Khan v Kerr
[2007] FMCA 512
•13 April 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| KHAN v KERR & ANOR | [2007] FMCA 512 |
| BANKRUPTCY – Application for annulment – whether solvency a ground – whether applicant established solvency – application for an extension of time to seek review of a sequestration order – relevant factors. |
| Bankruptcy Act 1966 (Cth), ss.52, 153B Federal Magistrates Court (Bankruptcy) Rules 2006, r.7.04 |
| Austral Brick Co Pty Ltd v Daskalovski Emmett J, unreported, Federal Court of Australia, 23 June 1998 Barber v Bone Thorpe International Ltd [2001] FMCA 4 Cameron v Cole (1944) 68 CLR 571 Corney v Brien (1951) 84 CLR 343 Delph Singh v Wood (1918) 26 CLR 497 Estee Lauder Pty Ltd v Drew [1999] FCA 642 Hawthorne v Carter [2006] FCA 1097 Heinrich v Commonwealth Bank of Australia [2003] FCA 539 Heinrich v Commonwealth Bank of Australia [2003] FCAFC 315 Hudson v Whalen [1999] FCA 189 Layton v Westpac Banking Corp (2000) 181 ALR 603 Muller v Combis [2005] FCAFC 150 Papps v Tapp (1997) 78 FCR 524 Pattison v Hadjimouratis [2006] FCAFC 153 Rafaraci v Pearce & Heers [2003] FCA 1307 Re Anasis; Ex parte Total Australia Limited (1985) 63 ALR 493 Re Cameron Smith [1964] NSWR 1282 and 1285 Re Cook [1946] ABC 245 Re Deriu (1970) 16 FLR 420 Re Frank; Ex parte Piliszky (1987) 16 FCR 396 Re Gollan; Ex parte Gollan (1992) 40 FCR 38 Re Sarina; Ex parte Wollondilly Shire Council (1980) 43 FLR 163 Re Williams (1968) 13 FLR 10 Rigg v Baker [2006] FCAFC 179 Sandell v Porter (1966) 115 CLR 666 Stankiewicz v Plata [2000] FCA 1185 T & S Recoveries Pty Limited v Skalkos [2004] FCA 816 Wren v Mahony (1972) 126 CLR 212 at 225 |
| Applicant: | RAHEAM KHAN |
| First Respondent: | DAVID KERR |
| Second Respondent: | VERO INSURANCE LTD |
| File Number: | SYG3784 of 2006 |
| Judgment of: | Barnes FM |
| Hearing date: | 15 March 2007 |
| Delivered at: | Sydney |
| Delivered on: | 13 April 2007 |
REPRESENTATION
| Counsel for the Applicant: | Mr S. Golledge |
| Solicitors for the Applicant: | Yates Beaggi Lawyers |
| Counsel for the First Respondent: | Mr B. Skinner |
| Solicitors for the First Respondent: | Sally Nash & Co |
| Counsel for the Second Respondent: | Mr T. Castle |
| Solicitors for the Second Respondent: | Gadens Lawyers |
ORDERS
That all applications be dismissed.
That the costs of the first and second respondents be taxed and paid out of the bankrupt estate of Raheam Khan in accordance with s.109(1)(a) of the Bankruptcy Act 1966.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG3784 of 2006
| RAHEAM KHAN |
Applicant
And
| DAVID KERR |
First Respondent
| VERO INSURANCE LTD |
Second Respondent
REASONS FOR JUDGMENT
Background
On 18 September 2006 sequestration orders were made against the estates of Raheam Khan and his brother, Reptiar Khan (also known as Reftiaq Khan) on the application of the second respondent (the petitioning creditor) Vero Insurance Ltd. There was no appearance by or for either of the Khans on that day.
On 18 December 2006 Raheam and Reftiaq Khan filed an application seeking that the sequestration orders made against each of them be annulled and that further, and in the alternative, the sequestration orders be set aside and that the creditor’s petition be dismissed. The Trustee of the bankrupt estates is the first respondent in these proceedings.
On the first return date, 6 February 2007, consent orders were made by a Registrar of this Court for the applicants and the second respondent to file and serve any further affidavits. The application was stood over until 20 February 2007. However on 20 February 2007, as the Khans had not notified creditors of their annulment application, the matter was listed for hearing on 15 March 2007.
The written submissions for the Khans dated 1 March 2007 prepared by their then counsel addressed only the issues of annulment under s.153B of the Bankruptcy Act 1966 (Cth) (the Act) and the possibility that the sequestration order could be set aside as an order made in the absence of a party under Rule 16.05(2) of the Federal Magistrates Court Rules 2001.
At the time fixed for the hearing on 15 March 2007 the Court was advised that Raheam Khan had retained new solicitors who held no instructions from Reftiaq Khan. There was no appearance by or on behalf of Reftiaq Khan. His application was dismissed for non-appearance under Rule 13.03A(c) of the Federal Magistrates Court Rules. All further references to “the applicant” are to Raheam Khan.
Counsel for the applicant then sought leave to file an amended application in Court seeking that the time for seeking review of the sequestration order made by the Registrar on 18 September 2006 be extended to 15 March 2007, that the sequestration order be set aside on review, and in the alternative, that the bankruptcy be annulled pursuant to s.153B of the Bankruptcy Act.
It was submitted that the original application had sought review (in seeking an order to set aside the sequestration order) but had simply omitted to seek an extension of time within which to seek such review. Counsel for the petitioning creditor opposed the amendment, but sought that if it was allowed then the extension of time should not be granted. If it was to be granted, the creditor sought time to file further evidence given the time at which this issue was raised and the distinction between the procedure and requirements for an annulment and a review. The trustee sought that the Court not extend the time for making of a review application as this would prejudice the trustee as to costs.
I allowed the amendment and heard the annulment application and argument in relation to the application for an extension of time within which to seek review under s.104 of the Federal Magistrates Act 1999. This judgment addresses both issues.
Chronology
It is convenient to set out a summary of relevant events. In describing these past “events” I note that, as discussed further below, the applicant takes issue with whether he (or other members of his family) were parties to certain agreements and entered into certain transactions.
First on or about 12 December 2003 contracts for the sale of two home units “off the plan” in Labrador, Queensland for $245,000 each were signed. The vendor (it is not disputed) is GCU Central Pty Limited (GCU). The buyers are described in the copy sale agreement annexed to Raheam Khan’s affidavit of 16 December 2006 as Raheam Khan and Reftiaq Khan. Some of the documentation also includes the name of the Khans’ mother. On 19 December 2003 an application for a deposit power guarantee in respect of the contract for sale of Lots 55 and 56 in the name of Raheam Khan and Reftiaq Khan was completed. On about 19 January 2004 the amount of $24,000 was issued by way of a deposit power guarantee by Vero Insurance Limited (the petitioning creditor). Completion of the purchase was due on 20 August 2004. The time for completion was extended to 31 August 2004. The purchases were not completed and the vender terminated the contracts.
On 13 December 2004 GCU commenced proceedings in the Southport Magistrates Court in Queensland against the applicant and Reftiaq Khan seeking that the deposits for the contracts of sale (each in the sum of $24,500) be paid to it.
On 15 February 2005 the Khans filed a notice of intention to defend those proceedings and a defence in which it was pleaded that the defendants had never signed the alleged agreements for sale of the properties, that the second defendant (Reftiaq Khan) had never signed a deposit bond agreement and that the guarantor did not sign any guarantee.
On 9 March 2005 Vero commenced proceedings in the Local Court of New South Wales against the applicant and Reftiaq Khan seeking payment of $24,000 in respect of the deposit power guarantee together with costs and interest. On 9 May 2005 Vero obtained a default judgment against the Khans in the sum of $25,687.64. Judgment was entered on 15 June 2005.
On 22 July 2005 bankruptcy notice NN2435/05 was issued seeking payment to Vero of the debt of $25,687.64 by the applicant and his brother. On 22 November 2005 the applicant was served with the bankruptcy notice.
In December 2005 the applicant and his brother filed a notice of motion in the Local Court seeking to set aside the default judgment obtained by Vero on the basis that the defendants were never served with any originating process. An affidavit of Raheam Khan sworn on 28 November 2005 and filed in connection with the notice of motion was to the effect that he had never been served with any originating process in relation to this matter and intended to strongly defend it.
On 20 December 2005 the applicant and his brother filed an application to set aside the bankruptcy notice in the Federal Court. In a supporting affidavit sworn on 30 November 2005 Mr Khan stated that he was not served with the originating process and first became aware of the proceedings when served with the bankruptcy notice.
On 7 February 2006 a Registrar of the Federal Court made orders in accordance with short minutes of order signed by the legal representatives for the applicants and for Vero Insurance dismissing the application to set aside the bankruptcy notice and ordering that the applicants (Mr Khan and his brother) pay the respondent’s costs.
Meanwhile, on 16 January 2006 the notice of motion in the Local Court to set aside Vero’s default judgment was listed for hearing on 16 February 2006. A copy of the notice of listing from the Downing Centre Local Court was annexed to the applicant’s affidavit of 16 December 2006.
On 16 February 2006 the application to set aside the default judgment was dismissed with costs. According to the applicant there was no appearance on behalf of his brother or himself on that date.
On 13 March 2006 the Khans filed a second notice of motion to set aside Vero’s default judgment, again on the basis that the defendants had not been served with the originating process. The notice of motion was listed for hearing on 20 April 2006. Raheam Khan attests that he was present at the Local Court on 20 April 2006 with his then solicitor at the hearing of the notice of motion and that the notice of motion was dismissed.
Meanwhile on 16 March 2006 the bankruptcy notice was reissued by Vero against the Khans and served on 26 April 2006 under cover of letter sent to an address in Edensor Park, New South Wales.
On 21 June 2006 a creditor’s petition was presented and filed by Vero in relation to the applicant and his brother. On 7 August 2006 the Federal Magistrates Court ordered substituted service of the creditor’s petition by post to the address in Edensor Park, New South Wales.
The proceedings by GCU against the Khans were listed for trial on 28 August 2006. On 23 August 2006 the Khans’ solicitor sought the consent of GCU’s solicitor to an adjournment on the basis that the Khans’ mother was one of the parties and was very ill and that the brothers were involved in taking her to hospital for treatment. The solicitors for GCU responded, indicating that they were instructed to oppose the application for an adjournment. They also advised that if the Khans failed to appear they were instructed to seek default judgment.
On 28 August 2006 the Khans made an application for an adjournment of the GCU proceedings. It was refused. According to the affidavit of Alexandra Brook (a solicitor for GCU) sworn on 7 March 2007, when the trial commenced the Khans failed to appear in person but were represented by solicitors and “after hearing argument” judgment was entered for GCU against the Khans in respect of their claim, costs and interest. Such amounts have remained unpaid.
On 18 September 2006 sequestration orders were made against the estate of the applicant and his brother.
On 18 December 2006 the applicant and his brother filed the present application.
The annulment application
In these proceedings the applicant relied on his affidavits sworn 16 December 2006 (filed 18 December 2006), 19 February 2007 (filed 20 February 2007) and two affidavits sworn on 15 March 2007 and filed in Court. The applicant tendered the statement of affairs he completed which was omitted from the annexures to his affidavit of 16 December 2006 and other material. Mr Khan was cross-examined by counsel for the second respondent. The first respondent, the Trustee, provided the court with a report in the form of an affidavit sworn on 30 January 2007 in compliance with Rule 7.04 of the Federal Magistrates Court (Bankruptcy) Rules 2006.
The second respondent relied on an affidavit sworn by Alexandra Brook on 7 March 2007 and filed on 15 March 2007 and copies of a number of affidavits, the originals of which are in various court files, and tendered a copy of the application to set aside the bankruptcy notice which formed the basis for the creditor’s petition.
Section 153B(1) of the Bankruptcy Act provides relevantly that “If the Court is satisfied that a sequestration order ought not to have been made … the Court may make an order annulling the bankruptcy”.
Neither the application nor the amended application set out the grounds on which the annulment was sought (cf Rule 7.02(1) of the Federal Magistrates Court (Bankruptcy) Rules 2006). The written submissions for the applicant addressed the grounds relied upon in relation to the annulment application. It is apparent from those submissions that three issues were raised on behalf of the applicant: whether the Court should go behind the default judgment which was the basis on which bankruptcy notice was issued; whether the sequestration order ought not to have been made on the ground that service of the creditor’s petition had not been properly effected or because the applicant did not appear and was not represented at the hearing of the sequestration order on 18 September 2006; or whether the Court should be satisfied as to the solvency of the applicant for the purpose of the exercise of the Court’s discretion under s.153B.
Shortly before the hearing the applicant retained new lawyers. In oral submissions, counsel for the applicant (who had not prepared written submissions) approached the matter from a different perspective. While he relied on the written submissions he contended that issues raised in relation to the default judgment and absence of the debtor when the sequestration order was made were part of all the circumstances and that the question of the solvency of the applicant at the time of the sequestration order was the primary consideration. Reference was made to the statement by Tamberlin J in Rafaraci v Pearch & Heens [2003] FCA 1307 at [27] that it was “well established that, in the exercise of the discretion under s.153B, a court must first consider whether the Sequestration Order should have been made, and then whether, in light of all the circumstances of the case, the Sequestration Order should be annulled”. I have considered the grounds as set out in the written submissions and as presented in oral submissions.
The default judgment
The first basis on which it was contended that the sequestration order ought to be annulled (or issue said to be a relevant circumstance) relates to the default judgment in the proceedings commenced in the Local Court of New South Wales by Vero on 9 March 2005 that formed the basis for the bankruptcy notice. It is relevant to have further regard to the background to that application.
On 12 December 2003 a contract for the sale of two lots, being home units, purchased “off the plan” in Labrador Queensland each for the sum of $245,000 was entered into. An agreement for the purchase of Lot 55 is before the Court. It describes the buyers as Raheam Khan (the applicant) and Reftiaq Khan (his brother) and contains two signatures beside the notation for the signature of the buyer. A copy of that contract is an annexure to the affidavit of the applicant sworn on 16 December 2006. That annexure includes not only the sheet headed “sale details” and the signing page, but also a document described as a “warning” which contains signatures under the name of Raheam Khan, Reftiaq Khan and Hafina Khan. Also attached is documentation in relation to Lot 55 including a furniture package which describes the purchasers of the furniture package (for the sum of $20,000) as Raheam, Reftiaq and Hafina Khan.
In his affidavit of 16 December 2006 the applicant stated, in paragraph three, that on or about 12 December 2003 “I, together with my brother Reftiaq and my mother Hafina Khan entered into written agreements to purchase two home units ‘off the plan’”. The units were described. In that affidavit the applicant stated that annexed to the affidavit was a copy of various pages forming part of the agreement for the purchase of Lot 55 “containing my signature, the signature of my brother and the signature of my mother”. The applicant attested that the agent on the sale had introduced him, his mother and brother to a firm of solicitors, although they never met with any of the solicitors, that they had applied for finance through a mortgage broker, Statewide Mortgages, and that a person named Jackie in the office of the mortgage broker had attended to preparation of necessary paperwork on their behalf.
The applicant stated in his affidavit that none of the documentation was ever explained to them by anyone at the solicitors said to be acting on their behalf or anyone in the office of the mortgage broker.
The affidavit then addressed an annexed Deposit Power Guarantee application issued by Royal and Sun Alliance purportedly in relation to the purchase of Lot 55 (which stated that the applicants for the deposit guarantee were the applicant and his brother). The applicant’s affidavit evidence was as follows:
I do not know who prepared the application. I do not recognise the handwriting appearing on the application. The handwriting is not mine.
The signature appearing at the bottom of the page is purportedly mine. I did not sign the deposit guarantee application, nor, to the best of my knowledge, did my brother ever sign an application. The terms of the application and the manner in which the deposit guarantee would operate in the event the purchase did not proceed was never explained to me by either DEL Lawyers or anyone in the office of the mortgage broker.
The applicant stated that he had been informed that it was alleged that on 19 January 2004 the amount of $24,000 was issued by way of a deposit power guarantee by Vero Insurance Ltd. In paragraphs 9 and 10 of his affidavit of 16 December 2006 he stated that completion on Lot 55 was due on 20 August 2004, that the time for completion was extended but that he, his mother and brother “were unable to complete the purchase as our finance was ultimately not approved”.
The applicant also claimed in his affidavit of 16 December 2006 that the statement of liquidated claim filed by Vero alleging a debt of $24,000 was not served upon him personally and that he was unaware that proceedings had been commenced or that a default judgment had been obtained against him and his brother prior to service of the bankruptcy notice on or about 22 November 2005.
In his affidavit of 16 December 2006 the applicant also claimed (at paragraph 15) that shortly after service of the bankruptcy notice he and his brother instructed a solicitor (a Mr Lindo) to act on their behalf in relation to taking the necessary steps to set aside the Local Court default judgment obtained by Vero. Somewhat confusingly the affidavit continued “Although both my brother and I attended Mr Lindo’s office and provided him with instructions for the purpose of this application, I was not primarily involved in dealing with Mr Lindo. I left this to my brother, Raheam (sic) and relied upon him to deal with Mr Lindo and keep me informed as to the progress of the application”.
In his affidavit of 15 March 2007 the applicant claimed that the content of paragraph three of his earlier affidavit did “not accurately reflect the circumstances described in that paragraph”. The applicant stated that he did not sign any contracts for sale of land concerning the two home units and that the signatures which appear on the annexure were not his signatures. He claimed the only document he ever signed in relation to the home units was a document provided by the mortgage broker with whom they were dealing at the time and that he had not seen a copy of that document since he signed it.
The applicant also claimed that insofar as the reference in paragraphs 9 and 10 in the earlier affidavit tended to suggest that he “was aware that certain contracts were in place regarding the purchase of the two home units”, at no time did he ever consider he had bound himself to any form of contract or agreement concerning the purchase of the home units and that he intended to seek legal advice before proceeding.
As set out in the chronology, in December 2005 the Khans commenced proceedings in the Federal Court of Australia to set aside the bankruptcy notice and in the Local Court to set aside the default judgment. In supporting affidavits the applicant stated that the basis on which he sought to have the default judgment set aside was that he was never served any originating process. The application to set aside the bankruptcy notice was dismissed, apparently by consent. It appears that the applicant’s claim that he did not sign any contracts of sale or the deposit power guarantee application was not raised in documents filed in either of these proceedings.
The applicant appears to attribute responsibility for non-appearance in the Local Court in relation to the first notice of motion to his then solicitor. However his evidence is that he attended the Downing Centre Local Court with his solicitor on 20 April 2006 and was present when the second notice of motion was heard and dismissed. He claimed that his solicitor had been informed that the case had not been properly prepared and that it should be presented again. The orders made on that day dismissing the notice of motion included an order that any further notice of motion filed by either or both the defendants was to be listed before a magistrate and not the registrar. After that date no further notice of motion was filed on behalf of the applicant and his brother. The applicant’s evidence is that he spoke to his solicitor on a number of occasions thereafter.
In written submissions it was acknowledged that while it was now claimed that the guarantee application was not signed by the applicant and that the terms of that application and the manner in which it was to operate was never explained to the applicant by the lawyer or by anyone else in the office of the mortgage broker with whom they were dealing, no claim or evidence of these matters was put in either of the two applications to set aside the default judgment filed in the Downing Centre Local Court or addressed in the affidavits in support, despite the fact that prima facie such matters ought to have been included in the affidavits to set aside the default judgment in order to establish that the applicants had a defence upon the merits for the purposes of Part 36 Rule 36.16 of the Uniform Civil Procedures Rules 2005 (see Re Cameron Smith [1964] NSWR 1282 and 1285).
On this basis it was contended for the applicant that the sequestration order ought not to have been made because the order had as its origin a default judgment which could “arguably” have been set aside had the two applications to set aside that default judgment been properly brought by the applicant’s then solicitor. In other words it was suggested that the absence of reference to an available defence on the merits in respect of which the applicant now gives evidence was the fault of his solicitor.
The arguments in relation to the judgment against the applicant were put somewhat differently in oral submissions. It was submitted that it was the applicant’s evidence that the deposit power guarantee application was not signed by him and also, according to his affidavit of 15 March 2007, that he did not sign any contract for sale of land concerning the two home units. The contention for the applicant was, in essence, that he had for some time denied liability in relation to both the judgment debt to Vero that was the basis for the bankruptcy notice that founded the creditor’s petition and also a debt in relation to which GCU had obtained judgment (which was said to be effectively a default judgment). It was said that despite attempts to set aside the default judgment obtained by Vero, the assertions made by the applicant in relation to the basis for these debts had not been tested, in effect because he had not been well served by those who represented him.
It was not, however, suggested that the evidence positively established that the Vero and CGU debts were fatally flawed, but argued that in light of what were said to be the applicant’s oft-repeated assertions that he did not sign relevant documents, receive advice in relation to them or commit himself to those agreements, there were reasons to be “cautious” about drawing a conclusion about the validity of those judgments, so that it could be said that there was at least an issue to be tried in connection with the status of those judgments.
Counsel for the second respondent made submissions in relation to both going behind a judgment and the more generally expressed oral submissions.
First, it was submitted that there was no general rule that the court was bound to enquire into the validity of a default judgment and that it was not the role of the Court to try the merits of the case where a default judgment had been entered. Rather it was said that the true question for the Court in these proceedings was whether a debt was truly owed by the judgment debtor to the judgment creditor at the time of the creditor’s petition. (See Corney v Brien (1951) 84 CLR 343 and Rigg v Baker [2006] FCAFC 179 at [18] and [74]).
It was submitted that there was no sufficient basis for the applicant to challenge the default judgment in these proceedings as the substance of the submissions advanced for the applicant in relation to the default judgment was not that he was unaware of the default judgment, that he did not have access to legal advice for the purpose of setting aside the default judgment, or even that he did not take steps to set aside the default judgment.
Indeed it was said that the evidence disclosed a series of attempts to set aside the default judgment and also the bankruptcy notice based upon the default judgment in which, it was noted, the grounds now sought to be relied on were not raised, despite the fact that the applicant had legal representation at all relevant times. It was also noted that the application to set aside the bankruptcy notice filed in the Federal Court on 20 December 2005 was dismissed with costs on 16 February 2006.
It was submitted that the contention that there were matters disclosed in the evidence in these proceedings which should have formed part of the application to set aside the default judgment in the Local Court ought not to be accepted as a circumstance that would justify the Court going behind the default judgment upon which the bankruptcy notice was based.
Moreover it was submitted that the grounds advanced in the written submissions were internally inconsistent and also inconsistent with other affidavit evidence of the applicant. It was argued that the allegation that the terms of the deposit guarantee were not explained could only arise if the deposit guarantee had been signed by the applicant and that it was hardly consistent to assert first that the applicant did not sign the document, but that if he did sign the document he was not properly advised about it. It was also pointed out that the applicant was aware of a date for completion of the purchase of the units and extension of the time for completion (although now says he had not entered a contract). He had also acknowledged dealing with and signing a document in front of a person named “Jackie” at the mortgage brokers. The witness to the disputed signature was a Jackie. The applicant had agreed in cross-examination that he gave his credit card (details of which appear on the documents in issue) to Jackie. It was submitted that it could be said that the applicant, who claimed to own or have an interest in a number of properties, had some experience of conveyancing matters. It was submitted that the objective circumstances were against Mr Khan’s version of events.
It was also pointed out for the second respondent that the affidavit evidence of 15 March 2007 did not withdraw the December 2006 evidence, but described it as “not accurately reflecting the circumstances”. It was submitted that it did not provide a satisfactory explanation and that the court should be satisfied that the objective evidence was such that no reasonable doubt was raised about the signature on the deposit power guarantee being Mr Khan’s. The evidence in relation to the contract of sale was said to support this proposition.
Counsel for the second respondent also referred to the fact that in the notice of intention to defend and defence filed on 15 February 2005 in relation to the proceedings brought by GCU against the Khans to forfeit their deposits upon their failure to complete the purchases of the units (that is, before the notices of motion in relation to the default judgment and the application to set aside the bankruptcy notice), the claims that the applicant and his brother did not sign the alleged agreement for the purchase of the properties, that the signatures on the contract did not belong to the defendants and that “fraudulent activity will be duly investigated and reported to the appropriate authorities” were raised. It was also claimed in the defence that the defendants never signed a deposit bond agreement and that the guarantor did not at any time sign any guarantee. In other words it was said that the question of the authenticity of the signatures of the applicant and his brother and the absence of legal advice was a matter which had been the subject of a pleading filed by the applicants (who at that stage were represented by the same solicitor who represented them at the time of the applications to set aside the bankruptcy notice and the petitioning creditor’s default judgment).
Hence it was said that there was no basis for the Court to assume that the same issues of authenticity of signatures and lack of explanation were not matters which were known to the applicant’s then solicitor or not discussed with the applicant at the time the applications to set aside the default judgment were made. In these circumstances it was submitted that the Court ought not to accept the submission that the sequestration order ought to be annulled because it was based on the default judgment.
It was said that a perfectly plausible explanation for the failure to raise these arguments in the subsequent proceedings to set aside the Vero default judgment and the bankruptcy notice was that the applicant’s solicitor was of the view that such a defence could not be made out.
In oral submissions it was argued that the objective evidence in fact supported the contention that there was no doubt that the signatures on the relevant documents were the applicant’s and that, as set out above, if one had regard to the conduct of the various proceedings they could not simply be explained away on the basis that the applicant’s former lawyer was incompetent and did not raise issues that should have been raised.
Reasoning
In oral submissions counsel for the applicant in effect submitted that the sequestration order ought not to have been made in all the circumstances, including the fact that it had as its origin a default judgment which could arguably have been set aside had the two applications to set it aside been properly brought putting an available defence on the merits of which the applicant now gives evidence. I have considered whether the applicant’s submissions in this respect establish a ground for annulment and also as part of all the circumstances.
The law in relation to going behind a judgment is a helpful starting point in considering these arguments. A court can go behind a judgment founding a creditor’s petition on an application for annulment (see Heinrich v Commonwealth Bank of Australia [2003] FCA 539 and [203] FCAFC 315). However, in this case it would not be appropriate to do so, as it has not been established in these proceedings that there are substantial reasons for doubting whether there is in fact a debt due to the petitioning creditor (see Wren v Mahony (1972) 126 CLR 212 at 225 and Corney v Brien (1951) 84 CLR 343). Special circumstances such as to warrant going behind the judgment obtained by Vero in the Local Court have not been established.
In reaching this conclusion I have taken into account that the applicant was aware of the default judgment, that he had access to legal advice and that he unsuccessfully sought to have the default judgment set aside in the local court. He did not pursue the claims now raised in the application to set aside the bankruptcy notice.
Moreover there are some inconsistencies and implausibilities in the claims he now makes which are relevant to this issue. It is difficult to reconcile claims that first the applicant did not sign the deposit guarantee, but secondly that its terms were not explained. Clearly the applicant had some dealings with the mortgage broker and provided credit card details. There is no explanation for the applicant’s knowledge as to the August 2004 completion date and extension of the time for completion if he did not consider himself bound by the contract (some eight months after the events of December 2003). Statements in his 15 March 2007 affidavit qualify but do not withdraw the December 2006 evidence.
The allegations of fraud the applicant made in February 2005 (in the GCU defence) are matters in relation to which he has had ample opportunity to take further action.
In all the circumstances the applicant’s evidence is not such as to satisfy me that there are substantial reasons for doubting whether there is in fact a debt due to the petitioning creditor such that the Court should go behind the Vero default judgment.
While the judgment in issue was obtained by default, I note that the applicant twice filed notices of motion to set aside the judgment. He had the opportunity to raise the grounds he now asserts. The essence of these very grounds were raised by him in the GCU pleadings in relation to which there was not a subsequent default judgment – the Khans were represented at the hearing and the matter was heard albeit they were not themselves present. He had the same solicitor acting for him at the time of the GCU proceedings (although Queensland lawyers appeared) as at the time of the notice of motions in relation to the default judgment. He was unsuccessful after a hearing on the second notice of motion. The issue of the genuineness of his signature was apparently not raised in those attempts. Nor, however, did he file a further notice of motion despite the considerable amount of time that has since passed.
In all the circumstances the evidence before this court is not such as to either establish or raise such an issue about the competence of the applicant’s then lawyer as to explain the failure to raise this issue in the notice of motion or the failure to indicate further such proceedings warrant either going behind the judgment.
Nor does the argument that the default judgment could “arguably have been set aside” as his counsel contends because of the claims that the applicant did not sign the documentation in relation to the power guarantee as to establish that the sequestration “order ought not to have been made”. The relevance of these arguments as part of “all the circumstances” is discussed further below.
Service of creditor’s petition and non-appearance of applicant
The second basis on which it was submitted that the sequestration order should be annulled (or said to be relevant to that question) is based on the fact that the applicant did not appear and was not represented at the hearing of the sequestration order and that the orders were made in his absence. The applicant does not challenge the order for substituted service made on 7 August 2006 that the creditor’s petition be served by prepaid ordinary post at an address in Glen Elgin Crescent, Edensor Park. However the applicant’s contention is that he never saw a copy of the letter sent to that address and so was not personally aware that the creditor’s petition had been listed for hearing. It was the applicant’s evidence (in his affidavit of 16 December 2006) that “although those premises belong to my parents I no longer lived at that address after May 2006 having at that time moved to premises at … … … Hinchinbrook”. His evidence was that the letter of 15 August 2006 serving the creditor’s petition was never received by him.
In written submissions it was submitted that, notwithstanding the order for substituted service, the applicant did not appear at the hearing of the creditor’s petition and as a result was denied the opportunity to be heard. It was said that Re Anasis; Ex parte Total Australia Limited (1985) 63 ALR 493 established that on the basis of s.153B of the Act, or in the Court’s inherent jurisdiction, a sequestration order may be annulled in such circumstances. It was also said to be relevant that, as stated in Re Cook [1946] ABC 245, the Court should be especially wary in circumstances where the sequestration order was based on a creditor’s petition served by way of an order for substituted service. It was suggested that the inherent jurisdiction of the Court to annul a sequestration order in the absence of a bankrupt was embodied in Rule 16.05(2) of the Federal Magistrates Court Rules. (Also see Federal Court Rules, Order 35 Rule 7(2)(a)).
In oral submissions it was conceded that there was an order for substituted service and that the documents were apparently served in accordance with that order so that there could not be said to be a lack of natural justice or an abuse of process. It was however submitted that no abuse of process had to be shown (Rarafaci v Pearce) and that the court should be cautious about a bankruptcy produced in such circumstances. It was observed that despite the fact that the applicant had a solicitor acting for him in the Local Court proceedings the creditor had not sought that service be effected on that solicitor.
It was said that while no explanation could be given for the applicant’s failure to receive the creditor’s petition, consistent with his statement that he no longer resided at the Edensor Park address subsequently the trustee had written to him at the address to which he said he had moved.
It was submitted that it was in the interests of justice that the applicant be heard and that this would be achieved most appropriately by annulling the bankruptcy and allowing the creditor’s petition to be reheard on the review application.
For the second respondent it was pointed out that Bankruptcy Regulation 16.01(a) permits service to be effected by post to a person at his or her last known address and that the last known address of a person would be interpreted in a commonsense manner having regard to the evidence available to the judgment creditor (see T & S Recoveries Pty Limited v Skalkos [2004] FCA 816) consistent with a policy in the Act of ensuring that persons do not benefit from evading service.
It was said that there was no basis for the applicants to challenge service of the creditor’s petition in this matter, either on the basis of the order for substituted service or pursuant to the Bankruptcy Regulations or otherwise.
It was also submitted that the evidence disclosed that the address in Edensor Park was in fact the last known address of the applicant at the time of service of the creditor’s petition and the making of the sequestration order and was an appropriate address for an order to be made for substituted service, as it was the address of the applicant on the electoral roll (as stated in the affidavit of Colin McAlpine sworn 2 November 2005 in proceedings NSD2435 of 2005 at paragraph 3) and an address shown as the applicant’s on a New South Wales land and property search (see affidavit of Colin McAlpine and also affidavit of Simone Kilby dated 7 August 2006). It was conceded to be the address of the applicant until May 2006 and the address at which his parents resided. It was also the address on the applicant’s driver’s licence and where he continued to receive mail and the address from which he operated his business. It was an address to which the applicant’s solicitor had addressed mail to the applicant.
It was also pointed out that the Edensor Park address was used by the applicant in court documents filed by him, in particular his affidavit sworn on 20 November 2005 in support of his application to set aside the bankruptcy notice and his affidavit sworn on 20 November 2005 in the notice of motion in the Local Court proceedings to set aside the default judgment that was the basis for the bankruptcy notice (although these proceedings predated his claimed move in May 2006).
It was said that in weighing the merits of this claim the Court should have regard to the extreme difficulties previously experienced by Vero in effecting service upon the applicant of the bankruptcy notice (as attested to in the affidavit of Anthony Bradley sworn 21 November 2005 in Federal Court proceedings NSD2435 of 2005) and that for these reasons the Court ought not to accept the submission that the sequestration order ought to be annulled on this basis.
Reasoning
The circumstance of the applicant’s failure to appear on the day the sequestration order was made is not such that the sequestration order should be set aside. As is now conceded for the applicant, the Registrar made an order for substituted service and no issue is taken with this order or with the fact of service in accordance with the order. The relevance of the fact that the sequestration order was based on a creditor’s petition served by way of an order for substituted service and made in the absence of the debtor to all the circumstances is discussed further below.
While not pursued in oral submissions by counsel for the applicant, insofar as there is any suggestion that the sequestration order should be set aside under Rule 16.05 of the Federal Magistrates Court Rules as having been made in the absence of the applicant, such a procedure is inappropriate where, as here, time has passed and administration of the estate commenced (see Austral Brick Co Pty Ltd v Daskalovski Emmett J, unreported, Federal Court of Australia, 23 June 1998).
Solvency and all the circumstances
In written submissions it was submitted for the applicant that the court in exercising its discretion to make an order for annulment of the bankruptcy should take into account evidence that the applicant’s estate was otherwise solvent. (see Estee Lauder Pty Ltd v Drew [1999] FCA 642 and Re Gollan; Ex parte Gollan (1992) 40 FCR 38). It was contended that based on the trustee’s affidavit report the Court could conclude that although the estate was heavily encumbered, the estimated value of the assets of the estate comfortably exceeded the liabilities and that the applicant had disclosed an income of approximately $46,000 per annum.
It was also submitted that the applicant had given evidence that he was prepared to meet the trustee’s reasonable costs to date and that in all the circumstances the Court ought to exercise its discretion pursuant to s.153B of the Act to annul the sequestration order made on 18 September 2006.
In oral submissions, counsel for the applicant submitted more generally that even if the application could not succeed based on the issues raised in relation to the default judgment and service, nonetheless the question of solvency should be determinative, and that there was now evidence of solvency at the time of the sequestration order before the court.
It was submitted that the trustee had made no submission that the applicant was insolvent in late September 2006 and that the evidence in Mr Kerr’s affidavit led to the conclusion that the applicant was healthily solvent by reference to available assets (chattels, equipment, a truck and some real estate). It was also said that the applicant’s affidavit of 15 March 2007 demonstrated that in mid-2006 he (and his brother) had borrowed funds from Royal Guardian to assist with the purchase of a property and that the ability to raise funds on secured assets was an indicator of solvency. Further just before the sequestration order, the applicant and his brother had $92,000 in their bank account (albeit part of a loan), part of which went towards the purchase of property, the balance being given to his then lawyer. It was submitted that the failure to pay Vero was not indicative of insolvency as the applicant was not aware that the petition was on foot and, in any event, denied any liability to Vero. It was argued that the evidence demonstrated that in September 2006 there were funds available and capable of being raised on security which would have enabled the two largest debts of the estate (to Vero and GCU) to be paid.
The applicant contended in light of this material that in all the circumstances the bankruptcy should be annulled on the basis that the applicant was solvent at the time of the sequestration order and that had the material concerning his solvency been before the court the sequestration order would not have been made (see Re Gollan (1992) 40 FCR 38 at 42). It was said that in such circumstances a sequestration order could be set aside or, as Spender J recognised in Re Gollan, the bankruptcy annulled (ibid).
It was suggested that, consistent with the approach taken by Federal Magistrate Driver (albeit on review of a sequestration order) in Barber v Bone Thorpe International Ltd [2001] FMCA 4 in what were said to be similar circumstances, justice would be served in this case by annulling the bankruptcy but leaving the creditor’s petition on foot so that the applicant would, in the interim, have a “final chance” to properly agitate his disputes in other courts, and that if he did not do so the bankruptcy would be “reinstated”. It was suggested that such an approach would protect the interests of all the parties.
For the second respondent it was submitted primarily that the question of solvency would only arise if the Court was otherwise satisfied that the applicant had established that the sequestration order ought not to be made and hence that the question would not arise in this case because neither of the grounds on which the applicant relied were established.
Vero contended that the Court should also have regard, as a matter of discretion to the fact that no proposal had been advanced to pay the debts of the creditors so as to take advantage of s.153A and that the Court should accord little weight to the statement of affairs prepared by the applicant which was unsupported by any independent documentation or verification either as to value or as to the ability of the applicant to realise any of the alleged assets to pay out his creditors. It was also said to be relevant to take into account that not only did the petitioning creditor oppose the application but also that the affidavit of Alexandra Brook indicated that another creditor of the applicant (GCU) also opposed the application.
In oral submissions counsel for Vero again submitted that solvency was only a discretionary consideration in relation to a s.153B application. It was said that on review of a sequestration order the court has a discretion to make a sequestration order (s.43(1)) and a solvent debtor could seek to persuade a court not to make a sequestration order even if an act of bankruptcy had been committed (and see s.52(2)(a)). However it was said that on an annulment application the issue for the court related to the preconditions to the prima facie justification for a sequestration order, so that to establish that the sequestration order ought not to have been made the applicant had to demonstrate, for example, that there was no debt due or that the act of bankruptcy was not made out. In other words it was said that solvency was not a ground on which it could be established that the sequestration order ought not to have been made.
Reference was made to the decision of the Full Court of the Federal Court in Rigg v Baker [2006] FCAFC 179. In that case the factual issue was whether a debt was in fact owed to the creditor. At first instance the bankruptcy had been annulled. The petitioning creditor appealed. Spender and French JJ found that the judge at first instance had erred in concluding that the sequestration order ought not to have been made. French J found that his Honour also erred in exercising his discretion. Spender J found no error in the exercise of the discretion. Cowdroy J dissented, considering that the sequestration order ought not to have been made. The second respondent pointed out that French J indicated, at [59], that the power to annul a bankruptcy under s.153B involves two elements:
1. The Court’s satisfaction that the sequestration order ought not to have been made.
2. The Court’s exercise of a discretion to make an order annulling the bankruptcy.
It was said for the second respondent that French J recognised that as Fisher J stated in Re Frank; Ex parte Piliszky (1987) 16 FCR 396 at 403 “… a judge ‘ought’ not to have made an order only if he was ‘bound’ not to make the order” and that this related only to whether preconditions were not made out (not to the exercise of a discretion not to make an order on the grounds of solvency). It was conceded that this issue was not, however, resolved in Rigg v Baker.
In the alternative it was submitted that if solvency was a relevant factor in this case it had not been established that Mr Khan was able to pay his debts at the date on which the sequestration order was made. It was submitted that this was so even if the applicant’s assets exceeded his debts. In this respect it was pointed out that in his affidavit the trustee had referred to essentially unsatisfactory conduct on the part of the applicant in providing information about his affairs and submitted that the later affidavit evidence did not establish an ability to pay debts as they fell due (the one property with apparently substantial equity being tied up in a rental arrangement with family members).
Further, there was said to be a lack of financial information in proper form from an accountant or of proper valuations. On this basis it was said that the court could not be satisfied, if solvency was a relevant factor, that the sequestration order ought not to be made.
The trustee submitted that an annulment required an exercise of discretion by the Court which involved consideration of issues of solvency and that there was no evidence of an ability of the applicant to pay all his debts as and when they fell due. The trustee neither consented to nor opposed an annulment, as this was acknowledged to be a matter for the Court to consider in the exercise of its discretion taking into account the position of all the creditors of the bankrupt estate.
Reasoning
Section 153B relevantly require the court to be satisfied that the sequestration order “ought not to have been made”. If it is so satisfied it “may make an order annulling the bankruptcy”. The Full Court of the Federal Court has said that this requires the Court to “first consider whether the sequestration order ought not to have been made. If it so finds, then the Court must consider whether, in the exercise of its discretion, the bankruptcy should be annulled: Re Deriu (1970) 16 FLR 420” (Heinrich v Commonwealth Bank of Australia [2003] FCAFC 315 at [20]).
As their Honours went on to state in Heinrich (at [20]):
Later evidence of previously unknown facts may disclose matters which show that the sequestration order ought not to have been made. That is, the Court is entitled to consider not only the case as disclosed at the time when the sequestration order was made, but also those facts now known then to have existed. The Court excludes those facts which have occurred since the order was made. Later evidence of previously unknown facts may disclose matters which should that the sequestration order ought not to have been made. (and see Rigg v Baker [2006] FCAFC 179 per French J at [61] and Cowdroy J at [107] – [110]).
The applicant for annulment bears the onus of satisfying the Court that the sequestration order ought not to have been made (Pollock v Deputy Federal Commissioner of Taxation (1994) 94 ATC 4148 at 4153 – 4154; Rigg v Baker per Spender J at [11] and French J at [63]).
The second respondent submitted that the question of solvency will only arise if the Court is otherwise satisfied that the bankrupt has established that the sequestration order ought not to have been made. Clearly the issue of solvency is relevant in relation to the exercise of the discretion (see Pollock), in the sense that a debtor’s insolvency is a factor that would weigh heavily against exercising the discretion (see Layton v Westpac Banking Corp (2000) 181 ALR 603 and Hawthorne v Carter [2006] FCA 1097).
The only authority cited for the second respondent in support of a restrictive approach to the question of whether the sequestration “ought not to have been made” is Rigg v Baker and cases cited therein, although it was acknowledged this issue was not resolved in Rigg v Baker. In fact it seems that reliance is placed on remarks in other cases quoted with evident approval by French J. Thus in Re Frank; Ex parte Piliszky (1987) 16 FCR 396 at 403 Fisher J stated “a judge ‘ought’ not to have made an order only if he was ‘bound’ not to make the order.” His Honour continued: “In my opinion ‘ought’ in s.154(1)(a) is of imperative significance and an order should not be annulled unless the judge was in the circumstances bound not to make it and even then there is a residual discretion not to annul” (and see Hudson v Whalen [1999] FCA 189 in which this proposition was quoted at [10]).
The applicant relied on Re Gollan; Ex parte Gollan (1992) 40 FCR 38 as set out above. In that case obiter remarks were made by Spender J to the effect that if he had not set aside the sequestration order on review he would have annulled the bankruptcy. There was no discussion of the basis for such an order.
Counsel for the applicant also referred to Rafaraci v Pearce & Heers [2003] FCA 1307 in support of the proposition that the discretion under s.153B was untrammelled and ought not to be limited, for instance, to cases of abuse of process. That case was concerned, however, with deficient evidence in relation to the service of a statement of claim, the bankruptcy notice and the creditor’s petition, although Tamberlin J did state (at [27]) that there were “many reasons why a Court might grant an annulment pursuant to s.153B”.
As French J observed in Rigg v Baker at [64]:
Generally speaking the true facts, which if known to the person making the order may have led him or her to refuse the order, relate to the financial circumstances of the debtor. They may, however, extend to procedural issues: Maxwell-Smith v S E Hill; in the matter of Maxwell-Smith [2004] FCA 840 at [20] (Moore J).
In Stankiewicz v Plata [2000] FCA 1185 at [29] it was said that there was authority suggesting that a bankrupt “whose assets exceed his or her debts at the date of the sequestration order ordinarily will be entitled to an annulment of the bankruptcy, at least if the bankrupt gives undertakings to pay the costs of the petitioning creditor and the trustee’s costs of administration. … This principle is said to follow from s.52(2)(a) of the Bankruptcy Act which provides that if the Court is satisfied that the debtor “is able to pay his or her debts, it may dismiss the creditor’s petition. In general, a debtor who so satisfies the Court, will succeed in having the creditor’s petition dismissed.”
In Stankiewicz their Honours (Drummond, Sackville and DowsettJJ) went on to state that they were: “content to assume, without deciding, that the authorities to which we have referred correctly state the position”. On this basis solvency (if established) would be a “ground” for annulling the bankruptcy, subject to any discretionary factors which would weigh against making the orders (although I note that there is no undertaking by the applicant to pay the petitioning creditor’s costs).
It is not, however, necessarily to resolve this issue for the purposes of this case, because even if the fact that an applicant can satisfy the Court that he or she is “able to pay his or her debts” in the sense considered in Stankiewicz at [30] and Sandell v Porter (1966) 115 CLR 666 at 670 per Barwick CJ, is a basis on which it can be said that the sequestration order ought not to have been made, nonetheless in this case the applicant has not established his solvency at the time of the sequestration order or that in all the circumstances the sequestration order ought not to have been made. The evidence before the Court is not such as to establish that the applicant is solvent (and see Muller v Combis [2005] FCAFC 150).
The evidence put before the Court by the applicant is both internally inconsistent and differs from that provided to the Trustee in the statement of affairs received by the Trustee on 11 December 2006 and tendered as an exhibit in these proceedings by the applicant. It is unsubstantiated and, in some respects, inadequate.
I note first that the evidence of the Trustee, David John Kerr in his affidavit of 30 January 2006 was that he had difficulty obtaining a statement of affairs from the applicant (despite several letters to the applicant and his solicitor) and that the applicant had failed to respond to his requests for further information regarding his affairs in a number of specified requests. Mr Kerr also attested to the fact that his investigations at that date revealed that the statement of affairs was inaccurate in not disclosing certain debts and property, and that there were (detailed) discrepancies between the information provided about income and assets in his statement of affairs and in the applicant’s application for a loan from Royal Guardian Mortgage Corporation completed on 5 July 2006. The Trustee had sought information from the applicant about these discrepancies and had not received a reply. Nor had the Trustee been able to ascertain the extent of the applicant’s claimed interest in a partnership transport business with a Mr Prasad.
The Trustee’s report also details creditors of the applicant beyond those listed in the statement of affairs (including not only the disputed debts to Vero and GCU but also the Commonwealth Bank and the Deputy Commissioner of Taxation). It also listed undisclosed Queensland real property of unknown value, in addition to a disclosed property at Mt Perry.
In setting out the assets of the joint estate of the applicant and his brother the Trustee also noted some uncertainty about the extent of each person’s interest in the Macquarie Links property purchased in mid-2006.
It is important to note that in oral submissions counsel for the Trustee advised that the Trustee was not in a position on the enquiries that he had made to date, to make an assertion one way or the other on solvency.
The evidence from the applicant as to solvency consists of his affidavit sworn on 16 December 2006, his (unsigned) December 2006 statement of affairs and his affidavits of 20 February 2007 and 15 March 2007. In cross-examination, aspects of evidence relevant to solvency also emerged.
From this material it can be seen that the applicant has provided conflicting evidence as to his income, assets and liabilities and that certain issues are unresolved. For example, in his December 2006 statement of affairs he stated that his before tax income from self-employment with K9 Touring/Sydney Spares in the “last” 12 months was $46,000 and gave the same figure for his expected before tax income for the next 12 months. No supporting evidence of income was provided. He disclosed no tools of trade, business assets (or security over business assets) although elsewhere in the statement of affairs he did list a truck as a vehicle owned or in which he had an interest. He did not provide financial statements or information as to who prepared his financial statements or tax returns. He did not disclose any partner in the business (although the Trustee recorded that he advised he was in partnership with a Mr Prasad).
In his affidavit of 16 December 2006 the only reference to his statement of affairs (which was said to be annexed) was that it showed his assets exceeded his liabilities and that his estate was solvent.
In his affidavit of 20 February 2007 the applicant addressed some of the issues raised in Mr Kerr’s affidavit. Relevantly, he claimed in relation to a discrepancy between the income disclosed in his statement of affairs and the income (and shares and jewellery) disclosed in a mid-2006 Royal Guardian loan application, that his gross income in 2005 to 2006 was $98,000 as had been stated in the loan application, but that after his late mother’s illness he had cut back on working hours. He stated that the income in the statement of affairs was his “net income for the last twelve months from the date of the statement of affairs” (sic).
However in his affidavit of 15 March 2007 he again addressed the affidavit of the trustee. He claimed that Mr Prasad was a former partner and that he was now in partnership with his brother and that the business had no assets. However he also claimed that prior to his bankruptcy, in the “two courier/delivery businesses” he operated “we operated two trucks”, each of which would derive an annual gross income of $96,000. In the same affidavit he later stated that upon his and his brother’s bankruptcy the Commonwealth Bank of Australia (CBFC) had “repossessed one of two trucks which were used in our businesses” (but that he owned the other outright).
Putting aside the issue of ownership and encumbrance of the repossessed truck, the affidavit continued “As a result of the CBFC repossessing one of the trucks, our earning capacity has been reduced to approximately $96,000.00 gross per annum between my brother and I. My share of that income would be approximately half that amount.” This is a completely different explanation for the inconsistent claims about his income (which in any event still remains unsubstantiated). It also raises a question as to whether the partnership may have had an encumbered asset – since repossessed.
The attached bank statements for the account said to be used in connection with the applicant’s business activities are incomplete and not such as to provide confirmation of his claims. I note however that the balances shown on those statements do not accord with the disclosure of bank balances in the statement of affairs.
The applicant’s claim that he has now been advised by his new solicitors that he should obtain documents relating to his taxation affairs and that his accountant is overseas, takes no account of the requests for such information from the trustee and in the statement of affairs. Given the limited information, inconsistencies and inadequacies in the applicant’s claims about his income I cannot be satisfied that he has made a full and true disclosure such as to go towards demonstrating his claimed solvency.
Another area where the applicant’s evidence is deficient in positively establishing his solvency, is in relation to his interest in real property. First it is not clear what interest the applicant has in relation to properties owned with his brother and mother (who is now said to be deceased). For example, he disclosed a jointly owned property in Edensor Park in his statement of affairs. However in his affidavit of 16 December 2006 he stated that these premises “belong to his parents”. In cross-examination he admitted that this was a “mistake” and that he was a part-owner.
In his statement of affairs he also disclosed an interest (although the nature and extent of that interest was not described) in a Macquarie Links property said to have been purchased in September 2006 for $690,000 with his brother and mother. This property is of some significance as it is one in which there appears that there may be some equity. In the statement of affairs it was also said that the property was not vacant and not rented. In his affidavit of 19 February 2007 the applicant stated about this property that he had informed the trustee in November 2006 that the property “belongs to my parents and they will be living there”. Yet in his affidavit of 15 March 2007 he claimed that he and his brother had purchased the Macquarie Links property on 25 September 2006 for $600,000 (sic), that he had a fifty per cent interest in the property together with his brother, but that the property was leased to his wife’s family for $710 per week. It is impossible, on this evidence, to determine whether the applicant has a realisable interest in this property such as to be taken into account in demonstrating solvency. He has also given conflicting evidence as to other properties in which he has an interest or ownership. There are no proper valuations before the Court. The extent of his net equity (if any) cannot be calculated with any degree of confidence on the evidence before the Court.
If solvency is a ground for annulment, it has not been established by the applicant. Nor can it be said to be apparent on the material before the Court. While solvency does not necessarily require a debtor to have sufficient cash at hand or available on deposit to pay all creditors in full immediately (if the debtor has other realisable assets, Re Sarina; Ex parte Wollondilly Shire Council (1980) 43 FLR 163), it is clear that it is not sufficient merely for the debtor to establish he has assets exceeding his liabilities, but not presently available or realisable (Stankiewicz at [26] – [32]).
In the face of the incomplete and/or conflicting evidence described above from the applicant as to his liabilities, income and assets I am not satisfied that solvency has been made out. Hence, even having regard to the “caution” that should be exercised in relation to a sequestration order made in the absence of the debtor based on a default judgment and taking into account the applicant’s claims about possible arguable defences in relation to the Vero default judgment, in all the circumstances I am not satisfied that the sequestration order ought not to have been made.
It has been said that the discretion to annul must be exercised with great caution (Cameron v Cole (1944) 68 CLR 571) and that an applicant seeking an annulment has a duty akin to that of “full and true disclosure” (Papps v Tapp (1997) 78 FCR 524). I cannot be satisfied that there has been such disclosure in this case. For these reasons it has not been established that the sequestration order ought not to have been made.
Hence the further issue of discretion does not arise, but for the sake of completeness I note that the lack of co-operation with and full disclosure to the trustee and my inability to be satisfied as to the financial situation of the bankrupt on the evidence before the Court (as well as the views of both the petitioning creditor and GCU) are factors which would weigh against the exercise of such discretion. While the evidence does not go so far as to establish “hopeless” insolvency (see Pollock) it is such that I cannot be satisfied there was full disclosure and I would, in the exercise of my discretion, refuse the application.
Finally, I am not persuaded that all the circumstances are such that the applicant should be given “another chance” as his counsel submits to challenge the Vero default judgment by annulling the bankruptcy and after some time referring the creditor’s petition. This suggestion does not take into account the strict requirement that the court be satisfied that the “sequestration order ought not to have been made” and, in any event, am not persuaded that, even if this were an approach open to the court, it would best serve the interests of justice, particularly given the time that has elapsed since the default judgment and the opportunity the applicant has had to challenge that judgment.
The application for annulment should be dismissed.
Application for extension of time within which to seek review
The sequestration order was made on 18 September 2006. The applicant admits that he received notification of that fact on or about 21 September 2006. The applicant seeks an order that the time for seeking a review of the sequestration order made by the Registrar on 18 September 2006 be extended to 15 March 2007.
Subject to any direction by the Court, an application for review of a sequestration order made by a Registrar under s.104 of the Federal Magistrates Act 1999 must be made within 21 days of the date of the decision (see Rule 2.03(1) of the Federal Magistrates Court (Bankruptcy) Rules).
In exercising its discretion under this rule the Court has power to extend the time for filing of a review application. However in all the circumstances of this case I am not persuaded that the extension of time should be granted.
The application for annulment was not filed until 18 December 2006. If it did in fact seek a review under s.104 (insofar as it sought orders that the sequestration order be set aside and the creditor’s petition dismissed), it was out of time. No extension of time or direction under Rule 2.03 was sought in that application. The written submissions for the applicant addressed only annulment and an application that the sequestration order be set aside under Rule 16.05 (not a s.104 review as a hearing de novo of the creditor’s petition).
The applicant has recently changed lawyers. He now seeks, nearly six months after he became aware that the sequestration order was made, an extension of time within which to seek a s.104 review in the amended application that was filed in Court at the start of the hearing of the annulment application. There is no evidence that Rule 7.06 was complied with, in particular by notification to creditors of the application for review (as distinct from the annulment application). Both of the respondents opposed any extension of time within which to seek such a review.
After hearing submissions on the question of amendment, I ordered that the amendment to the application be allowed. The parties made submissions on whether an extension of time for the making of the review application should be granted.
As counsel for the applicant submitted, the exercise of the power to grant an extension of time involves discretionary considerations. I have had regard to the factors taken into account by Wilcox J in Hunter Valley Developments Ltd v Cohen (1984) 3 FCR 344 in relation to an application for an extension of time to seek review under the Administrative Decisions (Judicial Review) Act 1977 (Cth). I have considered each of those factors and also the factual circumstances and statutory context in which this application is made.
First, while “special circumstances” need not be shown (Hunter Valley at 348), the Court must be positively satisfied it is proper to grant the extension of time. In this context it is notable that “the prima rule” rule is that proceedings commenced outside a prescribed period will not be entertained (at 348).
This principle is of significance in the context of an application to review a sequestration order. As Downes J states in Grundy v Wattyl Australia Pty Ltd [2002] FCA 1480 at [10] “bankruptcy administration must begin promptly. If bankruptcy administrations are to be at risk of termination months after they have begun, with issues as to how intervening costs incurred by the trustee are to be met, problems could arise with respect to the proper administration of bankrupt estates”.
I note that the same issues do not arise in relation to an annulment application (see s.154 and Pattison v Hadjimouratis [2006] FCAFC 153).
It is relevant to have regard to the explanation for the delay. The explanation given by the applicant for the delay is not entirely satisfactory. Even if the application of December 2006 could be interpreted as seeking s.104 review, it was out of time as such an application. No extension of time was sought in that application and there was no subsequent indication in the documents filed in these proceedings that review was sought.
It is hardly surprising that no evidence was filed by the respondent as to prejudice. The application to amend the application was made at the start of the hearing of the annulment application. However I accept that, as counsel for the Trustee submitted, there is a very real prejudice to the Trustee if the review is permitted, given the time that has elapsed since the making of the sequestration order and the trustee’s expenses, remuneration and costs incurred to date. The second applicant made a similar point in relation to legal costs.
Counsel for the applicant conceded that this factor might influence the Court’s discretion in how it determined between the two applications, but submitted that it was not a reason to refuse him the opportunity to make the application and put submissions, and that in any event on review the issue of the trustee’s remuneration could be addressed by an order for annulment consistent with the approach in Pattison v Hadjimouratis [2006] FCAFC 153 (but see the recognition by Downes J in Grundy at [23] that this is a “real prejudice”).
Prejudice to the trustee is a material factor. While there may not be prejudice “in defending the proceedings occasioned by the delay” as discussed in Hunter Valley, the applicant’s submission assumes that, contrary to my decision above, the Court would be of the view that the prerequisites for annulment were established and the Court satisfied in the exercise of its discretion that the bankruptcy ought to be annulled. As that is not the case, the prejudice complained of in relation to proper expenditure on the administration of the estate is real, although it should not be determinative if a review is otherwise appropriate.
I note that while there was a brief appearance for one other creditor, those not present had no opportunity to express a view on the application for an extension of time – and there is evidence that GCU opposed the annulment application. No notice was given to any creditor that anything other than an annulment was sought. In any event, as stated in Hunter Valley the mere absence of prejudice is not enough to justify the grant of an extension of time.
A significant issue in relation to this application is the merits of the substantive application and whether there is an arguable case. When the application for an amendment and an extension of time was made, it was sought that the Court proceed with both the annulment and review applications. Hence, in this case, as distinct from a situation where all the evidence is not before a Court, the prospects of success can be assessed with a greater degree of certainty (cf Hunter Valley in which Wilcox J did not attempt any evaluation of the applicant’ prospect of success in the substantive application).
Given the shortcomings of the evidence on solvency put before the Court by the applicant, based on the findings in relation to the annulment application it can be said that the evidence is such that the review application would be doomed to fail on the basis that the Court would not be satisfied by the applicant that he was able to pay his debts in s.52(2)(a). There has in fact been the opportunity for the merits of this case in relation to solvency to be fully ventilated in these proceedings – particularly given the applicant’s reliance on an argument as to solvency, even if the “perspective” from which one considers that issue would not be exactly the same in review and annulment proceedings. Hence any extension of time would be futile. In that respect as the annulment application has been unsuccessful the suggestion that the applicant should have ‘another chance’ before a review is heard to challenge the Vero default judgment does not arise.
For the sake of completeness considerations of fairness as between the applicant and other persons in a like position do not assist the applicant. It is also relevant to have regard to the statutory context, the availability of an application for annulment (not subject to the same time limit), the time that has in fact passed, the work done by the Trustee and the interests of creditors and the public in the prompt administration of bankrupt estates.
Insofar as the applicant contends he has been poorly served by his lawyers, in fact this is not clear. For every possible explanation for action or inaction mooted by the applicant, there is an equally possible contrary argument. The Court has not had the benefit of evidence from any of the lawyers involved. It is not clear that both the solicitors acting for the applicant at the relevant time (the applicant apparently changed solicitors shortly after his bankruptcy) were “oblivious” to the need to make a review application in 21 days from the sequestration order. It is equally possible that they saw the appropriate avenue as an annulment application. The applicant claims that it is relevant that the official in the trustee’s office to whom he and his then solicitor for the applicant spoke did not bring the possibility of review (and time limits) to the attention of the applicant or his solicitor. That is not however a factor that warrants the extension of time, particularly given the context of the discussion with the Trustee.
Such evidence as is before the Court as to steps taken by and for the applicant in the 21 day period in which he could have sought review within time (including a change of solicitor, discussion of the possibility of paying the outstanding debt or seeking annulment) is not such as to establish that he would have sought review if better advised as seems to be suggested. In any event, these matters do not amount to satisfactory explanations for the delay (see Grundy at [27]).
In all the circumstances I am not persuaded that the extension of time in which to make a review application should be granted in the interests of justice. I bear in mind that the making of a sequestration order is a serious step that alters the status of an individual and that prima facie, if such an order is to be challenged such challenge should be made in a timely and prompt manner.
Accordingly the application for an extension of time in which to seek review is refused. Hence all applications should be dismissed.
The costs of the respondents should be paid. It is appropriate that, both respondent’s costs be taxed and paid out of the bankrupt estate of Raheam Khan in accordance with s.109(1)(a) of the Bankruptcy Act 1966. (see Reftiaq Khan v Kerr [2007] FMCA 521)
I certify that the preceding one hundred and forty-eight (148) paragraphs are a true copy of the reasons for judgment of Barnes FM
Associate:
Date: 13 April 2007
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