Leung v United Housewares Pty Ltd - [2003] FMCA 98

FEDERAL MAGISTRATES COURT OF AUSTRALIA

LEUNG v UNITED HOUSEWARES PTY LTD

[2003] FMCA 98

BANKRUPTCY – Annulment – going behind judgment where wrong party sued – relevance of inability to understand English or court process – solvency – whether the amount owed to a creditor should be disregarded – relevance of consent to order for trustees administration and legal costs.

Bankruptcy Act 1966, ss.153B,.154B, 154(2)

Applicant:

KIM LEUNG (ALSO KNOWN AS HING CHEUNG LEUNG)

Respondent:

UNITED HOUSEWARES PTY LTD
(ACN 001 272 484)

File No:

MZ 1052 of 2002

Delivered on:

3 March 2003

Delivered at:

Melbourne

Hearing Date:

3 March 2003

Judgment of:

McInnis FM

REPRESENTATION

Counsel for the Applicant:

Mr P.J. Pickering

Solicitors for the Applicant:

Stamfords Lawyers

Respondent:

No appearance

Counsel for the Official Trustee:

Mr I. Frost

Solicitors for the Official Trustee:

Australian Government Solicitor

ORDERS

The sequestration order made 13 June 2002 be annulled.
That the applicant shall pay the official trustee's costs and expenses incurred in the administration of the bankrupt estate agreed in the sum of $4,944.63, together with the legal costs of this application agreed in the sum of $1,000.00, making it a total of $5,944.63, on or before
3 April 2003.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MZ 1052 of 2002

KIM LEUNG (ALSO KNOWN AS HING CHEUNG LEUNG)

Applicant

And

UNITED HOUSEWARES PTY LTD (ACN 001 272 484)

Respondent

REASONS FOR JUDGMENT

(Revised from Transcript)

This is an application by Kim Leung (also known as Hing Cheung Leung) (the Applicant) seeking annulment of a sequestration order which was made on 13 June 2002.
In these proceedings there has been no involvement of United Housewares Pty Ltd (the Respondent), although quite properly the Official Trustee in bankruptcy has appeared and relied upon an affidavit sworn 24 January 2003 and otherwise made submissions which effectively neither oppose or consent to an order for annulment.
The application for annulment is made pursuant to section 153B of the Bankruptcy Act 1966 (the Bankruptcy Act). In the application which was filed in the court on 14 October 2002 the order sought is simply an order pursuant to that section declaring the annulment of the bankruptcy and seeking further an order that the sequestration order ought not to have been made.
The terminology of that application in a sense simply picks up the words of the section itself and I take the application to be that I should make an order that the sequestration order be annulled.
The sequestration order was made against the estate of the Applicant, as indicated, on 13 June 2002. It was made upon a petition presented on 15 May 2002 by the Respondent, then an unsecured creditor, for an amount of $22,685.45. There is no dispute that sum had been the subject of a judgment debt. It is sufficient for the present purposes to note that the judgment debt was a judgment that had been entered in a local court; that is, the Penrith court, and had been entered, it would appear from the documents, on 17 August 2001. On that day the Respondent as Plaintiff had named as defendants the Applicant in these proceedings, amongst others, and had referred to the Applicant trading as “New World Pacific Homeware City.”
In fact the Applicant in his first affidavit before this court, to which I make reference briefly, had indicated that he was a director of a company New World Pacific Pty Ltd (the Company). He in fact ceased or resigned as a director of that company on 5 July 2002.
When the matter came before this court on 10 February 2003 it was evident to me that that first affidavit was deficient to the extent that it did not have proper particulars of jurat although the front of the document suggested that the date of the document, as distinct from the date when the affidavit was sworn, was 16 August 2002.
Accordingly on 10 February 2003 I made orders, amongst others, that leave be granted to the Applicant to in fact uplift that first affidavit and to do so for the purpose of reswearing the affidavit.
Rather than reswear the affidavit the Applicant, also pursuant to orders made of the court, has now filed and served a further affidavit sworn by him on 13 February 2003. For convenience it is appropriate that I then refer to that affidavit, although I note in passing despite the technical deficiencies in the first affidavit I am prepared to accept that it was sworn on 16 August 2002. To that extent, without the need for reswearing, I am prepared to accept and rely upon the first and second affidavits to which I have referred.
In the second affidavit the deponent refers to the fact that he had been a director of the company to which I have referred, but indicates that another party, a Mr Edward Lau, was also a former director. Mr Lau's full name is Hon Kwan Lau.
The Applicant says that Mr Lau was responsible for all dealings with English-speaking customers and that he was responsible only for dealing with Cantonese-speaking customers and did not deal with the English-speaking customers as he was totally unable to communicate with them.
He goes on to say in his affidavit that:
“Mr Lau was responsible for dealing with all business documents in English because of my inability to comprehend them.

I handled few, if any, matters concerning the business other than dealing with customers, especially where the speaking or reading of English was required.”
Essentially the affidavit then refers to the dealings that occurred between the Respondent and the company then operated by the Applicant and Mr Lau. The Applicant states in his second affidavit,
“I was highly confused as to the continuing status of many debts owed by the company especially after our primary creditor, Zyliss Australia Pty Ltd, changed its name to United Housewares Pty Ltd making it very difficult for me to understand what I was required to do.”
He goes on to say in the affidavit that he refers to his first affidavit and in particular paragraph 7 of that first affidavit where he had stated:
“To the best of my knowledge, I was not aware of the District Court proceedings in the Penrith court not having received any court documents in relation to this matter.”
Having referred to paragraph 7 of the first affidavit, the deponent in his second affidavit states:
“Even if I had received such documents, there would have been no way for me to understand what they meant at the time.”
He further goes on to refer to the service of the bankruptcy notice and again indicates in his first affidavit that he did not completely understand bankruptcy. In his second affidavit he states that his lack of understanding of the bankruptcy notice was due to his inability to understand English. He further states:
“... I did not understand the concept of personal consequences of bankruptcy proceedings at the time which have since been explained to me by my solicitors. At all times I believed and continue to believe that all debts are owed by New World Pacific Pty Ltd.”
At this hearing counsel for the Applicant has urged me to rely upon a number of factors which the court may take into account in exercising its discretion to consider whether or not it should in fact grant the application for annulment.
Section 153B of the Bankruptcy Act provides:
“153B If the Court is satisfied that a sequestration order ought not to have been made, or in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the court may make an order annulling the bankruptcy.”
It is clear on the authorities that in matters of this kind my primary task is to consider whether or not the sequestration order ought not to have been made. Having considered that, it is still open to the court to then consider further the issue of whether it ought to make an annulment order.
A number of factors have been referred to the court in relation to those matters that ought properly be considered by this court in the exercise of its discretion under section 153B of the Bankruptcy Act.
It seems to me that essentially the main argument of the Applicant is that in the circumstances of this case the court should effectively go behind the judgment to which I referred of the Penrith court and should find that in the circumstances had the Applicant participated in those proceedings and raised a defence, a proper defence could have been raised that the debt owed to the creditor was not indeed a personal debt but was rather a debt owed by the company of which the Applicant at all material times was a director.
Going behind a judgment, whether it be in a matter of this kind or indeed in any other application in the bankruptcy proceedings, is a significant and, in my view, serious step for a court to take.
In the present case, however, on the affidavit material before me it is my view that it is appropriate to go behind the judgment. In the present circumstances I am prepared to accept that at least prima facie the judgment entered in the Penrith court would not have been entered had the true facts and circumstances been known and in the circumstances where it is asserted the debt owed to the creditor was indeed a debt owed by the company rather than the director, namely the Applicant of that company.
Having done that, it seems to me that it is also appropriate to consider the other matters raised in the submissions for and on behalf of the Applicant. It is appropriate, in my view, for this court to consider the issue of solvency. I have been referred to the statement of affairs which has been the subject of an exhibit to the affidavit of the official receiver to which I have referred. In that statement of affairs it is clear that apart from the debt owed to the creditor in the present proceedings, the Applicant has only one other debt which is said to be a credit card debt to an unsecured creditor, namely National Australia Bank, for an amount of $8,211.97. The debt otherwise referred to in relation to the creditor in these proceedings is of course for the amount of $22,685.45.
The statement of affairs does not reveal any other assets, but it does reveal that the Applicant has an income of approximately $30,000. He derives that income from his interest in the company and otherwise has an interest as a shareholder in that company.
It has been urged upon the court that if I were to go behind the judgment, if I were to accept that there is a challenge to the judgment debt which was the foundation for the bankruptcy notice and ultimately creditor's petition, that it would be appropriate in the specific circumstances of this case that I should, in assessing the issue of solvency disregard that amount owed to the creditor and should then be encouraged by disregarding that amount to find that the Applicant is indeed solvent.
Neither counsel could refer me to a specific authority which would enable me to disregard the debt to the Respondent in the circumstances of the present case. I am prepared to accept, however, that the court has a general discretion in relation to making an assessment of the issue of solvency. I am prepared for the present purposes, although I do not suggest that it is a matter that should be applied to all cases, that in this case having gone behind the judgment it would be unfair and inappropriate to then use the amount said to be owed to the creditor in assessing the solvency or otherwise of the Applicant. On the material before me I am prepared to find that the Applicant is in fact solvent; that is, had an ability to pay his debts as and when they fell due.
Although some reliance has been placed upon the Applicant's inability to understand court documentation and indeed documentation which has been filed and served upon him in bankruptcy proceedings, I reject as a general proposition that it is sufficient for an Applicant in circumstances of this kind in considering delay or the inability to take action at an earlier stage to simply assert that he was unable to understand the meaning of the documents. I reject as an adequate explanation for failure to take appropriate action the statement referred to in the second affidavit of the Applicant namely that:
“Even if I had received such documents there would have been no way for me to understand what they meant at the time.”
To make such a statement is not, in my view, sufficient to enable an Applicant who is a company director to avoid the responsibilities he has as a company director to ensure that those documents in English which he does not understand should then be referred to either a solicitor and/or appropriate agencies who would be able to provide a translation of the documents.
Nevertheless in the present case, although I reject that as an explanation for the delay and inactivity, I am prepared to accept in the present circumstances that the Applicant did not seek, until it was too late to do so, appropriate advice which might have enabled him to set aside the judgment or at least challenge the bankruptcy notice by setting it aside and/or at least seek to persuade the court not to make a sequestration order. Although I am prepared to accept that there is a sufficient basis upon which I should accept that explanation, I do so somewhat reluctantly having regard to the excuse which has been proffered by the Applicant to which I have referred in relation to his lack or inability to understand English.
In all the circumstances, it is clear that had the court dealing with the sequestration order been acquainted with all the details which are now before this court, and indeed having regard to the facts in relation to this application. I conclude that a sequestration order ought not to have been made.
I am prepared to exercise a discretion which I have in the circumstances for the reasons I have given to make the appropriate order that the sequestration order of 13 June 2002 be annulled.
It has been agreed between the Applicant and the representative of the official receiver that in the present case the issue of costs of the administration of the estate should be met by the Applicant. Furthermore, it has been agreed by the parties that legal costs of the trustee should be met by the Applicant. In those circumstances it is clear that what the court should do is to proceed to make an order urged upon the court by the parties rather than accept an undertaking.

I am satisfied that I have power to make orders of this kind in a general with the consent of the parties.
If it was not the subject of consent, however, then it would seem to me that the appropriate course to follow would be to simply make an order for annulment of the sequestration order and to allow section 154 of the Bankruptcy Act to apply in relation to those costs, charges and expenses of the administration of bankruptcy to be sought by the trustee either from the estate or, in the event that there are insufficient funds, then pursuant to section 154(2), to seek those by way of a debt against the Applicant.
In the present case, however, given that there is consent and there has been agreement and that there is no opposition to an order being made, it is appropriate that I therefore make the orders sought.

I certify that the preceding thirty-five (35) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate:

Date: 3 March 2003