may well face another difficulty Any leave to permit Ms Adorni to apply out of time to review the sequestration order may be granted on terms that Ms Adorni indemnify the trustee for the expenses the trustee incurred in the course of her administration of the bankruptcy. Those costs may well exceed the amount of the judgment debt owed to WMD.

Should the Court make the orders claimed by the trustee?

1. I am satisfied the evidence establishes the following matters.

   a)Ms Adorni, the debtor, is aware of the sequestration order and of the need to lodge a statement of affairs but, for whatever reason, she has not lodged a statement of affairs.

   b)Ms Adorni obviously had notice of this application as she appeared on the last two of the three occasions the application has been before the Court.

   c)The trustee has brought the administration of the estate of Ms Adorni to the state which will enable the trustee to declare and pay dividends as required by s.140 of the Act.

   d)The trustee has identified all creditors and assets of Ms Adorni’s estate.

   e)The only creditor who has lodged a proof of debt, WMD, has been notified of the application, but does not intend to appear.

   f)The other creditor whom the trustee has identified, the Commonwealth Bank of Australia, claims no interest in Ms Adorni’s estate.

   g)Not to permit the distribution of the estate only because Ms Adorni has not completed a statement of affairs will prejudice the creditors of her estate because it will prevent or delay the payment of a dividend.

   h)Not to permit the distribution of the estate only because Ms Adorni has not completed a statement of affairs will also prejudice Ms Adorni. The costs that will accrue with the continuation of the bankruptcy will be borne by Ms Adorni’s solvent estate; and the annulment provided for by s.153A of the Act will be delayed.

2. In these circumstances, I am satisfied that the Court should make the orders claimed by the trustee.

From when orders should take effect

1. As I note earlier in these reasons, on each of the two occasions Ms Adorni appeared before the Court, she claimed WMD ought not to have charged her the fees for which WMD obtained default judgment. Ms Adorni claimed she has suffered an injustice by having been made bankrupt on the basis of her not paying WMD the fees it charged her.

2. In my opinion, because Ms Adorni’s estate is clearly solvent, and Ms Adorni’s claims to have suffered an injustice appear to be heartfelt, it is in the interests of justice that the orders I propose to make on the trustee’s application should not take effect until 21 February 2014. The purpose of so ordering is to afford Ms Adorni an opportunity to obtain legal advice about whether she has any reasonable grounds for setting aside the sequestration order and, if she obtains legal advice that she does have such grounds, to apply to the Court for the appropriate relief if she so chooses.

3. The making of such an order will delay the administration of the bankruptcy. However, given that Ms Adorni’s estate is solvent, the estate can, in effect, fund the additional costs that may result from the delay.

Should an adjournment have been granted?

1. As I also note earlier in my reasons, Ms Adorni applied for an adjournment of the hearing of the trustee’s application. I may not have expressly dealt with that application when the matter was before me on 20 December 2013, although, given that I indicated I proposed to make the orders claimed by the trustee on 23 December 2013, it should have been clear to Ms Adorni that I refused her application.

1. I did not grant Ms Adorni the adjournment she sought for two reasons. First, although I accept Ms Adorni has a number of difficulties with her health, none of these difficulties, on my observation, prevented her from understanding what was being said to her. And Ms Adorni certainly had no difficulty in expressing herself - Ms Adorni spoke with grace and eloquence. Second, the course I indicated to Ms Adorni and to Ms Kelly I proposed to take, namely, to make the orders the trustee sought subject to their coming into effect towards the end of February 2014, will afford Ms Adorni an opportunity to obtain legal advice, should she choose to do so. That is so, even if Ms Adorni has the surgery on 30 January 2014.

Conclusion and disposition

1. The trustee is entitled to the orders she seeks on this application. I propose to make the orders claimed by the trustee, but on the basis that they do not take effect until 21 February 2014. I will also grant the parties liberty to apply on such notice as the circumstances warrant. Ms Adorni may rely on that liberty to apply to the Court for leave to file out of time an application for a review of the sequestration order made on 16 April 2013 and, if leave is granted, to apply for a review of the sequestration order.

I certify that the preceding thirty seven (37) paragraphs are a true copy of the reasons for judgment of Judge Manousaridis

Date: 23 December 2013