Nicodemus v Ductmaster Pty Ltd
[2006] FMCA 1669
•15 November 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| NICODEMUS v DUCTMASTER PTY LTD | [2006] FMCA 1669 |
| BANKRUPTCY – Application to set aside bankruptcy notice − where judgment debt in favour of the respondent − where applicant unaware of the proceedings and the debt − where composition or arrangement accepted by the creditors which did not include the respondent − where bankruptcy thereafter annulled − where respondent obtained Bankruptcy Notice based upon judgment in the Local Court pre original bankruptcy − whether compromise bound respondent. |
| Bankruptcy Act 1966, Part IV, ss.64Z, 73, 74(5), 74(6), 75, 76B, 140, 153A, 153B, 222, 222D, 224, 224A Federal Magistrates Court (Bankruptcy) Rules 2006 |
| Union Club v Lord Andrew Charles Battenberg [2006] NSWCA 72 |
| Applicant: | RICO NICODEMUS |
| Respondent: | DUCTMASTER PTY LTD |
| File Number: | SYG 1984 of 2006 |
| Judgment of: | Raphael FM |
| Hearing date: | 24 October 2006 |
| Date of Last Submission: | 24 October 2006 |
| Delivered at: | Sydney |
| Delivered on: | 15 November 2006 |
REPRESENTATION
| Counsel for the Applicant: | Mr G McDonald |
| Solicitors for the Respondent: | Insight Litigation |
ORDERS
Bankruptcy Notice NN741/06 set aside.
Respondent to pay the applicant’s costs to be taxed, if not agreed, in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1984 of 2006
| RICO NICODEMUS |
Applicant
And
| DUCTMASTER PTY LTD |
Respondent
REASONS FOR JUDGMENT
Rico Nicodemus is an air-conditioning engineer. He was born in the Philippines. English is not his first language. Between 1998 and 2002 Mr Nicodemus was in partnership with a company known as Scottish Dravo Refrigeration and Air-Conditioning Pty Ltd (“Scottish Dravo”) in an air-conditioning business which traded as Top Deal Enterprise, which itself traded as Seven Star Air-Conditioning, according to evidence given by Mr Nicodemus to this court. For approximately one year between May 2001 and May 2002 Mr Nicodemus was a director and secretary of Scottish Dravo. Mr Nicodemus guaranteed the obligations of Scottish Dravo to a number of suppliers including the respondent to these proceedings. He told the court that he left Seven Star on 28 May 2002, by which I understand that he unofficially dissolved the partnership at that time. Scottish Dravo later went into liquidation. Meanwhile, in September 2002, the respondent Ductmaster brought proceedings by way of a statement of liquidated claim in the Local Court of NSW against Scottish Dravo and Mr Nicodemus.
The address given for Mr Nicodemus was in Marlowe Street, Campsie. The amount of the claim was $10,950.16. On 7 November 2002, Ductmaster obtained judgment against Mr Nicodemus in the sum of $11,336.37. Mr Nicodemus told the court that in about 2000 or 2001 he had moved from Campsie to Minto and was not at the Unit 4,
14 Marlowe Street address at the time these proceedings were issued. He claims that he never received notice of the proceedings or that judgment had been entered against him.
Ductmaster was not the only company to whom Mr Nicodemus had given guarantees. A number of them pressed him for payment. On
30 April 2003, the applicant became bankrupt and Anthony de Vries became his trustee. Mr Nicodemus provided his trustee with a Statement of Affairs which listed a number of creditors, the majority of whom were creditors of the air-conditioning business to whom
Mr Nicodemus had given guarantees. Ductmaster was not among them. Mr Nicodemus told the court that the reason that Ductmaster was not included was because he was unaware that there was an outstanding debt to Ductmaster. He told the court that the financial affairs of the partnership had been conducted by the company, Scottish Dravo, and not by him. He told the court that he had asked Scottish Dravo for a list of creditors but it was never given to him. The trustee was aware of the nature of Mr Nicodemus’ debts and where they came from.
On 5 August 2004, Mr Nicodemus wrote to his trustee making an offer to compromise with his creditors under s.73 Bankruptcy Act 1966 (“the Act”). He made a proposal to pay a sum of approximately $80,000 including the trustee’s costs. The trustee accepted the letter as complying with s.73 of the Act and commenced his investigations prior to calling a meeting of creditors. He prepared a report to the creditors, who were listed in that report as being owed a sum of $189,676.37. Ductmaster was not on that list of creditors. On 13 December 2004, the meeting of creditors was held. It was accepted by the parties that the resolution of that meeting and the composition proposed was one governed by the current s.73 of the Act.
The resolution was approved by 87.2% by value of the creditors present and voting. Only one creditor voted against. Thereafter a minute was prepared in accordance with s.64Z of the Act noting the resolution. The minute was dated 21 December 2004. On the same day a letter enclosing a certificate of resolutions passed and a copy of the minutes of the meeting of creditors was sent to IPSA by the trustee. Section 74(5) of the Act provides that
“Upon the passing of a special resolution of the meeting of creditors of a bankrupt under ss.73(4) the bankruptcy is annulled by force of this subsection on the date on which the special resolution was passed.”
Section 74(6) provides that
“Where a bankruptcy is annulled under this section, all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment shall be deemed to have been validly made or done but, subject to subsection (7), the property of the bankrupt still vested in the trustee vests in such person as the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his or her estate or interest in it, on such terms and subject to such conditions (if any) as the Court orders.”
The effect of a composition or a scheme of arrangement is described in s.75:
“(1) Subject to this section, a composition or scheme of arrangement accepted in accordance with this Division is binding on all the creditors of the bankrupt so far as relates to provable debts due to them from the bankrupt.
(2) The acceptance of a composition or scheme of arrangement does not:
(a)except with the consent of the creditor to whom the debt is due, release the bankrupt from a provable debt that would not be released by his or her discharge from bankruptcy; or
(b)release any other person from any liability from which he or she would not be released by the discharge of the bankrupt.
(3)The provisions of a composition or scheme of arrangement that has been accepted in accordance with this Division may be enforced by the Court on application by a person interested, and disobedience of an order of the Court made on the application is a contempt of the Court and is punishable accordingly.”
In June 2005, the trustee issued a Notice under s.140 of the Act in order to comply with ss.140(3) and (4) of the Act.
“140(3)Before declaring the first dividend, the trustee must give written notice of the trustee's intention to declare the dividend to anyone the trustee knows of who claims, or might claim, to be a creditor but has not lodged a proof of debt.
140(4)The trustee shall, in a notice published or sent in pursuance of subsection (3), specify a reasonable period within which creditors may lodge their proofs of debts.”
It is not known whether the Notice was published but a list of the creditors to whom it was sent is found in the affidavit of
Mr Nicodemus, filed on 9 August 2006. The list does not include Ductmaster. The dividend was paid and the composition complied with in full by the bankrupt. As a result the bankruptcy was annulled.
On 14 February 2006, Ductmaster obtained a certificate of judgment from the Local Court in respect of the judgment of November 2002.
On 23 February 2006, it sought and obtained the issue by the Official Receiver for the bankruptcy district of New South Wales of a Bankruptcy Notice numbered NN741/06 addressed to Mr Nicodemus at the Marlowe Street, Campsie, address. The Bankruptcy Notice was based upon the 2002 judgment. On 18 July 2006, Mr Nicodemus made an application to set aside the Bankruptcy Notice on the grounds that the debt in question had been discharged pursuant to the acceptance of the composition, which bound all his creditors who had provable debts as at the date of acceptance of the composition. It is not disputed by Ductmaster that theirs was a provable debt at such time.
In its written submissions the respondent says
“[2] The issue to be determined is whether or not the respondent was as at 23 February 2006 a Creditor of the Applicant.
[3] The respondent relies on Union Club v Lord Andrew Charles Battenberg [2006] NSWCA 72, (see paragraphs 59–65; 70]-[78; 108-144; 156-169]).
…
[5] Annulment places the Applicant in a position as if this Bankruptcy had never occurred, that is his position as at 30 April 2003. In April 2003 the applicant was a Judgment Debtor of the Respondent and thereby the Respondent a Creditor.
[6] A person restored to the position as if Bankruptcy had never occurred can contract with and compromise for consideration of their position with parties that agree and enter such a contract. The Applicant appears to have done this with a number of creditors.
[7] The Respondent was not a party to any agreement to compromise its status or claim.”
This submission was refined at the hearing. The respondent argued that the Battenberg judgment held that the effect of an annulment was that the bankruptcy “had never happened” so that, with the exception of those creditors who were actually party to the composition, all the applicant’s creditors who existed before the date of the sequestration were able to recover their debts against him. I am afraid this is not a proposition that I can accept.
Battenberg
is a case in which the respondent’s membership of the Union Club had been forfeit upon his becoming a bankrupt.
His bankruptcy was annulled. He argued that he was entitled to have his membership back. He argued that the effect of an annulment of bankruptcy is to place him in a position as if his bankruptcy had never occurred and therefore the Club must restore the forfeit membership. The Club argued that there was a private agreement between itself and the member by which his membership would be forfeit upon his bankruptcy, and that private agreement was based upon a recognition among members as a whole that a person who became a bankrupt ceased to be a gentleman and as such was no longer a person for whom membership of the Club was designed. Giles J said at [145]
“[144] One may accept that “bankruptcy”, as we know it, is the creation of statute law, as Fullager J observed in R v Davison (1954) 90 CLR 353. But it is intrinsically unlikely that when statute law created or more accurately recognised the status of bankruptcy for the first time when a sequestration order was made, Club members in their statutory contract intended to disregard that status and its adverse implications for the Club, merely because annulment followed with its attendant statutory fiction.
[145] Finally, it might be said against the interpretation I favour that it too carries an unreasonable outcome. That outcome is that, where s153B applies, a member will lose membership status despite annulment, in circumstances where the sequestration order ought not to have been made. That cannot be gainsaid. But I consider that it is of much lesser consequence, from the members’ and club’s viewpoint, than the adverse outcome from the interpretation favoured by the trial judge. I refer here to the numerous anomalies that flow from its retroactive operation. Moreover, a s153B situation is the very kind of case where members can reinstate the person concerned as a member. In practical terms one would not expect the club to allow the possibility of that kind of annulment to prevail over the practical considerations favouring a bright-line rule for cessation of membership on bankruptcy.”
In the course of judgment all three members of the court, Giles, Santow and Bryson JJA, considered the history of what is now ss.153A and 153B of the Act and noted that Lord Battenberg’s bankruptcy had been annulled by virtue of s.74(5), which the court found had a similar effect to s.153A insofar as it purported to effect a legal fiction. It was easy to see that a bankruptcy which arose out of a sequestration order that should never have been made should be considered to have never occurred, but the importation of this concept into a perfectly legitimate bankruptcy which was later ended by virtue of payment only came about as a result of a policy decision of the legislature: see Explanatory Memorandum to the Bill for the 1991 Bankruptcy Act para 15.2 and Quinn v The Official Trustee in Bankruptcy (1996) 443 FCA 1. At [80], Giles J said
“[80] There is strong recent support for the retrospective effect of annulment extending to reversing the fact of becoming bankrupt, not only where the annulment was under s 153B of the Act but also when it was under s 76(5). Retrospectivity could perhaps have been confined to property, or to property and status, and there may have been influence of Cockburn CJ’s language of remission to the person’s original situation beyond its intended meaning, but that has been the course of judicial thinking. A distinction could have been drawn between annulment when the bankruptcy should not have come about and annulment when the bankrupt had properly been made bankrupt, but was not. No significance has been attached to the change in language from annulment of the sequestration order to annulment of the bankruptcy.
[81] Accidents of history may have been at work, but it is important that there be uniformity in this area, and I consider that I should follow the recent cases and, so doing, hold that annulment of the respondent’s bankruptcy reversed the fact that he had become bankrupt. The judge was correct in the emphasised portions of his.”
Santow JA confined his decision mostly to the effect of Article 16(b) of the Club’s Rules. Bryson JA, after considering the authorities, supported the view expressed by Drummond J in Warrell v Westpac Banking Corporation (1994) 51 FCR 304, where his Honour said at [719]
“There is nothing in Thiessbacher [Thiessbacher v MacGregor Garrick & Co (1993) 2QDR 223] which provides any support for the proposition that annulment operates retrospectively where the propriety of the making of the sequestration order is attacked, and prospectively where annulment is justified by reason of an event occurring after sequestration. There is no ground in my view for differentiating between the consequences of annulment in these two situations. It follows that there is no warrant for giving to an annulment under s 74(5) of the Act, which, like an annulment under old s 154(1)(b) and new s 153B [sic], is founded on events occurring after the commencement of an unchallenged sequestration order, the limited effect suggested.”
But even if the effect of an annulment under s.74(5) is to put the former bankrupt into a position as if the bankruptcy had never taken place, this cannot ignore or override the other statutory effects of the annulment. These are codified in Part IV of the Act, which indicates what debts the composition or scheme of arrangement will relieve the bankrupt of, and which creditors of his will be bound by the composition. The creditors referred to in the subsections are, as we have seen, creditors who have provable debts against the bankrupt. To say that once the annulment had taken place this declaration of law was no longer valid, and any creditor who had not taken advantage of the composition to receive a percentage of his debt could enforce the debt in full, has only to be expressed to be shown to be incorrect. There are provisions for the setting aside and termination of a composition or a scheme of arrangement contained in s.76B of the Act, which applies ss.222 to 222D, 224 and 224A to these arrangements. But in this case the creditor has expressly disavowed any wish to set aside the composition even if it could have done so under one of those subsections. The creditor, while suggesting a less than frank attitude on the part of Mr Nicodemus, does not allege outright fraud and having heard Mr Nicodemus in evidence I think that it is very possible that neither the summons from the Local Court nor the judgment came to his notice. They were addressed to an address at which he was no longer residing and the creditor took no steps whatsoever to enforce the judgment until some four years later. On the other hand, Mr Nicodemus had been open with his trustee about his debts to other creditors of the business which he had operated in partnership with Scottish Dravo. It might have been possible for the trustee to ascertain details of this particular creditor, but I do not know enough about the circumstances to make any criticism of the failure to identify it.
A composition proposed by Part IV is required to have some certainty. Creditors who voted to accept such a composition would know, if they were aware of the provisions of the Act, that there is always a possibility that the amount of the dividend suggested by a trustee from the amount to be paid by the bankrupt may be reduced by the discovery of new creditors. That is a risk which the participating creditors are taken to have accepted. If the reduction is too great an application to set aside the composition could be made. In return, they are provided with certainty that once investigations have been made, the dividend is declared and the Notice is given by the trustee, no additional creditors will be allowed in after the date appearing in the Notice and their dividend will be paid. The bankrupt knows that if he provides the funds then, subject to the rights to set aside under s.76B that I have referred to, his bankruptcy will be at an end and all his creditors will be bound. Nothing said by their Honours in the NSW Court of Appeal in Battenberg seems to depart from that scenario and those principles.
The result of these findings is that I should set aside the Bankruptcy Notice and order that the respondent pay the applicant’s costs to be taxed, if not agreed, according to the Federal Magistrates Court (Bankrutpcy) Rules 2006.
I certify that the preceding eleven (11) paragraphs are a true copy of the reasons for judgment of Raphael FM.
Associate:
Date:
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