Re Coyle

[1993] FCA 244

Re: ALEXANDER GEORGE COYLE and SIDNEY MERLE COYLE
Debtors Petition No. 783 of 1991
FED No. 244
Number of pages - 13
Bankruptcy - Practice and Procedure
(1993) 42 FCR 72
(1993) 120 ALR 527

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
Drummond J (1)

CATCHWORDS

Bankruptcy - Application for annulment of debtor's petition to enable bankrupt to pursue cause of action for benefit of creditors - support by creditors for annulment application - order for annulment discretionary - approval of creditors not decisive - no satisfactory proposal before court by debtor to apply proceeds of action for benefit of creditors - when debtor remains insolvent, discretion to grant annulment should in general only be exercised where there is evidence before the court which shows that debtor would be able to obtain annulment under s. 74 of the Bankruptcy Act.

Practice and Procedure - Cause of action vested in trustee in bankruptcy - action commenced by bankrupt after date of bankruptcy - action properly constituted if annulment granted.

Words and Phrases - s. 153B of the Bankruptcy Act - "ought not to have been presented" - "ought not to have been accepted by the Registrar".

Bankruptcy Act 1966 - ss. 153A, 153B

Cockerill and Ors. v Worrell and Anor. (Drummond J, unreported, 9 March, 1992)

In Re A Debtor (1971) 1 WLR 261

In Re A Debtor (1971) 1 WLR 1212

Re Goddard (Pincus J, unreported, 14 November, 1986)

Re Goo Tuck (1892) 2 BC (NSW) 95

In Re Hester (1859) 22 QBD 632

Ingall v Moran (1944) KB 160

Re McCormack (Pincus J, unreported, 6 April, 1990)

The Metropolitan Bank Ltd. v Pooley (1885) 10 App. Cas. 210

Minister of State for the Interior v R.T. Company Pty. Ltd. (1962) 107 CLR 1

Re Mottee; Ex parte Mottee v The Official Receiver (1977) 29 FLR 406 at 412

Oates v Commissioner of Taxation (1990) 27 FCR 289

Re Oates; Ex parte Deputy Commissioner of Taxation (Cwth) (1987) 17 FCR 402

Sandell v Porter (1966) 115 CLR 666

Re Story; Ex parte Boulton (Drummond J, unreported, 4 June, 1992)

Story v Boulton (Full Federal Court, unreported, 18 September, 1992)

Re Alexander George Coyle and Sidney Merle Coyle

HEARING

BRISBANE, 28 August 1992

#DATE 16:4:1993

Counsel for the applicant: A.J.P. Collins

Solicitors for the applicant: Wellner Poole and Gray

Solicitors for the trustee: Lynch and Co.

Counsel for the intervener: P.D. McMurdo

Solicitors for the intervener: Clayton Utz

ORDER

The Court orders that:

1. The application for annulment is dismissed.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

DRUMMOND J This is an application to annul a bankruptcy which commenced on 15 April, 1991, upon acceptance by the Registrar of the debtors' petition.

1. The annulment application is brought to enable the debtors to prosecute an action which they commenced in the Supreme Court on 5 July, 1991 against their former solicitor. According to their statement of claim, the debtors seek damages because he allegedly failed to advise them that a covenant in restraint of competition in a draft contract for the purchase by them of certain shares in a company was ineffectual to prevent the vendors competing with the business acquired by the debtors by this share purchase. The pleading alleges that in or about July 1986, i.e., shortly after the debtors executed and completed the contract, one of the vendor-shareholders commenced to conduct a business in competition with that which the debtors had acquired. In their affidavit filed in support of the annulment application, the debtors say that it was this competition which caused their newly bought business to fail. Their claim for damages, however, is nowhere quantified.

2. The debtors also say that, as a result of relying on the advice of the solicitor to acquire the business by buying the shares rather than the business itself, they suffered loss in the form of having to meet "an undiscovered debt" owed by the company to the vendor-shareholders in respect of superannuation. The debtors have been sued by the vendor-shareholders on this debt and they have claimed over against the solicitor. Their claim against him in this regard has been compromised on terms that involve his indemnifying them against the vendor-shareholders' demand and undertaking, in their name, the defence to that demand. Although the debtors complain about the inadequacy of the solicitor's advice in this respect, there is no claim in the action they have brought against him for this particular alleged breach of duty, no doubt because of the compromise to which I have referred.

3. The debtors say that the solicitor has tried from the outset of the Supreme Court action to defeat it without an adjudication on the merits. In particular, they say he has sought to have the action dismissed on the ground that it is a nullity because it was commenced by the debtors only after they had become bankrupt. The solicitor's application seeking dismissal of the debtors' Supreme Court action against him has been adjourned to enable the debtors to apply for the annulment of their bankruptcy.

4. It was not disputed by the debtors that this cause of action against their former solicitor vested in this trustee when they became bankrupt. It is common ground that the debtors were insolvent when they presented their petition and that this remains the position. Their affidavit and their trustee's report show that they have unsecured creditors who are owed debts totalling over $325,000.00 (apart from the vendor-shareholders who are claiming over $290,000.00 plus interest at 15% from June 1986). They have no assets.

5. The sole reason the debtors advance for seeking annulment of their bankruptcy is that if their action against the solicitor is successful, it will yield funds which will be available to pay out their creditors. It seems clear that the creditors can expect no dividend in the bankruptcy and the trustee will not run the action against the solicitor because no creditor will secure him for the costs he will incur, and for the costs he will be exposed to, in doing that. The debtors, however, appear to be able to fund the action: they received Legal Aid for this purpose prior to commencement of the action and even prior to their bankruptcy and the Legal Aid Office has continued to fund them with full knowledge of the difficulties confronting the debtors in trying to maintain an action commenced after bankruptcy.

6. It was suggested by the debtors that I should not trouble myself with deciding whether annulment of the bankruptcy would result in their action against the solicitor being regarded as properly constituted from the outset and that this question should be left to the Supreme Court, which has before it their former solicitor's adjourned application to dismiss the action on the ground that it is a nullity. I do not think I can avoid determining this matter. If the debtors' action against the solicitor is a nullity, there is no prospect that the claim against him will be pursued by the debtors' trustee. The trustee would require a costs indemnity, which is not forthcoming, and if the debtors' action is a nullity the trustee would, in any event, have to commence a fresh action against the solicitor, which is probably now time-barred. It follows that it is only if annulment would operate to validate the debtors' action from the outset that there would be any point in granting the relief sought, even if all other discretionary considerations favoured the debtors.

7. In Cockerill and Ors. v Worrell and Anor. (unreported, 9 March, 1992) I held that an action brought after bankruptcy by the bankrupt in his name on a cause of action that vested in the trustee upon the commencement of the bankruptcy was an incurable nullity, the bankrupt having no standing to institute the proceedings and that it was only the trustee who had standing to bring such an action. I relied upon The Metropolitan Bank Ltd. v Pooley (1885) 10 App Cas 210, Ingall v Moran (1944) KB 160 at 164-5 and Minister of State for the Interior v R.T. Company Pty. Ltd. (1962) 107 CLR 1 at 7. I dismissed the bankrupt plaintiff's action, even though that had the inevitable consequence that if the trustee decided to commence proceedings afresh, the defendant would then have time-bar defences available to it which would not have been available if the proceedings commenced by the bankrupt could have been validated.

8. Until the Bankruptcy Amendment Act 1991 came into force in July 1992, the provision that would have governed the present case was s. 154, which provided:
   

"(1) 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.

(2) 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 (3), 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 estate or interest in it, on such terms and subject to such conditions, if any, as the Court orders.

..."

1. The effect of annulment under this section was considered at length by Hill J in Oates v Commissioner of Taxation (1990) 27 FCR 289. At 297 his Honour said:
   

"Having regard to s. 154(2) of the Bankruptcy Act, it seems clear that it will not be correct to say that the consequence of annulment is that the bankruptcy is avoided for all purposes ab initio. Further, it is clear that an offence committed during the period in which the bankruptcy continues under s. 43(2)(c) is still an offence notwithstanding the annulment: Director of Public Prosecutions v Ashley (1955) Crim LR 565 and cf. Re Hayes; Ex parte Hayes (1984) 59 ALR 210 at 223. Nevertheless, subject to these, and perhaps other exceptions that may arise as in Re Hayes (supra), it seems not incorrect to say that the effect of the annulment will be the setting aside of the bankruptcy order. Indeed as is stated in Halsbury's Laws of England (4th ed), p 611 the form of order of annulment made in the United Kingdom includes an order that the petition upon which the bankruptcy order was made should be dismissed."

1. A similar conclusion was reached by Shepherd J in Re Oates; Ex parte Deputy Commissioner of Taxation (Cwth) (1987) 17 FCR 402 and by Pincus J in Re Goddard (unreported, 14 November, 1986).

2. Section 154 was, however, repealed by s. 29 of the Bankruptcy Amendment Act 1991. The relevant law is now to be found in Division V of Part VII of the Act. The provisions are as follows:
   

"Section 153A

(1) If the trustee is satisfied that all the bankrupt's debts have been paid in full, the bankruptcy is annulled, by force of this subsection, on the date on which the last such payment was made.

(2) The trustee must, as soon as practicable after that date, give to the Registrar a written certificate setting out the former bankrupt's name and bankruptcy number and the date of the annulment.

(3) The Registrar must enter in his or her records the fact that the bankruptcy has been annulled and the date of the annulment.

...

(6) In this section:

"bankrupt's debts" means all debts that have been proved in the bankruptcy and includes interest payable on such of those debts as bear interest, and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee."

"Section 153B

If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Registrar, the Court may make an order annulling the bankruptcy." "Section 154

(1) If the bankruptcy of a person (in this section called the 'former bankrupt') is annulled under this Division:

(a) 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 are taken to have been validly made or done; and

(b) the trustee may apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee; and

(c) subject to subsections (3), (6) and (7), the remainder (if any) of the property of the former bankrupt still vested in the trustee reverts to the bankrupt.

(2) If the property of the former bankrupt referred to in paragraph (1)(b) is insufficient to meet the costs, charges and expenses referred to in that paragraph, the amount of the deficiency is a debt due by the former bankrupt to the trustee and is recoverable by the trustee by action against the former bankrupt in a court of competent jurisdiction.

(3) If an application is made to the Court by a person claiming an interest in property referred to in paragraph (1)(c), the Court, after hearing such persons as it thinks fit, may make an order, either unconditionally or on such conditions as the Court considers just and equitable, for the vesting of the property in, or delivery of the property to, a person in whom, or to whom, it seems to the Court to be just and equitable that it should be vested or delivered, or to a trustee for that person.

(4) Subject to subsection (5), if an order vesting property in a person is made under subsection (3), the property vests immediately in the person without any conveyance, transfer or assignment. ...

(6) The Court may make an order directing the trustee not to pay or transfer the property, or a specified part of the property, referred to in paragraph (1)(c) to the former bankrupt if:

(a) the Director of Public Prosecutions, or a person who is entitled to apply for an interstate confiscation order under a corresponding law, applies to the Court for an order under this subsection; and

(b) the Court is satisfied that:

(i) proceedings are pending under the Proceeds of Crime Act 1987 or a corresponding law; and

(ii) property of the former bankrupt may:

(A) become subject to a forfeiture order or interstate forfeiture order made in the proceedings; or

(B) be required to satisfy a pecuniary penalty order or interstate pecuniary penalty order made in the proceedings."

1. Section 153A(1) identifies the date on which an annulment under that section occurs, something for which it is unnecessary to provide, in relation to annulments under s. 153B. But whether the annulment is under s. 153A or s. 153B, the effect of the annulment and, in particular, whether it operates ab initio or only prospectively, is not dealt with by either provision. The reasoning in Oates v Commissioner of Taxation is applicable to the new provisions. The new s. 154 operates to protect certain transactions that have taken place prior to the making of an order annulling a bankruptcy, irrespective of whether the order is made under s. 153A or 153B. There can be no difference in the consequence that follows whether annulment is under the former or latter section. Cf. Oates v Commissioner of Taxation at 301-2.

2. In my view, the effect of annulment under s. 153A and s. 153B will generally be that the bankruptcy is set aside ab initio and the annulled bankruptcy will be treated as never having taken place for any purposes, save those set out in s. 154 and save in other special situations of the kind referred to in Oates v Commissioner of Taxation at 297. It follows that the solicitor's objection to the debtors' action against him that it is improperly constituted will fail, if annulment is granted.

3. To enliven the discretion conferred on the Court to annul a voluntary bankruptcy, s. 153B requires the Court to be satisfied that "the petition ought not to have been presented or ought not to have been accepted by the Registrar".

4. In Re Goddard (unreported, 14 November, 1986), Pincus J sought to give effect to the expression "the petition ... ought not to have been accepted by the Registrar" in s. 154(1)(a), the precursor to s. 153B, by holding that this expression should be taken to apply only to instances in which s. 55(3) was breached, i.e., to cases in which either it does not appear that the petition is "in accordance with the prescribed form" or it does not appear that a statement of affairs accompanied the petition. Non-compliance with rr. 30 and 30A of the Bankruptcy Rules would also constitute grounds for holding that the petition ought not to have been accepted by the Registrar. On this reading of the expression, there is no foundation for concluding that this was a case in which "the petition ought not to have been accepted by the Registrar".

5. The debtors, however, relied primarily on the first limb of s. 153B, viz., that the petition ought not to have been presented.

6. I was referred to two cases in which voluntary bankruptcies have been annulled on the application of the bankrupt. In Re McCormack (unreported, 6 April, 1990), Pincus J granted such an application where the evidence showed that the debtor was solvent at the time he presented his petition; it also seems that that continued to be the position right up to the time the application was heard by his Honour, although there was reason to think that if an action then on foot went against the bankrupt, he would then become insolvent. In Re Goo Tuck (1892) 2 BC (NSW) 95, annulment was ordered on the application of the bankrupt who was without assets and whose only liabilities were in respect of his involvement in a partnership. When he presented his petition, he was unaware that his infancy was an answer to the claims of all his creditors. At that time, the position thus was that he owed no enforceable debts of any kind, that is, he could probably be regarded as solvent.

7. It will in my view generally not be possible for a debtor to establish that his bankruptcy should be annulled on the ground that the "petition ought not to have been presented" when it is clear that at that time he was insolvent. Although in contrast to earlier legislation, the provisions of the Bankruptcy Act 1966 that now govern presentation of a debtor's petition do not require the debtor to admit his insolvency, the procedure available to a debtor to procure his own bankruptcy is only intended to be available to debtors who are insolvent: see Re Mottee; Ex parte Mottee v The Official Receiver (1977) 29 FLR 406 at 412. Where an insolvent debtor presents his own petition, s. 55 is being used for its intended purpose: it cannot be said, in such circumstances, that the petition ought not to have been presented. If a debtor is insolvent at the time he presents his own petition it cannot, in my view, be said that the petition ought nevertheless not to have been presented because the debtor then had a hope or even a reasonable expectation that his fortunes would improve either in the near future or in the long term. If, after becoming bankrupt on his own petition, the debtor is able for any reason to pay all his debts, then he will be entitled to an annulment of his bankruptcy under s. 153A upon complying with the requirements of the section. But that such a situation arises, or may arise, after bankruptcy, in circumstances in which it was anticipated that it would arise at the time the debtor presented his own petition, provides no ground for saying that the petition ought not to have been presented, the debtor then being insolvent in the sense in which the term is used in Sandell v Porter (1966) 115 CLR 666 at 670, at that time.

1. Given that the applicants were insolvent when they presented their petition, I am not prepared to find that it ought not to have been presented. Their application for annulment should be dismissed for that reason.

2. However, even if I am wrong in thinking that the circumstances are not such as to enliven the discretion to annul their bankruptcy, there are, in my view, strong discretionary reasons why annulment should be refused.

3. The debtors remain insolvent. On the information available to me, it is not possible to form any assessment on the prospects of success which the debtors have in their action against their former solicitor or any assessment as to how much they might recover as damages if the action were to succeed.

4. More importantly, although annulment was sought solely, so I was told, to enable the action to be run for the benefit of the debtors' creditors who can otherwise expect nothing, no proposal was set out in the material relied on by the debtors that showed how the creditors would benefit, if the action were prosecuted to a successful conclusion. It was only after I commented on this on three separate occasions in argument that undertakings were offered on behalf of the debtors, firstly, that if the bankruptcy is annulled, and the action proceeds in the Supreme Court, the debtors' solicitors will keep all creditors, contingent or otherwise, advised as to the progress of the action and, secondly, that upon judgment being recovered or the action being settled, the debtors' solicitors will advise all creditors of the result and will hold any funds received from judgment or settlement in their trust account and will not release any funds until all such creditors have been duly advised.

5. Counsel for the solicitor submitted that these undertakings do not go anywhere near far enough to provide a real assurance that, if the action runs and is successful, the creditors will receive the benefit of the action, without having to pursue the debtors for payment. This objection to the sufficiency of the undertakings is not a mere technical one. When, in the course of argument, I raised for the second time the absence of any proposal to pay out the creditors if the action should succeed, the following exchange occurred with counsel for the debtors:
   

"His Honour: We have already covered this issue, have not we? There is no proposal, no binding arrangement made between Mr and Mrs Coyle and their creditors that the fruits of the action will be held available to them. There is nothing in that regard at all.

Mr Collins: No binding statement, but similarly what becomes available, becomes available to the creditors. His Honour: Well, if the creditors are smart enough to make a claim for it, and pursue that claim --- Mr Collins: Yes.

His Honour: --- be likely to be recouped by the creditors. Mr Collins: Yes.

His Honour: But if they are not smart enough to make a claim, your clients being successful in the action, your clients will pocket the money.

Mr Collins: Yes, if the creditors are not smart enough, your Honour but ---

His Honour: Yes.

Mr Collins: --- I would ---

His Honour: Anyway, I am having this exchange to just test what you have to say about ---

Mr Collins: Well, your Honour, that is the weaker of my --- His Honour: --- that being a consideration, that the Registrar should have acted on, if he had have known it, to refuse to accept the petition.

Mr Collins: That is the weaker of my two submissions, your Honour. The other one is the first part - that the petition ought not to have been presented, and my submission is that: that the petition ought not to have been presented. It is as simple as that."

1. The position thus is that while annulment is said to be sought solely for the purpose of enabling the debtors to continue to run the action against the solicitor for the benefit of their creditors, they put no proposal before the Court, initially at least, to show how the creditors would benefit from the action, if it succeeds. They resisted putting any proposal forward, until it became apparent that the application might well fail for want of such a proposal. The undertakings I have referred to were not proffered until I returned to this matter a third time. Only then did they put forward undertakings which are inadequate to ensure that the creditors will benefit, if the action turns out to be successful.

2. If the debtors had been prepared to bind themselves to a clear proposal to apply anything they recovered in the action for the benefit of their creditors, they may have been able to obtain the creditors' acceptance of that proposal by special resolution, pursuant to s. 73 of the Bankruptcy Act. In that event, s. 74(5) would have operated to annul their bankruptcy automatically. But they would have been bound to implement that proposal: see s. 75(3). Yet they have chosen not to follow that path but to seek instead annulment under s. 153B, which does not, on its face, require any firm commitment from them to benefit their creditors.

3. The bankrupts have provided their creditors with copies of the annulment application and the affidavit of Mr. Coyle sworn 30 April, 1992. Each of the creditors has indicated that it does not oppose the application. Understandably, no creditor wishes to object, given the possibility that if the application succeeds, then the action may proceed without cost to any of them and, if successful, may lead to recovery of at least some of the debts owing to them by the debtors. That the creditors are of this mind cannot, however, be determinative of the annulment application. Whether the creditors would have maintained their support for the application if they were aware of the debtors' refusal to bind themselves to hold any fruits of the action for distribution among the creditors is a matter of some doubt. There is a public interest which goes beyond the interest of the individual creditors in being paid that must be taken into account in deciding whether or not to grant an application for release from bankruptcy by a bankrupt who remains unable to pay his debts in full. The 1992 amendments to s. 74 of the Bankruptcy Act 1966 enable a bankrupt who remains insolvent to procure an automatic annulment merely by persuading his creditors to accept his proposal for a composition or scheme of arrangement, which proposal may disregard or even be detrimental to the public interest: see Story v Boulton (Full Federal Court, unreported, 18 September, 1992). But this does not, I think, require the Court, on an application for annulment under s. 153B, to ignore those considerations touching on the public interest that have long been regarded as essential for the Court to take into account in deciding applications by insolvent debtors to be freed from bankruptcy.

4. What was said in In Re Hester (1859) 22 QBD 632 explains why it can never be decisive, on an application like the present one, that the consent of most or even all of the bankrupts' creditors has been obtained to the bankrupts being released from bankruptcy. There, Fry LJ said, at p 641:
   

"This appeal is based on the idle notion that the Court is bound by the consensus of the creditors obtained, not at a meeting of the creditors, not after a full and open discussion of the rights and interests of the parties and the general position of things, but obtained by the debtor going round to his various creditors, and procuring from them ... consents to the rescission of the receiving order, upon what representation and in what manner we do not know. ... I conceive that one of the objects of this statute was, if not to put an end to, yet at least to discourage, private arrangements between a debtor and his creditors. Any one who knows the history of the law of debtor and creditor of this country, knows that private arrangements between debtors and their creditors have often been scandalous, and that they have given opportunities for misrepresentation, for private bargains, and for undue preferences. I for one should pause long before I allow the evils of private arrangements between a debtor and his creditors to creep into the administration of this Act."

1. See also Lord Esher MR at 638-9.

2. In my opinion, since the jurisdiction to annul a bankruptcy conferred on the Court by s. 153B is a discretionary one, where debtors who remain insolvent seek annulment on the basis that they will be able to confer a benefit on their creditors if the bankruptcy is set aside, the Court should generally only grant annulment where the evidence shows that the debtors could obtain annulment under s. 74. Cf. In Re Hester at 638 and 640-1; In Re A Debtor (1971) 1 WLR 261 at 266 and, on appeal, (1971) 1 WLR 1212; Re Story; Ex parte Boulton (Drummond J, unreported, 4 June, 1992) and, on appeal, Story v Boulton (Full Federal Court, unreported, 18 September, 1992). This would involve proof that the creditors have been fully informed of what the debtors propose, including what the debtors are prepared to bind themselves to do for the benefit of the creditors and proof that the creditors generally support the proposal.

3. Therefore, even if the fate of this application for annulment were to depend upon my being satisfied, as a matter of discretion, that it was an appropriate case for annulment, then, for the reasons given, I would refuse the application.