CAVE v Madgwicks (A Firm) - [2010] FMCA 878

FEDERAL MAGISTRATES COURT OF AUSTRALIA

CAVE v MADGWICKS (A FIRM) & ANOR

[2010] FMCA 878

BANKRUPTCY – Application to review a sequestration order made by a Registrar – principal debt paid out between making of sequestration order and hearing de novo on review – balance outstanding insufficient to found a sequestration order – whether it is open to the court to annul a bankruptcy when it cannot be said that the sequestration order “ought not to have been made” within the meaning of s.153B.

Bankruptcy Act 1966, ss.52, 153A, 153A(1), 153B, 153B(1), 154
Federal Magistrates Act 1999, s.104
Federal Court (Bankruptcy) Rules 2005, r.7.04

Austral Brick Company Pty Ltd v Daskalovski [1998] FCA 782
Dean v QUF Industries Pty Ltd (1981) 51 FLR 317; [1981] FCA 71
Hy-Tec Industries Pty Ltd v Constable [2006] FMCA 704
Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338
Pattison v Hadjimouratis (2006) 155 FCR 226; (2006) 236 ALR 1; (2006) 4 ABC(NS) 367; [2006] FCAFC 1543; [2007] ALMD 5764
Re Frank; Ex parte Pilizsky (1987) 16 FCR 396
Rigg v Baker (2006) 155 FCR 531; (2006) 4 ABC(NS) 419; (2006) 236 ALR 629; [2006] FCAFC 179; [2007] ALMD 3366
Vaucluse Hospital Pty Ltd v Phillips [2006] FMCA 44; (2006) 5 ABC(NS) 330; [2008] ALMD 2465

Applicant:

PAUL CAVE

First Respondent:

MADGWICKS (A FIRM)

Second Respondent:

PETR VRSECKY

File Number:

MLG 60 of 2010

Judgment of:

Riley FM

Hearing date:

25 October 2010

Date of Last Submission:

25 October 2010

Delivered at:

Melbourne

Delivered on:

12 November 2010

REPRESENTATION

Counsel for the Applicant:

Mr P Fary

Solicitors for the Applicant:

Keith R Cameron

Counsel for the Respondents:

Mr J Kohn

Solicitors for the Respondents:

Madgwicks

ORDERS

The sequestration order made by the Registrar on 9 August 2010 (and amended on 13 August 2010) be set aside.
The creditor’s petition filed on 20 January 2010 be dismissed.
The second respondent’s implied, oral application for annulment of the bankruptcy be dismissed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 60 of 2010

PAUL CAVE

Applicant

And

MADGWICKS (A FIRM)

First Respondent

PETR VRSECKY

Second Respondent

REASONS FOR JUDGMENT

Introduction

This is an application for review of a sequestration order made by Registrar Hetyey on 9 August 2010 against the estate of the applicant. The application was filed on 26 August 2010, and was thus filed within the 21 day time limit.
The first respondent is the substituted creditor and the second respondent is the trustee in bankruptcy. Both respondents were represented by the same solicitors and barrister at the hearing of the application for review.
The matter initially came on for hearing on 27 September 2010, but was adjourned to 25 October 2010 to allow the applicant, who had recently engaged legal representation, to put forward appropriate material as to solvency.
The applicant said and it was acknowledged by the respondents that the principal debt on which the substituted creditor had relied to obtain the sequestration order had been paid in full between 27 September 2010, when the review hearing was first scheduled, and 25 October 2010, when the review hearing actually took place. The principal debt was a sum of about $29,000.
The review application is of course a hearing de novo, in which the creditor must make out his case. The applicant argued that the substituted creditor was unable to establish the matters required by s.52 of the Bankruptcy Act 1966 (“the Act”), in particular, that the debt on which the creditor relied was still owing. Accordingly, the applicant argued that the petition should be dismissed and the sequestration order should be set aside.
The respondents argued that, in addition to the principal debt, which had been paid, the applicant owed the first respondent interest on the judgment debt and the costs of the petition. The interest amounted to $3113.50. That amount was tendered to the first respondent on the morning of the hearing on 25 October 2010 but the tender was refused.
In any event, the applicant argued that the interest debt, or the bulk of it, and the costs order, were not in existence as at the date of the act of bankruptcy and therefore they could not be relied on as a debt to found a sequestration order. In Dean v QUF Industries Pty Ltd (1981) 51 FLR 317 at 323, Deane, McGregor and Spender JJ held that:
It is an established principle of bankruptcy law that the debt upon which the sequestration order is based must have been in existence at the time of the relevant act of bankruptcy ….
The respondents accepted that as a correct statement of the law. The date of the act of bankruptcy was 11 November 2009. The date of the judgment was 21 September 2009. No one provided a calculation to the court, but it was not disputed that judgment interest on $29,000 for the intervening period, which was less than two months, would not amount to more than $2,000, that being the minimum amount necessary until recently for a sequestration order.
Moreover, the amount of the costs under the order of Registrar Heytey has not yet been taxed, so those costs are not presently a liquidated amount capable of founding a sequestration order. Additionally, that costs order is itself one of the orders sought to be reviewed in the present application for review.
The respondents argued, however, that the bankruptcy should not be set aside because:
a)the court could not be satisfied that the debtor was solvent; and, in the alternative
b)the bankruptcy should be annulled.
Of course, if the bankruptcy is annulled, s.154 of the Act will allow the trustee to recover his remuneration from the debtor’s estate. If the sequestration order is simply set aside, the trustee will not be able to recover his remuneration pursuant to a statutory right under the Act.
If the creditor on the hearing of an application for review of a sequestration order is unable to establish the existence of a relevant debt at the relevant time, as is the case in the present matter, the bankruptcy cannot be allowed to continue, whether the debtor is solvent or not. However, the respondents urged the court to consider the question of solvency at least in relation to the issue of whether the bankruptcy should be set aside or annulled.
The respondents argued that the court, on an application to review a sequestration order, could choose whether to set aside the order or annul the bankruptcy. That contention seems to be overly simplistic. Subsection 153A(1) of the Act provides that a bankruptcy is annulled, by force of that subsection, if the trustee is satisfied that all of the bankrupt’s debts have been paid in full. Subsection 153B(1) of the Act provides that, if the court is satisfied that a sequestration order “ought not to have been made”, the court by order may annul the bankruptcy.
It was not suggested that s.153A applied in this case. That is, neither party submitted that the debtor had paid all of his debts. Indeed, the evidence was to the contrary. Nor was it argued with any force that the sequestration order “ought not to have been made” within the meaning of s.153B of the Act. It is well established that a sequestration order “ought not to have been made” only if the court, in all the circumstances, was bound not to have made it: Re Frank; Ex parte Pilizsky (1987) 16 FCR 396.
On an application to review, the court conducts a hearing de novo based on the material available at the time of the hearing and decides whether a sequestration should be made at that the time of the review hearing. On an application to annul a bankruptcy, the court looks back, to consider whether the order ought not to have been made in the sense that the court which made the sequestration order was bound not to have made it.
In the present case, the debtor did not appear before the Registrar when the sequestration order was made, and did not take any other step on the day of the hearing to oppose the order sought. French J, in the Full Federal Court, said in Rigg v Baker (2006) 155 FCR 531 at [71] that such circumstances were “a significant, if not an insuperable, obstacle” to “the proposition that [the court] hearing the petition was bound not to make a sequestration order”.
In an area of the law as controlled by statutory prescription as the law of bankruptcy, it is difficult to imagine that there could be some other, unstated, unspecific power in the court to take the profound step of annulling a bankruptcy in any circumstances that seemed fit. However, the respondents urged the court to do just that.
The authority for the respondents’ proposition that the court has a power that is at large to annul a bankruptcy, and that does not arise only under s.153A or s.153B of the Act, was said to be, primarily, Vaucluse Hospital Pty Ltd v Phillips (2006) 5 ABC(NS) 330. In that case, Riethmuller FM carefully considered the various policy issues in deciding on review whether to annul a bankruptcy as opposed to setting aside a sequestration order.
However, his Honour seems to have proceeded on the assumption that annulment was an option in that case, subject to the discretionary factors. Ultimately, his Honour concluded, for discretionary reasons, that an annulment under s.153B should not be granted. Consequently, Vaucluse is not authority for the respondents’ proposition that an annulment may be granted when the requirements of neither s.153A nor s.153B of the Act are satisfied.
The respondents also relied upon the decision in Hy-Tec Industries Pty Ltd v Constable [2006] FMCA 704. In that case, an arrangement had been made between the debtor and the creditor for the debt to be paid in instalments, but that fact was not communicated to the creditor’s solicitor. The solicitor proceeded with the creditor’s petition, and a sequestration order was made. This case appears to fall within s.153B of the Act, in that the order “ought not to have been made”. Nevertheless, Raphael FM declined to annul the bankruptcy, and set it aside instead, apparently on the basis of the sort of discretionary factors noted in Vaucluse. Again, Hy-Tec is not authority for the respondents’ proposition that a bankruptcy can be annulled otherwise than in accordance with s.153A or s.153B of the Act.
The leading case in this area is Pattison v Hadjimouratis (2006) 236 ALR 1. In that case, Connolly FM had heard an application by a bankrupt:
a)for an extension of time to apply for a review of a sequestration order;
b)to review the sequestration order; and
c)to annul the bankruptcy under s.153B of the Act.
His Honour granted the extension of time and set aside the sequestration order, but refused to annul the bankruptcy. His Honour considered that the trustee had early notice of the challenge to the sequestration order and consequently was required to exercise caution in incurring expenses while the status of the bankruptcy was uncertain: Kyriackou v Shield Mercantile Pty Ltd (No.2) [2004] FCA 1338. The trustee appealed.
The Full Federal Court in Pattison v Hadjimouratis upheld the decision of Connolly FM. The issue which taxed the Full Federal Court in Pattison v Hadjimouratis was whether, on an application to review a sequestration order, the Federal Magistrates Court could, in appropriate circumstances, both set aside the sequestration order and annul the bankruptcy.
Lander J, in dissent, said that both steps could not be taken. His Honour considered at [228] – [230] that, on an application to review a Registrar’s decision, the court was required to first conduct a hearing de novo on the creditor’s petition. If the court considered that a sequestration order should not be made, the court would dismiss the petition and set aside the Registrar’s orders. In that situation, no question of annulment could arise because there was nothing to annul.
The majority, however, consisting of Nicholson and Jacobson JJ, considered that the sequestration order could be set aside and the bankruptcy could be annulled simultaneously. That was because s.104 of the Federal Magistrates Act 1999 gave the court power on review of a Registrar’s decision to make whatever “orders it thinks fit in relation to the matter in respect of which the power was exercised.”
However, Jacobson J added an important rider to that statement. His Honour said at [58]:
Of course, the necessary condition for [an annulment at the same time as a setting aside] must be that the [sequestration] order ought not have been made in the first place.
That statement picks up the requirement in s.153B of the Act that an annulment can be made if the sequestration order “ought not to have been made”. Nothing in Jacobson J’s judgment is to the effect that s.104 of the Federal Magistrates Act 1999 gives the court on review a power to annul a bankruptcy that is independent of the express powers to annul set out in the Bankruptcy Act 1966. Indeed, his Honour’s judgment is to the contrary.
Nicholson J, agreeing with Jacobson J, said:
11… The scope of those powers [under s.104(3) of the Federal Magistrates Act 2000] is expressed in terms which admit of the making of an order of annulment, subject to annulment being open and appropriate. (emphasis added) …
…
14.Whether annulment is sought or is appropriate will depend on the circumstances of the particular matter. …
All in all, the effect of the majority decision in Pattison v Hadjimouratis is that, on an application to review a sequestration order made by a Registrar, the court may annul the bankruptcy under s.153B but only if the necessary condition for an annulment is present. That condition is that the sequestration order “ought not to have been made.”
Kyriackou v Shield Mercantile Pty Ltd (No.2) [2004] FCA 1338 is in keeping with that statement of principle. In Kyriackou v Shield Mercantile Pty Ltd (No.2), the sequestration order “ought not to have been made” because the bankruptcy notice was defective and thus there was no act of bankruptcy in failing to comply with it. Nevertheless, Weinberg J, for discretionary reasons, refused to annul the bankruptcy and confined himself to setting aside the sequestration order.
Conversely, in Austral Brick Company Pty Ltd v Daskalovski [1998] FCA 782, Emmett J, for discretionary reasons that weighed the other way, annulled a bankruptcy. However, his Honour expressly observed that “the order ought not to have been made” because the debtor had not been served with the creditor’s petition.
Nothing in Pattison v Hadjimouratis, Kyriackou v Shield Mercantile Pty Ltd (No.2) or Austral Brick Company Pty Ltd v Daskalovski supports the respondents’ contention that, on an application to review a sequestration order, the court may annul a bankruptcy even though the order is not one that “ought not to have been made.” I do not accept that contention, for the reasons given above.
The respondents were unable to point to any sound reason that the Registrar ought not to have made the sequestration order in this case. The respondents, while arguing that the court could not be satisfied that the debtor was solvent, contended that there was material filed by the debtor that was before the Registrar and that showed that the debtor was solvent. Therefore, it was argued, the sequestration order ought not to have been made.
That argument cannot succeed, not least because the debtor did not appear at the hearing to ask the court to take into account the affidavits that he had filed. The sequestration order was undefended on the day the order was made, although the debtor had on previous occasions appeared and sought adjournments. See Rigg v Baker. Moreover, even if the Registrar had been able to take into account the debtor’s evidence about solvency, the respondents did not point to anything in that evidence that was decisive, such that the Registrar would have been bound to have accepted it and bound not to make the sequestration order.
The respondents did not point to anything else that tends to suggest that the sequestration order ought not to have been made. Consequently, I am not satisfied that there is any basis in this case on which an annulment order could be made under s.153B of the Act, or on any other basis, in the circumstances of this case.
That being so, it is unnecessary to consider the question of the debtor’s solvency. There is no discretion to which the issue of solvency could go. That is, there is no scope in this case for the court to choose between setting aside the sequestration order and annulling the bankruptcy. Nor is there any scope for the court to allow the bankruptcy to continue, given that the substituted creditor is not able to establish the existence of a relevant debt at the relevant time.
Accordingly, there will be orders setting aside the orders made by Registrar Hetyey on 9 August 2010. There was no written or formally stated oral application for an annulment. However, to the extent that there was an implicit, oral application for an annulment of the bankruptcy, that application is refused.
In the course of seeking the annulment, the respondents (or more accurately, I suppose, the second respondent) sought an order that he be paid his costs, expenses and remuneration for preparing a report for the court pursuant to Rule 7.04 of the Federal Court (Bankruptcy) Rules 2005. That report was ordered on the application of the applicant. The applicant conceded that the court has a power incidental to Rule 7.04 to make an order for the costs, expenses and remuneration of the trustee for the preparation of a report under Rule 7.04. The applicant indicated that he could not resist such an order in circumstances where he had asked for the report to be prepared. In the light of the applicant’s concession, I consider that it is appropriate to make such an order and will do so.
The applicant suggested that the appropriate amount would probably be about $5,000, but indicated that he wished to seek instructions on that amount. The respondents did not specifically address how much would be an appropriate amount for an order for costs, expenses and remuneration in relation to the report under Rule 7.04. I will hear the parties further on that question.

I certify that the preceding thirty-nine (39) paragraphs are a true copy of the reasons for judgment of Riley FM

Date: 12 November 2010