Drake v Jones

[2009] FMCA 298

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DRAKE & ANOR v JONES [2009] FMCA 298

BANKRUPTCY – Annulment applications – debtors’ petitions – bankrupt husband and wife seek annulment in order to appeal from Supreme Court decision in favour of their major creditor – whether debtors’ petitions ought not to have been presented or accepted – Official Receiver’s obligation to advise petitioners of consequences of bankruptcy – operation of s.55(3AA) of the Bankruptcy Act – power of the Court to annul a bankruptcy arising out of a debtor’s petition – discretionary considerations.

Bankruptcy Act 1966 (Cth), ss.5, 15, 30, 55, 153B, 178, 253B, 303

Badman v Drake [2008] NSWSC 1366
Bagshaw and Another v Scott and Others (2002) 126 FCR 27
Boral Johns Perry Industries Pty Limited v Kurt and Gerlinde Piccardi; Dick & Dons Pty Limited; Fire Fighting Sprinkler Co Limited and George Gregory Grivas [1989] FCA 227
BWK Elders (Australia) Pty Ltd v White [2004] FCA 1611
Cameron v Cole (1944) 68 CLR 571
Conway v Insolvency & Trustee Service Australia [2003] FCA 943
Cottrell v Wilcox [2002] FCA 1115
Cummings v Claremont Petroleum NL and Another (1996) 185 CLR 124
Delph Sing v Woodand Others (1918) 25 CLR 497
Donnelly v Edelsten (1992) 34 FCR 556
Edelsten v Deputy Commissioner of Taxation (NSW) and Others (1989) 86 ALR 257
Frost v Sheahan (Trustee) [2009] FCAFC 20
Gao v The Official Trustee in Bankruptcy [2003] FCAFC 84
Heinrich v Commonwealth of Australia [2003] FCAFC 315
Layton v Westpac Banking Corporation (2000) 181 ALR 603
McKay v Mobil Oil Australia Ltd [1999] FCA 1124
Mannis v Official Receiver, I.T.S.A. [2003] FMCA 228
Muller v Combis [2005] FCAFC 150
Official Receiver (NSW), in the matter of D’Elboux [2002] FCA 510
Official Trustee; In the matter of the Estate of Smith [1999] FCA 1755
Orix Australia Corporation Ltd v McCormick and Others (2005) 145 FCR 244
Project Blue Sky Inc and Others v Australian Broadcasting Authority (1998) 194 CLR 355
Rafaraci v Pearce & Heers [2003] FCA 1307
Re a Debtor; Ex parte Debtor v Allen [1967] Ch 590
Re Abbas; Ex parte Official Trustee in Bankruptcy (1995) 57 FCR 140
Re Almassy (1999) 92 FCR 597
Re Anasis; Ex parte Total Australia Ltd (1985) 11 FCR 127
Re Beesley; Ex parte Beesley v Official Receiver [1975] 1 All ER 385
Re Bilen; Ex parte Sistrom (unreported Federal Court of Australia, Neaves J, NSW706 of 1983, 11 April 1985)
Re Coote (1993) 47 FCR 522
Re Coyle and Another (1993) 42 FCR 72
Re Deriu (1970) 16 FLR 420
Re Goddard (unreported, 14 November 1986, Federal Court of Australia)
Re Gollan; Ex parte Gollan (1992) 40 FCR 38
Re Goo Tuck; Ex parte Goo Tuck (1892) 2 BC (NSW) 95
Re McCormack (unreported, 6 April 1990, Federal Court of Australia)
Re Moncada; Ex parte Moncada and Official Trustee in Bankruptcy (1986) 11 FCR 205
Re Mottee; Ex parte Mottee and Another (1977) 29 FLR 406
Re Papps; Ex parte Tapp (1997) 78 FCR 524
Sandell v Porter and Another (1966) 115 CLR 666
Swain v Official Trustee  [2003] FMCA 13
Symes v Holbrook [2003] FCA 96
Symes v Holbrook (No.3) [2004] FMCA 71
Taylor v Taylor (1979) 143 CLR 1
Tyler v Thomas (2006) 150 FCR 357
Wong v Robinson [1995] FCA 805
Zodiac Investments Pty Ltd v Brelsford [1999] FCA 1482

Applicants: LAWRENCE ALLAN DRAKE & JUDITH EVANGALINE DRAKE

Respondent: MICHAEL JONES

File Number: SYG 576 of 2009

Judgment of: Barnes FM

Hearing date: 17 March 2009

Delivered at: Sydney

Delivered on: 30 April 2009

REPRESENTATION

Applicants: In person

Solicitors for the Respondent: William Roberts Lawyers

ORDERS

1. That the application for annulment of the bankruptcies of Lawrence Allan Drake and Judith Evangeline Drake be dismissed. 

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 576 of 2009

LAWRENCE ALLAN DRAKE & JUDITH EVANGELINE DRAKE

Applicants

And

MICHAEL JONES

Respondent

REASONS FOR JUDGMENT

Background

1. Mr and Mrs Drake each presented a debtor’s petition on 28 January 2009 and became bankrupt on 30 January 2009.  Mr Jones became trustee of both estates.  By a single application filed in this Court on 10 March 2009 they sought that their bankruptcies be annulled and that the hearing be expedited in order to enable them to pursue a foreshadowed appeal to the Supreme Court of New South Wales, Court of Appeal in the matter of Badman v Drake [2008] NSWSC 1366.

2. In that case Young CJ in Equity held that a transaction involving a gift from the elderly Mrs Badman to Mr and Mrs Drake must be set aside for equitable fraud and undue influence and on 19 December 2008 ordered that the Drakes pay to Mrs Badman by way of equitable compensation the sum of $378,623.19 plus interest of $37,551.12.  His Honour held that this amount should be charged on a Rouse Hill property in the names of the Drakes at least until priorities could be “unravelled” in light of the fact that after Mrs Badman commenced the Supreme Court proceedings the Drakes had purported to enter a contract to sell the Rouse Hill property to another party on terms allowing them to remain in occupation (see Badman v Drake at [95] – [96]). The issue of undue influence was determined by the Supreme Court as a preliminary question on 19 December 2008. Other matters (including the issue of costs) were adjourned until 4 February 2009.

3. Mr and Mrs Drake lodged a notice of intention to appeal to the Court of Appeal from the decision Badman v Drake in January 2009.  However on 28 January 2009 they each presented a debtor’s petition.  The petitions were accepted by the Official Receiver and they each became bankrupt on 30 January 2009. 

This application

1. In these proceedings Mr and Mrs Drake each filed and rely on affidavits sworn on 9 March 2009 in which they referred to difficulties in obtaining legal advice and representation in relation to the proposed appeal. They had legal representation in the Supreme Court proceedings until the date of judgment. They claimed that those lawyers declined to act further as their money “had run out.” They claimed that in the absence of legal representation or advice before the matter came back before the Supreme Court for determination of outstanding issues, they decided to become bankrupt as they were worried about appearing in the Supreme Court on their own with no legal representation.  They claimed that they now knew that this was a “huge mistake”. The Drakes assert that an unidentified solicitor and barrister are now prepared to act for them on a pro bono basis in relation to the proposed appeal to the Court of Appeal, provided their bankruptcies are annulled. However the Drakes attest that these new lawyers would not act for them in relation to the annulment application. They understand that the trustee of each of their estates (who was named as respondent in these proceedings) has not agreed to pursue the appeal.

2. By way of submissions in support of their annulment application the applicants relied on a copy of the judgment in Badman v Drake and a document entitled “our objections to the judgment” apparently prepared by them without the benefit of legal assistance, in which they take issue with what are said to be “wrong” factual findings or “mistakes” of fact made by the Supreme Court, the “understanding” of Young CJ in Equity of what they say was the factual situation and his Honour’s findings that the transaction they engaged in, which involved the use of Mrs Badman’s money to purchase a property for the Drakes beneficially, must be set aside for undue influence. They complained of bias on the part of Young CJ in Equity on the basis of his Honour’s description of references from two Ministers of Religion and a general practitioner (said by the Drakes to have been obtained to vouch for their integrity in response to a suggestion from the former solicitor for Mrs Badman that the Drakes had “initiated” the idea of Mrs Badman buying the house for them “whereas the reverse was the case”) as appearing “to be a case of equitable fraudsters trying to pull themselves up by their own bootstraps” (at [36]) and the factual findings with which they disagreed. There is otherwise no evidence before this Court as to any grounds for the proposed appeal to the Court of Appeal.

3. The applicants seek annulment of their bankruptcies under s.153B of the Bankruptcy Act 1966 (Cth). Each of the applicants is a person aggrieved by or interested in the matter within s.303 of the Bankruptcy Act. While only one application was filed, Mr Drake seeks annulment of his bankruptcy and Mrs Drake seeks annulment of her bankruptcy (cf Re Beesley; Ex parte Beesley v Official Receiver [1975] 1 All ER 385). The case they are each required to make must be discharged according to the civil onus (see Edelsten v Deputy Commissioner of Taxation (NSW) and Others (1989) 86 ALR 257 and Symes v Hollbrook [2003] FCA 96). The applicant’s son made oral submissions for his parents with the leave of the Court. The applicants also made post-hearing written submissions.

4. Michael Jones, the trustee in bankruptcy for each of the bankrupt’s estates, prepared a report dated 12 March 2009 as contemplated by r.7.04(1) of the Federal Magistrates Court (Bankruptcy) Rules.  Mr Jones appeared, represented by a solicitor.  No issue was taken before me with the fact that Mr Jones was named in the application as a respondent in the proceedings. 

5. The Trustee’s Report stated that it would appear that both Mr and Mrs Drake were currently insolvent.  It set out details of their financial position as disclosed in their statements of affairs. Given that the applicants were self-represented and the complexity of the issues raised, the trustee took a comparatively active stand in relation to the annulment application and provided the Court with detailed oral and written submissions (and post-hearing submissions) in relation to the relevant facts and law.  The trustee opposed the application. 

6. The applicants sought that their annulment application of 10 March 2009 be heard as a matter of urgency on the basis that their appeal to the Supreme Court of New South Wales, Court of Appeal should be lodged by 19 March 2009.  This matter was listed by the Registry on short notice and came before me and was heard on 17 March 2009.  Certain of the temporal requirements of the Federal Magistrates Court (Bankruptcy) Rules were not met. The trustee was served with the application and supporting affidavits on 11 March 2009.  This was not at least seven days before the hearing date of 17 March 2009 as required under r.7.02(2) of the Federal Magistrates Court (Bankruptcy) Rules.  As a matter of expediency, to allow the Court to consider the matter, the trustee prepared and filed a report on 13 March 2009 for the information of the Court (albeit not in the form of an affidavit and not filed at least five days before the hearing as required where the Court directs preparation of a report under r.7.04(1)). The trustee did not suggest that time constraints had affected his ability to prepare the report or to appear to assist the Court and provide information and did not seek an adjournment.

7. Under r.7.03 of the Bankruptcy Rules the applicant must give notice of an annulment application in accordance with Form 11 to each person known to the applicant to be a creditor. This notice must be served at least seven days before the hearing date fixed for the application.  No affidavit as to service on the creditors was filed. Mr Drake gave oral evidence that he gave notice in accordance with Form 11 to each of his and Mrs Drake’s creditors by personal delivery to the solicitors for one creditor in Sydney on 11 March 2009 and by mail to three creditors located in Melbourne on 11 March 2009.  Hence the creditors have not had the requisite period of notice.

8. The Court may dispense with non-compliance with the Rules (see r.1.06 of the Federal Magistrate Court Rules and Rafaraci v Pearce & Heers [2003] FCA 1307). Normally the absence of compliance, in particular in relation to proper notice to creditors, would be a matter of concern. However, in the particular circumstances of this case I considered it appropriate to hear the application on 17 March 2009 notwithstanding the non-compliance with the Rules. Insofar as it was necessary to enable me to do so I considered it appropriate to dispense with the requirements of the Rules, in particular the requirement that notice of the application be served on each creditor at least seven days before the hearing under r.7.03(3). I am mindful that, given the short notice, the fact that there was no appearance by or on behalf of any of the creditors should not be taken to establish support for the annulment application. The Court did not have the benefit of evidence as to the interests and wishes of unpaid creditors. The major (but not the only) creditor of each of the Drakes is Mrs Badman, the successful plaintiff in the Supreme Court proceedings. Her solicitors in Sydney were notified of the annulment application by letter delivered on 11 March 2009. Had I been minded to exercise the discretion to annul the bankruptcies it may have been necessary to consider requiring the requisite period of notice to be given to each of the creditors before making such orders. However, for the reasons given below, I am not satisfied that the bankruptcies of Mr and Mrs Drake should be annulled.

9. The Drakes contended that their petitions ought not to have been presented or accepted because they were acting without legal advice or representation at the time they presented the petitions and did not appreciate the consequences of bankruptcy in relation to their ability to pursue the intended appeal in the Court of Appeal. They now understand that on their bankruptcies the only proper party to bring such an appeal would be the trustee in bankruptcy and that he has not agreed to do so (see Cummings v Claremont Petroleum NL and Another (1996) 185 CLR 124 and Bagshaw and Another v Scott and Others (2002) 126 FCR 27).

10. It appears from a copy of the results of a Supreme Court file enquiry annexed to each of the affidavits of Mr and Mrs Drake that Badman v Drake was finalised on 4 February 2009.  In addition to orders that the Drakes pay equitable compensation and interest totalling $416,174.31 and that the interest of the Drakes in the Rouse Hill property be charged with payment to Mrs Badman of the amount, it was ordered that the Drakes pay Mrs Badman’s costs of the proceedings. The Supreme Court granted liberty to apply in relation to certain matters, including an order that Mrs Badman’s costs be assessed on an indemnity basis, an order seeking the appointment of receivers and managers or any other orders in aid of execution of the judgment.  In his report the trustee recorded that his staff were informed that Mr and Mrs Drake did not advise the Supreme Court of their bankruptcy on 4 February 2009 and that he wrote to the Registrar of the Supreme Court advising of the bankruptcies on 17 February 2009.

11. The trustee recorded in his report that at a meeting with the bankrupts on 18 February 2009 his staff explained to them that any appeal against the judgment of the Supreme Court of 19 December 2008 now vested with the trustee, that the trustee would need to seek legal advice as to the merits of any appeal and that he would need to be indemnified against any adverse costs order should the appeal be lost. The bankrupts do not dispute that in response they advised that they were without funds.  The report also recorded that Mr Drake was advised on 27 February 2009 that the trustee would need to have his costs met for any legal advice regarding the merits of any appeal. 

Power of the Court to annul a bankruptcy arising out of a debtor’s petition

1. Section 153B of the Bankruptcy Act 1966 (Cth) is as follows:

   (1)     If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor’s petition, that 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)     In the case of a debtor’s petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented. 

2. Section 55 of the Bankruptcy Act deals with debtor’s petitions and contains an express provision dealing with the consequences of bankruptcy founded on a debtor’s petition. Section 55(8) is as follows:

   A person who becomes a bankrupt by force of this section continues to be a bankrupt until:

   (a) he or she is discharged by force of subsection 149(1); or

   (b) his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B.

3. The automatic discharge provisions of s.149 are not in issue in this case. Nor is there any suggestion that annulment by force of s.74(5) (which deals with passing of a special resolution at a meeting of creditors) or s.153A(1) (annulment on payment of debts) is in issue.

4. Section 153B requires the Court in the exercise of its discretion first to consider whether “a sequestration order ought not to have been made or, in the case of a debtor’s petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver” and then to consider whether in light of all the circumstances of the case the bankruptcy should be annulled (see generally Re Deriu (1970) 16 FLR 420 and Heinrich v Commonwealth of Australia [2003] FCAFC 315 at [20]).

5. In considering the expression “ought not to have been” in s.153B the Court is entitled to consider not only the case as disclosed at the time of the bankruptcy, but also as it would have been disclosed had all the true facts been made known (see Symes v Holbrook [2003] FCA 96 at [15], Re Almassy (1999) 92 FCR 597 at [15] – [17] and, generally, Re Gollan; Ex parte Gollan  (1992) 40 FCR 38 at 40 – 42 per Spender J).

6. Much of the authority in relation to the scope of s.153B concerns bankruptcy founded on the making of a sequestration order rather than bankruptcy founded on the presentation of a debtor’s petition. However in Re Almassy the Federal Court considered an application to annul a bankruptcy founded on presentation of a debtor’s petition.  While the applicant in Re Almassy accepted that she could only succeed if the court was satisfied either that the petition “ought not to have been presented” or that it “ought not to have been accepted” (and relied only on the former), it was contended that s.153B gave the court a discretion “at large” to annul a bankruptcy based upon a debtor’s petition, in the sense that the applicant did not have to show some circumstance that disentitled her from presenting the petition. 

7. The applicant in Re Almassy sought annulment because, although she had been given information that the Official Receiver was obliged to give to petitioners, including information as to the probable charges to be made by the Official Receiver, she “did not appreciate the likely level of charges” (at [13]). This matter was said to be of particular significance given the size of her estate (at [13]). 

8. Mansfield J stated in Re Almassy (at [14]) that “… it is necessary for the applicant to establish some circumstances which meant that she was not eligible to present the petition to establish that it ought not to have been presented.  It is only if that point is reached that the Court has a discretion to annul the bankruptcy.”

9. Mansfield J held that it had not been established that the petition ought not to have been presented and found that in those circumstances he must refuse the application (at [23]).  Nonetheless his Honour went on (at [24]) to consider whether (if he was wrong and there was a discretion “at large”) the bankruptcy should be annulled on the basis contended for by the applicant.  Mansfield J found that he would nevertheless refuse the application to annul the bankruptcy. 

10. In Re Almassy what was in issue was whether the petition ought not to have been presented. It has been said that to establish that a petition ought not to have been accepted the applicant must establish that the conditions precedent to acceptance of a debtor’s petition under s.55 of the Act were not satisfied (see Re Almassy at [11], Re Abbas; Ex parte Official Trustee in Bankruptcy (1995) 57 FCR 140 and see Symes v Holbrook [2003] FCA 96 at [15]).

1. In this instance the Drakes sought to contend that their petitions ought not to have been presented and/or that they ought not to have been accepted by the Official Receiver and also that the Court could and should exercise what might be described as a discretion “at large” to consider their application and annul their bankruptcies. 

2. Consistent with the approach taken by Mansfield J in Re Almassy, I have considered whether it has been established that the petitions ought not to have been presented or ought not to have been accepted within s.153B and also discretionary issues.

3. Although the annulment application is brought under s.153B, the applicants’ submissions raised the issue of whether there is a general discretion vested in the Court to annul a bankruptcy pursuant to an inherent jurisdiction to determine matters with respect to bankruptcies arising under the Bankruptcy Act 1966 (Cth) (“the Act”). That issue is discussed below.

Section 153B:  Whether petitions ought not to have been presented

1. The Drakes contended that their petitions ought not to have been presented because they were not properly informed as to the effect of bankruptcy on their intended appeal from the decision in Badman v Drake and hence were under a misconception and also because they “seemed” to be solvent. 

2. The Drakes also contended variously that the debt to Mrs Badman was not due and payable, that there was a stay on proceedings by Mrs Badman, that they were debtors to whom a stay under a proclaimed law within s.55(6A) applied, and that they had an “excellent” chance of success on appeal in Badman v Drake that would “remove” their major debt and on this basis the bankruptcies should be annulled. 

3. The authorities suggest that there are only limited circumstances in which a bankruptcy can be annulled on the basis that the debtor’s petition ought not to have been presented by the bankrupt.  The power may be exercised where it is established that the presentation of the debtor’s petition was an abuse of process, for example where the debtor was not in fact insolvent but improperly sought bankruptcy as a “haven from a proper claim by a creditor” as discussed in Re Almassy (at [19]) (and see Re Moncada; Ex parte Moncada and Official Trustee in Bankruptcy (1986) 11 FCR 205); if it was for the purpose of placing the debtor’s estate beyond the reach of a person who would imminently become a creditor (see BWK Elders (Australia) Pty Ltd v White [2004] FCA 1611); or where a bankrupt had gone bankrupt twice in error (see Official Receiver (NSW), in the matter of D’Elboux [2002] FCA 510). In Re Mottee; Ex parte Mottee and Another (1977) 29 FLR 406 Riley J stated in relation to the concept “ought not to have been presented” (which was then in s.154(1)(a) of the Bankruptcy Act) that “… in my opinion the consequent bankruptcy may be annulled where a debtor was not ‘entitled to use the machinery of the Bankruptcy Act’ (Re A Debtor; Ex parte The Debtor v. Allen [1967] Ch. 590, at p. 596) and the presentation of his petition may properly be characterized as an abuse of the procedure provided by s 55” (and see Re Almassy). 

4. There is no suggestion that there was any abuse of process in this case.  In Zodiac Investments Pty Ltd v Brelsford [1999] FCA 1482 (at [5]) Cooper J stated:

   … it will not be an abuse of process nor to achieve a purpose foreign to the bankruptcy law where the petition is filed to protect the bankrupt, who is insolvent, from the evils which might befall him or her at the suit of the bankrupt's creditors; notwithstanding that it may thwart the creditors in any action they are taking or proposing to take against the bankrupt.  (emphasis added).

5. It has also been said that generally it will not be possible for a debtor to establish that his or her bankruptcy should be annulled on the ground that the petition ought not to have been presented when it was clear that at that time the bankrupt was insolvent (see Re Coyle and Another (1993) 42 FCR 72 at 77 – 78 per Drummond J). While the Court now has power to annul a bankruptcy whether or not the bankrupt was insolvent when the petition was presented (see s.153B(2)), insolvency is a matter which has been said to weigh heavily against the exercise of the discretion under s.153B (see Layton v Westpac Banking Corporation (2000) 181 ALR 603).

6. On the other hand, solvency may provide a basis for annulment.  In Re McCormack (unreported, 6 April 1990, Federal Court of Australia) Pincus J annulled a bankruptcy, apparently on the basis that the petition ought not to have been presented, where the evidence showed that the debtor was solvent at the time he presented his petition and that he appeared to be so at the time of the annulment application (although there was reason to think that if an action on foot went against the bankrupt he would become insolvent). 

7. A voluntary bankruptcy was also annulled on the application of the bankrupt in Re Goo Tuck; Ex parte Goo Tuck (1892) 2 BC (NSW) 95. In that case the debtor was an infant, but was unaware at the time he presented his petition that this was an answer to the claims of his creditors. As Drummond J pointed at in Re Coyle at 77, at that time the position thus was that the debtor owed no enforceable debts of any kind and hence could probably be regarded as solvent (but now see s.7(1A) of the Bankruptcy Act).

8. In this case the Drakes seek annulment because they wish to pursue an appeal against their major creditor and the trustee is not prepared to pursue such appeal.  In Re Coyle bankrupts sought annulment to pursue a claim for damages against a third party.  The application was supported by their creditors.  However, Drummond J stated at (77 -78):

   It will in my view generally not be possible for a debtor to establish that his bankruptcy should be annulled on the ground that the "petition ought not to have been presented" when it is clear that at that time he was insolvent. Although in contrast to earlier legislation, the provisions of the Bankruptcy Act 1966(Cth) that now govern presentation of a debtor's petition do not require the debtor to admit his insolvency, the procedure available to a debtor to procure his own bankruptcy is only intended to be available to debtors who are insolvent: see Re Mottee; Ex parte Mottee and Official Receiver (1977) 29 FLR 406 at 412.

   Where an insolvent debtor presents his own petition, s 55 is being used for its intended purpose: it cannot be said, in such circumstances, that the petition ought not to have been presented. If a debtor is insolvent at the time he presents his own petition it cannot, in my view, be said that the petition ought nevertheless not to have been presented because the debtor then had a hope or even a reasonable expectation that his fortunes would improve either in the near future or in the long term. If, after becoming bankrupt on his own petition, the debtor is able for any reason to pay all his debts, then he will be entitled to an annulment of his bankruptcy under s 153A upon complying with the requirements of the section. But that such a situation arises, or may arise, after bankruptcy, in circumstances in which it was anticipated that it would arise at the time the debtor presented his own petition, provides no ground for saying that the petition ought not to have been presented, the debtor then being insolvent in the sense in which the term is used in Sandell v Porter (1966) 115 CLR 666 at 670, at that time.

   Given that the applicants were insolvent when they presented their petition, I am not prepared to find that it ought not to have been presented.  Their application for annulment should be dismissed for that reason

9. His Honour went on (at 78 – 79) to state that even if he was wrong in thinking that the circumstances were not such as to enliven the discretion to annul the bankruptcy, there were “strong discretionary reasons” why an annulment should be refused, having regard to the debtors’ insolvency, the inability of the Court on the information available to form any assessment of the prospects of success in the proposed action and the fact that there was no clear proposal or adequate undertakings to ensure that the bankrupt’s creditors received the benefit of the action should it succeed. 

10. The Drakes relied on Swain v Official Trustee [2003] FMCA 13. In that case McInnis FM annulled a bankruptcy based on a debtor’s petition having regard to a combination of two factors – the solvency of the debtor at all relevant times and her misconception or false belief as to her financial circumstances and arrangements at the time she presented her petition. Ms Swain was not aware at that time that financial arrangements had been put in place by her former partner to pay a joint debt to a mortgagee. She had received a demand for payment, but the creditor’s collection agency had not informed her of the arrangements put in place by her former partner. She apparently acted on the advice of a financial services agency to file a debtor’s petition and become bankrupt (Swain at [8] – [10]) and [16] – [17]).

11. Mr and Mrs Drake submitted that their circumstances were analogous to those in Swain as they “were not told they could not appeal when bankrupt even though ITSA knew of the appeal in the Supreme Court.”  As to whether ITSA “knew” of the appeal, the copies of the statements of affairs accompanying the debtor’s petitions annexed to the Trustee’s Report refer to the December 2008 judgment, but not to any actual or intended appeal.  It appears that these copies are incomplete and the trustee acknowledged that the Drakes also provided the Official Receiver with copies of the judgment in Badman v Drake and their list of objections and a statement explaining how they “got into this ghastly mess and why we feel we have been treated unfairly & unjustly by Judge (sic) Young who made so many mistakes which differ from the transcript.”  In that statement they also explained that their debts exceeded their assets by about $96,000, not including costs to be decided on 4 February 2009 and that because they had “no more money” they had no-one to represent them legally any more, although “they had been trying since last December.”  They stated that they “just want the whole thing to be over.”  This material does not establish that an appeal was on foot or that ITSA “knew” of an appeal, but in any event the decision in Swain did not turn on the knowledge of the Official Trustee or any suggested failure by such an official to inform Ms Swain of the consequences of bankruptcy.  The Drakes’ situation is not analogous to the debtor’s misconception in Swain as to her financial situation at the time of presentation of the petition. 

12. Indeed, even if the Drakes also provided the Official Receiver with a copy of the notice of intention to appeal (which is not apparent on the evidence before the Court), under r.51.9(3) of the Uniform Civil Procedures Rules 2005 (NSW) the filing and service of a notice of intention to appeal does not operate to commence proceedings in the Supreme Court. There was no appeal on foot at the time of presentation of the debtors’ petitions.

13. In effect, the Drakes’ argument is that because they intended to appeal and did not know (or were not informed by the Official Receiver or ITSA) about the effect of bankruptcy on their ability to conduct legal proceedings, their debtor’s petitions ought not to have been presented (or accepted) because they were under a misconception as to their situation and the effect of bankruptcy on the intended appeal. The Drakes rely on their lack of knowledge of the consequences of bankruptcy. The solicitor for the trustee referred to the fact that Mr Drake disclosed in his statement of affairs that he had previously been bankrupt in 1996. However their claimed lack of knowledge relates to the impact of bankruptcy on pursuing a foreshadowed appeal. 

14. In Re Almassy a bankrupt unsuccessfully sought an annulment on the basis that at the time of her debtor’s petition she did not realise the amount of the fees and charges which may be charged against her estate and because she sought to engage solicitors to pursue a contingent asset consisting of the prospect of receiving a distribution from the deceased estate of her aunt which, if received, would be sufficient to pay her debtors. 

15. Mansfield J was not satisfied that the applicant in Re Almassy had established that the petition ought not to have been presented.  While accepting that the expression “ought not to have” comprehended circumstances where the facts if known were such that the debtor’s petition ought not to have been presented, his Honour was not satisfied that the circumstances were such that the petition ought not to have been presented.  The applicant in Re Almassy did not seek to establish that she was not insolvent at the time she presented her petition.  According to Mansfield J (at [22]) she did not identify any other factor which, had it been known at the time, would have led to a conclusion that her petition ought not to have been presented.  It was not suggested by the applicant in Re Almassy that she was misusing the processes of the court. It is apparent that her lack of knowledge of the amount of fees and charges and the foreshadowed legal proceedings were not such as to satisfy the Federal Court that the petition ought not to have been presented. Relevantly, Mansfield J (at [21]) referred with approval to the statement by Drummond J in Re Coyle at 77 – 78:

    It will in my view generally not be possible for a debtor to establish that his bankruptcy should be annulled on the ground that `the petition ought not to have been presented' when it is clear that at that time he was insolvent ... Where an insolvent debtor presents his own petition, s 55 is being used for its intended purpose: it cannot be said, in such circumstances, that the petition ought not to have been presented. If a debtor is insolvent at the time he presents his own petition it cannot, in my view, be said that the petition ought nevertheless not to have been presented because the debtor then had a hope or even a reasonable expectation that his fortunes would improve either in the near future or in the long term.

16. Similarly, in Official Trustee; In the matter of the Estate of Smith [1999] FCA 1755 Heerey J dismissed an annulment application that had been sought by the Official Receiver on the basis that a petition ought not to have been presented by a debtor who was said to have relied on incorrect advice and not to have realised that the practical effect of sequestration would be to prevent her from pursuing legal action. While what Heerey J suggested in relation to whether there was a discretion to grant an annulment under s.153B in the case of a debtor’s petition when the debtor was insolvent at the time of presentation of the petition now has to be seen in light of s.153B(2), relevantly his Honour stated at [15] that the expression “ought not to have been presented” does not mean “‘ought not to have been presented’ because in retrospect, and given better advice, other options might have been pursued”.  The same may be said in this case.  

17. I am of the view that, consistent with the approach taken in these cases and the purpose of s.55, where an insolvent debtor presents his or her own petition, a hope or reasonable expectation that his or her fortunes may or would improve in the future (as discussed in Re Coyle) or the fact that with better advice other options might have been pursued instead of bankruptcy, including legal action (as considered in Smith), is not such as to establish that the petition ought not to have been presented. 

18. Moreover, even if a misapprehension as to the impact of bankruptcy on an intention to pursue an appeal is a matter which might go to show that a petition ought not to have been presented (and I note that no submissions were made as to the effect of s.153B(2)), the distinction between this case and Swain (or indeed Re McCormack and Re Goo Tuck) is that the evidence before the Court is not such as to establish either actual or, indeed, “apparent” solvency (as considered in Swain) of either of the Drakes at the time the petitions were presented or at present.  Whether considered in terms of whether their assets exceeded or were able to address amounts then owing to creditors (see Swain at [8] or as discussed in Sandell v Porter and Re Coyle), it is not established or apparent that at either of these times the Drakes were solvent.  The Drakes did not put evidence of their solvency before the Court (cf Symes v Holbrook). 

19. The trustee has expressed the opinion that at the time of preparation of the report the Drakes each appeared to be insolvent.  In the hearing the Drakes did not dispute this, although in post-hearing submissions they contended that they “seem to have been solvent” at the time of presenting their petition.  The evidence before the Court does not establish their contentions that they were solvent at any relevant time.  They made this suggestion on the basis that if certain matters regarded as “liabilities” in the Trustee’s Report were not taken into account their assets would exceed their liabilities.  Thus they claimed (without any evidence to support this proposition) that a joint “home equity loan” of $167,000 should not have been included as a liability as it was said not to be repayable until their death or sale of their home and that as credit card instalments were “regularly paid”, the credit card liabilities for Mr Drake of $14,632 and for Mrs Drake of $12,814 “were not part of the issue”.  However these unsubstantiated assertions do not establish solvency either at the time of presentation of the petitions or at present.  The “home equity loan” of $167,000 appears from the Trustee’s Report to be secured on the Rouse Hill property in the name of Drakes.  The submissions in relation to regular payment of credit card liabilities do not establish that such debts were or are not liabilities. 

20. The Drakes contended that were it not for the debt to Mrs Badman, who is their major creditor, they would be solvent. They made this claim on the basis that their assets would then exceed their liabilities. This may be so. However it has not been established that there was not a debt owing to Mrs Badman or, indeed, that it was not due and payable at the time of presentation of the debtor’s petitions (see r.36.4 of the Uniform Civil Procedure Rules 2005 (NSW)). I am not satisfied on the evidence before me that the Drakes were each solvent at the time of presentation of their debtor’s petitions or at present (see Sandell v Porter at 670 and Symes v Holbrook at [17] and ss.5(2) and 5(3) of the Bankruptcy Act). In contrast in Swain it appeared that the debtor was solvent (at [16]).

21. The Drakes also contended that the filing of a notice of intention to appeal in the Supreme Court of New South Wales, Court of Appeal operated as a stay of proceedings. This has not been established. As indicated, the filing and service of a notice of intention to appeal does not operate to commence proceedings in the Supreme Court (r.51.9(3) Uniform Civil Procedure Rules). Moreover, under r.51.44 of those Rules appeal proceedings do not operate as a stay unless the court directs. In this case there is no evidence that the Supreme Court ordered a stay on proceedings in relation to the judgment of 19 December 2008. The fact that the case before Young CJ in Equity had not “finished” at the time the debtors’ petitions were presented (in that there was to be a further hearing on 4 February 2009 in relation to costs and other matters), does not establish that there was a stay of proceedings or that there was not a debt due to Mrs Badman at the time of presentation of the debtors’ petitions (28 January 2009).

22. Nor has it been established that s.55(6AA) is applicable as contended by the applicants. Section 55(6AA) of the Bankruptcy Act provides that a debtor in relation to whom a stay under a proclaimed law applies is not, except with the leave of the Court, entitled to present a petition against himself or herself. A proclaimed law means a law specified for the time being in a proclamation in force under s.253B (see Part XIA of the Act). There is no evidence to suggest that these provisions (which relate to proclaimed laws providing for financial assistance to farmers for the purpose of discharging debts) have any application to the Drakes.

1. The Drakes also submitted that their financial position was different at 28 January 2009 compared to what it became after 4 February 2009 when their matter was next before the Supreme Court (presumably because of the costs order made against them in Drake v Badman). However this does not establish that there was not a debt based on the judgment of 19 December 2008 or that the Drakes were solvent at the time of their petitions or thereafter. It has not been suggested that presentation of their petitions was an abuse of process or an attempt to place their estates beyond the reach of a person who would imminently become a creditor as the result of an order for costs (cf BWK Elders (Australia) Pty Ltd v White at [7]).

2. Mr and Mrs Drake also contended that the fact that they have now obtained legal representation on the basis that their lawyers will only be paid if they win (cf “pro bono” in the sense of being for the public good or in the public interest) means that they have what they describe as an “excellent” chance of success on appeal in the Court of Appeal and that were they to succeed this would mean that they would no longer be indebted to their major creditor.  However, as Drummond J stated in Re Coyle at 78: “If a debtor is insolvent at the time he presents his own petition it cannot, in my view, be said that the petition ought nevertheless not to have been presented because the debtor had a hope or even a reasonable expectation that his fortunes would improve either in the near future or in the long term”. 

3. There is no proper evidence before the Court as to grounds of appeal.  It is not possible for the Court to form an assessment of the Drakes’ prospects of success on appeal based on their “objections” to the judgment of the Supreme Court and that fact that they have now obtained legal representation on a no win – no pay basis. 

4. I am not persuaded that in all the circumstances the fact that each of the Drakes acted to present a debtor’s petition without legal advice and subsequently changed their minds is such as to bring the case within the concept “ought not to have been presented” where, on the basis of the facts and circumstances they disclosed in the statements of affairs annexed to the debtor’s petitions and as disclosed at present, they were insolvent at the time of presentation of the petitions and at present. 

5. It appears from those statements of affairs that the bankrupts, who are age pensioners, disclosed total liabilities that exceeded their total assets by amounts of $45,715 in the case of Mr Drake and $49,894 in the case of Mrs Drake. There was no suggestion that assets were realisable in order to pay their debts as and when they became due and payable. The Drakes’ unsubstantiated post-hearing submissions do not establish solvency.

6. It has not been established that the petitions ought not to have been presented.  For the sake of completeness I note that, as discussed further below, even if the Drakes’ circumstances (including the fact that, in retrospect, other options might have been pursued, in particular the foreshadowed appeal) are such as to establish that the petitions ought not to have been presented, or if there is a discretion “at large” to consider the application, nonetheless, for the reasons given below, in the whole of the circumstances of the case, I am not persuaded that either of the bankruptcies should be annulled. 

Section 153B:  Whether the petitions ought not to have been accepted by the Official Receiver

1. The alternative basis in s.153B on which the Drakes rely is that the debtors’ petitions “ought not to have been accepted” by the Official Receiver.

2. The main contention of Mr and Mrs Drake appears to be that because the Official Receiver has power under s.55(3AA) to reject a debtor’s petition in certain circumstances and because they each annexed to their petitions copies of the judgment of the Supreme Court in Badman v Drake and their objections to the judgment, the Official Receiver ought to have rejected their petitions. It was also contended that the Official Receiver failed to give the Drakes necessary information under s.55(3A) about alternatives to and consequences of bankruptcy before accepting the petitions.

3. Section 55 of the Bankruptcy Act deals with debtor’s petitions. Relevantly, it is as follows:

   (1)     Subject to this section, a debtor may present to the Official Receiver a petition against himself or herself.

   (2)     A petition presented by a debtor under this section:

   (a)     shall be in accordance with the approved form; and

   (b)     shall be accompanied by a statement of the debtor’s affairs and a copy of that statement.

   (2A)  The Official Receiver must reject a debtor’s petition unless, at the time when the petition is presented, the debtor:

   (a)     was personally present or ordinarily resident in Australia; or

   (b)     had a dwelling‑house or place of business in Australia; or

   (c) was carrying on business in Australia, either personally or by means of an agent or manager; or

   (d)     was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager.

   (3)     The Official Receiver may reject a debtor’s petition if:

   (a)     the petition does not comply substantially with the approved form; or

   (b)     the petition is not accompanied by a statement of affairs; or

   (c) the Official Receiver thinks that the statement of affairs accompanying the petition is inadequate.

   (3AA)     The Official Receiver may reject a debtor’s petition (the current petition) if:

   (a)     it appears from the information in the statement of affairs (and any additional information supplied by the debtor) that, if the debtor did not become a bankrupt, the debtor would be likely (either immediately or within a reasonable time) to be able to pay all the debts specified in the statement of affairs; and

   (b)     at least one of the following applies:

   (i) it appears from the information in the statement of affairs (and any additional information supplied by the debtor) that the debtor is unwilling to pay one or more debts to a particular creditor or creditors, or is unwilling to pay creditors in general;

   (ii)     before the current petition was presented, the debtor previously became a bankrupt on a debtor’s petition at least 3 times, or at least once in the period of 5 years before presentation of the current petition.

   (3AB)     The Official Receiver is not required to consider in each case whether there is a discretion to reject under subsection (3AA).

   (3AC)    The debtor may apply to the Administrative Appeals Tribunal for the review of a decision by the Official Receiver to reject a petition under subsection (3AA).

   (3A)  Before accepting a debtor’s petition the Official Receiver must give the debtor the information prescribed by the regulations.

   (3B)  The Official Receiver must refer a debtor’s petition to the Court for a direction to accept or reject it if there is a creditor’s petition pending against a group of debtors (whether they are joint debtors or members of a partnership) that includes the debtor against whom the debtor’s petition is presented.

   (3C)  If the Court directs the Official Receiver to accept the debtor’s petition, the Court must specify the time of the commencement of the bankruptcy that results from acceptance of the debtor’s petition.

   (4)     The Official Receiver must accept a debtor’s petition, unless the Official Receiver rejects it under this section or is directed by the Court to reject it.

   (4A)  Where the Official Receiver accepts a petition presented under this section:

   (a)     he or she shall endorse the petition accordingly; and

   (b)     upon the Official Receiver endorsing the petition, the debtor who presented the petition becomes a bankrupt by force of this section and by virtue of presentation of the petition.

   …

4. Under s.55(1), and subject to that section, a debtor may present to the Official Receiver a petition against himself or herself. Subsection 55(2A) specifies circumstances in which the Official Receiver must reject a debtor’s petition (for example when the debtor is not personally present or resident in Australia). These requirements are not in issue in this case. Subsection 55(3) provides that the Official Receiver “may” reject a debtor’s petition if it does not comply substantially with the approved form, if it is not accompanied by a statement of affairs or if the Official Receiver thinks that the statement of affairs accompanying the petition is inadequate.  Again there is no suggestion that the petitions of Mr and Mrs Drake did not comply substantially with the approved form or that they were not accompanied by adequate statements of affairs.

Subsection 55(3A)

1. It is convenient to consider first the contention that the Official Receiver did not provide the Drakes with information about the effect of bankruptcy on their intended appeal or about alternatives to or consequences of bankruptcy and that the failure to provide this information meant that their petitions ought not to have been accepted. 

2. As set out above, s.55(3A) requires the Official Receiver to give the debtor prescribed information before accepting a debtor’s petition. Regulation 4.11(1) prescribes certain information for the purposes of s.55(3A), consisting of information about alternatives to bankruptcy, the consequences of bankruptcy, sources of financial advice and guidance to persons facing or contemplating bankruptcy, a debtor’s right to choose whether the bankruptcy is administered by a registered trustee or the Official Trustee and a statement as to certain matters constituting acts of bankruptcy by a debtor. The information must be “factual and objective” (reg.4.11(2)).  The forms of debtor’s petitions presented by the Drakes each contain the prescribed information and a signed acknowledgement. 

3. Under reg.4.11(3) the Official Receiver must not accept a debtor’s petition unless the debtor has given the Official Receiver a signed acknowledgment, which may be included in or appended to the petition, that the debtor has received and read the prescribed information. There are provisions dealing with circumstances where the intending petitioner has not given an acknowledgement or is unable to properly read the prescribed information and acknowledgement because he or she is blind, partially sighted, illiterate, partially literate or insufficiently familiar with the English language (reg.4.11(4) – (5)). There is no suggestion that the Drakes are within any of these categories.

4. In Orix Australia Corporation Ltd v McCormick and Others (2005) 145 FCR 244 Graham J considered the effect of a purported acceptance of a debtor’s petition by the Official Receiver where the requirements of s.55(3A) and reg.4.11 had not been complied with by the Official Receiver (because the information was not given to the debtor but to an attorney of the debtor). In Orix reliance was placed on the Federal Court’s power under s.15(5) of the Act to review an act done by the Official Receiver as well as on s.153B. The Federal Magistrates Court also has such a power of review under s.15(5). Even if Mr and Mrs Drake could apply to the Court for such a review (s.303), they did not do so. At the hearing they sought annulment. Insofar as they make contentions based on “acts” of the Official Receiver in post-hearing submissions it is not clear whether they seek to rely on s.15(5) as this was not raised at the hearing and is not referred to in their submissions. The Official Receiver is not a party to these proceedings (cf Orix). In any event, it has not been established that there was a failure to comply with s.55(3A), so the issue of whether a purported acceptance of the petitions was null and void as not complying with s.55(3A) does not arise.

5. In Orix Graham J found that the Official Receiver’s failure to comply with s.55(3A) before accepting a debtor’s petition rendered any purported acceptance of the petition null and void and made a declaration to that effect. In considering the consequences of non-compliance with s.55(3A) Graham J considered whether there could be discerned a legislative purpose to invalidate any act that failed to comply with the provision (see Project Blue Sky Inc and Others v Australian Broadcasting Authority (1998) 194 CLR 355 at [91] and [93]). His Honour found that the legislature intended that a failure by the Official Receiver to comply with s.55(3A) would render invalid any purported acceptance of a debtor’s petition under s.55(4A). Graham J had regard to the absence of a provision akin to s.54D(2) (accompanying the similarly worded requirement in s.54D(1)) that a contravention of s.54D(1) did not affect the validity of the Official Receiver’s acceptance of a s.54A declaration. Section s.55(3A) was said to impose a restraint upon the acceptance by the Official Receiver of a debtor’s petition and non-compliance with s.55(3A) was said to go to the very substance of the matter. Graham J also concluded (at [81]) that compliance with s.55(3A) was a condition precedent prescribed by the Act to a debtor becoming bankrupt under s.55(4A) of the Act (see also Donnelly v Edelsten (1992) 34 FCR 556 at 562 – 563). His Honour found (at [86]) that as there had been a substantive failure to comply with the Bankruptcy Act both in respect of presentation of the petition (which had been presented by an attorney ostensibly on the debtor’s behalf) and its acceptance, the bankruptcy should be annulled under s.153B, although indicating that such an order may have been unnecessary strictly speaking in light of the declaration made by the Court.

6. However in this case it has not been established that the Official Receiver failed to comply with s.55(3A). In contrast to the situation in Orix, it is apparent from the copies of the debtors’ petitions annexed to the Trustee’s Report that the forms completed by the Drakes each included the information prescribed under reg.4.11 (albeit such prescribed information does not include information specifically in relation to a bankrupt’s right to bring an appeal or to pursue an appeal as the Drakes suggested it should). The information advised about the availability of more information, such as financial advice and guidance from ITSA. Insofar as the Drakes take issue with the fact that the prescribed information does not include the effect of bankruptcy on legal action, there is nothing in the Act or Regulations that requires the Official Receiver to give intending petitioners information or advice other than the prescribed information.

7. Each of Mr and Mrs Drake completed a declaration acknowledging having read the information about the alternatives to and the consequences of bankruptcy, sources of financial advice and the right to choose a registered trustee should they proceed to present a debtor’s petition for bankruptcy. On the evidence before the Court it has not been established that there was a failure by the Official Receiver to comply with the requirements of s.55(3A) such that the debtor’s petitions ought not to have been accepted.

Subsection 55(3AA)

1. The Drakes also contended that it was apparent from the information supplied by them with their petitions (in particular, the marked copy of the judgment in Badman v Drake and their list of “objections”) that if they did not become bankrupt they would be likely within a reasonable time to be able to pay all the debts specified in their statements of affairs as the material indicated that they wished to appeal the decision of the Supreme Court. Their objections to the findings of Young CJ in Equity were said to be such that it was apparent that they would be likely to succeed on appeal and hence that they would be able to pay all their debts, as they would no longer have an obligation to pay their major debtor the amount of equitable compensation and interest ordered to be paid by them. It was also said to be apparent from this information that the Drakes were unwilling to pay the debt to Mrs Badman (within s.55(3AA)(b)) given the concerns they expressed in relation to the judgment. It appears to be contended that the Official Receiver should have rejected the petitions under s.55(3AA) and hence that the petitions ought not to have been accepted.

2. The Drakes also contended that they had not explored available alternatives to deal with financial difficulties and suggested that they should not have gone into bankruptcy if not actually forced to do so, if bankruptcy would preclude them from pursuing litigation. They referred to the fact that there was no creditor’s petition. They suggested (without explanation) that they appeared to be making payments to some but not all of their creditors. 

3. Authority under an earlier version of s.55 (which did not contain a provision akin to subsection (3AA)) suggested that the scope of the expression the petition “ought not to have been accepted” had to be considered in the context of the role of the Official Receiver when dealing with a debtor’s petition (see Re Abbas; Ex parte Official Trustee in Bankruptcy (1995) 57 FCR 140 at 143). In Re Abbas the expression was found to relate to cases where the procedural and related requirements in s.55 had not been met (ibid at 142 – 143 and see in Re Goddard (unreported, 14 November 1986, Federal Court of Australia) and Re Coyle). The capacity of the Registrar (at that time the relevant official) to refuse to accept a debtor’s petition under s.55 was at that time limited to circumstances where the petition did not comply with the requirement that it be in accordance with the prescribed form accompanied by a statement of affairs and a copy of that statement. Former s.55(3)(a) on its face imposed a duty on the Registrar to accept the petition if it appeared to comply with these requirements (see Re Coote (1993) 47 FCR 522 per Northrop J and Re Abbas at 143 – 144). 

4. In Re Abbas Moore J found (at 144) that the expression “ought not to have been accepted by the Registrar” in s.153B applied to and was limited to circumstances where a debtor’s petition was accepted notwithstanding that the “conditions precedent” in s.55(3)(a) to its acceptance were not satisfied.

5. I note that s.55(3) now provides that the Official Receiver “may reject” a debtor’s petition in certain circumstances. In Gao v The Official Trustee in Bankruptcy [2003] FCAFC 84 the Full Court of the Federal Court stated at [29]:

   … s 153B of the Act provides for the annulment of a bankruptcy where the debtor's petition "ought not to have been presented or ought not to have been accepted by the Official Receiver". Section 55(4) of the Act permits that a petition not be accepted where the preconditions to acceptance set out in s 55(3) are not complied with - that is to say, if the petition does not comply with the approved form, if it is not accompanied by a statement of affairs, or if the Official Receiver thinks that the statement of affairs is inadequate. Section 55(4) requires that if those conditions are satisfied the Official Receiver must accept a debtor's petition unless the Court directs it not to.

6. However, there was no evidence in Gao which went towards proving that the petition in question ought not to have been presented or accepted.

7. As set out above, in Orix Graham J found that compliance with s.55(3A) was a condition precedent prescribed by the Act. However I am not persuaded that a legislative purpose can be discerned to invalidate any act by the Official Receiver that fails to comply with s.55(3AA) having regard to the principles considered by Graham J, or that compliance with s.55(3AA) is a condition precedent to acceptance of a debtor’s petition (see Re Almassy, Re Abbas and Symes v Holbrook).

8. Section 55(3AA) is not of the same nature as the provisions considered in Re Abbas and Orix. It confers a discretion on the Official Receiver to reject a petition in certain circumstances. It does not impose a procedural requirement or a condition precedent to acceptance of a petition in the sense considered in those cases. Section 55(3AA) does not impose a restraint on the acceptance of a petition, given that s.55(3AB) provides that the Official Receiver is “not required” to consider in each case whether there is a discretion to reject under subsection (3AA). Section 55(3AC) provides for review of a decision under s.55(3AA) to reject a petition. A debtor may apply to the Administrative Appeals Tribunal for review of such a decision. Section 55(4) provides that the Official Receiver must accept a debtor’s petition unless the Official Receiver rejects it under s.55 or is directed by the court to reject it. There was no suggestion in this case that the petitions were or should have been referred to the Court by the Official Receiver. In light of the nature of s.55(3AA) and the effect of s.55(3AB) I am not satisfied that the legislature intended that a failure by the Official Receiver either to exercise the discretion in s.55(3AA) or the acceptance of a petition notwithstanding the possible application of s.55(3AA) factors is such that the petition ought not to have been accepted.

1. The Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2002 which introduced subsections 55(3AA), (3AB) and (3AC) makes clear the purpose of these provisions as follows:

   90         The purpose of new subsection (3AA) is to give the Official Receiver discretion to reject a debtor's petition where it is plain to the Official Receiver that the petition is an abuse of the bankruptcy system.

   91         One key purpose of the bankruptcy system is to allow people in a hopeless financial position to rule a line under their debts and be given a fresh start.  However, subsection (3AB) makes clear that the Official Receiver is not required to consider, in relation to any or every debtor's petition, whether there is discretion to reject it under subsection (3AA).  The Official Receiver is not required to apply an insolvency test to every debtor who petitions for bankruptcy.  Only the more blatant and obvious cases that might come to the Official Receiver's attention are likely to be considered as to the possible exercise of the discretion.

2. The Drakes seek review of the possible exercise by the Official Receiver of the discretion under s.55(3AA) in the context of an annulment application. They did not apply for review of an act of the Official Receiver under s.15(5) in the application or at the hearing. The Official Receiver is not a party to these proceedings. In any event, because of s.55(3AB), the Official Receiver is not required to consider in each case whether there is a discretion to reject a petition under subsection 55(3AA). Further, the Official Receiver’s capacity to refuse to accept a petition is limited, given the obligation in s.55(4) to accept a debtor’s petition unless he or she rejects it. I am not satisfied that the legislature intended that acceptance of a debtor’s petition would be null and void where the discretion to reject the petition under s.55(3AA) was not exercised, given s.55(3AB) (cf Orix).  The Drakes referred to Part 5 of the Official Receiver’s Practice Statement in relation to the exercise of the discretion to reject a petition.  However there is no evidence before the Court concerning the steps taken by the Official Receiver in this instance and no evidentiary basis for any assertion that the Official Receiver acted in such a way that the purported acceptance of the petitions should be reviewed. 

3. In post-hearing submissions the Drakes suggested generally in relation to s.55(3AA) that a remote but similar situation was referred to in Conway v Insolvency & Trustee Service Australia [2003] FCA 943 by Allsop J at [29]:

   In my view, the Tribunal did not direct its attention to the very question it was obliged to, though in one sense, at a more general level, it did direct itself to attempting to answer what was the amount of the unsecured liabilities.  What it did not do was, in the light of the legal nature of the underlying liability, address the necessary attention, any attention which was legally necessary to value that amount: the amount of the costs that would be assessed as recoverable under the relevant statutes.  In those circumstances the decision of the Tribunal was one which was vitiated by a jurisdictional error in its failure to address the correct question.  In those circumstances I would allow the appeal and I would set aside the decision of the Tribunal and remit the matter to the Tribunal for re-hearing in accordance with law.

4. However in Conway Allsop J was considering an appeal from a decision of the Administrative Appeals Tribunal reviewing a decision of a trustee in bankruptcy to refuse an application for an early discharge of a bankruptcy. It was in that context that Allsop J found (at [18]) that the AAT’s reasons displayed no appreciation of the specific task at hand which, under the then applicable provisions, required attention to be directed to the amount of liability for costs in an assessment. This issue was relevant to a determination of whether the bankrupt’s financial position enabled the grant of an early discharge as specified in s.149 of the Bankruptcy Act. Allsop J found that the Tribunal decision was vitiated by jurisdictional error in its failure to address the correct question.

5. That case does not assist the Drakes in relation to their present annulment application. These proceedings are not an appeal from or an application for review of any decision by the Administrative Appeals Tribunal (which under s.55(3AC) may review a decision by the Official Receiver to reject a petition under s.55(3AA)).

6. The Drakes referred in post-hearing submissions to the Official Receiver’s practice statement in relation to bankruptcy by a debtor’s petition. The fact that this statement provides a “guide” to dealing with a debtor’s petition and indicates that the Official Receiver has a discretionary power to reject a petition in certain circumstances (and sets out examples of situations in which the Official Receiver may consider exercising the discretionary power to reject a petition) does not establish that the Drakes’ petitions ought not to have been accepted as they contend.

7. I am not persuaded that it can be said that a petition ought not to have been accepted if the Official Receiver (acting as provided for in s.55(3AB)) failed to consider whether to reject it under subsection (3AA). Indeed, even if the Official Receiver’s acceptance of a petition after consideration of the exercise of the discretion under s.55(3AA) is reviewable by the Court in annulment proceedings, there is no evidence before the Court as to whether or not the Official Receiver did consider whether to reject the petitions under s.55(3AA). If it is intended to be suggested that the Official Receiver did not address attention to a matter it was legally necessary to address and hence that the petitions ought not to have been accepted, the basis for such a contention has not been made out from the fact that the debtors’ petitions were accepted, having regard to s.55(3AB) and s.55(4).

8. Insofar as the applicants assert that the Court has power under s.153B to in effect “re-exercise” the discretion accorded to the Official Receiver under s.55(3AA), no legal argument was provided in support of such a contention. It has not been established that in the context of an annulment application the Court can and should consider whether a debtor’s circumstances are within s.55(3AA) and on that basis find that a petition ought not to have been accepted if it appears to the Court that the requirements of s.55(3AA) were met at the time of presentation or acceptance of the petition.

9. Moreover, the general contention that the petitions ought not to have been accepted because the Official Receiver should have been alerted to the fact that these particular debtors may have been better off not going bankrupt because they took issue with the decision of the Supreme Court and had filed a notice of intention to appeal is not made out.  Nor is the claim there was a “conflict” between the petitions and the accompanying material showing a “determination” to proceed with a legal action, such that the Official Receiver should have rejected the petitions or (if there is a discretion at large) that the bankruptcies should be annulled.

10. While not in evidence, the Trustee did not dispute that the Drakes annexed to their petitions their “objections” to the judgment in Badman v Drake, a marked copy of the judgment and also a copy of the notice of intention to appeal.  This is not such as to establish that the petitions ought not to have been accepted by the Official Receiver on the basis that it could be seen that the debtors might (or should) have appealed from the judgment rather than voluntarily seeking bankruptcy. The “objections” to the judgment and notice of intention to appeal do not establish that there was a “conflict” such that the petitions ought not to have been accepted because bankruptcy would preclude the Drakes from pursuing an appeal they now (having obtained legal representation) say they are determined to pursue. I accept that they were not aware of the impact of bankruptcy on any proposed appeal.  However no appeal was on foot at the time the petitions were presented.  Moreover the Drakes’ letter to the Official Receiver suggested a “shortfall” of $96,000, indicated a concern about a possible future costs order and expressed a desire for “the whole thing to be over.”  It appears from their evidence that they had no legal representation at that time, having been refused legal aid on 16 January 2009 on the basis that the application did not satisfy the merits test.  They were advised by the Law Society of New South Wales by letter of 27 January 2009 that their matter was outside the guidelines for pro bono assistance. In these circumstances it cannot be said that the Official Receiver ought not to have accepted the petitions because the debtors had other possible available options (such as an appeal), in circumstances where they voluntarily sought bankruptcy and, not only on the information in their statements of affairs, but also on the information now available, they appear to be insolvent. 

11. As indicated, Mr and Mrs Drake each voluntarily presented debtor’s petitions having been given information about sources of advice about alternatives to bankruptcy.  It has not been established that the Official Receiver should have rejected the petitions or should have provided the Drakes with advice beyond that required under reg.4.11 such that it could be said that the petition “ought not to have been accepted” by the Official Receiver or that if there is a discretion “at large” the bankruptcies should be annulled. 

12. The “objections” that the Drakes raise in relation to the decision of Young CJ in Equity in Badman v Drake take issue with his Honour’s factual findings. The judgment and these “objections” do not of themselves enable any assessment to be made of the Drakes’ prospects of success in an appeal based on such objections. There was no other evidence of proposed grounds of appeal before the Official Receiver or before the Court. The fact that the Drakes consider they have an excellent chance of success (and have, since their bankruptcies, been able to obtain legal representation on a no win – no pay basis in relation to a foreshadowed appeal) is not such as to establish that they would be likely to succeed if they did appeal or that success would mean that they would be likely (either immediately or within a reasonable time) to be able to pay all the debts specified in their respective statements of affairs such that, in a broad sense, it could be said that the petitions ought not to have been accepted (or indeed that as a matter of discretion the bankruptcies ought to be annulled). The Drakes have not established that they would be likely to be able to pay all their debts, including the disputed debt to Mrs Badman, or that the documents provided to the Official Receiver with the petitions made this out. It is only in such circumstances the Official Receiver’s discretion to reject the petitions under s.55(3AA) would arise. However the information in the Drakes’ statements of affairs that is now available suggests that all the debts disclosed could not have been paid either immediately or in a reasonable time. The fact that with the benefit of hindsight and given advice, an option other than bankruptcy might have been pursued (see Smith at [15]) does not mean that the petitions ought not to have been accepted. Nor does the Drakes’ expectation that they would succeed on appeal in Badman v Drake (cf Re Coyle).

13. It has not been established that the Drakes’ petitions ought not to have been accepted by the Official Receiver. 

Whether inherent power to annul a bankruptcy founded on a debtor’s petition

1. Before considering discretionary factors in relation to annulment under s.153B it is relevant to consider the alternative basis on which the Drakes suggested that their bankruptcies could be annulled.

2. Their oral submissions appeared to suggest that the Court has an inherent jurisdiction to annul a bankruptcy. The trustee submitted that there was no general discretion or inherent jurisdiction vested in the Court to annul a bankruptcy arising out of a debtor’s petition other than the discretion that arises when s.153B of the Act is satisfied. His solicitor provided the Court with post-hearing submissions in relation to this issue.

3. Reference was made to the effect of s.30 of the Act. It is a facilitative provision giving the Court full power, within the limits of its jurisdiction to be found elsewhere, to make such orders as it considers should be made in order to carry out and give effect to the Act (see Re Bilen; Ex parte Sistrom (unreported Federal Court of Australia, Neaves J, NSW706 of 1983, 11 April 1985).

4. However, as the trustee submitted, whilst the words in s.30 may be of “extension” s.30(1) is not a source of power to override express provisions of the Act. Branson J stated in Tyler v Thomas (2006) 150 FCR 357 (at [13]) with respect to the question of whether s.30(1) could override s.120(1) of the Act:

   I agree with the view expressed by Bennett J that s 30(1)(b) of the Bankruptcy Act 1966 (Cth) did not authorise the Federal Magistrate to ignore the terms of s 120(1) of that Act. Section 30(1) of the Bankruptcy Act is intended to give the Court wide powers to give effect to and carry out the Act (Re Bilen; Ex parte Sistrom (unreported, Federal Court of Australia, NSW706 of 1983, 11 April 1985) at [8]).  It is not a source of power to override express provisions of the Bankruptcy Act. Having concluded that the transfer of property by Mr Douglas Tyler to Mr Michael Tyler was void against the respondent, his Honour was not empowered to alter the impact of s 120(1) by ordering, in effect, that the transfer would not be void against the respondent if Mr Michael Tyler paid to the respondent the difference between the market value of the land transferred and the consideration in fact given for its transfer.

5. The trustee submitted that if s.30(1) of the Act was intended to specifically override s.153B, Parliament would have specifically made provision to that effect. The approach taken in Tyler v Thomas would also appear to apply to s.153B of the Act so that s.30(1) of the Act would not “override” the express provisions of s.153B of the Act. On this basis, there would be no general power pursuant to s.30(3) to annul a bankruptcy, unless s.153B of the Act was enlivened. The applicants did not address this contention. On the material before the Court it has not been established that s.30 of the Bankruptcy Act empowers the Court to annul a bankruptcy resulting from a debtor’s petition other than as provided for in ss.74(5), 153A(1) or 153B of the Act (see s.55(8)).

6. As the trustee acknowledged in written submissions, the Federal Court has, in limited circumstances, set aside a sequestration order and annulled a bankruptcy made on the order of the Court as a result of presentation of a creditor’s petition where the debtor had been denied natural justice (for example by being denied the opportunity to be heard by the Court) and there was some real question to be tried in relation to the creditor’s petition (see Re Anasis; Ex parte Total Australia Ltd (1985) 11 FCR 127 at 132 to 133 per Burchett J and see Cameron v Cole (1944) 68 CLR 571 and Taylor v Taylor (1979) 143 CLR 1).

7. The Drakes contended that Re Anasis provided support for the view that the Court has an inherent power to annul bankruptcies (and that it should do so having regard to what is said to be the failure of the Official Receiver to reject the petition under s.55(3AA)). It also seemed to be suggested that the active role of the trustee in these proceedings (and his failure to approve the annulment) warranted annulment of the bankruptcy within the inherent power of the Court.

8. However Re Anasis does not assist the Drakes. The inherent jurisdiction considered in Re Anasis was the jurisdiction of the court to set aside its own orders where a sequestration order was made by the court on presentation of a creditor’s petition.  The Drakes’ bankruptcies were not the result of orders of this Court.  Bankruptcies arising out of debtor’s petitions are not created by order of a court.  Rather they arise by way of an administrative process via the Insolvency and Trustee Service of Australia. 

9. The Official Receiver is separate from the Court. A decision of the Official Receiver to accept a debtor’s petition (or not to reject it) is not a decision of the Court. Action taken by the Official Receiver under s.55 is not action within the jurisdiction of the Court in this sense (see Re Coote at 528). As Northrop J pointed out in Re Coote, s.55(4A) “operates of its own force” upon the Official Receiver endorsing a petition that is accepted. A debtor who presents a debtor’s petition becomes bankrupt by force of s.55 and by virtue of presentation of the petition. There is no order of any court in such circumstances (in contrast to the position where a sequestration order is made by the court based on a creditor’s petition). Hence authorities such as Re Anasis, Cameron v Cole and Taylor v Taylor in relation to the inherent jurisdiction of a court to set aside its own orders are of no application, either directly or by analogy. 

10. As to the Drakes’ criticism of the trustee, the fact that a trustee takes a relatively active role in proceedings and fails to support or even opposes an annulment application is not in itself a basis for annulment or a discretionary factor in favour of annulment, although such factors may arise for consideration in relation to any costs application if an annulment is granted.  Nor is the trustee’s failure in this case to pursue an appeal in Badman v Drake a basis for annulment. More generally I note that these are not proceedings under s.178 of the Act (see Cummings v Claremont Petroleum NL and Another (1996) 185 CLR 124 and Frost v Sheahan (Trustee) [2009] FCAFC 20).

Discretion to annul

1. I address the issue of the discretion to annul a bankruptcy in case I am wrong in relation to whether the petition ought not to have been presented or accepted or if the Court has a more general discretion under s.153B (or otherwise) to annul a bankruptcy resulting from a debtor’s petition, without an applicant having to show some circumstance which disentitled him or her from presenting the petition or that the petition ought not to have been accepted by the Official Receiver in the sense that a condition precent to acceptance had not been met.

2. The Court’s power to annul a bankruptcy is discretionary. In exercising that discretion the Court must take into consideration the whole of the circumstances of the case (see Delph Sing v Woodand Others (1918) 25 CLR 497) and the interests of the bankrupt, creditors and the public interest (see Boral Johns Perry Industries Pty Limited v Kurt and Gerlinde Piccardi; Dick & Dons Pty Limited; Fire Fighting Sprinkler Co Limited and George Gregory Grivas [1989] FCA 227 and Orix at [86]).

3. As Starke J indicated in Cameron v Cole (1944) 68 CLR 571 the discretion to annul must be exercised with great caution and only in special circumstances. In Re Papps; Ex parte Tapp (1997) 78 FCR 524 O’Loughlin J pointed out that an applicant seeking an annulment carried a heavy burden and had a duty akin to that of full and true disclosure. It is for the applicants to establish the facts to support the exercise of the discretion.

4. It is appropriate to have regard to all the evidence before me. In this case very little time elapsed before the application for the annulment. There is no suggestion that the applicants have engaged in adverse conduct during the course of the bankruptcy (except insofar as the Trustee’s Report indicates that to date they have resisted surrendering an asset that they transferred to their son in July/August 2008 which the trustee considers to be apparently voidable pursuant to s.121 of the Act as a transfer to defeat creditors).

1. While solvency may be a cogent ground on which to annul a bankruptcy (subject to discretionary factors to the contrary), importantly as set out above, it has not been established that either of Mr or Mrs Drake were or are solvent.  In Smith and Re Coyle it was suggested that the discretion would not be exercised to annul a voluntary bankruptcy on the ground that the petition ought not to have been presented if it was clear that at the time it was presented the debtor was insolvent. Even if s.153B(2) means that this principle does not necessarily apply in all cases, in this instance the apparent insolvency of the Drakes at all relevant times weighs against the exercise of discretion. The evidence before the Court is inadequate to establish solvency (see Muller v Combis [2005] FCAFC 150). Their statements of affairs suggest insolvency. The applicants’ assertions in this respect are discussed above. They do not establish solvency (see Mannis v Official Receiver, I.T.S.A. [2003] FMCA 228 at [38]). The debtors’ apparent insolvency not only at the time of presentation of petition but also thereafter weighs heavily against the exercise of the discretion to annul the bankruptcies (see Layton v Westpac Banking Corporation (2000) 181 ALR 603).

2. The proposed annulment to enable the Drakes to appeal against the judgment which gave rise to their major debt cannot be said to be for the benefit of creditors generally (cf Re Coyle).  There is no suggestion that funds would be obtained from those proceedings such as to enable them to pay other creditors.  Rather, if they were successful one of their creditors would cease to be a creditor. 

3. I have taken into account the evidence before the Court in relation to the size of the Drakes’ estates and the limited number of creditors.  The views of creditors are normally to be taken into account in relation to the exercise of the discretion.  The Court does not have evidence before it as to the interests and wishes of creditors.  While in the particular circumstances of this case the Court dispensed with the temporal requirement in relation to the time of notification to creditors of these proceedings, it cannot necessarily be assumed that the creditors would support or at least not oppose the annulment application if they had been given the normal period of notification.  Indeed, common sense would suggest that the major creditor, Mrs Badman, might not support the annulment application on the basis contended for by the Drakes. 

4. I accept that the Drakes did not understand the impact of bankruptcy on pursing any appeal from Badman v Drake.  However while the Drakes contended generally that they have very high prospects of success on such an appeal, this has not been established on the evidence before the Court.  There is no evidence as to proposed grounds of appeal or any legal argument in relation to the basis for such an appeal. The objections prepared by Mr and Mrs Drake are not such as to make out the case they seek to establish. Nor is the fact that they have apparently been able to obtain legal representation on a no win – no pay basis.  On the information before the Court it is not possible to make an assessment of their prospects of success (see Re Coyle at [22]).  The fact that they have filed a notice of intention to appeal and wish to pursue that appeal is not in itself a basis for annulment. 

5. The Drakes also submitted that there had been a rather important oversight on the part of those responsible for determining the extent of prescribed information under the Bankruptcy Regulations. While acknowledging that the effect of bankruptcy on legal action was not prescribed information, they contended that the Court should nonetheless take into account that the prescribed information did not contain any reference in its list of the consequences of bankruptcy to the effect on the ability of bankrupts to pursue legal action. This submission assumes that the Court has a discretion “at large” (see Mansfield J in Re Almassy) to annul a bankruptcy.  Even if there is such a discretion and the Drakes’ lack of awareness of the impact of bankruptcy on their ability to pursue legal proceedings could be a basis for annulment (see Swain v Official Trustee), in all the circumstances of the case, in particular in the absence of evidence of solvency, I am not satisfied that the applicants have established that the discretion to annul the bankruptcies should be exercised.

6. The applicants made no proposal for payment of fees or charges incurred by the trustee to date (see Re Almassy and Cottrell v Wilcox [2002] FCA 1115). In his report the trustee provided a detailed calculation of costs and fees in relation to both estates. When given the opportunity to address this issue, the Drakes suggested through their son that were they to succeed in their intended appeal then there would be funds available to pay the trustee. However it is not clear how success on appeal against the orders made in Badman v Drake would result in a monetary order in favour of the Drakes (except, perhaps, in relation to their legal costs) or funds becoming available. 

7. There is no evidence before the Court that the Drakes would be in a position to meet any order that they should pay the trustee’s fees and charges as a condition of any order annulling the bankruptcy.  There was no suggestion that the Drakes would or could make any arrangements for the payment of such charges.  In Wong v Robinson [1995] FCA 805 Sackville J held that as a matter of discretion he would dismiss an application for an annulment unless appropriate arrangements were made for the payment of outstanding fees, expenses and charges in relation to the bankruptcy and annulment proceedings and for the payment of the outstanding debt.

8. The Drakes took issue with the comparatively active role taken by the trustee in these proceedings.  They complained of his failure to pursue the intended appeal or to “approve” the annulment sought and contended that the trustee opposed the annulment application instead of adopting a bi-partisan and neutral role.  The applicants referred to Symes v Holbrook(No.3) [2004] FMCA 71 which considered the issue of whether a trustee should recover costs where an annulment application had been successful (see Symes v Holbrook(No.3) at [15] and McKay v Mobil Oil Australia Ltd [1999] FCA 1124). The trustee contended that there was nothing untoward in his position with respect to opposition to the application in the interests of creditors.

9. In this case, assessed against the background that the trustee is the respondent and was obliged to prepare a report, it was reasonable for the trustee to participate in the hearing in relation to the annulment application and to assist the Court by presentation of written and oral submissions.  The applicants were unrepresented.  There was otherwise no contradictor.  The application involves issues of law of some complexity (see Maas v Maas & Anor [1998] FCA 1447).

10. In all of the circumstances and having regard to the public interest in the orderly administration of insolvent debtor’s estates under the Bankruptcy Act to meet legitimate claims of creditors, I consider that, whether my discretion is constrained by the prerequisites to s.153B as discussed above or is a discretion at large as contemplated in Re Almassy or otherwise, the bankruptcies of Mr and Mrs Drake should not be annulled.   

11. I indicated when the matter was heard that I would deal with the issue of costs when judgment was delivered.  I will hear submissions in relation to the trustee’s foreshadowed application for costs. 

I certify that the preceding one hundred and twelve (112) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate: 

Date:  30 April 2009