Cavanagh B. v Bank of New Zealand

[1990] FCA 171

Re: BARRY CAVANAGH
And: BANK OF NEW ZEALAND
No. 875 of 1989
FED No. 171
Bankruptcy
98 ALR 217

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Von Doussa J.(1)

CATCHWORDS

Bankruptcy - application to rescind sequestration order - whether sequestration order operative before it was signed and sealed - whether debtor had become bankrupt - whether consenting trustee had become the trustee of the debtor's estate - whether trustee had standing to appear on the hearing of the application - relevance of delay in prosecuting application to rescind sequestration order discussed - whether evidentiary material placed before the court was satisfactory.

Bankruptcy Act 1966, ss.19, 21, 27, 37, 43, 155, 156A

Bankruptcy Rules, 12, 124

Federal Court Rules, O.1, r.11; O.35, r.3

HEARING

ADELAIDE

#DATE 24:4:1990

Counsel for the bankrupt : Mr D.H. Wilson

Solicitor for the bankrupt : Mr D.H. Wilson

Counsel for the petitioning
creditor : Mr J.S. Hannan

Solicitors for the petitioning
creditor : M.L. Sibly and Co.

Mr K.M. Pipkin, trustee of the
bankrupt's estate : in person

ORDER

1. The application for rescission of the sequestration order made herein on 28 August 1989 be dismissed.

Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

JUDGE1

The bankrupt seeks rescission of the sequestration order pronounced on 28 August 1989 by a registrar of the Court. On 7 September 1989, before that order was signed and sealed as required by rule 124 of the Bankruptcy Rules, the bankrupt filed the application now before the Court seeking to have the sequestration order rescinded on the ground that the petitioning creditor had been paid its judgment debt shortly after the order was made. There has been much delay in the prosecution of the application, about which I shall say more later. When the application eventually came on for hearing on 19 March 1990 a number of interested parties appeared. The petitioning creditor appeared to consent to the rescission of the sequestration order. Counsel appeared for the Deputy Commissioner of Taxation, who had earlier indicated his interest as a creditor, to announce that the bankrupt's liability to the Australian Taxation Office as at the date of the sequestration order had been discharged by a payment received from a third party upon whom a notice had been served pursuant to s.218 of the Income Tax Assessment Act 1936; the Deputy Commissioner did not oppose the rescission of the sequestration order. Mr K.M. Pipkin appeared and sought to be heard in opposition to the rescission of the sequestration order. Mr Pipkin is a trustee registered under s.155 of the Bankruptcy Act 1966. The petitioning creditor had filed with the petition a consent to act as trustee of the estate of the debtor signed by Mr Pipkin: see r.12(3)(ba) of the Bankruptcy Rules and sub.s.156A(1) of the Bankruptcy Act. Mr Pipkin submitted that by force of sub.s.156A(3)(a) he had become the trustee of the debtor's estate at the time when the sequestration order was pronounced on 28 August 1989.

1. The application for rescission was referred to a judge and adjourned to 2 April 1990 to enable the bankrupt and Mr Pipkin to place further information before the Court. On 2 April 1990 Mr Pipkin sought to file, and to rely upon, a written report by him of investigations he had made as trustee pursuant to s.19 of the Bankruptcy Act to ascertain the assets and liabilities of the bankrupt. Counsel for the bankrupt objected to the appearance of Mr Pipkin, and to the reception of his report or any other information from him, on the ground that until the sequestration order was signed and sealed it was not effective to make the debtor bankrupt, nor to appoint Mr Pipkin to the position of trustee of his estate. In short, whilst it was acknowledged by counsel for the bankrupt that if the sequestration order was signed and sealed it would operate as from 28 August 1989, the day on which the order was pronounced, it was contended that until formal entry of the order in the manner required by r.124, the order was of no effect.

2. Under the Bankruptcy Act, courts having jurisdiction in bankruptcy are superior courts of record: sub.ss.21(2) and 27(1). After a judgment or order is pronounced orally it is necessary that something further be done which will become "the record" of the court: Driver v. Driver (1950) SASR 8 at 10. For this purpose, the judgment or order must be passed and entered. When that ministerial act is completed, the judgment or order takes effect from the time when it was pronounced, unless, under a power in a rule of court, the court orders that it take effect at an earlier or later date. Such a power is common in rules of court: see Bernard C. Cairns, "Australian Civil Procedure" 2nd Ed. p 472. In the Federal Court of Australia Rules, O.35, r.3 provides :
   

"A judgment or order shall take effect on the date on which it is pronounced or made, unless the Court orders that it take effect at an earlier or later date."

However in relation to proceedings under the Bankruptcy Act the practice and procedure of the court is to be in accordance with the Bankruptcy Rules and the Bankruptcy (Offences) Rules: FCR, O.1, r.11; and those rules contain no equivalent provision to O.35, r.3. Further, the High Court has determined that the scheme of the Bankruptcy Act expressly precludes any power to order that a sequestration order take effect from any date other than the date on which it is made: Clyne v. Deputy Commissioner of Taxation and Ors (1984) 154 CLR 589 at 597-598. However the question remains whether a sequestration order is effective immediately it is pronounced, or only once it is passed and entered, i.e. signed and sealed as required by r.124.

1. The applicant relies in particular on s.37 of the Bankruptcy Act, the relevant parts of which read :
   

"37(1) Subject to subsections (2) and (3), the Court may rescind, vary or discharge an order made by it under this Act or suspend the operation of such an order.

(2) The Court shall not, after a sequestration order has been signed and sealed as provided by the rules, rescind or suspend the operation of the order."

These provisions must be read with sub.s.43(2) :

"43(2) Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until -

(a) he is discharged by force of section 149;

(b) he is discharged by order of the Court; or

(c) his bankruptcy is annulled under section 74 or 154."

1. The argument is that if the sequestration order comes into effect before it is signed and sealed, it would follow that from the pronouncement of the order the debtor becomes a bankrupt and paras.43(2)(a) to (c) make no provision for that bankruptcy to come to an end on the rescission of the order: cf Re Deriu (1970) 16 FLR 420 at 422 per Gibbs J. In that case, it may be assumed that the order, which had been made some nine years earlier, had been passed and entered before the application to rescind it was made. In Deriu, and in Cameron v. Cole (1944) 68 CLR 571 to which Gibbs J. makes reference, the present question was not raised by the facts nor considered. Putting aside for the moment any special considerations which may arise under the Bankruptcy Act, in courts of record during the time between the pronouncement of a judgment or order and it being passed and entered the judgment or order is inchoate and incomplete: Driver v. Driver, supra. The judgment or order has not yet passed from the control of the judge who made it, and it is open to reconsideration and review by that judge: In Re Harrison's share under a settlement. Harrison v. Harrison (1955) 1 Ch 260, Addison and Anor v. City Mutual Life Assurance Society Limited and Anor (1933) 49 CLR 106 at 110-111, re Edgar; Ex parte Davidson and Ors (1973) 2 ALR 649 at 656-657, Permanent Trustee Co. (Canberra) Ltd v. Stocks and Holdings (Canberra) Pty Ltd (1976) 28 FLR 195 at 198 and Pittalis and Ors v. Sherefettin (1986) QB 868. But it does not follow from the existence of this well recognised power in a judge to recall a judgment or order before it is perfected, that the judgment or order is during that period without operation or effect. In The Church of the New Faith Incorporated v. Bower and Australian Broadcasting Commission (No. 2) (1979) 21 SASR 161 at 163 as Zelling J. observed :
   

"In general the time at which an order is made is the date on which it is pronounced and not the date of its being drawn up: see Ex Parte Hookey; In the matter of The Risca Coal and Iron Company

(1862) 4 DeG, F and J 456 (45 ER 1261). It is perhaps more accurate to say that it is provisionally effective from the date it is stated orally, because a Judge can always recall or alter his order up to the date of its being drawn up..."

In that case his Honour held that an order, even though it had not been drawn up and entered as required by the rules of court, had operated to strike out paragraphs of a defence. It has also been held that garnishee proceedings may be instituted to attach a judgment debt even though the judgment creating the debt has not been passed and entered: Holtby v. Hodgson (1889) 24 QBD 103. The same inherent power to reconsider and review a judgment or order before it is entered has been recognised and extensively applied in the criminal courts: Reg. v. Cross (Patrick) (1973) 1 QB 937 at 940, R. v. Rumpf (1988) VR 466 at 469 and R. v. Caruso (1988) 49 SASR 465. In the criminal jurisdiction custodial sentences are frequently put into effect immediately upon pronouncement even though the sentence may not be entered in the record of the court until some time later.

1. In Re Harrison's share under a settlement. Harrison v. Harrison, supra, at 276 the Court of Appeal said :
   

"...although the judgment dates from the day of its pronouncement it is not perfected until drawn up, passed and entered, and anyone who acts on it beforehand must take such risk as there is that it will be drawn in the form in which it was heard to be pronounced.

We think that an order pronounced by the judge can always be withdrawn, or altered, or modified by him until it is drawn up, passed and entered. In the meantime it is provisionally effective, and can be treated as a subsisting order in cases where the justice of the case requires it, and the right of withdrawal would not be thereby prevented or prejudiced. For example, the granting of an injunction, although open to review, would generally operate immediately, that is, as soon as the relevant words are spoken. But an order which could only be treated as operative at the expense of making it, in effect, irrevocable, for example an order for the payment of money, cannot be treated as operative until it has been passed and entered. Where the nature of the case requires it, the process of passing and entering can be accelerated by the judge's direction, and this is often done in the Chancery Division."

The notion that an order will have effect upon pronouncement only in those cases where it can be so treated without making it, in effect, irrevocable postulates a test which in its application to different situations will not easily produce a clear cut answer. In many instances, even to treat an order for the payment of money as operative forthwith upon pronouncement would not be to render the order irrevocable; if the judgment or order were recalled and varied, the judgment creditor ordinarily could be called upon to repay such part of the money as was necessary to reflect the altered judgment. In the criminal jurisdiction the usual practice of executing an order for imprisonment forthwith upon it being pronounced might be thought to be the high water mark of irrevocability, yet this has not been treated as a reason for deferring the operation of the order. See also Re Barrell Enterprises and Ors (1973) 1 WLR 19. However I do not think it is necessary to explore further in this case whether, as a general rule, a test of practical irrevocability is determinative of whether a judgment or order made by the court of record becomes operative on being pronounced as I consider the scheme and provisions of the Bankruptcy Act make it clear that a sequestration order is to take effect from the time when the order is pronounced. It is sufficient to note from the general principles referred to that to so construe the Bankruptcy Act is not to introduce a novel concept which in itself would raise a doubt about the correctness of that construction.

1. On a literal reading of s.43(2) of the Bankruptcy Act, the words "Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt..." would suggest that the order is to operate immediately upon pronouncement. Whilst s.37 includes a power to rescind such an order, the language of that section itself indicates that an order operates from the time when it is made, not when it is signed and sealed. Sub-section 37(1) empowers the Court to rescind, vary, discharge or suspend "the operation" of an order made under the Act; this general power is then limited in the case of the power to rescind or suspend the operation of an order where the order is a sequestration order: sub.s.37(2). The power to suspend the operation of a sequestration order before it is signed and sealed, implies that the order is in operation from the time it was pronounced. Similarly the expression of the power to rescind "the operation of the order" rather than to rescind "the order" implies that the order is in operation from the time it was pronounced.

2. Furthermore, as the Act expressly provides when a debtor is to become bankrupt in the case of a sequestration order (sub.s.43(2) and Clyne v. Deputy Commissioner of Taxation, supra), it would be strange indeed if the commencement of the operation of the order were in practical terms rendered uncertain by a period of delay whilst the ministerial requirements of r.124 were put into effect.

3. It is not difficult to contemplate circumstances where it would be of great importance to the creditors that a trustee enter upon his duties under the provisions of the Act immediately a sequestration order is pronounced. To construe the words "Upon the making of a sequestration order" in sub.s.43(2) to mean "upon the pronouncement of a sequestration order" would achieve this result: see sub.s.156A(3).

4. In my opinion immediately a sequestration order is pronounced it becomes operative so that the debtor becomes a bankrupt with all the consequences which that entails including the consequence under sub.s.156A(3). This is so even though the order is only provisional in the sense that it may be reviewed and reconsidered until signed and sealed.

5. For these reasons, I consider Mr Pipkin has standing as trustee of the bankrupt's estate to be heard on the present application.

6. Because of the consequences which flow from a sequestration order, it is a serious step to rescind such an order in the exercise of the power under s.37. Where the power is exercised, the sequestration order is rescinded ab initio. The debtor will cease to be a person against whose estate a sequestration order has been made, and will cease to be a bankrupt for all purposes: Re Baker; Ex parte TLE Electrical Pty Ltd (1988) 79 ALR 445. Although the power under s.37 confers a general and unfettered discretion (Balhorn v. Colby and Ors (1982) 45 ALR 174 at 180) it is a discretion which ordinarily will only be exercised in favour of rescinding a sequestration order, in cases like the present one where the application is based on the fact that payment has been made to the petitioning creditor after the making of the order, where it is clear that the debtor had no other creditors at the date of the sequestration order who could be prejudiced by the rescission. The observations of Clauson J. in Re a Debtor (No. 5 of 1936); ex parte the Official Receiver (1936-1937) 18 B.and C.R. 187 at 189 et seq., which were cited with approval in Re Hope (Deceased); Ex parte Automobile and General Finance Company Limited and Ors (1939) 11 ABC 1 at 8, should be borne in mind :
   

"It is enough to say that the question of rescinding a receiving order and putting an end at that stage to the bankruptcy proceedings is a step that can only be taken after grave consideration, involving as it does the complete suppression of any publicity in regard to the bankruptcy proceedings and involving putting an end to the bankruptcy, as it would do in the present case, without compliance with the very careful provisions which are applicable, either in the case of an application to annul or in the case of an application to sanction a scheme...The circumstances were that although there had been a statement by the debtor as to who his creditors are, there has been no publicity. There has been no opportunity for persons to come forward and claim to be creditors. The consequence is that the court is not in a position to say what will be the fate of all the creditors. There may well be other creditors. It is the unfortunate experience of those who have to deal with these matters that the least reliable source of information as to the number and amount of the debtor's creditors is to be found in the debtor's statement where there has been no publicity. I must confess that for myself personally I am very much impressed with the grave danger of rescinding a receiving order, except in the most exceptional circumstances, and it appears to me that there were not sufficient materials before the registrar to justify him in exercising his discretion and rescinding the receiving order."

1. As the power under sub.s.37(2) is discretionary, the question of delay by the debtor in prosecuting an application to have a sequestration order rescinded is also likely to be of considerable importance. The scheme of sub.s.37(2), when read with r.124, is that a sequestration order will become final by being passed and entered within a few days of it being made. When an application is made under sub.s.37(2) for rescission of a sequestration order it is understandable that the steps required by r.124 may be halted until the application is heard, although it is to be noted that if an interested party requires the order to be signed and sealed notwithstanding the application, the usual steps required by r.124 will take their course unless the Court, if necessary on an urgent application, otherwise orders: cf Boral Johns Perry Industries Pty Ltd v. K. and G. Piccardi and Ors, Action G40 of 1989, unreported decision of the Full Court delivered in Sydney on 23 June 1989, at pp 3-4. Consistently with the scheme under which a sequestration order should become final promptly, the hearing of the application to rescind should be dealt with expeditiously. Unfortunately this has not occurred in the present case. Although the application for rescission was filed within ten days of the making of the sequestration order, and set down for hearing four days later, at the hearing the matter was adjourned for five weeks. One of the reasons noted for the adjournment was: "bankrupt to satisfy all other creditors". On a resumed hearing the application was further adjourned for four weeks, the reason noted on the file being that the parties were negotiating. When the matter again came on for hearing there was no appearance by the bankrupt or his solicitors. However appearances were made by solicitors acting for the petitioning creditor, and for the Deputy Commissioner of Taxation, who indicated that the debts of their respective clients had been satisfied. The registrar adjourned the matter "out of the list", an order which had the effect of leaving the application for rescission unresolved, and awaiting further action by the bankrupt to have the matter relisted - action which did not occur until late February 1990. When these adjournments occurred the only information on the Court file in support of the application was an affidavit from the bankrupt's solicitor who deposed to a belief that at the date of the application the bankrupt "has paid sufficient moneys to satisfy the amount owing to the abovenamed Bank of New Zealand" (the petitioning creditor). The affidavit did not even state the source of the deponent's information. Importantly, there was no evidence placed before the Court by the bankrupt disclosing whether he was solvent at the date of the sequestration order and whether he had other creditors at that date.

1. In my opinion it is undesirable that applications of this kind are adjourned for weeks at a time. It is important that they are heard and determined quickly. Where an adjournment is sought on the basis of a prospect of paying creditors, it behoves the applicant to incorporate in a supporting affidavit a comprehensive statement of his affairs. Unless the Court can be satisfied that adjournments are not likely to prejudice creditors, in my opinion they should ordinarily be refused. In this case, allowing for the fact that there had already been two lengthy adjournments, when there was no appearance by or on behalf of the bankrupt on the third hearing, the application should not have been adjourned sine die. Rather it should have been adjourned for a very short period of time, notice given to the bankrupt, and then, if he failed to attend on the next hearing, the application should have been dismissed for want of diligent prosecution.

2. As things now stand, it was not until 2 April 1990 that the bankrupt filed an affidavit which purported to state his assets and liabilities, that is more than six months after the date on which the sequestration order was made. The bankrupt deposes that at the date of swearing of the affidavit his assets exceeded his liabilities by $146,000. However the affidavit fails altogether to indicate what creditors he had at the time that the sequestration order was made, if and how the debts to those creditors have been satisfied or compounded, and whether he was solvent at that time. The assertion of an excess of assets over liabilities at the present time stands in contrast with information which was given to the Court on behalf of the bankrupt on the day that the sequestration order was made to the effect that he was unable to put any proposal forward towards meeting the debts of the petitioning creditor and the Deputy Commissioner of Taxation.

3. The statement of assets and liabilities deposed to by the bankrupt also stands in contrast with Mr Pipkin's written report about his enquiries as to the debtor's assets and liabilities. His enquiries have revealed two mortgages not disclosed by the bankrupt in his affidavit which are registered over the house property which comprises the major asset alleged by the bankrupt. His enquiries have also revealed other creditors. Even apart from Mr Pipkin's report, the failure of the bankrupt in his affidavit to explain the state of his affairs at the date of the sequestration order, coupled with the delay which has occurred, would lead me to exercise the discretion under sub.s.37(2) adversely to the bankrupt. The report of Mr Pipkin fortifies me in that decision. If the sequestration order were to be rescinded at this time it could have the effect of allowing the petitioning creditor to obtain a payment, which would otherwise be a preference, over other creditors.

4. In my opinion the application should be dismissed.