Demarco, in the matter of Demarco v Pascoe

[2000] FCA 1366

FEDERAL COURT OF AUSTRALIA

Demarco, in the matter of Demarco v Pascoe [2000] FCA 1366

BANKRUPTCY – application for annulment of sequestration order

Bankruptcy Act 1966 (Cth) ss 153A, 153B

Federal Court Rules O 35 r 7; O 77 rr 42, 43, 44

IN THE MATTER OF GODFREY CHARLES DEMARCO

GODFREY CHARLES DEMARCO v SCOTT PASCOE (AS TRUSTEE OF THE BANKRUPT ESTATE OF GODFREY CHARLES DEMARCO)

N 7675 OF 2000

EMMETT J
6 SEPTEMBER 2000
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 7675 OF 2000

IN THE MATTER OF GODFREY CHARLES DEMARCO

BETWEEN:	GODFREY CHARLES DEMARCO APPLICANT
AND:	SCOTT PASCOE (AS TRUSTEE OF THE BANKRUPT ESTATE OF GODFREY CHARLES DEMARCO) RESPONDENT
JUDGE:	EMMETT J
DATE OF ORDER:	6 SEPTEMBER 2000
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.T & H Glass Holdings Pty Ltd be granted leave to file a notice of appearance in Court.

2.The matter be stood over, part-heard, for further hearing on 19 October 2000 at 10.15 a.m.

3.The bankrupt file and serve no later than 9 October 2000 any further affidavits upon which he intends to rely in support of his application.

4.T & H Glass Holdings, if it wishes to oppose reliance on any such additional material, notify the bankrupt’s solicitors no later than 13 October 2000 of the grounds upon which that opposition is to be based.

5.The bankrupt within 14 days pay $3060.00 to T & H Glass Holdings Pty Ltd in respect of its costs of 5 and 6 September 2000.

6.The bankrupt is to comply with O 77 r 43 of the Federal Court Rules in respect of the further hearing.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 7675 OF 2000

IN THE MATTER OF GODFREY CHARLES DEMARCO

BETWEEN:	GODFREY CHARLES DEMARCO APPLICANT
AND:	SCOTT PASCOE (AS TRUSTEE OF THE BANKRUPT ESTATE OF GODFREY CHARLES DEMARCO) RESPONDENT

JUDGE:	EMMETT J
DATE:	6 SEPTEMBER 2000
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. I have before me an application under section 153B of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”). Section 153B provides as follows:

   “If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor’s petition, the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.”

2. The application is brought by Godfrey Charles Demarco.  On 16 May 2000 Lehane J ordered that the estate of Mr Demarco be sequestrated.  That order was made on the application of Australia and New Zealand Banking Group Limited (“the Bank”).  His Honour ordered that the Bank’s costs be taxed and paid in accordance with the Bankruptcy Act.  His Honour, however, also ordered that all proceedings under the sequestration order be stayed for a period of 21 days from 16 May 2000.

3. The explanation for that last order is to be found in his Honour’s reasons for judgment.  The Bank, by an amended petition filed on 28 April 2000, sought a sequestration order against Mr Demarco.  The act of bankruptcy was failure to comply with a bankruptcy notice dated 27 October 1999 requiring payment of a debt claimed to be due under a judgment of the Supreme Court of New South Wales which took effect on 19 October 1999.  The judgment was in effect an order for the payment of costs.  There was no dispute that Mr Demarco had not complied with the bankruptcy notice.  Accordingly he had committed an act of bankruptcy within six months prior to the presentation of the petition. 

4. However, Mr Demarco sought an adjournment of the hearing of the petition on two grounds.  One was that he had not been informed before the hearing on 28 April 2000 of certain objections to an affidavit.  The other ground was that negotiations between Mr Demarco and the Bank for the purpose of settling the Bank’s claim had continued until very shortly before the hearing and the Bank had rejected his final offer.  There was little factual dispute between Mr Demarco and the Bank as to the terms or the course of the negotiations.  Mr Demarco, however, said to his Honour that the fact that the final rejection came only very shortly before the hearing, meant that he was deprived of the opportunity to raise, as he claimed that he could, the funds necessary to pay in full the amount claimed by the bank.

5. His Honour declined to grant the adjournment.  His Honour was not satisfied that Mr Demarco was able to pay his debts, even assuming reliance could be placed on certain annexures to his affidavit to which objection had been taken.

6. Additionally, the Bank accepted that it was appropriate that, if a sequestration order was made, proceedings under it should be stayed for 21 days pursuant to section 52(3) of the Bankruptcy Act.  The period of 21 days, together with any period during which judgment was reserved, was thought to give Mr Demarco a sufficient opportunity to raise, if he could, the funds required to discharge the debt on which the bank relied. 

7. The hearing took place on 28 April 2000 and judgment was given on 16 May 2000.  On 6 June, which was within the period of 21 days from 16 May 2000, albeit the last day, Mr Demarco delivered a bank cheque to the offices of Minter Ellison who were the solicitors for the Bank.  A letter from Minter Ellison bearing the date 6 June 2000 relevantly provides as follows:

   “1.      We confirm receipt of a bank cheque made payable to our client of the sum of $54,439.65.

   2.We note that on 16 May 2000, his Honour Justice Lehane made the following orders:

   ‘1.The estate of Godfrey Charles Demarco be sequestrated.

   2.The petitioning creditor’s costs be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth).

   3.All proceedings under the sequestration order be stayed for a period of twenty one days from 16 May 2000.’

   ………………………

   3.We also note that his Honour made a further order to the effect that order 1 be not entered before the expiration of the period during which the proceedings are stayed in order 3.

   4.If the bank cheque received by us today is honoured by the drawee bank, then our client will not proceed to enter order 1 above.   However, our client reserves his rights in relation to order 2 above.”

8. Mr Demarco, through his counsel, contended before me that the intent of the Bank and it was said, by inference, his Honour having regard to the orders that were made, was that if the amount claimed by the Bank was paid within 21 days of the date of his Honour’s orders, the bankruptcy would not proceed.  It may be that such an expectation or intent failed to take account of the provisions of the Bankruptcy Act. While the Act contemplates that proceedings under sequestration order be stayed for period of 21 days, that provision is usually called in aid by a bankrupt who seeks to appeal against the sequestration order. There is no provision in the Act that provides for recision of a sequestration order upon payment of the amount claimed by the petitioner, other than section 153A. That section provides as follows:

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

   (2) The trustee must, as soon as practicable after that date, give to the Official Receiver a written certificate setting out the former bankrupt’s name and bankruptcy number and the date of the annulment.

   ………………………………
   (6) In this section ‘bankrupt’s debts’ means all debts that have been proved in the bankruptcy and includes interest payable on such of those debts as bear interest, and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee.”

9. The fact that his Honour appears to have ordered that the sequestration order not be entered before the expiration of the stay, indicates that his Honour may well have had in mind the limited provisions of section 153B, but also had in mind the possibility that, the order not having been entered, it would be open to his Honour to set aside his own order, pursuant to Order 35 Rule 7. Order 35 Rule 7(1) provides that the court may vary or set aside a judgment or order before it has been entered.

10. Thus it would have been open to his Honour, upon being informed of the payment to the Bank, to set aside order 1 made on 16 June 2000.  No application has been made under that order.  Rather the present application has been brought.  As at today, order 1 of 16 June 2000 has not yet been entered.  However, the direction given by his Honour from 16 June is no longer operative, since the direction operated only during the period of the stay that he ordered on that day. 

11. The application before the Court seeks, in addition to an order annulling the bankruptcy, orders dispensing with the requirements of Order 77 Rules 42, 43 and 44.  Rule 42 provides that an application for annulment must be served on the trustee at least 28 days before the hearing date fixed for the application.  Because the application was brought on with some urgency, the original return day was less than 28 days ahead.  The application was in fact served on the trustee more than 28 days before I embarked on the hearing.  Accordingly, there was no longer any need for dispensation with compliance with Rule 42.

12. Rule 44 requires that, in the case of an annulment application, the trustee must prepare a report for the periods before and after the bankruptcy.  It may well be that at the time that the application was filed, it was thought that the trustee would not have sufficient time to prepare a report.  However, in the course of the hearing before me a report from the trustee in bankruptcy was tendered.  In the event, dispensation with compliance with Rule 44 is unnecessary. 

13. Rule 43 provides that the applicant must notify each creditor known to the applicant of the bankrupt.  The applicant must serve the notice on each creditor at least 14 days before the hearing date fixed for the application.  That rule has not been complied with.  The basis upon which dispensation is sought is that the report of the trustee indicates that many of the creditors are creditors in respect of small amounts.  The report discloses total unsecured creditors of $69,997.  There are some 23 separate creditors.  A further justification for dispensation was the urgency with which the matter was originally intended to be brought on. 

14. In the course of the hearing before me, Mr Demarco acknowledged that in addition to a debt shown in the report of $11,025 owing to T & H Glass Holdings Pty Limited, there were other liabilities owing to that company, although the time at which the liabilities became quantified is not entirely clear.  There are, it appears, two certificates for costs ordered to be paid by Mr Demarco to T & H Glass Holdings Pty Limited, each for sums in excess of $4,000. 

15. In addition in proceedings involving the Sisters of Charity in the Supreme Court of New South Wales, Mr Demarco has also been ordered to pay the costs of T & H Glass Holdings Pty Limited.  The amount of that liability has not yet been quantified, although a bill of costs has been prepared on behalf of T & H Glass Holdings Pty Limited and served on Mr Demarco, showing total costs of $68,905.57.  None of those liabilities is referred to in the trustee’s report.  The report however, does show that Mr Demarco has total realisable assets, after deducting a secured debt, of $303,779.  Thus, if his unsecured debts do not exceed the sum of $69,997 shown in the report, together with the additional amounts to which I have referred that are owing to T & H Glass Holdings Pty Limited, there would be a not insubstantial surplus, after paying the costs of administration.  The report shows that the cost of administration up to 4 September 2000, amounted to $5906.48. 

16. The nature of Mr Demarco’s business is that of a real estate agent and builder.  Ordinarily, in order to engage in those businesses, it would be necessary for Mr Demarco to have a licence under New South Wales legislation.  There is no reason to doubt that he has such licences, although there is no concrete evidence of them before me.  Bankruptcy could well put those licences in jeopardy.  Further, the consequences of bankruptcy on the status of Mr Demarco could be significant for other purposes. 

17. When the application was called on, Mr Marcus Young of counsel appeared for T & H Glass Holdings Pty Ltd, an acknowledged creditor of Mr Demarco.  The precise amount of the debt, however, is not entirely clear from the evidence presently before me.  T & H Glass Holdings Pty Limited have opposed the order sought in the application for annulment of bankruptcy.  It is common ground that if an order were made the petition would be revived.  However, it is by no means clear that, if an order were made, T & H Glass Holdings Pty Limited would have standing to apply to be substituted as a petitioning creditor, assuming the Bank no longer wished to participate. 

18. The Bank did not appear today.  On 13 June 2000, Mr Demarco sent a facsimile communication to the Bank’s solicitor, in effect, requesting them to re-list the matter before the Court to vacate the sequestration and costs order.  In response, the Bank’s solicitors sent a deed of release to Mr Demarco for his signature.  While Mr Demarco declined to execute the deed of release, it is significant that the draft document contains an acknowledgment by Mr Demarco that the amount of the debts outstanding to the Bank on the date of the deed is not less than $122,773.97.  Mr Demarco said that he was told by the Bank’s solicitor that that figure was included in case Mr Demarco became bankrupt in the next six months and the Bank had to pay back the money it had received. 

19. That comment of course indicates an understanding on the part of the Bank’s solicitor that the sequestration order made by Lehane J would not stand.  However, it also indicates that there may be other indebtedness of Mr Demarco to the Bank that could have some effect on the question of whether or not there would indeed be a surplus if the sequestration order is to stand.  In the course of argument, both yesterday and today, I indicated to counsel for Mr Demarco that I would not be disposed to make the order sought, if at all, except on terms that satisfied me that the creditors would be no worse off as a result of the annulment of the bankruptcy.

20. The matter was adjourned from yesterday to today to enable Mr Demarco to consider the provision of further evidence.  Upon resumption of the hearing today, I gave leave for Mr Demarco to adduce further evidence in the form of a letter, dated with today’s date, from Dorrough Smart solicitors, addressed to Mr Demarco's solicitors, saying relevantly as follows:

    “We confirm that we hold instructions to act for Mr Ari Franklyn Harkham of 144 Cleveland Street Chippendale, in respect of his purchase of a one half share in [the property described as 375A Old South Head Road, North Bondi].  The purchaser is to take his interest subject to the existing mortgage unless the mortgagee does not consent, in which case a new mortgage will be negotiated with the National Australia Bank Bondi Junction.  The net equity of the share being purchased is $80,000. 

    Details of our instructions are:
               Purchase price: $223,500

    ………………………

    We confirm that our client is fully aware that the Vendor is presently before the Court and seeking to have a Bankruptcy application annulled.”

21. The property referred to is described in the trustee’s report.  The report shows it as having a value of $550,000 and that there is secured upon it an amount owing to Citibank Limited in the sum of $289,473.  Thus the equity of Mr Demarco in the property is shown in the report as being $260,527. 

22. Mr Demarco acknowledged in cross-examination that, at least on his view, the proposed sale of a half-interest to Mr Harkham involves an under-value but that he was prepared to enter into such an arrangement in order to be in a position to discharge his obligations to his creditors in full.

23. As a term of the order under section 153B Mr Demarco has proposed that, inter alia, the trustee in bankruptcy be appointed to take control of the property for the purpose of supervising a sale of the one-half interest in the property and that he pay out of the proceeds of sale the unsecured creditors identified in the trustee’s report.

24. I indicated in the course of argument that I was not satisfied that the terms were adequate to ensure that all creditors would be protected in the event that I made an order annulling the bankruptcy.  On the other hand it seems to me that the creditors generally may well have an interest in some arrangements being put in place that would ensure their prompt payment.  That would also apply to the position of T & H Glass Holdings Pty Limited.  Accordingly counsel for Mr Demarco asked that I adjourn the matter further to enable Mr Demarco to have the opportunity of formulating a proposal that would be more likely to satisfy me that the interests of the creditors would be protected.

25. Counsel for T & H Glass Holdings Pty Limited, in opposing the order sought, suggested that what was proposed is tantamount to an informal administration that would achieve the result that would be available to the bankrupt under section 153A(1) of the Bankruptcy Act. True it is, that if the requirements of section 153A are satisfied, Mr Demarco’s bankruptcy would be annulled. On the other hand, until that time, the consequences of bankruptcy would prevail. I consider that it is appropriate to take into account the interests of Mr Demarco in avoiding bankruptcy and its consequences as soon as possible. But for the slightly unusual circumstances surrounding the orders made by Lehane J, I would not have been satisfied that this was an appropriate case for annulment. However, in the light of his Honour's orders, it does appear to me that both the petitioner and Mr Demarco, and at least to some extent his Honour, had in mind that if the bank's debt was paid then there would be no bankruptcy. It is for that reason that I consider that it is appropriate to give Mr Demarco the opportunity of proposing terms for the annulment that would guarantee that the creditors are in no worse position.

I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Associate:

Dated:             25 September 2000

Counsel for the Applicant:	Mr B J Skinner
Solicitor for the Applicant:	The Argyle Partnership
Counsel for T & H Glass Holdings	Mr M W Young
Solicitor for T & H Glass Holdings:	Warwick Keay & Associates
Solicitor for Peter John William Huntington	Mr J F Merewether for Roxburgh & Co
Date of Hearing:	5 & 6 September 2000
Date of Judgment:	6 September 2000