Ram, Re; P.P. & Anor Continental Seagram Pty Ltd, Ex Parte

[1988] FCA 529

Re: PAUL PARAS RAM and SARWAN SINGH
Ex parte: CONTINENTAL SEAGRAM PTY LTD
No. W1799 of 1987
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT IN THE STATE OF NEW SOUTH WALES AND THE
AUSTRALIAN CAPITAL TERRITORY
Einfeld J.(1)

CATCHWORDS

Bankruptcy - Application to annul bankruptcy - defective service of bankruptcy notice and petition - whether sequestration order ought to have been made - discretion under section 154 not to annul.

Bankruptcy Act 1966 - ss 37, 41, 154, 306

Bankruptcy Rules - rules 15 and 195

HEARING

SYDNEY

#DATE 23:9:1988

Counsel and solicitors for Mr. C.B. Vernon
the applicants instructed by

Karam Ramrakha & Co Solicitors

Counsel and solicitors for Mr. R.E. Montgomery
the petitioning creditor instructed by

N.G. Cassim

ORDER

The applications to set aside the sequestration order made on 26 November 1987 and for annulment of the bankruptcies of the applicants are dismissed.

No order as to costs.

NOTE: Settlement and entry of these orders is dealt with in accordance with Order 124 of the Bankruptcy Rules.

JUDGE1

This application dated 18 March 1988, made by Paul Paras Ram (the first applicant) and Sarwan Singh (also known as Simon Sarwan Singh) (the second applicant) sought the setting aside of what was described as "all process herein". What this amounted to was an application to rescind a sequestration order made on 26 November 1987 against the estates of the applicants (the sequestration order) pursuant to section 37(1) of the Bankruptcy Act 1966 (the Act) or an annulment of the bankruptcy pursuant to section 154(1) of the Act.

1. The application is opposed by Continental Seagram Pty Limited (the petitioning creditor) which obtained judgment in the New South Wales Local Court on 12 February 1987 for $3083.93, representing non payment for stock of the applicants' former restaurant business. This was the judgment debt on which the sequestration order was obtained. It is also opposed by two other creditors, Westgo Communications Pty Ltd (operators of Radio Station 2WS), which claims to be owed $4550, and Hayden Nepean Broadcasters Pty Ltd (operators of Radio Station 2KA) to whom an unknown amount of money is owed. Both these creditors indicated their objection by letters dated 19 July 1988 addressed to the solicitor for the petitioning creditor. Two other objecting creditors are ANZ Card Holder Services which claims to be owed $3000 and Nationwide News Pty Ltd trading as Cumberland Newspapers which has obtained a judgment against the applicants in the New South Wales District Court for $9,281.80. A bankruptcy notice issued at the instance of this latter creditor was served on the applicants on 2 September 1987 and a creditor's petition was presented on 16 March 1988. I am informed that an application has been made by the applicants in the District Court to have this judgment debt set aside.

2. The evidence established that the applicants had formed a partnership in November 1985 to conduct an Indian restaurant business from leased premises. Each contributed the sum of $10,000. This money was deposited in a term deposit with the ANZ Banking Group Ltd, over which the bank held a charge. The bank also held a second mortgage over the property of the second applicant as security for an overdraft granted to the partnership business. Equipment used in the business was leased and casual staff were hired as required. It is through this business that the applicants incurred the debts they now have outstanding. The business ceased operating in February 1987.

3. The first applicant is a married man aged 36 years and has his wife and two dependant children to support. He is currently unemployed. He is in receipt of sickness benefits of $531 per fortnight and has to meet $840 in monthly mortgage repayments. His statement of affairs sworn 30 June 1988 indicates that he has a total of four unsecured creditors owed a total of $20,000. He also declares two secured creditors owed a total of $165,000. His assets which include commercial land in Fiji are said to amount to $220,640. The first applicant claims that he withdrew from the partnership's business - though apparently not the partnership itself - in April 1986, which was two months before the supply of the goods the subject of the judgment debt.

4. The second applicant is also a married man aged 35 years with a wife and two dependant children to support. He is currently employed as a process worker and is earning a net weekly wage of $230, with monthly mortgage repayments of $600. His statement of affairs sworn 30 June 1988 indicates a total of four unsecured creditors owed a total of $15,300 and two secured creditors owed $53,500. This applicant has assets totalling $300.

5. The joint statement of affairs sworn 30 June 1988 indicates a total of eight unsecured creditors owed $49,900 and one secured creditor owed $100,000. The only joint asset the applicants have is the $20,000 in the ANZ Bank term account. In addition, the official trustee's report dated 20 July 1988 reveals another unsecured creditor, BBC Hardware, which claims to be owed $8000 although this is disputed by the first applicant who claims that the debt is only $4000.

6. The applicants attribute the failure of the partnership business to a lack of working capital and a reluctance by the owners of the centre at which their business was located actively to promote the centre.

7. The official trustee submitted a total of four reports in this matter dated 19 April, 6 June, 29 June and 20 July 1988. The trustee noted that it took the applicants more than six months to file their statements of affairs, from the time that they were informed by the trustee of their failure to do so in compliance with the Act, in January 1988. Furthermore, the applicants were directed by me on 7 June 1988 to file their joint and individual statements of affairs by 28 June 1988 and again further ordered on 30 June 1988 to file them. The trustee also reported that neither of the applicants has contributed any funds to the credit of the estate.

8. On 7 June 1988, when this matter first came before the Court, the applicants sought an order setting aside the sequestration order on the basis that there had been defective service of the bankruptcy notice and petition on each of the debtors. It was conceded by the petitioning creditor that the applicants had not been properly served with either document.

9. The first part of the application was to set aside the sequestration order by way of rescission. As the sequestration order has long since been signed and sealed, it is now too late for its rescission (section 37(2)). This case thus raises the following issues:
   

1. The effect on the bankruptcy of the failure to have complied

with the statutory requirements as to service of the bankruptcy notice and the creditor's petition.

2. Whether annulment under section 154(1) is the proper way to abort such a bankruptcy.

3. If so, whether the discretion provided by section 154(1) is such that notwithstanding the defective service, the bankruptcy may remain on foot.

SERVICE OF BANKRUPTCY NOTICE

1. The requirement for service of the bankruptcy notice on the judgment debtor is found at section 41(4) of the Act which provides:
   

"Service of a bankruptcy notice shall be effected as prescribed."

1. Rule 15 (a) of the Bankruptcy Rules (the rules) provides:
   

"Unless otherwise ordered by the Court under sub-section 309(2) of the Act -

(a) service of a bankruptcy notice shall be effected on the debtor by delivering to the debtor personally a copy of the bankruptcy notice signed and stamped by the Registrar; . . ."

1. (Section 309(2) provides that the Court may in a particular case order that service be effected in a manner specified by the Court, whether or not any other manner of service is prescribed. However, this is not relevant for the purposes of this decision.) As to the meaning of personal service, see Re Ditfort; Ex Parte Deputy Commissioner of Taxation, Gummow J. (unreported 3 June 1988). The applicants submitted that defective service of the bankruptcy notice cannot be cured by section 306 of the Act. So far as is relevant this provides:
   

"(1) Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court."

1. The applicants' main submission was that as a consequence of their not having been served with the bankruptcy notice, no act of bankruptcy had been committed: Re Fairlie & Another; Ex Parte Armco Aust Pty Ltd (1968) 14 FLR 65. In substance, they say that for that reason the sequestration order ought not to have been made. In Pillai v Comptroller of Income Tax (1970) AC 1124, whilst speaking of corresponding provisions to section 306, the Privy Council said at 1135:
   

"It is implicit in the section that proceedings in bankruptcy may be so defective as to render them a nullity notwithstanding that no substantial and irremedial injustice has in fact been caused by the defect. The section draws a distinction between such a defect and a 'formal defect or irregularity'. It is only the latter which are validated by the section, provided that no substantial and irremedial injustice has been caused."

1. Similarly Walters J. stated in Re Long; Ex Parte Fraser Confirming Pty Ltd (1975) 6 ALR 338 at 343-4:
   

"I have come to the conclusion that the failure of the petitioner to prove personal service of the bankruptcy notice on the debtor is not a formal defect, or an irregularity, which can be corrected by bringing it 'within the umbrella' of s.306 of Act. In this context, I think I may suitably apply the words of Bowen L.J. in Re Howes; Ex Parte Hughes (1892) 2 QB 628 at 632; (1891-4) All ER 546: 'I do not regard this as a mere technical matter, for bankruptcy proceedings are of a peculiar character. They involve quasi-penal consequences to the debtor, and it is essential that all those forms, the object of which is to prevent injustice, should be strictly followed.' It is my opinion that the want of personal service of the bankruptcy notice on the debtor makes the petition founded on it a nullity, despite the debtor's subsequently acquired knowledge of the existence of the notice, and even though there is no proof of substantial injustice having been done to him by the defect in service.

I cannot regard the conditions of s 40(1)(g) and s 41(1) and

(4) of the Act as being satisfied. The bankruptcy notice is bad for want of regularity in the service of it. The petition on which it is founded fails in limine."

1. Similar views have been reiterated in cases such as Re DeIeso (1979) 24 ALR 701; Re Leppard; Ex Parte Fortune (Aust) Pty Ltd (1974) 5 ALR 556; Re Copley; Ex Parte Sundall (1961) 20 ABC 229 at 230; Re Collier; Ex Parte Dan Rylands Ltd (1891) 64 LT 742. In Re Long at 341 Walters J. went on to say:
   

"In my view, the issue of a bankruptcy notice is a proceeding in bankruptcy. The notice brings in train the process of bankruptcy; and to enable an act of bankruptcy, based on failure to comply with the requirements of the notice, to be available as a ground for a creditor's petition, it is essential, in my opinion, to prove that notice was duly served in accordance with the statutory rules, and further to prove a non-compliance with the requirements of the notice."

1. I agree with respect with the reservations expressed by Gummow J. concerning the non availability of section 306 to all such cases (Re Ditfort (above)). Further, I have some doubts that the creditor's petition is a nullity ab initio by reason of defective service of the bankruptcy notice, but it is clearly at least voidable if attacked.
   SERVICE OF CREDITOR'S PETITION

2. The requirements for service of a creditor's petition are found at rule 15(b) which provides:
   

"(b) Service of a creditor's petition shall be effected on a debtor by delivering -

(i) an official copy of the petition;

(ii) a copy of the affidavit or of each affidavit verifying the petition; and

(iii) where a registered trustee has consented, as referred to in paragraph 12(3)(ba), to act as the trustee - a copy of the instrument of consent,

to the debtor personally -

(iv) if service is effected in Australia - not less than 8 days before the hearing date for the petition; or

(v) in any other case - not less than such reasonable time before the hearing date for the petition as is determined by the Registrar.

1. In contra-distinction to the position pertaining to bankruptcy notices, it appears from the authorities that defective service of the petition may be cured by section 306 or rule 195. Rule 195 provides that non-compliance with the rules does not render a proceeding void unless the Court so directs. It also provides that a proceeding may be set aside in whole or in part as irregular, or may be amended in the terms that the Court directs. Alternatively, the Court may relieve a party from the consequences of non-compliance with the rules.

2. In Re Florance; Ex Parte Turimetta Properties Pty Ltd (1979) 28 ALR 403 Lockhart J. held that the defective service of a creditor's petition was curable and did not vitiate the proceedings. An important factor considered by Justice Lockhart was that there was no evidence of prejudice or injustice suffered by the debtor due to the defective service. Such criteria would, I think, apply here and I can see no reason why, all other things being equal, the Court would not favourably entertain an application to cure the defective service in this way. However, because of the defective service of the bankruptcy notice, it is not necessary in this case to rule finally on this matter here.
   ANNULMENT

3. Section 154(1) provides:
   

"Where the Court is satisfied -

(a) 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 Registrar; or

(b) that the unsecured debts of the bankrupt, being debts that have been proved in the bankruptcy, have been paid in full or the bankrupt has obtained a legal acquittance of them,

the Court may make an order annulling the bankruptcy."

1. In Re Bond; Ex Parte The Bankrupt (1978) 36 FLR 131, the debtor had given evidence that he was overseas at the time when he was alleged to have been served with the bankruptcy notice. A sequestration order had subsequently been made against his estate. After considering a number of factors including the conduct of the bankrupt, Sweeney J. held that the sequestration order should not have been made and annulled the bankruptcy. See also Re Anasis; Ex Parte Total Australia Ltd (1985) 63 ALR 493. I also made a detailed analysis of the authorities in Re Piccardi; Ex Parte George Gregory Grivas (unreported 3 August 1988). For the reasons given in those cases, I am satisfied that annulment is available and the appropriate course for the facts of this case. However, the petitioning creditor submitted that if section 154(1) were to apply, and I am satisfied that it does, then I should exercise the wide discretion provided for in section 154(1): Re Middleton, Beaumont J. (unreported 4 February 1987), and not grant an annulment.

2. In Re Frank; Ex Parte Piliskzy (1987) 77 ALR 511, Fisher J. indicated the extent of the section 154(1) discretion. His Honour said at 518:
   

"It is trite to say, as the above excerpts acknowledge, that the appropriate meaning is determined by the context. 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."

1. The fact that at all material times the bankrupt admitted that he was unable to pay his debts as they fell due was a crucial factor considered by Fisher J. in the exercise of his discretion. Fisher J. went on to conclude that even if he had been satisfied that the sequestration order ought not to have been made, it would not have been appropriate to annul the bankruptcy.

2. In determining the exercise of the discretion under section 154(1), the petitioning creditor submitted that I should have regard to the following factors:
   

1. the insolvency of the debtors: see Re Bond (above), Re Johnson, Jackson J. (unreported, 5 February 1987) and Re Frank (above);

2. the applicants' inability to pay their debts as they fell due at the time the sequestration order was made;

3. the delay of the applicants in filing this application on 18 March 1988, having regard to their knowledge since 8 January 1988 that the sequestration order had been made in November 1987;

4. the applicants' complete refusal to lodge their individual and joint statements of affairs as required by section 54 of the Act, until twice ordered by me to do so;

5. the fact that the judgment debt is admitted and the applicants have no ability to pay it.

1. Having regard to what was said in the cases to which reference has been made, I think it is additionally appropriate to have regard to the following factors:
   

(i) there are a number of creditors who have indicated their objection to the annulment and the applicants have not denied that substantial sums of money are owed to all or most of these creditors;

(ii) none of the trustee's reports indicate that any funds have been forwarded to or for any of the creditors of the estate;

(iii) an act of bankruptcy has been committed in respect of the bankruptcy notice issued by Nationwide News Pty Ltd.

1. In the light of these conclusions, the factors brought to my attention by the petitioning creditor, and the additional factors which I have noted, persuade me not to grant an annulment in this matter.

2. It is therefore not necessary to deal with the petitioning creditor's alternative submission that if I annul the bankruptcy, I should order a re-hearing of the petition in the inherent jurisdiction of the Court. This submission involved the use of the powers said to be available through rule 195(2)(b) to relieve the petitioning creditor from further service of the bankruptcy notice or petition. Alternatively it required the activation of section 33(1)(c) to extend the period for service of the bankruptcy notice and petition to a later date. I make no ruling or finding as to whether either of these courses are open or available, and if they are, whether they should be undertaken in this case. CONCLUSIONS

3. I am satisfied that:
   

(a) the sequestration order ought not to have been made due to the defect in service of the bankruptcy notice;

(b) the appropriate way of getting rid of the sequestration order is to annul the bankruptcy pursuant to section 154(1);

(c) the discretion provided in section 154(1) may be exercised in favour of leaving the sequestration order on foot.