K.& G. v Grivas, Ex Parte
[1988] FCA 424
•8 Mar 1988
CATCEWORDS
I
BANKRUPTCY - Application to set aside the signing and sealing of sequestration order by Registrar - extension of time - application to suspend/rescind or annul sequestratlon order - whether a sequestration order ought not to have been made - comparing resclsslon and annulment of sequestration order - going behind judgment debt - deed of arrangement - omission of information in statement of affairs by bankrupt - interests of commercial community and public.
Bankruptcy Act 1966 - ss 14, 33, 37, 73, 74, 149, 150, 154, 188, 189,
195Bankruptcy Rules - Rule 158
Re KURT AND GERLINDE PICCARDI
Ex parte GEORGE GREGORY GRIVAS
W 1607 of 1986 - . - DATE: 3 August 1988
PLACE: Sydney CORAM: Einfeld J.
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IN THE FEDERAL COURT OF AUSTRALIA GENERAt DIVISION
BANKRWTCY DISTRICT IN TEE No. W 1607 of 1986 STATE OF NEW SOUTE WALES AND TEE AUSTRALIAN CAPITAL TERRITORY
Re : - KCRT AND GERLINDE PICCARDI
Applicants
Ex Parte: GEORGE REGORY GRIVAS
Respondent
CORAM: Einfeld J.
- DATE: 3 August 1988 PLACE: Sydney MINUTE OF ORDWS
1. The bankruptcy is annulled.
2.
The objecting creditors, being Dick & Dons Pty Ltd, B.W.Modern Interiors Pty Ltd. Fire Fighting Sprinkler CO Ltd. and Boral Johns Perry Industries Pty Ltd, are to pay the applicants' costs.
NOTE: Settlement and entry of these orders 1s dealt with in accordance
wlth Order 124 of the Bankruptcy Rules.IN TEE FED= COURT OF AUSTRALIA ) GENERAL DIVISION
)
BANKRUPTCY DISTRICT IN TEE 1 No. W 1607 of 1986 ) STATE OF NEW SOUTE WALES AND TEE
1
AUSTRALIAN CAPITAL TERRITORY
Re : KURT AND GERLINDE PICCARDI -
Applicants
Ex Parte: GEORGE GREGORY GRIVAS
Respondent
CORAM: Einfeld J.
DATE: 3 August 1988
PLACE: SydneyOn l8 November 1986, a sequestration order was pronounced against Kurt and Gerlinde Pi'ccardi (the applicants) on the petition of the respondent
(Grivas). Immediately afterwards the applicants sought resclsslon or suspension of the order. On 27 January 1987, before the matter had been ruled on, the sequestratlon order was signed and sealed by the Registrar in Bankruptcy. Although in the circumstances set out in my earlier ~udgments in this matter on 8 and 24 July 1987, this administrative act was unknown to the applicants until 29 May 1987, section 37(2) of the Bankruptcy Act (the Act) prevents the suspension or rescission of this sequestration order.
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Eence by application dated 5 June 1987, the applicants moved to have set aside the signing and sealing of the sequestration order by virtue of sections 14(5) and 30(l)(b) of the Act and section 23 of the Federal Court Act. Judgment on this matter was reserved on 24 July 1987 to permit the simultaneous litigation of the rescissionlsuspension application together with the subsequently added application to annul the bankruptcy. All three of these applications are now for resolution and judgment. In substance the parties sought and were given leave to use the evidence in any application in support of the others.
At first Grivas opposed the orders sought, but when this matter came on for hearing, he withdrew his opposition. On the other hand, four unsecured creditors (the objecting creditors) opposed the making of the orders sought by the applicants. They are Dick and Dons Pty Ltd, whose creditor's petition was dismissed upon the making of the sequestratlon order, claiming a debt of $67,073.25 under judgment recovered on 15 May 1986 in the New South Wales District Court; B.W. Modern Interiors Pty Limited who claim a debt of $167,700 for material and labour supplied to
the applicants between February 1982 and December 1985 and who lodged a proof of debt' dated 18 May 1987 with the trustee; Fire Fighting
Sprinkler Co.Ltd who claim a debt of $19.403 for goods sold and
delivered to the applicants between July and December 1985 (this debt was disputed by the applicants in District Court proceedings which have been discontinued but this creditor proved its debt in the
bankruptcy); and Boral Johns Perry Industries Pty Ltd who obtained a default ludgment against the applicants on 18 June 1986 for $23,387.25
in the New South Wales District Court.
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Two other creditors filed notices of intention to oppose the resclsslon application on 29 May 1986. These creditors were Ries Plumbing Pty
Limited, who claimed a debt of $30,875.10 by a ~udgment obtained on 29 December 1986 in the New South Wales District Court; and Llnsid Pty Limited, to whom was owed $50,869.70 by a ~udgment obtained on 19 November 1986 in the Distlct Court of New South Wales in Newcastle. In the event, they did not appear at the hearing to oppose the orders sought.
Background
18 November 1986
1. An authority under section 188 of the Act was executed by the applicants appointing Geoffrey Ralph James, a partner of Arthur Young & CO Accountants, as controlling trustee of the estate and requiring him to call a meeting of creditors under Part X of the
Act (Part X trustee). The proposed Part X arrangement was to be
based principally on the redevelopment by the applicants of Lot 7. 93 Filey Street Adamstown (the proposal).
2. An application was made to Justice Neaves for an ad~ournment of
the csedit0r.s petition to permit this meeting to take place.
3. Justice Neaves refused the adjournment and made the sequestration order on the petition of the respondent in the
sum of $26.615.57.
4 . The applicants filed an application to rescind or suspend the sequestration order, in order to allov a Part X meeting of creditors to be called. Their solicitors asked the court registry not to sign or seal the sequestration order, and the papers were so marked.
5 . The Court appointed Brian Raymond Silvia of Ferrier Eiodgson as trustee pursuant to the sequestration order (the Court trustee).
11 December 1986
Grivas filed a notice of intention to oppose the applicants' application for resclssion/suspension.
15 December 1986
The application to rescind/suspend vas listed for directions before
Jackson J. This hearing is analysed in my previous judgment and although there are some ambiguities in the transcript of those proceedings making it unclear precisely what they vere about, it appears that no orders were made, the parties vere sent to the Registry for a hearing date a4d directions were given to re-list the matter for return
of subpoenas.
27 January 1987 Unknown to the applicants the sequestration order was entered, signed and sealed by the Registrar in Bankruptcy. 4 March 1987
The first affidavit verifying the applicants' statement of affairs was
signed by the applicants. The statement of affairs disclosed the fact
that the applicants had sixty five unsecured creditors who were owed $1,832,917.54; they had assets totalling $10,181 and the amount owed to
secured creditors was unknown.
5 March 1987
A creditors' meeting was called by the Court trustee. At thls meetingthe following took place:
The 1. Court trustee was advised that rescission of the
sequestration order was supported by a substantial number of
creditors in the light of and on the basis of the proposal. 2.
The Court trustee advised the meeting that the bankrupts had not filed a statement of affairs, nor provided information and their books and records to enable him properly to detemune their financial position. Mr Piccardi then handed the Court trustee an unsigned copy of the statement of affairs of 4 March 1987, advising that the signed document vould be available by the end of the meeting. That statement of affairs zevealed an unlikelihood that there would be moneys available to unsecured
creditors. 3 .
Mr Fox. solicitor for the applicants at the meeting, advised
that the 4 March statement of affairs had been prepared and that he was awaiting slgned coples to be delivered from his office. 4.
The proposal was discussed only generally, malnly in the context of the applicants' financial position.
5.
In a vote, twenty four credltors were in favour of supporting the applicants' rescission appllcatlon and nine were agalnst (including Grivas). The debts to those against amounted in
total to $419,214 whlle the debts to those in favour amounted to S1.164.109.05. 25 March 1987
Agreement was reached (it was slgned on 26 March) between Grivas and the
appllcants whereby, sub~ect to certaln conditions, Grivas agreed to
withdraw his opposition to the orders sought, to allow the Part X
meeting of creditors to be called, and to authorise the Part X trusteeto call the meeting. The main object of the meeting would be to enable
the unsecured creditors to consider the proposal and the agreement
between Grivas and the applicants under section 189 of the Act. 13 April 1987
By consent the sequestration order was suspended by this Court up to and
lncluding 29 May 1987, to permit a Part X meeting of creditors to takeplace on 25 Hay 1987
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22 May 1987
A second affidavit verifying the appllcants' statement of affalrs was
signed by the applicants. This statement of affalrs disclosed the same information regarding liabilities of the appllcants as that of 4 March
1987 except that the assets totalled $5090.50. 25 May 1987
A creditors' meeting was convened by the Part X trustee. At thls
meeting the following took place:1. The joint and lndivldual statements of affalrs of the appllcants were tabled.
2. The Part X trustee advised that the statements of the lolnt estate were identlcal in content to those provlded at the 5 March 1987 meeting. Be also advised that the individual statements contained all the liabilities of the joint estates and one half of each debtor's interest in the joint assets. The Part X trustee stated that, as he understood it, a copy of the statement of affairs of the previous meeting was avallable upon request by the creditors.
3.
Information regarding the proposal was placed before the
meetlng. Essentially the proposal Involved the applicants obtaining a discharge of the mortgage which the AN2 Bank held over the property at 6 Bailey Street, Adamstown. The appllcants
were then seeking to obtain the sum of $85,000, the amount
required to pay out the bank, from a number of people. The
evidence established that these people and funds were then and
stlll are available. Eavlng paid out the bank, the applicants
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propose to keep the property in their names and then to put in
train the necessary steps for the redevelopment of the property such as negotiating finance for the cost of the development and the lodging of the Development Application to the relevant council. The evidence 1s slight, but it appears that these various steps can be achieved.
Prior to the commencement of any works on the property, the
property would be put up for the sale of the completed redevelopment for a sum which would be sufficient to provide an estimated profit of $400,000 for unsecured creditors after utilising available tax losses. The profit would then be paid
to the trustee for pro rata dlstributlon to Creditors. The proposal is put by the applicants upon the followlng two crucial conditions:
(a) that in
the event that the redevelopment does not proceed for any reason or no funds become available at the end of the development, then the creditors will be precluded from taking further bankruptcy action against the applicants;
(b)
that the applicants’ secured creditors must agree not to participate in the distribution of surplus funds for the successful completion of the proposal to make up for any shortfall that they might suffer in realising or
otherwise dealing with their securities. .
4 .
The only secured creditor who indicated that it would not seek to recover any loss above the money realised from the sale of their securities was a subsidary or associate of the AN2 Banking Group Limlted to whom the applicants are indebted for the staggerlng sum of at least $6 million. The evidence established that this creditor had arranged and provlded most or all of the
funds
for
the
applicants’ offshore borrowlngs, secured by
mortgage on a number of the applicants’ properties.
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5. Another secured creditor, the CitiBank/CitiCorp Group, sald that it would not surrender its rights as an unsecured credltor. The evidence before me suggested that this attitude may be reversed.
6 . Another two unsecured creditors, Beneficial Finance Corporatlon Limited and the State Superannuatlon Board, opposed the proposal and said that they would prove as unsecured creditors
for any excess of debt to them above that realised from the
sale of t h e n securities. Subsequent events have removed these
impediments to the proposal.l .
The resolution that Mrs Gerlinde Piccardi execute a deed of
arrangement embodying the proposal resulted in the followlng vote:
In favour: 18 in number 64.28% Value $8,952,667.11 95.42%
. - Against: 10 in number 35.71%
Value $429.427.14 4.58%
8. The resolution that Mr Kurt Plccardi execute a deed of arrangement embodying the proposal resulted in the following vote:
In Favour: 19 in number 65.52% Value : $8,954,055.30 95.42% Against: 10 in number 34.48% Value : $429.427.14 4.58%
9. The voting on the resolution approving the agreement between
Grivas and the applicants was:
In Favour: 11 in number 52.38% Value $1,062.885.69 74.89% Against: 10 In number 47.62% Value $356,291.87 25.11%
All the resolutions therefore obtained the necessary majority in value.
29 May 1987
Attention was drawn in Court to the fact that one copy of the
sequestratlon order in the Court file had apparently been signed and
sealed, although another copy had not. To enable the appllcants theopportunity to consider their position, the application was stood over
to 10 June 1987. 5 June 1987 The applicants filed their application seeking an order that the signing and sealing of the sequestration order on 27 January 1987 be set aside. 10 June 1987
This application was adjourned to 8 July 1987.
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8 July 1987
The application to rescind the sequestration order and to review its signing and sealing were part heard, a partial or preliminary ludgment
was given and the matter was stood over to 23 July 1987. The applicants were ordered to file within 14 days any application to annul the sequestration order. 23 July 1987
The hearing of the application to review the signing and seallng
continued, at which the Registrar was represented, and the Court was informed of the earlier practice of the Registry to delay signing and
sealing if an application to rescind was being made.
24 July 1987
Further argument took place, a further ludgment was given and all thematters were fixed for hearing on 7 September 1987.
l September 1987
Grivas no longer opposed the application. Without determining whether
they could apbear as of right, leave was granted to the ob~ecting
creditors to participate in the proceedings. Petitioning Creditor's (Grivas') Debt
It appeared that the debt owed to Grivas arose pursuant to a partnershlp between Grivas, Peter James Evans and the applicants which owned premises at 97-105 Scott Street, Newcastle. The evldence established that Grivas had capital invested in the partnership and on 21 November 1978 the partners agreed that Grivas would receive a refund of his capital from the proceeds of a refinancing operation, which would in turn not take place until the premises were fully renovated.
Eowever, on 5 March 1980 the partners agreed that to assist the flnanclng of the renovation work, Grlvas would leave $50,000 in the partnership account, with interest being paid to Grlvas at $625 per month. The capital sum was to be repaid from a refinancing of the premlses when the premises were redeveloped and fully tenanted. The petition claimed the payment of this interest. As the premises were never redeveloped nor fully reflnanced, the applicants say that the
debt claimed by Grivas is not owing and has never become payable.
Applicants' Statement of Affairs
A question was ralsed at the hearing regarding whether the applicants
had made full disclosure of their company and trust interests in their
statements of affairs. This problem partly arose because of the fact
referred to earlier that two statements of affairs had been prepared -
one sworn on 4 March 1987 for the first creditors' meeeting called by
the Court trustee on 5 March 1987 and another svorn on 22 May 1987 andprepared for the 25 May 1987 Part X creditors' meeting.
The alleged problem with the first statement of affairs was that it
makes reference to a personal questionnaire completed by containing some details of the applicants' company and trust interests. the applicants The oblecting creditors argued that the statement of affairs is not properly constituted where it makes reference to another document in
this way.Mr Piccardi's evidence was that two questionnaires had been submitted for completion by the Court trustee. He stated that one of the personal
questionnaires was in fact available in March at the time of Mr
Piccardi's 4 March 1987 affidavit verifying the statement of affairs and the second one was available at the May meeting. The allegation concerning the second statement of affairs was that the contents of two statutory declarations dated 15 September 1983 and 15 November 1984 respectively were not disclosed. In short the declaratlons state that
Mr Piccardi has various company and trust interests. The objecting creditors stated that the failure to disclose all their interests was
misleading to the creditors at the creditors' meetings.Applicants' Financial Position
The evidence established that at the time of the creditors' meetlngs,
the applicants were involved in the following partnership Interests
which all dealt in the business of real estate development:
(a) Partnership with Peter James Evans and Suzanne Eileen Evans which was entered into in 1980. The applicants had a 50% share and the principal assets of this partnership were properties at 42-46 Eunter Street Newcastle and 406-408 King Street Newcastle. According to the information provided in the questionnaire attached to the statement of affairs of 4 March
1987, .this partnership has been dissolved. Although the
questionnaire states that the dissolution agreement was reduced to writing, no copy of the document evidencing the dlssolutlon
was ever produced.
(b) Partnership between the applicants and Nevllle Amos Bill entered into in October 1979. The applicants had a 50% interest in this partnership which has also been dissolved. The same
questionnaire indicates that the dissolution agreement was reduced to writing but no document of dissolution was produced.
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(C) Partnership with Doylplc Pty Limited, Peter Doyle and Peter and
Suzanne Evans entered into in 1980. The applicants had a 25% interest in this partnership. Its principal asset was the Royal Theatre. The evidence showed that a Mr B. McGulgan bought Doylpic's share for $150,000 and paid off the mortgage on this property. This partnership Is still continuing.
(d)
Partnership with Peter and Suzanne Evans and Grivas and his wife, Janice Grivas. This partnership owned the George Hotel and the applicants and the other two couples each had a one third Interest in the property. The same partnership, excluding only Mrs Grivas, owned the adlacent property known as the Royal Court. This partnership is still continuing. Both the George Hotel and the Royal Court were subject to a mortgage in favour of the AN2 Bank. Originally the amount secured was $505,000 but by the time of the hearing, it had escalated to $562,000 and 1s
currently approximately $ 5 7 0 . 0 0 0 .
The George Hotel
The evidence showed that the partners were interested in selling this
property. After paying off the current mortgage to the bank, it was thought by some partners that they might each remain with approximately $100.000. Mr Piccardi believed that there would probably be no surplus after the sale and payout of the mortgage. A factor Influencing his belief was that a sum of money was claimed by Mr and Mrs Grivas for wages relating to work done at the hotel. Hr Piccardi entered into an arrangement with the other partners so that the other partners would share Piccardi's portion. Mr Piccardi said that he had entered into the arrangement with Grivas in March 1987 in the hope that Grivas would withdraw his opposition to the rescission of the sequestration
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order. The evidence was that this agreement was disclosed at the second
creditors' meeting.Grivas and his wife claimed to be owed about $79,800 in unpaid wages between 1 July 1985 and the date of the hearing. Despite worklng throughout the period, Grivas claimed that he, his wife and the family trust recelved nothing betweeen 1 July 1985 and 30 June 1986 and said that he had drawn about $20,000 in wages altogether. Despite an alleged agreement by the partnershlp on 29 May 1987 pursuant to which Mr and
Mrs Grivas were to receive $800 per week if they both worked or $600 per
week if only Mr Grivas worked, the evidence of Grivas was that he and
his wife received into their family trust 5700 per week from which they drew 5 3 0 0 each. Grivas says that In the first SIX months of that year, no money was paid. In the second half of the year, he said that he drew $200 per week, and from March 1987, he started to pay himself and his wife $600 per week. Grivas also claimed to be owed $60,900 by virtue of this agreement.
Jontria Pty Ltd In May 1986 tne applicants caused to be reglstered a company called
twenty year old son Xurt Anthony Plccardi. Its principal asset is a Jontria Pty Ltd. the principal shareholder of which is the applicants' lease over the premises operating as a coffee shop at 6-12 Pacific Street, Newcastle. Mrs Piccardi said that she works there with her son. The company has paid on behalf of the appllcants certain mortgage instalments on the applicants' residentlal home at 14 Wattle Street, Bolton Point. The mortgage 1s owed to the Advance Bank (formerly the
NSW Building Society) and the evidence was that the applicants were at
the time of the hearing already some two to three months in arrears. The company had also, on behalf of the applicants, paid accounts incurred in the development of propertles in Pacific Street, Newcastle.
One Dollar Transfer To Bill
It was also established that the applicants entered into an arrangement
with Mr Hill in May 1986 involving the transfer of several properties
to him for the sum of $1. The total value of these properties, as at 30 June 1984, was S2.315m. At May 1986 valuations the total was $3.lm of which Mr Piccardi had a one half interest of over one million dollars. All these properties were mortgaged to Citicorp. In return for this transfer, the agreement was that the partnership would be dissolved and that Mr Bill was to take over the liability under the mortgages secured over those properties.
Mr Hill’s current claim against the applicants is some $814,000, although as at 30 August 1986 the amount alleged to be owing vas $899,736. It is based on a deficiency of funds on the properties. Mr Piccardl relinquished his interest in the partnership between Mr Bill and himself but did not relinquish or acknowledge or receive absolution from the debt that he owed the partnership. . Mr Bill therefore retained the right to claim money that Mr Piccardi owed to the partnership.
The matters €or determination in this case are:
1. The review of the signing or sealing of the sequestration order. 2. The suspension or rescission of the sequestration order. 3. The annulment of the bankruptcy. 1. TEE REVIEW OF TEE SIGNING AND SFALING For the reasons and in the circumstances outlined in my reasons on 8 and 2 4 July 1987, I am satisfied that the signing and sealing of the sequestration order was effected on 27 January 1987 in the Registry without notice to the applicants. This was due to an accidental and
erroneous reading and interpretation of some of Justlce Jackson's remarks on 15 December 1986. I am satisfied that the applicants received, and proceeded in the belief that they had received, an undertaking from the Registry that nothing would be done and no step would be taken, at least without prior notice to them, to preludice or forestall their section 37 application to rescind. It is not disputed that at the time of this occurrence, the practice of the Registry was to give and comply with such undertakings unless the Court intervened,
although I am informed that this practice has been subsequently altered
to ensure that the matter comes promptly before a Judge. In my earlier reasons of 8 July 1987, I expressed the view that the Court has power under section 14(5) of the Act to review the signing and sealing by Regi'strars of sequestration orders. The question is whether
I can and now should do so in the circumstances which exist here. The applicants submitted that section 306 can be used for this purpose, but I doubt that an administrative mishap in the Registry can be described as a 'formal defect or irregularity' within the meaning of that section.
On the other hand, rule 158 provides: "An application under sesection 14(5) of the Act m y be made mthin 21 days from the date on whlch the order,
dxection or act sought to be renewed was made, glven or
done "
This period had long since expired when this application for review was made. Bowever, section 33(l)(c) provides that the Court may extend thls time. If this is a case for rescission. I think it would be approprlate to extend the time and to grant the review. For the reasons given here
and in the earlier judgments, I would then order that the signing and sealing of the sequestration order be quashed.
2. TEE SUSPENSION OR RESCISSION
This is an entirely discretionary order provided for by section 3 1 (1) of the Act. Essentially the applicants maintained that rescission should be effected because the petitioning creditor no longer opposed the order and because the cxeditors' meeting on 25 May 1987 resolved in
favour of the deed of arrangement being put into effect and the proposal proceeding. The applicants say that I must consider the circumstances of the making of the sequestration order. They claim that a Part X scheme of arrangement wap-being proposed and an authority from the trustee was to
be available at a later stage on the day the sequestration order was pronounced. I should also consider the fact that the applicants filed their application for rescission of the order on the same day that it was made; that the reason as to why Neaves J refused to grant an adlournment was because he believed that the applicants had had sufficient time to formulate a Part X scheme. The applicants also
attack the judgment debt of Grivas which they say was not immediately
payable on 19 November 1986.
On the other hand, the ob~ecting creditors argued that the appllcants
had had numerous opportunities to oppose Grivas' claim. One objectlng creditor pointed to the applicants' failures:
(a) to lodge a notice of grounds of defence in the District Court;
(b) to lodge an intention to oppose the petition filed in the Federal Court;
(C) to file an application to extend time to comply wlth the bankruptcy notice; and
(d) to lodge an application to set aside the judgment of the District Court either after service of the bankruptcy notlce or after service of the petition.
This objecting creditor pointed out that the debt was acknowledged in the deed of 26 March 1987 entered into with Grivas and that the
debtors were represented before the court when the application for the sequestration order was made. Alternatively, the applicants could have .
appealed Justice Neaves' decision not to grant an adjournment on 18 November 1986. A creditors' meeting could then have been arranged pursuant to section 73(2) and then an annulment could have been sought pursuant to section 74.
On the substance of the matter, the applicants explaln that the predominant reason for their predicament is because of the adverse movements in the Australian dollar as against the Swiss Franc (substantially affecting their offshore borrowings made in March 1985)
and the downturn in the Newcastle economy consequent upon Australian and Eunter District economic problems after the international trade crisis.
It is clear that if a sequestration order ought not to have been made,
the appropriate remedy is annulment and not rescission: Re Deriu 119701 16 FLR 420; Re Bond 119781 22 ALR 287. See also section 43(2). The oblecting creditors argued that if rescission is to be considered the tests to be applied are similar to those where there is an application to set aside judgment: Balhorn v Colby 119821 45 ALR 174 at 180-81; Re - Anasis 119851 63 AIR 493 at 500 where the distinction between rescission and discharge is explained.
The oblecting creditors, while allowing for the Court‘s wide discretion in the matter, argued that the paramount consideration was that lustice
should be done. They submitted that there should be no departure from
the general rule that all available evidence must be produced at the original hearing: Re Buckley 119751 27 TZR 496, and in particular that the applicants should have done something before 18 November 1986. It was argued that because a person continues to be bankrupt until discharged u n d p sections 149 or 150 of the Act or there is an annulment under sections 14 or 154, rescission does not put an end to the
sequestration order. In Simon v Vincent J.O‘Gonnan Pty Ltd
119791 41
FLR 95 at 108, when speaklng of Gibbs J‘s decision in Re Deriu [above],
Lockhart J stated:
“His Honour held that he was satlsfled that the
sequestratlon order ought not to have been made and annulled the bankruptcy He sald that the resclsslon of a
sequestration order does not put an end to the bankruptcy
and relied for that conclusion on the reasons f o r ]udgmnt
of Wlllmms J m Cameron v Cole L19441 68 CIA 571 and the
tern of s . 4 3 (2) of the Act which provlde:
’ ( 2 ) Upon the making of a sequestratlon order agalnst
the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt untll -
(a) he is dxscharged by force of
section 149 Of this Act;
(b) he is dxcharged by order of the Court ; or
(C) the sequestration order 1s annulled.’
His Honour was conslderlng a different question to the one before us. Ills Honour did not say that there was no power
in the court to resclnd a sequestratlon order under S 37;
but rather that, in the circumstances of the case before him, as the rescission of the sequestratlon order would not put an end to the bankruptcy, ’the proper way of gettlng
rid of the sequestratlon order is by annulling it under s.154 ”’
Lockhart J went on to say :
“Where an order has been correctly made m the first Instance and a party seeks to introduce evidence of events that have subsequently happened whlch would lustlfy the
m k m g an order for rescission of the orlginal order, generally the proper course 1 to apply for an order court in
for rescission under 3 . 3 7 ; but if the order had been
wrongly made in the first instance the usual course of It
appealing against it should be followed .
In Re Bond Iabovel Sweeney J at 288-89 stated:
“It is argued for the petitioning creditor that this 1s not
a matter where the court can be satisfied that a
sequestration order ought not to have been made an that S 154 (l)(a) therefore does not apply Reliance was placed on Re Norris L18901 7 Mor 8 at 10. In a case in which appllcation was made under thls sectlon to annul a
bankruptcy on the ground that the judgmnt on whlch proceedings were founded was not a real debt, Gibbs J sald:
‘In my opinion, the mgllsh decisions as to the power to
rescind a recelvlng order (some of which are referred to in
the ~udgmnts in Camron v Cole 119441 68 CIR 5 7 1 at 583-4, 600, 608 and 610) must be applled nth cautlon to the
Australian statute, since the hglish sectlon which
corresponds to S 154 of the Bankruptcy Act 1966-69 ( S 29 of
the Bankruptcy Act 1914) although it gives power to annul
an ad~udxation, does not give power to annul a receivlng
order. With the greatest respect to the mew of Mannmng J, it seems to me that, where a sequestratlon order ought not to have been made, because the debtor was not indebted to the petitlonlng creditor, the proper way of getting rld of
the sequestration order 1s by annullllng It under S 154 Indeed, as Wllliam J polnted out In Cameron v Cole, the rescission of the sequestratlon order would not put an end
to the bankruptcy (see S 43(2) of the Bankruptcy Act 1966- 1969)' ( ~ e Deriu [l9701 16 420 at 4221."
Slmilarly Burchett J in Re Anasis [1985-861 63 ALR 493 at 499-500 stated:
"Once a sequestratlon order has been made, S 43(2) provldes
that the debtor not only beccunes a bankrupt but contlnues to be a bankrupt until he is discharged by S 149; he 1s discharged by order of the court; or his bankruptcy IS annulled under S 74 or 154. Accordingly, it has been held
that a rescission under S 37 would 'not put an end to the
bankruptcy' (Re Deriu L19701 16 ETR 420 at 422), and thatwhere a sequestration order ought not to have been made,
because in truth the debt upon which it was based did not exist or because the bankruptcy notice and petition had not
been served, the DroDer wav of uettinu n d - - of the order 1s
by annulment under S 154 ( k e DeGiu suGra; Re Bond [l9781 22 ALR 287; Clyne v Deputy Cmssioner of Taxatlon (No 3)
L19841 55 AIR 143; 58 AWR 398 at 400 and 401-2) "
This is not an easy case to fit clearly into those statements. On the one hand the applicants rely on events after the sequestration order was made. On the other hand they say that if the adjournment application
had been granted, as they claim it should have been, all these later . events would have happened before any sequestration order could have been made and would have prevented or made unnecessary a sequestration order. Further, the applicants rely on the probable non accrual of the Grivas debt as contradicting the petitioning creditor's right to a sequestration order. They also point to the withdrawal by Grivas of hls opposition to the orders now sought, against his last minute notification on 17 November 1986 that he would oppose the adjournment, to support their case that the sequestration order ought not to have been made.
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I am doubtful of the efficaciousness to the applicants of rescission in
the circumstances that exist here. In any event, it is my view that this case is one for annulment and not rescission. If this conclusion is wrong, I would rescind the sequestration order.
The order sought by the applicants is annulment as provided in section 154(l)(a) of the Act. This provides:
“154. (1) Where the Court is satisfied -
(a)
that a sequestration order ought not to have been made or, In the case of a debtor’s petltlon, that the
petltion ought not to have been
accepted by the Registrar; . . the Court may make an order annulling the
bankruptcy . ”
The applicants say that I should take particular note of the fact that the petitioning creditor no longer opposes the orders sought and the
fact that the applicants discovered only the day before the hearing of
18 November 1986 that the petitioning creditor would oppose an
application for an adjournment. The applicants submit that bankruptcy
would be a greater detriment than benefit to the creditors.Having regard to the facts and arguments earlier outlined, and on the basis of the explanations provided in the authorities to which reference has been made, it seems to me that the applicants have made out a case for the annulment of their bankruptcy.
The objecting creditors argued that in considering whether a bankruptcy
should be annulled on the ground that the sequestration order ought not to have been made, the Court must have regard to the facts in exlstence
at the time the order was made: Re Scott K19751 6 ALR 558; Re Calderon Riley J [unreported 31 May 19871.
However, on this question, the authorities seem to be confllcting. For example, in Re Kenneth Leslie Eatcher Ex Parte K.L. Eatcher [unreported 6 November 19871, Justice French followed Re Scott [above], as did
Jackson J in Re Kenneth Johnson & Dianne Johnson [unreported 5 February
19871. Yet, in Re Bond [above], Sweeney J stated at 289:
"In the judgment of Willlams J referred to, his Honour referrlng to the predecessor to S 154 sald: 'By S 124(l)(a) the court is given the fullest power to renaedy any ln~ustlce that the debtor m y have suffered through a sequestration order having been improperly obtained. It can annul the order whenever in the oplnlon f the cow3 it ought not to have been made. It can decide, therefore, at a properly constituted hearing whether the order should have been made
on the mrlts in the llght not only of the evidence whl h
was avallable at the date the sequestration rder was made, but also of any evldence that has subsequently become
avallable before the date of the appllcatlon to annul'
(Cam?roii v Cole (19441 68 CIR 571 at 608)
Having considered the Ehgllsh Act as It then stood and
these cases, I am of opinion that I should not follow the acta m Re Norrls. In my mew annulment 1s an
appropriate procedure here. In the light of the evldence
then available and of the evidence which has now becomeavailable, the sequestration order should not have been made
and the proper way of getting rid of the order 1s by
annulrent under S 154. "
The issue here is whether the expression 'ought not to have been made' means : 1. ought not to have been made on that date on the basls of the information then available; or
2. ought not to have been made if the facts associated with the
creditor's petition had been known as the Court now knows them; or
3. ought not to have been made on the basis of the total knowledge of the debtors' affairs which the Court now has, including the current facts relating to the creditor's petition.
Eaving regard to the untrammelled width of the statute, and the authorities, especially Re Bond [above], I am of the opinion that the third of these alternatives represents the correct approach. But 1s it subject to any limitations or qualifications?
The objecting creditors submitted that the reasons for the debtors' insolvency was irrelevant to a consideration of whether the sequestration order should have been made. Eowever, the following two
points were made by Gibbs .l in Re Deriu [above] at 420-1 on what is required in a section 154 application:
"Section 154(1) of the Bankruptcy Act 1966-1969 provldes that where the court is satisfied (inter alla) that a sequestratlon order ought not to have been mde, the Court
m y mke an order annulllng the bankruptcy Under this
section there are two matters which the court has to consider, first, dether a sequestration order ought not to
have been mde, and then, If the Court 1s satisfied of
that, whether in the exerclse of the Court's discretion the
order should be annulled (Re Willlams L19681 13 ETR 10 at 23). "
In considering whether a sequestration order ought not to have been made, the court may go behind the judgment debt in order to ascertain
whether in fact there is a real debt. In Simon v Vincent J. goma man
Pty Ltd 119791 41 IZR 95 at 110, Lockhart J stated:
"The Federal Court of Bankruptcy, and later thls Court, has
luns&ctlon upon the hearing of a petitlon to go behlnd a judgrrent and lnquire whether It was founded on a real debt: see Corney v Brim 119511 84 CIA 343 and Wren v Mahony
119721 126 CLR 212.
The ]urisdlctlon arises because S 52 (1) of the Act requires that, at the hearing of a crdtor's petitlon, the court shall require proof, inter alla, of the fact that the debt
or debts on which the petitionmg creditor relies 1s or are
stlll owing. S i r Garfield Bartack referred in Wren v Mahony (1972) 126 CLR 212 at 223 to: 'the dcminant place the m t o r y words of S 52 (1) occupy m relatlon to the making
of a sequestration order and that the resolution of the
question whether or not the proof of the petitioning
crdtor's debt is satlsfactory does not concern only the
lmnediate parties to the petition': 119721 126 CIA at 223. "
Lockhart J at 111 adopted with approval the basls and rationale of this
~urisdiction defined by Lord Esher in Re Havkins; Ex parte Troup [l8951 1 QB 404 at 408-9:
"We have sald that the Court will go behind the ~udgrrent,
and I think the cases shew that the Court m11 go behlnd a
]~~dgm?nt by consent. I am also of the oplnlon that a ju5qmnt obtained by a compromise does not of itself stop
the Court from going behind it We have tried to say that the Court will go Into the whole transaction, because the question is not one of a &spute between the two parties; it is a matter which m11 affect, and matenally affect, the
rights of all the crdtors who are not before the Court when it has to detenrune whether a rec iving order should or should not be made, which m11 or may result m the debtor
belng made a bankrupt. The Court will go into the whole matter, and see whether upon the whole it 1 s fan to the whole body of creditors that the m, on the particular transaction between himself and the petitioning creditor, should have a receivlng order made agalnst him. In the
s a m way, when a creditor comes to prove in bankruptcy the
Court m11 go behind the judgrrent, and Inquire lnto the whole transaction which preceded it.
To make a m a bankrupt 1s obviously a strong interference with the rlghts of the general body of hls
creditors. Each crdtor is materially affected to the extent that he cannot by his own diligence get the whole of
his debt. Rm the m m n t of bankruptcy, though he be the
mst diligent of his creditors, he has to go into equal competition with the mst Idle ''
Lockhart J considered that "the circumstances in which the court will lnqulre into the validity of a judgment debt are not closed", but that the court will not inquire into the question as a matter of course. Eis Eonour said that:
"Circumstances tending to show fraud, collusion or
miscarriage of justice or that a compromise was not a falr and reasonable
one are the mst frequent examples of the
exercise by the court of this jurisdiction . I,
In Cameron v Cole [above] at 5 8 1 , Latham CJ adopted the statement in Re - Flatau; Ex Parte Scotch Whisky Distillers Ltd 118881 22 QBD 83 at 85:
"'When an issue has been detemned in any other court, If evldence is brought before the Court of Bankruptcy of circumstances tending to show that there has been fraud, or
collusion, or miscarriage of justice, the Court of Banluruptcy has power to go behind the judgmnt and to inquire into the validity of the debt' . . The Court m so exercising its dxxretion does not (and cannot) set aside the ~udgment, but it declines to allow it to be relied upon
m the' bankruptcy jurisdiction . . A creditor is not
allowed in the banlcruptcy ]usrisdiction to rely upon a
judZprrent &shonestly obtained. There is every reason for applying the sam? rule to a debtor in that jurisdiction."
The applicants submitted, and I agree, that this principle should be applied here and that I should go behind the judgment on the ground of miscarriage of lustice. They said, and I agree, that the debt of
Grivas would only have been due and owing if the property had been redeveloped, when the partnership came to an end, or when refinancing
occurred. As none of these happened, there was no debt.
The oblecting creditors submitted that the sequestratlon order was properly made as the act of bankruptcy had been proven along with the debt owed by the petitioning creditor. They stated that the debt had become due on Mr Piccardi's default in paying interest and that the
appllcants themselves admitted owing the money. I reject these contentions. Eaving heard Grivas and the applicants In the wltness box, I have come to the conclusion that Grivas' evidence about the debt 1s very dubious. I prefer and accept the evidence of Mr Piccardl. In my opinion, the sequestration order ought not to have been made.
On the discretionary considerations, the objecting creditors submitted that annulment should be refused even If the Grivas debt was not due and owing. Their arguments were:
(a) It is not in the general interest of the creditors: Re Willlams 119681 13 !?LR 10 at 20-25, which held that if a substantial miscarriage of justice results from the acts of the bankrupts
then an appeal should not be allowed. (b) Conside'ration must be given to the fact that one of their number
sequestration order could have been made and that therefore (Dick and Dons Pty Ltd) had a petition served upon which a another act of bankruptcy had been proven: Re Finn [l9821 41
ALR 487
(C) There was an act of bankruptcy in the signing of the section 188
authority.(d) The applicants were clearly insolvent.
(e) Their status of bankruptcy would give the trustee the opportunity to investigate transactions with which the applicants had allegedly been involved within the six month
relation back period (as provided by sections 120 and 121 of the Act 1 .
(f 1 There is a need for public examination of the affairs of the applicants in view of the size of the debt involved. Eaving heard the applicants give oral evidence regarding their affalrs during which they were both extensively cross examined, I believe that little would be gained by this exercise now to the benefit of the creditors or the public. It is difficult to imagine that the Newcastle business community would not know If the applicants, themselves or in collusion with others, had
significant assets hidden away from their creditors.
Reliance was also placed on the following matters put by way of submissions: .
1. The applicants did not have substantial reasons for failing to
provide the Court on 18 November 1986 with reasons not to sequestrate.
2. The only alternative available to the Court on the day of the sequestration order was to adlourn the matter to allow a Part X meeting to be held.
3. The Part X creditors' meeting had no force in law because of the signed and sealed sequestration order. This is apparently correct.
4 . Weight should not be given to a creditors' meetlng where the substantial creditors, e.g. ANZ Capital Markets Pty Ltd. Mr
8111, Mr Doyle, and Mr and Mrs Evans, voted because the
appllcants hope or expect that these creditors will not have to
be repaid. The objecting creditors doubted whether Mr ~ 1 1 1
could vote at all, and queried whether the Information presented at the creditors' meeting was sufficient.
5 .
The transactlons with Messrs Grivas, Hill and Evans should be
investlgated by a trustee be in the interests of all the creditors.
6. The deed of arrangement is contrary to the public interest because the applicants would have to borrow further funds, the
proposal is too speculative, and the ultimate fate of the unsecured creditors is unknown.
7.
There was not full disclosure in the statement of affairs.
As arguments against annulment, I reject these submissions. In my view it would not only be in the Interests of the creditors, which are paramount, to grant an annulment but also in the interests of the public. Public interest was an important factor in considering an application under section 3 1 to rescind/vary or discharge an order pursuant to section 37 of the Act in Re Buckley & Another Ex Parte James Hardie h CO Pty Ltd [l9761 27 E'LR 496.
In Re Gordon McFarlane Moore-Smith Ex parte The Bankrupt [unreported, 3 November 19871, Plncus J held that in considering the granting of an early discharge, the Court could have regard of the Interests of the commercial community. Bearing in mind the fact that the total debt 1s so large and the fact that so many persons are directly or Indirectly going to be affected by the applicants’ fate, I t h m k it is proper to
have regard to commercial interests of the public in this case. In this case, they seem to me to be overwhelmingly supportive of annulment. There is ample evidence of the applicants’ contribution to Newcastle and its community. Its commercial establishment will have the certainty of heavy losses if the applicants remain bankrupt but have a chance of significant recovery if the proposal is allowed to proceed. As with the creditors, the interests of the public and the commercial community will be served by annulment.
The relevant provision regarding statements of affalrs is found in section 195(2) of the Act. In essence, it requires that a debtor must give particulars, in respect of each asset and particulars of each
liability whether secured or not. If secured, particulars of the
security must be given. In Re Segal; Lensworth Finance Ltd v Segal
119751 45 EZR 85 at 88. Riley J stated that it is essential that the
information given . should be full and correct. See also Chicagakis v
Deputy Conuulssioner of Taxation [l9811 36 ALR 527 at 533-34; Beard v
Prestige Baking Industries Pty Ltd 119811 36 ALR 307 at 319, Fox J; - Re
Augustyn; ex parte Bernard Putnin the trustee of the Property of
Augustyn v Michael Edward Augustyn Lee J [unreported, 8 July 19881. Eowever, these cases also show that the Courts have always examined complaints of non disclosure to discover their circumstances, and put aslde defects or omissions which were not material or intentional and
which did not In fact mislead the trustee or creditors.
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Taking into account the powerful testimonials to the applicants' character, the interests of the creditors and the public, and the facts
attested to or documented in the evidence, the following matters appear to me to point to the appropriateness of annulling the bankruptcy:
1. The applicants developed an lmpresslve reputation as hardworking people dedicated to the appealing development of Newcastle and its environs.
2. They were apparently truthful witnesses, who were fundamentally
not the authors of their bankruptcy.
3 . They have enlisted substantial support from their creditors, especially those who know the applicants and the standard of work attained by the applicants.
4 . The proposal is framed so that, if successful, creditors will obtain more than they would obtain from the applicants remaining bankrupt.
5 .
There are in my view grave doubts about the Grivas debt to the
point where on the evidence before me, I would have had doubts .
about pronouncing the original judgment and would on the evidence here have set it aside.
6 . The circumstances of the applicants' insolvency were not brought
about through lack of industry or recklessness but primarily
through the attraction to them, and many others in the community
at the time, of the seductively low interest rates of overseas loans. The principal. cohorts of the applicants in these
activities are now commendably standing back from the
bankruptcy to permit the proposal to proceed.l . The other factor related to the applicants' circumstances was the downturn in the Newcastle property market which was not easily predictable. 8 . Whatever disclosures were not made by the applicants to one or other of the creditors' meetings, I am satisfied that nothing of substance was withheld. Further I do not believe that there was an intent on the part of the applicants to mislead or deceive either the trustee or the creditors. Nor have any creditors appeared here to claim that they were actually misled.
9 . Perhaps most persuasively of all, the justice or lnlustice of the matter must take account of the fact that the overwhelming
majority of creditors believe that their best interests lie in
the Part X deed taking effect and the proposal proceeding. As it happens, I share this view with these creditors, but the Court should be cautious in substituting its own ludgment for that of the creditors who are involved and have significant .
financial interests at stake.
I therefore make an order annulling the bankruptcy of the applicants. The objecting creditors are to pay the applicants' costs.
.
H
Counsel and solicitors for Mr. G.A. Moore the applicant instructed by
Turnbull Ell1 PartnersCounsel and solicitors for Mr. B.J. Skinner Boral Johns Perry instructed by the Industries Pty. Ltd. Lobban McNally and Harney Counsel and solicitors for Mr. P. Brereton
Dick and Dons Pty. Ltd. instructed by
Trisley and Kilmurray
Consel and Solicitors for Mr. P. Brereton B.W. Modern Interiors Instructed by
Wood Roberts and RayfieldCounsel and solicitors for Mr. P. Brereton Fire Fighting Sprinkler instructed by Co. Ltd. J.P. Lamich and Co. Solicitors for the
Parker and Randall respondentfpetitioning
creditor
. .
0