Daevys v Official Trustee in Bankruptcy; In the Matter of Daevys[2011] FCA 398

The Review of Proofs of Debt 6 The provisions of the Bankruptcy Act 1966 (Cth) of immediate relevance to this proceeding are within a narrow compass. 7 For present purposes it is sufficient to note that s 55 provides for the presentation of a debtor's petition and that s 153 sets forth the effects of a discharge from bankruptcy. In very summary form, the effect of discharge is to "release" a bankrupt from his provable debts, but the administration of his estate continues unless there is an annulment of the bankruptcy. Although discharged, the property of the bankrupt remains vested in the trustee. Section 153(1) does not have the effect of revesting in the bankrupt the property which was under the sequestration order vested in the trustee: Pegler v Dale [1975] 1 NSWLR 265. In Gosden v Dixon (1992) 107 ALR 329 at 331 McLelland J explained the extent to which property vested in the trustee remained so vested after discharge from bankruptcy, and the right of a bankrupt to later acquire property after his discharge, as follows: The contention is that after a discharge it is not open to a trustee in bankruptcy to become registered by transmission and thus become the owner at law of property of which he previously was the owner in equity. I have not been referred to any decision on that question but it seems to me that the answer is clear on general principles relating to the law of bankruptcy. In general terms, where a person becomes a bankrupt, property that belonged to him at the commencement of the bankruptcy or is acquired by him before his discharge vests in the relevant trustee and constitutes property which is available to be realised and divided among the bankrupt's creditors. That, I think, is the effect of ss 58(1) and 116 of the Bankruptcy Act. A discharge from the bankruptcy releases the bankrupt from his debts and enables him to retain property which he subsequently acquires free of any claim by the trustee. That, I think, is the effect of ss 153 and 116 of the Act. However, a discharge does not cause to be revested in the bankrupt any property which has vested in the trustee prior to the discharge from bankruptcy. In regard to such property the trustee is still bound to collect and realise it, and to distribute the proceeds among the creditors, notwithstanding the discharge. These propositions are clearly established by several decisions including Pegler v Dale (1975) 6 ALR 62, [1975] 1 NSWLR 265; Re Balhorn; Ex parte Balhorn and Official Trustee (1981) 39 ALR 223; Daemer v Industrial Commission (1990) 22 NSWLR 178, 99 ALR 789. In the words of Lockhart J in Re Balhorn (at 226): "The trustee of a bankrupt's estate is still bound to collect, realise and distribute such of the bankrupt's property as was vested before discharge in the trustee." 8 Section 82 identifies those "debts and liabilities" which are "provable" in a bankruptcy. It is a section which is to be construed "generously or liberally": P T Garuda Indonesia Pty Limited v Grellman (1994) 48 FCR 252 at 259 per Lockhart J. Section 84 thereafter provides for the manner in which a creditor may prove a debt in a bankruptcy. The section requires such a creditor to lodge a "proof of debt" which sets out particulars of the debt and requires that the proof be in accordance with the approved form. 9 Section 102 thereafter provides for the admission or rejection by the trustee of each proof of debt sought to be proved. That section provides in part as follows: Admission or rejection of proofs (1) The trustee shall examine each proof of debt and the grounds of the debt sought to be proved and, subject to the power of the Court to extend the time, shall, not later than 14 days after the expiration of the period specified in the notice of intention to declare a dividend as the period within which creditors may lodge their proofs of debt, either: (a) admit the proof of debt in whole; (b) admit it in part and reject it in part; (c) reject it in whole; or (d) require further evidence in support of it. (2) … (3) Where the trustee considers that a proof of debt has been wrongly admitted, he or she may: (a) revoke the decision to admit the proof of debt and reject it in whole; or (b) amend the decision to admit the proof of debt by increasing or reducing the amount of the admitted debt. (4) Where the trustee considers that a proof of debt has been wrongly rejected in whole, he or she may: (a) revoke the decision to reject the proof of debt; and (b) admit the proof of debt in whole or admit the proof of debt in part and reject it in part. (5) … (6) … These are the provisions referred to by Mr Daevys in his Application. 10 Subject to the process of "review" provided for in s 104, the decision to accept or reject a proof of debt is a decision entrusted to the discretion of the trustee. When exercising that discretion the trustee is not required to formulate a proof of debt for a creditor. Thus, in Re Estate of Cook (1958) 18 ABC 162 at 169 to 170 Clyne J concluded: … It was not the duty of the official receiver to formulate a proof of debt for Lang. The official receiver has a public position and has duties he is bound to perform. He has to examine every proof of debt, and the grounds of the debt and to admit it or reject it or require further evidence to support it. In re Van Laun; Ex parte Chatterton (1907), 2 K.B. 23, at p. 30, Cozens-Hardy M.R. said: "All that we now decide is that the trustee is entitled to say 'I will not admit your proof until you have given me reasonable means of satisfying myself whether the debt in respect of which you are proving is to any and what extent just and reasonable.'" 11 Many provisions within the Bankruptcy Act 1966 (Cth) provide for the "review" of decisions taken in the implementation of that Act by this Court. 12 Section 104 is one such provision. That section provides for a "review" of a decision of the trustee "in respect of a proof of debt". The section, in its entirety, provides as follows: Appeal against decision of trustee in respect of proof (1) A creditor, or the bankrupt, may apply to the Court for review of a decision of the trustee under subsection 102(1), (3) or (4) in respect of a proof of debt. (2) The Court may, upon the application, confirm, reverse or vary the decision of the trustee. (3) Subject to the power of the Court to extend the time, an application under this section to review a decision shall not be heard by the Court unless it was made within 21 days from the date on which the decision was made. Section 104(3), it will be noted, requires an application for review to be filed within 21 days - although that time can be extended by an order of the Court. See: Re Wong; Ex parte Wong v Donnelly (1995) 63 FCR 426 at 429 per Sackville J. Time begins to run from the date when the decision was "made" and not from when notice of the decision is "conveyed or served": Rocom International Pty Ltd v Prentice [2002] FCA 604 at [6] per Tamberlin J. The discretion to extend time was there described as "broad and flexible" and one to be exercised where it was "just in all the circumstances", supra at [4]. Considerations relevant to the exercise of the discretion were identified as including the following: whether the time limits are of a substantive or procedural nature; whether the case is arguable; the respective prejudice to the parties; the length of delay; responsibility and reasons for the delay; whether the delay was intentional or the result of a bona fide mistake; and whether the delay was caused by the litigant or legal advisers. Section 33(1)(c) also confers a discretion "to extend … any time limited by this Act …". 13 The nature of the "review" undertaken for the purposes of s 104 is a "review" not confined to the correctness or otherwise of the trustee's decision. It is a "re-hearing": P T Garuda Indonesia Pty Limited v Grellman (1994) 48 FCR 252 at 255 per Lockhart J. Thus, in Re D K Rogers; Ex parte CMV Parts Distributors Pty Ltd (1989) 20 FCR 561 at 562 to 563 von Doussa J cited with approval the following observations of Toohey J in Payne; Ex parte Levi (Unreported, Federal Court of Australia, Toohey J, 23 September 1986): [10] … Section 104 of the present Bankruptcy Act empowers the Court to "review" a trustee's decision and, in my view, that term carries with it the notion that the parties may place before the Court such material as they wish, provided of course that it is relevant and otherwise admissible. … The function of the Court is not to consider the correctness or otherwise of the trustee's decision in the light of the material before him but to determine, in the light of the material before it, whether the applicant has a debt that should be admitted to proof. Of course, inconsistencies in the material provided to the trustee and that offered to the Court may properly be taken into account. See also: BDT Holdings Pty Ltd v Piscopo [2009] FCA 151 at [4] per Rares J. 14 There has been said to be an onus upon the party seeking "review" of a decision taken by the trustee. In circumstances where a creditor was seeking review of a decision to reject a proof of debt, in Re Masters; Ex parte Gerovich (Unreported, Federal Court of Australia, Toohey J, 30 July 1985) Toohey J thus concluded: [5] … However, the trustee's decision to reject the proof of debt in respect of the $16,000 must be confirmed, simply because there is no basis upon which it can be reversed. The claim for $16,000 is expressed in such vague terms and is so lacking in precision that it is not possible to characterize it as a claim arising by reason of a contract, promise or breach of trust. Even if it were possible so to characterize the claim, there is no information which would enable the Court to conclude that the trustee erred in rejecting the proof of debt. Section 104 requires the Court, on application, to review a decision of a trustee but it is for the alleged creditor to satisfy the Court that a decision rejecting a proof of debt should be reversed. The applicants have failed entirely in this regard. In respect to a separate claim, His Honour further concluded: [9] How does the Court determine the application in the light of this contentious issue which is at the very heart of the applicants' claim? Counsel for the applicants submitted that the Court must make a decision, however unsatisfactory and inadequate the materials made before it may be. This is no doubt true but equally it is for an applicant to persuade the Court that a trustee's rejection of a proof of debt should be reversed. If an applicant fails to do this, the trustee's decision must be affirmed. As it is the applicant who claims to be a creditor of the debtor, this approach seems to me to be inevitable. On ordinary principles of evidence, one who seeks the intervention of the Court to alter an existing situation, in this case the rejection of a proof of debt, carries the burden of persuading the Court that it should intervene. [10] On the affidavits themselves, I must conclude that the applicants have failed to satisfy the onus that they bear. 15 In explaining the rationale for why some decisions are not taken by the Court itself and in explaining the nature of the "review" function conferred upon this Court, in Re Brindle; Ex parte FB & FA McMahon Pty Ltd (1992) 35 FCR 506 at 509 to 510, Hill J made the following observation when considering a "review" which was sought pursuant to the then s 14 of the Bankruptcy Act: I do not think that in the context of the Bankruptcy Act the power conferred upon the court to review a decision of a Registrar is properly to be equated to judicial review of administrative decision-making. Many, if not all, of the functions specifically conferred by the Act on the Registrar are, without question, administrative. … The legislative purpose of conferring powers or functions upon the Registrars of the court in bankruptcy matters was to relieve the judges from having to determine a variety of matters, administrative or perhaps judicial, in respect of many of which there would be little or no dispute. His Honour continued: The question for decision in the present case, in my opinion, may be posed to be whether the legislature in entrusting certain powers thought to be administrative upon the Registrar did so intending that in any review of the exercise of those powers the court would itself be able to exercise the discretions, or rather intended that the role of the court should be limited to a process of judicial review. In answering this question it is to be noted that the review under s 14(5) involves an application in the original jurisdiction of this court. In that respect it is not an appeal stricto sensu. For this reason it is unlikely that it involves no more than considering, in accordance with the principles in House v The King (1936) 55 CLR 499, whether the Registrar's exercise of discretion has miscarried. … But once it has been acknowledged that the appeal is not so limited, there seems no reason to deny that in the review the court could itself exercise discretions otherwise conferred upon the Registrar. If the court has such power, and I believe that it does, then the court is entitled to be informed by evidence of matters, not only not before the Registrar at the time the initial decision was given ..., but evidence which came into existence thereafter and before the time of hearing, so long as that evidence bears upon the subject matter in question.

The Basis for the Application 16 When presenting his Debtor's Petition, Mr Daveys also filed a Statement of Affairs setting forth his creditors. 17 The Proofs of Debt which were later admitted by the Trustee in respect to the bankruptcy of Mr Daevys were summarised as follows: PoD ID Creditor Name & Address Payee Status Admitted$ Paid$

75035 ENERGY AUSTRALIA Y ADMITTED $820.00 $0.00 Debtor Management GPO BOX 4009 SYDNEY NSW 2001 824 4171 22 77240 SPOONER & HALL Y ADMITTED $2,631.00 $0.00 PO BOX 38 MANLY NSW 1655 DJH 02/194 77337 HIGU CONSTRUCTIONS Y ADMITTED $41,702.00 $0.00 25 HALLAM AVE LANE COVE NSW 2066 RENT 2B/9 NELLS ROAD 90951 SYLVIA MILLER & ASSOCIATES Y ADMITTED $25,685.00 $0.00 131 ORRONG ROAD ELSTERNWICK VIC 3185 3760605875510030 90952 LAURA ORCHARDS PTY LTD Y ADMITTED $23,657.00 $0.00 3/8 James St MANLY NSW 2095 GUARANTOR 90953 AMERICAN EXPRESS AUSTRALIA LIMITED Y ADMITTED $25,685.00 $0.00 C/- INSOLVENCY MANAGEMENT SERVICES (IMS) GPO BOX 210 SYDNEY NSW 2001 CREDIT CARD 77284 B J HOWES PTY LTD Y WITHDRAWN 932 PACIFIC HIGHWAY LISAROW NSW 2250 INDUSTRIAL GAS Count: 7 Totals: $120,180.00 $0.00

With the exception of Higu Constructions, proofs of debt in accordance with the approved form were also annexed to the affidavit in respect to each of these creditors. Consistent with the terms of s 103, where the amount of the debts claimed "includes cents, the cents must be disregarded in admitting proof of the debt". During the course of the hearing on 7 April 2011 a proof of debt in respect to Higu Constructions was separately tendered. 18 Again with the exception of Higu Constructions, there is a substantial comparability between the amounts said to be owing in the Statement of Affairs and the table showing the proofs of debt which have been admitted. In respect to Higu Constructions, the Statement of Affairs sets forth the debt as being approximately $20,000 and not the $41,702 which was later admitted. 19 The dates upon which each debt was admitted, however, were not separately identified. But the Respondent wrote to Mr Daevys on 20 January 2011 confirming the proofs of debt which had been admitted. That letter continued: Further note that if you are dissatisfied with the Trustee's decision to admit the above-mentioned proof of debt claims, you may make an application in the Federal Court pursuant to s 104 of the Bankruptcy Act 1966 (copy enclosed) to review it, but, subject to the power of the Court to extend time, no application to review the Trustee's decision will be heard by the Court unless the application is made within twenty-one (21) days from the date of this letter. The Trustee indicated that he was content for an order to be made extending the time within which a review could be sought pursuant to s 104(3) so that time was to commence as from 20 January 2011. Given that the terms of s 104(3) require an application to be made within 21 days "from the date on which the decision was made", as opposed to the date upon which the Trustee notified Mr Daevys of the decision to admit the proofs of debt, it is necessary to extend the time within which the present application for review may be made and considered. 20 The affidavits filed by Mr Daevys in support of his Application nevertheless fail to set forth any basis upon which the decision of the Trustee to admit these debts could be open to question. Proofs of debt were admitted which substantially corresponded to Mr Daevys' own Statement of Affairs. And such debts were supported by the proofs of debt which had been lodged by each of the creditors whose debts had been admitted. To the extent that Mr Daevys now contends that one or other of the debts has been paid or otherwise resolved, and to the extent that an adjournment was sought to enable Mr Daevys an opportunity to adduce evidence as to any such payment, no such evidence has been filed. It should also be noted that on 1 March 2011 the Trustee wrote to Mr Daevys requesting him to provide "documentary evidence to substantiate your allegations". There was no response to that request. 21 There is no factual basis before the Court upon which any conclusion can be founded other than that each of the debts was properly admitted. Even in the absence of any onus upon Mr Daevys, there is no basis to "review" the decision of the Trustee so as to reach any different conclusion. 22 There is no basis in a further submission advanced by Mr Daevys that the letter dated 20 January 2011 in some way conveyed to him misleading advice as to how he should proceed.

Conclusions 23 Each of the proofs of debt was properly admitted. 24 The Application as filed on 10 February 2011 seeking a review of the decisions to admit the proofs of debt is dismissed.

ORDERS 25 The Orders of the Court are: 1. Pursuant to s 104(3) of the Bankruptcy Act 1966 (Cth) the time within which an application may be made is extended such that the 21 day period there prescribed is to commence on 20 January 2011. 2. The Application as filed on 10 February 2011 is dismissed. 3. The Respondent Trustee's costs be costs in the administration of the estate. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Flick.