Re Clyne, Peter Leopold v Ex parte Deputy Commissioner of Taxation

[1983] FCA 258

Re: PETER LEOPOLD CLYNE
And: DEPUTY COMMISSIONER OF TAXATION
No. P4 of 1983
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
AND THE AUSTRALIAN CAPITAL TERRITORY
Beaumont J.

CATCHWORDS

Bankruptcy - Debtor bankrupt upon presentation of debtor's petition - Creditor's petition awaiting hearing - Opposition to creditor's petition - Power of court to make sequestration order on earlier creditor's petition - Effect of sequestration order on debts owed by bankrupt - Circumstances when court has power to make sequestration order notwithstanding earlier bankruptcy - interests of general body of creditors considered - relation back.

Bankruptcy Act, 1966 ss.52(1), 55, 55(3)(b), 58(3)(b), 82(1), 84(1), 85(1), 86(1)

HEARING

SYDNEY

#DATE 7:10:1983

ORDER

1. That a sequestration order be made against the estate of the debtor, such order to take effect on 6 September, 1983 prior to the presentation by the debtor of his own petition pursuant to the provisions of s.55 of the Act.

2. Declare that William Edward Andrew is the trustee of the estate of the debtor.

3. Order that costs (including reserved costs) be taxed and paid according to the Act.

4. Order that costs of the trustee of intervening in this proceeding be taxed and paid according to the Act.

5. Direct that a draft of this order be delivered to the Registrar within seven days in accordance with Rule 124(2).

JUDGE1

By his petition dated 4 January, 1983, the petitioning creditor seeks the making of a sequestration order against the estate of the debtor pursuant to s.52(1) of the Bankruptcy Act, 1966 ("the Act"). The hearing of the petition was initially fixed for 12 April, 1983. The hearing of the petition was adjourned on that date and was later further adjourned from time to time. On 19 September, 1983, the petitioning creditor sought to proceed with the petition. However, in the intervening period, the debtor presented his own petition (on 6 September, 1983) pursuant to s.55 of the Act and thereby became bankrupt by force of that provision.

The debtor now opposes the petition of the petitioning creditor on the following grounds:

"1. On the 6th day of September 1983 the respondent filed a petition pursuant to the provisions of Section 55 of the Bankruptcy Act 1966-1982 (Cth) and this was accepted by the Registrar.

2. Thereupon, by virtue of the presentation of the said petition, and by force of Section 55(3)(b) of the said Act, the respondent became a bankrupt.

3. This Honourable Court has no power to make a sequestration order against a bankrupt except in relation to a debt or debts which arose or came into existence or were incurred or contracted after the date of the first bankruptcy.

4. The debt on which this petition is based arose entirely prior to the bankruptcy referred to in paragraph 2 hereof.

5. On and as from the 6th day of September, 1983 the petitioner's debt ceased to be a debt due or payable by the respondent to the petitioner and was converted by virtue of Section 82(1) of the said Act into a right to prove for the said debt in the respondent's bankruptcy.

6. Accordingly it is now no longer correct to say and it will not upon the hearing of the petition be correct to say that the debt on which the petition is founded and/or the debt claimed in the petition is or that any part thereof is due or payable by the respondent to the petitioner.

7. For the above reasons it is contended that this Honourable Court has no power to make a sequestration order against the respondent."

Although its relevance need not be considered at this stage, the reason for the contest between the parties may be found in the longer period of relation back which will apply if the petitioning creditor succeeds: there is no question that the debtor will be made bankrupt even if this petition is dismissed; however, if it is dismissed, a shorter period of relation back will apply since the bankruptcy will have commenced much later.

In support of his opposition, the debtor submits that when a bankruptcy has occurred, either by way of a sequestration order or by the filing and acceptance of a petition under s.55, a second bankruptcy by way of sequestration order cannot take place except if a further debt arises after the first bankruptcy. This, he says, is because the "moving picture" of a person's affairs becomes frozen at the moment of bankruptcy; that person's status changes, and so does the status of that person's assets and debts. At the moment of bankruptcy, the debts of the bankrupt cease to be debts due to or recoverable by the creditor, and they become a mere right to prove in the bankruptcy. That right is an equitable right and the creditor becomes a cestui que trust in relation to the assets that vest in the trustee when a bankruptcy occurs (see the Act, s.58(3)(a) and see In re Higginson & Dean; Ex parte The Attorney General, (1899) 1 Q.B. 325 at p.333; In re Thomas; Ex parte The Commissioners of Woods and Forests (1888) 21 Q.B.D. 380 at pp. 383-384; Ex parte The Trustee of the Property of Cork (Decd.); Blackburn & Others (Respondents) (1932) 5 A.B.C. 1 at pp.5-6; Re Payne; Heuzenroeder v. The Trustees (1934) 7 A.B.C. 127 at pp. 128-9). In short, he says that there is no debt "still owing" at the hearing of the petition as s.52(1)(c) requires.

The principal authority relied on by the debtor is the decision of Clyne, J. in Re White (1960) 20 A.B.C. 11. The facts were that the estate of the bankrupt were sequestrated on 23 March, 1959. On 16 November, 1959, on the petition of another creditor, one Slater, a further sequestration order was made against the estate of the bankrupt. By each sequestration order the same person was appointed the official receiver of the debtor's estate. An application was made by the official receiver for an order that the sequestration order made on 16 November, 1959, be rescinded. It was held that the official receiver was entitled to make the application and that his application must succeed. Clyne, J. ordered that the sequestration order made on 16 November, 1959 be rescinded.

Clyne, J. said (at p.12):

"It is well established that when a person is made bankrupt his property becomes vested in the official receiver of his estate and the remedies which his creditors had against his property can no longer be enforced. In substitution for these remedies the creditors acquire a right to share equally and proportionately in the distribution of the bankrupt's estate. See In re Thomas; Ex parte The Commissioners of Woods and Forests (1888) 21 Q.B.D. 380 at p.383.

This is clearly the effect of s.60(1) of the Bankruptcy Act. When White became bankrupt on 23rd March, 1959, Slater's remedy against White or his property ceased to exist, and he had then merely a right of proof against White's bankrupt estate. It was contended that the words in s.60(2) of the Act, 'any remedy against the property or person of the bankrupt in respect of the debt', i.e., a debt provable in bankruptcy, must mean a remedy in the way of enforcing payment of the debt, not by way of bringing action or suit, but a proceeding such as a proceeding under an Act dealing with the imprisonment of fraudulent debtors. This contention, in my opinion, cannot be accepted. The word 'remedy' has a well defined meaning and this meaning cannot be restricted in the manner suggested by counsel for Slater."

Clyne, J. then dealt with the question of the relief to be granted as follows (at p.13): "The question remains whether the official receiver was entitled to make this application. The power to rescind under s.26 of the Bankruptcy Act is discretionary, and it has been said that this power is almost without limits. In my opinion, it was undoubtedly open to the official receiver to seek the order which he now seeks. Slater had a right to prove in the estate of White under the earlier sequestration order. He had no legal right to the later sequestration order obtained by him against White. In these circumstances the official receiver ought not to be obliged to act as an official receiver under the later order of an estate which at the date of this order was being administered by him under the earlier order."

A similar situation arose in Re Cole; Ex parte Richards (1966) 9 F.L.R. 190. There also, Lucas, J. ordered that the second sequestration order was wrongly made and should be rescinded. It was also held that no order could be made protecting the petitioning creditor's costs of the second petition (see also Re Seres; Ex parte Byrne Bros. Pty. Ltd. (1967) 10 F.L.R. 439). The reasoning in Re White, supra, and in Ex parte Trustee of Property of Cork; Blackburn & Others (Respondents), supra, was followed and applied.

In Cork, reliance was placed (at p.6) upon a passage in the judgment of Wright and Darling, JJ. (delivered by Wright, J.) in In re Higginson and Dean; Ex parte The Attorney-General (1899) 1 Q.B. 325 (at p.325) which is illuminating for present purposes:

"The original assignees in the bankruptcy, and their successors in office, have from the time of the bankruptcy been entitled to the old railway shares in trust for such creditors as had been or might be admitted to proof. The bank immediately before its dissolution was not a mere creditor. It was a creditor whose claim was in proof. Its claim was no longer a mere right of action for a debt. It could no longer have maintained an action as for a debt. The debt had been, at any rate provisionally, merged in an equitable execution (Twiss v. Massey ((1737) 1 Atk. 67) per Lord Hardwicke; Cooke's Bankruptcy Laws, 4th ed., ch.1, p.5); and the right to sue had been replaced, not, indeed, by any particular interest in any specific chattels, but by a right to have all the assets, as and when realised, applied pro rata for the bank's benefit with the other creditors. This right, as it seems to me, existed as an equitable interest or chattel at the time of the dissolution . . ."

The notion of equitable execution thus explained by Wright, J. has always been fundamental to the administration of the laws of bankruptcy. Wright, J. cited Lord Hardwicke in the early case of Twiss v. Massey, supra, where the Lord Chancellor (at p.67) described a "commission of bankrupt" as an "action and execution" in the first instance. According to Blackstone, Commentaries on the Laws of England, 15th Ed. (1809) at p.512 (note 15), through the medium of a court of equity, the creditors of a deceased insolvent might always be compelled to take an equal distribution of the assets. "It was only necessary for a friendly bill to be filed against the executor or administrator, to account; after which the Chancellor would injoin any of the creditors from proceeding at law."

Equitable relief by way of equitable execution in the form of the appointment of a receiver would be granted where there was no remedy or no adequate remedy, by execution at law (see Anglo-Italian Bank v. Davies (1878) 9 Ch.D. 275 at p.283; Harris v. Beauchamp Brothers (1894) 1 Q.B. 801 at p.809; Ashburner's Principles of Equity, 2nd Ed. (1933) at p.354; Keeton and Sheridan, Equity (1969) at p.510; p.515). In the same way, on sequestration of the estate of a debtor under the Act, an official receiver or official trustee is appointed to hold and distribute the property of the bankrupt equally among his creditors in the same degree. He is a statutory trustee (see Ayerst (Inspector of Taxes) v. C. & K. (Construction) Ltd. (1976) A.C. 167 at p.178) and his appointment may likewise be seen as a form of equitable execution. As Kitto, J. observed in Motor Terms Co. Pty. Ltd. v. Liberty Insurance Ltd. (1966) 116 C.L.R. 177 at pp.180-1, Lord Eldon made the general principle clear when he remarked in Ex parte Dewdney (1809) 15 Ves. Jun. 479, at p.498; 33 E.R. 836 at p.843:

"Upon the whole my opinion as to the general point is, that in the consideration of this Statute a Commission of Bankruptcy is nothing more than a substitution of the authority of the Lord Chancellor, enabling him to work out the payment of those creditors, who could by legal action, or equitable suit, have compelled payment; and that the objection upon the Statute is competent to the creditors; and may be sustained. I am confirmed in that opinion, recollecting what is done in bankruptcy without any authority by the Statutes; which is to be accounted for only thus; that the Lord Chancellor is understood in the distribution to govern himself as to legal debts by the rules of law, and as to equitable debts by the rules of equity; regarding the claim of each creditor as a suit depending."

Viewed in this way, it is apparent that the making of a sequestration order does not in any way destroy or extinguish a debt owed by the bankrupt. The debt, as the Act acknowledges (see ss.58(3)(b); 84(1); 85(1); 86(1); 153(1) and 154(1)(b)), survives as a debt, but the ordinary rights of a creditor to recover his debt are withdrawn upon the initiation of the special mode of administering assets for the benefit of creditors generally (see Motor Terms Co. Pty. Ltd. v. Liberty Insurance Ltd., supra, at p.181). In the ordinary case, as White demonstrates, since double recovery is not permitted, the creditor is restricted to his right to prove against the special fund.

However, this is not always so. For insurance and other reasons, it may be appropriate for the Court to grant leave to a creditor to commence legal proceedings to recover a provable debt (s.58(3)(b)). Such leave, if granted, is usually granted upon the condition that any judgment obtained in any such proceedings will not be enforced in the ordinary way; so that recourse may be had to an insurance cover, if appropriate; or the judgment creditor may be permitted to prove in the bankruptcy for the amount of the judgment. This example serves to illustrate that the existence of the debt is not affected by the making of a sequestration order, notwithstanding that, broadly speaking, each unsecured creditor lose his antecedent rights against the person and property of the debtor to recover his debt (see The Queen v. Davison (1954) 90 C.L.R. 353 at p.383). But the subject of proof in the bankruptcy is the debt itself which continues to exist until discharged otherwise.

In the ordinary case, as White decided, it is contrary to the spirit of the bankruptcy legislation to permit a sequestration order to be made at the behest of a creditor whose debt has already been provisionally merged in the administration arising under a prior sequestration order. To permit, in the ordinary case, two sequestrations and thus two administrations commencing at different dates in respect of the same property and the same debts of the bankrupt would invite chaos. However, it does not necessarily follow that the Court is powerless in a case such as the present where the debtor has had resort to the provisions of s.55 at a time when a creditor's petition has been on foot for sometime and is awaiting a hearing. This is especially so when the dismissal of this petition upon the grounds urged by the debtor has the consequence that the commencement of the bankruptcy, for relation back and other purposes, will be a date much later than would be the case if a sequestration order were to be made on this petition. However, if a sequestration order were now to be made, special provision would need to be made to avoid, if possible, the practical difficulties which would arise if there were separate administrations commencing at different dates but in respect of the same property and the same debts of the bankrupt.

One way of avoiding these practical difficulties is to antedate the second sequestration order so as to deem it to have been made on the date of the previous bankruptcy. There is precedent for such a course. Thus, in the United Kingdom, a petitioning creditor may appeal from the dismissal of his petition, even though, subsequent to its dismissal, a receiving order has been made on the debtor's petition. If such an appeal is successful, the receiving order will stand, but will operate as if made on the creditor's petition; and as if dated when the creditor should have obtained his receiving order (see Halsbury's Laws of England, 4th Ed. Vol. 3 para. 943 at p.514; Williams on Bankruptcy, 18th Ed. at p.67).

In Re Haynes, Ex parte Kibble (1890) 7 Morr. 50, a bankruptcy petition presented on 3 January, 1890 was dismissed by the county court registrar on the ground that the act of bankruptcy alleged in it had not been proved, but on 9 January, 1890, a receiving order was made against the debtor on his own petition upon which he was adjudicated bankrupt. The creditor appealed against the order dismissing his petition on the ground that by the wrong decision of the registrar he had been deprived of his costs and had been prevented from having carriage of the proceedings. It was held that the order dismissing the petition of the creditor must be set aside; and that a proper order under the circumstances would be to direct that the receiving order made against the debtor should be amended as if dated 3 January, such receiving order to be deemed to be made on the petition of the creditor.

During the course of argument, Cave, J. asked counsel (at p.52): "What is to be done in a case of this kind? Suppose a payment has been made by the debtor which under the earlier petition could be attacked as an undue preference but could not be so attacked under the later petition. Do you contend that we have not the power to direct that the receiving order in existence should be taken to rest on the earlier petition?"

In his judgment, in which A.L. Smith, J. concurred, Cave, J. said (at p.52):

"It seems to me that if the order ought to have been made by the registrar it would be unjust that the petitioning creditor, who wanted to distribute the debtor's assets amongst the creditors, should have to pay costs which he ought not to pay. I do not myself see why we should not direct that the receiving order should be dated January 3rd and remain as if on the creditor's petition. It seems to me that the proper course to take will be to direct that the order of January 3rd must be set aside. The receiving order to be amended as if dated on January 3rd and deemed to be made on the petition of the creditor."

Haynes was followed and applied by a Divisional Court (Vaughan Williams and Gainsford Bruce, JJ.) in Re Johns, Ex parte Spears (1893) 10 Morr. 190. A similar question arose in Re Payne (1948) 15 A.B.C.1. After a creditor's petition had been presented against one of two partners, a sequestration order was made against them both on their own petition. At the subsequent hearing of the creditor's petition, application was made for an order appointing the same trustee and consolidating the proceedings. It was held that the proper course was to make a sequestration order on the creditor's petition and then to order that the proceedings be consolidated.

Clyne, J. said (at p.2):

"I find it difficult to understand how a trustee can be appointed in an estate where a sequestration order has not been made, and the course I propose to adopt is to make an order on the petitioner's case in the first place, and then consolidate the proceedings thereunder with those under the debtors' petition. The order of sequestration I now make on the creditor's petition. There is authority for this course, which I think I should adopt. (See In re a Debtor (1935) W.N. 211.)

This authority also points out what is necessary in order to enable the petitioning creditor to obtain his costs. A second sequestration order may be necessary in the interests of creditors, for example in a case of relation back. Although the debtors have sworn that there were no joint assets, further material has been advanced on behalf of the petitioning creditor which raises a doubt as to the truth of their statement, and some enquiry is necessary into the circumstances of various transfers made prior to the 24th September, 1948. It appear to me that this application ought not to be refused because it will allow the official receiver to go further back than otherwise he would have been allowed to go. The order I make is that the proceedings under the debtors' petition be consolidated with the proceedings under the creditors' petition."

The English authority relied on by Clyne, J., In re a Debtor, (1935) WN 211, was a decision of the Court of Appeal (Lord Wright M.R., Romer and Greene, L.JJ.). The question raised by the appeal was whether the Registrar had jurisdiction to make the receiving order notwithstanding that a receiving order had already been made against the same debtor in the Canterbury County Court. It was argued on behalf of the debtor that s.7 of the Bankruptcy Act, 1915 (U.K.) put an end to the rights of creditors to take further proceedings, and therefore directly the receiving order was made in the Canterbury County Court, the Registrar in the High Court ceased to have any jurisdiction to make the second receiving order: the only result of making such an order would be to burden the estate with a second set of costs.

Lord Wright M.R., said (at p.211) that there appeared to be no legal objection to the receiving order in the present case. The Registrar had jurisdiction to make it, the petition was properly presented and the debtor was within the district of the High Court. There might be a case in which it would be of real practical value that a second receiving order should be made, such as relation back to the trustees' title, but it ought to be realised and he wished to make it clear that it was undesirable that a second receiving order should be made merely to enable a petitioning creditor to get the costs of the petition out of the estate. He desired to state again that it would not be desirable to make a second receiving order unless there was satisfactory evidence before the Registrar at the time when he was asked to make a second receiving order that it was in the interests of the general body of creditors that such an order should be made (cf. former Rule 128 of the Bankruptcy Rules).

In my opinion, a liberal view should be taken of the jurisdiction of a court of bankruptcy in a case such as this. Lord Esher, in passage adopted by McTiernan, J. in McIntosh v. Shashoua (1931) 46 C.L.R. 494 at p.520, explained why this should be so in Re Thurlow; Ex parte Official Receiver (1895) 2 Mans.158 at p.160; (1895) 1 Q.B. 724 at p.729):

"Of all the procedures in our Courts, that of the Court of Bankruptcy will be the first to brush aside all technicalities to get at what is fair and just. Dr. Lushington used to say of Admiralty law that it was wider than equity or common law, and that the Admiralty Court administered the law according to natural justice. That is also the rule in bankruptcy. In construing an Act of Parliament the Court will, if it can, so construe the Act as to leave the greatest latitude in the Court of Bankruptcy. Administration in bankruptcy is under the control of the Court, except where it is limited by Act of Parliament. It is not the creditors who administer bankruptcy law; it is no part of the rights of the debtor to interfere; no official receiver has a right to interfere, except subject to the control or orders of the Court; and no department of Government has any right to interfere. It is the Court of Bankruptcy alone that controls the administration through its officers, and above them is this Court of Appeal."

It follows, in my opinion, that where special circumstances such as the application of the doctrine of relation back exist, the Court has power to make a sequestration order notwithstanding an earlier bankruptcy if it is in the interests of the general body of creditors to do so. In my view, the circumstances of this case justify the making of a sequestration order on the earlier petition and I propose to so order.

In accordance with the course followed in Haynes, Johns and Payne, supra, I further propose to antedate the sequestration order as of 6 September, 1983 being the date upon which the debtor presented his own petition pursuant to s.55 and to deem this order to take effect prior to its presentation. Although in Payne, supra, consolidation of the debtor's and creditor's petitions was ordered, there are difficulties in following that course here because the statutory bankruptcy effected by s.55 is a non-judicial act and cannot be consolidated with a judicial proceeding (see Davison, supra, and Lockins v. Richards (1969) 43 A.L.J.R. 274). However, in my view, it will suffice for present purposes if the sequestration order is antedated so as to take effect on 6 September, 1983 but prior to the debtor's statutory bankruptcy on that day. The making of an order antedating the operation of a receiving order is the practice generally followed in the United Kingdom where, on appeal from the dismissal of a bankruptcy petition, a receiving order is made (see Re Raatz; Ex parte Carlhian (1897) 4 Mans. 50; Re Teale; Ex parte Blackburn (1912) 2 K.B. 367; Halsbury's Laws of England, 4th Ed., Vol. 3 para. 943 (footnote (1) at p.514). In my opinion, this is the appropriate course to be followed in this case. There is a presumption that where a judicial act and a non-judicial act are done on the same day, the judicial act is referred back to the earliest moment of the day and takes priority over the non-judicial act (see Re Warren, Wheeler v. Mills (1938) 2 All E.R. 331 at pp.338-341). However, I think that it is preferable, in the exercise of the power vested in the Court by s.30(1)(b) of the Act, that the matter is put beyond question by ordering that the sequestration order on this petition take effect on the same day as but prior to, the statutory bankruptcy. Further, reasons of convenience indicate that it is appropriate that the trustee of the estate of the debtor in his statutory bankruptcy also act as trustee in this bankruptcy (cf. Re Close; Ex parte Abbott - unreported - Fisher, J., 19 August, 1983).

The debtor raises no other matters in opposition: he concedes that all formal matters have been proved and does not suggest that any reason exists for the exercise of the residual discretion vested in the Court under s.52 of the Act. I am satisfied that the debtor has committed the act of bankruptcy alleged in the petition. I am satisfied with the proof of the other matters of which s.52(1) of the Act requires proof.

I propose to make the following orders:

1. I make a sequestration order against the estate of the debtor, such order to take effect on 6 September, 1983 prior to the presentation by the debtor of his own petition pursuant to the provisions of s.55 of the Act.

2. I declare that William Edward Andrew is the trustee of the estate of the debtor.

3. I order that costs (including reserved costs) be taxed and paid according to the Act.

4. I order that costs of the trustee of intervening in this proceeding be taxed and paid according to the Act.

5. I direct that a draft of this order be delivered to the Registrar within seven days in accordance with Rule 124(2).