Re Durali, Ali Ex Parte Durali, Ali v Taktikos, Peter

[1996] FCA 1018

IN THE FEDERAL COURT OF AUSTRALIA
EXERCISING FEDERAL JURISDICTION IN BANKRUPTCY         No. VB 605 of 1996

BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA

RE:  ALI DURALI  Bankrupt

EX PARTE:  ALI DURALI  Applicant
  and
  PETER TAKTIKOS  Respondent

COURT:         NORTHROP J
PLACE:         MELBOURNE
DATE: 15 NOVEMBER 1996

REASONS FOR JUDGMENT

This is an application by the Bankrupt, Ali Durali, for an order under section 153B of the Bankruptcy Act 1966, that his bankruptcy be annulled. The relevant part of section 153B provides:

"If the Court is satisfied that a sequestration order ought not to have been made .... the Court may make an order annulling the bankruptcy."

The authorities make it clear that under that provision there is power in the Court to investigate an alleged debt, which is said to arise, or, to be more accurate, to be proved by
a judgment debt. On this point I need do no more than refer to two authorities;  Re Deriu (1970) 16 FLR 420 and Re Raymond; ex parte Raymond (1992) 36 FCR 424. At the same time it is clear that if the Court is satisfied that a sequestration order should not have been made because the debt did not exist, or for any other appropriate reason, for example that the debtor was solvent, there remains a discretion in the Court whether to order the annulment of the sequestration order or not.

This application must be considered in the light of the provisions of the Bankruptcy Act. The Court is concerned with the question of solvency and acts of bankruptcy. Where a petitioning creditor relies upon an act of bankruptcy arising from the failure by the debtor to comply with a bankruptcy notice for the payment or otherwise of a judgment debt, the judgment debt really is only evidence of the existence of the debt. In an appropriate case, the Court, at the hearing of the petition, can investigate whether that debt in fact is owing. The same general principles apply in relation to an annulment application. In the present case, the bankrupt who originally was unrepresented, did not make his application in conformity with the requirements of rule 57 of the Bankruptcy Rules nor had there been any compliance by the parties with rules 102, 103 and 106 of the Bankruptcy Rules.  Further, directions made for the conduct of the case were not complied with insofar as they related to the filing of affidavits within specified times.  As a result, when the matter came on for hearing on Monday of this week, there was utter confusion. There was no clear statement anywhere of the grounds upon which the bankrupt sought to have the sequestration order annulled.  There was no clear statement anywhere as to the grounds of opposition relied upon by the petitioning creditor, and it was not even clear what section the applicant was relying on.

At the hearing, the bankrupt, the petitioning creditor, and the trustee in bankruptcy
each appeared and was represented by counsel although it is not clear why the trustee needed legal representation. The trustee was not a party or respondent to the application.  At this stage the comment should be made that under Bankruptcy Rule 57(3), where an application for an annulment is made and served on the trustee, and I quote:

"..... the Trustee must file a report, not later than 10 days before the hearing date of the application, about the bankrupt's conduct and examinable affairs, in both the period before, and the period after, the bankruptcy occurred."

Sub-rule 57(4) provides:

"The Court may, upon the hearing of an application for an order, annulling a bankruptcy, have regard to the report filed in accordance with subrule (3)."

In applications of this kind the trustee normally files such a report and attends a hearing to answer any questions relating to the bankruptcy which the Court thinks appropriate.  It is not the normal practice for the trustee to file an affidavit either for the purpose of presenting the report or to justify the report.  The trustee, in many respects, is like an officer of the Court whose function, at times like this, is to be present to assist the Court in consideration of the issues before it.

In the present case, an affidavit had been filed by the trustee as well as a report given at an earlier stage, since directions had been given by the Court for the filing of an affidavit.  The reason for such a direction is not clear, but in fact a further affidavit was filed.  But as far as the Court is concerned, in considering this matter at this stage, it only has to regard to the report itself.  It is sufficient to say that there is material in that report to suggest that
the bankrupt has not co-operated with the trustee as required by the Bankruptcy Act. The reason for this is not clear, but it should be noted that this is one of the cases where the petitioning creditor choses the trustee in bankruptcy and the Official Trustee in Bankruptcy was not the trustee in bankruptcy as happens in most cases.  I should also add, although I give no weight to this matter, that the dispute arising in this case involves peoples of different nationalities involving a Greek Turk, who was born in Greece, speaks the Greek and Turkish languages and has been in Australia for some 21 years, a Greek who has been in Australia for some time, and a Turk who has been in Australia for some time.  There are undercurrents, possibly, of conflicts of which the Court is unaware, existing between the parties.

At the time when the case came on for hearing, much time was wasted trying to establish the issues to be decided.  This matter should not have been set down for hearing before the application was ready for trial, since affidavits were still being relied upon which had been sworn either on the Friday before, or the Monday itself, of the hearing.  It must be understood that the Bankruptcy Rules as well as the Federal Court Rules, even though they are not applicable to this application, are designed to facilitate the orderly presentation of disputed matters before the Court. If the rules are followed, the litigants, as well as a Court, are greatly assisted.  The issues are defined and the matter can be tried expeditiously. Because of the utter confusion the Court was disposed to adjourn the hearing of the application to enable the proper procedures to be followed.  At that stage it was apparent, however, that the costs and expenses already incurred, especially those by the trustee, were very large and were out of all proportion to the amount of the debt of the bankrupt.  The failure to comply with the proper procedures had inflated the amount of those costs and expenses.  Such action has the effect of giving the law, unnecessarily, a very bad name and
tends to bring the Court into disrepute.

Accordingly, the Court proceeded to hear the application in an attempt to have the dispute determined as speedily as possible and without the need to incur further expenses. This has not been an easy task having regard to the confusion which had arisen and to the fact that the affidavits filed are in a most unsatisfactory state containing much material which is inadmissible and not relevant to issues before the Court. In the event and in all the circumstances, the Court is able to decide this application on findings of fact. The Court is able to give its judgment immediately at the conclusion of submissions.

A reference to the dates of crucial events enables the issues to be ascertained.  The sequestration order was made on 7 March 1996.  It was based upon an act of bankruptcy arising from the non-compliance with a bankruptcy notice based on a judgment debt obtained in the Melbourne Magistrate's Court on 7 February 1995.  It was a default judgment and was in the sum of $1697.66 being $1,350.00 for a claim for work and labour done, costs of $313.00, and interest $34.66. It appears from an exhibit before the Court that the complaint by the judgment creditor was for an amount of $1,350.00 where it is stated that the nature of the claim was for moneys owing, that it arose in Melbourne and that it arose in 1993. The particulars of the claim were said to be that the bankrupt is indebted to the judgment creditor in the sum of $1,350.00 being for the painting of a shop in Chapel Street, Prahran, full particulars of which had been previously provided and alternatively the bankrupt is indebted to the plaintiff in the sum of $1,350.00. No further particulars were given. The amount claimed was $1,350.00 plus interest plus costs.

As a result of submissions made on behalf of the judgment creditor and in view of
what will be said later, it is noted that those particulars are not very explicit.  The certificate given by the Magistrate's Court in relation to the judgment debt which, as I said, was a default judgment, showed that the claim was for work and labour done. Looking at the particulars the impression given is that essentially the claim was for work and labour done in relation to painting work on a shop in Prahran. With interest from the date of judgment until the issuing of the bankruptcy notice, the amount claimed in the bankruptcy notice was $1878.68, an amount just above the sum of $1,500.00 being the minimum amount required to found a bankruptcy notice.

The bankrupt had knowledge of the petition and the sequestration order. He had knowledge of the judgment debt but did not make his application for annulment until 22 July 1996.  Before then he had contacted several solicitors but no action apparently was taken by any of them on behalf of the bankrupt. The bankrupt denies that he was ever indebted to the judgment creditor for work and labour done or under any other cause of action.

A most disturbing feature of this application is the large amount of costs and expenses already incurred in relation to a debt, although large to an impecunious person, in reality is very small, the debt being less than the $1,500.00 but brought above that figure by reason of costs and interest. Accepting a debt in the sum of $1,878.00, the amount mentioned in the bankruptcy notice, the petitioning creditor's costs were taxed at $2,477.99.  The trustee's costs and expenses including legal expenses are said to be in the order of $18,000.00.  These costs and expenses appear to be high. When added to the costs of the petitioning creditor and having regard to the amount of the debt questions must arise as to what this is all about. Where expenses like that can be incurred under legal processes there is something wrong somewhere. The Court does express concern at the fact that these large sums have been
incurred in relation to a relatively small debt.  This is what gives the law a very bad name and brings the Court into disrepute. It causes dissatisfaction and the Court must be jealous of its standing, of the law, and the effect on litigants generally. Bankruptcy proceedings should not be used as a means of enforcing a judgment debt. Where a judgment debtor owns land, ample procedures under State law are available to enforce payment of the debt.

I have already said that the affidavits which have been filed were unsatisfactory.  The bankrupt and a witness who swore an affidavit in support of the application were cross-examined.  In addition affidavits were filed on behalf of the applicant both by himself and his son.  The dispute as to the basis of the debt arose out of the painting of a shop in Chapel Street, Prahran, which was being refurbished by a Mr Arslan, who was the person of Turkish nationality.  He speaks English well.  He was in the process of refurbishing the shop for the purposes of conducting a coffee shop. For that purpose he was seeking a painter. Apparently Ali Durali, the bankrupt, knew Mr Arslan and as a result of requests suggested that the judgment creditor, Peter Taktikos, the Greek, was a good painter and should do the job.

The bankrupt was the person born in Greece but of Turkish descent. He has been in Australia some 21 years.  During that time he conducted a clothing business.  He was assisted by his daughter who was a designer.  Apparently he conducted the business through a company of which he and his wife were directors but during the difficult times of 1990 the business failed. Since then the bankrupt, apparently, has not had employment. Presently he is receiving social service payments. He appears to be the joint owner with his wife of the matrimonial home.  Although he can speak some English he gave his evidence through an interpreter. The affidavits sworn by him do not show that they were so sworn through an
interpreter.  It appears that there was some arrangement made between the judgment creditor and Mr Arslan concerning the painting of the shop.  There is a dispute as to what the terms of that arrangement were.  There is a dispute about whether any payments had been made pursuant to the arrangement, but for present purposes it is sufficient to say that the painting was done and the claim made by the judgment creditor is in relation to the work done by him for doing that painting.

The judgment creditor says that initially the painting was to be done and paid for by Mr Durali, that he would not have agreed to have done it pursuant to a contract with Mr Arslan because he did not know Mr Arslan. It is interesting to note that following the non-payment of the amount claimed by the judgment creditor the summons in the Magistrate's Court was directed against two defendants, Ali Durali and Mr Arslan, and judgment was entered against both those persons.

Mr Arslan says that the arrangement was that he would get the painting done by the judgment creditor, that in substance he has paid certain amounts towards that painting work.  There were payments during the course of the work for material supplied, as well as for labour, and that the amount claimed by the judgment creditor is in excess of what is owing.  The matter is further complicated by the fact that pursuant to affidavits subsequently filed by the judgment creditor and his son, it is said that the liability of the bankrupt was based upon either an indemnity or pursuant to a guarantee and not for work and labour done by the bankrupt.

In cases like this where affidavit material is relied upon, it is very difficult to determine disputed questions of fact.  In the present case the bankrupt and Mr Arslan have
each been cross-examined, but there was no request by the bankrupt for the judgment creditor or his son to be cross-examined. Counsel for the judgment creditor has urged the Court to draw inferences from the fact of the absence of cross-examination based upon principles similar to those in Jones v Dunkel (1959) 101 CLR 298 of drawing adverse inferences against the bankrupt. I know of no general principle applying to cases of the present kind. Here there is no compulsion to put to a witness questions as to what a subsequent witness, on an opposing side, is going to say to give that witness the opportunity to answer them. Here the affidavits had been filed and in my opinion there is no reason why the bankrupt was compelled to cross-examine the deponents and why any adverse inferences should be drawn against the bankrupt for failing to so cross-examine them. In any event the judgment creditor had changed his evidence.

In all the circumstances, I find that Mr Arslan was a witness of truth and can be relied upon. He does accept his liability to pay an amount, the exact amount of which may be uncertain at the moment.  He has no assets in order to pay that amount at the present time.  I also accept that the bankrupt, essentially, was a witness of truth, although in so doing a fact most adverse to him can be established.
           In the circumstances, I find as a fact that there was no agreement between the bankrupt and the judgment creditor that the work was to be done by Mr Durali. I am satisfied on the evidence that there was no indemnity or guarantee given by Mr Durali to the judgment creditor for the payment of the amounts incurred in the painting work. It is in this context that the Court has difficulties in assessing the weight to be given to evidence having regard to the background of the parties and persons concerned.  The Court can only act on the evidence before it and having regard to what I will describe as the practicalities of it, I can see no reason why in fact Mr Durali would be in a position of giving an indemnity or
guarantee in this case.  There is no doubt there was a friendship between Mr Durali and Mr Arslan. As well, there is no doubt that there was a friendship between the judgment creditor and Mr Durali. But those friendships, in my opinion, were not sufficient to explain the giving of an indemnity or guarantee by Mr Durali for the painting work to be done by Mr Taktikos for Mr Arslan.

Having regard to these findings of fact, I am satisfied that there was no basis for the judgment to be entered against the bankrupt. Upon that basis, the Court is satisfied the judgment should not have been entered and, prima facie, the sequestration order based upon that judgment debt should be annulled. There is no need to consider whether the sequestration order should not have been made by reason of the exercise of the discretion conferred by paragraph 52(2)(b) of the Bankruptcy Act.

The question of more difficulty relates to the discretion as to whether the Court should make the annulment order or not.  Here counsel for the judgment creditor has listed a number of factors that the Court should take into account in refusing to grant the annulment.  There is one authority where Pincus J in the Federal Court did list a number of factors that he took into account in exercising a discretion whether to annul a bankruptcy or not; see Re McCollum (1987) 71 ALR 626 and in particular at 629.

The factual matters which have given risen to the concern of the Court can be summarised as follows.  The bankrupt knew of the judgment debt, but took no steps to set it aside.  The bankrupt knew of the sequestration order, but for a long time took no steps to set it aside.   The bankrupt was a man of business experience.  He had encountered bad debtors in that business. He had obtained Court orders against some of those debtors, but despite
obtaining the orders of the Court was unable to recover the moneys owing to the business and, pursuant to an unresponsive answer given by him while giving evidence, the reasons he took no action were, essentially, because he thought the judgment creditor could not recover the money from him.  His experience in relation to judgments being what it was, he considered the law was insufficient to enforce the judgment against him.  That is a very dangerous view to take.  It is almost as if he considered the legal system to be ineffective and, as it were, he was prepared to defy the law.

Counsel for the judgment creditor took that, plus a number of other factors into account to urge the Court not to exercise its discretion in favour of the bankrupt.  He referred to the fact that the bankrupt had been a business man, had used the Court procedures for the purpose of collecting debts and should have been aware of the processes, that he failed to give any satisfactory explanation as to why he did not defend the summons in the first place, even though he knew that Mr Arslan was overseas, or was intending to go overseas and that to some extent he was looking after the affairs of Mr Arslan while he was away.  He referred to the reasons given by the bankrupt for not opposing the proceedings in the Magistrate's Court to the effect that he had been unable to recover sums after a court order obtained by him against his debtors, that he failed to seek to satisfy the order of the Court when he had early knowledge of the order, that he failed to have the order of the Court set aside after an attempt by the Sheriff had been made to execute a warrant to enforce the judgment. Even after the bankrupt was given notice in relation to an oral examination in the Magistrate's Court he made no attempt to have the order set aside, but it should be noted that Mr Arslan who was a judgment debtor also, did attend at the Magistrates Court and filled in a questionnaire in which he made offers of payment of up to $4,000.00 on certain terms that he did apply under State legislation for time to pay the debt, but because of the

lapse of time the Court refused to make those orders.

This is consistent with the view that it was Mr Arslan who was the real debtor and not the bankrupt.  Counsel also relied upon the fact that the bankrupt did not make any attempt to have the bankruptcy notice set aside, or did not seek to oppose a making of the sequestration order and that the bankrupt has failed to comply with the requirements of the Bankruptcy Act following the sequestration order and, although having knowledge of the right to apply to the Court for an annulment, took no steps to do that, despite being advised by the trustee that he take that course if he so desired.

All these are weighty considerations to take into account, but in all the circumstances of this case, in my opinion they are not sufficient to justify the refusal of an order annulling the bankruptcy.

Having regard to all the circumstances, the Court will make an order that the sequestration order be annulled.  It is now after 4.30 pm and there is no time to hear submissions as to the form of that order, or as to any other orders consequentially that should be made. During the course of the hearing on Monday, the Court referred to a decision of a Full Court of the Federal Court of Australia namely Adsett v Berlouis (1992)109 ALR 100. Reference may be made to the whole of the reasons of the Court in that case and in particular to what was said at 111:-

"In principle, there is no difference in the approach to be taken when the questions of the trustee's right to indemnity and right to remuneration fall for consideration. That is, the trustee's right to remuneration is limited to work properly undertaken. In this context, "properly" means work reasonably and bona fide undertaken for the purpose of administering the estate or performing any public duty imposed by the
Act, conformably with the trustee's duty to perform the work with reasonable care and skill and in an efficient and economical way."

It may well have a bearing on questions of orders to be made in this case.

Submissions were made as to the form of the orders to be made. I propose to make an order in a form similar to that made by Spender J in the case of Re Gollan; ex parte Gollan (1992) 40 FCR 38. Counsel for the bankrupt has submitted there should be a variation from the normal order because of the special facts of this case. There is force in that, but here the bankrupt had ample opportunity to look after his rights from the very beginning. It was not as if orders had been made in the absence of knowledge by him. In those circumstances I see no reason to depart from the normal order.

The Court orders that the sequestration order against the bankrupt made on 7 March 1995 be annulled.  The Court orders that the bankrupt pay the petitioning creditor's costs of the petition which have been taxed at $2,477.99.

I order that the bankrupt pay the costs of the petitioning creditor and of the official trustee to be taxed. I order that the bankrupt pay the reasonable costs and expenses of the administration undertaken by the trustee those costs and expenses to be taxed if not agreed upon.

In each case the order for costs includes reserved costs.

I certify that this and the preceding thirteen (13)  pages are a true copy of the Reasons for Judgment herein of the Honourable Justice R M Northrop.

Associate:

Date:

ATTACHMENT

Counsel for the Applicant:  Mr Zia Bey

Solicitors for the Applicant:  George A Madden Pty Ltd

Counsel for the Respondent:  Mr R S Randall

Solicitors for the Respondent:  Swersky & Velos

Counsel for the Trustee:  Mr B Guzzo

Solicitors for the Trustee:  Abbott Stillman & Wilson