Re Papps; Ex parte Tapp

[1997] FCA 1031

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - annulment - application to rescind - facts to be taken into consideration - nature of onus on the applicants - nature of onus on the debtor - whether order of annulment ought to have been made - whether secured creditors are entitled to apply for an order of rescission.

Bankruptcy Act 1966 (Cth)

Re Barton (1980) 43 FLR 245
Tooheys Ltd v Minister for Business and Consumer Affairs (1981) 36 ALR 64
Ralkon v Aboriginal Development Commission (1982) 43 ALR 535
Re Frank; Ex parte Piliszky (1987) 16 FCR 396
Re Edgar; Ex Parte Davidson (1973-74) 2 ALR 649
Orr v Holmes (1948) 76 CLR 632

MICHAEL GEORGE PAPPS v RAICE TAPP
NO SP 295 OF 1996

O’LOUGHLIN J
ADELAIDE
3 OCTOBER 1997

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SP 295  of   1996

RE	MICHAEL GEORGE PAPPS A DEBTOR
EX PARTE	RAICE TAPP PETITIONING CREDITOR
JUDGE:		O'LOUGHLIN J
DATE OF ORDER:		3 OCTOBER 1997
WHERE MADE:		ADELAIDE

THE COURT ORDERS THAT:

1. Further consideration of this application be reserved and that the application be listed on Tuesday 14 October 1997 at 10.30 am for the pronouncement of orders.

1. Each party is to file and serve within seven days of the date hereof a minute of the order or orders that each party seeks and a written outline of the submissions in support thereof.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SP 295 of 1996

BETWEEN:	MICHAEL GEORGE PAPPS A DEBTOR
AND:	RAICE TAPP PETITIONING CREDITOR

JUDGE:	O'LOUGHLIN J
DATE:	3 OCTOBER 1997
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

Application pursuant to s 37 of the Bankruptcy Act 1966 (Cth) (“the Act”) to rescind an order made on 2 April 1997 annulling the bankruptcy of Michael George Papps (“the debtor”).

On 30 October 1996, Ms Raice Tapp applied for the issue of a bankruptcy notice directed towards the debtor.  Her application was based on a judgment obtained by her in the Adelaide Magistrates Court (Civil Division) held at Adelaide on 17 May 1996.  The judgment debt amounted to $5,497.75.  A bankruptcy notice was duly issued and served on the debtor and, as a consequence of his failure to comply with the terms of that notice, he committed an act of bankruptcy on 19 November 1996.  Thereafter a creditor’s petition was served on the debtor on 16 December 1996 and in his absence a sequestration order was made against his estate on 10 February 1997.

On 13 February 1997, the debtor filed an application in this Court seeking an order annulling his bankruptcy. He relied upon the provisions of s 153B of the Act which, so far as is relevant to these proceedings, are as follows:

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

Before proceeding further in the narrative, it is necessary to mention two further creditors’ petitions.  The Workers Rehabilitation and Compensation Corporation (“Workcover”) obtained two judgments against the debtor in the Adelaide Magistrates Court.  The first judgment was obtained on 22 August 1995 and was in the sum of $4,039.30.  The second judgment was obtained on 19 February 1996 and was in the sum of $3,028.  In each case, the debtor failed to comply with the terms of a bankruptcy notice and in each case, as a result of that failure, a creditor’s petition was served on the debtor.  There is a note on the Court file, dated 11 December 1995, that the first judgment debt and costs had been settled.  But the file further reveals that on 2 July 1996 the Australian Taxation Office (“the ATO”) sought an order that it be granted leave to substitute as petitioning creditor.  An order to that effect was made on 31 July 1996.  Meanwhile, the file in respect of the second judgment debt reveals that on 8 May 1996, for undisclosed reasons, the creditor’s petition was adjourned out of the list.  The next event of importance occurred on 5 November 1996 when the petition based on the first judgment was dismissed.  Subsequently, on 21 November 1996 the debtor was ordered to pay the costs of the ATO in the sum of $4,204.60.  The role of the ATO as a substituted creditor and the events of November 1996 will assume significance later in these reasons when discussing the involvement of the ATO as a supporting party to the current application.

On 2 April 1997 when the Court considered the debtor’s application for annulment, it had before it the debtor’s statement of affairs dated 5 March 1997 and the report of the Official Receiver for and on behalf of the Official Trustee dated 1 April 1997.  The trustee’s report reveals that the debtor’s wife, Margaret Papps, is also bankrupt.  A sequestration order was made against her estate on 24 February 1997.  Although Mrs Papps is not a party to these proceedings, the fact of her bankruptcy is a matter of some significance, as will appear later in these reasons.

The debtor is a medical practitioner in general practice; he conducts his surgery at 13 Semaphore Road, Semaphore using the registered business name “Semaphore Medical Centre”.  He has been in practice at that address for eleven years.

The debtor’s statement of affairs and the trustee’s report disclose that the debtor owned four parcels of real estate, (some jointly with his wife) all of which had been re-financed in July 1996.  The value of the four properties comprising that real estate was said to be, in total, $3,150,000.  There were three secured creditors.  The first two were the Independent Order of Odd Fellows (“IOOF”) and the Australia & New Zealand Banking Group Ltd (“the ANZ”).  The third secured creditor is, in fact, a group of many investors all of whom were clients of a Mr Barry Swincer, a finance broker (“the Swincer group”).  This group had advanced $1,586,000 to Dr and Mrs Papps on 5 July 1996 upon the security of two mortgages over various parcels of real estate.

The members of the Swincer group are the applicants in the current proceedings.

The Official Trustee apparently made inquiries of Mr Swincer, for the trustee’s report states that payments under the Swincer group mortgages were three months in arrears and that notices of default had been issued.  Presumably, like inquiries were not made of IOOF and the ANZ, for if they had been made, they would have also revealed that those mortgages were in default.  Those defaults were not referred to in the report nor in the statement of affairs.

The trustee’s report stated that the debtor advised that he had acquired a particular property at Kings Park in 1990 and that a building had been constructed from which he operated a nursing home.  The business operated under the name of “Rest Care”.  According to the trustee’s report however, the debtor ceased to be the proprietor of that business on 19 June 1994 and Mrs Papps is currently the registered proprietor.  The debtor informed the trustee that the nursing home is currently unoccupied and that there are no staff.  He stated that it had been his intention to convert the premises into a retirement village but that there had been a dispute with the Swincer group which had prevented the conversion taking place.  Further information before the Court reveals that there is litigation in the Supreme Court of South Australia in which the debtor is the plaintiff and Mr Swincer and the Swincer group are the defendants.  As I understand the position, the debtor is alleging that as a consequence of misrepresentations made by Mr Swincer the debtor has been unable to convert the Kings Park premises into a retirement village and has suffered consequential losses.  In addition, in separate proceedings in the Supreme Court, the Swincer group is seeking orders permitting them to enforce their securities over the Kings Park property.

The debtor’s statement of affairs showed that his income from his medical practice in the preceding twelve months had been $350,000 and he estimated that his income for the next year would be the same.  He also disclosed income of $300,000 from the operation of the nursing home but no income was shown as expected from this source for the next year.  It may be that the figure of $350,000 was listed as his gross income for elsewhere in his statement he disclosed his income from his medical practice at $20,000 per calendar month.  The statement of affairs showed book debts owing to the debtor from Medicare, Workcover and Veterans Affairs totalling $45,000 together with some small items of plant and equipment.

Eight unsecured creditors were listed in the statement of affairs, totalling $70,675.  Secured creditors were said to be $2,148,000.  The final result showed a surplus of assets over liabilities well in excess of $1,000,000 with an income earning potential of between $240,000 and $350,000 per year.  The unsecured creditors did not include Ms Tapp, the petitioning creditor, as her debt and costs had been paid out in full before the compilation of the statement of affairs.

As presented, the statement of affairs gave the appearance that the debtor was substantially solvent and had an income potential more than adequate to meet his debts as and when they fell due and became payable.  Any doubts arising as a result of information that the debtor and his wife were in default under their mortgage to the Swincer group were assuaged by the debtor’s evidence that there was a buyer for the Kings Park property and that if an order of annulment were made, he would be able to execute a contract of sale.  It was further stated that the proceeds of sale would be sufficient to pay all debts in full, including secured creditors, although, as a matter of fact, such a sale never took place.  There being no opposition to the debtor’s application, an order of annulment was accordingly made on 2 April 1997.

Before the order of annulment was made there had been an earlier directions hearing in this matter on 17 February 1997.  No transcript of that directions hearing exists.  That lead to the following exchange as recorded in the transcript of proceedings on 2 April 1997:

“His Honour: Ms Axford on the previous occasion - I have not got a transcript of the proceedings - my recollection is that I issued a direction that all creditors should be served with notice of these proceedings.  Is my memory correct?

Ms Axford:     Yes your Honour.

His Honour:    Have you done that Mr Brook?

Mr Brook:Your Honour, my instructions are that of the creditors who are listed on the unsecured creditors Dr Papps has been in contact with all of them.  I took specific instructions on this point subsequent to your Honour’s order and just before today.  All of the creditors here apart from two or three of them have been paid out in full.  They are aware of the orders and they have not insisted on a copy of the order being served upon them, a copy of the application being served upon them. (sic)  But they have all in contact (sic) with Dr Papps and they have all been paid out in full so the short answer is I cannot give an unequivocal undertaking they have been served but my instructions are - Dr Papps is here today - my instructions are that they are all aware of the proceedings and they have all entered into negotiations to have their debts paid in full.

His Honour:    That is the degree of satisfaction I am looking for.  Dr Papps can give evidence on oath or we can adjourn off and you can file an affidavit, but one way or the other I need to be satisfied that ...

Mr Brook:That is why I have asked Dr Papps to be here today your Honour.”

Ms Axford is the Official Receiver and Mr Brook is the solicitor for the debtor.  Thereafter Dr Papps gave evidence in terms consistent with the information Mr Brook had provided the Court and at the conclusion of his evidence the following exchange took place:

“His Honour: What about secured creditors?

Mr Brook:Secured creditors are affected by properties at Kings Park and Malvern and there is reference in the official receiver’s report to those properties being in default.  My instructions are that there is a buyer for the property at Kings Park and if the annulment is granted today my instructions are Dr Papps can execute a contract whereupon all debts will be paid in full including secured creditors.  That is one of the delicacies ...

His Honour:    You heard what Mr Brooks said, Dr Papps.  Is what he said an accurate summary of the position? ... Yes your Honour, that is exactly right.”

Regrettably both answers given to the Court by Mr Brook were inaccurate to a material degree.  Why this occurred I do know as Mr Brook did not give evidence.  As will become apparent there were creditors over and above those listed in the statement of affairs who had not been notified of the application for the order of annulment and the answer with respect to secured creditors did not include any reference to the actions taken by IOOF and the ANZ against the debtor as a defaulting mortgagor.  I am prepared to assume that just as he failed to make a full and true disclosure to the Court, so also the debtor has failed to fully and adequately inform his solicitor of the true state of his financial affairs.  However, members of the legal profession must always remember that over and above their duty to their client they have a higher duty to the court to assist the court in its deliberations.  The onus is upon them to ensure, to the best of their ability, that any information that they give to the court is, in every respect, complete and accurate.

THE APPLICATION TO ANNUL

When the debtor brought on his application for an order annulling his bankruptcy he was required to comply with the provisions of r 57 of the Bankruptcy Rules as they existed prior to their recent amendment with effect from 31 July 1997.  One of the obligations upon the debtor was to serve “a copy of the application on each of the creditors of the debtor ...” (r 57(2A)).  The word “creditors” is not defined in the Rules nor in the Act and in my opinion it was therefore incumbent on the debtor to serve his secured creditors as well as his unsecured creditors with a copy of his application for an order annulling his bankruptcy. Independently of the contents of r 57, there was the oral direction of the Court when the matter first came on for hearing and when directions as to service were given. As has already been stated, the transcript of the proceedings of 2 April 1997 confirmed that there was an earlier direction that “all creditors” should be served and there was a specific question asked by the Court with respect to “secured creditors”.  The debtor was legally represented; there was ample opportunity for him to inform the Court that through accidental slip the secured creditors had not been served with notice of the application.  Such advice would have, in the ordinary course of events, led to a short adjournment to enable the debtor to comply with the Bankruptcy Rules and the directions of the Court.  Instead, unfortunately, the position was obfuscated by the answers that were given to the Court.

WHETHER THE APPLICANTS HAVE STANDING

Mr Frayne, counsel for the debtor, submitted that the applicants, by virtue of being secured creditors, have no standing to bring this application.

The debtor had filed an application on the 18 September 1997 seeking an order that the applicants’ application be struck out and argument on this issue was presented as a preliminary issue.  At the conclusion of argument I ruled that the applicants did have standing.  I now set out my reasons for coming to that conclusion.

Section 37 of the Act does not identify those parties who may approach the court seeking an order of rescission; it merely states that the court “may rescind, vary or discharge an order made by it under this Act or may suspend the operation of such an order”. However, s 303 of the Act provides:

“Where in respect of any matter this Act provides that:

(a)      an application may be made to the Court; or

(b)      the Court or the Registrar may exercise a power;

and does not specify the person by whom the application may be made or the person on whose application the power may be exercised, as the case may be, the application may be made by, or the power may be exercised on the application of, any person aggrieved by or interested in that matter.”

Therefore, any party who is “aggrieved by or interested in” the annulment order would appear to have locus to approach the Court seeking an order of rescission, variation or discharge of the earlier order of the Court. In my opinion, the applicants, notwithstanding that they are secured creditors of the debtor, were parties who, at the time of the annulment order and at the time of their application for its rescission, were materially interested in the affairs of the debtor. Their interest arose not only because they were creditors, but because the debtor was in default with the calendar monthly payments of interest that he was required to make under the mortgage. There is some dispute about the extent of that default but the debtor had not, at least, paid the monthly interest that was due in March 1997 and he has not paid anything since that date. Furthermore, the debtor had disclosed in his statement of affairs that he had not paid outstanding land tax and council rates. The interests of secured creditors would be further enlivened by this failure. Section 182 of the Local Government Act 1934 (SA) stipulates that rates imposed on land are a charge on the land and s 22 of the Land Tax Act 1936 (SA) states that land tax is, until payment, a first charge on the land in respect of which the tax is payable. Failure by a debtor to pay his rates and taxes could have an adverse affect on the value of the secured creditors’ equity.

Mr Frayne pointed out that a secured creditor may only present, or join in the presentation of, a creditor’s petition if that creditor is willing to surrender his or her security for the benefit of creditors generally: see subs 44(3) of the Act. Mr Frayne used that statutory provision as his stepping stone for the proposition that a secured creditor is thereby denied the utilisation of s 37 unless he or she likewise surrenders his or her security. No authority was advanced in support of that proposition and, in my opinion, there is authority to the contrary. Re Barton (1980) 43 FLR 245 was a case dealing with a bankrupt’s application for discharge from his bankruptcy. In the course of his reasons Lockhart J said:

“There are sound reasons why all the debtor’s creditors, not only those whose debts have been proved, should be given notice of the prospective hearing of an application for discharge.  For instance there may be secured creditors of the debtor who, although standing outside the bankruptcy, may have an interest in the application for discharge.” (at 254)

In my opinion those remarks also apply to an application of this nature where secured creditors have established that they have an interest in the financial status of the debtor.

For the reasons that I have already set out it would seem to me that the present applicants are persons who are particularly interested in the financial affairs of the debtor. If, as I suspect, he might be insolvent and unable to pay his debts as and when they fall due and become payable that may have some adverse material affect upon their security. Unlike subs 44(3) secured creditors are not singled out; there is no suggestion that they are prevented from utilising the provisions of s 303 and s 37.

In Tooheys Ltd v Minister for Business and Consumer Affairs (1981) 36 ALR 64, Ellicott J examined the meaning of the expression “a person who is aggrieved”  in the Administrative Decision (Judicial Review) Act 1977 (Cth) and said at 79:

“The words “a person who is aggrieved” should not, in my view, be given a narrow construction.  They should not, therefore, be confined to persons who can establish that they have a legal interest at stake in the making of the decision”.

In Ralkon v Aboriginal Development Commission (1982) 43 ALR 535 at 544 Keeley J quoted the passage set out above, adding that he agreed with the opinion there expressed by Ellicott J. I also agree, with respect, with that opinion and to it I add the observation that the additional words in s 303 “or interested in” express, in my opinion, a measure of involvement which is somewhat less than that of a person who is “aggrieved” by the matter.  In other words, a liberal interpretation should be afforded with respect to the parties who may fall under the umbrella of the section.

It is for these reasons that I was of the opinion that the applicants had locus to bring the present application before the Court.

THE BURDEN OF PROOF

Mr Frayne submitted that the Court should approach this matter on the basis that the applicants bear a burden similar to that borne by a party who seeks a new trial on the basis of the discovery of fresh evidence.  He relied upon the decision in Re Edgar; Ex Parte Davidson (1973-74) 2 ALR 649 as authority for that proposition. In that case the debtor had executed a Pt X Deed of Assignment. On 13 June 1973 his trustee applied to the Court for leave to sell certain land to a nominated purchaser. The debtor opposed that application but an order was made on 11 September 1973 substantially in the terms sought by the trustee. Contracts were subsequently exchanged between the trustee and the purchaser. In the application that was before the Court the debtor sought rescission of the order of 11 September 1973. The application was dated 17 October but was not filed until 29 October 1973. The affidavit of the debtor’s solicitor in support of the application asserted that the trustee’s application had been heard in the morning of 11 September instead of in the afternoon as the deponent had understood and told his client it would be. The debtor had thereby been deprived of putting before the Court the fact that he had, that morning, received an offer to purchase the land for an amount in excess of the price approved by the Court. In dismissing the application, Riley J said that the debtor had been dilatory in making his application to the Court and such a matter weighed against him in seeking the exercise of the Court’s discretion. His Honour went on to say that:

“... the debtor, in my opinion, bears a burden similar to that borne by a party who seeks a new trial of an action on the ground of the discovery of fresh evidence.”

His Honour then quoted the following passage from the judgment of Dixon CJ in Orr v Holmes (1948) 76 CLR 632 at 642:

“... new trials will not be granted because of fresh evidence unless it places such a different complexion upon the case that a reversal of the former result ought certainly to ensure.  The fact which the new evidence tends to prove, if it does not itself form part of the issue, must be well nigh decisive of the state of facts upon which the issue depends.  The evidence must be so persuasive of the existence of the fact it tends to prove that a finding to the contrary, if it had been given, would, upon the materials before the court, appear to have been improbable if not unreasonable”.”

In my opinion the decision in Edgar’s Case cannot assist the debtor in his present predicament.  In Edgar’s Case the debtor had taken an active stand in opposing the application for leave to sell; in the present case the applicants were in no way involved in the making of the sequestration order nor in the making of the order of annulment.  In fact they did not know of either event.  Furthermore, in the present case, the applicants were denied any opportunity to put information before the Court relevant to the debtor’s application for an order of annulment.  That denial was not present in Edgar’s Case.

In my opinion it would be wholly inappropriate to consider this matter in the manner suggested by counsel for the debtor.  The applicants in these proceedings are not to be equated with a party who seeks a new trial on the ground of the discovery of fresh evidence.  Such a statement envisages an element of involvement by the applicants in the original proceedings.  That element is absent in these proceedings.

In my opinion the test to be applied when a person comes before the court seeking an annulment of his or her bankruptcy is one that is akin to “full and true disclosure”.  It is incumbent upon such an applicant to place before the court all relevant material with respect to his or her financial affairs so that the court may be properly informed and may make a judgment that is based on the full facts and the actual circumstances of the applicant.  A person who seeks an annulment carries a heavy burden.  If, as has occurred in this case, the application is made very quickly, the debtor’s trustee would have little, if any, chance to investigate the affairs of the debtor.  For that reason, the trustee would not be in a position to act as a contradictor to the application.  Therefore the court is compelled to place its trust in the applicant, relying upon his or her integrity and honesty.  If, subsequently, it is found that the court’s trust has been misplaced, the confidence of the court in the applicant is thereby diminished and perhaps, destroyed.

SHOULD THE ORDER OF ANNULMENT HAVE BEEN MADE?

During the course of the present application, the applicants lead evidence which, if accepted, would lead to the conclusion that the debtor omitted seven unsecured creditors from his statement of affairs and understated the amount owing to an eighth creditor by about $50,000 and that as a result, debts to the value of $167,736.58 were not disclosed to the Court upon the occasion of the application for an annulment of his bankruptcy.  The applicants submitted that these omissions and other aspects of the conduct of the debtor warranted, as a matter of fact, the making of an order of rescission.  In addition, the applicants further submitted that, as a matter of law, the order of annulment should never have been made and, that being the case, it was appropriate that the Court should now rescind its earlier order.  Before examining the evidence, it will be convenient to dispose of the question of law for I do not think that it applies in the circumstances of this case.

Mr McNamara, counsel for the applicants, in submitting that the order of the annulment should never have been made, drew attention to the provisions of subs 52(1) which reads as follows:

“At the hearing of a creditor’s petition, the Court shall require proof of ;

(a)the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);

(b)      service of the petition ; and

(c)the fact that the debt or debts on which the petitioning creditor relies is or are still owing;

and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor.”

Mr McNamara submitted that the fact that a sequestration order had been made on the 10 February 1997 was an indicator of the Court’s satisfaction of the proof of the three matters referred to in subs 52(1).  Next Mr McNamara drew attention to the provisions of subs 52(2):

“If the Court is not satisfied with the proof of any of those matters [ie the matters referred to in subs 52(1)] or is satisfied by the debtor;

(a)      that he or she is able to pay his or her debts; or

(b)that for other sufficient cause a sequestration order ought not to be made;

it may dismiss the petition.”

Mr McNamara’s proposition was that the Court was presumably not satisfied of the ability of the debtor to pay his debts or conversely was not satisfied that there was “other sufficient cause” to refrain from making a sequestration order.  As to this proposition, it must be borne in mind that Dr Papps did not appear in Court on the day when the sequestration order was made; he did not thereby make any attempt to satisfy the Court of his ability to pay his debts or of the existence of any “other sufficient cause”.

Mr McNamara relied upon the decision in Re Frank; Ex parte Piliszky (1987) 16 FCR 396 as authority for his ultimate proposition that the order of annulment should never have been made. At the time of the decision in Re Frank the power of annulment was contained in subs 154(1) of the Act. The relevant subsection then read:

“(1)     Where the Court is satisfied -

(a)that a sequestration order ought not 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 debtor, being debts that have been proved in the bankruptcy have been paid in full or the debtor has obtained a legal acquittance of them,

the Court may make an order annulling the bankruptcy

Although the language of s 153(B) differs from that of the former subs 154(1) the differences are not material for present purposes.

In Re Frank, after quoting the provisions of subs 154(1) of the Act, Fisher J went on to say:

“In my opinion it is proper to contrast the position of a Full Court on hearing of an appeal seeking the setting aside of a sequestration order and that of this Court when an annulment under s 154(1)(a) is sought.  Particularly this is so when the judge making the order did so in the exercise of his discretion.  It would be strange if in a matter such as this I was called upon to review the order of Forster J on the same grounds as the debtor requires it to be reviewed by the Full Court.

In Cameron v Cole (1944) 68 CLR 571 at 583 Latham CJ said of the power to annul in the then Bankruptcy Act 1924 (Cth):

“There is no power to annum a valid sequestration order without observance of what have been described as ‘the very careful provisions’ which are applicable in the case of an application to annul:  Re A Debtor; Ex parte Official Receiver (1937) 106 LJ Ch 225.”

Likewise at 594 Starke J said:  “This power of reviewing or rehearing any order is one that must be exercised with great caution and should not be exercised unless in special circumstances: Ex parte May; Re May (1884) 12 QBD 497.”

In Re Williams (1968) 13 FLR 10 at 23 Gibbs J, as he then was, said:

“If the court is satisfied that the order ought not to have been made, it is not bound as a matter of course to annul the order, but must consider in the light of all the circumstances of the case whether the order ought to be annulled:  Delph Singh v Wood (1918) 25 CLR 497 at 498-499; Re Lawson (1939) 11 ABC 137 at 139.”

In the light of the various contrasting avenues open to a bankrupt to approach the court to have the sequestration order set aside, it is in my opinion necessary to attach significance to the “careful provisions” of s 154, and in particular the words “ought not to have been made”.  In my opinion it can be said that a judge “ought” not to have made an order only if he was “bound” not to make the order.  In circumstances where it was open to a judge to make an order in the exercise of his discretion, it can only be said he “ought not to have made the order” if none of the circumstances could justify the making of an order.  Alternatively it can be established that an order “ought” not to have been made because subsequent evidence discloses that all of the true facts were not before the court when the order was made:  Re Cook (1946) 13 ABC 245 at 249.

The word “ought” as it appears in the English Rules of Court was given the meaning of “must” in Comber v Leyland and Bullins [1898] AC 524 by the Lord chancellor at 528 and Lord Herschell at 529. H C Black’s Law Dictionary (5th ed, 1979) says of the word “ought” that although generally directory only it will be taken as mandatory if the context requires it.  However in Grundt v Great Boulder Proprietary Mines Ltd [1948] Ch 145 at 150 Cohen LJ said: “It is to be observed that the word ‘ought’ is not necessarily of imperative significance and is certainly not synonymous with the word ‘must’.”

It is trite to say, as the above excerpts acknowledge, that the appropriate meaning is determined by the context.  In my opinion “ought” in s 154(1)(a) is of imperative significance and an order should not be annulled unless the judge was in the circumstances bound not to make it and even then there is a residual discretion not to annul.”(at 402-403)

I have no difficulty in accepting the views expressed by his Honour in his reasons but I do not agree with Mr McNamara that taken to their ultimate conclusion, they mean that an order of annulment can only be made if error on the record is identified in the making of the sequestration order.  The decision in Re Frank was dominated by two factors, both of which are absent in the present case.  In the first instance, the debtor was present at all material times including the occasion when the sequestration order was made and in the second instance, it is recorded that the debtor “conceded that he was insolvent and unable to pay any of the judgment debts and on no occasion departed from this concession.” (at 399).

In my opinion the essential difference in this case is that the debtor, being absent on the occasion of the making of the sequestration order, did not thereby exercise his right to establish to the satisfaction of the Court that he was able to pay his debts.  On the occasion of the making of the annulment order the debtor placed before the Court evidence that pointed to a contrary conclusion - that he was able to pay his debts (even though subsequent information now suggests that that evidence might have been inaccurate).  I do not therefore accept the proposition that the order or annulment ought not to have been made.

THE EVIDENCE FOR THE APPLICANTS

It is now necessary to examine the evidence to determine to what extent the debtor omitted creditors from his statement of affairs and whether he gave notice to all his creditors of his application for an annulment.

The primary source of information is the affidavit of John Bruce Kain, the solicitor for the applicants.  Annexed to that affidavit are items of correspondence passing between Mr Kain and creditors or solicitors or agents of creditors of the debtor.  Mr Kain’s affidavit was filed on 25 July 1997 and was duly served on the debtor for he replied to it in his affidavit that was filed on 12 August 1997.  Thus, when assessing the information contained in the affidavit of Mr Kain, it is of significance to bear in mind that the debtor was possessed of that information and had had the opportunity to reply to that information in his affidavit of 12 August 1997; he also had a like opportunity during the course of his evidence in the current application.  Curiously, counsel for the applicants did not exercise his right to cross-examine the debtor.  This had the beneficial effect of substantially shortening the proceedings and it may be that counsel accurately assessed that the strength of his case did not need improvement.  On the other hand, it meant that the many explanations offered by the debtor for his omissions remain unchallenged.

ANNESLEY COLLEGE

On 23 April 1997 (some three weeks after the annulment order) Annesley College obtained a judgment against Dr and Mrs Papps in the sum of $12,840.20.  Those proceedings had been on foot since 31 October 1996 when the summons had been issued out of the Adelaide Magistrates Court.

The debt owing to Annesley College was not disclosed by the debtor in his statement of affairs.  In his affidavit of 12 August 1997 the debtor said:

“I refer to subpar 7.3.  [that is, of Mr Kain’s affidavit]  I say that arrangements had been made with Annesley College and my wife for the payment of the debt.  I do not know the precise terms of the arrangement but I was not aware, because of the arrangement, that there was a debt due to Annesley College.”

Obviously he did not disclose the existence of this debt to his solicitor for he would have been advised that, as a joint debtor, he had an obligation to disclose the debt to the Court upon the occasion of his application for an annulment of his bankruptcy.  Dr Papps did not disclose to the Court, when giving evidence in these current proceedings, what were the details of the alleged arrangement that his wife had made with Annesley College.  In particular he did not suggest that Annesley College had relieved him from his obligation to pay the debt.  Finally, there remains the fact of his wife’s bankruptcy in February 1997.  How could she, in such circumstances, have made an arrangement to assume responsibility for the debt?  The debtor offered no explanation.  I find that the debtor failed to disclose a debt of a material size to the Court and I further find, based on the debtor’s admission, that he failed to advise this creditor of his application for annulment of his bankruptcy.  I am not able to find that these omissions were deliberate but I do find that the debtor’s conduct with respect to this debt exhibited an attitude that I classify as reckless indifference to his obligations to the Court.  In approaching the Court for an annulment of his bankruptcy, it was incumbent on the debtor to supply to the Court a full and detailed explanation of every aspect of his financial affairs.

CITY OF UNLEY

The debtor disclosed the City of Unley as an unsecured creditor in the sum of $22,000 in his statement of affairs.  Mr Kain exhibited to his affidavit a letter from the solicitors for the City of Unley.  According to that letter, the amount owing by the debtor was, with interest and legal fees, in the vicinity of $72,000.  The debtor did not address the amount of his indebtedness to the City of Unley in his affidavit of 12 August.  He limited his comments to an assertion that he had informed the creditor of the annulment application.  He said:

“As to par 7.4 I say the Corporation of the City of Unley was aware of my bankruptcy and of the application to annul it.  Moreover the Fire Department informed me and I verily believe that the Corporation of the City of Unley informed them, the Fire Department, that they, the Corporation of the City of Unley, were aware of my bankruptcy and of the fact that I was going to apply for an annulment.  I said to the fire department, in my discussions with them, “the bankruptcy is of a temporary thing and its going to be remedied anyway and the situation will be brought back to normal”.”

It need hardly be said that the particularity of the circumstances relating to the debtor advising the creditor of the application to annul is wholly unsatisfactory.  I cannot make a finding that the City of Unley was or was not notified by the debtor of his annulment application.  I do, however, find that in the compilation of his statement of affairs the debtor materially understated the amount owing by him to the City of Unley and failed, notwithstanding the opportunity to do so, to explain the reason for this understatement in his affidavit and in his oral evidence.  Once again, this conduct is indicative of the debtor’s reckless indifference to his obligations to the Court, not only upon the occasion of his annulment application, but also in respect of his response to the current application.

BUTTERCUP BAKERIES AND STAR WHOLESALERS

On 2 October 1996 Buttercup Bakeries obtained a judgment against “Michael Papps and Margaret Papps both trading as Restcare Nursing Hostel”.  As a result of seeking information about the existence of that debt, Mr Kain received a facsimile transmission from the AMA Group of Companies stating that the Group acted for Buttercup Bakeries and also for Star Wholesalers Pty Ltd.  As to the latter, the advice was that there was an amount of $2,157.10 owing and that no payments had been made since 15 January 1997.  As to both of these creditors the debtor stated in his affidavit of 12 August 1997:

“As to subpar 7.5 I say that the debt due to Star Wholesalers and the debt due to Buttercup Bakeries are debts of my wife and not of mine.”

The debtor did not, upon the occasion of his application for annulment, disclose the existence of either of these debts nor did he give notice of his application for an annulment to either of those creditors.

Mrs Papps filed an affidavit in these proceedings acknowledging that she was the debtor of Star Wholesalers.  She was made available for cross-examination but the applicants did not take the opportunity to cross-examine her and to test her assertions.  In those circumstances I feel that I should accept this uncontradicted evidence and I will not regard the debt owing to Star Wholesalers as a debt that was owing by Dr Papps.  The debt owing to Buttercup Bakeries, although only $335, was still a judgment debt and the debtor was one of the two judgment debtors.  I repeat the comments that I made when considering the manner in which the debtor conducted himself with respect to the debts owing to Annesley College and the City of Unley.

PHILLIPS FOX

Among the exhibits to Mr Kain’s affidavit was a copy of the record of the Adelaide Magistrates Court showing that the legal firm of Messrs Phillips Fox had commenced proceedings against the debtor on 7 March 1997 claiming a debt of $9,931.93.  On 23 April 1997, three weeks after the annulment order had been made, the creditor obtained a judgment in the sum of $5,452.93 after giving credit for moneys paid prior to judgment.  Mr Kain wrote Phillips Fox seeking particulars of the judgment debt but he did not receive any reply.  Nevertheless the debtor failed to address the subject of this debt in any of the affidavits that he filed in this matter.  I find that at the time of the compilation of his statement of affairs, the debtor was indebted to Phillips Fox either in the sum of $9,931.93 or, at the least, in the sum of $5,452.93, that he omitted to include that debt in his statement of affairs and that he omitted to disclose the existence of that creditor to the Court in his annulment application.  I further find that, notwithstanding the fact that this matter was drawn to the attention of the debtor as a consequence of him being served with the affidavit of Mr Kain, the debtor offered no explanation for this most important omission.

For completeness I should mention that there is a further endorsement in the record of proceedings that the judgment in this matter had been stayed indicating, perhaps, an area of dispute between the debtor and his creditor.  However, no other information was forthcoming
contradicting the findings that I make that Phillips Fox were creditors of the debtor, that they were not included as such in the statement of affairs and that the debtor has failed to offer any explanation whatsoever about this material omission.

COMMISSIONER OF LAND TAX

Mr Kain deposed that he endeavoured to obtain information from the State Taxation Office Land Tax Division but that the office declined to furnish the information sought as it was concerned that such a disclosure might breach its obligations to the debtor pursuant to the Privacy Act. Nevertheless, Mr Kain exhibited to his affidavit copies of judgments for $4,567.50 and for $20,928 whereas the debtor had listed the Commissioner as a creditor in the sum of $22,000. Both records from the Adelaide Magistrates Court contain an entry dated 14 March 1997 entitled “Discontinuance of Action” suggesting that the judgment debts have been paid out in full. But Dr Papps did not explain whether he, then a bankrupt, had paid those debts out of his own monies or whether some third party had paid them on his behalf. If he paid them out of his own moneys he was in breach of the provisions of the Act; if they were paid on his behalf by a third party then that third party was, in all probability, another creditor whose existence was not disclosed to the Court. Either way, it is another example of a failure on the part of the debtor to place material information before the Court.

CITY OF PORT ADELAIDE ENFIELD

Exhibited to Mr Kain’s affidavit were copies of the records of the Adelaide Magistrates Court indicating that the City of Port Adelaide Enfield had obtained judgments against the debtor on 30 April 1997 in the sum of $3,279.71 and on 16 April 1996 in the sum of $3,552.04.  Both debts appear to have been still outstanding on the date of the application for the annulment.  Neither debt was disclosed in the statement of affairs.  No attempt was made by the debtor in any of his affidavits to contradict his ongoing liability for the discharge of these debts.  It could not be said that the debtor overlooked the matter, for in par 14 of his affidavit of 12 August 1997 he alludes to the City of Port Adelaide Enfield and other creditors saying that “I am informed by my wife and verily believe that the [nominated creditors] were aware of the application”.

AUSTRALIAN TAXATION OFFICE

On 1 September 1997 the Deputy Commissioner of Taxation gave notice of his intention to appear on the hearing of the application to rescind the order annulling the bankruptcy of the debtor.  That application was supported by the affidavit of Lyn Anne Bartz, sworn on 29 April 1997; Ms Bartz is an officer of the ATO.  In that affidavit there were three broadly based assertions of indebtedness made with respect to the debtor.  First, it was claimed that the debtor had not paid group tax with respect to the wages of his receptionist at the Semaphore Surgery.  Then it was alleged that he had not paid group tax in respect of the workforce at Restcare and finally there was the following statement:

“Income Tax - Dr Michael G Papps as at 28.8.97

Year Ended               30.6.92             $20832.29

Year Ended               30.6.93             $19137.83

Year Ended               30.6.94             $12104.25

Total Tax   $52074.37”

The debtor’s response to these allegations was contained in his affidavit of 11 September 1997.  He said:

“I was not aware of any claim by the Australian Taxation Office at the time that the orders were made to notify each creditor of the application and when the order annulling my bankruptcy was made.”

The debtor therefore conceded that the ATO had not been notified by him of the application to annul his bankruptcy but, so he claimed, this was because he was unaware that he owed any money to the ATO.  He expanded further upon the matter when giving evidence in the current proceedings.  He said that he had been in dispute with the ATO and he acknowledged that the ATO had become the substituted creditor on the creditor’s petition to which reference has already been made.  He maintained however that the creditor’s petition was dismissed in November 1996 because he had paid to the ATO in excess of $200,000.  He said in evidence that he regarded that payment as not only discharging all of his liabilities but as constituting an overpayment in excess of $50,000 or thereabouts.  He said that he had been willing to make the overpayment as a matter of commercial judgment and so as to conclude his dispute but that it was his intention to pursue his rights to recover the surplus paid.  He did not refer to any such right of recovery as an asset in his statement of affairs.

Therefore, so the debtor claimed, far from him owing the ATO any money on account of income tax or group tax, the ATO owed him money.  As to group tax he acknowledged that he had not made any group tax payments but he said that he had withheld making payments because of the size of the overpayment that had been made in November 1996.  He also suggested that this was done with the knowledge and tacit approval of an officer of the ATO.

It could be that his admission that he had not paid group tax in respect of Restcare was an incorrect admission.  Earlier in these reasons I have referred to information suggesting that his wife has been the proprietor of the business for some years.  No such explanation or excuse is however available with respect to the Semaphore Surgery.  He was clearly the employer and as an employer, he had an obligation to remit group tax instalment deductions to the department.  His explanation that the department approved of this arrangement is very difficult to accept.  However, the information put before the Court by the ATO lacks precision.  The department sought to meet this deficiency by filing a further affidavit of Ms Bartz on the day preceding the commencement of the hearing but elected not to pursue the tender of that affidavit when confronted with the possibility that proceedings would have to be adjourned to enable the debtor’s legal advisers to obtain instructions on the additional material.  As a result, on the material before me, I am able to find that the ATO was a creditor at the time of the application for annulment but I am unable to make a finding about the debtor’s state of mind.  It seems incredible that anyone would be unaware of an income tax liability of such magnitude but it could be that the debtor is such a person.  His attitude of indifference, (which I have only touched on, for I find it unnecessary to set out in detail the number of occasions upon which he has allowed outstanding debts to proceed to judgment and warrants for arrest) suggests a casualness towards financial affairs not commonly found.

I find it very difficult to accept the debtor’s assertion that he believed that when he paid in excess of $200,000 to the ATO in November 1996 he had thereby discharged all his liabilities to the extent that he had over paid the ATO some $50,000.  It is difficult to accept that any person would make such an excessive payment but in this case it was a payment that was made by a person who had numerous outstanding debts.  There is a further area of concern which touches upon the debtor’s relationship with the ATO.  In the earlier bankruptcy proceedings (when the ATO had substituted as petitioning creditor) the debtor had sworn an affidavit in which he described his “attempts to raise the monies claimed by the Deputy Commissioner of Taxation and other creditors”.  He then deposed that his mother, his sister and his parents-in-law were each in the course of mortgaging their respective properties to give him financial assistance.  He anticipated borrowing in the vicinity of $180,000 from them:

• his sister had mortgaged her property and was expecting to raise in the region of $60,000 - or thereabouts, which monies she would give to the debtor for the purpose of paying the Deputy Commissioner of Taxation and other creditors

• his parents in-law were mortgaging their property and expected to raise approximately $100,000 which monies they would give to him to pay the Deputy Commissioner of Taxation and other creditors

• his mother was mortgaging her property.  She expected to raise $20,000.  Again he said that those monies would be available for the Deputy Commissioner of Taxation and other creditors

Whether all or any of these loans were made to the debtor was not stated.  If they were made, then there are further creditors whose existence has not been disclosed.  If the loans were not made, one wonders how the debtor raised such a substantial sum to pay the ATO.  Presumably, he did not raise it from his own resources for if he had those resources there would have been no need for the debtor to borrow from his relatives.

I turn now to briefly examine the circumstances surrounding the debtor’s secured creditors.

IOOF

Exhibited to Mr Kain’s affidavit was a detailed account prepared by the IOOF showing the history of the debtor’s secured loan.  It would seem that the security was granted in July 1996 and that penalty interest was incurred as early as August 1996 and September 1996 for late payment of instalments due under the mortgage.  It would also seem that the last payment of any nature was made in October 1996.  A cheque was dishonoured in February 1997 and in March 1997 there is an entry “changing of locks $140” indicating that the mortgagee had gone into possession of the premises.

As a result, there was at the time of the application for the annulment, a serious default in respect of this secured debt, the circumstances of which should have been disclosed to the Court.  Subsequent to the annulment, the IOOF exercised its power of sale which, of itself, is a very adverse indicator of the debtor’s financial circumstances.

AUSTRALIA & NEW ZEALAND BANKING GROUP LTD

On 14 April 1997, the ANZ applied in the District Court for an order for possession of the property that is the subject of its mortgage and on 11 June 1997 the debtor and his wife consented to such an order being made.  There is evidence on the file that as at 1 April 1997, the day preceding the date of the making of the annulment order, the amount outstanding under the security was $33,359.86.  There is also evidence that a notice of sale had been issued by the ANZ on 31 January 1997 and that no payments had been made since that date.  Again, this is a case of the debtor being seriously in default in respect of a secured debt and it was incumbent upon him to make a full and true disclosure to the Court upon the occasion of his application for an annulment of his bankruptcy.  He has failed to do so.

THE APPLICANTS’ MORTGAGE

Default in respect of this mortgage allegedly occurred in December 1996 when a cheque for the monthly payment of interest was dishonoured by the debtor’s banker.  There is evidence in the form of a letter of apology from the bank explaining that the dishonour occurred through an oversight and the debtor has relied on that letter of apology as a ground for alleging that he was not thereby in default of the mortgage.  I express no comment on that novel plea as it will be for the Supreme Court to determine that matter in due course of time.  I am however, for the purposes of these reasons, prepared to assume that there is a dispute subsisting in the Supreme Court between the debtor and the applicant in respect of the applicant’s security and I do not think anything further need be said on the subject.

VALUATION OF PROPERTIES

In his affidavit sworn 25 July 1997 Mr Swincer stated that prior to agreeing to advance monies to the debtor he obtained a valuation of the debtor’s properties from Tregenza Valuation Services.  That valuation was annexed to Mr Swincer’s affidavit.  It is undated but presumably it was made somewhere in mid 1996.  The values disclosed in the valuation report and the values listed by the debtor in his statement of affairs are as follows:

Brief Description of Property         Tregenza Valuation Services           The debtor

Kings Park  $1,850,000  $2,200,000

Malvern  $   510,000  $   550,000

Semaphore  $   190,000  $   250,000

Plympton  $   221,000  $   150,000

Total  $2,775,750  $3,150,000

However, there are significant doubts about the ownership of the Plympton property.  Exhibit BMS 4 to the affidavit of Mr Swincer is a photocopy of the relevant certificate of title and it shows that Mrs Margaret Papps is the registered proprietor of 99 undivided 100th parts in the land and that the debtor Michael George Papps is the registered proprietor of the remaining 100th part.  The debtor did not, at any stage, address this issue.

SOLVENCY

The debtor’s apparent substantial solvency as disclosed in his statement of affairs has been severely eroded by the various factors that have been enumerated in these reasons.  There are more unsecured creditors than were disclosed; there is doubt about the ownership of the Plympton property; and there is doubt about the debtor’s estimates of values in any case.  There is the inability of the debtor to protect his properties from the IOOF’s power of sale and there is the debtor’s inability to prevent the ANZ from obtaining an order for possession of other properties.  These factors suggest that on 2 April 1997 the debtor was not, and is not now, able to pay his debts as and when they fall due and become payable.  For these many reasons, I am satisfied that “all of the true facts were not before the court when the [annulment] order was made”:  Re Cook 1946) 13 ABC 245 at 249.

On the other hand, it may be that the debtor is now and was on the 2 April 1997 solvent.  Perhaps, notwithstanding the matters to which I have just referred, his assets may exceed in value his liabilities and he may have the ability to meet his debts as they fall due.  However, any confidence that I had in the debtor has been shattered by the material omissions that I have identified and by his failure to explain (or explain satisfactorily) those omissions.  I fall short of accusing him of dishonesty; that has not been established.  But what was established was an attitude of reckless indifference to the need to make a full and true disclosure to the Court when applying for an annulment of the sequestration order.

THE CONDUCT OF THE DEBTOR

If a decision is made to rescind the order of annulment, it should not be thought that an irreversible punishment is thereby being inflicted upon the debtor.  In fact, the historical concept of bankruptcy is to afford protection to debtors from the pursuit of their creditors.  An order of rescission would be made because of the uncertainties concerning the debtor’s financial circumstances, because of his failures to give notice to secured creditors and certain unsecured creditors of his intention to apply for an annulment and, most of all, because of his failure to place all relevant facts before the Court.  If an order rescinding the order of annulment is made and the debtor’s bankruptcy thereby revives he will not be prevented, on a subsequent occasion, from making a fresh application to the Court for annulment.  On that occasion however, he would be well advised to have regard to the several areas of complaint that have been identified in these reasons.  He would be well advised to ensure that meticulously accurate information is placed before the Court so that the Court might make a proper assessment of his circumstances and exercise its discretion accordingly.

ORDERS

It would seem to me for the reasons that I have set out above, that the failure on the part of the debtor to present an accurate statement of his financial affairs at the time when he applied for an annulment of the sequestration order should justify the Court in making an order rescinding the order of 2 April 1997.  However, in his closing submissions, Mr Frayne, counsel for the debtor, asked that he be heard before any orders were made.  I agreed to that request at the time of reserving my judgment and accordingly I publish these reasons upon the terms that counsel are invited to make further submissions on whether or not an order of rescission should be made.  On the adjourned hearing further consideration can then be given to the nature of the defects and their consequences.

Subsection 306(1) of the Act provides as follows:

“Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of the opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of that court.”

Rule 195 of the Bankruptcy Rules also address the same subject.  The provisions of that rule which are set out hereunder give an extended discretion to the Court:

“195.(1)       Subject to subrule (2), non-compliance with these Rules does not render a proceeding void unless the Court so directs.

(2)Where the provisions of these Rules have not been complied with in relation to a proceeding:

(a)the proceeding may be set aside, either wholly or in part, as irregular, or may be amended or otherwise dealt with in such manner and upon such terms as the Court thinks fit; or

(b)the Court may, upon such terms as the Court thinks fit, relieve a party from the consequences of non-compliance with these Rules.

(3)An application to set aside a proceeding as irregular shall not be allowed:

(a)unless the application is made within a reasonable time after the irregularity came to the knowledge of the applicant; or

(b)if the applicant has taken a fresh step after knowledge of the irregularity.

(4)An application to set aside a proceeding as irregular shall specify the irregularity intended to be relied on in support of the application.”

They are matters that must be considered before any order is made.

I certify that this and the preceding twenty-seven (27) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Loughlin

Associate:

Dated:            3 October 1997

Counsel for the Applicant:	Mr P A McNamara
Solicitor for the Applicant:	Messrs Clelands
Counsel for the Respondent:	Mr M A Frayne
Solicitor for the Respondent:	R N Brook
Date of Hearing:	22-25 September 1997
Date of Judgment:	3 October 1997