Re Wong; Ex parte Wong v Donnelly
[1995] FCA 630
•18 AUGUST 1995
CATCHWORDS
BANKRUPTCY - Annulment of bankruptcy - whether trustee should be satisfied that all the bankrupt's debts have been paid in full -trustee entitled not to be satisfied that all of the bankrupt's debts have been paid in full until satisfied that proofs have been lodged in relation to all provable debts and a decision has been made on those proofs - words and phrases "act, omission or decision of the trustee" for purposes of s.178 of Bankruptcy Act 1966 - "act or omission" is wider than "decision" - trustee's responses to request by the bankrupt may constitute an "act".
Bankruptcy Act 1966 (Cth) ss.153A, 178.
Oates v Commissioner of Taxation (1990) 27 FCR 289
Re Tyndall (1977) 30 FLR 6
McGoldrick v Official Trustee in Bankruptcy (1993) 47 FCR 547
Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478
Re Coyle (1993) 42 FCR 72
Storey v Lane (1981) 147 CLR 549
RE: DOUGLAS WONG; DOUGLAS WONG v MAX CHRISTOPHER DONNELLY & ORS
NB 2901 of 1994
Sackville J.
Sydney
18 August, 1995
IN THE FEDERAL COURT OF AUSTRALIA )
BANKRUPTCY DIVISION ) No. NB 2901 of 1994
BANKRUPTCY DISTRICT OF THE STATE )
OF NEW SOUTH WALES )
RE:
DOUGLAS WONG
Bankrupt
EX PARTE:
DOUGLAS WONG
Applicant
AND:
MAX CHRISTOPHER DONNELLY
First Respondent
AND:
BABSARI PTY LIMITED
Second Respondent
AND:
RAYMOND YEE PING TSUI
Third Respondent
CORAM: SACKVILLE J.
PLACE: SYDNEY
DATE: 18 AUGUST, 1995
THE COURT ORDERS THAT:
The application be dismissed.
The applicant pay the costs of the first, second and third respondents.
NOTE:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
BANKRUPTCY DIVISION ) No. NB 2901 of 1994
BANKRUPTCY DISTRICT OF THE STATE )
OF NEW SOUTH WALES )
RE:
DOUGLAS WONG
Bankrupt
EX PARTE:
DOUGLAS WONG
Applicant
AND:
MAX CHRISTOPHER DONNELLY
First Respondent
AND:
BABSARI PTY LIMITED
Second Respondent
AND:
RAYMOND YEE PING TSUI
Third Respondent
CORAM: SACKVILLE J.
PLACE: SYDNEY
DATE: 18 AUGUST, 1995
REASONS FOR JUDGMENT
Nature of the Proceedings
The applicant is a bankrupt. A sequestration order was made against his estate on 16 December 1994, on the application of NZI Capital Corporation Ltd ("NZI"). The first respondent, Mr M.C. Donnelly ("the Trustee"), was appointed trustee of the bankrupt's estate pursuant to the sequestration order.
The bankrupt now applies for relief arising out of what is said to be the foreshadowed refusal of the Trustee to issue a
certificate under s.153A of the Bankruptcy Act 1966 ("the Act") annulling the bankruptcy. So far as relevant, s.153A of the Act provides as follows:
153A(1)If the trustee is satisfied that all the bankrupt's debts have been paid in full, the bankruptcy is annulled, by force of this subsection, on the date on which the last such payment was made.
(2) The trustee must, as soon as practicable after that date, give to the Registrar a written certificate setting out the former bankrupt's name and bankruptcy number and the date of the annulment.
(3) The Registrar must enter in his or her records the fact that the bankruptcy has been annulled and the date of the annulment.
...
(6) In this section:
"bankrupt's debts" means all debts that have been proved in the bankruptcy and includes interest payable on such of those debts as bear interest, and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee."
It will be necessary later to say something more about the nature of the relief sought by the bankrupt. However, the basis of the bankrupt's claim is that he has the resources available to pay out those creditors whose proofs of debt have been admitted by the Trustee. He claims that, upon payment in full of those creditors (including one creditor whose proof the Trustee proposes to admit in part), he is entitled to an annulment of the bankruptcy. This is said to be so notwithstanding that two claimants have lodged proofs of debt as creditors which have not yet finally been determined in accordance with the processes provided for in the Act. The major argument put on behalf of the bankrupt is that the term "the bankrupt's debts" in s.153A(1) means the debts which have been admitted to proof at the time payment is made by the bankrupt, regardless of whether other proofs of debt have been lodged but not yet finally determined.
The Additional Respondents
Mr Coles QC and Mr McQuade appeared for the bankrupt. Mr Robinson appeared for the Trustee.
At the hearing, Mr Preston of counsel announced an appearance on behalf of Babsari Pty Ltd ("Babsari") and Mr Raymond Yee Ping Tsui ("Mr Tsui"), both of whom `ave lodged proofs of debt with the Trustee. Mr Preston applied for an order joining Babsari and Mr Tsui as respondents to the application, contending that Babsari and Mr Tsui could be adversely affected by the relief sought by the bankrupt. Despite Mr Coles' opposition to the joinder, I made orders joining Babsari and Mr Tsui as respondents to the application. Both Mr Robinson and Mr Preston presented arguments opposing the grant of relief to the bankrupt.
The Statutory Framework
Section 153A of the Act is contained in Part VII, Division 5 of the Act, introduced by the Bankruptcy Amendment Act 1991 (No. 9 of 1992). Under s.153A(1), if the trustee is satisfied that the bankrupt's debts have been paid in full, the bankruptcy is annulled by force of the sub-section. Accordingly, there is no need for an order of the Court for the annulment to become effective, although s.153A(2) requires the trustee to issue a
certificate. The annulment takes effect on the date of the last payment of the bankrupt's debts.
Section 153B empowers the Court to make an order annulling a bankruptcy if satisfied, inter alia, that a sequestration order ought not to have been made. This section has not been invoked in the present proceedings.
The effect of an annulment, whether under s.153A or s.153B, is stated by s.154(1):
"If the bankruptcy of a person (in this section called the "former bankrupt") is annulled under this Division:
(a)all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment are taken to have been validly made or done; and
(b)the trustee may apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee; and
(c)[subject to resolving the claims of third parties], the remainder (if any) of the property of the former bankrupt still vested in the trustee reverts to the bankrupt."
It is provided elsewhere in the Act that, upon the making of a sequestration order, a debtor becomes a bankrupt and continues to be a bankrupt until one of a number of events occurs. These events include the annulment of the bankruptcy by force of s.153A(1): s.43(2)(b).
Section 153A(6) defines the "bankrupt's debts", as used in s.153A(1), to mean, relevantly, "all debts that have been proved in the bankruptcy...". Section 83 provides that a creditor shall be taken not to have proved a debt until a proof of debt lodged by him in respect of that debt has been admitted.
The process of proving debts is dealt with in Part VI, Division 1 of the Act. Subject to that Division, all the debts and liabilities to which the bankrupt was subject at the date of the bankruptcy are provable in the bankruptcy: s.82(1). A creditor wishing to prove a debt must lodge with the trustee a proof of debt in accordance with the statutory requirements: s.84(1), (2). The trustee may require verification of the proof by statutory declaration: s.84(3). A creditor may, with the consent of the trustee, amend a proof of debt: s.98(1).
The trustee must examine each proof of debt and, subject to the power of the Court to extend time, not later than 14 days after the expiration of the period specified in a notice as the time within which creditors may lodge proofs, must either admit or reject the proof (in whole or in part) or require further evidence in support of it: s.102(1). If the trustee rejects the proof in whole or in part he or she must inform the creditor of the grounds of the rejection: s.102(2). Where the trustee considers that a proof has been wrongly admitted or rejected, he or she may revoke or amend the decision: s.102(3), (4). Thus a rejection of a proof does not deprive the trustee of power to reconsider the decision should circumstances warrant a different decision.
A creditor who is dissatisfied with a decision of the trustee in respect of a proof of debt, may apply to the Court to review the decision: s.104(1). Such an application, unless the Court extends time, must be made within 21 days from the date of the decision: s.104(3). The Court may confirm, reverse or vary the trustee's decision: s.104(2). Where a creditor or the bankrupt considers that a proof of debt has been wrongly admitted, that creditor or bankrupt may apply to the Court for an order that the proof be expunged or the amount of the admitted debt be reduced: s.99(1).
There is no statutory time limit on a creditor lodging a proof of debt. The trustee, after compliance with certain notice requirements, may declare dividends to creditors who have proved their debts: s.140. A creditor who has not proved the debt before a dividend is declared is entitled to be paid, out of available money in the trustee's hands, dividends that he or she has failed to receive. However, that creditor is not entitled to disturb the distribution of a dividend declared before the debt was proved: s.144.
Legislative History
Mr Coles referred to the legislative history of s.153A and it is convenient briefly to consider that case now. The history of the statutory and judicial power to annul bankruptcies was considered by Hill J. in Oates v Commissioner of Taxation (1990) 27 FCR 289, at 294 ff, and I do not repeat the analysis here. As Hill J. points out, a statutory power to annul a bankruptcy has existed in the United Kingdom since at least 1842.
For present purposes it is enough to commence with s.124(1)(b) of the Bankruptcy Act 1924 (Cth), which provided that
"where it is proved to the satisfaction of the Court that the debts of the bankrupt are paid in full, or that he has obtained a legal acquittance of his debts, the Court may, on the application of any person interested, annul the sequestration order."
In Re Gay (1943) 13 ABC 134 (Ct of Bankruptcy/Clyne J.), Clyne J. "reluctantly" held that the word "debts" meant all the debts of the bankrupt, including secured debts.
The Bankruptcy Act 1966 (Cth) overturned the specific decision in Re Gay. Section 154(1)(b) of that Act provided that
"(1)Where the Court is satisfied -
...
(b) that the unsecured debts of the bankrupt have been paid in full or the bankrupt has obtained a legal acquittance of his unsecured debts,
the Court may make an order annulling the bankruptcy." (Emphasis added.)
In Re Southwell; Ex parte Southwell (1979) 46 FLR 367 (FCA/Riley J.), Riley J. held that "unsecured debts", as used in s.154(1)(b), referred to unsecured debts which had been proved in the bankruptcy. Thus, the bankrupt was held entitled to an annulment upon payment of proved and admitted debts of $11,980, even though there were three unsecured creditors totalling $444 whose debts had not been paid. These creditors had not lodged proofs of debt and did not oppose the application for annulment, despite being served with notice of the application. No issue arose in the case of creditors who had lodged proofs of debt, but whose proofs had not finally been determined either by the trustee or by the Court on an application for review.
The decision in Re Southwell was confirmed by an amendment to s.154 effected by the Bankruptcy Amendment Act 1980 (No.12 of 1980). As amended, s.154 provided as follows:
"(1) Where the Court is satisfied -
...
(b)that the unsecured debts of the bankrupt, being debts that have been proved in the bankruptcy, have been paid in full or the bankrupt has obtained a legal acquittance of them,
the Court may make an order annulling the bankruptcy." (Emphasis added.)
This was the first time the Act employed the phrase "debts that have been proved in the bankruptcy" in connection with annulment of bankruptcy. That phrase is now incorporated in the definition of "bankrupt's debts" in s.153A(6).
In Re Giuca; Ex parte the Bankrupts (1986) 10 FCR 59 (FCA/Jenkinson J.), Jenkinson J. held that an order for annulment could be made even though the claim of a person claiming to be
a secured creditor was being contested in court proceedings. However, no proof of debt as an unsecured creditor had been lodged by that person. Jenkinson J. held that the 1980 amendment to s.154(1)(b) confirmed the construction adopted by Riley J. in Re Southwell and that the concerns of the secured creditor were not to be taken into account in relation to the bankrupt's application for annulment.
The 1992 amendments changed the procedure for annulment in cases of payment of the bankrupt's debts, by dispensing with the need for a court order and by making the annulment dependent upon the trustee being satisfied that all the bankrupt's debts have been paid in full. The Second Reading Speech (Cth Parl Deb., S., 14 November 1991, 3127 ff) sheds no light on why this change was made. There is nothing, however, that suggests that Parliament intended to address the issue presented by the present case.
The Proofs of Debt
A statement of affairs was filed by the bankrupt on 24 February 1995. This disclosed assets said to total $745,314, including $222,750 cash at bank, shares of $144,193 and debts due to the estate of $314,370. The statement of affairs showed unsecured creditors totalling $590,492. Of this figure, NZI was said to be owed about $580,000. In addition, the statement of affairs referred to deferred creditors totalling $752,320 and unquantified contingent liabilities in the form of disputed claims by Mr Tsui and another party arising out of guarantees given to Westpac Banking Corporation Ltd.
On 8 March 1995 the Trustee received $222,606 from the sale of the bankrupt's share of a property. This appears to be all but a small part of the "cash at bank" referred to in the statement of affairs.
In a report forwarded to known creditors on 21 March 1995, the Trustee gave notice of his intention to declare a first interim dividend, and requested creditors to lodge their claims by 25 April 1995. A notice of intention to pay a dividend appeared in the Commonwealth Government Gazette of 4 April 1995.
On 30 March 1995, Mr Tsui lodged a proof of debt for $490,947. The debt was said to comprise loans to the bankrupt made in 1987 totalling $200,000 and interest thereon. On the same date, Babsari lodged a proof of debt for $842,047, comprising a debt of $562,611 said to arise from the bankrupt's position as a co-surety of a loan with Babsari, together with accumulated interest on the debt. The proof was accompanied by a copy of a summons issued out of the Commercial Division of the Supreme Court of New South Wales, in which Babsari and Mr Tsui were named as plaintiffs and a number of persons, including the bankrupt, were named as defendants. One of the claims by Babsari against the bankrupt was for a contribution of $80,373, being one seventh of a sum of $562,611 allegedly paid by Babsari to Westpac Banking Corporation in discharge of a debt owed to Westpac by a third party. The summons alleged that the bankrupt was one of six co-sureties of the debt, all of whom were liable to make an equal contribution to Babsari.
By letter dated 30 March 1995, the bankrupt's solicitors called on the Trustee to provide, by the following day, details of all debts proved in the bankruptcy, together with the costs and expenses of the Trustee. On 31 March 1995, the Trustee replied, noting that he had received proofs of debt from Babsari and Mr Tsui. Since these proofs of debt were under consideration, the Trustee advised that he was not in a position to notify the bankrupt's solicitors of the proved debts.
The Trustee's letter prompted a reply from the bankrupt's solicitors, also dated 31 March 1995, as follows:
"It is apparent from the content of your letter that there are, as at today's date no proved debts as defined in the Bankruptcy Act 1966.
We hereby authorise you to deduct from the funds held in respect of this Bankrupt Estate, the funds necessary to discharge interest, costs, charges, expenses and remuneration in relation to this Estate.
We call on you to forthwith file a Certificate of Annulment of the Bankruptcy with the Federal Court Registry.
We hereby authorise and direct you to pay the balance of the funds held by you in respect of this Estate to Holmes and Bevan Trust Account.
We further hereby call upon you to attend to the above matter by close of business today." [Emphasis in original.]
This demand reflected a construction of s.153A(1) that would entitle a bankrupt, in a case where no proofs of debt had been admitted by the trustee, to an annulment of the bankruptcy simply upon payment of the trustee's fees and expenses. On this interpretation, the bankrupt is entitled to an annulment, notwithstanding that the trustee is actively considering whether proofs of debt already lodged should be admitted.
On 31 March 1995, NZI lodged a proof of debt for $564,551, based on a judgment obtained against the bankrupt, including accumulated interest on the judgment debt. The proof of debt stated that NZI had a security deposit of $62,818 which it had offset against the debt, producing a net indebtedness of $501,733. The Trustee admitted the proof for $501,733 on the day it was lodged.
On the same day, the Commonwealth Bank lodged a proof of debt for $3,820, which was also admitted that day by the Trustee. That debt has subsequently been paid in full.
Further Correspondence
By a facsimile sent at 11.49 am on 31 March 1995, the Trustee noted that a creditor's meeting had taken place at 10 a.m. that morning and advised that the debts due to NZI and the Commonwealth Bank were now proved debts. The letter also advised that the bankruptcy could not be annulled until the claims of Babsari and Mr Tsui had been resolved. Later on the same day the Trustee provided to the bankrupt's solicitors details of his fees and expenses to that stage.
To complete a busy day of correspondence, the bankrupt's solicitors sent a further letter on 31 March 1995. The letter included the following:
"We note you have informed us that the proved debts as at today's date are:-
NZI Capital Corporation Limited $501,733.00
Commonwealth Bank 3,820.82
We advise that we have received into trust, from third parties (relatives), funds totalling $320,000.00. We note that you hold in your trust account the sum of $222,605.99.
We advise that the funds received into our trust account are available to pay the proved debts of the Bankrupt Estate as aforesaid, plus the costs, charges and expenses of the Estate.
Please advise us of your bank account details so we may arrange to transfer such of the funds held in our trust account as are necessary to effect payment of the proved debts and your fees and thereby obtain an annulment of our client's Bankruptcy. The amount to be transferred is the amount necessary to meet the difference between the funds held in your trust account and the total of the proved debts and your costs and expenses.
The funds have been paid into our trust account on the basis that, if a Certificate of Annulment does not issue, then the funds must be refunded in full. We will only remit the funds as aforesaid on receiving your undertaking that upon receipt of those funds you will issue a Certificate of Annulment and file the Certificate in the Court. We look forward to receiving your undertaking accordingly and details of your bank account." [Emphasis in original.]
The Trustee replied, on 3 April 1995, as follows:
"In my opinion, I am unable to make a distribution to creditors and annul the bankruptcy until these claims [of Babsari and Mr Tsui] have been dealt with. As a result I am unable to provide the undertaking you have requested.
Should you disagree with this then you have the right to apply to the Federal Court to appeal against my decision and seek an order that the bankruptcy be annulled."
The Trustee's Position
In a report dated 8 May 1995, the Trustee gave his reasons for not issuing a certificate under s.153A of the Act:
"Given the above, I advise that I did not issue a Certificate under Section 153A of the Act and annul the bankruptcy on 30 March 1995, 31 March 1995, and 3 April 1995 for the following reasons:
I believe it was necessary to notify creditors of my intention to declare a dividend and allow all creditors the opportunity to prove their debts;
I believe it was necessary to deal with the claims lodged by Raymond Tsui and Babsari Pty Limited before making a distribution to creditors.
As a result, I conclude that the bankrupt's Application should not be granted in order to allow a determination to be made regarding the claims of Raymond Tsui and Babsari Pty Limited."
By an affidavit sworn on the day of the hearing and read in evidence, the Trustee's solicitor deposed that the Trustee's intention was to reject Mr Tsui's claim in full and to admit Babsari's claim in the sum of $80,373, but to reject the balance of Babsari's claim. The Trustee had not, however, formally rejected Mr Tsui's claim, nor had he admitted Babsari's claim to the extent foreshadowed. This was because he was awaiting the outcome of the present proceedings before formally determining whether to admit the proofs of debt lodged by Babsari and Mr Tsui.
Available Funds
There was unchallenged evidence that the bankrupt's father, Mr Frederick Wong, had caused funds totalling $320,000 to be deposited into the trust account of the bankrupt's solicitors on 31 March 1995. (The affidavit referred to $340,000 but, having regard to the terms of correspondence, this would seem to be a misprint for $320,000.) These moneys were to be advanced to the bankrupt by way of conditional loan by a company apparently controlled by Mr Wong. The loan was conditional upon the bankrupt obtaining an annulment of his bankruptcy and was to come into effect upon the bankruptcy being annulled. On 28 July 1995 the amount held by the solicitors was about $322,500, after allowing for payment of the Commonwealth Bank debt and (presumably) interest earned on the moneys deposited into the trust account.
The bankrupt's father deposed that a company with which he was associated was prepared to provide a further $122,017, presumably on the same terms as the earlier payment of $320,000 to the bankrupt's solicitors. This amount was said to be
"the estimated dividend that [Babsari and Mr Tsui] would receive from the moneys presently held by [the Trustee] if [Babsari] were admitted in the sum of $562,611 and the Tsui debt were admitted at $200,000."
The figure of $122,017 was calculated on the basis that the sum of approximately $202,000 held by the Trustee, after meeting fees and expenses, would allow a dividend of 16 cents in the dollar for the proved debts (or debts which the father assumed would be proved) of NZI Capital, the Commonwealth Bank, Babsari and Mr Tsui. However, there was no evidence that any portion of the sum of $122,017 had been paid, either to the Trustee or to the bankrupt's solicitors.
Preliminary Matters
Three points should be made at the outset. The first is that Mr Coles conceded that, at the date of the hearing, the Trustee could not be satisfied that "all the bankrupt's debts [had] been paid in full", within the meaning of s.153A(1) of the Act. This was so, even if attention were confined to debts formally admitted by the Trustee. At the date of the hearing, the bankrupt had not paid the admitted debt of NZI, although sufficient funds were held by the bankrupt's solicitors to enable that debt to be discharged in full, if the condition attached to the loan of those funds were satisfied.
Secondly, it was common ground that it was inappropriate for me to attempt to determine whether the balance of Babsari's proof of debt and Mr Tsui's proof of debt would ultimately be admitted, should the Trustee make the decision foreshadowed by him and should Babsari and Mr Tsui seek review of the rejection of the proofs. Under s.104 of the Act a creditor who is dissatisfied with a decision of a trustee in respect of a proof of debt may apply to the Court to review the decision. Mr Coles did not suggest that the claims of Babsari and Mr Tsui, to the extent they had been rejected by the Trustee, were frivolous or manifestly ill-founded. Nor did he suggest that the Trustee was bound to form the view that any applications for review by Babsari and Mr Tsui were doomed to failure.
In his report of 8 May 1995, the Trustee stated that it was expected that, if the claims lodged by Babsari and Mr Tsui were rejected, they would seek review of the Trustee's decision pursuant to s.104 of the Act. There was no evidence to suggest that this expectation was ill-founded. The parties proceeded on the basis that it was open to the Trustee to hold this view.
Thirdly, Mr Coles disavowed any suggestion that the Trustee had failed in his duty to determine the proofs of debt lodged by Babsari and Mr Tsui.
The Court's Powers
Mr Coles' main contention was that, where a trustee has admitted some proofs of debt and rejected others, and where the admitted debts had been paid, the trustee was bound to be satisfied that "all the bankrupt's debts have been paid in full". This was so, notwithstanding that the creditors, whose proofs had been rejected, had not exhausted the review processes provided in the Act and that their claims could not be regarded as frivolous. In putting this proposition, Mr Coles acknowledged that, since the proved debts of the bankrupt had not been paid at the date of the hearing, the Trustee could not be ordered to issue a certificate under s.153A(2) of the Act. However, Mr Coles invoked s.178 of the Act as the source of power for the Court to grant declaratory relief in the circumstances of the present case. Section 178 provides as follows:-
"If the bankrupt, a creditor or any other person is affected by any act, omission or decision of the
trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable."
The declaration ultimately sought by Mr Coles was in the following form:
"A declaration that it is just and equitable:-
(a)that the Respondent be satisfied that all the Applicant's provable debts have been paid in full and may forthwith file a certificate of annulment with the Registrar upon:-
(i)payment to -
(I)NZI Capital Corporation Ltd of $507,733.00;
(II)Babsari Pty Ltd of $80,373.07;
(III)Commonwealth Bank of Australia in the sum of $3,820.82;
(IV)and interest payable on those amounts as is properly payable;
(ii)payment of the reasonable costs, charges and expenses of the administration of the bankruptcy of the Applicant, including the remuneration of the Respondent;
(b)that the respondent be at liberty to use the funds presently held by him to pay or part-pay the amounts referred to in (a)."
In effect, the declaration would amount to advice by the Court that upon payment of all the admitted debts (including Babsari's debt, to the extent that the Trustee had foreshadowed it would be admitted) and costs and charges, the Trustee should be satisfied that all the bankrupt's debts had been paid in full within the meaning of s.153A(1).
Mr Coles pointed out that, in the present case, the effect of the Trustee's correspondence and the report of 8 May 1995 was that the Trustee had formed the view that, even if the bankrupt paid the admitted debts of NZI and the Commonwealth Bank in full, the Trustee would not be satisfied that all the bankrupt's debts had been paid in full, within the meaning of s.153A(1). The Trustee had adopted this position because he considered that he could not be satisfied that all the bankrupt's debts had been paid until the claims of Babsari and Mr Tsui had been finalised, if necessary by the determination of an application to the Court for review of the Trustee's foreshadowed rejection of the proofs of debt. The position had not been changed by the Trustee's statement that he intended to accept Babsari's proof of debt to the extent of $80,373. (While the correspondence and report are not, perhaps, unequivocal in expressing the Trustee's position, Mr Robinson confirmed in argument that this was intended to be the Trustee's stance.)
To support his contention that s.178 empowered the Court to grant relief to the bankrupt, Mr Coles relied on the observations of Deane J. in Re Tyndall (1977) 30 FLR 6, at 9-10. Deane J. contrasted the language of s.178 with that used in the earlier legislation:
The critical differences in wording between s.148 of the 1924 Act and s.178 of the present Act are that the present Act does not require that the applicant be a person "aggrieved" as did the previous Act and the English bankruptcy legislation and that the present Act does not make the focal point of the jurisdiction the confirming, reversing or modifying of "the act or decision complained of". Under s.178, the bankrupt, a creditor or any other person affected by an act, omission or decision of the trustee is empowered to apply to the court. The express requirement that the applicant be a person "aggrieved" no longer exists. Nor is the court, in express terms, required to
approach the matter on the basis that the appropriate question is whether "the act or decision complained of" should be confirmed, reversed or modified. Once the matter is properly before the court, the court is empowered - and obliged - to make such order in the matter "as it thinks just and equitable".
...
In my view, the wording of s.178 of the Act is such as to confer upon the court the widest possible discretion as to the appropriate order which should be made in the particular case and is quite inconsistent with the approach that, upon an application made pursuant to the section by a bankrupt, creditor or other person affected by an act, omission or decision of the trustee, the court is only empowered to interfere with the trustee's act, omission or decision if it is of the view that the trustee has acted absurdly or unreasonably or in bad faith. Once the matter is properly before the court, the court is, by the express words of s.178, empowered (and, as I have said, obliged) to make such order in the matter as it thinks just and equitable.
This is not, of course, to say that the court should either disregard the relevant decision of the trustee or ignore the well-established policy under bankruptcy legislation that the court should not unduly interfere with the day-to-day administration of a bankrupt's estate by a trustee. The trustee is made responsible for the administration of the bankrupt estate under the general provisions of the Act. He must, in the course of that administration, make a variety of decisions aimed at enabling the administration to be carried out with promptness and efficiency. Some of these decisions will be business or commercial decisions in which the business or commercial experience of the trustee would itself provide a basis for arguing that, unless it were shown that the trustee's decision was perverse or clearly wrong, it would be inappropriate and unjust for the court to interfere. Again, under the present legislation, the trustee will ordinarily be the official receiver and the court must be conscious of the fact that the official receiver will be made responsible for the administration of an extraordinarily large number of estates. In such circumstances, the administration of the Bankruptcy Act demands that the court take into account, in exercising its functions under the provisions of s.178 of the Act, the opinion of the official receiver, as trustee, as to what is expedient in the interests of the prompt and efficient administration of a particular bankrupt estate. That is, however, a completely different thing to saying that the court can only interfere with an act,
omission or decision of the official receiver, as such trustee, when it is of the view that the official receiver has acted unreasonably, absurdly or in bad faith in so acting or failing to act or in reaching that decision."
Deane J's observations have been subsequently approved by the Full Court: McGoldrick v Official Trustee in Bankruptcy (1993) 47 FCR 547, at 555. It should be noted that the power conferred by s.178 is discretionary and the Court will not necessarily interfere with the judgment of the trustee: Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478 (FCA/FC), at 485.
As Deane J. pointed out in Re Tyndall, the power conferred by s.178 of the Act is enlivened, inter alia, when the bankrupt is "affected by any act, omission or decision of the trustee". In the present case:
(a)the Trustee stated in correspondence and in a report that he could not be satisfied that all the bankrupt's debts had been paid in full, even if the bankrupt paid all debts then admitted by the Trustee; and
(b)on Mr Coles' argument, the Trustee misconstrued s.153A(1), in that he erroneously took the view that he could not be satisfied that all the bankrupt's debts had been paid in full until creditors who had lodged proofs had exhausted the processes provided for in the Act, including an application for review to the Court pursuant to s.104 of the Act.
I think it doubtful whether the Trustee has yet made a "decision" that he is not satisfied that all the bankrupt's debts have been paid in full. Since the Trustee has admitted NZI's proof of debt, and since it is clear that that debt has not been paid, the occasion for the Trustee to make the judgment envisaged by s.153A(1), as a practical matter, has not yet arisen. It is true that the bankrupt has indicated that he will cause NZI's debt to be paid if the Trustee gives certain assurances. But the fact is that the debt has not yet been paid and the Trustee has never had sufficient funds in hand to enable NZI's debt to be discharged. In these circumstances, I think it is doubtful whether the Trustee can be regarded as having decided that payment of the debt is insufficient to allow him to be satisfied that "all the bankrupt's debts have been paid in full". Compare the views of Mason C.J., in a different statutory context, in Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321, at 336-337 (to the effect that a decision for the purposes of the Administrative Decisions (Judicial Review) Act 1977 will generally entail a decision which is final or operative and determinative).
Nonetheless, the Trustee has expressed the view that payment of NZI's debt would not permit him to be satisfied of the matter referred to in s.153A(1). Section 178 does not merely use the word "decision"; it confers power on the Court whenever a bankrupt is affected by any "act, omission or decision of the trustee". The phrase "act or omission" is clearly wider than "decision". The word "act", in its dictionary meaning, covers "anything done or performed": Macquarie Dictionary. In my opinion, a considered statement in writing by a trustee, in response to a formal request by a bankrupt, as to the course of action the trustee proposes to follow in the administration of the estate, usually will amount to an "act of the trustee" within s.178 of the Act. In the circumstances of the present case I think that the Trustee's responses to the requests made on behalf of the bankrupt, as recorded in the correspondence and the report of 8 May 1995, constitute an "act" of the Trustee for the purposes of s.178. I do not think there is any doubt that the Trustee's act has affected the bankrupt, since it has effectively blocked the path to annulment of the bankruptcy.
This approach is consistent with that taken by Nicholson J. in Re Hall; Ex parte Anderson, 22 May 1995, unreported. In that case his Honour held that he had power to restrain a trustee from realising or distributing the assets in the bankruptcy, pending the hearing of the bankrupt's application for annulment. His Honour so held notwithstanding that the bankrupt had not identified any particular act, omission or decision beyond steps the trustee had taken, or would take, to realise and distribute the property. Although Nicholson J. ultimately declined to grant an injunction, his Honour's observations support a broad view of s.178.
If Mr Coles were to succeed in demonstrating that the Trustee's expressed position was based on an incorrect construction of s.153A(1), I am inclined to the view that, subject to discretionary considerations, the Court could make a declaration along the lines sought on behalf of the bankrupt.
The Broader Argument
Mr Coles' more sweeping contention was that s.153A(1) should be read literally, with the result that if a bankrupt pays all debts (if any) admitted at a particular time, he or she is entitled to an annulment of the bankruptcy. Mr Coles pointed out that the phrase "bankrupt's debts" is defined in s.153A(6) to mean
"all debts that have been proved in the bankruptcy and includes ...the costs, charges and expenses of the administration of the bankruptcy...". (Emphasis added.)
The effect of this definition, on Mr Coles' argument, is that only debts which have actually been proved in the bankruptcy must be paid by the bankrupt before the conditions specified in s.153A(6) is satisfied. Debts which have not been the subject of a proof, or which have not yet been admitted by the trustee, are not to be taken into account. Mr Coles contended that s.83, which provides that a creditor is not to be taken to have proved a debt until a proof of debt lodged in respect of that debt has been admitted, supported his argument.
According to Mr Coles, the only question is whether, at any given time, the bankrupt has paid out debts already proved (if any) and the costs and expenses of the administration of the bankruptcy. If the answer is in the affirmative, the trustee is bound to be satisfied that all the "bankrupt's debts" have been paid in full
and the bankrupt is therefore entitled to an annulment of the bankruptcy. Mr Coles accepted that the logic of this argument is that, if a sequestration order is made and, before any creditors have an opportunity to lodge proofs of debt, the bankrupt pays the costs and expenses of the trustee, he or she is entitled to an annulment of the bankruptcy. Similarly, if creditors have lodged proofs, but the trustee has not yet had an opportunity to accept or reject any of the proofs, the bankrupt is entitled to an annulment upon payment of the costs and expenses of the trustee.
The effect of an annulment of a bankruptcy under s.153A and s.153B has been summarised by Drummond J. in Re Coyle (1993) 42 FCR 72, at 77, as
"generally...that the bankruptcy is set aside ab initio and the annulled bankruptcy will be treated as never having taken place for any purposes, save those set out in s.154 and save in other special situations of the kind referred to in Oates v Commissioner of Taxation [(1990) 27 FCR 289], at 297".
In Oates, at 297, Hill J., after a careful consideration of the authorities concerning the effect of annulment of a bankruptcy, stated the position as follows:
"Having regard to s.154(2) of the Bankruptcy Act, it seems clear that it will not be correct to say that the consequence of annulment is that the bankruptcy is avoided for all purposes ab initio. Further, it is clear that an offence committed during the period in which the bankruptcy continues under s.43(2)(c) is still an offence notwithstanding the annulment: Director of Public Prosecutions v Ashley [1955] Crim LR 565 and cf Re Hayes; Ex parte Hayes (1984) 59 ALR 219 at 223. Nevertheless, subject to these, and perhaps other exceptions that may arise as in Re Hayes (supra), it seems not incorrect to say that the effect of the annulment will be the setting aside of the bankruptcy order. Indeed as is stated in Halsbury's Laws of England (4th ed), p 611 the form of order of annulment made in the United Kingdom includes an order that the petition upon which the bankruptcy order was made should be dismissed."
(Section 154(2) of the Act in the form considered by Hill J. was to the effect of the present s.154(1). In Re Coyle, at 76, Drummond J. considered that Hill J.'s reasoning was applicable to the annulment provisions as amended in 1992.)
While an annulment does not avoid the bankruptcy for all purposes, the general effect is as stated by Drummond J. See also Theissbacher v MacGregor Garrick & Co [1993] 2 Qd R 223 (SCt Q/CA); Worrell v Westpac Banking Corporation (1994) 51 FCR 304 (FCA/Drummond J.). It follows that, if Mr Coles' broader argument is correct, a bankrupt who is astute enough to act promptly, before any proofs of debt have been lodged or admitted, could have the bankruptcy annulled, without paying any of his or her debts. As has been noted, s.153A(1), unlike s.153B, does not condition the annulment on a court order, but on the trustee being satisfied that all the bankrupt's debts have been paid in full. If the trustee is so satisfied, the bankruptcy is annulled by force of the sub-section, as from the date of the last payment. One of the consequences of an annulment in the circumstances to which I have referred would be that the former bankrupt would no longer be under the obligations imposed by s.77 of the Act to give to the trustee all relevant books and his or her passport; nor would the former bankrupt be obliged to give
information to the trustee about his or her affairs.
In my view, the literal construction of s.153A(1), contended for by Mr Coles, leads to absurd consequences. For this reason it cannot be right. It is true that the definition of "bankrupt's debts" refers to debts that "have been proved in the bankruptcy". But the use of this language is not inconsistent with what Mr Coles described as a "temporal limitation" on the operation of s.153A. In short, it is consistent with the language of s.153A to conclude that the trustee is entitled to address the question of whether the bankrupt's debts (as defined) have been paid in full on the basis that creditors should have an appropriate opportunity to prove their debts in accordance with the statutory procedures for proving debts in a bankruptcy. On this approach, it is open to the trustee to defer considering whether all debts that have been proved in the bankruptcy have been paid until he or she has had an opportunity to determine what proofs of debt will be lodged by creditors of the bankrupt.
A Narrower Argument
The obvious difficulties with the more sweeping argument led Mr Coles to formulate a more modest alternative. This was that, where creditors have lodged proofs of debt in a bankruptcy and the trustee has admitted at least some of those debts, payment of the admitted debts will amount to payment of "all the bankrupt's debts" within s.153A(1) of the Act. In these circumstances the trustee is bound to be satisfied that all the bankrupt's debts have been paid in full notwithstanding that:
(a)some proofs of debt have not yet been determined by the trustee; and
(b)some creditors whose proofs had been rejected have not exhausted the review processes provided by the Act.
As a variant of this argument, Mr Coles looked ahead to the foreshadowed rejection of Mr Tsui's proof by the trustee and his foreshadowed acceptance in part of Babsari's proof of debt. Mr Coles submitted that, assuming that the Trustee acted as foreshadowed, the bankrupt's debts would be paid in full, for the purpose of s.153A(1), when the admitted debts (including Babsari's debt, to the extent it would be admitted) were paid in full. This would be so regardless of the fact that Babsari and Mr Tsui might apply for review (perhaps successfully) of the decision to reject their proofs of debt in whole or in part.
Mr Coles argued that the policy underlying s.153A was to encourage bankrupts to pay out creditors. He acknowledged that his approach could lead to a situation where creditors whose claims were proved swiftly would receive payment in full, while those whose claims were disputed by the trustee (even though the claims might be well-founded) would receive nothing from the bankrupt. However, Mr Coles said that the annulment of the bankruptcy would not prejudice the creditors whose claims were disputed. As Mr Coles pointed out, the effect of annulment of a bankruptcy is to revive the right of the creditor to sue, at least if the creditor's proof has not been rejected in the
bankruptcy: More v More [1962] Ch. 424; Oates v Commissioner of Taxation, at 297. Mr Coles also suggested that, unless there is some cut-off point for the operation of s.153A(1), it might never be open to a trustee to form the opinion contemplated by the sub-section, since the trustee could never be sure that other creditors would not belatedly lodge proofs of debts.
In my view, Mr Coles' submissions suffer from the difficulty that the incorporation of a mandatory cut-off point into s.153A(1) produces arbitrary consequences that are not consistent with the objectives of bankruptcy law. Is the line to be drawn as soon as the first proof of debt is admitted by the trustee? Is it open at that point to the bankrupt to pay out the sole admitted debt and invoke s.153A(1)? If this is so, other creditors, who have not yet lodged proofs of debt, even if they have incontestable claims and have foreshadowed to the trustee their intention to lodge such proofs, would receive nothing from a payment by the bankrupt to the admitted creditors. Instead, they would find that the bankruptcy had been annulled before their own proofs of debt had been lodged, let alone considered. I do not think this result was contemplated by the drafters of the legislation. As Aickin J. observed in Storey v Lane (1981) 147 CLR 549, at 563, the nature of bankruptcy in Australia
"requires that it should operate uniformly on debts of equal degree owed by a bankrupt, uniformly both as to the bankrupt and as to his creditors".
In the words of Gibbs C.J. in the same case, at 557,
"the equitable distribution of the assets of the
insolvent debtor is a fundamental purpose of the bankruptcy law".
If the line is drawn at the point where the trustee has either accepted or rejected all proofs of debt lodged in response to a public invitation, other difficulties arise. Mr Coles contended that, at this point, if all admitted debts were paid, the trustee would be bound to be satisfied that all the bankrupt's debts had been paid in full. Yet a creditor who had applied to the Court for review of the rejection of his or her proof would be powerless to prevent annulment of the bankruptcy, even if the trustee had erroneously rejected the proof of debt. Indeed, the creditor would be powerless to prevent annulment of the bankruptcy, even though he or she has fresh evidence which is likely to persuade the trustee to exercise the power conferred by s.102(4) of the Act to revoke the decision to reject the proof of debt.
It must be remembered that a trustee ordinarily does not admit a claim which is doubtful on the information available at the time of the decision: D. Rose, Lewis Australian Bankruptcy Law (10th ed 1994), 113. Furthermore, the only material available to the trustee, other than the proof of debt lodged by the creditor, is often information provided by the bankrupt. In the present case, the basis for the trustee's foreshadowed rejection of Mr Tsui's claim was evidence from the bankrupt himself, to the effect that Mr Tsui had not lent money to him, but to a trading company. The bankrupt's evidence in this case may or may not ultimately be accepted. The point is that, in many cases, whether a debt is admitted or rejected by the trustee depends upon information provided by the bankrupt. It is not difficult to imagine cases where the bankrupt takes steps to encourage rejection of proofs of debt by the trustee in order to limit the extent of admitted debts, thereby opening the way to an annulment of the bankruptcy by payment of those debts. In any event, it would be curious if the practical effect of a policy of encouraging a bankrupt to pay his or her debts is that creditors whose debts happen to be admitted quickly are paid in full, but those whose debts, although equally genuine, and prosecuted with equal vigour, happen to be disputed, receive nothing from the bankrupt and are left to the uncertainties of post-bankruptcy enforcement action.
I do not think that it is correct to suggest, as Mr Coles did, that a creditor whose proof of debt has not been accepted suffers no detriment by reason of the annulment of the bankruptcy. I have already referred to the fact that the annulment releases the bankrupt from obligations imposed, for example, by s.77 of the Act. The enhancement of opportunities for the improper disposal or concealment of assets is obvious. It may be, as Mr Coles suggested, that payments to the admitted creditors could be attacked as preferences, although this proposition is difficult to reconcile with the language of s.154(1)(a) of the Act. Even if that were the case, the annulment would be likely to push back the dates by reference to which the avoidance provisions in the Act operate. These include s.120(1) (avoidance of settlements made within two years of the commencement of bankruptcy) and
s.122 (avoidance of certain preferences made within six months of presentation of the petition).
In my opinion, it is implicit in s.153A(1) that the trustee, in determining whether he or she is satisfied of the matter specified in the sub-section, can take into account not only proofs of debt likely to be lodged, but those that have been lodged but that have not yet finally been determined in accordance with the procedures laid down by the Act itself. Accordingly, whether the trustee can or should be satisfied that all the bankrupt's debts have been paid for the purposes of s.153A(1) depends on the circumstances the trustee is required to assess. The trustee is entitled, at the least, to consider whether a creditor's proof of debt will be admitted through the processes provided for in the Act. A trustee is also entitled not to be satisfied that all the bankrupt's debts have been paid if, for example, he or she is aware that a proof of debt has been lodged but not yet determined as required by s.102(1). Indeed, it is difficult to see how the trustee could be so satisfied when it is known that a proof of debt is awaiting determination which, if accepted, will constitute one of the "debts that have been proved in the bankruptcy".
Similarly, in my opinion, it is open to a trustee not to be satisfied that all the bankrupt's debts have been paid in full if a proof of debt has been rejected but the creditor's rights of review have not yet been exhausted. The Court, on an application for review, may confirm, reverse or vary the trustee's decision: s.104(2). If the trustee considers that the application to the Court for review has more than minimal prospects of success, in my view, the trustee is entitled to await the outcome before addressing the question of whether all the debts of the bankrupt have been paid in full. On the other hand, depending upon the circumstances, it may be open to a trustee to be satisfied that all the bankrupt's debts had been paid in full even if the review process for a rejected proof has not been exhausted. This could be the case, for example, if the trustee is satisfied that the appeal is frivolous and that there is no genuine prospect of the proof being admitted in whole or in part.
Contrary to Mr Coles' submission, I do not think that, because there is no time limit on a creditor lodging a proof of debt in a bankruptcy, a trustee can never be satisfied that all the bankrupt's debts have been paid. Section 153A(1) conditions the annulment of the bankruptcy on the trustee being satisfied that all the bankrupt's debts (that is, those that have been proven in the bankruptcy) have been paid. If the trustee is satisfied in a given case that all creditors likely to lodge proofs of debt have done so, he or she is not prevented by the theoretical possibility of a late proof being lodged, from being satisfied of the state of affairs specified in s.153A(1).
In my opinion, there is nothing in the legislative history that leads to a contrary conclusion. The legislation prior to the Bankruptcy Amendment Act 1991 did not specifically address the issue presented by the present case, where proofs of debt have been lodged but not finally determined. Nor did the authorities address this question. It is true that the 1992 amendments vested responsibility in the trustee, rather than the Court, to determine whether the bankrupt's debts have been paid in full. The amendments also removed the discretion which was previously vested in the Court. But these changes shed no light on whether the trustee is entitled to await the determination of proofs of debt lodged by creditors before deciding that the bankrupt's debts have been paid in full. In my view, the legislative history provides no support for the construction of s.153A put forward by Mr Coles.
Conclusion
In the result, I do not think that the applicants have shown that the Trustee has acted on the basis of an erroneous construction of s.153A(1) of the Act. To put the matter another way, it was and is open to the Trustee not to be satisfied that all the bankrupt's debts have been paid in full until a final decision has been made (including the determination of any application for review) on the proofs of debt lodged by Babsari and Mr Tsui. There is therefore no basis for declaratory or other relief under s.178 of the Act. Accordingly, the application should be dismissed. Subject to any contrary argument, I think the appropriate course is for the applicant to pay the costs of all respondents.
I certify that this and the preceding 34 pages are a true copy of the Reasons for
Judgment of the Honourable Justice Sackville.
Associate:
Dated:18 August, 1995
Heard:2 August, 1995
Place: Sydney
Decision:18 August, 1995
Appearances: Mr B. Coles QC, with Mr P. McQuade, instructed by Michell Sillar, Solicitors, appeared for the applicant.
Mr D.P. Robinson, instructed by Holmes & Bevan, Solicitors, appeared for the first respondent.
Mr B.J. Preston, instructed by Colin Biggers & Paisley, Solicitors, appeared for the second and third respondents.
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