Hagen, D. v Harrison, R
[1990] FCA 470
•29 AUGUST 1990
Re: DOUGLAS HAGEN
Ex Parte: ROSS HARRISON; RAYMOND JOHNSON; GRAHAM STONE; DOUGLAS HAGEN AND THE
OFFICIAL TRUSTEE IN BANKRUPTCY and RAPID METAL DEVELOPMENTS (AUSTRALIA) PTY.
LTD.
No. P3 of 1990
FED No. 470
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
EXERCISING FEDERAL JURISDICTION IN BANKRUPTCY
BANKRUPTCY DISTRICT OF THE STATE OF TASMANIA
Northrop J.(1)
CATCHWORDS
Bankruptcy - Sequestration order pronounced - sequestration order not signed, sealed or filed - debt paid before order pronounced - power to rescind sequestration order rather than an order annulling bankruptcy - whether debtor ever became bankrupt.
Bankruptcy Act 1966 s.s. 31A, 37, 43, 52, 54
HEARING
HOBART
#DATE 29:8:1990
JUDGE1
In the exercise of powers conferred by s.31A of the Bankruptcy Act 1966, on 8 May 1990 at Hobart, a District Registrar of the Federal Court pronounced a sequestration order against the estate of Douglas Hagen ("the Debtor"). The order was made under sub-section 52(1) of the Act. It was made on the petition of Ross Harrison, Raymond Johnson and Graham Stone ("the Petitioning Creditors"). The petition had been presented on 16 March 1990. The petition was based upon an act of bankruptcy which had been committed on 22 November 1989 being the failure by the Debtor to comply with a bankruptcy notice requiring the payment of the sum of $5009.00. Despite the requirements of Rule 124 of the Bankruptcy Rules, the Petitioning Creditors did not deliver to the Registrar in Bankruptcy a draft of the sequestration order. The Registrar has not signed, sealed and filed the sequestration order. Thus the sequestration order has not been entered.
The petition first came on for hearing before the District Registrar at Launceston on 1 May 1990. At that hearing the Petitioning Creditors were represented by their solicitor and the debtor appeared in person. At that hearing the Petitioning Creditors had filed an affidavit of debt in conformity with paragraph 52(1)(c) of the Act and paragraphs 21(1)(b) and (c) and 21(2)(b) of the Bankruptcy Rules. At that hearing, the District Registrar adjourned the hearing of the petition to 8 May 1990 at Hobart. Immediately after the hearing on 1 May 1990 the Debtor told the solicitor for the Petitioning Creditor that he could arrange monies to pay the Petitioning Creditors' debt and was told by the solicitor that that would be accepted if it was paid before the hearing on the adjourned day and that the debt could be paid at the office of the solicitor at Launceston. The solicitor also said that if the debt was paid, he would not seek a sequestration order against the Debtor. The Debtor paid the debt to the solicitors for the Petitioning Creditors at the office of the solicitor on 7 May 1990. On 8 May 1990, the solicitor for the Petitioning Creditors appeared and sought the sequestration order. The Debtor did not appear. No further affidavit of debt was filed despite the requirements of Reg. 21(2)(b) which require the affidavit of debt to be sworn "on the hearing date for the petition" or if that is not practicable, "as soon as practicable before that date". The fact that the debt on which the Petitioning Creditors relied was no longer owing was not brought to the attention of the District Registrar.
The relevant part of sub-section 52(1) of the Act is set out:-
"52. (1) At the hearing of a creditor's petition, the Court shall require proof of:-
(a) ...
(c) the fact that the debt ... on which the petitioning creditor relies is ... still owing, and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor."
It is obvious that the sequestration order should not have been made on the petition of the Petitioning Creditors. On 9 May 1990 the solicitor for the Petitioning Creditors became aware of that fact. He advised the Registrar in Bankruptcy of that fact and indicated that the Petitioning Creditors would seek an annulment of the sequestration order. On the same day, an officer of the Official Trustee was informed of what had happened and that there would be an application made to annul the sequestration order. The Petitioning Creditors did not seek to have the sequestration order signed and sealed as required by Bankruptcy Rule 124.
On 1 and 2 August 1990 two applications came on for hearing before the Court. They were heard together. In the first application the Petitioning Creditors sought an order under s.37 of the Act rescinding the sequestration order. The Debtor and the Official Trustee were served with this application. The Debtor through his counsel, sought an order under s.154 that the sequestration order be annulled. The Acting Official Receiver appeared for the Official Trustee. In the second application, Rapid Metal Developments (Australia) Pty. Ltd. ("Rapid Metal"), a creditor of the Debtor, sought an order pursuant to s.49 of the Act that it be substituted as a petitioning creditor in place of the Petitioning Creditors. The Debtor and the Official Trustee were served with this application. The Debtor, through his counsel, did not oppose this application if the sequestration order was annulled or rescinded. The Acting Official Receiver appeared for the Official Trustee. Counsel for Rapid Metal supported the submissions of counsel for the Petitioning Creditors.
At the conclusion of the hearing of the applications, it was obvious that the sequestration order had to be rescinded or annulled. It is desirable that any such order should be made as quickly as possible. Accordingly, the Court made an order that the sequestration order be rescinded. The Court made an order substituting Rapid Metals as petitioning creditor. The Court announced that it would publish its reasons for making the first order at a later date. Those reasons are now published.
The issue can be stated shortly but its resolution depends upon the application of what appear to be conflicting provisions in the Bankruptcy Act. Two things are clear, namely that the sequestration order was pronounced even though it should not have been made and that the order has not been signed and sealed.
The relevant parts of s.37 of the Act are set out:-
"37(1) Subject to sub-sections (2) and (3), the Court may rescind, vary or discharge an order made by it under this Act or suspend the operation of such an order.
(2) The Court shall not, after a sequestration order has been signed and sealed as provided by the rules, rescind or suspend the operation of an order;
(3) ...".
The opening phrase of sub-section (1) and sub-sections (2) and (3) were inserted into the Bankruptcy Act in 1980, see s.22 of Act No. 12 of 1980. On the facts of this case sub-section (2) does not prohibit the Court from rescinding the sequestration order. It is clear that on the wording of subsection (1) the Court has power to rescind the sequestration order made on 8 May 1990.
The relevant parts of s.154 are set out:-
"154 (1) Where the Court is satisfied:-
(a) that a sequestration order ought not to have been made ...
(b) ..."
the Court may make an order annulling the bankruptcy."
It is clear that the Court has power to annul the sequestration order made on 8 May 1990. Sub-section 154(2) protects action taken during the bankruptcy and before the bankruptcy is annulled but on these applications, no issue arises under this sub-section.
Sub-section 43(2) of the Bankruptcy Act is of importance and is set out in full:-
"(2) Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until-
(a) he is discharged by force of section 149;
(b) he is discharged by order of the Court; or
(c) his bankruptcy is annulled under section 74 or 154".
Section 74 empowers the Court to annul a bankruptcy where a composition or scheme of arrangement has been accepted in accordance with s.73. The parts of sub-section 154(1) relevant to these applications have been set out earlier in these reasons. Paragraph 154(1)(b) empowers the Court to annul a bankruptcy where the unsecured debts have been paid in full. In the present application it is not necessary to discuss the nature of a discharge of bankruptcy.
The importance of the making of a sequestration order is illustrated by the fact that the status of a person changes when that person becomes a bankrupt. Thereupon he becomes subject to the provisions of the Bankruptcy Act and the Bankruptcy Rules. The property of the bankrupt vests forthwith in the Official Trustee; see s.58 of the Act, who thereafter administers the affairs of the bankrupt in conformity with the Act and the Rules. It is in this context that the importance of the power to annual a bankruptcy is apparent as is the protection conferred by sub-section 154(2) the provisions of which protect actions taken by the Official Trustee during the period of the bankruptcy.
In the present case, counsel for the Debtor sought to rely upon the provisions of sub-section 43(2) of the Act to support a submission that the Court should not rescind the sequestration order made on 8 May 1990 but should annul the bankruptcy. It is difficult to understand why this submission was put, since, if accepted, the Official Trustee would be entitled to certain expenses from the estate of the Debtor which expenses it might not be able to recover from the Debtor if the sequestration is rescinded. Nevertheless counsel put the submission and relied upon a number of authorities such as Cameron v Cole (1944) 68 CLR 571, Re Deriu (1970) 16 FLR 420 and Re Bond ex parte The Bankrupt (1978) 36 FLR 191. These authorities were decided at a time when the relevant bankruptcy legislation did not prevent the Court from rescinding an order after it had been entered. Having regard to the special provisions permitting an annulment of a sequestration order, it is not surprising that the Courts expressed the view that the proper course should be to annul a bankruptcy rather than rescind the sequestration order particularly when the sequestration order had been entered in conformity with the rules.
In Re Cavanagh; ex parte Bank of New Zealand, 24 April 1990, Federal Court of Australia, Von Doussa J. (unreported) the Court considered the nature of a sequestration order which had been pronounced but not entered in compliance with Rule 124. In that case, the bankrupt had in substance, paid the debt after the order had been pronounced and to that extent the facts were different from the facts of this case. Von Doussa J. held that the sequestration order took effect at the moment it was pronounced but was not perfected until it had been entered in conformity with Rule 124. In his reasons, His Honour considered many authorities including Cameron v Cole and Re Deriu. His Honour concluded:-
"In my opinion immediately a sequestration order is pronounced it becomes operative so that the debtor becomes a bankrupt with all the consequences which that entails ... This is so even though the order is only provisional in the sense that it may be reviewed and reconsidered until signed and sealed."
With respect, I agree with that conclusion and the reasons expressed by His Honour for coming to that conclusion. This conclusion illustrates, however, the desirability to have a sequestration order entered as soon as possible after the sequestration order is pronounced. Rule 124(2) illustrates the need for speed; but the crucial reason is that until the sequestration order is entered, the order may be rescinded with the result that actions taken by the Official Trustee may have no effect. As Von Doussa J. said:-
"Because of the consequences which flow from a sequestration order, it is a serious step to rescind such an order in the exercise of the power under s.37. Where the power is exercised, the sequestration order is rescinded ab initio. The person will cease to be a person against whose estate a sequestration order has been made, and will cease to be a bankrupt for all purposes. Re Baker; Ex Parte TLE Electrical Pty. Ltd. (1988) 79 ALR 445".
In other words the person will never have been a bankrupt pursuant to the sequestration order that has been rescinded.
In Re Baker a sequestration order had been pronounced but had not been entered. After the order had been pronounced, the debt had been secured to the satisfaction of the petitioning creditor. No other person had shown any interest in the bankruptcy. Davies J. held that in those circumstances the sequestration order should be rescinded pursuant to s.37 of the Bankruptcy Act. At p 446 His Honour quoted sub-section 43(2) of the Act and then continued at pp 446-7:-
"In Re Deriu (1970) 16 FLR 420, Gibbs J held that, once a sequestration order had been made, it ought not to be set aside under the then provisions of s.37 of the Act, for s.43(2) would continue to apply and the debtor would remain a bankrupt notwithstanding the setting aside of the order. His Honour held that the proper order to make was an order under s.154(1) annulling the bankruptcy. This decision was followed in Re Bond; Ex parte the Bankrupt (1978) 22 ALR 287 and in Re Anasis; Ex parte Total Australia Ltd (1985) 63 ALR 493. However, none of those cases was concerned with the present situation. The present provisions treat a sequestration order which has been made but not signed and sealed as imperfect and vulnerable to rescission by the court. The section specifically gives to the court power to rescind a sequestration order in the circumstance where it has not been signed and sealed. This provision of the Act must be given effect according to its terms and other provisions of the Act such as s.43(2) must be read subject to it. In my opinion, therefore, if under s.37 a sequestration order is rescinded ab initio, the debtor will cease to be a person against whose estate a sequestration order has been made and, because the rescission will apply from the time of the making of the sequestration order, the debtor will cease to be a bankrupt for all purposes, including the operation of s.43(2)."
With respect, I agree with that conclusion and with his Honour's reasons for coming to that conclusion.
On the facts of this case, the appropriate order was to rescind the order made on 8 May 1990. The debt had been paid before the order was pronounced. The fact that the order should not have been made was known to the Petitioning Creditors and the Official Trustee the next day when it was apparent that an application was to be made to annul that order. On these facts the order should have been, and was, rescinded.
Section 52(4) of the Bankruptcy Act, provides for the lapse of a creditors petition. Under that section, a petition lapses at the expiration of the specified period "unless, before the expiration of whichever of those periods is applicable, a sequestration order is made on the petition or the petition is dismissed or withdrawn." In the present case, the rescission of the sequestration order has the result that no sequestration order has been made on the petition. The petition has not lapsed. In any event, the payment of the debt by the Debtor on 7 May 1990 itself constitutes an act of bankruptcy under paragraph 40(1)(b)(iii) of the Bankruptcy Act. Rapid Metal applied under s.49 of the Bankruptcy Act to be substituted as petitioning creditor in place of the Petitioning Creditors. Rapid Metal satisfies the requirements of s.49. There was no opposition to the making of the order sought.
For these reasons, the orders were made on 2 August 1990.
There remains for consideration the question of the costs of the applications.
The order for costs made by the sequestration order has been rescinded. Any order for costs on the petition will need to be determined by the District Registrar when the petition comes on for hearing. The costs of the application by Rapid Metal should be costs reserved on the petition in which Rapid Metal is the substituted petitioning creditor.
The costs of the application by the Petitioning Creditor come into a different category. The Petitioning Creditor was at fault in that it did not file an affidavit of debt sworn on 8 May 1990. The solicitor for the Petitioning Creditor, although knowing that the Debtor might pay the debt to the solicitors for the Petitioning Creditor before 8 May 1990, apparently made no enquiry of his office on 8 May immediately before the hearing of the petition. The Debtor was at fault in not appearing at the hearing on 8 May. The fact that the Petitioning Creditor made the application suggests that they might have thought they were at fault. Even then, the application as issued did not seek rescission of the order. As stated earlier, it is difficult to understand why the Debtor opposed the making of the order for rescission. In all the circumstances, this is a case where there should be no order for the costs of the application.
Orders made accordingly.
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