French v Wilcox

THE statutory FRAMEWORK 6 Section 238 of the Act relevantly provides as follows: "238(1) A composition that has been accepted by a special resolution of a meeting of a debtor's creditors called in pursuance of an authority under section 188 (in this Division referred to as a composition under this Part) is binding on all the creditors of the debtor. 238(2) Subject to subsections (3) and (4), it is not competent for a creditor, so long as a composition under this Part remains valid: (a) to present a creditor's petition against the debtor, or to proceed with such a petition presented before the composition was accepted, in respect of a provable debt; (b) to enforce any remedy against the property or person of the debtor in respect of a provable debt; or (c) to commence any legal proceedings in respect of a provable debt or take any fresh step in such a proceeding. 7 Subsections 238(3) and (4) are concerned with the rights of secured creditors and persons having the benefit of a maintenance agreement or maintenance order respectively. They are of no present relevance. 8 Section 239 of the Act is in the following terms: "239(1) A creditor may, within 21 days from the date on which the special resolution accepting a composition under this Part was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor. 239(2) If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought. 239(3) The Court may, if it thinks fit, dispense with service on the debtor of notice of an application under this section, either unconditionally or subject to conditions. 239(4) The making of an application for a sequestration order against the estate of a debtor under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application." 9 Section 222(2) confers powers on the Court, in circumstances of irregularity, to make orders declaring a composition, or any provision of the composition, to be void. Section 222(7) of the Act then provides as follows: "The trustee or a creditor may include in an application under subsection (1) or (4) an application for a sequestration order against the estate of the debtor and if the Court, on the first-mentioned application, makes an order under subsection (2) or (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought."

the appeal 10 The appellant was not legally represented at the time when he filed his Notice of Appeal. However, his solicitor, Mr Knaggs, filed an appearance in court at the hearing of the appeal and made submissions on his behalf. The grounds of appeal read as follows: 1. The requirements of the Bankruptcy Act and Rules, and the rules of natural justice, were not observed by the court in making those orders specifically: (i) Section 238(2)(a) of the Bankruptcy Act declares it is not competent for the Creditor to proceed (which includes a hearing) with a petition presented [as this was] before the acceptance of a composition [deemed valid until set aside]. In the alternative to (i): (ii) the Court did not make a determination on the Debtor's Notice of Opposition to the Petition dated 18 November 1999; (iii) to the extent the Court purported to conduct a hearing on 30 August 2000; the Petitioner did not file an Affidavit of Searches as to Bankruptcy Proceedings, as required by rule 19(3) of the Bankruptcy Rules; (iv) to the extent the Court purported to conduct a hearing on 30 August 2000; the Petitioner did not file an Affidavit that the alleged debt on which the Petition was based, was still owing; as required by rule 19(4) of the Bankruptcy Rules; (v) the Petitioner did not file an Affidavit of Search in the Court where judgment was obtained as required by rule 19(5) of the Bankruptcy Rules; (vi) the Court did not conduct a hearing upon the Petition at all; (vii) the Court should not have made the Order in N7054 of 2000 aside (sic) the respondent's Composition (which Order immediately preceded the Order the subject of this Motion), because the Respondent John Desmond French and his controlling trustee were denied natural justice in that application. [This ground was abandoned at the hearing of the appeal.] 2. The applicant contends that he has not committed an act of bankruptcy and that the sequestration order should not have been made.

reasoning 11 The first question to consider is whether the first respondents, by taking the steps which they took at the hearing on 21 July 2000, purported to do something which s 238(2) of the Act provided it was not competent for them to do i.e. "to proceed with" the creditors' petition. It is unnecessary for this purpose to consider whether an order made under s 222(2) of the Act would have had the effect of rendering the composition to be of no effect as at 21 July 2000. This is because the primary Judge in the present case did not make an order declaring the composition to be void. Rather, he made an order under s 239(2) setting aside the composition. The composition was therefore valid on 21 July 2000. 12 The transcript of the proceedings before the learned primary Judge shows that in his opening remarks, counsel for the first respondents said this: "Now, the reason we seek, in the event that your Honour is persuaded to set aside or declare void the composition to then move on the petition as opposed to those provisions [a reference to ss 222(7) and 239(2)] is that that would give the applicants the benefit of an act of bankruptcy of 13 July 1999 whereas if your Honour made a sequestration order on the application to set aside, that act of bankruptcy would be more than six months in the past and therefore could not be relied upon in any subsequent bankruptcy." 13 Shortly thereafter counsel sought a direction that "… the evidence in one case be evidence in the other …". The appellant, who appeared in person, said that he had no objection to such an order and it was duly made. 14 Counsel then read an affidavit and tendered other documents in support of the application to set aside the composition. 15 Counsel then said this: "Your Honour, can I then just deal with the formalities that would be required by the rules to obtain a sequestration order in the petition matter and simply ask your Honour to note a series of affidavits. I don't think there is any need to go to them at this stage." 16 Thereupon counsel took his Honour to the following affidavits: · an affidavit sworn on 10 May 1999, proving service of a bankruptcy notice on the appellant on 7 May 1999; · an affidavit sworn on 28 September 1999, verifying the matters alleged in the creditors' petition; · an affidavit sworn 12 October 1999, proving service of the petition and supporting affidavits; · an affidavit of continuing debt, sworn on 21 July 2000; and · an affidavit of search of the index kept by the Insolvency Trustee Service of Australia, also sworn on 21 July 2000. 17 In our view, a fair assessment of what took place in Court on 21 July 2000 was that the first respondents were seeking conditionally to proceed with the creditors' petition, (including adducing the evidence upon which they relied in support of that petition), not at that time but later. This was subject to the satisfaction of a very important condition, namely that the petition not be dealt with unless the Court decided to set aside the composition. 18 The first respondents' position can be seen as one where, if his Honour were not persuaded to set aside the composition, the evidence led in support of the creditors' petition would simply be disregarded and no order would be made in relation to the creditors' petition. However, if his Honour were to decide that the composition be set aside, the first respondents were to be taken as having then moved in terms of the petition. The evidence adduced on 21 July 2000 would only then be taken into account in hearing and determining the creditors' petition. 19 Section 238(2) was enacted in its present form as part of the substantial revision of bankruptcy legislation in 1966. Apart from s 161 of the Bankruptcy Act 1924 (Cth), which made provision for compositions to be binding on all creditors, there was no comparable earlier provision. 20 The relevant recommendation of the Clyne Committee (Report of the Committee to Review the Bankruptcy Law of the Commonwealth, 1962) was simply that: "336. So long as a composition remains valid, it will not be competent for a creditor to petition for the debtor's bankruptcy in respect of a debt provable under the composition or to enforce any remedy, or commence or continue any legal proceedings, in respect of such a debt." 21 We do not think that any assistance in the construction of s 238(2)(a) can be derived from the statutory history. 22 In our view, there is much to be said for the proposition that, in the peculiar circumstances of this case, the steps which the first respondents took on 21 July 2000, conditional as they were, did not amount to "proceed[ing]" with their petition. 23 Such a construction of s 238(2)(a) would be consistent with the policy which can be discerned in its neighbouring section, s 239. Section 239(1) permits a creditor to include an application for a sequestration order in its application to set aside a composition. Section 239(2) confers power on a Court which sets aside a composition forthwith to make a sequestration order thus sought. Furthermore, s 239(4) reflects Parliament's intention that certain key statutory conditions, which normally apply before a sequestration order is made, are not to apply to an application for a sequestration order which is sought as part of an application to set aside a composition. Once an application has been made in accordance with s 239(1) to set aside a composition, the fact that the application for a sequestration order is contained in a separate document, lodged and filed earlier with the Court, should not, in our view, impel this Court to adopt a construction which would be inconsistent with the policy manifest in s 239 that the summary making of a sequestration order (if applied for by the creditor) is an issue properly before the Court hearing an application to set aside a composition. Furthermore, there are good practical reasons which justified the course adopted by the parties and the primary Judge in this matter. Subject to the debtor's rights being protected, it would have been wasteful for a further, separate hearing of the creditors' petition to be convened after his Honour's decision to set aside the composition. 24 We acknowledge that such a construction runs counter to a more literal interpretation of the relevant portion of s 238(2)(a). 25 However, we do not think that it is necessary to decide the point because even if the first respondents are to be characterised as having, to some extent, "proceeded" with the creditors' petition on 21 July 2000, that did not invalidate the course taken by the primary Judge on 30 August 2000. 26 On that date, once the primary Judge had said, (at [28]): "I am satisfied that the applicants have established the matters required under s 239 of the Act and I therefore set the Composition aside. The costs of the application to set aside the Composition should be paid by the second respondent" it was, in our view, open to his Honour to proceed to hear and determine the petition. He can be seen to have done that in the passage set out at [5] above. His Honour, at that point, had regard to the affidavits in support of the creditors' petition which we have described in summary [16] above. 27 When the Court reconvened on 30 August 2000 and had indicated that the composition would be set aside, we think that it can be said to have been hearing the creditors' petition. It would have been open at that time for the appellant to have informed his Honour of any changed factual circumstances which might have a bearing on whether the sequestration order should or should not have been made. The appellant did not do so. 28 In our opinion, it was open to his Honour, on the evidence then before him on 30 August 2000, to make a sequestration order. His Honour had read the affidavits referred to above and expressly stated that he was satisfied that the appellant had committed the act of bankruptcy alleged in the creditors' petition. He also said that he was satisfied as to the other matters on which s 52(1) of the Act required proof. We return to that subject below. 29 The appellant [see ground 1(ii)] complained that his Honour did not make a determination on his Notice of Opposition to the Petition (dated 18 November 1999). There were only two grounds in that notice. The first was that the appellant had applied to the High Court of Australia for special leave to appeal against the judgment on which the bankruptcy notice was based. On 18 April 2000, the High Court of Australia had dismissed that application. 30 The second ground in the notice of intention to oppose petition was an assertion that the affidavit of search required by Order 77, rule 19(3) of the Federal Court Rules ("the Bankruptcy Rules") "was not made of the deponent's own knowledge". At the hearing of the appeal Mr Knaggs drew our attention to the fact that the relevant affidavit of search stated that the deponent had "… caused a search to be made by computer …". 31 Order 77 rule 19(3) provides that the affidavit may be of a person who has searched "… or caused a search to be made …" in the relevant index. There was no substance in the ground and in any event a copy of the search was annexed to the affidavit. 32 The next two grounds of appeal were that, to the extent that the Court "purported to conduct a hearing on 30 August 2000", the first respondents had not filed an affidavit of search as to bankruptcy proceedings as required by rule 19(3) of the Bankruptcy Rules, nor an affidavit of continuing debt as required by rule 19(4) of those Rules. 33 Sub-rules 19(3) and (4) provide as follows: "19(3) The applicant must file an affidavit of a person who has searched or caused a search to be made, in the National Personal Insolvency Index no earlier than the day before the hearing date for the petition: (a) setting out the details of any references in the Index to the debtor; and (b) stating that there were no details of a debt agreement, in relation to the debt on which the applicant relies, in the Index on the day when the petition was presented; and (c) that has attached to it a copy of the relevant extract of the Index. 19(4) The applicant must file an affidavit of a person who knows the relevant facts: (a) sworn as soon as practicable before the hearing date for the petition; and (b) stating that each debt on which the applicant relies is still owing." 34 The purpose of rule 19(3) would seem to be to provide the Court with evidence that there is no debt agreement in force which, by the operation of s 185K, would preclude a creditor from proceeding further with a creditor's petition. It would also provide the Court with evidence of any other proceedings in bankruptcy which might have a bearing on the making of a sequestration order. 35 The evident purpose of rule 19(4) is to provide a means of proving what is required by s 52(1)(c) of the Act, i.e. the fact that the debt or debts on which the petitioning creditor relies is or are still owing. 36 His Honour had evidence before him that the debt on which the first respondents relied was still owing as at 21 July 2000. In the absence of any suggestion being made by the appellant, when the matter was before his Honour on 30 August 2000, that the debt had been paid, it was open to him to infer that the debt was still owing. 37 In our view, his Honour did not err in law in making the findings which we have set out in [5] above. Likewise, his Honour had an index search sworn on 21 July 2000. In the absence of any suggestion from the appellant that any proceedings in bankruptcy had taken place between 21 July 2000 and 30 August 2000, he was, in our opinion, entitled to assume that no such proceedings (including the making of any debt agreement) had taken place. 38 We think that his Honour may be taken impliedly to have dispensed with compliance with the requirements of Order 77, rules 19(3) and (4) - see Federal Court Rules Order 1, rule 8. The appellant was unable to demonstrate that his Honour's discretion had miscarried or that there had been any miscarriage of justice. The appellant acknowledged at the appeal that he had not made any payment in reduction of the debt owing to the first respondents and there was no suggestion of any relevant bankruptcy proceedings between 21 July 2000 and 30 August 2000 which might have appeared from an index search. 39 The next ground of appeal [ground 1(vi)] was that the Court did not conduct a hearing upon the petition at all. We do not think that this ground has been made out. As we have mentioned above, the hearing of the petition occurred on 30 August 2000. 40 We think that this sub-ground includes a complaint by the appellant that he was denied procedural fairness. We do not think that there is any substance in that complaint. The appellant was made aware at all stages that, subject to the composition being set aside, the first respondents would at that stage seek the making of a sequestration order in accordance with the creditors' petition. He had every opportunity to put before the Court any evidence in support of his Notice of Opposition. There was, in reality, no substance to the grounds stated in that notice. 41 Ground 2 of the notice of appeal raises a contention that the appellant has not committed an act of bankruptcy and that the sequestration order should not have been made. This was not one of the grounds upon which the appellant opposed the making of a sequestration order. He should not be allowed to raise these issues for the first time in the appeal. 42 For the foregoing reasons, we would dismiss the appeal with costs. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Lee & Carr.

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

SACKVILLE J: 43 Lee and Carr JJ has set out the facts and the relevant provisions of the Bankruptcy Act 1966 (Cth). I agree that the appeal should be dismissed. I shall briefly state my reasons. 44 The appellant's first and principal contention was that the primary Judge had failed to observe the requirements of s 238(2)(a) of the Bankruptcy Act and that this failure warranted the setting aside of the sequestration order made on 30 August 2000. In order to make out this contention the appellant must establish that · the first respondents ("the creditors") contravened s 238(2)(a) by proceeding with the petition presented on 30 September 1999 (N 8095 of 1999) while the composition, entered into on 4 January 2000, remained valid; and · the contravention has the consequence that the sequestration order made by the primary Judge on 30 August 2000 must be set aside. 45 At the hearing before the primary Judge on 21 July 2000, counsel for the creditors made it clear that he wished to rely on the creditors' petition presented on 30 September 1999. He took this course because under s 115(1) of the Bankruptcy Act, the bankruptcy is deemed to have relation back to, and to have commenced at, the earliest act of bankruptcy committed within six months of presentation of the petition. Under the orders made by the primary Judge, the relevant act of bankruptcy was committed on 13 July 1999 (the date that a Registrar of the Court dismissed the appellant's application to set aside the bankruptcy notice). It would seem that a sequestration order made against the appellant pursuant to s 222(7) or s 239(2) of the Bankruptcy Act would have relation back to the act of bankruptcy committed on 24 November1999, the date the appellant signed an authority to his trustee under s 188(1) of the Bankruptcy Act to call a meeting of creditors (see s 40(1)(i)). 46 Counsel was alert to the difficulty that Div 6 of Part X of the Bankruptcy Act contemplates that a sequestration order cannot be made against the estate of a debtor while a composition remains in force. For this reason, he informed the primary Judge that only if his Honour were persuaded to set aside the composition did the creditors wish to move on the petition presented on 30 September 1999. 47 Nonetheless, the creditors invited the primary Judge to give a direction that evidence in one case be evidence in the other. Counsel for the creditors later asked his Honour to "note" a series of affidavits that went to prove the matters necessary to satisfy the requirements for the making of a sequestration order. It is clear enough that the creditors' intention was to adduce then and there the evidence necessary to support the petition. That this is so is shown by counsel's express reference to "reading" the affidavits. It is also clear enough that a number of the affidavits read on behalf of the creditors related only to the creditors' petition and were irrelevant to the application to set aside the composition. 48 In these circumstances, it seems to me difficult to suggest that the creditors did not "proceed with" the petition at the hearing on 21 July 2000. It is true that the language of s 238(2)(a) of the Bankruptcy Act is less specific than that of s 58(3)(b), which provides that, except with the leave of the Court, it is not competent for a creditor, after a debtor has become bankrupt, to take "any fresh step" in any legal proceedings against the bankrupt. Nonetheless to adduce evidence in open court in support of a creditors' petition seeking a sequestration order is to proceed with the petition, even though the judge is asked not to rule on the petition unless and until the composition is set aside. 49 This conclusion is supported by the dictionary definition of "proceed". The Macquarie Dictionary includes the following definitions: "2. to go on with or carry on any action or process…5. Law. a. to begin and carry on a legal action". It is also consistent with the evident intention of the Bankruptcy Act that a creditor should not, during the currency of a composition, continue with a petition presented before the composition was accepted. The Act makes special provision for a creditor to apply for a sequestration order at the same time as an application is made to declare a composition void or have it set aside: ss 222(7), 239(2). Where such an application for a sequestration order is made, and the composition is declared void or set aside, the usual requirements governing the making of a sequestration order are dispensed with: ss 222(9), 239(4). 50 I should add that I agree with Lee and Carr JJ that there is little assistance to be derived from the legislative history of s 238(2)(a) in determining its proper construction. There is, however, nothing in par 336 of the Clyne Report (Report of the Committee to Review the Bankruptcy Law of the Commonwealth, 1962) that suggests a construction of s 238(2)(a) different from the one I have adopted. 51 The difficulty confronting the appellant occurs at the second step of his submission. I am prepared to assume that the appellant's consent to the course adopted at the hearing of 21 July 2000 does not detract from the conclusion that the creditors proceeded with the petition in contravention of s 238(2)(a) of the Bankruptcy Act. Even so, that does not necessarily mean that the sequestration order made by the primary Judge on 30 August 2000 is liable to be set aside on the appeal. 52 It is important to note that s 238(2)(a) of the Bankruptcy Act states that a creditor is not competent to proceed with a petition. It does not say that the Court cannot proceed with a petition. Much less does it say that the Court, having set aside a composition, cannot make a sequestration order on the basis of evidence adduced at a hearing held at a time when the composition was in force. 53 Had the primary Judge made a sequestration order before setting aside the composition, doubtless the sequestration order would be liable to be set aside. But in my opinion there is nothing in the language of s 238(2)(a), nor in the purpose of Div 6 of Part X of the Bankruptcy Act, which requires the conclusion that a sequestration order made after a composition is set aside should itself be set aside simply because it is based on evidence adduced by a creditor in contravention of s 238(2)(a): cf Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, at 389-390, per McHugh, Gummow, Kirby and Hayne JJ. In the absence of express language it is not to be assumed that Parliament intended the inconvenient results that would flow from acceptance of the appellant's submission. 54 Of course, the Court will still be required to act in conformity with the rules of procedural fairness and to comply with other provisions of the Bankruptcy Act. But the fact that evidence was adduced while the composition was on foot does not of itself warrant setting aside the sequestration order. 55 It follows from what I have said that a hearing of the creditors' petition took place on 21 July 2000, when the Court received evidence in support of the petition. I do not think it is necessary to decide whether a hearing also took place on 30 August 2000, the day on which the primary Judge delivered judgment and pronounced the orders. Whether or not a hearing took place on that date, I agree with Lee and Carr JJ that none of the other grounds relied on by the appellant has been made out. 56 The appeal should be dismissed, with costs. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Counsel for the Respondent: Mr B J Skinner

Solicitor for the Respondent: Messrs Kemp Strang

Date of Hearing: 12 February 2001

Date of Judgment: 22 February 2001