Chamberlain v Viterra Ltd
[2010] FMCA 747
•1 October 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| CHAMBERLAIN v VITERRA LTD & ANOR | [2010] FMCA 747 |
| BANKRUPTCY – Sequestration order made in absence of solvent debtor who was not personally served with or made aware of initiating process, bankruptcy notice or creditor’s petition – whether bankruptcy should be annulled or sequestration order set aside. |
| Bankruptcy Act 1966 (Cth), ss.37, 52, 153A, 153B, 154 Federal Magistrates Court Rules 2001 (Cth), r.16.05 |
| Alaeddin v CGU Workers Compensation (NSW) Ltd [2007] FMCA 1833 Allianz Australia Workers Compensation (NSW) v Andreou [2006] FMCA 364 Austral Brick Co Pty Ltd v Tome Daskalovsk [1998] FCA 782 Grundy v Wattyl Australia PtyLtd [2002] FCA 1480 Kyriackou v Shield Mercantile Pty Ltd (No.2) [2004] FCA 1338 Pattison v Hadjimouratis (2006) 155 FCR 226; [2006] FCAFC 153 Re Sarina; Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163; [1980] FCA 66 Sandell v Porter and Another (1966) 115 CLR 666; [1966] HCA 28 Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372; [1980] FCA 138 Vaucluse Hospital Pty Ltd v Phillips & Anor [2006] FMCA 44 |
| Applicant: | KENT STANLEY CHAMBERLAIN |
| First Respondent: | VITERRA LTD FORMERLY KNOWN AS ABB GRAIN LTD (ACN 084 962 130) |
| Second Respondent: | ALAN GEOFFREY SCOTT |
| File Number: | SYG 1949 of 2010 |
| Judgment of: | Barnes FM |
| Hearing date: | 14 September 2010 |
| Delivered at: | Sydney |
| Delivered on: | 1 October 2010 |
REPRESENTATION
| Counsel for the Applicant: | Mr Wood |
| Solicitors for the Applicant: | Matthew Williams |
| Solicitors for the First Respondent: | Marshalls |
| Solicitors for the Second Respondent: | Sally Nash & Co |
ORDERS
The sequestration order made on 2 August 2010 against the estate of Kent Stanley Chamberlain be set aside.
The creditor’s petition be dismissed in relation to Kent Stanley Chamberlain.
The applicant pay the second respondent’s costs of preparation of the report filed in accordance with the directions made on 7 September 2010 and of these proceedings as agreed and in the absence of agreement taxed in accordance with the Federal Court Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1949 of 2010
| KENT STANLEY CHAMBERLAIN |
Applicant
And
| VITERRA LTD FORMERLY KNOWN AS ABB GRAIN LTD (ACN 084 962 130) |
First Respondent
| ALAN GEOFFREY SCOTT |
Second Respondent
REASONS FOR JUDGMENT
These proceedings
On 2 August 2010, a registrar in the Adelaide Registry of this court made a sequestration order against the estates of Paul Richard Chamberlain and Kent Stanley Chamberlain (Mr Chamberlain). The order was made in the absence of Mr Chamberlain, who on 6 September 2010 filed an application in the Sydney Registry of this court seeking either that the sequestration order be annulled pursuant to s.153B(1) of the Bankruptcy Act 1966 (Cth) (the Act) or that the sequestration order be set aside and such further or other order as the court thought fit. Mr P.R. Chamberlain is not a party to these proceedings.
When the matter came before me on 7 September 2010, I listed it for hearing on 14 September 2010 and made orders abridging the time for service of the application on the petitioning creditor and Trustee and required the Trustee to prepare a report under r.7.04 of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth). At the hearing, both the petitioning creditor, Viterra Ltd, and the Trustee, Alan Geoffrey Scott, were represented.
The applicant relied on two affidavits sworn by him and also affidavits of his wife and Inga Catherine Kirkman, a Sydney agent for his solicitors.
At the start of the hearing on 14 September 2010, counsel for the applicant sought leave to file and rely on an amended application, which, as an alternative to the orders sought in the original application, sought an order pursuant to s.104(2) of the Federal Magistrates Act 1999 (Cth) that the decision of the registrar of this court of 2 August 2010 to make a sequestration order against the estate of Mr Chamberlain be reviewed, and such further or other order as the court thought fit. It was explained in submissions that this was intended to encompass an application for an extension of time within which to make such an application in accordance with s.104(2)(b) of the Federal Magistrates Act.
In essence, Mr Chamberlain claimed that he should not have been made bankrupt as he was not aware of the petitioning creditor’s judgment, the issue of the Bankruptcy Notice, the presentation of the creditor’s petition or of the hearing at which the sequestration order was made until late August 2010 and he was solvent.
Notification to creditors
Ms Kirkman attested to notification of these proceedings to known creditors of Mr Chamberlain (who had attested to his financial position in affidavits sworn on 3 September 2010 and 9 September 2010). While the notices are not in the form required under r.7.03 or r.7.06 of the Bankruptcy Rules, I am satisfied that they conveyed all the information required to be given to the creditors. In addition, the notice given to creditors was one day short of the seven days provided for in the Bankruptcy Rules. It emerged in submissions that the solicitors for Mr Chamberlain had understood that the order made on 7 September 2010 abridging the time by which the application was to be served included, or was intended to have included, service on creditors. There is no evidence or suggestion of prejudice to any creditors. A report from the Trustee was filed in the form of an affidavit. No other creditors have sought to appear.
I am of the view that, having regard to the circumstances of the present case as discussed further below, this is an appropriate case in which to dispense with the requirement of strict compliance with the Bankruptcy Rules.
The sequestration order
The petitioning creditor, Viterra Ltd (formerly known as ABB Grain Ltd), commenced proceedings against Mr P.R. Chamberlain and Mr Chamberlain in the District Court of South Australia in 2009 (proceedings number 973 of 2009). It was claimed that the Chamberlains, as trustees for the Mali Trust, had applied for and been supplied with certain goods on credit for which they had not paid.
In evidence before the court as an exhibit is a copy of an affidavit of 10 November 2009 of Stella Campbell Forsyth, the solicitor for ABB Grain Ltd, that was relied on by the petitioning creditor in support of an application in the District Court for presumptive (substituted) service of the summons in that matter. Ms Forsyth’s evidence was that a process server had been instructed to serve the summons on the defendants at a “remote rural property” at a specified address in Grass Patch, Western Australia. There is no evidence as to why this address was regarded as Mr Chamberlain’s address (as distinct from that of his father). The bailiff had advised Ms Forsyth that the police officer who operated in that area had been to the address two times “and had been unable to serve the defendants”; subsequently the police officer had been out to the property, but was unable to make contact with the defendants; that he telephoned “them and the defendants were well aware of the matter but would not make themselves available for service”; and that the police had had “dealings with the defendants before and they were very hard to serve anything on”. A further report from the bailiff was said to be to the effect that the defendants had made arrangements to collect the documents from the police officer but had failed to attend. However, the report (attached to Ms Forsyth’s affidavit) referred to the fact that it could take months to do such jobs in remote locations; that the bailiff had attended the address on three dates and left a card on each occasion; and that “on the last occasion the debtor made contact and arranged to collect the documents but failed to attend”.
The District Court of South Australia made an order for substituted service on both Mr Chamberlain and his father at a PO Box address and a residential address in Grass Patch, Western Australia. On 22 December 2009 the petitioning creditor obtained default judgment in the sum of $52,167.04 and costs and disbursements of $2,595.00. Bankruptcy Notice SA32 of 2010, which was issued on 21 January 2010, was based on this judgment.
The solicitor for the petitioning creditor sought and obtained an order for substituted service of the Bankruptcy Notice at the same Post Office Box and street address in Grass Patch, Western Australia at which the District Court summons had been served. In an affidavit in support of that application for substituted service, the solicitor advised that the Bankruptcy Notice had been forwarded to agents for service in Western Australia, but that it had been returned with a letter stating that the bailiff did not cover the area anymore, that there was no agent or bailiff to cover the area because it was too far to travel and that the agent was not prepared to go out into this remote location. The process server suggested service via normal post or registered post.
The affidavit in support of the application for substituted service of the Bankruptcy Notice stated that the solicitors had made inquiries “in relation to ascertaining if there was any other person or persons in the general area who were prepared to visit the respondent debtors’ property for the purposes of attempting to effect service”, but they had not been able to locate such persons. Searches had been conducted of the Land Titles Office indicating that Mr P.R. Chamberlain was the owner of properties at an address in Grass Patch and used the Post Office Box address in Grass Patch. There is no reference to any address or searches conducted in relation to Mr Chamberlain in that affidavit. Reference was made to the fact that the District Court had allowed substituted service to the postal address provided. An order was made for substituted service by post to each respondent at the Post Office Box address in Grass Patch, Western Australia. The Bankruptcy Notice was served in accordance with the order for substituted service.
Similarly, after the creditor’s petition was presented, the solicitor for the petitioning creditor sought an order for substituted service, indicating that personal service had not been attempted and that the process server had advised that as a consequence of the respondent debtors living in a remote area, service of the documents would prove extremely difficult. An order was made for substituted service on both Mr P.R. Chamberlain and Mr Chamberlain at a Post Office Box at Grass Patch, Western Australia. The creditor’s petition was served in accordance with the order for substituted service.
There is no evidence of any attempt having been made by the solicitor for the petitioning creditor to obtain any evidence in relation to the address of Mr Chamberlain, notwithstanding that Land Titles Office searches in relation to his father Mr P.R. Chamberlain were carried out and referred to in the affidavit in support of applications for substituted service and notwithstanding that after Mr Chamberlain was made bankrupt, the Trustee had no difficulty ascertaining the address of a Perth property owned by Mr and Mrs Chamberlain. Nor, it appears, was any search of the electoral roll made in relation to Mr Chamberlain.
Mr Chamberlain’s evidence
Relief is sought on three alternative bases. In order of priority it was first sought that the court grant an extension of time for review of the decision of the registrar and set aside the sequestration order. In the alternative, it was sought that the decision of the delegate be set aside under r.16.05 of the Federal Magistrates Court Rules 2001 (Cth). As a final alternative, it was sought that the bankruptcy be annulled under s.153B of the Bankruptcy Act.
Mr Chamberlain claimed not to have been aware of the District Court proceedings in which the judgment which formed the basis for the Bankruptcy Notice was obtained, or of the Bankruptcy Notice, the creditor’s petition or the sequestration order of 2 August 2010 until his wife was informed by their bank on 26 August 2010 that he had been made bankrupt.
Mr Chamberlain’s unchallenged affidavit evidence is that on or about 16 April 1996 he became a trustee of the Mali Trust of which his father, Mr P.R. Chamberlain, was also a trustee. The Trust operated a family farming business at a property in Grass Patch in Western Australia that was managed by Mr Chamberlain’s father. Mr Chamberlain occasionally helped out on the property during university holidays. However after university he pursued a career in engineering. Mr Chamberlain’s relationship with his father became strained in or about October 2007 and he told his father he wanted to get out of the Trust. He had no further contact with his father apart from three or four emails, until he telephoned him in or about January 2009. This occurred after he was served at his residence in Parkes, New South Wales, with court documents regarding recovery proceedings being undertaken by Elders Rural Bank Ltd against himself and his father for failure to pay the mortgage on the Grass Patch property. His evidence is that the Grass Patch property was sold in about February 2009, the Elders debt was repaid and the recovery proceedings dismissed by consent. On or about 11 February 2009, Mr P.R. Chamberlain signed a deed of variation amending the Mali Trust deed and removing Mr Chamberlain as trustee, pursuant to notices in writing by Mr P.R. Chamberlain as appointor. Mr Chamberlain has not spoken to his father since his removal as a trustee from the Mali Trust.
Mr Chamberlain also put evidence before the court in relation to his place of residence at various times. He explained that in February 2005 he had purchased a property in Wattle Grove, Perth, Western Australia. In October 2006 he transferred a half-share in that property to his wife as joint tenant. He and his wife lived at that address until November 2007, when they moved to Koala Street, Parkes in New South Wales. In October 2009 Mr and Mrs Chamberlain purchased a property in Orange Street, Parkes, where they reside with their children. They continue to own the Perth property, which is tenanted and is the subject of a mortgage to the ANZ Bank (as is the Parkes property).
According to Mr Chamberlain, in or about September 2008 he changed his address on the electoral roll to Koala Street, Parkes, and in or about July 2010 he changed his address on the electoral roll to his present address in Orange Street, Parkes. He still has a mail redirect on his Perth property address to a Post Office Box in Parkes which has been maintained since he moved to Parkes.
Mr Chamberlain’s uncontested evidence, which I accept, is that he had no knowledge that any proceedings had been commenced by Viterra Ltd to recover a claimed debt until 26 August 2010 when he became aware of his bankruptcy. Without admission that any amount was owed, he claimed that he would have been in a position to satisfy that debt on 2 August 2010.
I am satisfied that Mr Chamberlain had no notice of the petitioning creditor’s judgment, Bankruptcy Notice, creditor’s petition, or of the sequestration order until he became aware on 26 August 2010 that he had been made bankrupt. He became aware of this after his wife discovered on 25 August 2010 that their bank account was frozen. She was advised by a customer service officer that it appeared that either she or her husband was bankrupt. On the morning of 26 August 2010 she was informed by an ANZ employee that Mr Chamberlain had been bankrupted and given details of the Trustee. Mr Chamberlain’s wife (who swore an affidavit on 2 September 2010) obtained confirmation from an officer of the Trustee that Mr Chamberlain had been made bankrupt. In the course of that conversation, the Trustee’s representative advised that registered mail had been sent by the Trustee to Mr Chamberlain at the Wattle Grove, Perth address. This appears to be a reference to correspondence sent by the Trustee on 3 August 2010 to what the Trustee described in his affidavit sworn on 9 September 2010 as the only known address for the bankrupt, being 79 Arthur Road, Wattle Grove, Western Australia. This is the Perth property owned (but not occupied) by Mr and Mrs Chamberlain. There is no evidence before the court as to how the Trustee was able so easily to locate an address (albeit that it was not in fact the current residential address), for Mr Chamberlain while the petitioning creditor did not identify any address other than his father’s address. It would seem that the Trustee may have located this address by a land title search in Western Australia.
Mr and Mrs Chamberlain have a mail redirect notification from that property. They did not receive the initial correspondence from the Trustee, but were advised by the Trustee’s representative that as the mail in question was registered mail, it would have been kept at the post office to be signed for by the intended recipient. In a conversation between Mr Chamberlain and the Trustee’s office, he was advised that the correspondence in question had been re-sent by ordinary mail, which would be redirected to the New South Wales address. On 31 August 2010 Mr Chamberlain completed a Statement of Affairs as requested by the Trustee. It was provided to the Trustee and a copy is annexed to the Trustee’s affidavit filed in these proceedings.
Mr Chamberlain consulted solicitors who engaged a Sydney agent on 1 September 2010. These proceedings were commenced on 6 September 2010. On 7 September 2010 Mr Chamberlain’s solicitors requested a copy of the Federal Magistrates Court file from the South Australian Registry and subsequently also requested a copy of the District Court file. According to the affidavit of Ms Kirkman sworn on 10 September 2010, it was only on review of these files that she formed the opinion that there was a proper basis for the applicant to seek review of the decision of the Registrar of 2 August 2010 making a sequestration order against the applicant.
Mr Chamberlain’s evidence is that since 26 August 2010 he has unsuccessfully tried to contact his father in relation to this matter.
Mr Chamberlain also asserts his solvency. He claims that he would have been in a position to pay the petitioning creditor’s debt of $54,762.04 on 2 August 2010 as set out in his affidavits of 3 September 2010 and 9 September 2010. That assertion is based on evidence that he and his wife have net assets exceeding their liabilities in the order of $385,786.25 (having regard to real estate (properties in Perth and Parkes), motor vehicles, bank accounts, other investments, superannuation, and mortgage or finance commitments) and on the basis that, having regard to the value of the Perth property and the outstanding amount of the mortgage, they have equity which could have been used to pay the petitioning creditor’s debt by increasing their mortgage. It is also claimed that having regard to the payments they have been making on the Perth mortgage, they have the ability to draw down a sum of $15,737.50 that has been paid in advance towards that mortgage. Mr Chamberlain also disclosed an account with the ANZ Bank which provided a line of credit of up to $50,000, which had been drawn down to approximately $18,000 as at 2 August 2010, leaving a possible further $32,000 to be drawn down. He claimed that as at 30 June 2010, he and his wife had a managed fund with ING Fund Management of $11,988.01. I note in relation to this last item that, according to his Statement of Affairs completed on 31 August 2010, at that date the ING fund had $5,994 in it.
Mr Chamberlain is a mechanical engineer, employed as an engineering superintendent for a mining company on a salary of $136,031 per annum. He and his wife also receive rent from the Perth property.
His only other creditors (with his wife) are the ANZ Bank which holds mortgages over the Wattle Grove and Parkes properties (the value of which exceeds the amount secured). He also has a Visa credit card debt of $1,230.53 and a Volkswagen Golf the subject of a novated lease arrangement.
The Trustee’s report
The Trustee’s report confirmed Mr Chamberlain’s joint ownership of the Wattle Grove and Parkes properties and advised that on the information presently available, if Mr Chamberlain’s bankruptcy continued, the return to creditors would be 100 cents in the dollar provided no further creditors were identified. Importantly, the Trustee’s evidence is that based on the information in Mr Chamberlain’s Statement of Affairs and the limited investigations undertaken “it would appear that at the date of bankruptcy the bankrupt may in fact have been solvent”. The Trustee had no cause to doubt any facts in either Mr Chamberlain’s affidavit or Statement of Affairs.
Since August 2010 the Trustee’s office has been in regular contact with Mr Chamberlain’s solicitors in relation to the proposed application. The Trustee has not yet advertised for proof of debts. His costs and expenses at close of business on Friday, 3 September were $11,386.21 in respect of the separate estate of Mr Chamberlain.
I am satisfied that Mr Chamberlain had no knowledge of the District Court proceedings, the Bankruptcy Notice, creditor’s petition or sequestration order until 26 August 2010. As discussed further below, I am satisfied that he is able to pay his debts and that the sequestration order ought not to have been made against him. What is in issue is the order that should be made in these circumstances.
Rule 16.05
It is convenient to consider first whether an order should be made setting aside the order of the Registrar of this court under r.16.05 of the Federal Magistrates Court Rules. Rule 16.05(2)(a) of the Federal Magistrates Court Rules relevantly provides that:
The court may vary or set aside its judgment or order after it has been entered if:
(a) the order has been made in the absence of a party;
…
The sequestration order in this case was made in the absence of Mr Chamberlain. In Austral Brick Co Pty Ltd v Tome Daskalovsk [1998] FCA 782, a person who had been made bankrupt applied to the Federal Court for an order that a sequestration order made in his absence be set aside pursuant to O.35 r.7 of the Federal Court Rules (which is the equivalent of r.16.05) or based on such other power as the court had to set aside the orders. The petition had not been served personally on the debtor. Emmett J annulled the bankruptcy pursuant to s.153B of the Bankruptcy Act, but stated:
I should add that I would have been satisfied that the Court has jurisdiction and power pursuant to Order 35 Rule 7 to make an order setting aside the sequestration order made in the absence of the Debtor in circumstances where the Debtor was not served with the petition. However, it seems to me inappropriate to make an order under that rule where the estate has already been administered in bankruptcy, as is the case here.
In that case the sequestration order was made on 6 April 1998 and the application to the court was made on 28 April 1998. Emmett J referred to the fact that the Bankruptcy Act and Rules provided for “the protection of creditors in the event of an order being made under section 153B” of the Act and that there was “no similar regime applicable specifically for the setting aside of an order or a judgment pursuant to Order 35 Rule 7” of the Federal Court Rules. His Honour left open the possibility that in an appropriate case the power contained in O.35 r.7 could be exercised, but indicated that such power would normally be exercised in circumstances where the matter came before the court very soon after the order had been made and before there had been any administration in bankruptcy pursuant to a sequestration order. Such was the case in Allianz Australia Workers Compensation (NSW) v Andreou [2006] FMCA 364 which involved an application by a creditor on the day a sequestration order was made in the absence of the debtor where the debt had in fact been paid.
The solicitor for the Trustee suggested that it may be that in light of s.37 of the Bankruptcy Act, the Court had no power to set aside a sequestration order pursuant to a rule such as r.16.05 of the Federal Magistrates Court Rules.
I am not persuaded that in the circumstances of this case it would be appropriate to make such an order, having regard to the time at which the present application was made and the fact that administration of the estate has commenced. Hence it is not necessary to consider the effect of s.37 in this case. However I note that s.37(2) does not prevent the court from setting aside a sequestration order on review of a registrar’s orders or an annulment (see Pattison v Hadjimouratis (2006) 155 FCR 226; [2006] FCAFC 153).
Should the sequestration order be set aside or the bankruptcy annulled
Initially, this application was filed as an application for an annulment of bankruptcy or to set aside the sequestration order under r.16.05 (although the application referred generally to an order setting aside the sequestration order). The applicant now seeks that the court grant an extension of time and review the decision of the registrar under s.104(2) of the Federal Magistrates Court Act.
Under r.2.03 of the Bankruptcy Rules, subject to any direction by the court to the contrary, an application under s.104(2) of the Federal Magistrates Act for review of the exercise of the power of the court by a registrar under sub-s.102(2) must be made by application for review within 21 days after the day on which the power was exercised. However, the court can grant an extension of time within which to seek review.
In Grundy v Wattyl Australia PtyLtd [2002] FCA 1480, Downes J suggested that an application for an extension of time should ordinarily be refused where no adequate explanation has been offered for the delay and prejudice caused by the delay, such as the expenditure of substantial costs in administering the bankrupt’s estate.
In this case, an explanation has been offered for the delay, based on the applicant’s evidence that he was not aware that he was bankrupt until his joint bank account was frozen by the bank and his wife was informed of his bankruptcy on 26 August 2010. He then acted promptly in bringing proceedings before the court. In order to determine whether or not it was open to him to seek review of the registrar’s decision, it was appropriate for his solicitor to determine whether the sequestration order was made by a registrar or a Federal Magistrate. The applicant’s solicitor took steps to obtain the file from the South Australian Registry to determine the circumstances in which the sequestration order had been made.
Mr Chamberlain’s failure to appear at the hearing at which the sequestration order was made and the subsequent delay has been satisfactorily explained. Notwithstanding that there was service in accordance with orders for substituted service of the Bankruptcy Notice and the creditor’s petition, the documents did not come to the attention of Mr Chamberlain.
It must be said that the orders for substituted service appear to have been made on the assumption, which first arose at the level of the District Court proceedings in South Australia, that Mr Chamberlain must live with his father. It appears that no effort whatsoever was made by the petitioning creditor to locate Mr Chamberlain, notwithstanding that the Grass Patch property in Western Australia was shown by a Certificate of Title to be owned by Mr P.R. Chamberlain, not by both Mr Chamberlains.
I note that when the sequestration order was made and the Trustee was appointed, he appeared to have no difficulty in finding a Western Australian address for Mr Chamberlain.
Mr Chamberlain’s initial non-receipt of correspondence from the Trustee sent by registered mail to the Perth property has also been explained. He commenced these proceedings within 21 days of becoming aware of the sequestration order.
This is an acceptable explanation for the delay from the perspective of the applicant. I note that special circumstances need not be shown for the court to grant an application for an extension of time.
The solicitor for the petitioning creditor has not alluded to any prejudice whether in defending the proceedings or otherwise occasioned by the delay, except insofar as he raised the fact that as he had only recently received instructions and in light of the nature of the application as originally filed, there were no fresh affidavits of final search and debt as required under r.4.06 of the Bankruptcy Rules. Given that Mr Chamberlain has satisfied me that he is able to pay his debts and the question is simply whether the Bankruptcy Notice should be annulled or the sequestration order set aside, the absence of affidavits of final debt and search is not of itself such as to preclude an extension of time.
It is relevant to have regard to the fact that the Trustee has incurred some expense in administering Mr Chamberlain’s bankrupt estate in circumstances where the application was not lodged within 21 days of the date of the sequestration order.
The extent of the delay is relevant having regard to the fact that if an order is made setting aside the sequestration order upon review, the trustee has no entitlement to the costs and expenses incurred in the administration of the bankrupt estate (see Pattison v Hadjimouratis at [19]) as distinct from the position where the bankruptcy is annulled.
Indeed, and relevant to the issue of the appropriate orders to be made on review which is discussed further below, as Weinberg J in Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 pointed out (at [41]), having regard to the position in relation to trustee’s costs:
… There may be some cases, in which it will be appropriate to annul a bankruptcy under s 153B, thereby triggering the operation of s 154, rather than setting aside a sequestration order. …
However his Honour stated (at [42]):
…a trustee who administers a bankrupt estate, in the knowledge that the bankrupt is challenging the validity of the sequestration order, must exercise caution when incurring expenses whilst the status of the bankruptcy remains uncertain. …
In this case there is no indication of a lack of caution on the part of the Trustee. In such circumstances:
… a balance must be struck between the rights of the [bankrupt], who should never have been made bankrupt in the first place, and the Official Trustee, who has simply done what the Act requires him to do. …
(per Weinberg J at [43]).
In this case there has been some administration of the estate by the Trustee, but there is no suggestion that the Trustee has incurred substantial costs and expenses. He has undertaken only limited inquiries. I have borne in mind that, as Riethmuller FM, pointed out in Vaucluse Hospital Pty Ltd v Phillips & Anor [2006] FMCA 44 in relation to the caution to be exercised by a trustee (at [53]):
… undertaking the role of trustee is a function that a trustee embarks upon aware of the inherent risk that he or she may not be remunerated.
I note that from the file note kept by Mr Heidt of the Trustee’s office of the conversations with Mr and Mrs Chamberlain, that the Chamberlains expressed surprise and a lack of knowledge of any liability for a debt and their understanding that the proceeds of sale of the Grass Patch property had been utilised to pay off all debts in relation to the farm.
Mr Chamberlain advised the Trustee that he was a former trustee of the Mali Trust, but that he was not aware of any debt and did not recall signing any documentation that he would guarantee such debt and that he understood the Grass Patch property had been sold. His liability for that debt does not have to be determined in these proceedings.
Mr Chamberlain discussed with the Trustee’s Office his failure to receive notification of the bankruptcy and asked how he would be able to reverse the bankruptcy, making it clear that he intended to take action in that respect. In response Mr Heidt is recorded as having advised him that unless he could establish he had been “invalidly bankrupt”, the only means was to repay all creditors.
It is clear that the Trustee’s office was made aware, through these discussions, that Mr Chamberlain claimed to have no knowledge of the sequestration order or of liability for the debt on which the creditor’s petition was based and intended to seek to bring his bankruptcy to an end.
Hence the Trustee was made aware very shortly after the expiration of the 21 day period of Mr Chamberlain’s ignorance of the sequestration order and his intention to take steps to bring his bankruptcy to an end. He has been in contact with Mr Chamberlain’s solicitors since 26 August 2010 and was no doubt aware that he needed to exercise some caution while incurring expenses while the status of the bankruptcy remained uncertain. He has conducted only limited investigations. While the original application did not expressly seek an extension of time for review of the sequestration order it made clear Mr Chamerlain’s intention to seek orders to bring his bankruptcy to an end.
I am of the view that an extension of time should be granted. I note that the court has a discretion as to the orders to be made on a review application (and that the applicant seeks an annulment as an alternative if the court is not minded to set aside the sequestration order).
In Vaucluse Hospital Pty Ltd v Phillips Riethmuller FM considered in detail the distinction between a review and an annulment and the consequences. His Honour pointed out that in determining what orders ought to be made, the court has a broad discretion and suggested that the factors which may be taken into account by the court as to the preferable course include whether the application for review was made within time, whether there had been substantial administration of the estate, the existence of other interested creditors and the conduct of the bankrupt. I have had regard to all these factors. As indicated the sequestration order was made on 2 August 2010. This application was filed on 6 September 2010. While the application was made more than 21 days after the sequestration, it was filed within 21 days of Mr Chamberlain becoming aware of his bankruptcy. In no sense can the delay be described as excessive.
The solicitor for the Trustee submitted that it was clear that Mr Chamberlain’s creditors (including the petitioning creditor) could be paid from his bankrupt estate and that given his solvency, the bankruptcy could be annulled under s.153A of the Bankruptcy Act. In these circumstances it was submitted for the Trustee that there was no good reason for depriving the Trustee of the protection of s.154 of the Bankruptcy Act by setting aside the sequestration order rather than annulling it. It was also pointed out that the issue of Mr Chamberlain’s actual liability for the debt to the petitioning creditor was a matter that had yet to be resolved.
However Mr Chamberlain should not have been made bankrupt. He acted promptly when he became aware of his bankruptcy. His conduct is not open to criticism (cf Alaeddin v CGU Workers Compensation (NSW) Ltd [2007] FMCA 1833 at [11]).
As Riethmuller FM observed in Vaucluse Hospital v Phillips in relation to the use of s.153B to protect a trustee’s fees (at [65] – [66]):
Using s.153B solely to overcome a lack of power to order that a party pay the trustee’s remuneration and expenses (or part thereof) in a review or appeal is an approach that requires considerable care. To allow the consequences of a registrar’s order upon those choosing to participate in the effect of the order to become a basis to refuse to set it aside has the appearance of a less than appropriate review.
The purpose of Div 5 of Part VII (and s.37) was not to provide a method for making orders for the remuneration and expenses of trustees. The provisions do not allow for the exercise of any discretion of the type usually exercised with respect to costs: see for example Re Skase; ex parte Donnelly [1992] FCA 429; (1992) 37 FCR 509. The provisions of the Act with respect to the fees of trustees are presently outdated. …
I am satisfied on balance that in the circumstances it would be unfair to burden Mr Chamberlain with the expenses of administering the estate. There is evidence before the Court as to the quantum of the Trustee’s remuneration, costs and outlays to which I have had regard (see Alaeddin v CGU Workers Compensation).
In all the circumstances it is appropriate to extend the time for the making of the application for review and to set aside the sequestration order on the basis that Mr Chamberlain is able to pay his debts within s.52(2)(a) of the Act (see Re Sarina; Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163; [1980] FCA 66 and Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372; [1980] FCA 138) rather than to annul the bankruptcy.
I am satisfied on the evidence before the Court of Mr Chamberlain’s solvency. As stated in Sandell v Porter and Another (1966) 115 CLR 666 at 670; [1966] HCA 28 per Barwick CJ, the funds treated as being available to a person to pay his or her debts for solvency purposes:
… are not limited to his cash resources immediately available. They extend to moneys which he can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short period – relative to the size and amount of the debts, and to the circumstances, including the nature of the business of the debtor.
Mr Chamberlain meets this test, notwithstanding that he has not paid the judgment debt of the petitioning creditor. The evidence is clear that Mr Chamberlain was not aware of the District Court proceedings that led to the judgment debt. While he does not admit liability for the petitioning creditor’s debt, the evidence discussed above satisfies me that he is able to pay his debts, including the amount claimed by the petitioning creditor. This was not really disputed by the petitioning creditor or the Trustee and the issues that the solicitor for the Trustee raised about apparent differences between Mr Chamberlain’s Statement of Affairs and his later affidavit about available sources of funds were satisfactorily addressed.
As Mr Chamberlain has satisfied me that he is able to pay his debts within s.52(2)(a) of the Act, it is not necessary to determine whether the fact that the District Court summons, the Bankruptcy Notice and creditor’s petition did not come to Mr Chamberlain’s attention is other sufficient cause within s.52(2)(b) of the Act (notwithstanding compliance with substituted service orders). Given Mr Chamberlain’s ability to pay his debts (including that of the petitioning creditor) the sequestration order made on 2 August 2010 should be set aside and the creditor’s petition dismissed.
However, it was conceded by counsel for Mr Chamberlain that an order should be made that Mr Chamberlain meet the costs of the Trustee of preparing his report to the court for the purpose of these proceedings.
In the circumstances of this case, I am also satisfied that it is appropriate to order that Mr Chamberlain pay the costs of the Trustee of these proceedings, having regard to the fact that Mr Chamberlain initially sought an annulment and the Trustee as a party to the proceedings was entitled to argue that such an order should be made (see Pattison v Hadjimouratis at [240] – [245] per Lander J).
I certify that the preceding sixty-eight (68) paragraphs are a true copy of the reasons for judgment of Barnes FM
Date: 1 October 2010
3
13
5