Union Club v Lord Battenberg

[2006] NSWCA 72

NEW SOUTH WALES COURT OF APPEAL

CITATION:      Union Club v Lord Andrew Charles Robert Battenberg [2006]  NSWCA 72

FILE NUMBER(S):
40322/05

HEARING DATE(S):               13 March 2006

DECISION DATE:     07/06/2006

PARTIES:
Union Club - Appellant
Lord Andrew Charles Robert Battenberg - Respondent

JUDGMENT OF:       Giles JA Santow JA Bryson JA   

LOWER COURT JURISDICTION: Supreme Court

LOWER COURT FILE NUMBER(S):          SC 2448/04

LOWER COURT JUDICIAL OFFICER:     Campbell J

COUNSEL:
S Gaegler SC & R Scruby - Appellant
R Aldridge SC & J R Dupree - Respondent

SOLICITORS:
Minter Ellison - Appellant
Russo and Partners - Respondent

CATCHWORDS:
Company articles - membership ceased if member "becomes bankrupt" - member became bankrupt - bankruptcy then annulled on entry into arrangement with creditors - whether annulment meant had not ceased to be a member - consideration of effect of annulment in bankruptcy law - annulment retrospective - reversed fact of becoming bankrupt - but on construction of articles, membership ceased and was not restored upon annulment.  D

LEGISLATION CITED:
Bankruptcy Act 1966;
Bankruptcy Amendment Act 1991;
Income Tax Assessment Act 1936;
Insolvency Act 1986 (UK).

DECISION:
(1)  Grant leave to appeal;  (2)  Direct the filing of the notice of appeal within seven days;  (3)  Appeal allowed;  (4)  Set aside the declarations and orders made by Campbell J on 30 March 2005;  (5)  In lieu thereof, order that the summons be dismissed;  (6)  Order the respondent to pay the costs of the trial and the appeal, and that he have a certificate under the Suitors Fund Act if otherwise qualified.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA  40322/05
ED  2448/04

GILES JA
SANTOW JA
BRYSON JA

Wednesday 7 June 2006

UNION CLUB v LORD ANDREW CHARLES ROBERT BATTENBERG

Judgment

1. GILES JA:  The appellant is a company limited by guarantee.  It was incorporated in 1972 to acquire and take over the assets and liabilities of the then unincorporated body known as Union Club, and thereafter provided and continues to provide to its members the facilities of a club at premises in Sydney. 

2. The appellant’s Articles of Association provided for a number of categories of membership.  Ordinary members had to be proposed, seconded and elected by ballot.  By Article 7(e), after election and on payment of the entrance fee and subscription the ordinary member -

   “  …  shall be enrolled in the books of the Club, and shall be bound by the Articles and By-laws and subject thereto shall be entitled to the rights and privileges of a member.”

3. On 6 October 1992 the respondent became an ordinary member of the appellant.  By Article 4(a) he did not by reason of his membership have any interest in any of the property, profits or income of the appellant.

4. Article 16(b) provided -

   “(b)A member shall cease to be a member if he becomes bankrupt or enters into a deed of assignment, a composition or a scheme of arrangement with his creditors under Part X of the Bankruptcy Act 1966 (as amended).”

5. On 19 May 1997 a sequestration order was made against the respondent’s estate. The order was made pursuant to s 43(1) of the Bankruptcy Act 1966 (“the Act”), on a petition presented by a creditor. Section 43(2) provided that upon the making of a sequestration order the debtor “becomes a bankrupt”.

6. On 23 March 2000 the respondent’s bankruptcy was annulled by force of s 74(5) of the Act, on the passing of a special resolution at a meeting of creditors of the respondent accepting either a proposal for a composition in satisfaction of his debts or a scheme of arrangement of his affairs (the evidence did not disclose which).

7. In or shortly before April 2001 the appellant became aware of the sequestration order.  On 16 August 2001 it wrote to the respondent informing him that, pursuant to Article 16(b), he had ceased to be a member on 19 May 1997. 

8. The question in this appeal is whether the annulment had the effect that the respondent had not ceased to be a member. 

   The reasons of the trial judge

9. It was common ground that, subject to the effect of the annulment, the respondent had become bankrupt on 19 May 1997 within the meaning of Article 16(b).  The trial judge, Campbell J, recorded that the case proceeded on the “mutual assumption” that Article 16(b) was self-executing, and operated automatically on the occurrence of the event of the respondent becoming bankrupt.  His Honour referred to Rainsford v The Trustee of the Salsbury Club (1914) SR 65 at 73 (Southern Rhodesia) (cessation of membership of an unincorporated club) and in re the Bodega Company, Limited (1904) 1 Ch 276 at 283 (vacation of the office of a director).

10. The mutual assumption remained on appeal.  I proceed on the basis that it was not necessary, prior to the annulment, that the appellant became aware of the making of the sequestration order and elected to terminate the respondent’s membership. 

11. After recounting the material facts, his Honour set out fully the respective submissions of the parties.  He did not accept the appellant’s submission that his task was simply to construe Article 16(b), saying that the task was not just one of construction but also of deciding how the article operated, and that even as a matter of construction the meaning of the legal terminology in the critical phrase “becomes bankrupt” could not be determined “without looking at the framework of legal rules and policies in which the clause and the legal terminology in it, must operate”. 

12. His Honour noted with examples the great many occasions on which consequences flowed from a person becoming bankrupt, under statute or in private law under contract.  He observed that the examples he gave were by no means exhaustive, and -

    “ … serve to illustrate how wide a field of legal regulation is potentially affected if annulment of a bankruptcy has the effect that a consequence which, but for the annulment, would be held to have arisen under one of the statutes or contracts must be held not to have arisen, if the bankruptcy is later annulled.”

13. His Honour then canvassed at some length a number of areas of the law in which “annulment” operated, not only annulment of a bankruptcy but also setting aside of criminal convictions or judgments in civil matters, declarations of nullity of marriage, and other situations.  He did so in order to “consider what, if anything, can be drawn from that for the purpose of the present case”.  He did not comprehensively enunciate what could or could not be drawn, but in general considered that the situations were not analogous or determinative for his purposes.

14. Then returning to the present case, his Honour said that treating an act in the law as having a retrospective effect is “a familiar legal occurrence”, giving instances.  He accepted that there was “considerable artificiality” in this, but said that the artificiality was inherent in the notion of an event which had happened being “annulled” and that, if Parliament had legislated that a bankruptcy would in some circumstances be annulled, it had legislated that the artificiality would occur. 

15. This Honour then said -

    “70  The task of the Court in the present case is to decide whether, today, the condition for the plaintiff’s ceasing to be a member of the defendant, namely that he is someone who on 19 May 1997 became bankrupt, has occurred. The Bankruptcy Act 1966 (Cth) has provisions in sections 73 and 74, which have the effect that, today, the bankruptcy which once applied to the plaintiff is one which has been ‘annulled’. Subject to exceptions which the Bankruptcy Act 1966 (Cth) creates, and exceptions which arise as a matter of the general law, in the eyes of the law it is treated as not having occurred. None of the exceptions in the statute itself operate to give it any residual operation which is relevant to this case. Recognising today that in law the plaintiff was never bankrupt does not involve any upsetting of vested property rights or other vested rights. There is no action which was taken in reliance upon the bankruptcy being on foot and valid, which is relevant to the present case.”  (emphasis added)

16. At the heart of his Honour’s decision were the emphasised portions of his [70], that in the eyes of the law the bankruptcy is “treated as not having occurred” and the respondent “was never bankrupt”. 

17. His Honour said that he doubted that a private contract could control the effect of a statutory provision for annulment, and that he did not read the Articles as indicating a wish of members not to associate with bankrupts “extending so far as wishing not to associate with people who had once been bankrupt, but whose bankruptcy had been annulled”.

18. Thus his Honour concluded that in the present case there was “no exception of a type recognised by the general law to the retrospective operation of the annulment of the plaintiff’s bankruptcy”.  He accordingly made a number of declarations, including the first and key declaration -

    “1.Declare that on the true construction of Clause 16(b) of the Articles of Association of the defendant, and in the events which have happened, the plaintiff did not cease to be a member of the defendant by reason of the making of a sequestration order against him on 19 May 1997.”

19. This brief summary does not do justice to the learning in the consideration of the cases and the detailed reasoning in his Honour’s judgment.  The result, however, is rather striking.  The respondent, having not been a member of the appellant from 19 May 1997 to 23 March 2000, then was a member of the appellant for that period and (subject to other termination of membership) thereafter;  and not by conscious choice of the appellant or the other members of the appellant.  The reason for the cessation of membership worked by Article 16(b) can readily enough be seen, at least in general terms.  It was to ensure that members of the appellant should not have as a co-member a person who had become bankrupt or entered into a Pt X arrangement, and that the appellant itself should not be exposed to commercial dealings (membership dues and accounts) with a person who had done so.  Whether or not the reason involves, at least in part, an attitude which some might find unacceptable does not matter:  the article was part of the contract between members and between members and the appellant.  The respondent became bankrupt.  His bankruptcy was not annulled because he should never have been made bankrupt, but because he thereafter came to an arrangement with his creditors.  The reason for cessation of membership remained notwithstanding the annulment. 

    Leave to appeal

20. The appeal could be brought only with leave, because the respondent’s membership was not susceptible of valuation at $100,000 or more (see s 101(2)(r) of the Supreme Court Act 1970). The application for leave to appeal was heard on full submissions, as if an appeal. The respondent submitted that leave to appeal should not be granted. In my opinion leave to appeal should be granted, and for that reason I have referred to the parties as appellant and respondent. Although the respondent’s membership was not susceptible of valuation, there had been a fairly lengthy and unhappy relationship between the appellant and the respondent, and they both saw great importance in the membership beyond any monetary value. The legal issues which arise are of some complexity, and I consider that in the particular circumstances the appellant should be able to have appellate consideration of the judge’s decision.

    Becoming bankrupt and ceasing to be bankrupt

21. Annulment must be considered on the Act as it stood as at 23 March 2000.

22. Under the Act bankruptcy came about on the making of a sequestration order on a creditor’s petition (s 43(1)) or on acceptance by the Official Receiver of a debtor’s petition presented by the debtor (s 55(4A)). In each case the Act provided that the person “becomes a bankrupt” (s 43(2), s 55(4A)(b)), and the definition of “bankrupt” in s 5 reciprocally meant a person against whose estate a sequestration order had been made or who had become a bankrupt by virtue of the presentation of a debtor’s petition. In each case also, the Act provided that the bankrupt -

    “ … continues to be a bankrupt until:

    (a)he or she is discharged by force of subsection 149(1) or in accordance with Division 3 of Part VII;  or

    (b)his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under s 153B” (s 43(2); s 55(8)).

23. What did becoming a bankrupt or being a bankrupt mean?  The broad policies of bankruptcy are to enable a rateable division of the bankrupt’s property amongst his creditors and let the bankrupt start afresh, free from the burden of debt.  To this end, bankruptcy had consequences for the property of the bankrupt and, for want of a better word, the status of the bankrupt.  As to property, the bankrupt’s property other than after-acquired property vested in a trustee, and after-acquired property vested in the trustee as soon as it was acquired by or devolved on the bankrupt (s 58(1)).  As to status, the bankrupt’s creditors could not enforce any remedy against the bankrupt or, except with leave, commence any legal proceedings against the bankrupt, in respect of a provable debt (s 58(2));  the bankrupt came under duties of various kinds to do with ascertainment of property and administration of the bankrupt estate (s 77 and other provisions, extending to exposure to arrest if recalcitrant);  a bankrupt who derived income became liable to pay to the trustee contributions towards the bankrupt estate (s 139J et seq, extending to restriction on leaving Australia);  and the bankrupt would commit offences in certain events, such as failure to disclose property (s 265).

24. The regime of discharge by force of s 149(1) was, with some detail not presently material, that the bankrupt was “discharged from bankruptcy” three years after filing the statement of affairs, unless an objection to discharge had been filed and “taken effect”, in which case the three years was extended. Under Division 3 of Part VII, the bankrupt could apply to the trustee for early discharge from bankruptcy (s 149S), in substance where there was and would be no money to pay creditors (s 149T) but subject to a number of circumstances disqualifying the bankrupt from early discharge (ss 149X – 149ZE). The bankrupt was discharged early on the date in a certificate signed by the trustee (s 149ZF).

25. By s 153, the effect of the discharge was to release the bankrupt from all debts provable in the bankruptcy.  The discharged bankrupt remained obliged to assist the trustee in the realisation and distribution of such of his or her property as was vested in the trustee (s 152).

26. The alternative regime of annulment had the three avenues stated in para (b) of ss 43(2) and 55(8). It is convenient to note them in reverse order.

27. First, by s 153B of the Act-

    “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.”

28. Secondly, by s 153A(1) -

    “(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.”

29. Thirdly, and the relevant avenue in the present case, by s 74(5) -

    “(5)Upon the passing of a special resolution at a meeting of creditors of a bankrupt under subsection 73(4), the bankruptcy is annulled, by force of this subsection, on the date on which the special resolution was passed.”

30. I have already referred to the nature of a special resolution under s 73(4), being acceptance by creditors of a proposal for a composition or a scheme of arrangement. It may be noted that the composition or scheme of arrangement could itself be annulled and a consequential sequestration order made, see ss 75(4)-(6) -

    “(4)        If:

    (a)a default is made in any respect under such a composition or scheme of arrangement;  or

    (b)it is made to appear to the Court that:

    (i)the composition or scheme of arrangement cannot be proceeded with without injustice or undue delay to the creditors or to the bankrupt;  or

    (ii)the approval of the creditors was obtained by a misrepresentation by the former bankrupt;  or

    (iii)it is desirable that the affairs of the former bankrupt be investigated and administered under the provisions of this Act relating to bankruptcy;  or

    (iv)it is likely that the creditors will receive a greater dividend if the former bankrupt is again made a bankrupt;

    the Court may, if it thinks fit, on application by the trustee or a creditor, annul the composition or scheme of arrangement.

    (5)The annulment of a composition or scheme of arrangement does not affect the validity of any sale, disposition or payment duly made, or thing duly done, under or in pursuance of the composition or scheme of arrangement before the annulment.

    (6)The trustee or a creditor may include in an application under subsection (4) for a sequestration order against the estate of the debtor and, if the Court makes an order on the first-mentioned application annulling the composition or scheme of arrangement, it may, if it thinks fit, forthwith make the sequestration order sought.”

31. Under the first of the avenues, the bankruptcy should not have come about (s 153B). Under the second and third of the avenues, the bankrupt properly became bankrupt, but the bankruptcy came to an end prior to discharge by force of s 149(1); it came to an end either upon payment of creditors in full (s 153A(1)), or upon coming to an arrangement with creditors (s 74(5)).

32. Section 153B did not say when the bankruptcy was annulled, but the annulment was by a court order which would take effect when the order was made. Sections 153A(1) and 74(5) said that the bankruptcy was annulled “on” a particular date, the date of payment of the last of the creditors or the date of the special resolution. Annulment when an order was made or on an ascertained date picked up ss 43(2) and 55(8) in their statements that the bankrupt continued to be a bankrupt until the bankruptcy was annulled.

33. Section 154 stated the consequences of annulment under s 153B or s 153A(1). For present purposes, it is sufficient to note s 154(1)-(3) -

    “(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 subsections (3), (6) and (7), the remainder (if any) of the property of the former bankrupt still vested in the trustee reverts to the bankrupt.

    (2)If the property of the former bankrupt referred to in paragraph (1)(b) is insufficient to meet the costs, charges and expenses referred to in that paragraph, the amount of the deficiency is a debt due by the former bankrupt to the trustee and is recoverable by the trustee by action against the former bankrupt in a court of competent jurisdiction.

    (3)If an application is made to the Court by a person claiming an interest in property referred to in paragraph (1)(c), the Court, after hearing such persons as it thinks fit, may make an order, either unconditionally or on such conditions as the Court considers just and equitable, for the vesting of the property in, or delivery of the property to, a person in whom, or to whom, it seems to the Court to be just and equitable that it should be vested or delivered, or to a trustee for that person.”

1. Section 74 had its own provision for the consequences of annulment, in s 74(6) -

   “(6)Where a bankruptcy is annulled under this section, 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 shall be deemed to have been validly made or done but, subject to subsection (7), the property of the bankrupt still vested in the trustee vests in such person as the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his or her estate or interest in it, on such terms and subject to such conditions (if any) as the Court orders.”

   Some history

2. Annulment is an old concept in bankruptcy law, and annulment in the Act must be understood against the background of the legislation from which it can be traced and decisions on that legislation. Bankruptcy in English law has long been a creature of statute, with varying attention to the positions of debtors and of creditors. The earliest statute was in 1542, and more comprehensive statutes followed, see Holdsworth, History of English Law, Vol VIII, pp 23-40. 

3. The notion of “annulment” has itself varied.  As Smallcombe v Olivier (1844) 13 M & W 77; 153 ER 32 shows, in the early 19th century when annulment took the form of superseding a commission (a commission was in effect a bankruptcy order and superseding reflected a procedure by a writ of supersedeas) it had been regarded as putting all parties “in the precisely same position as if no commission had been issued” (at 87). That was thought in Smallcombe v Olivier “a very startling position” (ibid). It was held that the new procedure annulling a fiat, by statute having the same effect as superseding a commission, did not have that effect, so that a sheriff correctly made a return of nulla bona on a writ of execution against a bankrupt notwithstanding that the bankruptcy had later been annulled. Delivering the judgment of the Court, Pollock CB said at 87-8 -

   “While the commission was in force, (assuming, of course, that there were all the legal requisites to support it), the assignees might bring an action against the bankrupt’s debtor, and compel him to pay to them the debt which he owed to the bankrupt.  The debtor could have no defence to such an action.  The argument of the plaintiff is, that, if the commission should be afterwards superseded, the debtor must pay his debt over again to the bankrupt.  Again, the assignees contract to sell, and a stranger contracts to purchase, the bankrupt’s real estate.  A court of equity will, on a bill filed by the assignees, compel the purchaser to perform his contract, pay his purchase-money, and accept a conveyance;  and yet the plaintiff here contends, that afterwards, by an act to which the purchaser is no party, over which he has no control, and after any lapse of time, (unless protected by the Statute of Limitations), he may be wholly deprived of his property.  But there are other more startling consequences resulting from the doctrine contended for.  If the bankrupt does not duly surrender at the time required by the statutes, he is guilty of a felony, now punishable by transportation for life, and which, until lately, was capital.  And yet what is contended for is, that, before conviction, it is in the power of the Lord Chancellor to convert that which was a capital felony into a perfectly innocent act.  Again, while the fiat is in force, if the bankrupt has omitted to surrender, and has so committed felony, it may become necessary for peace officers or others to use force towards him in order to his apprehension and, under certain circumstances, even to take away his life, if he cannot otherwise be taken.  Can it be possible that the Lord Chancellor, by superseding a commission, or now, by annulling the fiat, can make a man a criminal and a murderer, who, at the time of the act done, did no more than his duty?  These are, no doubt, extreme cases, but they serve to test the correctness of the proposition contended for, which undoubtedly leads to all the consequences we have pointed out, and to many others equally absurd.”

4. Provisions in the nature of s 154 of the Act were thereafter enacted, giving continuing effect to the bankruptcy notwithstanding annulment to the extent of the savings but construed so as to otherwise give retrospective operation to annulment. As will be seen, the robust rejection of retrospective operation in Smallcombe v Ollivier appears to have been overtaken by construction of those provisions and an expansive view of retrospectivity beyond dealings with property.

5. The Bankruptcy Act 1869 (UK), described as an act to consolidate and amend the law of bankruptcy and accompanied by the Debtors Act 1869 abolishing imprisonment for debt, substantially recast the law, and the provisions for annulment began to take on their nature under the Act.

6. Bankruptcy came about by an order adjudging the debtor to be bankrupt (s 8). By s 28, the bankrupt’s creditors could accept a composition or assent to a scheme of arrangement, and if the composition or scheme so required the order of adjudication could be annulled by order of the Court “from and after the date of the order annulling the same”. There did not have to be annulment: the composition or scheme could bring “closure” of the bankruptcy and an order of discharge (ss 47, 48). By s 81, broadly equivalent to ss 74(5) and (6) of the Act -

   “Whenever any adjudication in bankruptcy is annulled all sales and dispositions of property and payments duly made, and all acts theretofore done, by the trustee or any person acting under his authority, or by the Court, shall be valid, but in such case vest in such person as the Court may appoint, or for all his estate or interest, therein upon such terms and subject to such conditions, if any, as the Court may declare by order.  A copy of the order of the Court annulling the adjudication of a debtor as a bankrupt shall be forthwith published in the London Gazette and advertised locally in the prescribed manner, and the production of a copy of the Gazette containing such order shall be conclusive evidence of the fact of the adjudication having been annulled, and of the terms of the order annulling the same.”

7. There could also be annulment if the creditors failed to appoint a trustee or the office of trustee fell vacant and was not fulfilled (s 84). There was no equivalent to s 153A(1) of the Act, although payment of creditors in full could bring an order of discharge under s 48. Nor was there an equivalent to s 153B of the Act.

8. In ex parte Ashworth, in re Hoare (1874) LR 18 Eq 705 Sir James Bacon CJ held that “without any special enactment” the Court of Bankruptcy “has power at any time, for good reason, to annul any bankruptcy in which an adjudication may have been made” (at 713). This illustrates a notion of annulment going beyond the statutory use of the term. The Bankruptcy Act 1883 (UK) included an equivalent to s 153B of the Act (s 35). In re Gyll, ex parte The Board of Trade (1888) 5 Morr 272 it was held that the act was a complete code on annulment, see also in re Hester, ex parte Hester (1889) 22 QBD 632, on the cognate New South Wales statute re Blakemore, ex parte Blakemore (1892) 3 BC 5, and on the Commonwealth act of 1924 Cameron and Cole (1944) 68 CLR 571 as explained in Taylor v Taylor (1979) 143 CLR 1. This has remained the position, although accompanied by the court’s jurisdiction to prevent abuse of its process (see for example ex parte Painter;  re Painter (1895) 1 QB 85; Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509).

9. Bailey v Johnson (1872) LR 7 Ex 263, a decision on the 1869 act, set the law on a path different from that of Smallcombe v Olivier.  After an order of adjudication the bankrupt’s property was realised and the creditor was paid in part.  The creditor himself then became bankrupt.  The order of adjudication was then reversed on appeal.  The creditor’s trustee brought an action against the former bankrupt to recover the debt, and the defendant claimed to set off the part repayment.  It appears to have been thought that, in order that there could be the set-off as an item of mutual credit, it was necessary that at the time of the creditor’s bankruptcy the money paid to the creditor was money of the defendant.  It was held that it was.

10. All members of the Court addressed s 81 of the 1869 act, Cockburn CJ saying (at 264) that it “applies to the case of a bankruptcy being annulled by whatever means” and was not limited to annulment under ss 28 and 81.  Again, the notion of annulment was not confined to the statutory use of the term;  but the decision was by explanation of the statutory use.

11. Cockburn CJ said at 265 -

    “The effect of s 81 is, subject to any bona fide disposition lawfully made by the trustee prior to the annulling of he bankruptcy, and subject to any condition which the Court annulling the bankruptcy may by its order impose, to remit the party whose bankruptcy is set aside to his original situation.  Here the Court of Bankruptcy has imposed no condition;  the general provision of the section has therefore its full effect, and that effect is to remit the bankrupt, at the moment the decree annulling his bankruptcy is pronounced.  We must therefore look at the money as though it were money paid in his name instead of in the name of Bullard, for having become his by virtue of the annulling of his bankruptcy, it is to be considered as his at the moment when it was paid in;  as his, therefore, at the time of the bankruptcy of Harvey and Hudson.”

12. Blackburn J was less explicit, saying at 205 that “[w]ithout determining whether the effect of s 81 is in every case to go back to the beginning, and to place the bankrupt in the position of having always owned what is by the section to ‘revert’ to him” the annulment “created at least an inchoate equitable claim of such a kind as ought to be taken into account”.  The extent of the concurrences of Keating, Mellor, Lush and Grove JJ is not entirely clear, but Keating J said at 266 that the annulment “does, at all events to this extent, remit him to his former estate so as to make the payment a matter of set-off” and Mellor J said at 266 that the effect of the annulment was “to declare that the money was the defendant’s”.  Brett J agreed with Cockburn CJ’s “full interpretation” of s 81.

13. The “full interpretation” was in essence that the direction in s 81 that the bankrupt’s property revert to the bankrupt had retrospective effect.  Consequences of the kind described in Smallcombe v Olivier do not seem to have received consideration, and that case does not seem to have been cited.  The statutory use of the notion of annulment under ss 28 and 81, where the bankrupt properly became bankrupt but the bankruptcy came to an end upon coming to an arrangement with creditors, was applied when the bankruptcy should not have come about.  Cockburn CJ’s language of remission to the bankrupt’s original situation was used only to describe the effect of s 81 in relation to the bankrupt’s property, but had a wider influence in later cases, and in the later cases the equation of annulment when the bankruptcy should not have come about and annulment when the bankrupt had properly been made bankrupt continued. 

14. Moving to the Bankruptcy Act 1914 (UK), in force and available as a model at the time of the first Commonwealth bankruptcy legislation, s 29 provided that the Court could by order annul the adjudication “where in the opinion of the court a debtor ought not to have been adjudged bankrupt, or where it is proved to the satisfaction of the court that the debts of the bankrupt are paid in full” (s 29(1)). There was a saving of the trustee’s acts and provision for vesting or reversion of the bankrupt’s property to the same effect as s 81 of the 1869 act. This was broadly equivalent to ss 153B, 153A(1) and 154 of the Act. Section 21 provided for an order annulling the bankruptcy and vesting the bankrupt’s property in him or such other person as the court might appoint if the creditors accepted a proposal for a composition or a scheme of arrangement. This was broadly equivalent to s 74(5) and (6) of the Act. By s 21(3), the annulment could itself be annulled and the debtor adjudged bankrupt if the composition or scheme was obtained by fraud, if there was default, or if the composition or scheme could not proceed without injustice or undue delay.

15. Australian provision for bankruptcy under Commonwealth legislation began with the Bankruptcy Act 1924. It was relevantly in similar form to the United Kingdom legislation. The Court could “annul the sequestration order” if in the Court’s opinion a sequestration order ought not to have been made or it was proved to the satisfaction of the Court that the debts of the bankrupt were paid in full (s 124(1)), with the by now familiar provision saving the trustee’s acts and provision for vesting or reversion of the bankrupt’s property (s 124(2)). The bankrupt could also apply for “an order of discharge for the release of his estate” if his creditors had been paid in full or a legal acquittance of the debts had been obtained (s 123). Section 71 provided for proposal and Court approval of a composition or scheme of arrangement and an order “annulling the sequestration order and vesting the property of the bankrupt in him or in such other person as the Court appoints … “ (s 71(18)). The composition or scheme could itself be annulled, without prejudice to the validity of anything done under it (s 71(15)). Nothing was said about a consequential order for bankruptcy.

16. The 1924 act was replaced by the Act in 1966, following the 1962 report of the Committee appointed to review the bankruptcy law. It relevantly took substantially the same form.

17. As the Act then stood, by s 154 the Court could make an order “annulling the bankruptcy” if it was satisfied that the sequestration order ought not to have been made or the debtor’s petition ought not to have been presented or accepted, or that the debts had been paid in full or the debtor had “obtained a legal acquittance of them” (s 154(1)); the validity of the trustee’s acts was saved and the property of the bankrupt vested in such person as the Court appointed or reverted to the bankrupt (s 154(2)). By s 74, the Court could approve a composition or scheme of arrangement, and if it did so could make an order “annulling the bankruptcy” (s 74(1)-(4)), with like saving of the trustee’s acts and provision for vesting or reversion of property (s 74(6)). The composition or scheme of arrangement could itself be annulled by reason of default or injustice or undue delay in proceeding with it, or if approval was obtained by fraud (s 75(4)), and now a consequential sequestration order could be made (s75(6)). There was, however, a change in language, from annulment of the sequestration order to annulment of the bankruptcy. The report does not refer to such a change, which so far as appears was no more than a drafting matter.

18. The Act relevantly took its form as at 23 March 2000 with amendments made by the Bankruptcy Amendment Act 1991. Sections 153B and 154A(1) came to provide separately for annulment, and annulment upon payment of debts in full and upon approval of a composition or scheme of arrangement was automatic, without the need for approval by the court or a court order.

    Retrospective operation

19. In referring to annulment of the bankruptcy “on” a particular date, ss 153A(1) and 74(5) were open to the view that their annulment operated to bring the bankruptcy to an end without any retrospective effect. Annulment by court order pursuant to s 153B was open to the same view. However, historically and from the saving provisions dealing with the consequences of annulment, that view was not adopted. Smallcombe v Olivier did not prevail, and from Bailey v Johnson onwards numerous decisions spoke of annulment as having retrospective operation.  In Australia, in re Taylor;  ex parte Taylor (1898) 8 BC (NSW) 50 it was said at 51 that if a bankrupt obtains an order annulling the bankruptcy he “goes scot free, and it is as though he had never been in the Court at all”. In the High Court in Cameron v Cole Latham CJ said at 594, citing Cockburn CJ in Bailey v Johnson, that in respect of his property the debtor is “restored to the status quo ante” and “remitted to his original situation”;  see also Starke J at 594 (“remit all persons interested to their original positions”).  In Marek v Tregenza (1963) 109 CLR 1 at 4-5 Kitto and Menzies JJ described annulment as restoring the bankrupt to his former condition, so far as that could be done without invalidating intermediate acts of the court and bankruptcy officials. The language of restoring the bankrupt to his original situation was used in re Lawson (1939) 11 ABC 137, re Gay (1943) 13 ABC 134 and re Falvey (deceased) (1946) 13 ABC 291. In all these cases but Cameron v Cole the annulment was because the bankrupt had paid his creditors in full or obtained a legal acquittance of his debts, that is, the bankrupt had properly been made bankrupt.  Retrospective operation even in that circumstance was thoroughly established.  I will come to more recent decisions taking up, and further extending, these descriptions of annulment.

20. The appellant did not dispute in the appeal that annulment under the three avenues in the Act, including pursuant to s 74(5), had retrospective operation. Its submissions were principally directed to construction of Article 16(b). They included, however, that retrospective operation did not of itself provide the answer to the question because the retrospectivity did not extend to the fact of becoming bankrupt.

21. In University of Wollongong v Metwally (1984) 159 CLR 447 at 478 Deane J said of the nature of the retrospective operation of a statute -

    “A parliament may legislate that, for the purposes of the law which it controls, past facts or past laws are to be deemed and treated as having been different to what they were. It cannot, however objectively, expunge the past or "alter the facts of history": cf. Akar v Attorney-General (Sierra Leone). If the fact was that its Emperor wore no clothes, it is powerless either to reverse that fact outside the fields in which it is master or objectively to convert into falsehood the truth which a small child saw.”

22. Constitutional questions explain his Honour’s reference to the fields in which a Parliament is master, and they do not arise in the present case. It was open to Parliament to legislate, by the provisions as to annulment, that a past fact to do with a person’s bankruptcy should be treated as having been different from what it was. This it did, in the language of annulment of the person’s bankruptcy. Parliament could not objectively convert into falsehood the fact that the person became bankrupt, although it could reverse that fact for the purposes of the Act or more generally. Deane J’s observations are a reminder that it is necessary to ask just what past fact is to be treated as different from what it was, and to ask whether on the proper construction of Article 16(b) it nonetheless operated on the objective truth.

23. Two issues are thus raised.  As a matter of bankruptcy law, did annulment of the respondent’s bankruptcy reverse the fact that he had become bankrupt?  Even if it did, as a matter of contract law on its proper construction did Article 16(b) nonetheless bring about cessation of his membership?

    Reversal of the fact

24. By the definition of “bankruptcy” in the Act it -

    “ … in relation to jurisdiction or proceedings, means any jurisdiction or proceedings under or by virtue of this Act”.

25. The point of the definition appears to have been to bring within bankruptcy the jurisdiction and proceedings under Pts X and XI of the Act, see reAlam’s Deed of Arrangement (1932) 4 ABC 98 at 10-3; re Hawkesford (1937) 10 ABC 26 at 29. It does not assist in determining what is meant by annulment of a person’s bankruptcy.

1. It should be repeated that, with the Act, annulment was not of the sequestration order but of the bankruptcy. This lent itself to reversal of what flowed from the person becoming a bankrupt (the effects on property and status), rather than reversal of becoming a bankrupt (the making of the sequestration order). In the UK the annulment remained annulment of the bankruptcy order, see Insolvency Act 1986 (UK) s 282(1). Arguably, there was not by force of law reversal of the objective fact that the person had become bankrupt; annulment necessarily accepted that fact, otherwise there would be no occasion for annulment. Rather there was reversal by force of law of the consequences which the law had attached to that fact, and reversal only to that extent. The fact that the person had become bankrupt lived on, and by force of the Act so did the consequences of becoming a bankrupt at the least in the validity of acts done in the administration of the bankrupt’s estate (s 154(1)(a), s 74(6)), the former bankrupt’s liability for costs, charges and expenses (s 154(2)) and the possible vesting of property in third parties (s 154(3), s 74(6)).

2. Apart from whatever remains of Smallcombe v Olivier, there is some support in the cases for annulment working less than complete reversal of the facts.

3. In Director of Public Prosecutions v Ashley (1955) Crim LR 565;  more fully noted in 18 MLR 415, the bankrupt committed the offences of obtaining credit while a bankrupt and managing a business while a bankrupt.  The bankruptcy was then annulled.  It was held that he had still committed the offences.  The decision was doubted in Theissbacher v MacGregor Garrick & Co (1993) 2 Qd R 223 at 229, see later in these reasons. In re Baysington;  Gillon v NCSC (1987) 12 ACLR 412 a similar question was resolved by construing the provision creating the offence as involving whether the offender was a bankrupt at the time of the offence. Smallcombe v Ollivier was cited as raising “a central question, namely is it to be supposed that the legislation intends to make an act criminal when committed but innocent at some later date”.  In fact the concern in Smallcombe v Ollivier was the reverse, but Master Seaman QC appears to have taken a similar view of the answer to that of Pollock CB.

4. In re Hayes;  ex parte Hayes (1984) 59 ALR 219 the bankrupt’s discharge turned on whether he had “again [become] a bankrupt”. He had become a bankrupt a second time while his first bankruptcy was in force, but the first bankruptcy had then been annulled pursuant to s 154 of the Act. Spender J regarded the bankrupt as still bankrupt at the time of the second bankruptcy. It is, with respect, not entirely clear whether he did so because he thought the retrospective operation of s 154 was limited by the reference in s 43(2) to the debtor continuing to be a bankrupt until his bankruptcy is annulled. His Honour’s decision was not followed by Pincus J in re Fitzgerald;  ex parte Fitzgerald (1988) 99 ALR 189, and was doubted in Oates v Deputy Commissioner of Taxation (1990) 27 FCR 289 at 303

5. Re Oates;  ex parte Deputy Commissioner of Taxation (1987) 17 FCR 402 does not suggest confined reversal of the facts, but should be mentioned now as the background to Oates v Commissioner of Taxation. It concerned an application for annulment on the ground that creditors had been paid in full (s 154(1)(b) as it then stood). The bankrupt had been discharged from bankruptcy by force of s 149 of the Act, but wished to have an annulment so that he could claim the benefit of tax losses incurred prior to bankruptcy as a set-off against taxable income earned since his discharge. In contrasting the annulment with discharge, Sheppard J said at 404 that, subject to s 154(2), the order annulling the bankruptcy “places the bankrupt in the same position as he was prior to the making of sequestration order”, and -

   “Thus property which has vested in the Trustee pursuant to s 58, subject to s 154(2) and (3) revests in the bankrupt. He is not released from any of his debts and, at least in legal theory, he is treated as if he were never bankrupt.”

6. An order annulling the bankruptcy was made, and Oates v Commissioner of Taxation was concerned with obtaining the benefit of the tax losses. By s 80(4) of the Income Tax Assessment Act 1936, where a taxpayer “has become a bankrupt” prior to the year of income, a tax loss incurred prior to the date on which he became a bankrupt could not be deducted. Hill J held that s 80(4) should be construed, in the context of the Income Tax Assessment Act and the legislative purpose of the provision, so that where the bankruptcy was annulled “the taxpayer has never become a bankrupt within the meaning of s 80(4) of the Act” (at 303).

7. At first sight this supports annulment working a complete reversal of the facts, including the fact of becoming a bankrupt, but his Honour’s reasoning was to the contrary. At the commencement of a comprehensive discussion of the effect of annulment, his Honour noted the submission that annulment operated so that “the bankrupt was, for all purposes, including s 80(4) to be treated as if he had never become a bankrupt” (at 293). The taxpayer was successful, but not on that basis. Rather, involved in his Honour’s construction of s 80(4) was that, absent its context and legislative purpose, the taxpayer was in the position of having become a bankrupt notwithstanding the annulment – otherwise his Honour could simply have said, in giving effect to the Act, that the annulment operated so that the taxpayer had never become bankrupt.

8. In coming to his conclusion, his Honour noted with apparent approval Director of Public Prosecutions v Ashley and re Hayes;  ex parte Hayes.  Although he said (at 297) that subject to exceptions “it seems not incorrect to say that the effect of the annulment will be the setting aside of the bankruptcy order”, he continued (at 297-8) -

   “Further support, if it be needed, for the view that an order of annulment does not in all respects operate ab initio is to be found in the decision of the Full Court of this court in DCT v Clyne. In that case, Mr Clyne had become a bankrupt upon the presentation of his own petition. A sequestration order was subsequently made by this court on the petition of the Deputy Commissioner. It was the propriety of this second order that was in issue before the High Court in Clyne v DCT (1984) 154 CLR 589. Subsequently the Deputy Commissioner applied for and obtained an order of annulment of the bankruptcy resulting from Mr Clyne’s petition under s 154 and then sought to proceed again upon the petition originally presented by him. That petition had been presented more than 12 months from the date of the renewed hearing. Section 52 of the Bankruptcy Act provided that a petition lapsed subject to a power to extend it at the expiration of 12 months commencing on the date of presentation of the petition unless before the expiration of that period a sequestration order was made on the petition, or the petition was dismissed or withdrawn. In Clyne, the initial and invalid sequestration order was made within 12 months and Mr Clyne argued that once that sequestration order was set aside by the judgment of the High Court, the consequence was that no sequestration order had been made and the petition had lapsed. The court rejected Mr Clyne’s submission. It held that the sequestration order made, albeit wrongly, had not been void and the petition had not lapsed.

   Hence, if all that is meant by the words ‘becomes a bankrupt’ in s 80(4) of the Act is that a sequestration order has been made against the estate of the taxpayer, Clyne’s case could be argued, by analogy, at least to require that even in the case of an order improperly made, it was the fact of the making of that order which attracted the operation of s 80(4) and brought about the unavailability of the losses as a deduction with the consequence that Mr Oates’ submission must be rejected.”

9. As comment on these decisions, it is difficult to exclude from annulment of a bankruptcy some of the effects on property and status while leaving others.  The situation in Director of Public Prosecutions v Ashley is now accommodated by s 275 of the Act, by which a person may be prosecuted for an offence although the bankruptcy has been annulled. Excluding reversal of the fact of becoming a bankrupt could, however, be seen as a different thing, and arguably s 275 itself recognises continuance of the fact of becoming a bankrupt.

10. There is, however, a difficulty in principle. I have referred to the equation of annulment when the bankruptcy should not have come about and annulment when the bankrupt had properly been made bankrupt. Annulment where the sequestration order should never have been made (s 153B of the Act) appropriately calls for retrospective reversal of becoming a bankrupt. Annulment where creditors have been paid in full or an arrangement has been made with creditors can be seen as an incentive to the bankrupt, with the reward including more than reversal of what flowed from becoming a bankrupt: see the Explanatory Memorandum to the Bill for the 1991 act, para 15.2, and Quinn v Official Trustee in Bankruptcy (1996) 443 FCA 1, although in that case the incentive was said not to justify a construction of the then s 154 enabling a discharged bankrupt to take advantage of s 73. The Act does not indicate two kinds of annulment. Where the legislation preceding it spoke of annulment of the sequestration order, and earlier of the adjudication, and there does not appear to have been more than a drafting preference in the Act’s reference to annulment of the bankruptcy, the argument for confining retrospective reversal short of reversal of becoming a bankrupt is significantly compromised if it means that a sequestration order which should never have been made continues as an order.

11. It is pertinent that, outside bankruptcy, retrospective annihilation of an act in the law has been given full effect.  In The Commissioner for Railways (New South Wales) v Cavanough (1935) 53 CLR 220 an officer convicted of a felony was by statute deemed to have vacated his office, but on the conviction being set aside was considered never to have been convicted (see at 224-5). If a sequestration order were set aside on appeal, in general and subject to protection for acts done under the order it would be as if it had not been made (see The Commissioner for Railways (New South Wales) v Cavanough at 224-5, 227-8).

12. As a textual matter, s 75(6) of the Act providing for a consequential sequestration order if the composition or scheme of arrangement was itself annulled suggested that the automatic annulment of the bankruptcy had done away with the sequestration order. Perhaps more important is that the language of Cockburn CJ in Bailey v Johnson, speaking of remitting the bankrupt to his original situation, has been taken up in at least one decision on the Act as meaning reversal of the fact of becoming bankrupt.

13. In Theissbacher v MacGregor Garrick & Co the question was whether, when the bankruptcy had subsequently been annulled under s 154(1)(b) of the Act, court proceedings were deemed to have been abandoned by the bankrupts’ trustee by force of ss 60(2) and (3) of the District Court Act, which provided -

    “(2)An action commenced by a person who subsequently becomes a bankrupt is, upon his becoming a bankrupt, stayed until the Trustee makes election, in writing to prosecute or discontinue the action. 

    (3)If the Trustee does not make such an election within 28 days after notice of the action is served upon him by a defendant or other party to the action, he shall be deemed to have abandoned the action.”

14. Pincus JA and White J held that there had not been abandonment because “the annulment retrospectively deprives s 60(3) of the effect it would, apart from the annulment, have had on the action” (at 230).  Their Honours first considered whether the annulment was retrospective or operated only from the time the annulling order became effective;  they held that it was retrospective.  After referring to a number of cases as decisions on the effect of annulment, their Honours said (at 229) -

    “The former bankrupt is, at least in general, treated as never having been made bankrupt; that is the effect of annulment. If one applies that principle to the present case, then the appellants, being deemed never to have become bankrupt are unaffected by s 60(2), which depends upon their having become bankrupt; in consequence s 60 (3) does not affect them either.”

15. The cases cited by their Honours, beginning with Bailey v Johnson and including many to which I have referred, were concerned with annulment of an adjudication or sequestration order. Their Honours observed (at 228) that the terms of s 81 of the Bankruptcy Act 1869 (UK) did not appear to them to be in any relevant respect different from the terms of the Act with which they were concerned. The cases did not in fact go beyond effect on property. Their Honour’s decision did involve an effect on property, but was not tied to it and turned simply on whether the bankrupts had become bankrupt. The decision may have taken restoration to the bankrupt’s original position further than the decisions to which their Honours referred, but it stands against annulment working less than a complete reversal of the facts.

16. Fitzgerald P dissented in the result, considering that the saving provision in s 154(2) of the Act excluded from the effect of annulment the trustee’s failure to make an election. His Honour did say, at 229, that “the general effect of annulment provided for by s 154(1) involves the retrospective annihilation of the sequestration order and its consequences …”. This language was consistent with the majority’s view of the extent of the retrospective reversal.

17. In Coyle v Cassimatis (QCA, 1 November 1993, unreported) the question was whether, following annulment of their bankruptcy pursuant to s 74(5) of the Act, a cause of action which the former bankrupts wished to prosecute remained vested in their trustee. If the composition did not otherwise provide, the cause of action had reverted to the former bankrupts pursuant to s 74(6) of the Act. Although not essential to the reasoning of the court (Fitzgerald P, Thomas and McKenzie JJ), it was said -

    “It would be consistent with the decision of this Court in Theissbacher v MacGregor Garrick & Co (1993) 2 Qd R 223 to conclude that, although only annulled ‘on’ the day of the creditors’ special resolution, the annulment was retrospectively effective to annihilate the appellants’ bankruptcy and its consequences except as otherwise provided by the Act, notably subsection 74(6). Prima facie, therefore, the appellants were, in law, never bankrupt, and accordingly their cause of action against the respondent remained, in law, vested in them and did not at any time vest in [the trustee]”.

18. It may be noted that the language in Coyle v Cassimatis changed from annihilation of the sequestration order, the language of Fitzgerald P in Theissbacher v MacGregor Garrick & Co, to annihilation of the bankruptcy.  No significance appears to have been attributed to the different language.  Notwithstanding that it was obiter, there was affirmation that annulment meant that the debtor was “never bankrupt”.

19. In re Hudson ;  ex parte ANZ Bank v Bird (1994) 50 FCR 281 the creditors accepted a proposal for a compromise or scheme of arrangement, whereupon the bankruptcy was annulled pursuant to s 74(5) of the Act. A question was whether the court retained jurisdiction to hear and determine a creditor’s application for priority in payment of debts, the relevant power being to make orders where “in any bankruptcy” certain conditions were established. It was held that the court had jurisdiction in bankruptcy under s 27 of the Act and the definition of “bankruptcy” in s 5, and that it did not matter that there was no bankruptcy in existence. Northrop J’s observations on the effect of annulment were obiter, but his Honour described the effect of an annulment as being to put the bankrupt back in the position he would have been if the bankruptcy had never occurred, referring to the discussion of the legal consequences of an annulment in Theissbacher v MacGregor Garrick & Co and to Fitzgerald P’s language of retrospective annihilation of the sequestration order in that case, and to annihilation of the bankruptcy and its consequences in Coyle v Cassimatis. 

20. In Worrell v Westpac Banking Corporation (1994) 51 FCR 304 the question was whether, following the annulment of their bankruptcy, the former bankrupts should be substituted as applicants in proceedings commenced by their trustee, or whether they should be joined as applicants. Time bars made the question significant. Citing the passage from Coyle v Cassimatis earlier set out, Drummond J declined to distinguish annulment pursuant to s 74(5) of the Act from the annulment pursuant to s 154 in that case. His Honour said (at 306-7) -

    “There is nothing in Thiessbacher which provides any support for the proposition that annulment operates retrospectively where the propriety of the making of the sequestration order is attacked, and prospectively where annulment is justified by reason of an event occurring after sequestration. There is no ground in my view for differentiating between the consequences of annulment in these two situations. It follows that there is no warrant for giving to an annulment under s 74(5) of the Act, which, like an annulment under old s 154(1)(b) and new s 153B [sic], is founded on events occurring after the commencement of an unchallenged sequestration order, the limited effect suggested.”

21. Drummond J noted his earlier decision in re Coyle (1993) 42 FCR 72 in which he described annulment under ss 153A and 153B as generally “that the bankruptcy is set aside ab initio and the annulled bankruptcy is treated as never having taken place for any purposes, save those set out in s 154 and in other special situations of the kind referred to in Oates v Commissioner of Taxation at 297”.  His Honour ordered that the former bankrupts should be substituted as applicants.

22. There is strong recent support for the retrospective effect of annulment extending to reversing the fact of becoming bankrupt, not only where the annulment was under s 153B of the Act but also when it was under s 76(5). Retrospectivity could perhaps have been confined to property, or to property and status, and there may have been influence of Cockburn CJ’s language of remission to the person’s original situation beyond its intended meaning, but that has been the course of judicial thinking. A distinction could have been drawn between annulment when the bankruptcy should not have come about and annulment when the bankrupt had properly been made bankrupt, but was not. No significance has been attached to the change in language from annulment of the sequestration order to annulment of the bankruptcy.

23. Accidents of history may have been at work, but it is important that there be uniformity in this area, and I consider that I should follow the recent cases and, so doing, hold that annulment of the respondent’s bankruptcy reversed the fact that he had become bankrupt. The judge was correct in the emphasised portions of his [70].

    Construction of Article 16(b)

24. Article 16(b) was part of a private contract. It nonetheless picked up, and used to bring about cessation of membership, events occurring under the Act; not only becoming a bankrupt, but also entering into a deed of assignment, a composition or a scheme of arrangement with creditors under Pt X of the Act. It was not suggested that “becomes bankrupt” differed from becoming a bankrupt, or meant no more than being without sufficient funds to pay creditors.

25. The terms of a private contract which picks up and uses becoming a bankrupt may expressly qualify the use.  The appellant’s Articles did not do so.  I accept that a qualification may be found by construction of Article 16(b).  Oates v Commissioner of Taxation illustrates the process, although by construction of a statute which picked up and used becoming a bankrupt.  On the proper construction of Article 16(b), did it operate on the objective truth so that the respondent became bankrupt notwithstanding that his bankruptcy was later annulled?  Put another way, although as a matter of bankruptcy law annulment of the respondent’s bankruptcy reversed the fact that he had become bankrupt, did that fact remain for the operation of the contract?

1. The respondent submitted that the Article picked up something for which the Act provided, becoming a bankrupt; a member of the appellant could not become bankrupt unless the member became bankrupt by force of the Act. If, therefore, in reversal of that fact the Act provided (with retrospective effect) that the member never became bankrupt, there was nothing for the Article to use to bring about cessation of membership. The Act gave that upon which the Article operated; the Act took it away.

2. It is necessary, however, to recall Deane J’s observations in University ofWollongong v Metwally.  In Oates v Commissioner of Taxation the taxpayer had become a bankrupt but his bankruptcy was annulled.  “Has become a bankrupt” in s 80(4) was effectively construed to mean “has become a bankrupt (and the bankruptcy has not been annulled)”.  The equivalent in the present case would be to construe Article 16(b) to mean “becomes bankrupt (even if the bankruptcy has been annulled)”.  The reading in of the words in parentheses is not re-writing Article 16(b), but explaining the contractual meaning of “becomes bankrupt”.

3. The considerations for and against this construction of Article 16(b) are comprehensively examined in the judgment of Santow JA, which I have read in draft.  There is no point in canvassing them afresh.  I prefer to not ask whether Article 16(b) admits of no other interpretation than retrospective reinstatement of membership, it being sufficient to arrive at the better interpretation. 

4. The consideration particularly telling against the appellant’s construction is the case of a member who should never have been made bankrupt. An annulment under s 153B of the Act would appropriately negate the fact of becoming bankrupt and retrospectively restore to the member the membership which should never have ceased. On the other hand, it is not for the appellant and the other members to investigate the circumstances of a member becoming bankrupt and foresee annulment because the member should never have been made bankrupt, or indeed to investigate the prospects of a successful appeal by the member. Article 16(b) can readily enough be seen as an agreed blunt instrument; the member who should never have been made bankrupt or who successfully appealed can reapply for membership, and the decision to admit to membership can take account of the circumstances of the becoming bankrupt. I am persuaded that, for the reasons his Honour gives, the better interpretation is as he concludes.

   Orders

5. I propose the orders -

6. Grant leave to appeal.

7. Direct the filing of the notice of appeal within seven days.

8. Appeal allowed.

   4.Set aside the declarations and orders made by Campbell J on 30 March 2005.

   5.In lieu thereof, order that the summons be dismissed.

   6.Order the respondent to pay the costs of the trial and the appeal, and that he have a certificate under the Suitors Fund Act if otherwise qualified.

9. SANTOW JA: 

   INTRODUCTION

   This is an appeal brought by a club disputing the membership status of one of its members. It did so following a sequestration order being made against that member’s estate, pursuant to s43(1) of the Bankruptcy Act 1966 (“the Act”). Section 43(2) provides in consequence that the debtor “becomes a bankrupt”. He subsequently had his bankruptcy annulled by operation of law (s74(5) of the Act), when he entered into a scheme of arrangement or composition with his creditors. Just over a year later the club learned of his earlier bankruptcy for the first time. It unsuccessfully brought proceedings for a declaration that he had ceased to be a member by operation of the club’s constitution as contained in its Articles of Association.

10. The appellant club is the Union Club (“the Club”).  It is constituted, like many modern clubs, as a company limited by guarantee.  It was incorporated in 1972 to acquire and take over the assets and liabilities of the then unincorporated body known as “the Union Club”.  The member concerned is Lord Battenberg, respondent to the Club’s appeal. 

11. The dispute turns upon the proper construction of the Club’s constitution, as contained in its Articles of Association.  These constitute a statutory contract between the members and with their incorporated club.  Under the heading “Loss of Membership”, Article 16(b) provides as follows: 

    “(b)A member shall cease to be a member if he becomes bankrupt or enters into a deed of assignment, a composition or a scheme of arrangement with his creditors under Part X of the Bankruptcy Act 1966 (as amended).”

12. The Club contends that Lord Battenberg had automatically ceased to be a member on becoming bankrupt, by force of that Article.  It submits that the trial judge, Campbell J, was in error in accepting that subsequent annulment of his bankruptcy had both the legal and contractual effect that it was as if he had never been bankrupt so that, following annulment, he was a member still. 

13. If, as this reasoning presupposes, annulment had retroactive effect in terms of reinstating Club membership, it should follow that the member reinstated was liable all along for his Club dues during the period post-sequestration order and pre-annulment.  I shall refer to this as the interim period.  Yet during this interim period the then bankrupt member would not have been able to resist proceedings to have him removed from the Club, had the Club been aware of the position.  He would not thereafter have been able to enjoy the amenities of the Club.  That is clearly anomalous.  While the Club was in fact not aware in that interim period of Lord Battenberg’s bankruptcy so took no such proceedings for his removal, that need not always be so.  While plausible arguments could be advanced that a member was not liable to pay his or her subscription while denied the Club’s amenities, the very fact that this unreasonable result is arguably open militates strongly against a construction that gives rise to that risk.  Moreover, if the trial judge’s interpretation were correct, then it rewards concealment of bankruptcy until annulment, notwithstanding the intended automatic operation of the Article.  That is a further anomaly.  For reasons which I develop, I consider that interpretation to be neither compelled by the language used nor consistent with the object of the contract constituted by the Club’s Articles. 

14. A further anomaly is that the event which annulled bankruptcy here was a composition or creditor scheme of arrangement, entered into pursuant to s74(5) of the Act. Such a composition or scheme starts when “a bankrupt desires to make a proposal for his or her creditors” (s73(1)), whereupon his or her trustee calls a creditors’ meeting (s73(2)).  Yet, paradoxically, the almost entirely parallel Pt X process for a debtor instigated composition or scheme of arrangement (or assignment for benefit of creditors) would have automatically brought about cessation of membership under the self-same Article.  While s222 empowers the court to declare such an arrangement or composition void in certain circumstances, the language used does not readily lend itself to the notion that membership is thereby retroactively reinstated.  The Part X process is typically used by debtors to stave off bankruptcy. 

15. Why therefore should it be supposed that members of a club would want to terminate a member who staves off bankruptcy with a Part X scheme, typically by agreeing to pay less than 100 cents in the dollar, yet want to save a member from termination who actually becomes bankrupt, but then uses a similar scheme to annul bankruptcy? That a Part X arrangement should cause membership to cease and a parallel s74(5) arrangement do the opposite is both absurd and unreasonable. In either case the Club is at similar risk that the member under a scheme or composition, who typically pays less than 100 cents in the dollar, will default on his future subscription, quite apart from the effect on the Club’s reputation, if he is reinstated as a member.

16. To this, it may be said that members chose to use the statutory terms in their contract to describe the triggers for loss of membership.  They must therefore be taken to have intended to incorporate the legal incidents that attend expressions like “becomes bankrupt”.  Thus Article 16(b) first uses the expression “becomes bankrupt” found in the Act and then refers to a scheme or composition under “Part X of the Bankruptcy Act 1966”, as trigger events for cessation of membership.  But it must be kept clearly in mind that the task is one of construing the contract, not the statute.  That poses the fundamental question here.  It is whether the contract is to be construed as incorporating what is said to be the statutory or legal consequence of an annulment, namely that, as the trial judge, Campbell J, expressed it, “in the eyes of the law [bankruptcy] is treated as not having occurred”. (The statutorily recognised exceptions under s74(6) of the Act pertaining to property are not here relevant as no member has any interest in the property or profits of the Club (Article 4(a)) including on winding up (Object 9).) In one sense the law giveth (the status of bankruptcy) and the law taketh away (by annulment bankruptcy is retroactively deemed not to have occurred). But bankruptcy actually did take place; s43 says so. It is a legal fiction to pretend otherwise, merely because annulment intervened.

17. Alternatively therefore, should the contract be construed so that membership ceases automatically, upon the actual fact of bankruptcy, notwithstanding its later annulment? That latter interpretation recognises three things. First the literal words of s43(2) of the Act (“upon the making of a sequestration order … the debtor becomes a bankrupt”) are replicated in Article 16(b).  As I explain, Article 16(b) is capable of accommodating that as its meaning, irrespective of annulment.  Second, annulment is itself predicated upon the fact of there having been a prior bankruptcy, as the statutory language makes clear.  Third, the former interpretation gives rise to a number of anomalies and unreasonable, even oppressive, results; the latter generally speaking does not, and certainly not to the same degree.  It should be preferred for that reason, unless the language is intractable.  Moreover, that interpretation better accords with the object of the membership contract evinced by its constitution, in terms both of the reputation of the Club and its financial dependence on members’ subscriptions, as I explain below. 

18. I have had the advantage of reading the judgments of Giles JA and Bryson JA in draft.  I prefer the view of Giles JA that leave to appeal should be granted, for the reasons he states, as also with his observations at [87] and with the orders he proposes.   

19. The trial judge said he doubted that a private contract could control the effect of a statutory provision for annulment, and that he did not read the Articles as indicating a wish of members not to associate with bankrupts “extending so far as wishing not to associate with people who had once been bankrupt, but whose bankruptcy had been annulled”.  For reasons I develop below, I consider the presumed intention of members is rather that they would wish to have the option whether to re-admit, depending on the circumstances of the original bankruptcy and its aftermath.  That is not achieved by automatically preserving membership when bankruptcy is annulled.  I here judge contractual intention objectively, taking into account, as interpretive principles require, the genesis of the transaction and the object of the membership contract.  That transaction is entry into a social club where the financial standing of its members has consequences for the Club and its members, both reputational and financial, as reflected in the Club’s constitution.  The effect of the trial judge’s interpretation, if correct, is to put both at greater risk than an interpretation which automatically terminates membership on bankruptcy, notwithstanding later annulment, leaving it to members to decide whether to reinstate. 

20. I therefore consider the question is not whether the private contract could control the effect of a statutory provision for annulment.  Rather it is whether Article 16(b) of that contract properly construed must be taken 

    (a)to have incorporated all the statutory and legal consequences on bankruptcy of its annulment so as to reverse the bankruptcy and reinstate membership retrospectively, or instead 

    (b)whether termination of membership is triggered once and for all by a sequestration order bringing about bankruptcy, irrespective of whether annulment later follows. 

21. When contractual language is capable of more than one interpretation, that interpretation is to be preferred which avoids anomaly or unreasonable consequences; see for example Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 108-9.

22. Meaning is seldom plain and unambiguous, despite frequent invocation by each side to a contractual dispute of their version of what is said to be plain and unambiguous.  The search for meaning starts with what the words in their context would convey to a reasonable person in the position of a member having all the background knowledge which would reasonably have been available to members and the Club as the notional parties to the contract.  That is the approach mandated by the High Court in Maggbury Pty Limited v Hafele Australia Pty Ltd (2001) 210 CLR 181 per Gleeson CJ, Gummow and Hayne JJ at [11], quoting with approval Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912-13. In ascertaining meaning one looks beyond merely internal linguistic considerations to ascertain what were the circumstances with reference to which the words were used (Prenn v Simmonds [1971] 1 WLR 1381 at 1384). More particularly, one must, within the ambit of the words used, ascertain the genesis of the transaction (entry into Club membership) and the purpose of the resultant membership contract to determine what interpretation best accords; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 at 292-3.

23. I would take the genesis of the transaction of entering into Club membership and the purpose of the resultant contract as fundamentally social and directed to maintaining the financial soundness and reputation of the Club.  That social purpose is evident in Object 2(d) “to promote social, literary and recreational facilities … for the benefit of members …”, supported by objects 2(e) to (j).  The importance to members of its financial soundness is evinced by Articles 21 (expenditure, borrowing and property), 35 (payment of subscription), 36 (payment of house accounts), 38 (accounts), 39 (auditor), 42 (indemnity of others, etc.), and 44 (special levy).  Those provisions of the Articles emphasising financial probity and soundness find their foundation in Object 10, requiring “true accounts to be kept of the sums of money received and expended by the Club and the property rights and liabilities of the Club …”. 

24. Though clubs began as voluntary associations, their incorporation does not alter the limited nature of a member’s obligations and, within that limitation, the paramount importance of the continued capacity to pay the subscriptions required by the rules of the club.  As Lord Lindley said in Wise v Perpetual Trustee Co Ltd [1903] AC 139 at 149:

    “Clubs are associations of a peculiar nature.  They are societies the members of which are perpetually changing.  They are not partnerships; they are not associations for gain; and the feature which distinguishes them from other societies is that no member as such becomes liable to pay to the funds of the society or to anyone else any money beyond the subscriptions required by the rules of the club to be paid so long as he remains a member.  It is upon this fundamental condition, not usually expressed but understood by everyone that clubs are formed; and this distinguishing feature has been often judicially recognised.  It has been so recognised in actions by creditors and in winding-up proceedings.”  [emphasis added] 

25. In that contractual context, Article 16(b) has an evident purpose of ensuring that members, upon whose dues the Club’s finances necessarily depend, continue to remain financially capable of meeting their obligations. A member who enters into a scheme of arrangement or composition with creditors, like a bankrupt, is a greater financial risk to the club than a member who does not. Moreover, the stigma of a member’s bankruptcy must be very material when it comes to the reputation of a social club, even if bankruptcy were later annulled. Neither the public at large nor members are likely to be informed about, or draw fine distinctions between discharge and annulment; nor concern themselves with the potentiality for annulment, as where it is claimed that, in terms of s153B, the sequestration order ought not to have been made. I agree with Giles JA that Article 16(b) was intended as an agreed blunt instrument, in the interests of certainty.

26. Members are much more likely to be concerned by an interpretation that, if all debts are paid by the bankrupt with the result that his bankruptcy is annulled (s153A(i)), he is automatically and retroactively reinstated as a member.  Members are likely rather to have the presumed intention that they would want a choice as to whether to reinstate, taking into account the circumstances of the bankruptcy.  Likewise the member concerned may well want not to be re-admitted, if rendered liable to pay past subscriptions.  That is yet a further vice in the trial judge’s interpretation. 

27. Both Club and members need a clear-cut test on whether a member has or has not retained his membership following a sequestration order. This is for a number of reasons, but particularly to be clear about entitlement to the amenities of the Club and to vote. Though annulment at law reverses the effect of an earlier bankruptcy, it by no means follows that this reversal as a matter of contract was intended to obliterate the historical fact of an earlier bankruptcy. More likely the objective intention of members was for membership automatically to cease when the debtor, in the words of s43(2) “becomes bankrupt” upon the making of a sequestration order, irrespective of later annulment. Significantly, s43(2) makes no distinction between being discharged from bankruptcy and having bankruptcy annulled. Yet the trial judge’s interpretation gives these diametrically opposite outcomes.

28. It is convenient that I here set out the three avenues for annulment referred to in s43(2)(b) followed by s43 itself.

    First, by s153B of the Act -

    “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.” 

    Second, by s153A(1) -

    “(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.” 

    Third, and the relevant avenue in the present case, by s74(5) -

    “(5)Upon the passing of a special resolution at a meeting of creditors of a bankrupt under subsection 73(4), the bankruptcy is annulled, by force of this subsection, on the date on which the special resolution was passed.” 

29. Section 43 provides: 

    “43     Jurisdiction to make sequestration orders

    (1)      Subject to this Act, where:

    (a)a debtor has committed an act of bankruptcy; and

    (b)at the time when the act of bankruptcy was committed, the debtor:

    (i)was personally present or ordinarily resident in Australia;

    (ii)had a dwelling house or place of business in Australia;

    (iii)was carrying on business in Australia, either personally or by means of an agent or manager; or

    (iv)was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager;

    the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.

    (2)      Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until:

    (a)he or she is discharged by force of subsection 149(1); or

    (b)his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B.”

1. I consider that the appeal should succeed. I conclude that Lord Battenberg ceased to be a member of the Union Club on and from the date that a sequestration order was made against his estate on 19 May 1997, notwithstanding the subsequent annulment of that bankruptcy by his entering into a composition or scheme of arrangement with his creditors pursuant to s73(4) of the Act. I would therefore propose orders as set out by Giles JA at [88],

2. BR`        YSON JA: Union Club, the Claimant, is a company limited by guarantee. The Opponent became a member on 6 October 1992. On 19 May 1997 the Federal Court of Australia made a Sequestration Order against the Opponent under the Bankruptcy Act 1966 (Cth). On 23 March 2000 the Bankruptcy was annulled under ss.73 and 74 of the Bankruptcy Act; that is, the Opponent made a proposal for a composition in satisfaction of his debts, the composition and the Trustee's report were considered by the meeting of creditors and the creditors by Special Resolution accepted the proposal; and thereupon, as provided by s.74(5):

   74(5) Upon the passing of a special resolution at a meeting of creditors of a bankrupt under subsection 73(4), the bankruptcy is annulled, by force of this subsection, on the date on which the special resolution was passed.

3. On 16 August 2001 the Claimant informed the Opponent that he had ceased to be a member on 19 May 1997 pursuant to cl.16(b) of the Articles of Association, which is as follows:

   16.(b) A member shall cease to be a member if he becomes bankrupt or enters into a deed of assignment, a composition or a scheme of arrangement with his creditors under Part X of the Bankruptcy Act 1966 (as amended).

4. By Statement of Claim in the Equity Division filed on 24 June 2004 the Opponent claimed a declaration that on the true construction of cl.16(b) and in the events which have happened he did not cease to be a member of the Union Club by reason of the Sequestration Order; with alternative and ancillary claims. He succeeded before Campbell J. and the Claimant seeks leave to appeal against the judgment and orders of Campbell J. of 30 March 2005. Leave to appeal is necessary because, although the Opponent obtained a final order, the subject matter, that is club membership, is incapable of valuation in money terms and hence it cannot be shown that the value limits of $100,000 referred to in s.101(2)(r) of the Supreme Court Act 1970 have been met. The Memorandum of Association establishes that members have no interest in club property: cl.4(b). Membership of an unincorporated private club is not a subject on which judicial decision is usually available unless there are elements such as the involvement of livelihood or rights to property. Changes in the law relating to liquor licensing which required that clubs be incorporated had the consequence that disputes about expulsion or other termination of membership became justiciable.

5. The proposed appeal turns on the interaction between the Bankruptcy Act and the terms of the Constitution of the Claimant; the matters for decision in the proposed appeal do not involve any interest of the public or of any large section of the public; it is unlikely that anyone not associated with the Claimant will ever be concerned to know how cl.16(b) operates.  The law about the effect of annulment in bankruptcy without judicial order is already established clearly by decisions of the Court of Appeal of Queensland and of single judges of the Federal Court of Australia.  Resolution of the dispute is plainly important to the parties, as it involves the continued association of the Opponent with other members, and personal dignity is involved; but I do not regard these considerations as justifying leave to appeal.  There has already been a hearing, which involved full consideration of the issues, and Campbell J.'s judgment dealt in a careful way with the matters put forward for decision; it has not been claimed that the Trial Judge did not consider the issues, or that the trial miscarried in any way, and there was no claim of procedural injustice or other failure in the administration of justice.  In relation to an interest of this kind I am of the view that one full and careful judicial disposition is all that justice requires, and that the availability of reasonably arguable grounds for reaching a different conclusion is not sufficient to justify the grant of leave to appeal.  However as I am in the minority in this view and as leave to appeal will be granted, I proceed to address the issues in the appeal.

6. The Claimant’s argument did not involve or require close consideration of the concept of annulment in the Bankruptcy Act. There was extensive reference to provisions of the Bankruptcy Act and to case law on that legislation in the course of argument, although the statute law was not the primary focus of the Claimant's case. One basis of the argument was a view, which I accept, to the effect that an instrument with contractual force, including the Constitution of a Corporation, may provide for some consequence to follow upon a person’s becoming bankrupt in terms which show that the consequence is not affected or altered if the bankruptcy is later annulled. As the argument was presented, cl.16(b) has that meaning and effect. Before addressing this I will attempt to state, lengthy though this statement must be, what is involved in an annulment of a bankruptcy under s.74(5).

7. To be a bankrupt is a personal status which comes into being on the making of a Sequestration Order, and thereafter continues until brought to an end in some way provided for by the Bankruptcy Act.  Annulment of bankruptcy removes this altered personal status ab initio as well as operating on more specific statutory consequences of a Sequestration Order.  Where, as in the Opponent's case, a person becomes bankrupt on the making of a Sequestration Order, s. 43 (2) provides:

   43(2) Upon the making of a Sequestration Order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until:
   (a) he or she is discharged by force of subsection 149(1); or
   (b) his or her bankruptcy is annulled by force of subs.74(5) or 153A(1) or under s.153B.

   Section 43(2)(b) makes the same provision in relation to annulment under ss.74(5), 153A(1) and 153B without distinction.

8. Section 57A deals, not altogether in the same way, with a person who becomes bankrupt by virtue of the presentation of the debtor’s petition. A Sequestration Order may be set aside on appeal, or set aside in some other way, and the circumstances in which a Sequestration Order may be set aside are limited by its standing as the order of the Federal Court of Australia, a superior court of record. If a Sequestration Order is set aside, the status of bankruptcy is in principle set aside with it; but the consequences are not left to general principle, and are dealt with by explicit provisions of the Bankruptcy Act. The primary provision is s.153B Annulment by Court:

   153B. Annulment by Court
   (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.
   (2) In the case of a debtor’s petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented.

9. The order referred to in s.153B annuls the bankruptcy; s.153B does not refer to annulling or setting aside the Sequestration Order, which may or may not happen according to the Court's view of what is appropriate. The terms of s.153B show that there may be an order annulling a bankruptcy even though the Sequestration Order is not set aside.

10. Part VII – Discharge and annulment, Div.5 Annulment of bankruptcy, which contains s.153B, also contains s.153A Annulment on payment of debts which creates machinery for annulment where all the bankrupt’s debts have been paid in full. In this machinery the annulment does not depend upon an order or any other action of the Federal Court of Australia. Annulment is brought about by s.153A(1).

    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.

11. Section 154 contains provisions which relate to the effect of annulments under both ss.153A and 153B in the same terms. Acts of the trustee or the Court before the annulment are taken to have been validly made or done. Section 154 applies in the same way to all annulments under Pt.VII, Div.5, whether under s.153A or s.153B.

12. Part IV – Proceedings in connexion with bankruptcy, Div.6 – Composition or arrangements with creditors contains s.74(5) under which the opponent’s bankruptcy was annulled.

13. A composition or scheme of arrangement under Pt. IV Div.6 is to be distinguished from compositions or schemes of arrangement with creditors under Pt.X of the Bankruptcy Act; Pt.X compositions are referred to in cl.16(b), and compositions under Pt.IV, Div.6 are not. In the machinery of s.73 a bankrupt makes a proposal for a composition or a scheme of arrangement and this is considered by a meeting of creditors who may by Special Resolution accept the proposal. Then s.74(5) provides that the bankruptcy is annulled on the date on which the Special Resolution was passed.

14. In the workings of Pt.IV, Div.6 it is an underlying assumption that the person who proposes the composition or scheme of arrangement is in fact a bankrupt; if he were not, s.74 and the annulment for which it provides could have no operation.  Section 74 and particularly subs.(6) preserve the effect of transactions which have taken place before the annulment, and among other things deal with whether or not property of the bankrupt still vested in the trustee reverts to the bankrupt; this consequence may or may not happen, according as the Court appoints.

15. Decision of this case requires consideration of the concept of annulment as used in these provisions of the Bankruptcy Act. In the ordinary use of the English language, annulment of a bankruptcy means that the bankruptcy is nothing, that it does not exist and did not ever exist; it is null. Much judicial opinion, and the language and purpose of s.153B, show that annulment of a bankruptcy by order of the Court has that effect; the bankruptcy is annulled ab initio, with the limitations on that operation for which the Bankruptcy Act expressly provides in s.154.

16. In contrast with s.153B, which operates where a Sequestration Order should not have been made, ss.153A and 74(5) produce annulment of a bankruptcy in circumstances of artifice; the assumption is that the bankrupt indeed was a bankrupt, otherwise the machinery cannot be invoked; yet when it is invoked the bankruptcy is annulled, in such a way that transactions in the interim need statutory validation. Where annulment is brought about by machinery provisions in ss.74(5) and 153A the text of the legislation suggests the possibility that references to annulment are used in a different sense, because both those provisions specify the date on which the bankruptcy is annulled, and that date is plainly not the date on which the bankruptcy came into existence. These provisions are ambiguous as they could be understood as meaning that the bankruptcy was annulled for the whole period during which it would otherwise have existed, but could also be understood as meaning that the bankruptcy continued until the date specified, and was null from then onwards. The existence of provisions in ss.74(6) and 154 dealing with the effect of annulment and conferring effect on transactions which took place before annulment points, not with entire certainty, towards the view that annulment operates ab initio in all three cases; otherwise there would be no need for an enactment conferring effect on transactions which took place in the interim. 

17. It is worth dwelling for a moment upon what happens to sales and dispositions of property and payments which were made before the Special Resolution which brought about the annulment but which do not fit within the provisions of s.74(6) which specify the transactions which are deemed to have been validly made. Before the Special Resolution transactions which occurred in that period were effective; they could be justified by pointing to the Sequestration Order. After the Special Resolution was passed, they cannot be shown to be effective in that way only; as well as pointing to the Sequestration Order it is necessary to show how they fall within s.74(6). Similar consequences arise under ss.153A and 154. Questions relating to the validity of these transactions are answered differently, but in both cases correctly, if the questions are put and answered before the Special Resolution to the way in which they are to be answered after the Special Resolution; and this is correct whether they are answered by a court ruling on their validity, or by any other person.

18. There has been bankruptcy legislation in various forms in England since 1542; see R v Davison (1954) 90 CLR 353 at 376 (Fullagar J). In the 19th Century bankruptcy legislation in England and New South Wales provided for bankruptcy to begin with an adjudication or judicial order, with which came the possibility that the order might be set aside on appeal or quashed in some way. In Oates v Federal Commissioner of Taxation (1990) 27 FCR 289 at 294 Hill J said that statutory power to annul a bankruptcy existed since at least the Bankruptcy Act 1842 (UK), and that since the Bankruptcy Act 1869 (UK) there had been provision in terms substantially similar to s.154 of the Bankruptcy Act 1966 (Cth). Before the statutory power was created in 1842 different judicial views had been expressed as to the effect of the procedures which then existed for setting aside a bankruptcy; see Hill J. at 296. The old procedures have become difficult to follow and unnecessary to pursue. In the Bankruptcy Act 1966 in the form which it took until amended by the Bankruptcy Amendment Act 1991 the Court was empowered by s.154 in its then form to make an order annulling a bankruptcy. Sections 154(1) and (2) were:

    154. (1)  Where the Court is satisfied --
    (a)    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 Registrar; or
    (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.

    (2)  Where a bankruptcy is annulled under this section, 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 shall be deemed to have been validly made or done but, subject to sub-section (3), the property of the bankrupt still vested in the trustee vests in such person as the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his estate or interest in it, on such terms and subject to such conditions, if any, as the Court orders.

19. The power conferred by s.154(1)(a) to make an order annulling the bankruptcy was not like the power of an appeal court, which would ordinarily set aside a Sequestration Order which ought not to have been made. The Court which made the Sequestration Order was authorised to make an order annulling the bankruptcy; this is not quite the same thing as an order setting aside the Sequestration Order. The power in s.154(1)(b) was quite a different power; the Court could make an order annulling the bankruptcy although there had been no error and there was nothing wrong with the Sequestration Order except that the bankruptcy had become unnecessary. Section 154(2) qualified the effect of annulment, recognised that there was a time interval until the annulment occurred and preserved the effect of some transactions before the annulment; this illustrates how widely the annulment would otherwise have acted.

20. In the Bankruptcy Act as it then stood Pt.III Div.6 dealt with composition or arrangement with creditors. Section 73 provided procedure in which creditors might by Special Resolution accept a proposal for a composition in satisfaction of a bankrupt’s debts or for a scheme of arrangement of affairs. By s.74 the Court was empowered to approve or refuse to approve the composition or scheme of arrangement and by s.74(5) where the Court approves the composition or scheme of arrangement under this section, it may make an order annulling the bankruptcy. Then s.74(6) made provisions preserving the effect of transactions before the annulment.

21. The Bankruptcy Amendment Act 1991 provided for a generally similar scheme except that under s.74(5) in its amended state, and under s. 153A annulment takes effect without a court order. The composition or arrangement with creditors, when approved by Special Resolution, itself brings about an annulment more simply than the previous ss.73 and 74. Satisfaction of the bankrupt’s debts itself brings about an annulment under s.153A, making unnecessary an order of the Court for which s.154(1)(b) had earlier provided. Now some annulments are effected by an order of the Court but some are not. There is no reason to conclude that these legislative changes were intended to introduce some new concept of annulment or to make a substantial change in the effects of annulment. The Bankruptcy Amendment Act 2004 (Cth) made further changes, principally relating to Part X arrangements, and these changes do not affect the issues in this appeal.

22. Oates v Federal Commissioner of Taxation related to an annulment of a bankruptcy which had come into existence with a Sequestration Order; the annulment was effected by an order of the Court under s.154(1) and (2) of the Bankruptcy Act in its earlier form, which contained provisions corresponding generally with s.153B; but also provisions dealing with annulment by court order in the case now dealt with by s.153A where the debts have been paid in full. Justice Hill extensively considered the retrospective effect of annulment in bankruptcy law, but did not do so in the context of s.74(5) or any corresponding provision.

23. Justice Hill reviewed case law of the 19th Century (294-297) which contained broad statements about the effect of annulments, or of corresponding earlier procedure, an example being, in Bailey v Johnson (1872) LR7Exch 263 at 265:

    The effect of s.81 is, subject to any bona fide disposition lawfully made by the trustee prior to the annulling of the bankruptcy, and subject to any condition which the Court annulling the bankruptcy may by its order impose, to remit the party whose bankruptcy is set aside to his original situation.  Here the Court of Bankruptcy has imposed no condition; the general provision of the section has therefore its full effect, and that effect is to remit the bankrupt, at the moment the decree annulling his bankruptcy is pronounced, to his original powers and rights in respect of his property.  We must therefore look at the money as though it were money paid in his name instead of in the name of Bullard, for having become his by virtue of the annulling of his bankruptcy, it is to be considered as his at the moment when it was paid in; as his, therefore, at the time of the bankruptcy of Harvey and Hudson.  I am therefore of opinion that the Court of Exchequer was right in holding that it might be made a matter of set-off.

24. As bona fide dispositions were preserved, both by 19th Century statutes and it would seem by judicial decisions, the person whose bankruptcy was annulled was not entirely remitted to his original situation.  Justice Hill also referred to 19th Century case law, which is elaborate and ultimately inconclusive, on the effect of annulment of bankruptcy on settlements and testamentary dispositions which provide for forfeiture on bankruptcy.  This law is exemplified by Metcalfe v Metcalfe [1891] 3 Ch 1 which affirmed Kekewich J. at (1890) 43 Ch D 643. It does not appear to me that the implications of legislated annulment were truly addressed in that case: at 43 Ch D 643 at 642-643 Kekewich J. addressed only the revesting section, and the Court of Appeal did not recur to the legislation. A later instance of the workings of this law is In re Forder, Forder v Forder [1927] 2 Ch 291: Clauson J. at 298 explained attributing effect to an annulled bankruptcy in terms of the true intention of the settlor being to prevent the property intended for the object of his bounty passing over to a stranger. As his Lordship said, there was then a long line of authority as to what would be an annulment “in time” before any part of the property had been acquired under the forfeiture clause. These decisions appear to me to have been part of the large and unsatisfactory chapter of the law which disappeared with Perrin v Morgan [1943] AC 399, in which construction of wills and settlements was treated as a subject for precedential law rather than for disposition on the construction of the document under adjudication. This body of case law suffers from the shortcomings which led to the House of Lords to discard the whole approach which they exemplified. No assistance can be gained from cases on construction of other documents.

1. Justice Hill concluded, at 297 "... it seems not incorrect to say that the effect of the annulment will be the setting aside of the bankruptcy order” but enumerated several significant exceptions and qualifications to this statement. His Honour then proceeded to consider the meaning and effect of s.80(4) of the Income Tax Assessment Act 1936 (Cth) which related to allowable deduction of losses incurred prior to the day on which the taxpayer became a bankrupt. Justice Hill considered rescission of a Sequestration Order, but rescission is no longer significant because of legislative changes. Justice Hill referred (301-302) to Re Oates; Ex parte Deputy Commissioner of Taxation (NSW) (1987) 17 FCR 402 at 405 (Sheppard J.), where Sheppard J. observed “… at least in legal theory [the bankrupt] is treated as if he were never a bankrupt.” His Honour also considered the practice of the Federal Court with respect to the form of its orders.

2. From Hill J.'s review it is plain that statements in judgments which attribute sweeping retrospective effect to annulment of bankruptcy must be approached with care when the effectiveness of intervening transactions is under consideration.

3. Theissbacher v MacGregor Garrick & Co. (1993) 2 Qd R 223 related to the effect of annulment by order of the Court under s.154(1) of the Bankruptcy Act as then in force on a stay under s.60 of the Bankruptcy Act of an action commenced by the bankrupt before he became bankrupt, until the trustee made an election to prosecute or discontinue the action. The annulment did not take place under s.74(5) or any corresponding provision. It was held by majority (Pincus JA and White J) that annulment of the bankruptcy retrospectively deprived of effect failure by the trustee to make an election to prosecute or discontinue the action, and so enabled the former bankrupt to pursue the action. The majority said at 229 “The former bankrupt is, at least in general, treated as never having been made bankrupt; that is the effect of annulment." On a whole view of their Honours’ reasons there are significant qualifications. Fitzgerald P. dissented in the result, but spoke to similar effect; see p226. The judgment of the majority reviewed case law in which the effect of annulment has been treated as retrospective, including the statements in Cameron v Cole (1944) 68 CLR 571 at 583 (Latham CJ):

   When an order for sequestration is annulled the debtor, in respect of his property, is restored to the status quo ante, subject to any order which the Court may make under that sub-section …he is remitted to his original situation

   and Marek v Tregenza (1963) 109 CLR 1 (Kitto and Menzies JJ.) at 4, 5:

   The power of the Court to annul a sequestration order where the debts are paid in full is undoubtedly discretionary: Re Keet (1905) 2 KB 666, at p 677; but the discretion is judicial, and the intention appearing from the section is that the fulfilment of the condition is sufficient reason for restoring the bankrupt to his former condition (so far as that can be done without invalidating acts done by the Court or by bankruptcy officials in the meantime: see subs (2)) unless in the circumstances of the case, and speaking generally that means in the conduct of the bankrupt, there is to be seen a reason to the contrary, being a reason relevant to the purposes of the Act. In order to deal with the appeal, therefore, it is necessary to consider the circumstances in which the appellant's [application] for annulment came before the Court.

4. The provisions of s.74(5) were enacted by the Bankruptcy Amendment Act 1991. Re Hudson; Ex parte ANZ Banking Group Ltd v Bird (1994) 50 FCR 281 appears to be the first reported occasion on which the Federal Court addressed the consequences of an annulment under s.74(5) on intervening events and transaction. In the course of his consideration Northrop J. said (at 289-90)

   The effect of an annulment of bankruptcy is to put the bankrupt back in the position he would have been in as if the bankruptcy had never occurred.  In Re Lawson (1939) 11 ABC 137 Clyne J, at 138, said that the effect of an annulment is, subject to the matters to be mentioned later in these reasons, "to remit the party whose bankruptcy is set aside to his original situation". An annulment is to be contrasted with a discharge of bankruptcy which confirms the existence of the bankruptcy prior to discharge. The legal consequence of an annulment is discussed at length in Theissbacher v MacGregor Garrick & Co [1993] 2 Qd R 223 by Pincus JA and White J at 228-230. At 226 Fitzgerald P referred to the effect of an annulment order involving "the retrospective annihilation of the sequestration order". In the later case of Coyle v Cassimatis (unreported, Supreme Court, Qld, Court of Appeal, 1 November 1993), Fitzgerald P in speaking of annulment under s 74(5) said:

   “ ... although only annulled 'on' the day of the creditors' special resolution, the annulment was retrospectively effective to annihilate the (bankrupts') bankruptcy and its consequences except as otherwise provided by the Act, notably subs 74(6). Prima facie, therefore, the (bankrupts) were, in law, never bankrupt ..."

5. It does appear, from Fitzgerald P’s observations in Theissbacher v MacGregor Garrick & Co., that the reference in Coyle v Cassimatis (unreported, Supreme Court, Qld, Court of Appeal, 1 November 1993) to the annulment being retrospectively effective to annihilate the bankruptcy and its consequences was not intended to be a complete exposition.  The judgment of the Court of Appeal of Queensland (Fitzgerald P, Thomas and Mackenzie JJ.) containing the passage cited by Hill J. commences:

   It would be consistent with the decision of this Court in Thiessbacher v MacGregor Garrick & Co …. to conclude that, although only annulled “on” the day of the creditors’ special resolution, the annulment was retrospectively effective to annihilate the appellants’ bankruptcy and its consequences except as otherwise provided by the Act, notably subsection 74(6). Prima facie therefore, the appellants were, in law, never bankrupt, and accordingly their cause of action against the respondent remained, in law, vested in them and did not at any time vest in [their trustee].

6. Northrop J. held in Re Hudson that the Court had jurisdiction to hear and determine an application under s.109(10), which relates to an advantage to indemnifying creditors, which was pending when the bankruptcy was annulled; however his Honour in the event dismissed the application. It appears to me that the views in the passage I have set out were not determinative of the proceedings, but the passage does show Northrop J.’s view that an annulment under s.74(5) operates generally in the same way as an annulment by an order of the Court under s.153B or earlier provision, and is not a new and different concept of an annulment which affects rights only on and after the date of the Special Resolution.

7. In re Coyle (1993) 42 FCR 72 at 77, dealing with annulment under s.153A(1), Drummond J. held:

   In my view, the effect of annulment under s 153A and s 153B will generally be 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 FCT at FCR 297. It follows that the solicitor's objection to the debtors’ action against him that it is improperly constituted will fail, if annulment is granted.

8. In Worrell v Westpac Banking Corporation (1994) 51 FCR 304 Drummond J. held that annulment of bankruptcy under s.74(5) operated retrospectively as from the date of the making of the Sequestration Order; this holding was the ground of his Honour's decision to substitute the former bankrupts as applicants in proceedings earlier commenced by their trustee, as if the applicants had themselves validly commenced the proceedings at that time when their former trustee had commenced them. Substituting them as applicants gave then a significant procedural advantage which they would not have gained if they had merely been added as additional applicants. Drummond J. dealt comprehensively and, I would respectfully say, convincingly with the effect of annulment under s.74(5) and its retrospectivity.

1. In Re Wong; ex parte Wong v Donnelly & Ors (1995) 63 FCR 426 at 438-439 Sackville J. cited part of this passage and applied the same view to an annulment under s.153A.

2. In my opinion annulment under s.74(5) does everything which, in the earlier form of s.74(5) or s.154(1), would have been done by an order of the Court annulling the bankruptcy. The consequence brought about by the operation of s.74(5) and s.153A is annulment. It is not discharge from bankruptcy, or any other process bringing the bankruptcy to an end because the claims of creditors have been fully satisfied by payment or by their accepting a composition and satisfaction; the concept of annulment is used, and that is a concept which already was in use in bankruptcy law, and involved retrospective operation and established exceptions to retrospective operation. The concept of annulment, which theretofore applied to a process which was used when a Sequestration Order ought not to have been made, was taken up and applied to other situations in which satisfaction of debts had taken place. The consequences of annulment including its retrospective operation come with the adoption of the concept. Retrospective operation of annulment of a bankruptcy is a well established phenomenon, and apparent anomalies which result have to be accepted with full acceptance of the legal effect of an annulment. Annulment provisions in the Bankruptcy Act instance the truism expressed by Deane J. in University of Wollongong v Metwally (1984) 158 CLR 447 at 478:

   A Parliament may legislate that, for the purposes of the law which it controls, past facts or past laws are to be deemed and treated as having been different to what they were.

   Deane J. went on to deal with the interaction between such a law and Constitutional provisions, but there is no such interaction in this case.

3. The Claimant's argument did not challenge the law as it appears from Worrell v Westpac.  The argument relates to the true meaning and effect of cl.16(b) of the Articles of Association.  It was contended that cl.16(b) provides mandatorily that a member shall cease to be a member if he becomes bankrupt, and that as the Opponent became bankrupt he thereby ceased to be a member, and that the subsequent annulment and the effects of the annulment are irrelevant.  It was contended that cl.16(b) is a self-executing provision; if the event refers to happens the consequence stated occurs, whether or not the Claimant takes any action to bring the consequence is about, or indeed whether or not the Claimant is aware of the event.  Justice Campbell decided, in my opinion correctly, that cl.16(b) is self executing; Judgment 33.

4. When discussing (at Judgment 73) the decision in Oates v Federal Commissioner of Taxation, Campbell J. said "One of the recognised sources of a limit on the retrospectivity of annulment is when giving effect to another statute requires that the annulment not be in all respects retrospective.  A private contract, like the contract contained in the Articles of Association of the defendant, does not have the same capacity to limit the operation of the retrospectivity of an annulment."  It was submitted (written submissions 11) "... there is considerable authority to the contrary that, where a private instrument provides for something to happen on a person becoming bankrupt, the effect of the subsequent annulment of that [person’s] bankruptcy depends on the true construction of the instrument in question."  

5. In my opinion it is clearly possible for a private instrument to provide, effectually, for some consequence to flow from a person’s becoming bankrupt even if the bankruptcy should later be annulled, and the passage cited from Campbell J.'s paragraph 73 is not to the contrary and does not deal with this.  In concept a statute might deprive private instruments of such effect by some very ample provision stating the effects of annulment, but the Bankruptcy Act does not so provide, and it is as much open to make an effective contractual stipulation that a person ceases to be a member of a Club if the person becomes bankrupt whether or not the bankruptcy is later annulled as it is to stipulate for membership ceasing on any other event.  However the choice of becoming bankrupt as the event on which some legal consequence turns brings with it the possibility of there being an annulment of the bankruptcy, and unless it is made clear, expressly or by necessary implication, that the consequence follows even if or irrespective of there later being an annulment, the general effect of annulment extends to its effects on the person becoming bankrupt in the contractual provision.  This would not be true of many other events which could conceivably have been adopted, which are not subject to statute law providing for their annulment: examples are making defaults in payment of debts, becoming insolvent and entering into a Pt.X composition (which cl.16(b) mentions).

6. Section 43(2), dealing with the consequences of making a Sequestration Order, states the consequences – “the debtor becomes a bankrupt” in language which cl.16(b) comes close to reproducing – “If he becomes bankrupt”. In my opinion the express language of cl.16(b) does not support a construction in which the consequence stated is irrespective of the annulment of the bankruptcy. An implication to that effect is supported by the consequence stated – “a member shall cease to be a member" and the concrete nature of this consequence; a person is either a member or he is not, and if he ceased to be a member, it is necessary to ask what was the mechanism by which he became a member again with the annulment: a decision, by the Club, by a court or by anyone else, made before the Special Resolution produced an annulment, that he has ceased to be a member would be plainly correct. The anomaly is that the question whether the member ceased to be a member when the Sequestration Order was made and he became a bankrupt is answered in different ways, opposite ways, if the question is asked and answered before the annulling event or after the annulling event. In my opinion this is not a reason for implying into cl.16(b) some provision dealing with or modifying the effects of annulment.

7. The appearance of anomaly is somewhat blunted by the fact that, as found by Campbell J., the claimant became aware of the Sequestration Order in or shortly before April 2001, after the annulment had taken place, and began to treat the opponent as no longer a member from and after 16 August 2001.

8. Counsel referred to the provisions of Article 3 which relates to categories of membership and of Article 6 which relates to nomination for membership.  Article 6(a) relates to Ordinary Membership, states the qualification as "Each candidate for Ordinary Membership … shall be a gentleman …” and requires the proposer and seconder to know the candidate socially.  (There are also Associate and Special memberships).  Membership brings with it continuing social association, and the effect of the cl.16(b) is among other things to end the membership of a person who becomes bankrupt, whereas being or having been bankrupt is not, according to the terms of the Articles of Association, relevant to the qualification for becoming a member.  Senior counsel pointed out that the effect is that the person who ceases to be a member under cl.16(b) can become a member again without his bankruptcy preventing this; as counsel put it, the question whether the person shall be a member again and whether his association with members is to continue is again open for consideration.  I do not think that these illustrations of the workings of the Articles relating to membership are of any assistance in discerning the meaning of cl.16(b).

1. The nature of Articles of Association as a corporate constitution restricts the availability of facts and circumstances known to the persons who brought the Articles into effect as aids to its construction.  A corporate constitution is to be relied on by persons who become members in later times and by persons who are never members; this enhances the claims of literal interpretation.

2. The plain position is that cl.16(b) does not deal with annulment at all, and an annulment, if it happens, has the effect which the law gives to it, even though it must be acknowledged that it produces the anomaly that after the Special Resolution had been passed, the question whether the person ceased to be a member on the making of a Sequestration Order must be answered in a different way. The answer which the law gives to what happened in the past is changed by the annulment. That is simply a full acceptance of the process of annulment; the qualifications which exist are those for which the Bankruptcy Act provides, particularly in s.74(6); and there is no qualification relating to the operation of cl.16(b).

3. If leave to appeal is to be granted, the order of the Court of Appeal should, in my opinion, be:

   Appeal dismissed with costs.

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LAST UPDATED:     07/06/2006