Allied Mills Pty Ltd v Mai - [2010] FMCA 631

FEDERAL MAGISTRATES COURT OF AUSTRALIA

ALLIED MILLS PTY LTD v MAI & ORS

[2010] FMCA 631

BANKRUPTCY – Proceedings in connection with sequestration – application to review Registrar’s decision – failure to disclose security held by petitioning creditor – whether petitioner a “creditor” for the purposes of s.44(1) of the Bankruptcy Act1966.

BANKRUPTCY – Proceedings in connection with sequestration – petition and sequestration order – irregularities with petition and amendment - error in creditor’s petition – where creditor’s petition wrongly alleged creditor was unsecured– creditor’s petition held to be defective.

BANKRUPTCY – Proceedings in connection with sequestration – review of Registrar’s decision – non-service of petition – sequestration order set aside.

Bankruptcy Act 1966 (Cth) ss.4, 44(1), 44(2), 44(3), 44(4), 44(5)
Federal Magistrates Act1999 ss.104(2) & 104(3)
Enforcement of Judgments Act1991 (SA) s.8

In re a Debtor (1977) 1 WLR 1308
Wright Designed Pty Limited (Subject to Deed of Arrangement) v McClymont (2006) FCA 999

Applicant:

ALLIED MILLS PTY LTD

Respondents:

KIM LIEN MAI & CUONG NGOC MAI & DUNG NGOC MAI & NGOC CANH MAI

File Number:

BRG 567 of 2010

Judgment of:

Jarrett FM

Hearing dates:

6 & 13 August 2010

Date of Last Submission:

13 August 2010

Delivered at:

Brisbane

Delivered on:

13 August 2010

REPRESENTATION

Counsel for the Applicant:

Mr Thomas

Solicitors for the Applicant:

Dunstan Playford

Solicitor for the Respondent:

Mr Quinn

Solicitors for the Respondent:

Q5 Law

ORDERS

The sequestration order made by Registrar Baldwin on 15 July 2010 against KIM LIEN MAI, NGOC CANH MAI and CUONG NGOC MAI and the Order for Costs be set aside.
The creditor’s petition filed 7 June 2010 against KIM LIEN MAI, NGOC CANH MAI and CUONG NGOC MAI be dismissed.
The application for review filed 30 July 2010 in regards to DUNG NGOC MAI be dismissed.
The applicants’ KIM LIEN MAI, NGOC CANH MAI and CUONG NGOC MAI costs of and incidental to the creditor’s petition and the application for review in relation to KIM LIEN MAI, NGOC CANH MAI and CUONG NGOC MAI be taxed in accordance with the Federal Magistrates Court Rules 2001 and paid by the respondent.
Pursuant to s.30 of the Bankruptcy Act 1966, the National Personal Insolvency Index be corrected so that reference to this creditors petition and the Order made in so far as KIM LIEN MAI, NGOC CANH MAI and CUONG NGOC MAI are concerned is expunged.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT BRISBANE

BRG 567 of 2010

ALLIED MILLS PTY LTD

Applicant

And

KIM LIEN MAI & CUONG NGOC MAI & DUNG NGOC MAI & NGOC CANH MAI

Respondent

REASONS FOR JUDGMENT

(Ex tempore)

This is an application for review under ss.104(2) and 104(3) of the Federal Magistrates Act1999 for a sequestration order and an order for costs made by Registrar Baldwin against the estates of the four respondents to be set aside. The sequestration order was made on

15 July 2010.
This is a hearing do novo. On this application the Court is engaged in a fresh proceeding. It does not scrutinise the original reasons of the Registrar to ascertain if there was any error in the Registrar’s decision. It makes its own decisions on the merits of the case based upon the material before it. In applications for review of a sequestration order that requires the petitioning creditor to prove all necessary matters, including those specified in s.52(1) of the Bankruptcy Act.
Pursuant to s.104(3) of the Federal Magistrates Act the Court may make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised by the Registrar. Such a power includes a power in the present circumstances to make orders, it seems to me, leading to the correction of the National Personal Insolvency Index pursuant to s.30 of the Bankruptcy Act.
The proceedings in this case concern a judgment secured by the petitioning creditor against the respondents in the Local Court in Burswood in New South Wales. The claim was essentially for the price of goods alleged to have been sold and delivered by the petitioning creditor to the respondents.
The four applicants for review each have different bases upon which they seek to have the sequestration order against them set aside and the petition dismissed.
I will deal with the cases of the two respondents Kim Mai and Canh Mai first. They are husband and wife and, according to the material, the parents of the other two respondents. Their position is different to the other two respondents.
In respect of the judgment against Kim Mai and Canh Mai the petitioning creditor has secured a charging order in South Australia pursuant to s.8 of the Enforcement of Judgments Act1991 (SA). It is now conceded, although it was the subject of contest at one point that the charging order amounts to a security for the purposes of the definition of secured creditor in s.4 of the Bankruptcy Act1966. A consequence, among several, of that is that the petitioning creditor may not have been entitled to present a petition against Kim Mai and Canh Mai: ss.44(1) and 44(2) of the Act; and that it ought to have disclosed its security in the petition.
It is unnecessary to examine the nature of a charging order made pursuant to the Enforcement of Judgments Act1991 given the concession by the petitioning creditor, but even without the concession it seems to me that the charging order is clearly a security for the relevant purposes of the Bankruptcy Act.
Section 44 of the Bankruptcy Act sets out whom it is that might present petitions for sequestration orders. Ordinarily a petition for a sequestration order is presented by an unsecured creditor - a person who meets the descriptions set out in ss.44(1)(a), (b) and (c) of the Bankruptcy Act.
Sub-section 44(2) of the Bankruptcy Act provides that a secured creditor is, for the purposes of s.44(1)(a) of the Act, deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him or her exceeds the value of his or her security. In this case the security is for the amount specified in the Bankruptcy Notice - $4,509.60. It seems to me that the amount of the security does not exceed the amount of the debt owing to the petitioner creditor and so there is no amount in respect of which the secured creditor in this case, the petitioning creditor, can be said to be an unsecured creditor of Kim Mai and Canh Mai.
However, a secured creditor may present a petition as if he or she were an unsecured creditor if the secured creditor complies with s.44(3) of the Bankruptcy Act. Rather than attempt to explain the scheme of the Act and ss.44(3), (4), (5) and (6) in my own words I can do no better, with respect, than the judgment of Rares J in Wright Designed Pty Limited (Subject to Deed of Arrangement) v McClymont (2006) FCA 999, wherein his Honour says this:
21. Section 44(2) of the Bankruptcy Act 1966 (Cth) provides that subject to s 44(3) a secured creditor shall, for the purposes of s 44(1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him or her exceeds the value of his or her security. And s 44(3) provides that a secured creditor may present or join in presenting a creditor’s petition as if he or she were an unsecured creditor if they include in the petition a statement they are willing to surrender the security for the benefit of creditors generally in the event of a sequestration order being made against the debtor. Moreover, s 44(4) provides that where a petitioning creditor is a secured creditor, they must set out in the petition particulars of the security.
22. Wright Designed [and here it is just as easy to substitute the petitioning creditor’s name, Allied Mills Pty Limited] argued that by reason of s 44(5) a secured creditor could present a creditor’s petition as if an unsecured creditor and that if it did so the trustee, within three months after making the sequestration order can require it to surrender its security to the trustee for the benefit of creditors generally.
In written submissions, in support of the petitioning creditor’s case, it is said that the petitioning creditor accepts that it was obliged to list its security pursuant to the charging order on the petition, however its failure to do so did not invalidate the petition because s.44(5) of the Act clearly provides for circumstances where a secured creditor petitions as if it were an unsecured creditor. It is further said that the secured creditor may, with the leave of the Court, amend the petition to include the details of the security. In oral argument it was made clear that the application to amend was in the alternative and it was suggested that the failure to disclose the security was not fatal and all that needed to happen was that the trustee ask for the security to be surrendered in due course and it would be surrendered.
Rares J goes on in Wright Designed:
23.    Failure to surrender in accordance with a request is made a contempt of court by force of s 44(6). The expression in s 44(5) that the secured creditor has presented a creditor’s petition ‘as if he or she were an unsecured creditor’ links back to that expression as used in s 44(3), namely, that the secured creditor is given the right to present a creditor’s petition as if he or she were an unsecured creditor if, and in my opinion only if, the secured creditor includes in the petition the statements required by ss 44(3) and (4).
24.    That is, that the secured creditor must include in the petition the statements that he or she is willing to surrender the security for the benefit of the creditors generally in the event of a sequestration order being made and must set out the particulars of the security. In that circumstance s 44(5) operates to create an entitlement in the trustee to require the surrender in accordance with the statement pursuant to s 44(3) that the secured creditor would be willing to do so. And, it is in those circumstances that it makes sense for s 44(6) to provide that it is a contempt of the Court for the secured creditor to refuse to comply with the request. That is because the Court has been moved to sequestrate the estate of the debtor upon the basis of a statement under s 44(3) that the creditor would be willing to do that which, if the contempt is proved, he or she is clearly not doing, namely surrendering the security.
25.    I am of the opinion that section 44(5) does not permit Wright Designed to claim falsely in the petition that it holds no security and, if that is proved wrong, to turn around and say that it could present the petition anyway without having voluntarily offered, under section 44(3), to surrender the security for the benefit of creditors generally. Such a construction of section 44 reflects the principle of bankruptcy law that all unsecured creditors should be treated equally and a secured creditor should not be allowed to prove for its full debt as an unsecured creditor as well as keeping its security.
I am not bound by Rares J decision but I can see no reason why I would not follow it. It is persuasive authority which I apply in this case.
In my view, the petitioning creditor’s submissions are misconceived. There was an obligation on the petitioning creditor to list its security in the creditor’s petition and in circumstances where it failed to do so the petition is invalid because the petitioning creditor was not authorised to present the petition at all.
The irregularity in the petition however can be cured by amendment and an amendment was foreshadowed during the course of the argument in this case. Whether the Court should allow an amendment or not, of course, is a question of discretion and a relevant factor will be the prejudice to each of the parties if the amendment is permitted or refused as the case maybe. Additionally, the efficacy of the amendment needs to be taken into account and, as the cases demonstrate, the reason for the failure to disclose the security is of some importance as well. If the failure to disclose the security in the petition was properly characterised as inadvertent then a grant of leave will be more easily forthcoming. If the Court forms the view that the failure to disclose the security was deliberate, by reason of some misunderstanding of the law for example, then a grant of leave is not likely to be forthcoming: In re a Debtor (1977) 1 WLR 1308 and, again, Rares J in Wright Designed Pty Limited (Subject to Deed of Company Arrangement) v McClymont, (2006) FCA 999.
Here, until the hearing today, the petitioning creditor’s attitude was that it was not required to disclose the charging order because it was not a security. That stance changed today and the petitioning creditor seemed to accept that the charging order was indeed a security but, nonetheless, the submission continued that there was no obligation of any consequence at least on it to disclose the security in the petition. That was clearly an erroneous view of ss.44 and, in particular, ss.44(3), (4), (5) and (6).
But, notwithstanding that the deliberate nature of the petitioning creditor’s failure to disclose the relevant charging order, the amendment foreshadowed does not cure the difficulties that the petitioning creditor faces. The amendment that was foreshadowed was to delete the present paragraph 3 of the petition and substitute the following:
That the petitioning creditor holds security over the property of the respondent debtors pursuant to a charging order of the Magistrates Court of South Australia in the amount of $4,509.60.
In the foreshadowed amendment there is no offer, as required by s.44(3), to surrender the security for the benefit of creditors generally in the event that a sequestration order is made against the debtors. That is a pre-condition to a secured creditor presenting a petition, it seems to me, having regard to what Rares J says and having regard to the terms of the section. A secured creditor is only treated as an unsecured creditor for certain purposes and on certain conditions - those conditions need to be fulfilled before the secured creditor may present a petition as if he or she were an unsecured creditor.
Those conditions will not be fulfilled even if the amendment is granted. For that reason the amendment is not efficacious. The amendment will be refused.
In the absence of an efficacious amendment to the creditor’s petition the petition cannot succeed against the two respondents Kim and Canh, and the sequestration orders against them should be set aside, the costs orders discharged and the petition will be dismissed.
I turn then to the applicant Cuong. His case is that a sequestration order ought not be made against him because he was not served with the creditor’s petition.
There was no cross-examination of the deponents of any of the affidavits in this matter before me. The affidavits that bear on service of the petition on Cuong are his own affidavit, the affidavit of his father (Canh), and the affidavit of the process server Andrew Richard Smith filed by leave on 15 July, 2010.
In paragraphs 19 and 20 of Canh’s affidavit he deposes to having been served with the petition twice, once on 26 June, 2010 and again on 28 June, 2010. He deposes that on the second occasion a person asked him if he was the Ngoc Mai of the address of 35 Hansen Road, Woodville North, South Australia, 5012, stated on the documents. Canh says that he assumed that the documents were for him as that was his name in Vietnamese culture and he said “yes”. The creditor’s petition was given to him. He said that he did not fully understand that he was accepting the documents for anyone and he did not notify Cuong about the petition.
Cuong’s evidence is at paragraph 10 and 11 of his affidavit. He says that, at the time the petition was apparently served on him, he was working as a truck driver and he was not at home on that day. He says he was working the whole day on 28 June. He left home at 7.15 am and he returned home after 6 pm. He exhibits his timesheets for that day as corroborative evidence of that statement.
As against that evidence that the document was not served on the applicant, Cuong, there is an affidavit of service of the creditor’s petition sworn by Andrew Richard Smith filed on 15 July 2010. That document was filed in court by leave. It is a facsimile document. It is not clear from the material on the file whether leave to file the document by facsimile was given on the basis of any undertaking to file the original, but the originals do not appear on the court file. It is not clear whether the originals have been filed or not.
The facsimile copy of the document that has been filed by leave in Court has no exhibits to it, or no annexures, despite paragraphs 3, 4, 5 and 6 referring to various annexures to the affidavit. It is, therefore, incomplete and there has been no complete affidavit filed according to the court record. The deponent, Mr Smith, swears that he served Cuong on 28 June at 7.20 am with the relevant documents. He says he identified the person he served as the respondent debtor by asking him, “Are you Cuong Ngoc Mai?”, and by the person to whom he addressed those words responding “Yes”.
There is a conflict in the evidence between that of Canh and the process server, and that of Cuong and the process server. None of the witnesses were cross‑examined, but I am persuaded by the evidence attached to Cuong Mai’s affidavit, that was not the subject of objection, as to his working arrangements on the relevant day. Those arrangements tend to demonstrate that it was likely that he was not at home at the relevant time when the process server says that he served the documents, and that it is likely, given the evidence, that the wrong person was served.
I am satisfied on the balance of probabilities that the wrong person was served, and that Canh was served instead of Cuong. In those circumstances, I am not satisfied that Cuong has been served with the creditor’s petition and no sequestration order ought to be made against him. The sequestration order that has been made against his estate will be set aside. The petition against him will be dismissed.
The remaining applicant, Dung Ngoc Mai, cavilled with the amount sought by the petitioning creditor from him in the judgment from the local Court at Burswood, and as it appears in the bankruptcy notice and the petition.
The difficulty with the amount claimed from him seems to have been resolved, and it was conceded in the course of submissions today that there is now no issue about the amount claimed against him.
Having regard to his evidence, there is no basis upon which, it seems to me, that a sequestration order ought not to have been made. The Registrar had before her at the relevant time all of the documents necessary to satisfy the requirements of s.52(1) of the Bankruptcy Act, and it was appropriate in the circumstances for a sequestration order to be made.
Insofar as the application for review by the respondent, Dung Ngoc Mai is concerned, the application will be dismissed.
In my view, costs should follow the event. The three successful applicants should have their costs of the creditor’s petition that has been dismissed in so far as it concerned them, and the application for review. There is no good reason, it seems to me, for there not to be an order for costs. It might be the case that these issues, upon which the applicants have now been successful, could have been raised by them at the time the creditor’s petition was initially heard. But if those issues were raised, given the petitioning creditors stance, it would have led to the application simply being transferred to a federal magistrate for a decision, in any event. No significant additional costs have been incurred by the failure to appear.

That does not deal with the costs of the application for the review, but it demonstrates, it seems to me, that the matter might not have simply been dealt with on the first return date.
The letter that forms exhibit 1 in the costs application, for the reasons expressed by Mr Thomas in submissions, is really not to the point. It does not assist the resolution of the costs argument one way or the other.

I certify that the preceding thirty-six (36) paragraphs are a true copy of the reasons for judgment of Jarrett FM

Associate:

Date: 19 August 2010