REASONS FOR JUDGMENT
SACKVILLE J:
42 I agree with the reasoning and conclusion of Hill & Marshall JJ on the cross-appeal.
43 I also agree with Hill & Marshall JJ that the learned primary Judge lacked power to make an order on the creditor's application extending the time for compliance with the bankruptcy notice until 28 May 2003. I shall stated briefly my reasons for reaching this conclusion.
44 In the present case the period for compliance with the bankruptcy notice issued on 28 March 2001 expired on 24 June 2002, the date of the decision of Raphael FM dismissing the debtor's application to set aside the bankruptcy notice. It appears that the period had been extended until that date by an order of the Magistrate's Court.
45 It may be that the period for compliance with the bankruptcy notice would have been extended until 24 June 2002 in any event by the operation of s 41(7) of the Act. This is because the debtor's application to set aside the bankruptcy notice was on the ground that the debtor had a counter-claim, set off or cross demand as referred to in s 40(1)(g) of the Act, thereby attracting the operation of s 41(7). Section 41(7) does not, however, extend the time for compliance of a bankruptcy notice pending an appeal by the debtor (or the creditor, for that matter). The effect of s 41(7) is exhausted when the trial court determines whether it is or is not satisfied that the bankruptcy notice should be set aside on the ground of a claimed counter-claim, set-off or cross-demand: Ebert v Union Trustee Co of Australia Ltd (1961) 105 CLR 327, at 333; Guss v Johnstone (2000) 171 ALR 598, at 609 [57].
46 It follows that the period for compliance with the bankruptcy notice was not automatically extended pending determination of the appeal from the Magistrate's decision. The appeal was in fact dismissed by Madgwick J on 28 May 2003. By then more than six months had elapsed since the act of bankruptcy, which occurred on 25 June 2002 (see s 40(1)(g) of the Act). Since the creditor had not presented a bankruptcy petition in the meantime, it was faced with a difficulty. Section 44(1)(c) of the Act provides that a creditor's petition is not to be presented against a debtor unless the act of bankruptcy on which the petition is founded was committed within 6 months before presentation of the petition. Hence the need for the creditor to apply to the primary Judge for an order extending time for compliance with the bankruptcy notice.
47 A reader of s 41 of the Act, uninstructed by authority, might form the view that the period of time for compliance with a bankruptcy notice cannot be extended once the debtor has committed an act of bankruptcy. It is now settled, however, that the power in s 41(6A) can be exercised after an act of bankruptcy, provided the conditions specified in the sub-section are satisfied: Streimer v Tamas (1981) 37 ALR 211 (Full Fed Ct); Guss v Johnstone, at 610 [58]. Therefore the fact that the debtor committed an act of bankruptcy on 25 June 2002 is not, of itself, an impediment to the creditor's application to seek an extension of time for compliance with the bankruptcy notice.
48 It is also settled that there is no statutory grant of power to extend the time for compliance except in accordance with the requirements of s 41(6A) of the Act: James v Abrahams (1981) 34 ALR 657, at 662 (Full Fed Ct); Guss v Johnstone, at 610 [62]. Thus the only possible source of authority for the order made by the primary Judge in the present case is s 41(6A).
49 The fact that the power in s 41(6A) of the Act can be exercised after an act of bankruptcy does not necessarily mean that the power can be exercised after the proceedings to set aside the bankruptcy notice have been determined. That issue did not arise in Streimer v Tamas. There the application to extend time was made before the proceedings had been concluded (although after the debtor had committed an act of bankruptcy).
50 The issue was, however, expressly addressed by Lockhart J in Re Sterling; Ex parte Esanda Ltd (1980) 30 ALR 77. His Honour observed (at 81) that the Act does not expressly confer power on the Court to set aside a bankruptcy notice. He held (at 83) that the power conferred on the Court by s 41(6A) of the Act to extend time for compliance with a bankruptcy notice where an application has been made to the Court to set aside the bankruptcy notice, impliedly carries with it the power to set aside the notice itself. Lockhart J then expressed the view (at 83) that the power to extend time for compliance "is in aid of the power to set aside the notice itself". His Honour pointed out (at 84) that once the Court has heard the application to set aside the notice, it may dismiss the application or set the notice aside. In either case "exercise of the power to extend time for compliance will then be spent".
51 Lockhart J's observations were not part of the ratio of Re Sterling, since the application to extend time in that case had been made by the debtor during the currency of proceedings to set aside the bankruptcy notice. Indeed, his Honour ultimately made an order extending the time for compliance with the notice (at 87). However, his Honour's observations about the power to extend time being in aid of an application to set aside the bankruptcy notice have frequently been cited with approval: see, for example, Re Lentini; Ex parte Lentini v CSR Limited (1991) 29 FCR 363, at 372, per Neaves J; McLean v Australia and New Zealand Banking Group Ltd (1993) 42 FCR 300, at 304-305, per Ryan J.
52 What might be described as the temporal issue arising under s 41(6A) of the Act squarely arose for decision in Re Udowenko; Ex parte Mitchell (1996) 69 FCR 299. There a bankruptcy notice was issued on 19 December 1995. An application by the debtors to set aside the bankruptcy notice was dismissed by a Deputy Registrar of the Court on 4 June 1996. No application to review that order was made. A creditor's petition was served on 15 August 1996. On 1 October 1996, the debtor sought an extension of time for compliance with the bankruptcy notice.
53 Lindgren J dismissed the application. His Honour reasoned as follows (at 304):
"In my view, it is clear on the proper construction of s 41(6A) that the condition of the existence of the power to extend time is not satisfied by the mere institution of a proceeding or making of an application to set aside, which has been dismissed or otherwise ceased to subsist as a current proceeding or application before the time for compliance with a bankruptcy notice has expired: cf McLean v ANZ Banking Group Ltd (1993) 42 FCR 300 (Ryan J). The reason is that the purpose of an extension of time under sub-s 41(6A) is limited to that of supporting a proceeding or application, that is to say, one which was instituted or filed before expiration of the time for compliance with the bankruptcy notice. Further, some support for this view of the provision is found in the use of the perfect form of the verb ('have been instituted' and 'has been filed') in s 41(6A)(a) and (b) which suggests a proceeding which has been instituted, or an application which has been made, before the expiration of the time for compliance with the bankruptcy notice, and which still subsists at the time when the occasion for exercise of the power to extend time arises.
In the present case, by the expiration of the time for compliance on 4 June 1996, the application to set aside the bankruptcy notice which had been filed before that expiration, had ceased to be on foot. Accordingly, there is no proceeding or application satisfying the description in s 41(6A) to which an extension of time ordered by me could be ancillary. I conclude therefore that I lack power to extend time."
54 In my view, despite the respondent's submission that Re Udowenko should not be followed, Lindgren J's reasoning is convincing. Section 41(6A), read in context, is not intended to authorise an extension of time to comply with a bankruptcy notice independently of an application to set aside the bankruptcy notice or an application to set aside a judgment in respect of which the bankruptcy notice was issued.
55 It should be noted that neither Re Sterling nor Re Udowenko was concerned with the exercise of the power in s 41(6A) of the Act in the course of an appeal from a decision to dismiss an application by the debtor to set aside a bankruptcy notice. This point was, however, adverted to by the High Court in Guss v Johnstone.
56 The primary Judge in Guss v Johnstone, Sundberg J, on an application to set aside a bankruptcy notice, made a declaration that the Court was not satisfied that the debtor had a counter-claim, set-off or cross-demand equal to or exceeding the amount of the debt. The debtor argued in the High Court that if the Full Federal Court or the High Court set aside the declaration, it would be of no effect ab initio. Thus, so it was argued, in these hypothetical circumstances the Federal Court would not have effectively determined whether it was satisfied of the matter referred to in s 41(7) (that is, whether the debtor had a counter-claim, set-off or cross-demand). Accordingly, under the terms of s 41(7), time for compliance with the bankruptcy notice would still be running.
57 The Court did not directly address this submission. Rather, their Honours said (at 610-611 [63]) that they were
"unable to accept that whenever, in a proceeding under s 40(1)(g) and s 41(7), a judge at first instance has determined that he or she is not satisfied of the matter referred to in s 41(7), and has declined to interfere with the process initiated by a creditor, no appellate reversal of that decision, whether by the Full Court or by this court, can alter the consequences of the decision. In a proper case it would have been within the power of the Full Court to set aside the declaration made by Sundberg J. The consequences for proceedings and events that had occurred in the meantime would vary with the circumstances, but they could include the same consequences as flowed from the order in Streimer v Tamas, where the statutory power to extend time for compliance with a bankruptcy notice, given by s 41(6A), was exercised after an act of bankruptcy had been committed."
58 This passage seems to assume that a failure by the debtor to comply with the bankruptcy notice held by Sundberg J to be valid would be an act of bankruptcy, notwithstanding the (hypothetical) setting aside of his Honour's declaration on appeal. The assumption is consistent with the decisions in Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378 (Fed Ct Bankruptcy/Gibbs J) and Re Hayes; Ex parte Thomas Borthwick & Sons (Australasia) Ltd (1970) 18 FLR 216 (S Ct NSW/Street J), which held that failure to comply with a bankruptcy notice requiring payment of a judgment debt is an act of bankruptcy notwithstanding that the judgment on which the bankruptcy notice is founded is later set aside.
59 In the passage I have quoted from Guss v Johnstone, the High Court appears to regard the power in s 41(6A) of the Act as available to an appellate court in order to undo the effects of what otherwise would be an act of bankruptcy on the part of the debtor (the successful appellant). It seems to follow that s 41(6A) is available to a debtor who seeks an extension of time to comply with a bankruptcy notice in order to render effective the debtor's successful appeal against an order by the trial Judge dismissing a challenge to a bankruptcy notice.
60 It is not necessary in the present case to consider the precise reach of s 41(6A) of the Act on an appeal against a dismissal of an application to set aside a bankruptcy notice. In this case, the creditor's motion was filed after the conclusion of the appellate process in this Court. On any view, at the time the motion was filed, there were no proceedings on foot to set aside the bankruptcy notice. Nor was it suggested to us that proceedings to set aside the judgment or order on which the bankruptcy notice was founded were on foot at that time. Accordingly, it cannot be said that the creditor's application for an extension of time was in aid of the power to set aside the bankruptcy notice or of proceedings to set aside the judgment on which the bankruptcy notice was based. In these circumstances, the appeal must be allowed and the order made by the primary Judge extending time for compliance with the notice set aside.
61 Three further points should be made.
62 First, the only decision directly contrary to Re Udowenko is Halstead v Westpac Banking Corporation (1991) 32 FCR 394. For the reasons I have given, and also the reasons given by Hill and Marshall JJ, that case should not be followed.
63 Secondly, it is not necessary to decide whether a creditor can make an application under s 41(6A) of the Act to extend time for compliance with a bankruptcy notice. Even if the answer to that question is in the affirmative, the primary Judge in this case lacked power to make an order extending the time for compliance with the bankruptcy notice. Nevertheless, I note that there is one situation in which it is perhaps arguable that an application by the creditor is in aid of an application to set aside a bankruptcy notice. This is where the debtor succeeds in a challenge to the bankruptcy notice at trial and the creditor successfully appeals. An order by the Court exercising appellate jurisdiction extending time under s 41(6A) of the Act, on the application of the creditor, might be regarded as necessary to give effect to the orders made by the Court on the appeal. However, it is not necessary in this case to explore this question any further.
64 Thirdly, counsel for the debtor in the present case argued that limiting s 41(6A) of the Act to an application in aid of proceedings to set aside the bankruptcy notice, or of the judgment forming the basis for the notice, would expose the creditor to unfairness. Counsel specifically identified the case to which I have already referred, namely where the debtor succeeds on a challenge to the bankruptcy notice and the creditor successfully appeals. If the appeal takes more than six months, so it was argued, the creditor, through no fault of his or her own, would be precluded from relying on the creditor's act of bankruptcy. The argument assumes that an act of bankruptcy would occur immediately after the trial Judge's decision to set aside the bankruptcy notice since the order on appeal would presumably effectively expunge the order made by the trial Judge.
65 One answer to this contention is that a creditor, alert to the operation of s 44(1)(c) of the Act, could apply to expedite the appeal. Another is that there would seem to be no obstacle to the creditor, if there is a risk of the appeal process taking longer than six months, to presenting a creditor's petition founded on the act of bankruptcy constituted by the debtor's non-compliance with the bankruptcy notice. Obviously, the creditor's petition could not result in a sequestration order unless the appeal by the creditor against the setting aside of the bankruptcy notice were successful. However, if the creditor's appeal reversed or set aside the order setting aside the bankruptcy notice (see Federal Court of Australia Act 1976 (Cth), s 28(1)(a), (b), (c)), the general principle is that the order below is annulled ab initio, although action taken pursuant to the order or in reliance on it may be protected: K Mason and J W Carter, Restitution Law in Australia (1995), at [704]; Commissioner for Railways (NSW) v Cavanough (1935) 53 CLR 220; Wilde v Australian Trade Equipment Co Pty Ltd (1981) 145 CLR 590, at 602; D M Gordon, "Effect of Reversal of Judgment on Acts Done Between Pronouncement and Reversal" (1958) 74 LQR 517, 518-519. This suggests that the bankruptcy petition could be founded on the debtor's act of bankruptcy which would be "reinstated" by the order made on the appeal. A third possible answer is referred to in [22] above.
66 I agree with the orders proposed by Hill & Marshall JJ.
I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.