Re John Wayne Cornish Ex Parte Stephen Joesph English

[1984] FCA 409

Re: JOHN WAYNE CORNISH
Ex Parte: STEPHEN JOSEPH ENGLISH
BANKRUPTCY No. P134 of 1984, 701 of 1984
Bankruptcy
6 FCR 257

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND
Morling J.(1)

CATCHWORDS

Bankruptcy - petition presented by creditor - adjournment - debtor presents own petition - sequestration - shortening of time of relation back - whether bankruptcy arising out of debtor's petition should be annulled.

Bankruptcy Act 1966, ss. 115(1), 115(2) and 154(1)(a)

Bankruptcy - Debtor's petition - Creditor's petition presented earlier and pending - Annulment of bankruptcy sought - Whether the petition ought not to have been presented - Abuse of process - Debtor's purpose in presenting petition - Date of commencement of bankruptcy deferred - Prior dispositions and payments to other creditors - Bankruptcy Act 1966 (Cth), ss 55, 115(1), 115(2), 154(1)(a), 156A(1), 188.

HEADNOTE

Held: (1) Although the machinery of the Bankruptcy Act 1966 (the Act) is available to enable a debtor to become bankrupt on his own petition for the purpose of shielding himself from further liability to committal or harassment, the court will, pursuant to s 154(1) of the Act, annul a bankruptcy brought about by a debtor's own petition where his purpose in achieving that bankruptcy was to avoid a liability of a kind that results from the operation of the bankruptcy laws themselves. Thus, a bankruptcy will be annulled where sufficient evidence is placed before the court that the debtor's purpose was to make it impossible for a creditor to obtain a sequestration order on a pending petition, as here, and further, to place beyond the reach of the trustee, property which would otherwise vest in him.

Clyne v. Deputy Commissioner of Taxation (No 3) (1984) 58 ALJR 398, followed.

Re Dunn (1949) Ch 640; Ex parte Painter; Re Painter (1895) 1 QB 85; Re Hancock (1904) 1 KB 585, distinguished.

(2) In the light of the fact that a bankruptcy arising out of the presentation of the creditor's petition would have commenced at least nine months earlier than a bankruptcy resulting from the presentation of a petition by the debtor, uncontested evidence of certain dispositions of property and the payment of proceeds of sale to many of his creditors by the debtor during that nine-month period did establish that the debtor had the necessary purpose.

HEARING

Brisbane, 1984, November 19. #DATE 19:11:1984

APPLICATIONS

Application pursuant to s 154(1)(a) of the Bankruptcy Act 1966 for orders annulling a bankruptcy based on a debtor's petition and Petition seeking sequestration of that bankrupt's estate.

The applicant in person.

Solicitors for the applicant: English & Company.

GFV

ORDER

1. The bankruptcy of John Wayne Cornish resulting from the presentation of the petition in matter No. 701 of 1984 on 5 November 1984 is annulled.

2. The debtor is to pay the applicant's costs of the application for annulment, such costs to form part of the costs in matter No. 134 of 1984.

3. A sequestration order is made against the estate of John Wayne Cornish in matter No. 134 of 1984.

4. The substituted petitioning creditor's costs (including any reserved costs) are to be taxed and paid in accordance with the Act.

Orders accordingly

JUDGE1

There are two applications before the court today. The first is an application by Mr Stephen Joseph English pursuant to s. 154(1)(a) of the Bankruptcy Act for an order annulling the bankruptcy of John Wayne Cornish. Mr Cornish presented a debtor's petition on 5 November 1984. The basis of the application to annul the bankruptcy is that the petition ought not to have been presented. The circumstances which give rise to the making of that application will be referred to later in these reasons.

There is also before the court an adjourned petition in which Mr English is the substituted petitioning creditor. This petition has been adjourned on previous occasions. On 16 February 1984 a petition seeking the sequestration of Mr Cornish's estate was filed by Mallinson Sales Pty Limited trading as Mallinson Building Supplies. The petition was based upon an act of bankruptcy committed by Mr Cornish on 14 February 1984 when he failed to comply with the requirements of a bankruptcy notice which had been duly served upon him on 13 January 1984. Just prior to 30 April 1984 Mr Cornish paid Mallinson Sales Pty Limited the amount then owing to it, and on that date Mr English was substituted as the petitioning creditor.

The hearing of the petition was adjourned until 25 July 1984, and subsequently came into the list on more than one occasion. It is unnecessary for present purposes to refer to the circumstances in which that matter (which is matter number 701 of 1984) came to be adjourned. Suffice it to say that the debtor claimed that his assets exceeded his liabilities and sought adjournments so that he could pay all his debts. The hearing of that petition was adjourned until 7 November but it did not proceed on that date and is again in the list today.

Apparently it became clear to Mr Cornish some time prior to 4 October that he would have difficulty in paying all his creditors and on that day the court was informed through his then solicitor that he wished to take advantage of the provisions of Part 10 of the Bankruptcy Act. He duly executed an authority pursuant to s. 188 of the Act authorizing a controlling trustee to call a meeting of his creditors. That meeting was called in due course and was held on 31 October 1984. At the meeting no special resolution was passed. Whilst there was some support for a motion that the debtor's affairs be administered under Part 10, there was not sufficient support for the passing of a special resolution to that effect.

A resolution was also proposed at the meeting that Mr Cornish should be required to file a debtor's petition within seven days. However, although this motion also received some support, it did not receive sufficient support to be carried. Thereafter, on 5 November 1984 the debtor presented his own petition. Accordingly, pursuant to s. 115(2) of the Act, Mr Cornish's bankruptcy was deemed to have commenced at the time of the presentation of his own petition, that is, 5 November 1984.

Section 115(2) provides that the bankruptcy of a person who becomes a bankrupt by virtue of the presentation of a debtor's petition shall if he has committed any act or acts of bankruptcy within the period of six months immediately preceding the date on which the petition was presented be deemed to have relation back to and to have commenced at the time of the commission of that act. On the evidence before the court it would seem that in the case of Mr Cornish the bankruptcy brought about by the presentation of his own petition would commence as from 5 November 1984.

Shortly after 5 November it became apparent to Mr English that if the bankruptcy which took effect on 5 November 1984 were not annulled, there could be unfortunate consequences for the creditors. The reasons for this, of course, is that in terms of s. 115(2) of the Act, if a sequestration order had been made on Mr English's petition, the debtor's bankruptcy would have commenced at the time of the commission of the earliest act of bankruptcy within the six months immediately preceding the date on which that petition was presented. On any view of the matter, the debtor's bankruptcy would have related back to February 1984 and possibly earlier.

There is no doubt that s.154 of the Act gives the Court power to annul the bankruptcy if the case can be brought within the terms of the section. The section was recently considered by the High Court in Clyne v Deputy Commissioner of Taxation and Others (Number 3) (1984) 58 A.L.J.R. 398. As the High Court pointed out in Clyne's Case, this Court has power to annul a bankruptcy resulting from the acceptance of a debtor's petition even though the petition was properly accepted by the Registrar. If the presentation of a petition amounts to an abuse of the process provided by s.55 of the Act it can readily be said that the petition ought not to have been presented and in those circumstances power exists to annul the bankruptcy resulting from its acceptance.

The Court said (at p.402):

"It is a purpose foreign to the bankruptcy laws, and an abuse of process, for a debtor to present a petition for the purpose of making it impossible for a creditor to obtain a sequestration order on a pending petition and with the further purpose of shortening the period of relation back, possibly placing beyond the reach of the trustee property which would otherwise vest in him."

The question which arises in the present case is, therefore, whether it can properly be said that Mr Cornish's purpose in presenting his own petition was to make it impossible for one of his creditors to obtain a sequestration order on a pending petition, and, whether he had the further purpose of shortening the period of relation back, thereby possibly placing beyond the reach of his trustee property which would otherwise vest in him.

I have no difficulty at all in forming the view that Mr Cornish's purpose in presenting his own petition was to prevent Mr English obtaining a sequestration order on the petition which has been pending in this court now for some months. But the matter which has exercised my mind is whether there is sufficient evidence before the Court for it to infer that it was Mr Cornish's further purpose to shorten the period of relation back. It seems clear from the judgment of the High Court in Clyne's Case that in a case such as the present this further purpose must be established before the Court can exercise the power of annulment under s. 154.

I have come to the view that I can properly infer from the evidence that Mr Cornish had this further purpose. There is evidence before the Court that Mr Cornish disposed of some of his property between February 1984 and November 1984. In particular there is evidence that he sold some of his real estate and paid many of his creditors during that period, for example, the sale on 27 July 1984 of lot 58 on registered plan number 162281 to Starworld Pty Limited for the sum of $20,000.

Mr Cornish has not appeared and has not offered any opposition to the orders sought against him. It seems to me that, unless the bankruptcy which came into effect on 5 November is annulled, there is a real risk of prejudice to the creditors who might otherwise be deprived of the opportunity of realizing on property which passed out of the ownership of Mr Cornish before 5 November 1984.

I have considered whether this is a case of a kind referred to in re Dunn (1949) Ch. 640 and ex parte Painter; re Painter (1895) 1 Q.B. 85, and re Hancock (1904) 1 K.B. 585. In all those cases the court declined to annul bankruptcies brought about by presentation by debtors of their own petition. As was said by the High Court in Clyne's Case, they may be explained as cases in which the debtor used, and was entitled to use, the machinery of the Bankruptcy Act for his own purposes so as to shield himself from further liability to committal or other harassment. But as the High Court pointed out, in none of those cases was the debtor seeking to avoid a liability of a kind that results from the operation of the bankruptcy laws themselves.

Inferring, as I do, that one purpose of the presentation by the debtor of his own petition was to shorten the period of relation back, thereby possibly placing beyond the reach of his trustee property which would otherwise vest in him, I think that this case is distinguishable from the cases to which I have referred and falls within the Clyne type of case. For these reasons I annul the bankruptcy of John Wayne Cornish which resulted from the presentation of his own petition on 5 November 1984. The debtor must pay the costs of that application, including any reserved costs.

There remains the petition in which Mr English is the substituted creditor. I am satisfied that the debtor did commit the act of bankruptcy alleged in that petition. I am also satisfied of the other matters of which the Act requires proof. There is evidence before the court which persuades me that the petitioning creditor has taken all reasonable steps to obtain from registered trustees a consent under s.156(A)(1) in respect of the estate of the debtor, but has been unable to obtain any such consent. I make a sequestration order against the estate of Mr Cornish.

On the question of costs, I have from time to time made orders for costs in Mr English's favour, but for more abundant caution the order I now make is that the substituted petitioning creditor's costs, including any reserved costs, are to be taxed and paid in accordance with the Act. That will mean that, insofar as Mr English has not yet received an order for costs, he will do so as a result of the order I now make.

In accordance with the usual practice, I direct the substituted petitioning creditor to lodge a draft of the order I have made today with the Registrar within seven days. The exhibits may be returned to the parties who produced them.