Roberts, O. v Bower, L.M
[1994] FCA 74
•28 FEBRUARY 1994
ONUS ROBERTS v LAWRENCE MILTON BOWER AND GLORIA DAWN BOWER
No. P1268 of 1993
FED No. 74/94
Number of pages - 12
Bankruptcy
(1994) 48 FCR 350
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
EINFELD J
CATCHWORDS
Bankruptcy - Creditor's petition - notice of opposition - whether unexecuted mortgage offered as security for debt - whether sufficient security - effect of instalment order made by District Court as stay - whether bankruptcy notice capable of amendment in substantive way - whether amendment should be sealed - discretionary refusal of sequestration.
Bankruptcy Act 1966 (Cth) ss 5, 14A, 31A(1)(d), 33(1), (2)(b), 40(1)(g), 44(2), (3), (4), 51(1), 52(1), (2), (2)(b), 306(1)
Barry v Heider (1914) 19 CLR 197
Re McAlpine Ex parte AMEV Finance Limited (1987) 17 FCR 42
Re Schekeloff (1989) 22 FCR 407
Re Spurr Ex parte Werner and Ors (1991) 31 FCR 236
Re Padagas Ex parte Courier Air Conditioning Pty Ltd (1977) 16 ALR 475
Clyne v Deputy Commissioner of Taxation (1982) 42 ALR 703
Re Moss Ex parte Tour Finance Ltd (1968) 13 FLR 101
Re Florance; Ex parte Turimetta Properties Pty Ltd (No 2) (1980) 39 FLR 400
Re Shoreline Homes Ltd (1982) 1 NZLR 663
Re Betts (1897) 1 QB 50
Re a Debtor Ex parte the Debtor (1908) 1 KB 344
Re Pender Ex parte Sullivan Einfeld J, unreported 22 April 1988
Radich v Bank of New Zealand Full Court of the Federal Court (Einfeld, Foster and Drummond JJ), unreported 10 September 1993
Hoffman v MMI Workers Compensation (NSW) Limited Einfeld J, unreported 21 October 1993
Bradbrook, MacCallum and Moore: Australian Real Property Law (1991, The Law Book Company Limited)
HEARING
SYDNEY, 14 December 1993
#DATE 28:2:1994
Solicitor for the debtor S. Nash of Sally Nash and Co
Solicitor for the petitioning W. Clarke of Champion and
creditors Partners
ORDER
1. Pronounce a sequestration order against the estate of the debtor.
2. Order that costs (including reserved costs) be taxed and paid according to the Bankruptcy Act 1966 (Cth).
3. Direct that a draft of this order be delivered to the Registrar within 7 days in accordance with sub-rule 124(2) of the bankruptcy rules.
JUDGE1
EINFELD J By a petition presented on 8 April 1993, Lawrence Milton Bower and Gloria Dawn Bower (the petitioning creditors) petition the court for a sequestration order against the estate of Onus Roberts (the debtor). The petition is based upon a default judgment obtained against the debtor and her husband in the District Court on 20 February 1991 for the sum of $50,000.51 inclusive of interest and costs. On 19 June 1992 the petitioning creditors issued a twenty-one day bankruptcy notice. On 17 July 1992 the bankruptcy notice was amended by a Registrar in Bankruptcy and the bankruptcy notice and notice of amendment was served on the debtor on 29 September 1992. The act of bankruptcy allegedly occurred on 20 October 1992.
There is no evidence to explain the delay in presenting the petition but it may be related to problems which followed 19 June 1992 when the debtor applied to the District Court to have the judgment debt paid in instalments. On 24 June the District Court ordered instalments of $600 per month, the first of which was due on 27 July 1992. This payment was not made and on 15 September 1992 an affidavit of non-compliance was filed by the creditors' solicitor. On 28 October 1992 the debtor made a payment of $1,000.
On 14 December 1993 the present case was brought before this Court as an opposed petition to sequestrate the debtor's estate. The debtor's submissions in opposition to the sequestration order can be divided into five headings:
1. security has been granted
2. the instalment order by the District Court acted as a stay of the judgment
3. the bankruptcy notice was flawed and incapable of amendment
4. the amendment to the bankruptcy notice was not sealed
5. the Court should exercise its discretion not to make the sequestration order
Security granted
4. The evidence of the debtor is that on 24 June 1993 she sent a second mortgage over her home Folio Identifier 217/262001 by security post to the petitioning creditors. This mortgage was stated to be granted in consideration of the petitioning creditors forbearing to execute the judgment obtained in the District Court. The mortgage provided that the debtor would pay the sum secured by the mortgage together with interest at 11.25% per annum by monthly payments of $600.The debtor submitted that "on the uncontested evidence of the debtor there is sufficient equity in the property to provide adequate security for the petitioning creditors". The debtor also argued that no evidence was filed by the petitioning creditors disputing the security and that paragraph 3 of the creditors' petition does not refer to the security nor abandon it as required by section 44(3) of the Bankruptcy Act (Cth) 1966 (the Act).
The first point to note in relation to this submission is that the mortgage document was not sent by the debtor to the petitioning creditors until 10 weeks after they presented their petition and verified its contents. This was also one month after personal service of the petition had been effected upon the debtor. There can therefore be no question that the petition was correct and complied with section 44(3) of the Act, at the time of both its issue and its service, in stating that the petitioning creditors held no security over the property of the debtor.
In response to the debtor's allegation of adequate security, the petitioning creditors submitted that the evidence does not show that the mortgage document was ever seen or signed by the creditors let alone registered. Indeed the debtor herself stated that she has been unable to find any evidence of registration of the mortgage. The petitioning creditors submitted that an unregistered mortgage does not create a mortgage charge over property, and that they are not secured creditors for the purposes of the Act.
Section 5 of the Act defines "secured creditor", in relation to a debtor, as:
..... a person holding a mortgage, charge or lien on property of the debtor as security for a debt due to him from the debtor .....
Although under the Torrens system no legal title is conferred until a mortgage is registered, a document in registrable form may well confer equitable rights: Bradbrook, MacCallum and Moore, Australian Real Property Law (1991, The Law Book Company Limited) #18.13.
In the present case the execution of a mortgage in registrable form created an equitable charge even though the mortgage was not registered: Barry v Heider (1914) 19 CLR 197; Re Shoreline Homes Ltd (1982) 1 NZLR 663. The petitioning creditors are thus subject to subsections (2) and (3) of section 44 which provide:
(2) Subject to sub-section (3), a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him exceeds the value of his security.
(3) A secured creditor may present, or join in presenting, a creditor's petition as if he were an unsecured creditor if he includes in the petition a statement that he is willing to surrender his security for the benefit of creditors generally in the event of a sequestration order being made against the debtor.
The petitioning creditors firstly contest the debtor's submission that there is "uncontested evidence" of "sufficient equity" in the property to cover their judgment debt. They secondly state that they are prepared to surrender under section 44(3) the value of any security that the mortgage may afford them.
It cannot be said that there is uncontested evidence that the security is sufficient to cover the $50,000 odd owed by the debtor and her husband to the petitioning creditors. Although the "sale value" of the property is estimated by the debtor in her various affidavits to the Court as $100,000 and $115,000, no basis is provided for either of these figures. In addition, any value of the security is subject to the first mortgage over the property to Australia and New Zealand Banking Group Ltd (ANZ) of $45,000. Moreover, the evidence shows that in an attempt to consolidate their liabilities, the debtor and her husband as joint judgment debtors approached the St. George Bank to lend them $65,000, being $45,000 to pay out the ANZ mortgage and $20,000 towards the petitioning creditors' debt. As St. George was prepared to make this loan, this $65,000, although no doubt underestimating the value of the security, conveys the most objective means of appraising the current value of the property. It indicates a significant shortfall in the value of the security.
However, as the petitioning creditors are prepared to surrender any security afforded by the mortgage on 21 September 1993, it is not necessary for the Court to determine conclusively the value of the security provided. To effect this surrender, the petitioning creditors apply for leave to amend the petition pursuant to section 306(1) of the Act providing for the regularisation or validation of formal defects or irregularities.
The present case in my opinion is similar to Re Florance Ex parte Turimetta Properties Pty Ltd (No 2) (1980) 39 FLR 400 where a petitioning creditor, believing itself to be an unsecured creditor, presented a bankruptcy petition against the debtor in the usual form. The debtor opposed the petition and after a hearing the creditor was found by the Court to be secured. The creditor applied to Justice Lockhart for leave to amend the petition to effect compliance with section 44(3) and (4) of the Bankruptcy Act by including a statement of willingness to surrender its security for the benefit of the creditors generally in the event of a sequestration order being made. His Honour held that the Court had power to grant the leave sought although no reference was made to whether this amendment was pursuant to section 306(1) or 33(1) of the Act. In this case, at least, the amendment sought is more than a formal defect, and any leave to amend should be granted under section 33(1) and not section 306(1).
As to whether the Court's discretion should be exercised in favour of leave to amend the petition, there is no evidence in this case that the petitioning creditors ever relied on the mortgage or even knew of its existence. The evidence of the debtor is that she sent the second mortgage by security post to them. No receipt of this delivery was provided nor is any evidence given as to when, or if, the petitioning creditors received the unexecuted mortgage. No call was made for the production of the mortgage sent by the debtor on 24 June 1993 and the evidence concerning that document begins and ends with the statement of the debtor that she sent it to the creditors on that date. These circumstances persuade me that leave should be granted to allow the petitioning creditors to surrender the value of their security.
This ground of opposition fails.
Instalments as a stay
17. The debtor relied on part 31A rule 2(8) and 2(9) of the District Court Rules which state:
(8) Where -
(a) an application is made by or on behalf of a judgment debtor under sub-rule (1) and no application in respect of the judgment debt has previously been made by or on behalf of the judgment debtor under that subrule or under rule 1(1); and
(b) the registrar refuses under subrule (4) to make an order pursuant to the application, the application shall, until it is dealt with under subrule (7), and unless the Court otherwise orders, operate as a stay of enforcement of the judgment in respect of which the application is made, except enforcement by way of a garnishee order to which section 98 of the Act applies made before the application was made to the registrar.
(9) Where the Court or the registrar makes an instalment order under this rule, the order shall while it remains in force, operate as a stay of enforcement of the judgment in respect of which the order was made, except enforcement by way of a garnishee order to which section 98 of the Act applies made before the order under this rule was made.
The debtor asserted that these provisions had the effect of staying the bankruptcy notice on 19 June 1992, and that no act of bankruptcy could have occurred on 29 October 1992.
The starting point is section 40(1)(g) of the Act which provides:
A debtor commits an act of bankruptcy in each of the following cases:
.....
(g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i) where the notice was served in Australia -- within the time fixed by the Registrar by whom the notice was issued; ..... .....
Extensive authority both here and in England has made abundantly clear that this section's application depends upon whether there was a stay as at the date of issue of the bankruptcy notice, or at the latest as at the date of its service on the debtor: Re a Debtor; Ex parte the Debtor (1908) 1 KB 344 at 351 per Fletcher Moulton LJ; Re Moss; Ex parte Tour Finance Ltd (1968) 13 FLR 101 at 103 per Gibbs J; Re Padagas; Ex parte Courier Air Conditioning Pty Ltd (1977) 16 ALR 475 at 476 per Riley J. See also my comments in Hoffman v MMI Workers Compensation (NSW) Limited unreported, 21 October 1993 at pages 3-4.
The most recent treatise on this area of the law was written with great learning by Justice Burchett in Re Schekeloff (1989) 22 FCR 407, a case where instalment orders were made by the District Court after service of the bankruptcy notice. After a comprehensive review of the law, his Honour concluded at 649:
In my view, this court should follow those statements of the law. Therefore, I hold that the bankruptcy notices in the present case are not liable to be set aside by reason of the orders for payment by instalments, and staying execution, which were not made until after service of the notices.
The question then to be determined in the present case is whether the instalment order made by the District Court on 24 June 1992 as a result of the application filed on 19 June 1992, was in force at the date of the issue of the bankruptcy notice on 19 June 1992, or at the latest on 29 September 1992 when it was served on the debtor.
The debtor submitted that pursuant to Part 31A rule 2(8) a stay operated from the date of filing her application for payment by instalments on 19 June 1992. However, Part 31A rule 2(8) applies only where subparagraphs (a) and (b) are both satisfied. In the present case, as the registrar did not refuse to make an order for payment by instalments, subparagraph (b) was clearly not activated. Closer reading of the rules discloses that rule 2(8) was not directed to this type of situation, but rather where an application refused by the registrar at first instance is set down for an appeal or review hearing before the Court. In the period between the refusal and the hearing, this rule provides that the application acts as a stay.
As the registrar made an instalment order in the present case, the applicable rule is Part 31A rule 2(9). This rule provides that where an instalment order is made, the order shall, while it remains in force, operate as a stay of enforcement of the judgment. The operative words are "made" and "while it remains in force". There is no retrospectivity either express or implied in this rule. In the present case the instalment order was made on 24 June 1992 and it was on that date that the stay of the judgment came into force.
Secondly, the debtor submitted that the bankruptcy notice was not issued on 19 June 1992, but rather on 17 July 1992 when it was amended. The creditors conceded that a stay under Part 31A of the District Court Rules was in force as at that date.
The difficulty with this submission is that there is no authority for it. Amendment of bankruptcy notices as provided for in sections 31A, 33 and 360(1) of the Act and Bankruptcy Rules 102 and 112 is completely distinct from the issue of bankruptcy notices. In my opinion the amendment to the bankruptcy notice did not result in the re-issuing of the bankruptcy notice. The notice itself was not re-issued nor was its date of issue amended.
The final issue to consider is whether a stay operated at the date of service of the bankruptcy notice on 29 September 1992. Part 31A rule 3(2) of the District Court Rules provides:
An order made under Rule 1 or 2 in respect of a judgment debt shall ..... cease to be in force if the Judgment Debtor fails to make any payment in accordance with the order and thereafter the judgment may, except where otherwise directed by the Court or provided in the agreement (if any), be enforced for the balance of the judgment debt owing to the Judgment Creditor.
Although the debtor stated that she received no notification of the date for first payment of the judgment debt, a search by her solicitor of the District Court file showed that the first payment was due on 27 July 1992. Yet the debtor made no payment until 28 October 1992. The mandatory wording of Part 31 rule 3(2) has the effect of terminating the stay on 27 July 1992 when the first instalment payment fell due. I have some hesitation in making such a finding, as there is no evidence as to when the debtor became aware that an instalment payment was due on that date. However, the fact that 27 July 1992 was the date nominated by the debtor in her application, coupled with her failure to make any submission on this point and the clear legislative intent of the rule, lead me to the conclusion that the rule operated so as to terminate the stay as from that date, well before the notice was served on the debtor.
There was therefore no stay in force under the District Court Rules either at the time of issue of the bankruptcy notice or at the time of its service. This ground of opposition fails.
Bankruptcy notice incapable of amendment
30. Rule 8 of the Bankruptcy Rules requires that a bankruptcy notice accord with form 4 of the Rules. This form has as part of its requirements a paragraph B which sets out the provision of security to the satisfaction of the Court. I have already noted that the bankruptcy notice issued by the petitioning creditors on 19 June 1992 did not contain this paragraph, and that on 17 July 1992 the notice was accordingly amended to include it. The paragraph was handwritten in red ink on the bankruptcy notice, and a note was placed at the top of the notice noting the order of amendment. The sealed order of amendment was served with the amended bankruptcy notice. The debtor submitted that a bankruptcy notice which is ineffective when issued is incapable of amendment to make it an effective document.Sections 31A(1)(d) and 33(2)(b) provide that a Registrar may at any time allow the amendment of any written process, proceeding or notice under this Act. Contrary to the debtor's submissions no limitations are placed on this power by the parliament, which must have envisaged that bankruptcy notices could be amended by a Registrar in circumstances other than by overlooking or otherwise overcoming the mere "formal defects" provided for in section 306. This view is in my opinion strengthened by the concession by the debtor's solicitor that there is no authority for this submission. As a matter of commonsense the submission seems highly unlikely to be correct.
Moreover, no injustice was done to the debtor in allowing the amendments. These amendments were made prior to service of the bankruptcy notice and were marked clearly in red ink. Most importantly, service of the notice was accompanied by the sealed order of amendment. In Clyne v Deputy Commissioner of Taxation (1982) 42 ALR 703 at 707 Justice Lockhart said:
In my view the order is not part of the notice but it may be examined to determine whether the Debtor could have been reasonably misled ... to ignore the order would be unreal and contrary to good sense.
These circumstances lead me to the conclusion that there is no reason why the amendment should not stand. This ground of opposition also fails.
Failure to seal amendment
34. The debtor submitted that as the amendment to the bankruptcy notice was not sealed the amended bankruptcy notice was invalid.Rule 108 of the Bankruptcy Rules sets out the requirement for amending a bankruptcy notice. This provides:
108. (1) Where the Court or the Registrar allows the amendment of a document, being a written process, proceeding or notice, under section 33 of the Act, the person who filed the document shall amend the document --
(a) by writing the alteration or addition on the document in red ink or otherwise in such manner as to distinguish the alteration or addition from the original matter or any previous amendment; or
(b) by adding to, or interleaving in, the document pages on which the alternation or addition is written.
(2) When a document is amended, the solicitor for the person who filed the document shall write at the top of the front page of the document, particulars of the order allowing the amendment and of the date on which the amendment is made, in accordance with the following form:-
"Amended the day of 19 , in pursuance of the order of dated the day of , 19 .".
(3) A solicitor writing on a document the particulars required by sub-rule (2) shall sign his name immediately under those particulars.
The petitioning creditors complied with all aspects of this rule.
The debtor submitted, however, that this rule applies to formal defects only and was inappropriate in the present circumstances where the substance of the notice was amended. She argued that the amendment was one which should have been sealed to give it force and effect, and referred to a number of cases such as Re McAlpine Ex parte AMEV Finance Limited (1987) 17 FCR 42; Re Pender Ex parte Sullivan Einfeld J, unreported, 22 April 1988; and Re Spurr Ex parte Werner and Ors (1991) 31 FCR 236, where the Court held that the bankruptcy notice was defective because it contained uninitialled and apparently unauthorised changes or was confusing or capable of misleading on the face of the notice.
None of these cases are applicable to the present circumstances where the amendment and the authority for the amendment were clear on the face of the notice, and the notice of amendment was served with the notice. There is no possibility that the debtor could have been confused by the amendment or believed that it was unauthorised. There is no requirement in either the Act or the Rules for amendments to be sealed. Section 14A of the Act simply requires notices to be sealed. This was done. In addition the order bears a seal.
In the absence of any specific provision or requirement for sealing of amendments and of any injustice done to the debtor, this objection must also fail.
Discretion
39. The debtor's final submission is that the Court should dismiss the creditors' petition in the exercise of the discretion provided by section 52(2) of the Act which states:
If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:
(a) that he is able to pay his debts; or
(b) that for other sufficient cause a sequestration order ought not to be made;
it may dismiss the petition.
This discretion is sought to be energised on the basis that security has been given to the petitioning creditors and that there is adequate equity in the home of the debtor to secure the mortgage and the judgment debt. I have already observed that there is a doubt as to whether there is sufficient equity in the debtor's home to secure the judgment debt. Certainly the evidence is not sufficient to refuse sequestration on this basis.
The debtor also argued that the Court should dismiss the petition under section 52(2)(b) on the ground of futility, as the $800 she earns per month would be insufficient for a Court to require income contributions and that a sequestration order in the present circumstances would be futile. In Re Betts (1897) 1 QB 50, Lord Esher MR said at 52:
If the Court is clearly convinced, not merely by the statement of the debtor, but from all the circumstances of the case, that there cannot be any assets or any prospect of any coming into existence, and that, if a receiving order is made, the only effect will be a mere waste of money in costs, then in such a case the Court has a discretion in the matter, and will be justified in exercising that discretion by refusing to make the order.
See also Radich v Bank of New Zealand, Full Court of the Federal Court (Einfeld, Foster and Drummond JJ), unreported 10 September 1993.
Clearly a sequestration order in the present case would not be futile as the debtor has a number of assets to which, if the trustee considers it appropriate, the petitioning and other creditors will have recourse to satisfy their claim at least in part. This is not the type of case where this type of "futility" argument applies. I see no reason to refuse to make a sequestration order.
When this matter was before the Court on 14 December 1993, the solicitors for the petitioning creditors placed before the Court the evidence required under section 52(1) so that if the debtor's notice of opposition failed, the petition could be granted without further hearing. From this evidence I am satisfied that the debtor committed the act of bankruptcy alleged in the petition and with the proof of the other matters of which section 51(1) of the Act requires proof. I make a sequestration order against the estate of the debtor and order that costs (including reserved costs) be taxed and paid according to the Act. I direct that a draft of this order be delivered to the Registrar within 7 days in accordance with sub-rule 124(2).
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