Clyne v Deputy Commissioner of Taxation

Clyne v Deputy Commissioner of Taxation - [1984] HCA 44 - HCA 1983 case summary — Zoe

[5]

On 4 January 1983 the Deputy Commissioner of Taxation (the first respondent) presented in the Federal Court a petition for a sequestration order against the estate of Mr. Peter Leopold Clyne ("the debtor"). The petition alleged that the debtor was indebted to the Deputy Commissioner in the sum of $1,300,844.68, the balance due under a final judgment recovered in the Supreme Court of New South Wales on 11 March 1982, and that the debtor had committed an act of bankruptcy in that he failed on or before 24 December 1982 either to comply with the requirements of a bankruptcy notice served on him on 13 August 1982 or to satisfy the court that he had a counterclaim, set-off or cross demand equal to or exceeding the sum specified in par. (a) of the bankruptcy notice. It is not now disputed that the debtor was indebted as alleged, or that he committed the act of bankruptcy on which the petition was founded. However, the debtor took proceedings in the Federal Court to set aside the bankruptcy notice and the time for compliance with the notice was extended from time to time while those proceedings were pending. After those proceedings had proved unsuccessful, a further extension of time for compliance with the bankruptcy notice was refused, the act of bankruptcy was committed and the petition of the Deputy Commissioner of Taxation ("the creditor's petition") was presented. In the meantime the debtor had appealed to this Court against the decision of the Federal Court upholding the validity of the bankruptcy notice, and the hearing of the creditor's petition, which was originally fixed for 12 April 1983, was adjourned from time to time while the appeal was pending. The appeal was dismissed on 2 September 1983. On 6 September 1983 the debtor presented his own petition and it was accepted by the registrar. The debtor thereupon became a bankrupt by virtue of the presentation of the petition and by force of s. 55(3) of the Act. Orders had in the meantime been made in the Federal Court by Neaves J. under s. 50 of the Act directing the official trustee to take control of the property of the debtor and by a subsequent order it has been declared that notwithstanding the bankruptcy those orders continue to operate according to their tenor until further order. The creditor's petition, which at 6 September 1983 stood adjourned to 19 September 1983, came on for hearing on that date before Beaumont J. It appears that Mr. John William O'Brien (the third respondent), a registered trustee, by instrument filed at the time when the creditor's petition was filed, consented to act as trustee of the estate of the debtor in the event that he became a bankrupt, and that Mr. William Edward Andrew (the second respondent) by a similar instrument filed at the time of the filing of the debtor's petition also consented so to act. These instruments were filed for the purposes of s. 156A of the Act. On 7 October 1983 Beaumont J. made a sequestration order "to take effect on 6 September 1983 prior to the presentation by the debtor of his own petition pursuant to the provisions of s. 55 of the Act". He considered that for reasons of convenience the trustee of the estate of the debtor in his statutory bankruptcy should act also as trustee in the bankruptcy that resulted from the making of the sequestration order and he declared that Mr. Andrew "is the trustee of the estate of the debtor". The Deputy Commissioner appealed to the Full Court of the Federal Court from that part ofthe judgment of Beaumont J. which declared that Mr. Andrew is the trustee of the estate of the debtor. The debtor cross-appealed from the whole of the judgment. The Full Court of the Federal Court allowed the appeal and dismissed the cross-appeal. The order of Beaumont J. was varied in two respects. First, the learned judges who constituted the Full Court considered that Beaumont J., in ordering that the sequestration order take effect on 6 September prior to the presentation by the debtor of his own petition, overlooked s. 57A of the Act, which provides in effect that a person who becomes bankrupt by virtue of the presentation of a debtor's petition is deemed to become a bankrupt "at the first instant of the day on which the petition is accepted by the Registrar". They thought that the order of Beaumont J. would have achieved the effect which was intended if it had provided that the sequestration order should "take effect on the same day as but prior to the statutory bankruptcy" but to put the matter beyond doubt they ordered that the order of Beaumont J. should be varied by substituting the date "5 September 1983" for the date "6 September 1983". Secondly, their Honours concluded that by force of law each of the two trustees is a trustee of the estate of the bankrupt. They did not so declare, but deleted from the order of Beaumont J. the declaration that Mr. Andrew is the trustee of the estate of the debtor. The debtor now appeals from the whole of the judgment and orders of the Full Court of the Federal Court. The Deputy Commissioner of Taxation cross-appeals from so much of the judgment as held that Mr. Andrew and Mr. O'Brien are both trustees of the estate of the debtor and seeks a declaration that Mr. O'Brien is the sole trustee of that estate.

[7]

The Act does not expressly state whether a court may proceed to make a sequestration order on a creditor's petition when it appears on the hearing of the petition that the debtor has already become bankrupt by virtue of the presentation of his own petition. Of course, if an undischarged bankrupt has, after the date of the bankruptcy, contracted new debts, a second sequestration order may be made, and s. 59 of the Act will then become applicable. The Act, however, is silent as to what is to be done with a creditor's petition that is founded on a debt incurred before the date of the presentation by the debtor of his own petition. It seems to us for a number of reasons that it is not possible for the court in those circumstances to make a sequestration order while the bankruptcy which resulted from the acceptance of the debtor's petition continues to exist. Before the court can make a sequestration order, it must be satisfied that "the debt or debts on which the petitioning creditor relies is or are still owing": s. 52(1)(c). But since the debtor was already bankrupt when the petition came to be heard, the remedies against the person and property formerly available to the Deputy Commissioner had been taken away and there was substituted a right to prove against the estate which had become vested in Mr. Andrew as trustee: see In re Thomas; Ex parte Commissioners of Woods and Forests [1] . At that time the Deputy Commissioner "was not a mere creditor. [He] was a creditor whose claim was in proof. [His] claim was no longer a mere right of action for a debt. [He] could no longer have maintained an action as for a debt. The debt had been, at any rate provisionally, merged in an equitable execution ": see In re Higginson & Dean; Ex parte Attorney-General [2] ; Ex parte Trustee of the Property of Cork [3] ; and In re Cole; Ex parte Richards [4] . Amounts which were owed by a debtor at the date of the bankruptcy may, notwithstanding his bankruptcy, still be described as debts, and the Act refers to them as such: see, e.g., ss. 58(3), 84(1), 85(1), 86(1), 153(1), 154(1)(b). They are "debts" from which the bankrupt is not released until he is discharged from bankruptcy: s. 153. However, in our opinion, they are no longer debts "still owing" within the meaning of s. 52(1)(c). Although, as was rightly observed in the Federal Court, one dictionary meaning of "owing" is "that is yet to be paid", the word connotes a sense of obligation to make the payment. The effect of the bankruptcy however is that the debtor is no longer obliged to pay his creditors; indeed he is disabled from doing so. If he offered payment they could not safely accept it; their right is a right of proof against the estate.

[13]

It is unnecessary for present purposes to consider whether the two English decisions may be explained by differences between legislation in England and Australia or whether In re Payne can be justified because it concerned joint and separate estates. Those cases suggest no persuasive reason for holding that a person who is already bankrupt may be made bankrupt again on a petition founded on a debt provable in the existing bankruptcy. And there are other reasons which support the conclusion that a sequestration order cannot be made in circumstances such as the present, while the bankruptcy which resulted from the acceptance of the debtor's petition remains on foot. As a general rule, a sequestration order may not be made, and a debtor's petition may not be accepted, unless a registered trustee has, under s. 52(1A)(a) and s. 55(4A)(a), consented to act as the trustee of the estate. Section 156A(3)(a) provides that where, "at the time when a debtor becomes a bankrupt, a registered trustee has, under sub-section (1), consented to act as the trustee of the estate of the debtor and the consent has not been revoked, the registered trustee becomes, at that time, by force of this sub-section, the trustee of the estate of the bankrupt". We would agree with the conclusion of Fisher J. in In re Close; Ex parte Abbott [11] that where two petitions are presented, and an order is made on one but the other is dismissed, the trustee who had consented to act in relation to the petition upon which the sequestration order was made becomes the sole trustee of the estate of the bankrupt. However, that decision would not resolve the difficulty that would arise in the present case, when, if the debtor has become a bankrupt, both by the making of a sequestration order and by virtue of the debtor's petition, both trustees will be trustees of the estate - not jointly but separately. It is true that the creditors might, by special resolution, remove a trustee (s. 181) but that would of course depend upon agreement being reached by the requisite majority of creditors. The power of a court to remove a trustee is limited: see ss. 156A(4) and (5) and 179(1)(a). It is unlikely that the Parliament intended that it should be possible for two persons to be, separately, trustees for what might be, virtually or even entirely, one estate, for this could lead to chaos in administration, and this supports the conclusion that it is contrary to the policy of the Act to make a sequestration order on a petition founded on a debt that is already provable.

[17]

For these reasons, in our opinion, the Federal Court had no power to make the order that it did while the bankruptcy which resulted from the acceptance of the debtor's petition continued. It had, however, power to annul that bankruptcy, and the course open here was to annul the bankruptcy which arose by force of s. 55 and then to make a sequestration order. Power to annul a bankruptcy is given by s. 154(1) where the court is satisfied, 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". The words of this paragraph show that the court has power to annul a bankruptcy resulting from the acceptance of a debtor's petition even though the petition was properly accepted by the registrar. If the presentation of a petition amounted to an abuse of the process provided by s. 55 of the Act, it can rightly be said that the petition ought not to have been presented and in those circumstances power exists to annul the bankruptcy resulting from its acceptance. It has been consistently held in England that the court has power to annul an adjudication and rescind a receiving order based on a debtor's own petition if the presentation of the petition was an abuse of the process of the court, and that this is so even though s. 6 of the Bankruptcy Act 1914 U.K., and the predecessors of that section, are mandatory in form and provide that the court "shall" make a receiving order on a debtor's petition which alleges that the debtor is unable to pay his debts: see In re Bond [15] ; Ex parte Painter; In re Painter [16] ; In re Betts; Ex parte Official Receiver [17] ; In re Hancock [18] ; In re Dunn [19] ; In re a Debtor [20] . (The English legislation gave power to annul an adjudication, but not a receiving order, and it was therefore necessary to rescind the latter.) The principle of those decisions applies equally, in our opinion, when there is an abuse of the process provided by s. 55, notwithstanding that it cannot be said that there has been an abuse of the process of the court because no judicial order is made when a registrar accepts the petition under s. 55. We agree with the conclusion stated in In re Mottee [21] that a bankruptcy resulting from the acceptance of a debtor's petition may be annulled if the presentation of the petition was an abuse of the procedure provided by s. 55.

[28]

In the present case, the presentation of the petition by the Deputy Commissioner ("the creditor") instituted a judicial proceeding in the Federal Court. The creditor was entitled, in that proceeding, to seek a sequestration order against the appellant ("the debtor") based on the act of bankruptcy which the debtor had admittedly committed. Under the relation back provisions of s. 115(1) of the Act, the debtor's bankruptcy under such a sequestration order would be deemed to have commenced at the time of the commission of the earliest act of bankruptcy committed by him within the period of six months immediately preceding the date on which the creditor's petition was presented, namely, 4 January 1983. It would seem that that "time" would be 24 December 1982 since it is common ground that the debtor committed an act of bankruptcy on that day and there is no evidence that he committed any prior act of bankruptcy within that period of six months. It follows that the creditor was seeking, in the judicial proceedings which had already been instituted at the time the debtor presented his petition, a sequestration order which would, pursuant to the provisions of the Act, relate back to 24 December 1982 with the consequence that it would, at least prima facie, avoid transactions by the debtor with his property subsequent to that date. On the other hand, the relation back provisions with respect to a bankruptcy by virtue of the presentation of a debtor's petition (s. 115(2)) provide that the bankruptcy shall be deemed to relate back to, and to have commenced at, the commission of the first act of bankruptcy committed within the period of six months immediately preceding the date on which the petition was presented. In practical terms, the debtor's bankruptcy pursuant to the sequestration order which the creditor was seeking would relate back to 24 December 1982 whereas the debtor's bankruptcy pursuant to his own petition would either relate from 6 September 1983 or, if it is subsequently ascertained that he had committed a prior act of bankruptcy within the six months preceding that date, to the date of that prior act of bankruptcy. That means that any transactions by the debtor during the period 24 December 1982 and 6 March 1983 would be within the relation back period of a sequestration order made on the creditor's petition but would not, on any approach, be within any relation back period of a bankruptcy on the debtor's petition. It is common ground that there were, in fact, at least two transactions by the debtor with his property during that period.

[29]

There is plainly much to be said for the view that it would not have been the legislative intent to override and possibly frustrate judicial proceedings instituted by a petitioning creditor by an administrative procedure which enabled a debtor to shorten the "relation back" period by becoming bankrupt on his own petition. There is obvious force in the view that the Act should be construed so as to preclude a debtor from so depriving the petitioning creditor and other creditors of the ordinary fruits of bankruptcy proceedings. The difficulty is, however, that it appears to me that the particular problem was simply not adverted to when the administrative procedures enabling a debtor automatically to become bankrupt upon acceptance of a debtor's petition by a registrar were introduced into the Act and that it is not possible to do more than speculate about the approach which would have been adopted by the Parliament if it had directed its attention to the problem. It is possible that the preferred approach would have been that a debtor should be precluded altogether from presenting a petition to the registrar pursuant to s. 55 of the Act if a bankruptcy petition has been presented to the court against him and is awaiting hearing. It may be that the Parliament would have taken the approach that the appropriate course, were a creditor's petition is pending against a debtor, was to provide that any debtor's petition must also be presented to the court and subsequently be dealt with by judicial proceedings which would, in an appropriate case, enable consolidation of the pending creditor's petition and the debtor's petition. It may be that the approach would have been adopted that special provision should be made introducing some limited exception to the general rule that a sequestration order should not be made on a creditor's petition founded on a debt which existed prior to and was provable in a subsisting bankruptcy either in any case where the first bankruptcy resulted from the acceptance of a debtor's own petition or only in those cases where the creditor's petition had been presented before the debtor became bankrupt on his own petition. It may be that some other approach might have been thought more suitable. Moreover, whatever approach might have been thought appropriate, the inclusion of special procedural provisions would have been desirable. In particular, if the view had been taken that a sequestration order should be available against a bankrupt on the petition of a creditor whose debt was due and payable at the time when the debtor had become bankrupt on a debtor's petition, it would have been plainly desirable that special legislative provision be made either to avoid the existence of two distinct bankrupt estates or to deal with the problems involved in the concurrent existence of two such estates.

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Judgment (31 paragraphs)

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