Sherwood v PPB Pty Ltd
[2010] FMCA 916
•25 November 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| SHERWOOD v PPB PTY LTD & ORS | [2010] FMCA 916 |
| BANKRUPTCY – Application pursuant to s.153B of the Bankruptcy Act 1966 (Cth) for annulment of Sequestration Order – application dismissed. |
| Bankruptcy Act 1966 (Cth), ss.33(1)(b), 41(5), 43, 52, 153B, 306 Federal Magistrates Court Rules 2001 (Cth), r.1.05 Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), r.7.04 Federal Court Rules (Cth), o.13, 62 |
| Bulic v Commonwealth Bank of Australia Ltd [2007] FCA 307 Bryant v Commonwealth Bank of Australia Daly v Watson (1994) 50 FCR 544 Mani v Burness [2010] FCA 1132 Re A debtor(No.7 of 1910) [1910] 2 KB 59 Re Frank; Ex Parte Piliszky (1987) 16 FCR 396 Re Saville; Ex parte Commercial & General Acceptance Ltd (1964) 20 ABC 225 Re Small; Westminster Bank v Trustees [1934] Ch 541 Rigg v Baker (2006) 155 FCR 531 |
| Applicant: | PAUL DAVID SHERWOOD |
| First Respondent: | PPB PTY LTD |
| Second Respondent: | LION FINANCE PTY LTD (ACN 095 926 766) |
| Third Respondent: | INSOLVENCY TRUSTEE SERVICES AUSTRALIA |
| Fourth Respondent: | JONES KING LAWYERS |
| File Number: | SYG 1307 of 2010 |
| Judgment of: | Lloyd-Jones FM |
| Hearing date: | 7 September 2010 |
| Delivered at: | Sydney |
| Delivered on: | 25 November 2010 |
REPRESENTATION
| The Applicant: | The Applicant appeared in person as a self represented litigant. |
| Counsel for the Second and Fourth Respondent: | Mr A. Davis |
| Solicitors for the Second and Fourth Respondent: | Jones King Lawyers |
| First and Third Respondent | No appearance |
| Counsel for the Trustee in Bankruptcy: | Mr P Cutler |
| Solicitors for the Trustee in Bankruptcy: | HWL Ebsworth Lawyers |
ORDERS
The Application filed on 15 June 2010 is dismissed.
The Applicant is to pay the Respondent parties’ costs, to be taxed if not agreed in accordance with o.62 of the Federal Court Rules (Cth).
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1307 of 2010
| PAUL DAVID SHERWOOD |
Applicant
And
| PPB PTY LTD |
First Respondent
| LION FINANCE PTY LTD (ACN 095 926 766) |
Second Respondent
| INSOLVENCY TRUSTEE SERVICES AUSTRALIA |
Third Respondent
| JONES KING LAWYERS |
Fourth Respondent
REASONS FOR JUDGMENT
Background
This is an Application dated 15 June 2010, seeking the annulment of the Applicant’s bankruptcy, the revocation of a Sequestration Order made on 10 February 2010 by a Registrar of this Court and the removal of associated caveats. In the affidavit filed with the Application, the Applicant advances the argument that the Bankruptcy Notice No. NN 4758 of 2009, which was the basis of the Creditor’s Petition, contained several defects.
In addition, the Applicant claims he was denied procedural fairness in the conduct of his matter, as he was suffering from depression and “was unable to function in an effective manner in the management of [his] personal affairs” and was unable to attend the hearing of the Creditors Petition.
The proceedings
The Applicant in these proceedings is a self-represented litigant. The Application for Annulment was first listed on 13 July 2010 before Registrar Hedge. The matter was adjourned in the Registrar’s list on two occasions before it was referred to this Court for directions on
17 August 2010. On this occasion, I set the matter down for hearing on 7 September 2010.
The Application filed in these proceedings seeks the following final orders:
i)Annulment of the Bankruptcy and the revocation of the subsequent Sequestration Order and caveats;
ii)The reinstatement of the agreement to pay by instalments; and
iii)Dismissal of the costs incurred by creditors or trustees in this matter.
The Applicant also seeks the following interim order:
i)That the trustee, by Court order, be directed not to incur any further costs in this matter until it is heard by the Court.
In Mr Sherwood’s affidavit filed in support of his application, he effectively set out the nature of his claim in the following terms:
I am the debtor named in the Creditor’s Petition SYG2856/2009. The creditor in this matter is Lion Finance BP/L. To the best of my knowledge my debt to the creditor as of 8/12/2009 was $8622.52 plus interest. This debt dates back to approximately 28-3-2007. Early in 2009 I entered into an agreement to pay this debt by instalment. The details of this agreement were that I was to pay $250.00 per month until the debt and the interest were cleared. In keeping with this agreement, I made five payments totalling $1,250.00 until approximately July 2009.
On 16 November 2009, lawyers for the creditor lodged a Creditor’s Petition seeking to have me declared bankrupt. The hearing was scheduled for 10-02-2010. The reason this was sought was due to the agreement to pay by instalment having lapsed due to non-payment on my behalf. The documents served on me in regard to this matter were incorrect on their face in that:
(1) The Applicant was incorrectly listed as Workers Compensation Nominal Insurer;
(2) The amount of the debt was incorrect.
During the period between the last payment I made under the agreement to pay by instalment and the service of the Creditor’s Petition (July 2009 and November 2009). I had lapsed into (undiagnosed) depression. This was due to the fact that my father was suffering stage 4 (terminal) melanoma and in addition to the stress this diagnosis had caused:
(1) I was assisting with his care and the provision of transport to and from his treatment
(2) I was helping my elderly mother deal with the day-to-day running of her house etc.
(3) I was running my own business and dealing with the effects of the economic downturn.
As a result of this, and the confusion caused by the inaccuracies in the paperwork listed above, I became depressed and was unable to function in an effective manner in the management of my own personal affairs. It was only after my father’s death on April 26th 2010 that I was found to be suffering from depression.
I intended to ask for time to comply with the orders outlined in the bankruptcy Notice at the Court hearing on February 10th, 2010 citing the illness as I knew I was not well but at that time did not realise that depression was the reason, however the Court papers served on me by the creditor’s lawyers stated that I had to give three days notice of my intention to appear in Court. As there was only 24 hours before my Court date, this was not possible. Attempts made by me to check that this was, in fact, the case proved futile as all attempts to contact the Court failed. The Court listed on the paperwork dealt only with bankruptcy as it applied to family law case and all attempts to be directed to the correct Court failed.
For the reasons outlined in this affidavit I feel I have been denied procedural fairness and ask that the Court grant orders sought as outlined in the attached application.
Mr Sherwood indicated that he also relied upon his affidavit affirmed and filed on 16 August 2010. Objection was raised to para.4 of that affidavit. Mr Sherwood indicated to the Court that he no longer relied upon paras. 3 or 4 which addressed an issue of quantum which is no longer in dispute and those paras. were not read. Similarly, para.7 which contained medical evidence in respect of Mr Sherwood’s father. It is agreed between the parties that it was accepted that his father was ill and has since unfortunately passed away. Consequently para.7 and the attached Annexure “C” were not read.
Mr Davis indicated that the Second and Fourth Respondents relied upon two affidavits of Michael Guest. The first affidavit was dated 20 July 2010 and the second affidavit was dated 24 August 2010. Those affidavits were read and there was no objection. Mr Cutler, appearing for the Trustee in Bankruptcy, informed the Court that he did not read the affidavit of Andrew Scott which had been filed in the Registry but relied upon the affidavit of Scott Darren Pascoe who is the Trustee sworn 30 August 2010. Mr Cutler informed the Court that when the matter was before His Honour Federal Magistrate Raphael on 17 August 2010, there was discussion in respect of the filing of a report under the r.7.04 of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth). Although no order was made to that effect, Mr Cutler indicated that they filed that material to comply with His Honour’s direction.
Applicant’s submissions
Mr Sherwood informed the Court that he wished to raise two issues. The first was whether a phone call made by Mr Sherwood to Lion Finance Pty Ltd at some time during the 21 days in which the Bankruptcy Notice was served, qualifies as giving notice under s.41(5) of the Bankruptcy Act 1966 (Cth) (“the Act”). Section 41(5) states:
(5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.
Mr Sherwood states that he gave such notice to the creditor and this notice is proven by the reduction of the amount claimed in the letter dated 8 December 2008 from Jones King Lawyers addressed to Mr Paul D Sherwood (second affidavit of Mr Sherwood Annexure “E”).
Mr Sherwood argues that if the Court holds that his phone call to Jones King constitutes providing notice, then he claims that he has responded to the Bankruptcy Notice, as required by law, and that no act of bankruptcy occurred. Therefore, his Sequestration Order and the Creditor’s Petition were unfounded.
The second argument advanced by Mr Sherwood is that if the Court holds that the phone call does not constitute giving notice, then he relies on the fact that the Creditor’s Petition, served on him and filed with the Court, contains a manifest error, on its face, in that the affidavit verifying para.4 of the Creditor’s Petition is flawed.
Mr Sherwood states that the Applicant listed on that affidavit is “Workers Compensation Nominal Insurer” with whom he had no case. This was a document filed by a paralegal who states that he is in the employment of the solicitor of the Applicant. Mr Sherwood argues that by incorrectly identifying the Applicant as Workers Compensation Nominal Insurer, they invalidated their search of the National Court Registry and therefore they invalidated their Creditor’s Petition for being unable to prove the act of bankruptcy. By attaching the Applicant’s incorrect name, the affidavit fails to meet the provisions called for in the Act under s.52(1). The document before the Court should be the same as the one served which clearly is not the case.
Submissions of the Second and Fourth Respondents
The Second and Fourth Respondents submit that the Applicant took no steps throughout the process to attend Court, when required. Significantly, they relied on the authority of French J (as he then was) in Rigg v Baker (2006) 155 FCR 531 where His Honour suggested that it would generally be very difficult for a bankrupt to have a bankruptcy annulled under s.153B of the Act if the bankrupt did not appear at the hearing of the Petition. Further, it is submitted that in order for a Court to exercise the discretion afforded under s.153B, it must be satisfied that a sequestration order “ought not to have been made”. This, it is submitted, is imperative in character as the requirement will only be satisfied if the Court was bound not to make it (Re Frank; Ex Parte Piliszky (1987) 16 FCR 396).
The Second and Fourth Respondents submit that although an order under s.153B of the Act is discretionary, the requirement that the Sequestration Order “ought not to have been made” requires a real and substantial reason as to why there is an error or basis upon which the order should not have been made. That is, it is submitted, that there was a discretion which was exercised adversely to the bankrupt.
In relation to the Applicant’s claim that he was denied procedural fairness, the Second and Fourth Respondents suggest that the Applicant was afforded procedural fairness and natural justice but the Applicant denied himself the opportunity to attend the numerous Court proceedings, “either deliberately ignoring various Court requirements or recklessly choosing to do so”.
The Applicant’s assertion that the Bankruptcy Notice contained a defect or irregularity must be considered in light of whether the alleged defect or inconsistency is a formal defect or irregularity. In this respect, it is submitted, s.306 of the Act must be considered but this does not establish a basis for the finding of a formal defect or irregularity in accordance with the Act.
Mr Davis referred to Mr Sherwood’s assertion that there was an error contained in the affidavit verifying para.4 of the Creditor’s Petition. Mr Davis submits that this alleged error is not sufficient to justify an order under s.153B of the Act for the following reasons outlined in his written submissions:
a) the error is best described as a typographical error, noting that the bankrupt’s name appears upon the affidavit; and
b) the error was corrected by the Court, at the invitation of the Court ;and
c) the correction was notified to the bankrupt; and
d) all of these steps occurred well prior to the Sequestration Order being made; and
e) at the time of making of the Sequestration Order the Court was fully aware of the issue which [were] before the Court; and
f) no objection was raised by the bankrupt to this process or to the making of the Sequestration Order;
g) notwithstanding 11a)-f) above, the defect or irregularity does not, it is submitted, invalidate the proceedings given that there is no substantial injustice that has been caused by the defect or irregularity.
Mr Sherwood seeks to challenge the amounts set out in the Bankruptcy Notice and the Petition. Mr Davis indicates that this issue is easily dealt with by virtue of the fact that Mr Sherwood offered no conclusive (or indeed any satisfactory) evidence to support the assertion upon which he relies. Of significance is the fact that Mr Sherwood does not dispute the existence of the debt or the service of any of the various documents. In those circumstances, even if Mr Sherwood had attended the Court and objected to the making of the Sequestration Order by objecting to the Creditor’s Petition, it is simply not possible to demonstrate any prejudice to him, such that would have warranted any outcome other than the making of the orders that were ultimately made.
Mr Davis drew the Court’s attention to the affidavit of Mr Scott Darren Pascoe sworn 30 August 2010 and particularly paras.57-59 to the effect that, in his opinion, the bankrupt was insolvent well-prior to the date of his report and the date of bankruptcy.
Submissions of the Trustee
Mr Cutler, appearing for the Trustee, indicated that his client took a neutral position in the proceedings however there are some issues about the conduct of affairs of the bankrupt which the Trustee wished to bring to the Court’s attention. The Sequestration Order was made on 10 February 2010 however it took until 25 May 2010 for a Statement of Affairs to be presented (Mr Pascoe’s affidavit, para.13). Mr Pascoe’s affidavit details some examination of the examinable affairs of the bankrupt. This includes an estimate that Mr Sherwood has equity in his real property of approximately $300,000.00 (Mr Pascoe’s affidavit, para.29). The debt recorded in the Bankruptcy Notice is an amount of $12,325.50 that is owed to the creditor, Lion Finance Pty Ltd. In Mr Pascoe’s affidavit at para.43, there is an analysis of Mr Sherwood’s solvency position. There is a discussion of balance sheet solvency at paras. 48-50 and cash flow solvency from paras. 51-59. It is at para.59 that Mr Pascoe reached the conclusion that Mr Sherwood is balance sheet solvent, but cash-flow insolvent, with cash-flow insolvency being the appropriate test. In that analysis there is an issue of un-lodged tax returns (para.40). Mr Cutler submits that there appears that there may be tax returns that have not been lodged for quite a number of years and there is a possibility of an outstanding tax debt, but that is yet to be established.
Mr Cutler indicated that the second issue that he wished to draw to the Court’s attention was the absence of any arrangement having been made by Mr Sherwood for the payment of the Trustee’s costs and expenses. Attached to Mr Pascoe’s affidavit (at page 27) there is a letter from Mr Sherwood to the Trustee, dated 25 May 2010 in which he makes it clear that he does not want to be liable for the Trustee’s fees.
Mr Cutler submits that Mr Sherwood’s annulment application filed in Court did not contain any evidence of without prejudice conversations which occurred between Mr Pascoe and Mr Sherwood. Mr Pascoe has formed the view that Mr Sherwood is not solvent and has not made any arrangement to pay the Trustee’s properly incurred fees. Mr Cutler submits that these two factors are both discretionary and weigh against the making of an order for an annulment.
Material placed before the Registrar at sequestration hearing
I indicated to the parties that the Affidavit Verifying Paragraph 4 which were before the Court were copies and not the documents that had been placed before Registrar Morgan on 10 February 2010 when the Sequestration Order was made. I advised the parties that when viewing the file, before commencing Court, I had observed a file note indicating that there had been a discussion between a member of the Registry staff and the legal assistant who was filing the documents. The Registry staff member had observed and had brought to the legal assistant’s attention that the wrong party appeared as the Applicant on the Affidavit Verifying Paragraph 4. The note made reference to the document being amended and the legal assistant undertaking to amend all copies.
I brought to the parties’ attention that in Mr Sherwood’s affidavit, affirmed 16 August 2010, Annexure “D” is a copy of the Affidavit Verifying Paragraph 4 of the Creditor’s Petition. It is file stamped 24 November 2009 and names the Applicant as “Workers Compensation Nominal Insurer”. That document has not been amended.
Similarly, the affidavit of Michael Guest affirmed 22 July 2010 at Annexure B there is also a copy of the Affidavit Verifying Paragraph 4 of the Creditor’s Petition. This is also file stamped 24 November 2009 and also identifies the Applicant as Workers Compensation Nominal Insurer, but contains no amendment. I enquired whether the parties had any objection to me examining the file in proceedings SYG 2859 of 2009 to determine what documents were placed before Registrar Morgan at the Sequestration hearing.
There was no objection and I have subsequently had access to that file and the original copy of the Affidavit Verifying Paragraph 4 of the Creditor’s Petition. On that copy, the words “Workers Compensation Nominal Insurer” and the ABN number have been struck out and hand printed above appears “Lion Finance Pty Ltd ACN 095 926 766”. On the back of the document, the following handwritten note appears:
Spoke to Ulysses, solicitor for Jones King Lawyers, regarding the Applicant’s details on this form. He instructed me to change the Applicant to Lion Finance P/L and he will inform the Respondent of the changes. He apologised for the typo as the office used the same template for previous application.
The note is dated 27 November 2009 which is three days after the documents were filed.
Significantly, the Affidavit of Personal Service sworn by Nick Tsioukanis, licensed commercial agent states on oath that on
26 November 2009 at 1pm he duly served Paul D. Sherwood with a signed and sealed copy of the following documents:
·Creditor’s Petition;
·Affidavit Verifying Paragraph 4 of the Petition;
·Affidavit of Service of the Bankruptcy Notice; and
·Consent to Act and Trustee Declaration.
With the exception of the Affidavit Verifying Paragraph 4, the Applicant is identified as Lion Finance Pty Ltd on all of the documents. The second document in the bundle does carry the incorrect Applicant’s name as “Workers Compensation Nominal Insurer”. Although this error exists, on a fair reading of the documents, the error is apparent. When the matter came before Registrar Morgan at the hearing of the Petition, the Affidavit Verifying Paragraph 4 had been amended with a file note which is referred to above. The additional document before the Registrar was the Affidavit of Search sworn by Jan Stather on 10 February 2010. That document in effect updates the material that is contained in the Affidavit Verifying Paragraph 4. After reviewing these documents, I am satisfied that it was appropriate for Registrar Morgan to proceed with making of a Sequestration Order. If at any stage prior to the making of the Sequestration Order, Mr Sherwood or anybody briefed to appear before him, would not have succeeded in having the Petition dismissed. Although, there may have been orders for this error to be rectified.
If Mr Sherwood approached the Court about the Workers Compensation Nominal Insurer appearing on the Affidavit Verifying Paragraph 4, the Creditor could have sought to amend that document under s.33(1)(b) of the Act and that amendment would have been provided that the Court was satisfied that no injustice would have been done to either of the parties if the amendment was allowed: Re Small; Westminster Bank v Trustees [1934] Ch 541. Generally, an amendment should be allowed if thereby the real question can be raised between the parties: Re Saville; Ex parte Commercial & General Acceptance Ltd (1964) 20 ABC 225. As the Federal Magistrate Court Rules 2001 (Cth) do not address in sufficient detail the issue of amendments, I rely on r.1.05 of the Federal Magistrate Court Rules 2001 (Cth) which allow this Court to apply Federal Court Rules where necessary. Order 13 of the Federal Court Rules addresses the issue of amendments. Order 13, r. 2(1) states:
(1) Subject to the following provisions of this rule, the Court may, at any stage of any proceeding, order that any document in the proceeding be amended, or that any party have leave to amend any document in the proceeding, in either case in such manner as the Court thinks fit.
Order 13, r.4 states:
(4) Where there has been a mistake in the name or identity of a party, an amendment to correct the name of the party may be made notwithstanding that the effect of the amendment is to substitute another person as a party.
Clearly, this is a correction of an error where the incorrect Applicant is identified and its correction does not introduce a new party as the remainder of all the documentation correctly identifies the Applicant as Lion Finance Pty Ltd.
The requirement that the Petition be verified is designed to prevent the filing of insubstantial Petitions: Bryant v Commonwealth Bank of Australia citing Re A debtor(No.7 of 1910) [1910] 2 KB 59. Deficiencies in verifying an affidavit may be overcome by adducing further evidence at the hearing: Daly v Watson (1994) 50 FCR 544 per Beaumont and Gummow JJ. Consequently I am satisfied that no injustice would have occurred if the correction was formally sought. Similarly in the absence of a formal correction no injustice occurred by the error or the force of the Affidavit Verifying Paragraph 4.
Consideration
Judgment was entered against Paul D Sherwood in the Local Court, Downing Centre on 28 March 2007, in the amount of $9,872.52. Interest was claimed on that debt in the amount of $2,452.98 resulting in a judgment debt plus interest of $12,325.50. Mr Sherwood has not challenged that decision and has made no reference to it in his submissions. On 17 October 2009, Mr Sherwood was served with the Bankruptcy Notice, NN4758/2009. The Notice contained the normal term in that he was required, within 21 days after service of the Notice, to either pay to the creditor the amount of the debt or to make an arrangement to the creditor’s satisfaction for the settlement of the debt. The Notice in paras.5, 6 and 7 set out the steps to be taken should Mr Sherwood seek to challenge the notice or extend the time to comply. It is not in dispute that Mr Sherwood did not take any steps to challenge the validity or seek an extension of time to comply with the Bankruptcy Notice. Consequently, on 24 November 2009 the Applicant Creditor, Lion Finance Pty Ltd filed a Creditor’s Petition seeking a Sequestration Order under s.43 of the Act against the estate of Mr Sherwood.
The hearing of the Petition was set down on 10 February 2010 at 9:45 am. The Petition clearly indicates that if the Respondent Debtor, Mr Sherwood, wished to appear at the hearing he was required to file and serve a Notice of Appearance together with a Notice Stating Grounds of Opposition to the Petition in accordance with Form 5 and an affidavit supporting his grounds. To pursue this course, Mr Sherwood was required to serve a copy of each document on the creditor at the address of service stated on the Petition, not less than three days before the date of the hearing and attend Court at the hearing.
On 26 November 2009, Mr Sherwood was served with a copy of the Creditor’s Petition, an Affidavit Verifying Paragraph 4 of the Petition, an Affidavit of Service of the Bankruptcy Notice and a copy of the Consent to Act and Trustee Declaration. The Affidavit of Service was sworn by a licensed commercial agent, which clearly states that he personally served Mr Sherwood with those documents. Again, this is not in dispute.
On 10 February 2010, the matter was before Registrar Morgan and there was no appearance by Mr Sherwood or any documents filed in the Court Registry indicating any challenge to the Petition. Registrar Morgan had all of the necessary documentation necessary to satisfy s.52 of the Act. This documentation included:
i)Creditor’s Petition;
ii)Affidavit Verifying Paragraph 4 of the Creditor’s Petition (I’ll refer to this below);
iii)Affidavit of Personal Service of the Bankruptcy Notice;
iv)Trustee’s Consent to Act Declaration;
v)Affidavit of Personal Service of the Creditor’s Petition;
vi)Affidavit of Search sworn 10 February 2010; and
vii)Affidavit of Debt sworn 9 February 2010.
Registrar Morgan was satisfied that the documentation was in order and proceeded to make a Sequestration Order against the estate of Paul D. Sherwood and an order for costs to be paid from the estate of the Respondent Debtor in accordance with the Act. The only aspect of these proceedings that is now in contention is the Affidavit Verifying Paragraph 4 of the Creditor’s Petition. I have examined the Affidavit Verifying Paragraph 4 that was before Registrar Morgan. That document has been amended by deleting the “Workers Compensation Nominal Insurer” and ABN number and replacing it with “Lion Finance Pty Ltd ACN 095 926 766”. In the top left-hand corner of that document the notation appears “PTO for note” and the note appears that is referred to in para. [27] above. On the information before Registrar Morgan, it was appropriate for him to make a Sequestration Order.
Mr Sherwood is a self-represented litigant and readily acknowledged to the Court his limited knowledge of the law, practice and procedure in this jurisdiction and in the Court. Although not stated in his application, he is seeking the Court to exercise its power under s.153B(1) of the Act which states:
(1) If the Court is satisfied that a sequestration order ought not to 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 Official Receiver, the Court may make an order annulling the bankruptcy.
A convenient summary of the relevant principals applying to an Application for Annulment is contained in the decision of Mani v Burness [2010] FCA 1132 per Tracey J at [18] where His Honour states:
[18] As French J observed in Rigg v Baker [2006] FCAFC 179 at [59], the power conferred by s 153B involves two elements, namely, the Court’s satisfaction that the sequestration order ought not to have been made and the exercise, by the Court, of a discretion to make an order annulling the bankruptcy. His Honour (at [63]) also quoted with approval five propositions which emerged from earlier decisions relating to applications for annulment of bankruptcy. They were:
1. It is for the Applicant for annulment who alleges, and it is therefore for him to bring himself within the section and satisfy the Court, that the sequestration order ought not to have been made.
2. The Court to whom the application is made seeks to ascertain the actual state of affairs at the time when the sequestration order is made.
3. In order to ascertain that actual state of affairs the Court hearing the application for annulment looks at the facts that were before the Court which made the sequestration order and at any other facts that were not before that Court but are shown on the hearing of the application for annulment to have been in existence when the sequestration order was made.
4. Having considered all the facts so looked at, the Court determines whether on those facts the Applicant has satisfied it that the sequestration order ought not to have been made.
5. If it is so satisfied, the Court is not bound to annul the sequestration order but must consider in all the circumstances of the case whether it ought to be annulled.
[19] The word “ought” bears an imperative meaning. In the context of s 153B it requires the Applicant for annulment to establish that the Judge or Registrar who made the original order was “bound” not to do so: see Re Frank; Ex parte Piliszky (1987) 16 FCR 396 at 403 (per Fisher J).
His Honour Tracey J also sets out in summary form a number of relevant principals applicable to an application under s.153B in Bulic v Commonwealth Bank of Australia Ltd [2007] FCA 307 at [12] where His Honour states:
Section 153B(1) and its predecessors have been considered in many decisions of this and other Courts. These authorities establish a number of relevant propositions. They are:
(1) An order can be made under s 153B(1) of the Act notwithstanding that the Applicant has been discharged from bankruptcy; Re Oates; ex parte Deputy Commissioner of Taxation (1987) 17 FCR 402.
(2) An Applicant who seeks an annulment of his or her bankruptcy “carries a heavy burden”. It is incumbent on 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 actual circumstances of the Applicant”: Re Papps; ; Ex parte Tapp (1997) 78 FCR 524 at 531.
(3) In determining whether or not a sequestration order “ought not to have been made” the Court is not confined to a consideration of whether the order should have been made on the facts known to the Court at the time at which it was made. The Court must take account of facts, known at the time at which the sequestration order was made and at which it determines an annulment application, even if those facts were not before the Court at the time at which the sequestration order was made: Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239 at 243; Re Raymond; ex parte Raymond (1992) 36 FCR 424 at 426.
(4) A sequestration order “ought not to have been made” if, on the facts known at the time of the annulment application, the Court would have been bound not to make the sequestration order: Re Frank; ex parte Piliszky (1987) 16 FCR 396.
(5) The Court will be so satisfied if it is established that the debtor was not, at the time the sequestration order was made, indebted to the petitioning creditor: Re Deriu (1970) 16 FLR 420 at 422.
(6) If the Court is so satisfied, it is not precluded from annulling the bankruptcy because the bankrupt had not sought to have the default judgment set aside or failed to oppose the Creditor’s Petition or failed to seek a review of the sequestration order: Re Raymond; ex parte Raymond (1992) 36 FCR 424 at 426.
(7) The power conferred on the Court by s 153B(1) is discretionary in nature. Even if persuaded that the sequestration order ought not to have been made, the Court can, in appropriate circumstances, decline to annul the bankruptcy: Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239 at 243.
(8) Considerations which may have a bearing on the exercise of discretion include unexplained delay in the making of the application, whether or not the Applicant is solvent, whether or not the Applicant has made full disclosure of his or her financial affairs and a failure by the bankrupt to oppose the Creditor’s Petition and attend the hearing at which the sequestration order was made: Re Williams (1968) 13 FLR 10 at 24–5; Boles at 247; Re Papps; ex parte Tapp (1997) 78 FCR 524 at 531; Rigg v Baker [2006] FCAFC 179 at [79]; Cottrell v Wilcox [2002] FCA 1115 at [7]. Additional considerations are collected in D. A. Hassall, “Annulment of Bankruptcy and Review of Sequestration Orders” (1993) 67 ALJ 761 at 766.
Although the authorities indicate that an Applicant seeking an annulment of his bankruptcy “carries a heavy burden” it was apparent that Mr Sherwood, as a self represented litigant with an acknowledged lack of understanding of the jurisdiction, did not attempt to put before the Court any material in respect to his financial affairs so that the Court could properly assess whether the Sequestration Order should have been made. However, the Court was assisted by the affidavit prepared by the Trustee, Mr Pascoe. I have reviewed this document and have been assisted by the submissions made by Mr Cutler that although Mr Sherwood was balance-sheet solvent, he was in fact cash-flow insolvent. I rely on paras.51-59 of Mr Pascoe’s affidavit which effectively summarises the nature of Mr Sherwood’s financial affairs and provides the best available summary as to the question of Mr Sherwood’s solvency.
Cash Flow
51. As noted in paragraph 22 of this Report there are no banking records as the bankrupt has advised he does not hold any bank accounts; all his income in received in cash. In addition, as noted I have not been provided with any business records for the business. In the absence of records, I have not been able to conduct a detailed analysis as to the bankrupt’s solvency on a cash flow basis.
52. In relation to the debt outstanding to Lion Finance I refer to the Affidavits of Michael Guest sworn on 23 July 2010 (“Guest Affidavit”) and 24 August 2010 and filed in these proceedings. The Guest affidavit sets out in detail the history of the debts outstanding to Lion Finance by the bankrupt commencing from 3 March 2006 to present day together with eh details of the payments made by the bankrupt over this period. In summary the information contained in the Guest Affidavit in my opinion provides evidence the bankrupt has had difficulties paying his debts to Lion Finance as and when they fall due since 3 March 2006.
53. As advised previously at paragraph 37 in this report Lion Finance have claimed an amount of $11,647 at the date of bankruptcy.
54. Contained within Annexure “O” of this Report at Pages 122 to 137 is a copy of a running account statements produced by the GE Money in relation to the two loan accounts secured by mortgage over The Property. The statements contain a detailed history of all payments and charges on the two accounts since 14 May 2003 to April 2010. Statements for Loan account 10329 78/1 provide evidence of a history of missed payments by the bankrupt which peaked on 29 June 2006 at $13,650 in arrears as shown at Page 125. It appears these missed payments were refinanced by GE Money on or around 19 April 2007 when the balance of the loan was $380,170 which is shown at Page 126 as ‘journal entries’.
55. Since 19 April 2007 the debt owing to GE Money on Loan account 10329 78/1 has increased to a sum of $398,058 as at the date of the bankruptcy which is shown at page 131. It appears this increase relates to overdue payments that have been capitalised by GE Money as there is no evidence of any loan advances being made on this account during this period which might explain this increase. In summary, the information contained in these statements (pages 122 to 137) in my opinion provides evidence the bankrupt has had difficulties paying his debts to GE Money as and when they fall due prior tot eh 29 June 2006.
56. In relation to the potential debt outstanding to the ATO, I refer to my comments in paragraph 40 and 41 of this Report. In summary there may be a substantial liability owing to the ATO once all of the bankrupt’s returns are lodged. In my opinion this may be a reason why the bankrupt has failed to complete his tax returns.
57. Due to a lack of information about income including financial records and tax returns, the aging of debts owing to Lion Finance and the increase mortgage debts, I have formed the view that the bankrupt was insolvent on a cash-flow basis. The large quantity of tax obligations that appear to be outstanding in this matter is in my opinion a further indicator of insolvency.
58. In conclusion, whilst it appears on a balance sheet test the bankrupt is unlikely to be able to refinance the property within a relatively short period of time, to pay his debts as and when they fall due. Accordingly, I have therefore placed reliance on the cash flow test for the purposes of this report in finding the bankrupt to be insolvent at the date of this report and at the date of bankruptcy.
59. In my opinion given the giving the aging of the debts the bankrupt was insolvent well prior to this date however as I do not have financial records for the business and bank records for the bankrupt, I am unable to comment further.
The above information would not have been available to Registrar Morgan at the time of the making of the Sequestration Order. The Registrar was dealing with the information that was before him at the time of making that order. The review of Mr Sherwood’s financial affairs by Mr Pascoe subsequent to the making of the Sequestration Order does not establish any ground that would justify the annulment of that order on the basis of the question of solvency.
I acknowledge that Mr Sherwood faced considerable psychological stress due to the illness of his late father and because of this situation, Mr Sherwood took no steps to challenge the Local Court judgment, the Bankruptcy Notice or the Creditor’s Petition resulting in the issue of the Sequestration Order. However Mr Sherwood has not put before the Court any material that would suggest that a challenge to any one of the steps taken by the Creditor in the Local Court or this Court would have succeeded in preventing the sequence of events leading to the Sequestration Order. Mr Sherwood has advanced the argument that he wished to return to the instalment plan that had previously been operating. On the material before the Court and on Mr Sherman’s own admission there had been a long period of default in this payment regime and no attempt has been demonstrated that the repayments were to be recommenced. The analysis set-out by Mr Pascoe in his affidavit, which is reproduced above and strongly suggests that the adherence to the payment schedule was extremely unlikely.
In Mr Sherwood’s affidavit in support of his application, he raises the issue which in effect suggests that he had insufficient time in which to appear before the Court on 10 February 2010 at the hearing of the Creditor’s Petition. He indicates that he was guided by a procedure outlined in the Bankruptcy Notice of the necessary steps to file an appearance prior to the hearing. This submission is a little confused as the procedure to be followed to challenge a Bankruptcy Notice has a specific period in which to comply which is different from the Creditor’s Petition which has a different set of time limits. Mr Sherman’s affidavit suggests that he wished to appear at the hearing of the Creditor’s Petition on 10 February 2010 however there was insufficient time in which to file an appearance. The documents on file indicate that the Creditor’s Petition was served on 26 November 2009 listing the scheduled hearing of the Creditor’s Petition on 10 February 2010 at 9.45am before a Registrar of this Court. I am satisfied that all of the procedural steps and the appropriate time limits have been observed in respect of the filing of the petition and the subsequent hearing. A claim that Mr Sherwood was provided with insufficient time in which to file an appearance cannot be sustained and his claim that he was denied procedural fairness correspondingly falls away.
Conclusion
Mr Sherwood has placed before the Court the personal circumstances that faced him at the time that the Local and this Court were dealing with the various steps resulting in a Sequestration Order. Mr Sherwood was unable to advance any argument that questions the validity of the making of that order. I make no criticism of Mr Sherwood’s inability to address his relevant aspects of an annulment argument as a self-represented litigant. Consequently, I have had to rely on the affidavit material tendered by the other parties to these proceedings and the helpful submissions made by their respective counsel. Significantly, the review of Mr Sherwood’s financial position by the Trustee has confirmed that Mr Sherwood or a suitably qualified legal practitioner could not have advanced an argument that annulment was appropriate based on Mr Sherwood’s solvency. In these circumstances, I am satisfied that the Court should not exercise its discretion to annul the Sequestration Order. The Application should be dismissed.
I certify that the preceding forty-five (45) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM
Associate:
Date: 25 November 2010
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