Hy-Tec Industries v Constable

[2006] FMCA 704

FEDERAL MAGISTRATES COURT OF AUSTRALIA

HY-TEC INDUSTRIES v CONSTABLE & ORS [2006] FMCA 704

BANKRUPTCY − Sequestration order − set aside − annulment − where judgment debt awarded to creditor − where judgment debtor arranged to pay debt in instalments and consequently bankruptcy petition not to be pursued − where credit arrangements not communicated to relevant parties resulting in judgment debtor being made bankrupt − where delay in creditors seeking review of sequestration order made by Registrar − whether extension of time should be granted to enable review − whether bankruptcy should be annulled − whether conduct of creditor and debtor meant annulment should be ordered − whether trustee need make necessary steps to restore bankrupt’s estate to status before making of sequestration order.

COSTS − Whether bankrupt should pay trustee’s costs where bankruptcy annulled − whether costs be ordered against debt collector’s appointed solicitor on an indemnity basis on grounds of improper conduct.

Bankruptcy Act 1966, ss.153, 154
Federal Magistrates Court Rules 2001
Bankruptcy Regulations 1996
Federal Magistrates Court (Bankruptcy) Rules 2006

Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338
Vaucluse Hospital Pty Ltd v Phillips & Anor [2006] FMCA 44
Rangott v Marshall (2004) 139 FCR 14
Hacker v The Owners – Strata Plan No 17572 [2005] FCA 1936

Applicant: HY-TEC INDUSTRIES PTY LIMITED
ACN 070 100 702

First Respondent: STEPHEN CONSTABLE TRADING AS STEVE CONSTABLE CONCRETE SERVICES

Second Respondent:	GEOFFREY DAVID MCDONALD AS TRUSTEE OF THE BANKRUPT ESTATE OF STEPHEN CONSTABLE TRADING AS STEVE CONSTABLE CONCRETE SERVICES
Third Respondent:	SIMON ROBERT BEVERLY

File number: SYG648 of 2005

Applicant: HY-TEC INDUSTRIES PTY LIMITED ACN 070 100 702

Respondent: STEPHEN CONSTABLE ALSO KNOWN AS STEVEN CONSTABLE

File number: SYG612 of 2006

Judgment of: Raphael FM

Hearing date: 10 May 2006

Date of last submission: 10 May 2006

Delivered at: Sydney

Delivered on: 24 May 2006

REPRESENTATION

Counsel for the Applicant: Mr E Muston

Solicitors for the Applicant: TurksLegal

For the Respondent: Respondent in person

Counsel for the Second Respondent: Mr S Golledge

Solicitors for the Second Respondent: Yates Beaggi Lawyers

Counsel for the Third Respondent: Mr J Johnson

ORDERS

Upon the Applicant paying to Mr McDonald the remuneration which, but for the setting aside of the Sequestration Order, he would have been entitled to recover in respect of his administration of the bankrupt estate of Mr Constable between 15 June 2005 and 27 February 2006 (either as agreed or calculated and taxed in the manner contemplated by Regs. 8.07 to 8.12 Bankruptcy Regulations 1996):

1. Time for filing of an application to review the orders of Registrar Tesoriero made on 14 June 2005 be extended until 11 April 2006 pursuant to Rule 2.03 of the Federal Magistrates Court (Bankruptcy) Rules 2006.

2. Sequestration order made by Registrar Tesoriero on 15 June 2005 be set aside pursuant to s.104(3) of the Federal Magistrates Act 1999.

3. Petition dated 15 March 2005 dismissed.

4. The costs of the applicant and of Geoffrey David McDonald as trustee of the bankrupt estate of Stephen Constable in proceedings no. 648 of 2005 and 612 of 2006 be paid by Simon Robert Beverly on an indemnity basis.

5. The Trustee take all steps necessary and available to him to restore Mr  Constable’s estate to the status it had immediately prior to the making of the sequestration order.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG648 of 2005

HY-TEC INDUSTRIES PTY LIMITED
ACN 070 100 702

Applicant

And

STEPHEN CONSTABLE TRADING AS STEVE CONSTABLE CONCRETE SERVICES

First Respondent

GEOFFREY DAVID MCDONALD AS TRUSTEE OF THE BANKRUPT ESTATE OF STEPHEN CONSTABLE TRADING AS STEVE CONSTABLE CONCRETE SERVICES

Second Respondent

SIMON ROBERT BEVERLY

Third Respondent

SYG612 of 2006

HY-TEC INDUSTRIES PTY LIMITED
ACN 070 100 702

Applicant

STEPHEN CONSTABLE ALSO KNOWN AS STEVE CONSTABLE

Respondent

REASONS FOR JUDGMENT

1. Stephen Constable is a concreter who trades as Steve Constable Concrete Services.  On 19 May 2004 judgment was entered against him in the Local Court at Parramatta in the sum of $15,632.01 owed to Hy-Tec Industries Pty Limited.  Mr Constable did not pay the amount of that judgment.  The debt to Hy-Tec had been placed in the hands of Metwest Management Pty Limited who were debt collectors and Mercantile agents.  When Metwest was instructed by a client to collect a debt it would place the legal work in the hands of a solicitor, Mr Simon Beverly, of Chase Lawyers.

2. On 26 November 2004 Hy-Tec Industries instructed Metwest to proceed with the issue of a bankruptcy notice against Mr Constable.  Metwest instructed Mr Beverly to proceed to prepare and issue a bankruptcy notice on behalf of Hy-Tec.  The bankruptcy notice was issued on 4 January 2005 being Bankuptcy Notice NN0005/05.  Mr Constable did not comply with the bankruptcy notice which had been served on him on 6 February 2005 on or before 28 February 2005.  On 16 March 2005 Chase Lawyers presented a creditors petition in Matter No SYG648 of 2005 against Mr Constable.  On 15 March 1005 Mr Beverly wrote to Ms T Loureiro, the credit manager of Hy-Tec advising her that:

   “Pursuant to your instructions we have attended to preparing filing and forwarding for service upon the judgment debtor a creditors petition. … In the event that we receive a response to the claim prior to the allocated hearing date we shall forward such details to your office for your consideration and comment in the absence of which we will proceed to obtain a sequestration order and seek the appointment of a trustee to administer the financial affairs of the debtor.”

3. On 21 April 2005 Mr Beverly wrote to the debtor advising him that the proceedings had been listed for hearing in the Federal Magistrates Court at 10.15a.m. on 29 April.  That hearing did not proceed because the affidavit of service of the bankruptcy petition omitted a date.  The hearing of the petition was put over until 26 May 2005.  In the meantime Mr Constable had contacted Ms Loureiro for the purposes of arranging to pay his debt by instalments.  Ms Loureiro told either a Mr Gibbons or a Mr Boyton of the mercantile agents that she was happy to accept an instalment arrangement of $500.00 per month and asked them to put a hold on any action.  There is an indication in some correspondence between the mercantile agency and Mr Beverly that this hold was communicated to him by way of letter dated 16 May from Metwest Management to Chase Lawyers. Ms Loureiro confirms that she gave these instructions and that:

   “…at no time did I ever tell Metwest Management to proceed with the bankruptcy petition subsequent to 10 May 2005.”

4. Mr Constable paid $2,000.00 on account of the debt.  In the meantime on 26 May 2005 Mr Beverly wrote to Ms Loureiro:

   “We refer to the above matter and note your instructions to proceed to bankrupt the judgment debtor in the absence of him committing to paying the outstanding judgment debt, together with accrued interest and costs within twelve months.  We do not anticipate the judgment debtor being in a position to make such a commitment and as such attach a final affidavit of debt which will enable us to obtain a sequestration order against Mr Constable when the matter is next listed before the Federal Magistrates Court for hearing on 9 June.

   We ask you to attend to print the attached affidavit and sign the same next to the small cross that appears towards the bottom right hand of the document and then post the same to us at your earliest convenience undated and unwitnessed to P O Box 13, Milsons Point, NSW, 1565.

   In the event that we receive a payment and commitment to satisfy the outstanding judgment debt together with accrued interest and costs within the required period we will contact your office for your further instructions; in the absence of which we will automatically proceed to bankrupt the judgment debtor. We will await your early advices and should you have any queries regarding any aspect of the matter please do not hesitate to contact the writer.”

   Mr Beverly also wrote to Mr Constable on 26 May:

   “We refer to the above matter and advise that the bankruptcy proceedings currently listed before the Federal Magistrates Court of Australia Sydney will be heard at 10.15a.m. on 9 June 2005 at Level 18, Law Courts Building, Queens Square, Sydney.

   We are further instructed to advise that our client is not prepared to accept repayment of the outstanding judgment debt together with accrued interest and costs unless a commitment is received by you on or before 9 June 2005 to satisfy such amount within twelve months.  We await your early responses.”

5. Ms Loureiro signed the form and returned it to Mr Beverly but as requested by Mr Beverly in the letter to her and in an email to John Boyton it was neither dated nor witnessed.  Mr Beverly’s position regarding what happened thereafter is best expressed in a letter that he wrote to Ms Loureiro on 28 October 2005 at numbered paragraphs 5 and 6:

   “[5] Formal instructions with respect to the offer were sought from the petitioning creditors office on 12 May 2005 and again on 25 May 2005.  We did not receive a response to the offer and, accordingly, adjourned the petition for final hearing before the Federal Magistrates Court on 9 June 2005.  The judgment debtor was advised of this under cover letter dated 26 May 2005.  Final affidavits were prepared to enable the hearing of the petition to proceed on 9 June 2005, including a fresh affidavit of debt that was sent to your office under cover letter dated 26 May 2005.  The affidavit of debt was returned without any instructions to cease with the application.  Indeed, the final affidavit of service of the petition was received on 8 June 2005 from Mr  Boyton, again, without any instructions to cease with the application.

   [6] In all the circumstances, and being armed with the necessary affidavit documentation, we proceeded with the hearing of the application and a Sequestration Order was made against Mr Constable.  At no time during the course of the application did we ever receive any instructions not to proceed, and to the contrary, received all the necessary documents to proceed.”

6. Why Ms Loureiro signed the affidavit of debt when she had put a hold upon the proceedings has not been explained.  It is accepted by all concerned that Mr Constable had paid $2,000.00 off the debt and that Hy-Tec had agreed to him paying the balance by instalments and not proceeding with the bankruptcy petition.  The hearing of the petition was once again adjourned until 15 June 2005.  Mr Beverly did not contact his client again but instead completed the affidavit of debt that Ms Loureiro had signed by dating it on 14 June and by witnessing it.  By that time the affidavit of debt was inaccurate because the debtor did not owe $15,632.01, having paid $2,000.00 off the debt.  Mr Beverly should not have done what he did and he accepts this.  If the proper procedures had been followed and Ms Loureiro had been asked to swear an affidavit on 14 June 2005 she would have pointed out the error and probably told Mr Beverly that the sequestration order was no longer to be sought.  This did not happen and a sequestration order was made against Mr Constable who had not attended the hearing because he was under the clear impression that matters between himself and Hy-Tec had been sorted out. 

7. Mr Geoffrey David McDonald, a partner in the firm of Hall Chadwick, was appointed trustee of Mr Constable’s estate.  It appears that Mr  McDonald was not provided with any advice of his appointment until 25 August 2005.  On 31 August 2005 a letter was sent by the trustee to Mr Constable advising him of his bankruptcy and requesting him to provide the trustee with certain information and complete a statement of affairs.  Upon receipt of that document Mr Constable rang Ms Loureiro and said to her:

   “SC:    Tracy, I have been made a bankrupt.  I thought we had an arrangement.

   TL:    I  don’t know what happened.  I gave instructions that the matter was to be closed and no further action was to be taken on the matter.  I will have to ring the solicitors and make enquiries.”

8. Thereafter, Ms Loureiro contacted Mr Gibbons from Metwest Management to find out what happened.  When she learnt that the bankruptcy had proceeded she told him to fix it.  She says that she also telephoned Mr Beverly and told him to fix it.  She had correspondence with Mr Beverly who, on 20 September 2005, also wrote to Mr  Constable stating:

   “As you are a bankrupt we suggest that you contact Mr McDonald’s office as soon as possible and discuss the matter and the possible options available to you.  We cannot provide you any further advice or assistance as this would constitute a conflict of interest.”

9. Mr Constable continued to communicate with Ms Loureiro requesting that something be done about his bankruptcy status. He also had some discussions with people from the offices of Hall Chadwick but he did not complete the statement of affairs or provide them with very much information. Mr Beverly did nothing. Eventually in February Hy-Tec instructed another firm of solicitors who on 27 February 2006 took out an application numbered SYG612/2006 in this court seeking an annulment of the bankruptcy under s.153B(1) of the Bankruptcy Act 1966 (the “Act”).  On 11 April 2006 the new solicitor, Mr Hodges, also filed an Application for Review of the Decision of Registrar and for leave to bring that application out of time.  He also filed a Points of Claim which had as respondents Mr Constable, Mr McDonald qua trustee and Mr Beverly.  He sought orders requiring Mr Beverly to pay the applicants and the first and second respondents’ costs on an indemnity basis after 26 May 2005, and an indemnity from Mr Beverly in respect of any liabilities that Hy-Tec may have to Mr Constable or to the trustee resulting from the making of the sequestration order.

10. At the hearing of both of these applications, the annulment and the review, all parties were present. The applicant, who in both cases was Hy-Tec rather than the bankrupt himself, limited its claim in the Federal Magistrates Court against Mr Beverly to an application for the payment of costs by a legal representative personally pursuant to Part 21 Rule 21.07(1) of the Federal Magistrates Court Rules 2001. It did not appear to be in dispute that the provisions of Rules 21.07(3) and 21.07(5) had been complied with. Section 153B of the Act is in the following form:

    “(1) If the Courthttp:// - 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.”

11. The effect of s.153B is described in s.154:

    “If the bankruptcy of a person (in this section called the former bankrupt ) is annulled under this Division:

    (a) all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment are taken to have been validly made or done; and

    (b) the trustee may apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee; and

    (c)subject to subsections (3), (6) and (7), the remainder (if any) of the property of the former bankrupt still vested in the trustee reverts to the bankrupt.

    (2)  If the property of the former bankrupt referred to in paragraph (1)(b) is insufficient to meet the costs, charges and expenses referred to in that paragraph, the amount of the deficiency is a debthttp:// - debt due by the former bankrupt to the trustee and is recoverable by the trustee by action against the former bankrupt in a court of competent jurisdiction.

    (3)  If an application is made to the Court by a person claiming an interest in property referred to in paragraph (1)(c), the Court, after hearing such persons as it thinks fit, may make an order, either unconditionally or on such conditions as the Court considers just and equitable, for the vesting of the property in, or delivery of the property to, a person in whom, or to whom, it seems to the Court to be just and equitable that it should be vested or delivered, or to a trustee for that person.

    (4)  Subject to subsection (5), if an order vesting property in a person is made under subsection (3), the property vests immediately in the person without any conveyance, transfer or assignment.

    (5)  If:

    (a)  the property to which such an order relates is property the transfer of which is required by a law of the Commonwealth, of a State or of a Territory to be registered; and

    (b)  that law enables the registration of such an order;

    the property, even though it vests in equity in the person named in the order, does not vest in that person at law until the requirements of that law have been complied with.

    (6)  The Court may make an order directing the trustee not to pay or transfer the property, or a specified part of the property, referred to in paragraph (1)(c) to the former bankrupt if:

    (a)  the Director of Public Prosecutions, or a person who is entitled to apply for an intestate confiscation order under a corresponding law, applies to the Court for an order under this subsection; and

    (b)  the Court is satisfied that:

    (i)     proceedings are pending under the a proceeds of crime law; and

    (ii)    property of the former bankrupt may:   

    (A)  become subject to a forfeiture order or interstate forfeiture order made in the proceedings; or

    (B)  be required to satisfy a pecuniary penalty order or interstate pecuniary penalty order made in the proceedings.

    (7)   The Court, on application made to it, may vary or revoke an order made     under subsection (6).”

12. The most relevant provisions of s.154 are ss.154(1)(b) and 154(2). There is no provision in the Act for the trustee’s costs to be paid by any other person than the bankrupt. The effect of a review would be the setting aside of the sequestration order so that any costs incurred by the trustee would be to the trustee’s account; Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 at [39-43]. In the hearing before me Hy-Tec’s first preference was for me to extend time for the hearing of a review against the making of the sequestration order and for me then in the hearing de novo that would follow and in which
    Hy-Tec would offer no evidence, to determine to set aside the sequestration order with an order for costs being made personally against Mr Beverly.  That was also the preferred position of Mr Constable who would have no liability for the trustee’s costs under such an order; see generally Kyriackou supra; Vaucluse Hospital Pty Ltd v Phillips & Anor [2006] FMCA 44. The trustee argued for an annulment so that his costs could be paid by Mr Constable. Mr Beverly argued that he should not bear the costs of the legal proceedings because he had indicated to Hy-Tec that he would be proceeding with the bankruptcy unless he heard from that company that it had come to an arrangement with Mr Constable and therefore his actions were reasonable.

13. In solving this dilemma I have to have regard to certain additional facts.  In order to grant the extension of time necessitated by the delay in applying for the review I must look at the conduct of Hy-Tec and to a lesser extent Mr Constable in the period between early September 2005 and the filing of the application.  In considering whether the trustee should be burdened with bearing his own costs for carrying out his statutory obligations I am must look at his conduct in regard to administration.  Finally, Mr Beverly urges me to take neither of the courses sought in the applications but to confirm the bankruptcy of Mr Constable on the grounds that he is insolvent and I should exercise my discretion not to grant an annulment or a review.

1. Put shortly the reason for the delay given by Hy-Tec is that it believed Mr Beverly was dealing with the matter.  In an affidavit of 30 March 2006 Ms Loureiro states:

   “[8]  I say that notwithstanding that I have only been able to set out two conversations I would have left numerous telephone messages with Simon Beverly over the four or five month period after I became aware of the bankruptcy order.  It was my belief that appropriate and necessary action was being undertaken by Simon Beverly either on his own account or with the assistance of Tom Gibbons.  I was never advised by either Simon Beverly or for that matter Tom Gibbons that no action was being undertaken.

   [9]  I say that in an effort to move matters forward in or about November 2005 I asked Mr Gibbons to provide a letter setting out that the bankruptcy was made in error.  I attach a copy of an email sent to Mr Gibbons as Annexure “A”.

   [10]  I say that I was not aware that it was necessary for an application to be made to the court for the setting aside or annulment of the bankruptcy order under Hy-Tec Industries Pty Ltd instructed solicitor Mark Hodges to take over the matter.

   [11] I say that each time that I spoke to Stephen Constable about the matter I assured Stephen Constable that everything was being attended to in this matter to rectify the matter.  My conversations with Stephen Constable continued up until Hy-Tec Industries Pty Ltd engaged Mark Hodges to take over conduct of the matter in or about February 2006.”

2. Hy-Tec employed Mr Hodges to act for them in early 2006. Mr Hodges was required to obtain the file from Mr Beverly to consider the situation and to advise. I do not think there was any delay in his making the application for annulment on 27 February 2006. There was some further delay until 11 April 2006 when Mr Hodges filed the second application for the extension of time and for the review. Mr Hodges is no longer acting for Hy-Tec. I think I can draw an inference that Mr Hodges’ knowledge of the Bankruptcy Act and procedures may not have been that of the experts who have appeared before me in these proceedings. The subtleties of the two different types of application may have evaded him. I would be disinclined to find that the applicant’s conduct through its solicitors between 27 February 2006 and 11 April 2006 disbarred them from the possibility of my granting an extension of time.

3. The actions of the trustee are dealt with in two affidavits sworn on 9 May 2006 by Simone Farrugia, an accountant in the employ of the trustee, and by Mr McDonald himself.  Although Mr McDonald deposes to a claim for remuneration of some $24,194.82 plus disbursements of $3,025.73 Mr Golledge, who appears on his behalf, accepts that this is just an indication of the costs, has not been approved by creditors and is open to be taxed under Regulation 8.09 of the Bankruptcy Regulations 1996 when the bill is put into a form that complies with Regulation 8.10. Ms Farrugia’s evidence is that she received a letter from Mr Beverly enclosing a sealed copy of the sequestration order on 28 July but that letter also enclosed a copy of the letter to Mr Beverly from Mr Constable advising that he would like to pay $500.00 per month off the Hy-Tec Industries account. This letter had been given to Mr Beverly prior to the making of the sequestration order and, it could be said, might have put the trustee on notice that it should communicate with the debtor and creditor as soon as possible. The trustee did nothing until 31 August when the certificate of appointment was received. It then sent out to the debtor the statutory documents including a statement of affairs, an income questionnaire, a notice of responsibilities and a Privacy Act authorisation. The next day, 1 September 2005, the trustee received a letter from Mr Beverly indicating that he was not in possession of any further information or documents other than those already provided and suggesting that the trustee contact Ms Loureiro or Mr Boyton, the mercantile agent. The trustee did contact Mr Boyton and he provided some information including the memo of 16 May which indicated that the Steve Constable Concrete account was to be put on hold. This information was provided on 2 September. On 12 September 2005 Mr Beverly wrote to the trustee:

   “We refer to the above matter and recent telephone conversation between the writer and the Petitioning Creditor’s office and advise that it appears that the bankrupt had negotiated a repayment regime with the creditor prior to your appointment as trustee.  This alleged arrangement was not communicated to our office until today.

   In any event, the Sequestration Order was made with the knowledge of and on instructions from the Creditor and we only draw your attention to these developments so that all parties are conversant with the history of the matter.  We suggest that the Bankrupt will soon approach your office with a view to annulling the Bankruptcy, or otherwise rectifying the position.

   Should you have any queries regarding any aspect of the matter please do not hesitate to contact the writer.”

4. On 5 September, some seven days before receiving that letter, Ms Farrugia had a telephone conversation with Mr Constable in which he told her that he shouldn’t have been made bankrupt because he had entered into an arrangement with Hy-Tec and had made a payment to them.  Ms Farrugia had told him that he still had to fill in all the forms and he agreed to do so.  Mr Constable didn’t fill in the forms.  Ms Farrugia appears to have relied on the statement in Mr Beverly’s letter that the sequestration order was made with the knowledge of and on instructions from the creditor.  She did not contact Hy-Tec and because Mr Constable had not completed the questionnaire and statement of affairs she made other enquiries concerning his financial position.  She continued to press him for the completion of the statement of affairs.  On 5 December she had a conversation with Mr  Constable who told her that the statement of affairs form that she had sent him was out of date and she should send him an up to date form and that in the meantime:

   “I am awaiting on a letter from Tracy of Hy-Tec to attach to the documents for the annulment application.  I will then lodge the application.”

5. At [26] of her affidavit Ms Farrugia deposes:

   “From 2 September 2006 to the present, I have had numerous telephone conversations with the Bankrupt, Tom Gibbons and Tracey Louriero, concerning the circumstances in which the Sequestration Order was obtained and what was going to be done to remedy the situation.  Although it was unclear whether the Bankrupt or the Petitioning Creditor would commence legal proceedings, it was always indicated to me that an Annulment Application was intended to be brought rather than Application to Set Aside the Sequestration Order, until I received a letter from Mark Hodges on 17 March 2006.  A copy of which is exhibited to me at the time of swearing his affidavit and marked “K”.”

6. Mr McDonald’s affidavit sets out his reasons for continuing the administration of the bankrupt’s estate notwithstanding the communications that his office had received concerning the possibility of an annulment application.  Based upon his experience, in 10% of the bankruptcy cases he deals with he is told that there are grounds for setting aside the sequestration order or annulling the bankruptcy but in only 4% of that 10% of cases does anything actually ever happen and in only 3% are those matters pursued to a final hearing and an order made setting aside the sequestration order or annulling the bankruptcy.  His evidence on this matter is contained at [13-17] of his affidavit:

   “[13] At all times prior to 17 March 2006, it was indicated to me that an annulment application was to be brought, rather than an application to set aside the sequestration order.  That being the case, I continued my investigation into the affairs of the Bankrupt with a view to discharging my obligations as Trustee, and for the purposes of preparing a report pursuant to rule 7.04 of the Federal Court (Bankruptcy) Rule 2005.

   [14] It is also my evidence that in light of my experience that it was unlikely that any Termination Application would be brought, and be pursued to final hearing.  I continued to discharge my obligations as Trustee to administer the Bankrupt Estate, and to investigate the affairs of the Bankrupt up to the date of the filing of the Set Aside Application.

   [15] I am informed and verily believe that over the course of the administration of the bankrupt estate, my staff have made numerous oral and written requests to the Bankrupt to provide to my office a completed Statement of Affairs (“SOA”).  In this regard I note the Bankrupt did not provide a completed Statement of Affairs until on or about 8 March 2006.

   [16] On account of the Bankrupt’s continued failure to disclose his current financial position, I formed the opinion that there was a reason for him failing to do so and that the reason related to the probability that the SOA would show a deficiency of assets to liabilities.  I also thought that there was a real risk that assets available to the bankrupt estate may be dissipated or otherwise disposed of and therefore I continued to investigate the Bankrupt’s affairs with a view to identifying potential available assets up to the date of the filing of the Set Aside Application.  In my experience, any dissipation or disposal of the assets of the Bankrupt’s estate will generally occur soon after the commencement of bankruptcy.  Further, it is my experience that the greater the time between the disposal of any assets and the ultimate discovery that the dissipation or disposal has occurred, the less likely it is that the trustee will be able to recover the relevant assets or funds.  That said, I was not minded to delay my investigations given my concerns.

   [17]  Upon being provided with notice of the Amended Application and later the Set Aside Application, I have refrained from conducting all but urgent and/or necessary activities/enquiries in the administration of the bank estate.”

7. At the request of the court pursuant to r.7.04 of the Federal Magistrates Court (Bankruptcy) Rules 2006 (the “Bankruptcy Rules”) Mr McDonald produced a report on the solvency of Mr Constable.  In that report he produces a schedule of the assets and liabilities of the bankrupt as outlined in his statement of affairs which, after taking into account the divisible assets available to creditors, revealed a surplus of $89,335.85.  This surplus was based upon the applicant’s valuation of his assets which included tools of trade, motor vehicle and his interest in a property in Bligh Park, New South Wales.  The unsecured creditor’s claims which the trustee found were valued at $17,600.00 included the debt to Hy-Tec Industries.  Known creditors of the bankrupt were circulated about the application before me but none appeared.  The trustee notes that Mr Constable has not filed a tax return for the year ending 30 June 2005 and would appear to have a potential tax liability.  During the course of the hearing Mr Constable produced a letter from his sister-in-law who acts as his bookkeeper and works with his accountant.  His sister-in-law signs the letter as a bachelor of business and chartered accountant.  She estimates his tax liability at $11,582.00 and estimates a GST liability, unpaid, of $7,000.00.  In relation to the GST liability there may be some penalties required to be paid.  Mr Constable produced a tax return for the year ended 30 June 2004 which he said he had paid.  The trustee deposes to the fact that he is unable to say whether or not Mr Constable is solvent.  What does appears to be the case is that Mr Constable’s mortgage payments, payments under leasing agreements for his vehicle and living expenses are being paid and that he has incurred no additional creditors.  He told the court that he had regular jobs as a concreter and was owed approximately $13,000.00 which he hoped would be paid fairly soon.  On the basis of this evidence, and noting that Hy-Tec are not seeking immediate payment of the judgment debt and would appear to be prepared to restore the instalment plan previously agreed to, I cannot see that as at the date of handing down judgment Mr Constable is unable to pay his debts as and when they fall due from his own funds or from money readily available to him.  I would not take the course urged upon me by Mr Johnston on behalf of Mr Beverly of declining to exercise my discretion to set aside the sequestration order on the grounds that Mr Constable is insolvent.

8. Having decided that I should not exercise my discretion to continue the bankruptcy I am required to choose between granting the application for the extension of time for review and the application for annulment.  Applying from what fell from Gyles J in Rangott v Marshall (2004) 139 FCR 14 if the sequestration order is set aside by way of review it would be as if the order had never been made and Mr Constable had never been a bankrupt:

   “On that basis the applicant is no longer trustee of the estate of the respondent and was not trustee at the date this proceeding was commenced.  That conclusion appears to be consistent with the reasoning in Guss v Johnstone (2000) 171 ALR 598
    at [56-63].”

1. As Weinberg J said in Kyriackou at [35]:

   “There are, unfortunately, some cases in which, irrespective of the outcome, an injustice may result.  This may be one such case.”

   This case is another.

2. In deciding what balance should be struck:

   “Between the rights of the appellant, who should never have been made bankrupt in the first place, and the Official Trustee, who has simply done what the Act requires him to do.”

   Weinberg J said at [42]:

   “The argument for fixing the estate with the costs and expenses of the administration seems to me to be less cogent when the putative bankrupt should never have been the subject of a sequestration order in the first place.”

3. Weinberg J decided that in the particular circumstances of Kyriackou the balance tilted in favour of the appellant.  His Honour’s reasoning was followed by Reithmuller FM in Vaucluse Hospitals Pty Limited v Phillips & Anor where in a lengthy judgment which considered all of the authorities his Honour concluded at [77]:

   “[77] In this case it appears that the effect upon the parties of an order setting aside the bankruptcy compared to an annulment only goes to the question of whether or not the bankrupt will have to pay the expenses of the Trustee in administering the estate for the very short period between the sequestration order and the date of setting aside or annulment. 

   [78] The debt was for a relatively small sum, which is equivalent to only one third of the trustee’s claims for remuneration and expenses.  The debt was for hospital fees the bankrupt thought were covered by his medical insurance.  The bankrupt is unable to properly manage his own affairs.  The debt was paid by his father soon after the sequestration order was made.  He is solvent and should never have been made bankrupt. 

   …

   [83] Had the trustee proceeded cautiously, few expenses needed to be incurred in this administration in the early stages it had reached before payment.  The trustee has rights to pursue at least part of his claims independently of these proceedings, if he so wishes: see 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq.) [1999] FCA 144.  There is no evidence of any need for the general projections of s.154. 

   [84] In the particular circumstances of this case I am not satisfied that it is appropriate to make an annulment order, rather than setting aside the registrar’s sequestration order.”

4. One case that Reithmuller FM did not refer to in Vaucluse was Hacker v The Owners – Strata Plan No 17572 [2005] FCA 1936. In that case Emmett J opined at [5-8]:

   “[5] Registrar’s orders were made pursuant to s.35A (1)(h) of the Federal Court of Australia Act 1976 (Cth) (‘the Federal Court Act’). Section 35A (1)(h) provides that a power of the Court prescribed by the Rules of Court may, if the Court so directs, be exercised by a registrar. Under Order 77 rule 7 of the Federal Court Rules, the Court may direct a registrar to exercise the power of the Court to make a sequestration order against a debtor’s estate. Section 35 A (5) of the Federal Court Act, however, provides that a party to a proceeding in which a registrar has exercised any of the powers of the Court under s.35A (1) may, within the time prescribed by the Federal Court Rules, or within any further time allowed in accordance with the Federal Court Rules, apply to the Court to review that exercise of power.

   [6] Order 77 rule 8(2) of the Federal Court Rules provides that an application for review of a decision of a registrar must be made within 21 days of the date of the decision. Order 3 rule 3(1) of the Federal Court Rules provides that a judge may, by order, extend or abridge any time fixed by the Federal Court Rules. The time may be extended before or after the time expires and whether or not an application for extension is made before the time expires.

   [7] There are very sound reasons why the time limits prescribed by Order 77 rule 8 in relation to review of sequestration orders should be enforced strictly. While there will be circumstances where an extension of time will be appropriate, the possibility of consequences for third parties in dealing with bankrupts makes compliance with time limits in such a context more significant than in some other contexts. It would not normally be appropriate to grant an extension of time for filing an application for review under Order 77 rule 8 where there has been substantial administration of an estate. Further, the Court would be slow to grant an extension where substantial costs have been incurred in the administration of the estate. In any event, before any extension will be granted, there must be a satisfactory explanation for the delay and some indication that there will be substantial prejudice if an extension is refused.

   [8] The prejudice to an applicant from refusal of an extension of time must be weighed against prejudice to other parties who may be affected by the extension. In that regard, the availability of alternative relief, if an extension is refused, is a relevant consideration. Further, in considering whether or not to grant an indulgence to a bankrupt, the conduct of the bankrupt in relation to the bankruptcy proceeding may be taken into account by the Court. The conduct that may be relevant includes conduct in relation to a bankruptcy petition as well as conduct following the making of a sequestration order. The fact that the debt relied upon by a petitioning creditor is undisputed may also be a relevant factor.”

5. Emmett J after noting that “the debtors showed a complete disregard for the processes of the Bankruptcy Act and the Court” declined to grant an extension of time but annulled the bankruptcy under s.153B which left the debtors liable for the trustee’s fees and expenses.

6. It could be said on the authority of Rangott that Weinberg J did not have the choice between making the orders which he eventually did make and an annulment under 153B but it is clear that in assessing the various merits of the parties he gave heavy emphasis to the fact that the sequestration order should never have been made.  That was the approached adopted by Reithmuller FM.  On the other hand Emmett J had less sympathy for the debtors for reasons which he explained at length in the judgment.  In Mr Constable’s case it seems that he is the only really innocent party in this.  He came to an arrangement with his creditor and he honoured it.  Either because the creditor did not tell the mercantile agent or because the mercantile agent did not explain the situation clearly enough to Mr Beverly the sequestration order was made.  It would not have been made if Mr Beverly had acted appropriately.  At that stage the creditor would have been given another opportunity to avoid placing Mr Constable in bankruptcy.  As soon as Mr Constable knew he was bankrupt he began to complain about the situation.  Hy-Tec promised to deal with it.  Mr Constable told the court that he knew the Hy-Tec people for many years.  Presumably, that was why they accepted his offer to pay by instalments.  He trusted them.  Hy-Tec trusted their mercantile agents and solicitor.  That was a mistake, at least so far as the solicitor was concerned.  Mr Beverly, no doubt sensing future problems did not take active steps to resolve the situation.  Eventually Hy-Tec took the only course open to them and changed their solicitor.  From that point on Hy-Tec’s actions cannot be impugned. 

1. The trustee only became aware of his appointment some months after it was made.  But very shortly after he became aware of the appointment he also became aware that there were problems associated with it.  He does not seem to have taken quite the steps that he might have taken to clarify what the problem was.  It is not as if he was only told about the problem by the debtor.  He was told about the problem by the creditor’s mercantile agent and the creditor itself.  Notwithstanding this he proceeded to act as if the only possible course open to the debtor was to annul the bankruptcy.  That would have meant that the trustee would be required to issue a report and he worked to obtain information for the purposes of that report.  Mr Constable was not particularly accommodating to his trustee.  He did not fill in the statement of affairs and he did not provide the trustee with very much information about his situation.  He continued to operate as if he was not bankrupt by drawing down on his bank account.  But in a way this is understandable.  He knew he should not have been made bankrupt and he was told by his creditor that the creditor would take whatever steps were required to rectify the situation. 

2. I join forces with all those judicial officers who have criticised the inability of courts to make orders against persons other than the debtor that would have the effect of indemnifying the trustee for his costs and expenses in administering an estate.  My inability to do that is the situation with which I am faced.  I am of the view that the authorities point  to my making a decision in favour of Mr Constable on the grounds that as between himself and the trustee he is the less blameworthy and that it is clear that he should never have been made bankrupt because of the arrangement he entered into with his creditor.  However, the position in these proceedings is not as grave from the point of view of the trustee as it might have been.  The applicant creditor has accepted that I would have power to grant the review on terms and that one of those terms might be the payment of certain of the trustee’s expenses.  On 15 May 2006 I received a written submission from Counsel for the applicant/creditor to the effect that, whilst he continued to argue for an order which would see the trustee pay all of his costs, if the court was minded to grant an extension of time under Rule 2.03 of the Bankruptcy Rules on terms his client would be willing to submit to a term that:

   “The Applicant pay to Mr McDonald the remuneration which, but for the setting aside of the Sequestration Order, he would have been entitled to recover in respect of his administration of the bankrupt estate of Mr Constable between 15 June 2005 and 27 February 2006 (either as agreed or calculated and taxed in the manner contemplated by Regs. 8.07 to 8.12 Bankruptcy Regulations 1996)”

3. Given my views of the merits this concession is well made and appreciated by the court.  In the circumstances I would be prepared to grant the applicant/creditor an extension of time to seek review of the Registrar’s decision.  The creditor has advised that if I made such an order it would offer no evidence in the application.  I would therefore dismiss the application for a sequestration order.  I would also dismiss the application for an annulment.

4. I now turn to the costs of the proceedings.  Hy-Tec seek an order that these be paid by Mr Beverly.  The costs they would seek that he pays are their own and the trustees.  Mr Constable was not legally represented.  The court has power to order that a legal practitioner pay costs where:

   “27.07 – order for costs against a lawyer

   i)The Court or Registrar may make an order for costs against a lawyer if the lawyer or an employee or agent of the lawyer has caused costs:

   (a)   to be incurred by a party or another person; or

   (b)to be thrown away; because of undue delay, negligence, improper conduct or other misconduct or default.”

5. I find, for the purposes of these proceedings only, that the conduct of Mr Beverly was improper.  He completed an affidavit and purported to witness the signature of the deponent when the deponent was not present in his office when the affidavit was sworn and when the affidavit in its unwitnessed form had been delivered to him some time previously. It was an affidavit that the Rules required be sworn as near as possible to the hearing of the Petition. If he had not done this Mr Constable would not be bankrupt and Hy-Tec would not be making their application.  The trustee would not have incurred costs and expenses and I would not have been required to make the difficult choice between burdening the trustee with his own costs or burdening Mr Constable with them.  Mr  Johnson has put forward the best case possible for Mr Beverly but it is not enough.  It was not the failure to receive instructions that caused these problems, it was Mr Beverly’s improper conduct.  I would order that Mr Beverly pay the costs of the applicant Hy-Tec and the costs of the trustee in respect of both sets of proceedings on an indemnity basis.

6. I note that the trustee has taken certain steps in relation to this bankrupt estate, particularly in registering a caveat against the interest of Mr Constable in his home.  I think it is appropriate that the court should order that the trustee take all steps necessary and available to him to restore Mr Constable’s estate to the status it had immediately prior to the making of the sequestration order.

I certify that the preceding thirty-three (33) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate: 

Date: