Capsalis v Ozdemir [2005] FMCA 1163

The proceedings were instituted by the judgment creditor (referred to as the respondent herein) with respect to a motor vehicle accident which caused damage to the respondent's motor vehicle. The applicant judgment debtor (referred to as the applicant herein) did not defend the proceedings. The car was driven by a second named defendant Kazim Er, who named the debtor as his employer. The applicant denies any association with Mr Er. He did not defend the matter in Court and a default judgment was attained.

The Trustee was appointed in May 2005 and on 28 June 2005 Registrar Mussett made a sequestration order.

If, on the re-hearing of a petition in which a Registrar has made a sequestration order, the sequestration order is set aside, without a further order annulling the bankruptcy, the Trustee has no means of recovering his costs and expenses (see Ivanhoe Grammar School v Raschilla [2003] FMCA 30). If, on the other hand, an order is made annulling the bankruptcy under section 153B of the Bankruptcy Act, section 154 of the Bankruptcy Act permits the Trustee to apply the property of the bankrupt in payment of the costs and expenses of the administration of the bankruptcy including the remuneration and expenses of the Trustee. The question is then raised as to when should the Court set aside the sequestration order and when should it annul the bankruptcy.

Section 103(1) of the Federal Magistrates Court Act 1999 (Cth) provides:

103 Delegation of powers to Registrars

(1) The Rules of Court may delegate to the Registrars any of the powers of the Federal Magistrates Court, including (but not limited to) all or any of the powers mentioned in subsection 102(2).

Rule 20.00A(1)(c) of the Federal Magistrates Court Rules 2001 (Cth) ("the FMC Rules") states:

20.00A Delegation of powers to Registrars

(1) For subsection 103 (1) of the Act, the following powers are

delegated to each Registrar:

...

(c) a power of the Court under a provision of the Bankruptcy

Act mentioned in Schedule 4.

The review conducted under rule 20.01(1)(a) and (2)(a) of the FMCA Rules must be made as follows:

20.01 Time for application for review

(1) For subsection 104 (2) of the Act, application for review of the exercise of a power by a Registrar must be made within:

(a) for the exercise of a power of the Court under a provision

of the Bankruptcy Act mentioned in Schedule 4 -- 21 days

...

(2) A time prescribed under subrule (1) may be extended in a

proceeding:

(a) by the Court or a Registrar on any terms as the Court or

Registrar thinks fit; or

20.03 Procedure for review

The review of an exercise of power by a Registrar:

(a) must proceed by way of a hearing de novo

Justice Weinberg's decision in Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 ("Kyriackou") is of considerable assistance in this matter. His Honour said as follows:

23 The Official Trustee submitted that, in the light of these authorities, the Court should annul a bankruptcy rather than simply set it aside in circumstances where a Trustee has carried out work in administering the estate. That was so, even if the ramifications of such an order might be considered unfair to the debtor.

33 Although the first respondent disclaimed any real interest in whether the appropriate disposition of the appeal involved setting aside the sequestration order, or whether an annulment was appropriate, it did note that in Symons_, French J at [11] expressed "serious reservations" about the Court's power to entertain an application by a Trustee for an order annulling a bankruptcy as an incident of setting aside a sequestration order. The first respondent submitted that in a case where there had been substantial administration of a bankruptcy it might be appropriate to make an annulment order instead of, or possibly in addition to, setting aside a sequestration order. However, this would not ordinarily be appropriate where a sequestration order made by a Registrar pursuant to delegated power was reviewed by the Court within the short time contemplated by s 35A(5) of the Federal Court of Australia Act or s 104(2) of the Federal Magistrates Act. In that connection, it was said to be relevant that an application to review a sequestration order had to be brought within twenty-one days, whereas an application to annul a bankruptcy could be brought at any time prior to discharge._

38 The final and most difficult issue to be determined is whether, as the appellant contends, the sequestration order should simply be set aside, or whether, as the Official Trustee contends, the bankruptcy should be annulled.

39 In the normal course, it would be appropriate simply to allow the appeal, set aside the sequestration order, and leave the Official Trustee to pursue whatever remedies he might have under the Act, or by virtue of the general law, in order to recoup expenses incurred. It is highly unlikely that the Court has power to order the first respondent to meet these costs, given that they do not arise out of the litigation itself.

40 It would be quite wrong, in my view, to burden Mr Kyriackou, who is the successful appellant in this proceeding, with the costs of administering a bankrupt estate that should never have been made the subject of a sequestration order. Regrettably, that leaves the Official Trustee with no obvious and immediate recourse against either the appellant, or the first respondent. It also leaves him with what might be considered to be a legitimate sense of grievance. He may be out of pocket for doing no more than what he was required by statute to do.

41 It might be thought that the Act is deficient in failing to provide for the summary recovery by a Trustee of the costs of administering an estate, and his or her reasonable remuneration, in circumstances where a sequestration order has had to be set aside. Perhaps the party responsible for those costs having been unnecessarily incurred, in this case the first respondent, ought to be summarily liable for them. There may be some cases, in which it will be appropriate to annul a bankruptcy under s 153B, thereby triggering the operation of s 154, rather than setting aside a sequestration order. Certainly, Emmett J took that approach in Austral. French J, in Symons_, was prepared to contemplate a similar course, though not without reservations. In my opinion, this is not such a case._

Counsel for the Trustee argued that the decision in Kyriackou ought to be distinguished on two grounds. Firstly, she submitted in the present case that there is no dispute as to the validity of the bankruptcy notice as there was in that case. I accept the applicant's submission that that is not a meaningful distinction. In this case, the petition should not have issued because the applicant was solvent. He has assets which exceed his debts by something of the order of $95,000; he has an income of $200 per fortnight from his work as a builder together with $235 per fortnight Newstart allowance and $800 per month from property rental. A creditor who issues a bankruptcy petition runs the gauntlet and takes his chances because a creditor's petition will be dismissed with costs ordinarily if the debtor is solvent. Justice Sundberg in Sarina v Council of the Shire of Wollondilly [1980] FCA 138; (1980) 48 FLR 372 said: "Bankruptcy proceedings are not for debtors who won't pay debts, they are for debtors who can't pay debts".

Further, there is not in truth or reality a debt owing. The applicant was not the driver of the vehicle that caused the damage nor was he the employer of the driver as was apparently alleged. He did not defend the matter when it came on for hearing as he understood the driver was attending to the resolution of the matter. The judgment debt, together with the interest, was paid by the third party driver on 8 August 2005.

The sequestration order was made on 28 June 2005 and it was argued that the applicant bankrupt was provided with documents by the Trustee and notice of the sequestration order on 15 July 2005. The application to set aside the bankruptcy was made on 29 July 2005. Counsel for the Trustee submitted that the timeframe in some way distinguishes the case from Kyriackou. I do not accept that submission. The affidavit of Mr Warren White himself in paragraph 6 states:

I delayed the commencement of the tasks I usually undertake and the administration of the bankruptcy until that matter was rectified. On 14 July 2005 I caused a package to be forwarded to the Bankrupt containing duplicate Statements of Affairs and a statement as to his rights and obligations.

I am informed by Ms Roxanne Ragazzon of my staff and believe to be true that on 15 July 2005 she was contacted by the Bankrupt's wife, Mrs Senem Ozdemir. Mrs Ozdemir confirmed that the bankrupt had received the package sent by me, that the bankrupt denied the liability to the petitioning creditor and that she and the Bankrupt wished to travel to Turkey the next day for a period of three to four months. Mrs Ozdemir requested advice as to how the bankruptcy administration could be resolved. I am informed by Ms Ragazzon and verily believe that she advised Mrs Ozdemir as to the various options available to the Bankrupt with a view to resolving matters. Now produced and shown to me and marked "WBW 1" is a true copy of the file note of Ms Ragazzon of 15 July 2005 which I verily believe to be a true and correct record of the discussion that took place at that time.

The document "WBW 1" makes it clear that the bankrupt's wife advised the Trustee that the bankrupt didn't speak or understand English very well, that he wasn't involved in the car accident and he wanted the bankruptcy process reversed and to be made to go away. The current application was then issued on 29 July 2005, 29 days after the sequestration order was made and it will therefore be necessary to extend the time for the filing of the application pursuant to rule 20.01(2)(a) of the FMC Rules. It is hard to imagine the applicant could have acted more expeditiously. The meeting of the 15 July 2005 should of itself have alerted the Trustee to the fact that the bankrupt intended to challenge the validity of the sequestration order. In all the circumstances, it is appropriate to extend the time accordingly. It seems to me that the facts here are very similar to those considered by His Honour in Kryiackou.

His Honour said in paragraph 42:

42 It seems to me that a Trustee who administers a bankrupt estate, in the knowledge that the bankrupt is challenging the validity of the sequestration order, must exercise caution when incurring expenses whilst the status of the bankruptcy remains uncertain. I can well understand why, in Austral, given the facts of that case, involving as it did a resolution of a dispute between a debtor and a creditor, Emmett J concluded that it was appropriate to order the annulment of the bankruptcy, rather than simply setting aside the sequestration order. There was something to be said for making the putative bankrupt's estate meet the costs needlessly thrown away, particularly given the fact that there had been a short administration. The argument for fixing the estate with the costs and expenses of the administration seems to me to be less cogent when the putative bankrupt should never have been the subject of a sequestration order in the first place. That is particularly so when the sequestration order is based upon a bankruptcy notice that has always been attacked as invalid.

His Honour seemed to accept the submissions contained in paragragh 33:

...that in a case where there had been substantial administration of a bankruptcy it might be appropriate to make an annulment order instead of, or possibly in addition to, setting aside a sequestration order. However, this would not ordinarily be appropriate where a sequestration order made by a Registrar pursuant to delegated power was reviewed by the Court within the short time contemplated by s 35A(5) of the Federal Court of Australia Act or s 104(2) of the Federal Magistrates Act.

It was further argued by the Counsel for the Trustee that the Trustee had statutory requirements to carry out in accordance with certain regulations. Some of these regulations have come into effect since Kyriackou was decided. In paragraph 28 of Kyriackou, His Honour stated:

The Official Trustee submitted that if the appellant's contentions were accepted, there would be serious repercussions with regard to the important task of administering bankrupt estates. Whatever alternative the Official Trustee chose, he could not win. If he acted in accordance with his statutory obligations, and proceeded to administer the estate, he might be unable to recoup his expenses if the sequestration order were later set aside. Conversely, if he refused to administer the estate because he thought the sequestration ought not to have been made, or feared the outcome of a challenge to that order, he might find himself liable in damages for breach of duty. In the case of a public official who had performed his or her statutory duties in a diligent manner, that result would be intolerable. In all the circumstances, the Official Trustee submitted that the first respondent should pay his costs of and incidental to both the review proceeding and the appeal, and that the bankruptcy should be annulled thereby enabling him to recover any expenses incurred in administering the estate from the appellant without having to contemplate issuing fresh proceedings.

Nevertheless, His Honour held at paragraph 42 of Kyriackou:

a Trustee who administers a bankrupt estate, in the knowledge that the bankrupt is challenging the validity of the sequestration order, must exercise caution when incurring expenses whilst the status of the bankruptcy remains uncertain.

I agree with the submission of the applicant that the Trustee has certain obligations and must carry out those obligations. It was not argued that he was not bound to carry out his duties. It is, however, the case that if all that work is done within the short space of time within which the application for review can be brought it is not appropriate for the debtor to be saddled with the costs of the administration.

Accordingly, as in the Kyriackou decision, a balance must be struck between the rights of the applicant, who should never have been made bankrupt in the first place, and the Trustee who has simply done what the Bankruptcy Act requires him to do. In all of the cirumstances of this case, I am satisfied that it is appropriate that there be an order that the sequestration order be set aside and there should be no order for annulment of the bankruptcy.

I certify that the preceding seventeen (17) paragraphs are a true copy of the reasons for judgment of Connolly FM