Lion Finance Pty Ltd v Jenkins
[2016] FCCA 3293
•21 December 2016
FEDERAL CIRCUIT COURT OF AUSTRALIA
| LION FINANCE PTY LTD v JENKINS | [2016] FCCA 3293 |
| Catchwords: BANKRUPTCY – Application to review sequestration order made by Registrar – whether debtor able to pay her debts – where tender of payment of part of the debt owed to the petitioning creditor after sequestration order – whether sequestration order should be set aside or bankruptcy annulled. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.19, 52, 58, 82, 104, 153B, 154 Federal Circuit Court (Bankruptcy) Rules 2016 (Cth), rr.2.02, 4.06 |
| Cases cited: Australia & New Zealand Banking Group Ltd v Foyster [2000] FCA 400 Pattison v Hadjimouratis (2006) 155 FCR 226; [2006] FCAFC 153 Totev v Sfar & Anor (2008) 167 FCR 193; [2008] FCAFC 35 Vaucluse Hospital Pty Ltd v Phillips [2006] FMCA 44 |
| Applicant: | LION FINANCE PTY LTD (ACN 095 926 766) |
| Respondent: | KYLEE ANN JENKINS |
| Trustee in Bankruptcy: | DAVID IAN MANSFIELD |
| File Number: | SYG 1178 of 2016 |
| Judgment of: | Judge Barnes |
| Hearing date: | 11 October 2016 |
| Date of Last Submission: | 14 November 2016 |
| Delivered at: | Sydney |
| Delivered on: | 21 December 2016 |
REPRESENTATION
| Solicitors for the Applicant: | CLH Lawyers |
| The Respondent: | In Person |
ORDERS
The sequestration order made by Registrar Hannigan on 30 June 2016 be set aside.
The creditor’s petition be dismissed.
Lion Finance provide a copy of these orders to the Official Receiver in Bankruptcy within two working days in accordance with the Bankruptcy Regulations 1996.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 1178 of 2016
| LION FINANCE PTY LTD (ACN 095 926 766) |
Applicant
And
| KYLEE ANN JENKINS |
Respondent
REASONS FOR JUDGMENT
On 30 June 2016, Registrar Hannigan made a sequestration order in relation to the estate of the applicant Kylee Ann Jenkins in circumstances where there was no appearance by Mrs Jenkins.
On 20 July 2016, Mrs Jenkins filed an application seeking review of the sequestration order. That application was supported by an affidavit sworn on 20 July 2016 and a subsequent affidavit of 13 September 2016. Mrs Jenkins also gave brief oral evidence and was cross-examined.
In support of the review application Mrs Jenkins claimed that she was solvent, that she had been involved in negotiations with the petitioning creditor to pay the debt at the time the sequestration order was made, that she had sought an adjournment of the hearing before the Registrar and that she was arranging funds to pay the debt.
The application for review under s.104(2) of the Federal Circuit Court of Australia Act 1999 (Cth) was filed within the time prescribed under r.2.02(3) of the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) (the Bankruptcy Rules).
An application for review of a decision of a registrar to make a sequestration order is to be considered by the Court as a hearing de novo (see Totev v Sfar & Anor (2008) 167 FCR 193; [2008] FCAFC 35 at [9]-[15]). I have had regard to the material presently before the Court in considering this application.
The petitioning creditor, Lion Finance Pty Ltd (respondent to the review application), sought to rely on the affidavits that had been before the Registrar at the time of the making of the sequestration order and also filed further affidavits of final search and final debt as required under r.4.06 of the Bankruptcy Rules. Lion Finance submitted that the Court should be satisfied on the evidence before it as to the matters in s.52(1) of the Bankruptcy Act 1966 (Cth) (the Act) and also that Mrs Jenkins had not established that she was able to pay her debts as they fell due or other sufficient cause within s.52(2) of the Act. It was contended, in the alternative, that if the Court found that Mrs Jenkins was solvent and set aside the sequestration order, the petitioning creditor’s costs should be paid by her or if the Court annulled her bankruptcy under s.153B of the Act then such annulment should be conditional upon the petitioning creditor’s costs being paid.
While I had not directed Mrs Jenkins’ trustee in bankruptcy (David Ian Mansfield) to prepare a report under r.7.06 of the Bankruptcy Rules, a solicitor for the trustee filed a notice of appearance and appeared at the hearing. He indicated that the trustee sought only to be heard to submit that if an order to set aside the sequestration order was made then an annulment order under s.153B of the Act should also be made to preserve the trustee’s statutory entitlement to the costs and the expenses of the administration of the estate under s.154 of the Act. Such an approach was said to be consistent with Pattison v Hadjimouratis (2006) 155 FCR 226; [2006] FCAFC 153. The trustee sought to rely on an affidavit of Mr Mansfield sworn on 10 October 2016 in relation to what he had done as trustee since the date of the sequestration order.
In addition Lion Finance and Mrs Jenkins filed post-hearing submissions in relation to issues that arose during the hearing.
Under s.52(1) of the Bankruptcy Act the Court is to have proof of the matters stated in the petition, service of the petition and the fact that the debt on which the petitioning creditor relies is still owing.
No issue was taken by Mrs Jenkins with the matters stated in the petition or with service of the petition. I am satisfied on the material before the Court (in particular, the affidavits relied on by Lion Finance) as to the matters stated in the petition and with service of the petition. Lion Finance relied on a debt of $21,461.38 based on a judgment of the Local Court of New South Wales of 13 January 2016 together with interest thereon. The act of bankruptcy relied on consisted of a failure to comply with a bankruptcy notice. The date of the act of bankruptcy was 12 April 2016. The bankruptcy notice, the creditor’s petition and the requisite accompanying affidavits were served personally on Mrs Jenkins.
It was not in dispute that the debt on which the petitioning creditor relied was owing at the date of the act of bankruptcy and was still owing at the time of the hearing of the creditor’s petition by the Registrar. However, on the afternoon before the hearing of the review application Mrs Jenkins made a BPAY transfer of $18,000 to Lion Finance. Lion Finance had not provided requested bank account details to Mrs Jenkins. It is not in dispute that this transfer was of Mrs Jenkins’ own volition. It was not pursuant to an agreement with Lion Finance. Her evidence was that she had “received legal advice as to paying the debt to below the $5000 outstanding mark, which is what I have done yesterday. We had requested bank account details to have that funds directly deposited into an account so it would be cleared funds available today. They weren’t provided to us so, in order to make the payment, we made it by BPAY so that we could just prove that it had been done.”
The solicitor for Lion Finance (who was not made aware of this payment until immediately before the hearing and after the affidavit of final debt was affirmed) referred to the fact that in McCracken v Phoenix Constructions (Queensland) Pty Ltd (2013) 210 FCR 149; [2013] FCAFC 41 Lander J (with whom Siopsis J and Gilmour J agreed) was of the view that the amount of the debt still owing at the time of the hearing of the creditor’s petition must be $5,000 (or more). His Honour stated at [79]-[81]:
[79] Lastly, the creditor must prove that the debt or debts upon which the petitioning creditor relies is or are still owing: s 52(1)(c). The use of the definitive article “the” before “debt” in s 52(1)(c) suggests that the debt there referred to is a debt earlier described. That is even more likely to be so because of the word “still” in the same paragraph. The reference to the debt still owing is, in my opinion, a reference to the debt described as owing in s 44(1)(c). Section 52(1)(c) requires the petitioning creditor to prove that the debt or debts claimed by the petitioning creditor in the creditor’s petition as owing and having the character of the debts described in s 44(1)(b), are still owing at the date of the hearing of the petition and when the sequestration order is to be made. For the reasons already mentioned, the debts relied upon must have been owing at the time when the act of bankruptcy occurred. That is why Lockhart J said in Re Taitthat the debt upon which the sequestration order is made must have existed at the date of the act of bankruptcy relied upon. That is also why Conti J said in Australia and New Zealand Banking Group Ltd v Coutts at [24]:
It is settled law that the debt relied upon by a petitioning creditor must exist at the time of the act of bankruptcy relied upon.
[80] Section 52(1)(c) requires the petitioning creditor to prove that the debt or debts relied on in the creditor’s petition are still owing. Therefore, the petitioning creditor must prove that the debt or debts amount to $5,000 and are still owing. Because s 52(1)(c) refers back to s 44(1) necessarily, the debts relied upon must have the character of the debts in s 44(1)(b). Therefore, they must be a liquidated sum. However, they cannot be at the hearing of the petition payable at a date certain after the hearing. They must have become payable at the time of the hearing.
[81] If the debt is not still owing a creditor simply cannot comply with the procedural obligations in r 4.04(4) and cannot satisfy s 52(1)(c).
While McCracken did not concern a review application, Lion Finance submitted that if Mrs Jenkins’ tender of $18,000 were to be accepted by it as payment, because the balance of the debt still owing would be less than $5,000 it would not be entitled to a sequestration order and this could mean that the review application would succeed. However it was suggested that the tender of the amount of $18,000 was designed to stifle Lion Finance’s rights with respect to the petition. In any event the solicitor for Lion Finance submitted that Lion Finance had not accepted the tender of payment. It was pointed out that a petitioning creditor was entitled to refuse the tender of payment of the debt after an act of bankruptcy had been committed (see McIntosh v Shashoua (1931) 46 CLR 494 at 508 per Starke J; International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 at [43] and Australia & New Zealand Banking Group Ltd v Foyster [2000] FCA 400 at [7]). It was also suggested that as a sequestration order had been made, the money should be paid to Mrs Jenkins’ trustee in bankruptcy, as otherwise it may constitute a preference payment to Lion Finance. It was explained that at the time the affidavit of debt was affirmed by Justin O’Flaherty on 11 October 2016, Lion Finance was unaware of the tender of payment and, as the funds had not cleared, had not had the opportunity to redirect the amount to the trustee or refund the funds to Mrs Jenkins. Lion Finance submitted that its conduct before and after the tender did not constitute acceptance of the payment and that as Mrs Jenkins was bankrupt its right was converted to a right of proof against her bankrupt estate (see ss.58(3) and 82(1) of the Act and Clyne v Deputy Federal Commissioner of Taxation (1984) 154 CLR 589; [1984] HCA 44 at [4]).
Lion Finance also submitted that if the tender were to be seen as payment by a third party on behalf of Mrs Jenkins (as Mrs Jenkins had attested to a gift and loan of this money from family members) there was no agreement binding Lion Finance to accept such payment.
It is not necessary for present purposes to determine the effect of acceptance of such a payment. As submitted, Lion Finance was entitled to refuse the tender of $18,000. Its conduct did not amount to acceptance. The tender did not have the effect that the Court could not be satisfied that the requirements of s.52(1)(c) were met at the time of the hearing. The relevance of the tender to the exercise of my discretion is considered below.
In all the circumstances I am satisfied with proof of the matters within s.52(1) of the Act.
Under s.52(2) of the Act if the Court is not satisfied with proof of the matters in s.52(1) or is satisfied by the debtor that she is able to pay her debts or that for other sufficient cause a sequestration order ought not to be made then the Court may dismiss the petition.
Mrs Jenkins’ primary argument was that she was able to pay her debts within s.52(2)(a) of the Act. She bore the onus in this respect.
Hely J stated in Foyster at [17]:
The onus of proving sufficiency of assets lies on the [debtor/bankrupt]. It is not sufficient for the [debtor/bankrupt] simply to establish that he has assets which exceed his liabilities in value. It must also be established that the assets are available to be realised and that they are capable of ready realisation…
Mrs Jenkins’ liabilities, as identified in her affidavit and statement of affairs and as ascertained by her trustee in bankruptcy after preliminary inquiries, were limited to the debt to Lion Finance of $21,461 and a personal loan from St George Bank in the amount of $8,020. According to the trustee’s report to creditors of 18 August 2016 the Australian Taxation Office had notified him that it did not currently have a claim against Mrs Jenkins’ estate (although she had not at that time lodged her income tax return for the financial year ending 30 June 2016). The trustee in bankruptcy reported that the personal loan was a debt jointly owed by Mrs Jenkins and her husband. In addition, as Mrs Jenkins disclosed, she and her husband have a RAMS home loan secured by a mortgage over the jointly owned family home. RAMS confirmed to the trustee a payout figure of $582,738.
It is the case that Mrs Jenkins annexed to one of her affidavits copies of council and water rates notices and utility bills in relation to the family home. Insofar as the submissions of Lion Finance proceeded on the basis that the rates notices and utility bills indicated that total amounts stated on the council and water rates and gas and electricity accounts revealed liabilities of Mrs Jenkins, it is not clear that this is so. The 2016-2017 council rates notice provided for payment by instalments. It appears to be marked to reflect some payments in August 2016. Only the first instalment was due on 31 August 2016. The utilities notices both show payments of earlier accounts. There is no evidence as to whether or not they have been paid. The water rates account was marked as paid. Mrs Jenkins’ evidence was that her husband attended to payment of these accounts.
The trustee’s report to creditors did not include such liabilities. Mrs Jenkins was not cross-examined as to her liabilities. For present purposes, it is appropriate to proceed on the basis of the liabilities as set out in the trustee’s report to creditors rather than the submissions for Lion Finance. The trustee in bankruptcy calculated that Mrs Jenkins’ total liabilities, as disclosed in her statement of affairs and based on his investigations to date, amounted to $29,481.
Even if some further amount should be included for rates and energy bills, what is not in dispute is that Mr and Mrs Jenkins own a family home as joint tenants. In her further affidavit of 13 September 2016 Mrs Jenkins claimed that all her liabilities were shared with her husband, who was a full-time contractor. She attested to her full-time employment and salary as a property manager with a real estate agency. She provided documents relating to her salary, a statement for the joint home loan secured by a mortgage over the family home for the period between March 2016 and 31 August 2016 which revealed regular repayments and a statement showing regular repayments of the personal loan between March and August 2016.
In cross-examination Mrs Jenkins explained that she and her husband were joint owners of the family home which, in her opinion, had a market value of $1.1 million. Mrs Jenkins was cross-examined as to the source of her opinion as to the market value of the property. She explained that it was based on comparable sales in the area and information in property sales reports to which she had access. She was asked about her expertise in the real estate market and agreed that she had some expertise, and that the value she had estimated was based on the property sales reports, combined with her expertise.
The trustee in bankruptcy advised creditors that he had conducted online investigations into the value of the family home which indicated a value similar to Mrs Jenkins’ estimate, albeit that no formal valuation or marketing appraisal from local real estate agents had been obtained. As the trustee observed, there appears to be considerable equity available in the property. The present equity in that property is in the order of $517,000 on this basis.
Mrs Jenkins explained that she understood that as a bankrupt she could not refinance the loan, but that should that change she and her husband had agreed that they would seek to refinance the loan. She had hoped she could reach agreement with Lion Finance in relation to repaying the debt without having to increase the mortgage. Her husband was maintaining the mortgage payments on the property. She was of the view that they had the capacity to maintain an increased loan facility based on her salary.
According to the trustee’s report to creditors, Mrs Jenkins also has a superannuation policy in the amount of $45,671 (although this is non-divisible property not normally available to creditors under the Bankruptcy Act) and two vehicles with a total current resale value which she estimated to be $16,500 and the trustee estimated to be $12,000. She also disclosed that she owned 888 shares in Virgin with an estimated market value (according to the trustee) of $215 and an unknown number of shares in NIB. The trustee’s calculation (on the basis of a half share in the value of the family home) was that Mrs Jenkins’ total assets were $314,069 with an estimated surplus over liabilities of $306,050.
It is clear that, even allowing for the inclusion of rates and energy accounts which may or may not have been paid or paid in part, Mrs Jenkins’ assets significantly exceed her liabilities.
In addition, Mrs Jenkins is employed on a full-time basis by a real estate agency as a property manager. It is apparent from the payslips she annexed to her affidavit and her disclosure to the trustee that her annual salary, including superannuation, is in the order of $70,000 a year.
In written submissions prepared before the hearing Lion Finance had submitted that there was no evidence as to the value of the family property or as to the amount of equity in the property available to Mrs Jenkins. That was so, but is no longer the case. Mrs Jenkins has now given evidence in that respect and provided a basis for her estimate which is consistent with the estimate of her trustee in bankruptcy and the figures set out above.
While there is no evidence of past attempts by Mrs Jenkins to refinance the loan on the property, Mrs Jenkins explained this on the basis that she had intended and expected, through negotiation with Lion Finance, to be able to meet that debt without obtaining a further loan. However she indicated that her husband was willing to refinance, insofar as that was necessary. Her evidence is that her husband is a full-time contractor and that the monthly mortgage repayments are paid by direct debit from his bank account.
As indicated, on the day before the hearing Mrs Jenkins paid Lion Finance $18,000 through a BPAY bank transfer. While it was open to Lion Finance to refuse to accept this payment, it is relevant in relation to Mrs Jenkins’ contention that she had access to resources which would permit her to pay her debts (as well as an excess of assets over liabilities). At the hearing she gave evidence that her husband and other family members had given her money to pay Lion Finance $18,000 and that most of this money was a gift, although she may have to pay back a small portion. She claimed she would have been able to obtain the full amount of the debt due to Lion Finance in this way, but she paid $18,000 (despite the fact that the debt was over $21,000) because she received legal advice to reduce the debt to below $5,000 in circumstances where Lion Finance had refused a total offer of $23,000. She submitted that the fact she had been able to raise $18,000 from family and friends to pay to Lion Finance (whether or not they accepted it or paid it to her trustee in bankruptcy) was evidence that she was able to obtain funds from her family in order to pay the judgment debt. There was also said to be sufficient equity in the matrimonial home to assist in paying the judgment debt in circumstances where her assets far exceeded her liabilities.
Section 52(2)(a) does not expressly require a debtor to be able to pay his or her debts from his or her own money. As Buchanan J (with whom Marshall and Tracey JJ agreed) relevantly stated in Whitton as Trustee of the Estate of John Emmanuel Rose v Regis Towers Real Estate Pty Ltd (in Administration) (2007) 161 FCR 20; [2007] FCAFC 125 at [34]-[37] (albeit in the context of considering s.121 of the Bankruptcy Act):
[34] Consideration of the principles to be applied when determining whether a person is insolvent at a certain date often begins with the observations of Barwick CJ in Sandell v Porter (1966) 115 CLR 666 (at 670):
Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time — relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.’
[35] It is important to note that s 95 of the Bankruptcy Act, as it then appeared, referred to a person paying debts ‘out of the debtor’s own money’. Many subsequent cases proceed upon an express or implied incorporation of this element as part of the legal test to be applied. This element, however, does not any longer appear in the definitions of solvency and insolvency in s 5(2) and (3) of the Bankruptcy Act which I earlier set out. Nor does this element appear in the corresponding definition in s 95A of the Corporations Act 2001 (Cth) (‘the Corporations Act’) which is in identical terms to s 5(2) and (3) of the Bankruptcy Act.
[36] In Lewis v Doran (2004) 184 FLR 454 Palmer J made the following observation about the change in definition now reflected in the Corporations Act (at [116]):
For those reasons I conclude that s 95A CA has changed the pre-existing law as to the definition of insolvency as stated in cases such as Sandell v Porter, and that it is no longer necessary in order to assess solvency to ascertain whether the company is able to pay all of its debts “from its own monies”, in the sense discussed in those cases. In my opinion, s 95A requires the Court to decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable by reference to the commercial realities. If the Court is satisfied that as a matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party.’
[37] On appeal (Lewis v Doran (2005) 219 ALR 555) Giles JA (with whom Hodgson and McColl JJA agreed) said (at [109]…):
[109] Particularly when the limiting words are no longer part of the test, there is no compelling reason to exclude from consideration funds which can be gained from borrowings secured on assets of third parties, or even unsecured borrowings. If the company can borrow without security, it will have funds to pay its debts as they fall due and will be solvent, provided of course that the borrowing is on deferred payment terms or otherwise such that the lender itself is not a creditor whose debt can not be repaid as and when it becomes due and payable. It comes down to a question of fact, in which the key concept is ability to pay the company’s debts as and when they become due and payable.
On such an approach, the ability of Mrs Jenkins to borrow or otherwise obtain money from a third party or parties to meet any or all of her debts (whether or not secured on her assets) is part of the evidence before the Court to be taken into account in determining whether she has established her ability to pay her debts within s.52(2)(a) of the Act.
In the particular circumstances of this case, having regard to the limited extent of Mrs Jenkins’ indebtedness, the substantial equity she has in her home and her demonstrated ability to raise, in a relevantly short time, funds through gifts and/or loans from family and friends, on balance I am satisfied that she has established that she has access to sufficient resources within a relatively short period such that she is able to pay her debts within s.52(2)(a) of the Bankruptcy Act. Having regard to the level of her debts and the unencumbered value of the matrimonial property, this is not a case in which it is clear that the property would have to be sold to enable Mrs Jenkins to meet her liabilities.
As I am satisfied that Mrs Jenkins has established that she is able to pay her debts, it is open to the Court to dismiss the petition. I have had regard to the matters that the applicant raised and all the evidence before me in relation to whether to exercise the Court’s discretion.
I accept Mrs Jenkins’ uncontested evidence that her financial circumstances were the result of a temporary lack of liquidity. Mrs Jenkins previously operated a child care business. She purchased that business in 2005 and operated it from leased premises until February 2013. In mid-2012, she decided to sell the business. After securing a prospective buyer, she inquired as to whether her landlord would renegotiate a lease with the proposed purchaser as the lease was due to expire at the end of February 2013. However the landlord advised that there would be no renewal of the lease as the landlord intended to conduct a child care centre from the premises. Mrs Jenkins searched for alternative premises, as she did not want to lose the business in which she had invested some $500,000 as well as her work. In approximately August 2012 she obtained approval from the Department of Education to lease an area within the grounds of a local primary school where she planned to erect portable buildings to operate the business after the expiration of the lease. She was required to participate in a formal tender process to secure the tenancy, which she did.
However, contrary to advice she was given that she did not need to seek council approval for the proposed development, Mrs Jenkins was subsequently notified by the local council that a development application was required. By the time the necessary approvals were obtained, the original lease had expired and with no other alternative available the majority of her former clients had taken up the services of her previous landlord and her child care business was “lost”.
Mrs Jenkins’ evidence, which I accept, is that she incurred significant expenses in failed attempts to relocate the business. She expended personal savings and took out a personal loan from St George Bank of $30,000. However she made repayments which reduced it to the current amount of a little over $8,000. She also explained that the landlord had refused to refund a rental bond of approximately $60,000 which was held in a private account and that she did not have the financial means to challenge this matter. After the demise of the business, Mrs Jenkins experienced what I accept was temporary financial hardship while only in part-time employment. Subsequently she obtained full‑time employment.
Lion Finance’s debt was based on a credit card facility she had obtained in approximately $2,000. The credit limit had been increased up to $13,000. Until the demise of her business and her temporary financial hardship Mrs Jenkins claims she made payments in accordance with the card conditions.
Mrs Jenkins understood that Lion Finance Pty Ltd (the petitioning creditor) had acquired the debt. She acknowledged receipt of a liquidated statement of claim and notification of bankruptcy proceedings. She explained that at the time she received the liquidated statement of claim in December 2015 she was overwhelmed by personal family issues, including ill health of family members, but also acknowledged that she was negligent in not responding.
Mrs Jenkins also gave evidence of unsuccessful attempts to reach an agreement to settle her liability to Lion Finance from May 2016 on. She explained that after receipt of the bankruptcy notice in April 2016 she attempted to contact Lion Finance via the person nominated on the bankruptcy notice, but received no response. After receipt of correspondence in May 2016 from another representative of Lion Finance, she made contact and forwarded a previous email containing an offer of settlement. That offer was rejected on 25 May 2016. Further information relating to her financial position was requested, which she provided by 8 June 2016.
On 16 June 2016, Mrs Jenkins was advised by a representative of Lion Finance that her then current offer was rejected. This occurred in circumstances where the creditor’s petition had been listed for a first return date before a registrar on 16 June 2016. The petition was adjourned until 30 June 2016 on the application of Lion Finance. While Mrs Jenkins did not attend on 16 June 2016, her evidence is that Lion Finance advised her on 16 June 2016 that her offer was rejected, but also that an adjournment of the matter had been sought and granted to 30 June 2016. She was invited to submit an increased offer, with lump sum payments, by 28 June 2016 and advised that in the absence of a response, the solicitors “may be instructed by our clients to proceed on the creditors petition on the next Court date” (that is, on 30 June 2016).
Mrs Jenkins did submit a further increased offer to settle by email of 28 June 2016 (including lump sum payments as had been requested by Lion Finance). Her evidence, which I accept, is that as she was in negotiations with Lion Finance and as she understood that she had complied with the requirement that the offer include lump sum payments, she did not think it necessary to approach the Court to formally request an adjournment at that time. She inferred that Lion Finance’s statement “contained a reasonable expectation of adequate notice should my latest offer be rejected and that a further two week adjournment would be sought”.
However, at 4:35pm on 29 June 2016 Mrs Jenkins received an email from Lion Finance’s solicitor advising that her offer was rejected and that they had been instructed to proceed with the creditor’s petition the next day.
Mrs Jenkins’ evidence is that with such short notice she was unable to arrange her work commitments in order to be able to attend the Court at 2pm on 30 June 2016 and that she had no one available to care for her children after school. She emailed the Registrar of the Court at 7:44pm on 29 June 2016 indicating that she had been corresponding with Lion Finance’s representative in an effort to come to a settlement, that she had made two offers, that her final offer had been rejected at 4:35pm on that day by email, that she had been in financial hardship and had made her best offer given the circumstances, and that she had been of the view that a settlement would have been reached. She explained that due to the timing of the notice from Lion Finance she would be unable to attend the hearing on the next day due to work commitments. She explained in her affidavit that she had not long commenced in her current employment.
Mrs Jenkins requested an adjournment for a minimum of two weeks to obtain legal advice. She stated that she had advised Lion Finance that she could not attend the hearing and that she had requested an adjournment. On the morning of 30 June 2016 Mrs Jenkins telephoned the registry to confirm that her email had been received and was advised that the email request would be placed on the file for consideration by whoever was presiding over the matter and that she would be advised of the outcome. An email to this effect was sent to her at 9:58am. There is no evidence as to whether Mrs Jenkins was advised that she could seek to participate in the hearing by way of telephone link. Her evidence is that on 5 July 2016 she again telephoned the registry as she had not received any notification. She was then advised that the matter had been heard in her absence and a sequestration order made. On 6 July 2016, she received an email from her trustee in bankruptcy.
Mrs Jenkins submitted that had the matter been adjourned she could have obtained legal advice and caused a payment to be made to Lion Finance in that period.
Mrs Jenkins has provided an explanation for her failure to appear at the hearing of the creditor’s petition. The circumstances are not such as to amount to “other sufficient cause” within s.52(2)(b) of the Act such that the sequestration order ought not to have been made, as Mrs Jenkins was advised, albeit late on the day before the scheduled hearing, that Lion Finance intended to “proceed on the creditors petition”. Nonetheless these matters are relevant as part of all the circumstances in relation to the discretion under s.52(2)(a) of the Act. Mrs Jenkins did not simply ignore the creditor’s petition.
Mrs Jenkins has satisfied me of the matters in s.52(2)(a) of the Act and that it is appropriate to set aside the sequestration order and dismiss the petition.
I have considered whether this is a case in which I should exercise my discretion to annul the bankruptcy under s.153B of the Act (see Pattison v Hadjimouratis). The solicitor for the trustee urged this course of action on the Court on the basis that this would preserve the trustee’s position in relation to the expenses of the administration of the bankrupt estate and, in effect, provide a simple means of enabling the trustee to recover his remuneration in the administration of the bankruptcy under s.154 of the Act. If the bankruptcy was not annulled under s.153B, the trustee would have no statutory basis under s.154 of the Act for recovering his remuneration. It was submitted for the trustee in bankruptcy that setting aside the sequestration order would inhibit the trustee from being paid his remuneration and expenses in circumstances where the sequestration order was not made in error. The petitioning creditor also supported such an approach.
It was pointed out that the work done by the trustee was pursuant to his duties under s.19 of the Bankruptcy Act. Reliance was placed on the trustee’s affidavit which detailed his obligations and summarised the work he had undertaken. He indicated that he first became aware of the application for review on 20 July 2016 and that immediately thereafter he withheld conducting further investigations and realising known assets, but that his obligations involved preparing a detailed report to creditors upon filing of the statement of affairs.
The trustee’s evidence was that he had not conducted any extensive work apart from the report, except for basic administrative tasks during the course of the administration of Mrs Jenkins’ bankrupt estate. In the report to creditors of 18 August 2016 the trustee disclosed work completed for which remuneration approval in the amount of $10,021.50 was sought. However the trustee stated in his affidavit that his fees and expenses as at 10 October 2016 were $20,625 plus GST and his legal fees were $3,700 plus GST. In other words, it appears that during the prescribed time for review and then while on notice of the review application, in circumstances where the Court did not ask the trustee to prepare a trustee’s report, the work he engaged in incurred quite significant expenses.
In his report to creditors of 18 August 2016 the trustee indicated that he expected that overall in administering the bankrupt estate he expected to incur expenses of approximately $30,071.50 plus GST. This amount would exceed the trustee’s assessment (as at 18 August 2016) of Mrs Jenkins’ total indebtedness to unsecured creditors.
The applicable principles in considering whether annulment is appropriate were discussed by Weinberg J in Kyriackou v Shield Mercantile Pty Ltd (No. 2) [2004] FCA 1338 and Pattison v Hadjimouratis (which made it clear that the Court had power to order an annulment of a bankruptcy on a review application). However it was also stressed (and see Vaucluse Hospital Pty Ltd v Phillips [2006] FMCA 44 at [70]-[71] per Riethmuller FM) that a balance has to be struck between the rights of an applicant who should not have been made bankrupt and a trustee who has simply done what the Bankruptcy Act requires him or her to do. I have borne in mind that the review application was lodged within the time provided for in the Federal Circuit Court (Bankruptcy) Rules. It was suggested in Kyriackou v Shield Mercantile Pty Limited (No. 2) at [39] (see also Begetis v Temperzone Australia Pty Ltd [2007] FMCA 498 at [32]) that ordinarily a review application made within the prescribed time (as here) would result in an order setting aside the sequestration order. It is well-established that a trustee in bankruptcy who administers a bankrupt estate with knowledge that the bankrupt is challenging the validity of a sequestration order must exercise caution when incurring expenses while the challenge is unresolved and the ongoing status of the bankruptcy remains uncertain. In undertaking the role of trustee in bankruptcy a trustee is also aware of the inherent risk that he or she may not be remunerated.
In this case the review was filed and prosecuted in a timely fashion.
While there was no evidence of Mrs Jenkins’ solvency before the Registrar as at 30 June 2016, this must be seen in light of the fact that the petitioning creditor had sought an adjournment on the first return date and the parties were engaged in negotiations. Mrs Jenkins was self-represented. This is not a case in which she flagrantly, recklessly or negligently disregarded court process. The absence of a notice of opposition and supporting affidavit evidence from Mrs Jenkins as at 30 June 2016 is perhaps unsurprising in those circumstances. I have also borne in mind that the evidence of solvency did not clearly emerge in these proceedings until the day of the hearing, although the trustee was aware of Mrs Jenkins’ financial position from the time she provided a statement of affairs on 20 July 2016.
Substantial costs are said to have been incurred by the trustee, particularly having regard to the extent and nature of the bankrupt’s indebtedness. However, as Riethmuller FM suggested in Vaucluse Hospital at [51], the circumstances warranted a cautionary approach. The sequestration order was made with respect to a relatively small debt, in the absence of the bankrupt, in relation to a debt that was not incurred in the course of business or commercial dealings, and, in circumstances where the bankrupt had a significant asset, such as a home. Moreover, the trustee has general rights of recovery (see Wenkart v Pantzer [2003] FCAFC 210; (2003) 132 FCR 204 at 207).
In the particular circumstances of this case I am not satisfied that it is appropriate to make an annulment order to enable the trustee to have recourse to s.154 of the Act. I will hear submissions in relation to the issue of the costs of the petitioning creditor.
I am satisfied it is appropriate to set aside the sequestration order and dismiss the petition.
I certify that the preceding sixty (60) paragraphs are a true copy of the reasons for judgment of Judge Barnes
Date: 21 December 2016
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