Re Lee, Rhonda Ex parte The bankrupt

[1978] FCA 113

I n t h e m a t t e r of -

THE BANKRUPTCY ACT 1'3 G6

And i n t h e m a t t e r of -

Ex p a r t c : The bankrupt !

e JUDGE MAKING ORDER: R i l ey J.

DATE OF ORDER: 2 1 June 1978

e i

O R D E R -

l

THE COURT ORDERS:

1. That thc bankruptcy of Rhonda L e e be annu l l ed .

2 . T h a t t h e r s p o n d e n t J u l i a Ann Sheehan pay t h e

e i

a p p l i c a n t ' s t a x e d c o s t s ( i n c l r d l n g r c s ~ r - ~ e d cos : : s )

of	a n d	i n c l d e n t	to the appLlca t lon	for	annulr,?n'-.	t
I
1

I

.

.

.-

CATCHWORDS

Bankruptcy - Annulment - Whether seques t ra t ion order ought

to have been made - S e r v i c e o f p c t i t i o n - Form of a f f i d a v i t

of s e r v i c e - Judgmen t fo r deb t - Alleged agreement of loan -

Sham agreement - Real a g r e e m e n t f o r s a l e of h a l f - s h a r e i n

b u s i n e s s of conduct ing a b r o t h e l - I l l e g a l a n d u n c n f o r c c a b l c

agreement - Bankruptcy A c t 1 9 6 6 , S.	1 5 4 - Bankruptcy	Rules,
R. 122(3).
,

I '

I

.

REASONS FOR JUDGMENT

Th i s i s a n a p p l i c a t i o n by Rhonda Lee f o r t h e

annulment of her bankruptcy on t h e g r o u n d t h a t t h e s e q u c s t r a t i o n

o rde r ough t n o t t o have been made. On 2 8 Octobcr 1 9 7 6 a t

d e f a u l t j u d g m e n t f o r $ 6 , 1 7 2 . 6 0 and $148.50 c o s t s ( a t o t a l

l

of $6,321.10) was o b t a i n e d a g a i n s t h e r i n t h e District Court:

of New South Wales by Mrs. Ju l i a .Ann Shcehan ( fo rmer ly Ju l i a

e Ann S i n c l a i r ) , who on 17 January 1977 procured t h e i s s u e

of a f o u r t e e n - d a y b a n k r u p t c y n o t l c e c l a l m i n g t h a t t o t a l

e	i
I

together w i t h i n t e r e s t of $ 1 4 0 . 2 7 ( $ 6 , 4 6 1 . 3 7 i n a l l ) . T h e

bankruptcy not ice was served on Mlss Lee on Saturday 2 2 January

1977. She f a i l e d t o comply with it, and thus commit ted an

I

act of bankruptcy on 7 February 1 9 7 7 .

Mrs. Sheehan on 4 Nay 1 9 7 7 p re sen ted a c r e d l t o r ' s

p e t i t i o n , d a t e d 2 0 Apri l 1977, whlch was r e tu rnab le on , and

came on f o r h e a r i n g b e f o r e Deane J. on, 25 August 1 9 7 7 . Therc

was no appearance by or on behalf of Miss Lec, and His Honour

made a s e q u e s t r a t i o n o r d c r a g a i n s t h e r e s t a t e .

Mrs. S h e e h a n a l l e g e d i n h e r p e t i t i o n t h a t t h e d e b t o r

was indeb tcd t o h e r i n t h e sum of $6,461.37, belng the amount

of $6,321.10 due under the judgment together w l t h l n t e r e s t of

$140 .27 , " t h e c o n s i d e r a t i o n f o r s u c h d e b t b e l n g moncy l e n t by

!

t h e P e t i t i o n e r t o t h e D c b t o r p u r s u a n t t o a n A g r e c m c n t d a t c d

29th May, 1 9 7 6 t o g e t h e r w i t h i n t c r e s t d u c u n d c r t h e s a i d

Agreement".

The agr'eement purportcd t o b e an agreemcnt whereby

Mrs. Shcehan ( then S i n c l a i r ) l e n t Miss L c e $ 6 , 0 0 0 , t h e r e c c l p t

of which was acknowlcdgcd, for for ty weeks. It provided that

t h e p r i n c i p a l s h o u l d b e r e p a i d by f o r t y w e e k l y i n s t a l m e n t s ,

i-

-2- t

.

each of $150, from 1 June 1 9 7 6 ; t h a t i f e a c h i n s t a l m e n t w a s

I 7

p a i d o n t h e d u e d a t e n o i n t e r e s t s h o u l d b c p a y a b l e ; b u t t h a t	i f	I
i -

d e f a u l t were made I n t h e payment of any instalment thc wholc W

of	t h e p r i n c i p a l t h e n o u t s t a n d i n g t o g e t h e r w i t h i n t e r e s t t h c r e o n
a t	t h e r a t e o f 10% p e r annum should be immcdiately due and

payable . k

Miss Lee s u b m i t t e d t h a t f o r two r e a s o n s t h e s e q u e s t r a t i o n F

o rde r ough t no t t o have been made. F i r s t , c o n t r a r y t o t h e

F

ev idence be fo re Dcanc J . , t h e c r e d i t o r ' s p e t i t i o n was ncvcr

s e rved on h e r . S e c o n d l y , t h e d e b t a l l e g e d b y t h e p e t l t i o n l n g

a	c r e d i t o r d i d n o t a r i s e o u t o f t h e a l l e g e d l o a n a g r e e m e n t , a n d
the Court would not have made t h e s c q u c s t r a t i o n o r d e r h a d It
a	known t h a t t h a t a g r e e m e n t was i n f a c t a sham and t h a t t h e r e a l
t r a n s a c t i o n was an i l l ega l and unenfo rceab le ag reeFen t bc twccn
Miss Lee and Mrs. Sheehan t h a t t h e f o r m e r w o u l d p a y t h e l a t t e r ,
by weekly instalments of $150.00, the sum of $6,000 for a
o n e - h a l f s h a r e i n t h e b u s i n e s s of a bro the l whlch they conductzd .

I n my opin ion Miss Lee f a i l s on t h e first p o i n t .

e Her ev idence was s i m p l y t h a t t h c p e t i t i o n was neve r s e rved on

h e r . The ev idence a s t o s e r v i c c t h a t w a s b e f o r e H i s Honom

e on t h e h e a r i n g o f t h e p e t i t i o n was a n a f f i d a v l t of M r . Lennard

John Baran, a p rocess server who deposed t h a t on Thursday

21 J u l y 1 9 7 7 a t 7.15 p.m. h e s e r v e d Miss Lee w i t h a n o f f i c i a l

copy of t h e p e t i t i o n a n d c o p i e s of t h e a f f i d a v i t s v e r i f y i n g

t h e p e t i t i o n "by d e l i v e r i n g t h e m t o h e r p e r s o n a l l y a t " a n

a d d r e s s i n Sydney a t which MISS Lce a d m i t t e d i n e v i d e n c e s h e was

t h e n l i v i n g . It is o b v i o u s t h a t i n t h e p r e p a r a t l o n of

Mr. B a r a n ' s a f f i d a v i t a s t e r e o t y p e d copy ( less names, da t e s and

addresses) of the ' Form 7 i n Appendlx R t o t he Bankrup tcy

Practice, 4 th edn (para . 1568) , was uscd. Though t h c word "her"

i n t h e e x p r e s s i o n j u s t q u o t e d w a s t y p c d i n s u b s t i t u t i o n f o r t h e

- 3-

d e l e t e d word "he" , less care was used w i t h t h e n e x t p a r a g r a p h

of t h e a f f l d a v i t , w h l c h as sworn by M r . Baran rcad " 2 . I

i d e n t i f i e d t h e p e r s o n s e r v e d b y r e a s o n of t h e f a c t t h a t he ( s ic )

a d m i t t e d t o me t h a t h e (s ic) was t h e d e b t o r r e f c r r c d t o i n t h e

p e t i t i o n " . -

Mr. Baran gave o ra l ev ldencc be fo re me, and some

emphasis was l a i d i n c r o s s - e x a m i n a t l o n o n t h e u s e o f t he

wrong gcnder in paragraph 2 o f h i s a f f i d a v i t . The Form l whlch

was used is o f f e r e d b y t h e e d l t o r s o f t h e B a n k r u p t c y P r a c t i c e

!

as a precedent (4th edn para . 1561, 5th edn para .3049) , and

i t s para. 2 i s based on Rule 1 2 2 ( 3 ) .

I n p a s s i n g , I sugges t t h a t it 1s p r e f e r a b l e t h a t a n i

a f f i d a v i t o f s e r v l c e , r a t h e r t h a n r e p r o d u c e p a r a . 2 of Form l ,

i

should se t o u t t h e c o n v e r s a t i o n on which the dcponen t r e l l ed

' 6

for	the pu rposes o f Ru le 122(3 ) ,	t hus	l eav ing	it	t o t h e	L
:
i

Cour t	de te rmine	to	whether	what	was said	amounted	t o t h e	I
b

admiss ion r e fe r r ed t o i n t h a t s u b - r u l e .

a i

Precedents should be u s e d c a r c f u l l y a n d i n t c l l i g e n t l y ,

i

and

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a b l e

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r e l y

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the

t e x t

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a a f f i d a v i t

a s	e x p r e s s i n g w h a t	t h e d e p o n e n t m e a n s . B u t	I	a m	!
P

' ,

s a t i s f i e d i n t h i s	case	t h a t t h e w o r d i n g	of	Mr.	Baran ' s para .	.i
I

2 s t a n d s as it d o e s a s t h e r c s u l t of a carcless s l i p a n d h a s n o

o t h e r s i g n i f i c a n c e . M r . Baran impressed m e as a c a r e f u l a n d

r e l i a b l e w i t n e s s , a n d h e l e f t me w i t h n o d o u b t t h a t t h e

i

p e t i t i o n was du ly se rved .on Miss Lee.

t

I t u r n t o t h e s e c o n d s u b m i s s i o n made on behalf of

..

Miss Lee . Mrs. S h e e h a n d i d n o t h e r s e l f f i l c an a f f i d a v i t

o r g i v e o r a l e v l d e n c e , a n d the o n l y c v i d e n c e r e l e v a n t t o

th i s submiss ion	i s t h a t o f	Mlss	Lee,	whlch I summarlsc a s
follows.

-4-

I

The two women were f r i e n d s , a n d b o t h were expe r l enc fd

prost i tutes . Ea r ly i n 1975 t hcy dcc lded t o j o i n f o r c e s t o

open, as a p a r t n e r s h i p e n t e r p r l s e f e l i c i t o u s l y named S l n l c e ,

a b r o t h e l , e u p h e m i s t i c a l l y r e f e r r e d t o as a massage par lour .

They r e n t e d a b u i l d i n g f o r t h e p u r p o s e , f u r n l s h e d It and

i n s e r t e d c s o t c r i c a d v e r t l s e m e n t s i n a p p r o p r l a t e j o u r n a l s .

The c a p i t a l f i n a n c l n g o f t h e b u s i n e s s seems t o have been car r icd

o u t somcwhat haphazardly, and Miss Lcc h a s o n l y a vaque ldea

of the sys t em and ex ten t o f t he cap i t a l expcnd i tu rc . She s ays

e however t h a t t h e p a r t n e r s s h a r e d e q y a l l y t h c c o s t o f f u r n l t u r e ,

new l i g h t - f i t t i n g s a n d t h e bond of $500 r e q u i r e d b y t h e l e s s o r

e of the p remises . I n t h e b e g i n n i n g , t h e p a r t n c r s t h e m s e l v e s

no t on ly sha red work as r e c e p t i o n i s t s b u t a l s o a i d e d d u l y

qua l i f ied employees i n p r o v i d l n g t h e p e r s o n a l s e r v l c e s

i

a d d i t i o n a l t o massage which were r e q u i r e d by p a t r o n s o f t h e

b u s i n e s s . Miss Lee's p e r s o n a l a p p l i c a t i o n t o t h e l a t t e r t a s k ,

however , ceased a f te r about th ree months some time i n 1 9 7 5 and

t h e r e a f t e r s h e d e v o t e d h e r s e l f s o l e l y t o h e r d u t l e s as

r e c e p t l o n i s t . Mrs. Sheehan contlnued t o work I n b o t h c a p a c i t i e s .

Apparent ly a p a r t i n g o f t h e ways came i n May 1 9 7 6 .

1 .

I n Miss Lee's words "A few t h i n g s l c d up t o May". In an

a f f i d a v l t s w o r n by h e r i n A p r l l 1 9 7 8 and f l l e d on 2 4 A p r i l

1978 , t o which a copy of the agreement of 2 9 May 1 9 7 6 was !

annexure B , Miss Lee inc luded the fo l lowing pa rag raphs :

"9 . The docunient marked a s annexure ' B ' t o

t h l s A f f i d a v i t came I n t o e x l s t c n c e I n t h e

fo l lowing c i rcumstances . In about ApL-11, 1 9 7 6

Sheehan said t o m e words t o t h e e f f e c t : ' I f

you want t o kccp your share of t h e busxness then

s i n c e i t s va lue 1s $12,000.00 y o u ' d b e t t c r p a y

m c $G,pOO.OO	t o	s t a y	p a r t n e r s . '	F o r	s e v e r a l	4
I

r casons I agreed t o t h l s demand and I said words

t o t h e f f e c t : 'O.K.'.

10. A f t e r t h e w o r d s r e f e r r e d t o i n p a r a q r a p h 3

above were spokcn I sa id to Shcehan words t o the

3

e f f e c t : ' I h a v e n ' t g o t h c $6,000.00. ' She then

s a i d w o r d s t o t h e e f f e c t : ' D o n ' t w o r r y , I'll

g e t my s o l i c i t o r t o draw u p a doculncnt t o make

it l o o k l e g a l . I t wlll look l i k e I l e n t y o u

t h e money and you w l l l owe It t o me and you can pay

i t t o m e o u t o f t h e moncy VC get f rom the bu- , lness . '

I t h e n s a i d , 'O.K.

11. Whenever Shechan and myself spoke of ' t h e

b u s m e s s ' we r e f e r r e d t o t h e b u s j . n e s s of massaqe

pa r lou r where we c a r r l e d 05 t h e b u s l n r s s of k

p r o s t l t u t i o n . T h a t E, w e kept p remises w h e r e

E

men wcre i n v i t e d t o e n t c r , a n d t h e y wcre s o l l c l t c d

r:

for p a y m n t of money I n r e t u r n f o r p a r t l c l p a t l o n

by women on the premises ( inc ludlnc ; Sheehan x:d

m y s e l f ) I n s e x u a l a c t s . \;e somct lmes re fe r red to

t h e b u s m e s s as a ' b r o t h e l ' . "

The words " to s t a y p a r t n e r s " i n p a r a g r a p h 9 a r e i n

0 t h e c i r c u m s t a n c e s n o t e a s i l y l n t e l l i g i b l e i f t h e i n i t i a l

c a p i t a l e x p e n d l t u r e was borne equal ly by t h e p a r t n e r s ; b u t t h e y

d o n o t a c c u r a t e l y ref lect t h e u n c o n t r a d i c t e d o r a l c v i d e n c c

0 i

given by Miss Lee, i n wh ich she exp la ined tha t she was r e a l l y

I .

buying Mrs. S h e e h a n ' s i n t e r e s t i n t h e f u r n i t u r c a n d o t h e r a s s e t s

of t h e b u s i n e s s . Mrs. Sheehan was s ick and about t o marry and

r e t i r e from the bus iness , wh ich thus wou ld thcn , a s a r e s u l t o f

t h i s t r a n s a c t i o n , b e l o n g to Miss Lee alone, and which shc

0 i n t e n d e d ( a s Mrs. Sheehan knew) t o c a r r y o n as s o l e p r o p r l e t o r .

The real n a t u r e o f t h e t r a n s a c t i o n was masked by the agreement

of 29 May 1 9 7 6 . Miss Lee neve r r ece ived a l oan of $6,000

0

from Mrs. Sheehan as the agreement a l leged . Nor d id she pay

Mrs. Sheehan any money a s the ag reemen t r equ i r ed : In t he first

p lace she had none: i n t h e s e c o n d , s h e was pe r suaded tha t t he

f u r n i t u r e was worth only somethinq more l l k c $ 2 , 0 0 0 than $G,OOO

a n d t h a t Mrs. Shcehan, whom s h e had t rus t cd , had a t t empted t o

c h e a t h e r .

. The accuracy of Miss Lee's ev idence was impugncd

on the ground of her c le lay i n making hcr s t o r y known, and i n d c r d

she seems t o have advanced i t f o r t h e f i r s t tlme when m

. * - G -

s w e a r i n g h e r s t a t e m c n t o f a f f a i r s on 14 Pcbruary 1 9 7 8 s h e

l i s t e d Mrs. Shcehan a s a n u n s e c u r e d c r c d l t o r f o r $G,OOO

and added "Balance owing on c o n t r a c t f o r p u r c h a s e of b u s i n c s s .

I contend t h l s c o n t r a c t c o u l d well have bcen unlawful and the

d e b t t h e r e b y n o t d u e . " B u t h c r p a s s l v i t y I n thc f a c e of

p r o c e e d i n g s a g a l n s t h e r i n t h e Dlstrict Court and m bankruptcy

is 'I t h i n k a d e q u a t e l y c x p l a i n e d b y h e r h a v i n g i n i t i a l l y

r e c e i v e d i n c o r r e c t legal advice, havlng undergone a malor

abdominal opera t ion in November 1 9 7 6 a f t c r which shc d id not t i

f u l l y r e c o v e r h e r h e a l t h u n t i l a b o u t A p r l l 1 9 7 7 , and havlnq thcn

e l

i n September	1977	c o n t r a c t c d	h c p a t l t i s	f r o m	w h i c h	she	1s not	t
!

y e t f u l l y r e c o v e r e d .

e The evidence given by Miss Lec on which t h i s

submission i s based has gone uncontradlcted, and havlng heard

h e r i n t h e w i t n e s s b o x I a c c e p t it. My c o n c l u s i o n s a r e

t h a t the agreement between her and Mrs. Shechan was i n f a c t

an ag reemen t fo r t he sa l e by Mrs. Sheehan and the purchase

e by Mlss Lee o f Mrs. S h e c h a n ' s i n t e r e s t I n t h e asscts of t h e

bus iness o f a b r o t h e l r u n b y them i n p a r t n e r s h i p , a n d t h a t

Mrs. Sheehan knew t h a t Miss Lee i n t e n d e d t o u s e t h e asscts

e i n t h e c o n t i n u a n c e o f t h e b u s m e s s . The case t h c r e f o r e i s

s q u a r e l y w i t h i n t h e p r i n c i p l e t h a t , as s t a t e d i n t h e h e a d n o t e

to Pearce v. Drooks ( 1 8 6 6 ) L.R. 1 Exch. 213, one who makes a

c o n t r a c t f o r sale w i t h t h e k n o w l e d g e t h a t t h e o t h e r c o n t r a c t l n g

\ p a r t y i n t e n d s t o apply . the subJcc t mat te r of t h e c o n t r a c t to

an immoral purpose cannot recover upon thc c o n t r a c t .

Had t h e f a c t s t h a t a r c now b e f o r e me been known

t o the l ea rned judge who madc t h e s e q u e s t r a t i o n o r d e r I

th ink tha t t ha t o fdc r wou ld no t have becn made. I accord ing ly

a n n u l t hc bankrup tcy and o rde r t he r e sponden t t o pay thc

a p p l i c a n t ' s t a x e d costs of t h e a p p l i c a t i o n i n c l u d i n g r c s e r v e d c o s t :

Re:	iL4013I)A LdE	- Appllcdnt
J u l i a nnn Sheehan	- despondent

JUKZ:	Hiley J .
DATE OF JUDGIT?XiT:

DATES	OF	d3UINGS:	24th Lay, 1979.
1st June, 1978.
2nd June , 1978.
I. Roberts .
Abbott Tout L'reer tc mrvilklnson,
56 b1:lrtin r'lace, Sydney.
L. Levy ( s o l i c i t o r ) .
I a n ,larsha.ll hloore i. Go.,
54 dp r lng S t r ee t , 3on~ i i ;mc t lon .