Hacker v The Owners - Strata Plan No. 17572

REASONS FOR JUDGMENT 1 On 31 August 2005, sequestration orders were made by a Registrar of the Court in respect of the estates of Susanna Shoshanna Gisella Hacker ('Ms Hacker') and Nandor Daday ('Mr Daday') (together 'the Debtors'). Michael Gregory Jones ('the Trustee') was appointed as trustee of the estate of each of the Debtors. The orders were made on a petition filed on 10 February 2005 ('the Petition') by the Owners - Strata Plan No. 17572 ('the Creditor'). The Petition was based on acts of bankruptcy alleged to have been committed on 24 August 2004 consisting of failure to comply with a bankruptcy notice. 2 By notice of motion filed on 30 September 2005, the Debtors sought an extension of time for applying for review of the sequestration orders. By the same notice of motion, the Debtors sought review of the sequestration orders and dismissal of the Petition. The Debtors claim that the Petition should be dismissed because it was based on purported acts of bankruptcy that did not occur. The extension of time is opposed by the Creditor and the Trustee. 3 On 5 July 2004, bankruptcy notice NN 1634/04 ('the Bankruptcy Notice') was issued by the Official Receiver under s 41 of the Bankruptcy Act 1966 (Cth) ('the Bankruptcy Act'). The Bankruptcy Notice was addressed to each of the Debtors at 5 Bareena Street, Narrabundah, ACT ('the Narrabundah Premises'). The Creditor alleges that the Bankruptcy Notice was served on each of the Debtors on 4 August 2004 at the Narrabundah Premises and that each of the Debtors committed an act of bankruptcy on 25 August 2004, by failing to comply with the Bankruptcy Notice. 4 The Trustee contends that, if the Bankruptcy Notice was not served as alleged by the Creditor, the appropriate course for the Debtors is to apply under s 153B of the Bankruptcy Act for annulment of the bankruptcies, on the ground that the sequestration orders ought not to have been made, rather than to apply for review of the orders, by way of hearing de novo of the Petition. The particular concern of the Trustee is that substantial costs have been incurred by the Trustee in the administration of the estates of the Debtors, which may not be recoverable from the Debtors if, on review of the sequestration orders, the Petition were dismissed. In one sense, the Trustee opposes being deprived of the fortuitous advantage afforded by the failure of the Debtors to apply, within time, for review of the sequestration orders. 5 The Registrar's orders were made pursuant to s 35A(1)(h) of the Federal Court of Australia Act 1976 (Cth) ('the Federal Court Act'). Section 35A(1)(h) provides that a power of the Court prescribed by the Rules of Court may, if the Court so directs, be exercised by a registrar. Under Order 77 rule 7 of the Federal Court Rules, the Court may direct a registrar to exercise the power of the Court to make a sequestration order against a debtor's estate. Section 35A(5) of the Federal Court Act, however, provides that a party to a proceeding in which a registrar has exercised any of the powers of the Court under s 35A(1) may, within the time prescribed by the Federal Court Rules, or within any further time allowed in accordance with the Federal Court Rules, apply to the Court to review that exercise of power. 6 Order 77 rule 8(2) of the Federal Court Rules provides that an application for review of a decision of a registrar must be made within 21 days of the date of the decision. Order 3 rule 3(1) of the Federal Court Rules provides that a judge may, by order, extend or abridge any time fixed by the Federal Court Rules. The time may be extended before or after the time expires and whether or not an application for extension is made before the time expires. 7 There are very sound reasons why the time limits prescribed by Order 77 rule 8 in relation to review of sequestration orders should be enforced strictly. While there will be circumstances where an extension of time will be appropriate, the possibility of consequences for third parties in dealing with bankrupts makes compliance with time limits in such a context more significant than in some other contexts. It would not normally be appropriate to grant an extension of time for filing an application for review under Order 77 rule 8 where there has been substantial administration of an estate. Further, the Court would be slow to grant an extension where substantial costs have been incurred in the administration of the estate. In any event, before any extension will be granted, there must be a satisfactory explanation for the delay and some indication that there will be substantial prejudice if an extension is refused. 8 The prejudice to an applicant from refusal of an extension of time must be weighed against prejudice to other parties who may be affected by the extension. In that regard, the availability of alternative relief, if an extension is refused, is a relevant consideration. Further, in considering whether or not to grant an indulgence to a bankrupt, the conduct of the bankrupt in relation to the bankruptcy proceeding may be taken into account by the Court. The conduct that may be relevant includes conduct in relation to a bankruptcy petition as well as conduct following the making of a sequestration order. The fact that the debt relied upon by a petitioning creditor is undisputed may also be a relevant factor. 9 As I have said, the Petition was presented on 10 February 2005. The hearing date of the Petition was originally 10 March 2005, but it was subsequently amended to 11 April 2005, then to 1 June 2005 and finally to 31 August 2005. The amendments were apparently required because of difficulty in ascertaining the whereabouts of the Debtors. 10 Mr Richard Wellmeela swore an affidavit and gave oral evidence concerning service of the Petition on Ms Hacker and Mr Daday on 5 August 2005 in the hallway outside the entrance to an apartment known as 126/6-14 Oxford Street, Darlinghurst ('the Oxford Street Premises'). Ms Hacker accepts that, on 5 August 2005, in the hallway outside the entrance to the Oxford Street Premises, she was served with a variety of documents, including a sealed copy of the Petition. Mr Daday denied that the Petition was served on him at that time or at all. In an affidavit, Mr Daday swore that he did not become aware of the issue of the Petition, or of its hearing on 31 August 2005, until 7 September 2005, when he received a communication from the Trustee. 11 Ms Hacker said that Mr Daday was not present at the time she was served with the documents but that, probably within minutes of being served, she spoke to Mr Daday about them. Mr Daday confirmed that Ms Hacker spoke to him about the documents on 5 August 2005 and said that, when Ms Hacker spoke to him about the documents, he understood that 'we were in some sort of trouble'. He did not recall what he understood the documents to be although he accepted at one stage in the course of his oral evidence that he understood that they were bankruptcy documents. He accepted that he knew that something had to be attended to promptly. He left it to Ms Hacker to deal with the matter. 12 There were some inconsistencies in Mr Wellmeela's evidence of identification of Mr Daday. However, Mr Daday was a particularly unimpressive witness, who made no attempt to cooperate with the cross-examiner when giving oral evidence. I would not accept Mr Daday's evidence unless corroborated. I was also unimpressed by Ms Hacker as a reliable witness, although she made more of an attempt at cooperation than Mr Daday. 13 In the circumstances, I am not satisfied, on the balance of probabilities, that the Petition was served on Mr Daday on 5 August 2005 near the spot where Ms Hacker was served. On the other hand, nor am I persuaded that it was not served at that time. In any event, there can be no doubt that the Petition came to Mr Daday's attention on that day very shortly after it was served on Ms Hacker, whether or not it was formally served on him. 14 Ms Hacker said that, upon receipt of the documents on 5 August 2005, she did not understand what a bankruptcy petition was. She accepts, however, that she read parts of the documents served on her, including the third page of the Petition, which contained an endorsement of the amended hearing day of the Petition, namely, 31 August 2005. However, Ms Hacker says that she mistakenly read '31 August 2005' as '1 August 2005'. That is to say, Ms Hacker claims that she believed, when the Petition was served on her, that the hearing day of the Petition had already passed. The signatures and seals on the sealed copy of the Petition served on Ms Hacker may mask the date to some little extent. However, the date would be clear except on the most cursory of glances. 15 Ms Hacker said that some time after receipt of the documents on 5 August 2005, possibly on Monday, 8 August 2005, she telephoned the registry of the Federal Court. In the course of that telephone conversation, she was informed by an officer in the registry that it would be most irregular for a petition to be served after the hearing day. She accepts that she was told by the officer in the registry that she should search the file to find out what orders had been made. She made a note in pencil, on the sealed copy of the Petition, indicating that she had 21 days within which to lodge an application for review of any order that might have been made. She wrote that because that is what she was told by the officer in the registry. 16 Notwithstanding the information that she was given by the registry, Ms Hacker did nothing. While she made desultory claims that she was unwell at various times during August, there was no medical evidence to that effect and she accepted that she was well enough to attend a hearing at the Consumer Trader and Tenancy Tribunal in Sydney during the month of August 2005. It is clear that Ms Hacker and Mr Daday, in the face of serious court documents, and the fact that the day on which they were to be dealt with by the Court had passed, chose to ignore them. 17 It is also clear that no later than 7 September 2005, each of the Debtors knew that the Trustee had been appointed pursuant to orders made by the Court on 31 August 2005. By letters of 6 September 2005 addressed to each of the Debtors, the Trustee informed them of his appointment as trustee. He also required them to provide certain materials, including statements of affairs. The letters prompted no immediate response or action on the part of either of the Debtors. 18 In the days following 6 September 2005, there were several telephone communications between an employee of the Trustee, on the one hand, and one or other of the Debtors, on the other, in which cooperation was sought from the Debtors. Specifically, they were informed that the Trustee required a statement of affairs to be filed within 14 days from 7 September 2005. Each of them was informed by an employee of the Trustee that cooperation with the requirements of the Trustee would avoid unnecessary costs. 19 Ms Hacker said that, after she received a telephone call from an employee of the Trustee on 6 September 2005, informing her that she was a bankrupt, she spoke to a Mr Gary Neave, a solicitor, who said that he needed $10,000 'up front'. Ms Hacker did not provide any such funds to Mr Neave. 20 In the week commencing 12 September 2005, Ms Hacker had a telephone conversation with Mr David Purcell, another solicitor. Mr Purcell told Ms Hacker that it would be necessary 'to look at the way the notices were issued and you will have to go and look at the file at the Court as to how the documents were served'. In the same week, Ms Hacker went to the Federal Court Registry in Queens Square and was given a pro forma notice of motion and affidavit. Ms Hacker did nothing with those pro forma documents. 21 On Monday, 19 September 2005, Ms Hacker spoke to Mr Peter Lander, a third solicitor. Mr Lander arranged an appointment to see Ms Hacker on 21 September 2005. On that day, Mr Lander and the Debtors conferred for approximately 45 minutes. Mr Lander was given a number of documents, including affidavits by Mr Robert Warren of service of the Bankruptcy Notice. Mr Lander says that, at that stage, he was unaware that there may have been an issue as to service of the Bankruptcy Notice. He was not aware of the procedure to review the orders of a registrar pursuant to s 35A of the Federal Court Act, or the time limit for making any application in relation to a sequestration order. He apparently made no immediate effort to find out. 22 Following his meeting with the Debtors, Mr Lander wrote to the Trustee on 21 September 2005, indicating that he had received instructions from the Debtors. The letter went on to say: 'We are instructed by Mr Daday that he was unaware of the hearing of the application on 31 August 2005. Ms Hacker has good reasons to explain her absence from Court on that day. Having regard to the real estate held by our clients and level of debt thereon they are clearly solvent. Our clients have instructed us to prepare an application for annulment of the sequestration order and the same will be filed on their behalf within the next few days.' No suggestion was made in the letter that Ms Hacker was unaware of the hearing on 31 August 2005. Despite the fact that Mr Lander had affidavits of service of the Bankruptcy Notice, no assertion was made in the letter that the Bankruptcy Notice had not been served on either of the Debtors. 23 On 21 September 2005, the Trustee wrote to the Debtors again, requesting information, including the submission of statements of affairs. Shortly thereafter, an employee of the Trustee requested the Debtors to provide keys for apartments owned by the Debtors, which are used by them to generate income as serviced accommodation. The Debtors declined to provide keys to the Trustee. 24 Mr Lander conferred with the Debtors on 22 September 2005 for approximately 45 minutes. During that time, he had a telephone conversation with Mr JC Thompson of counsel. He also had a conversation with Mr Graham Ward of the Trustee's office in which Mr Lander said: 'The primary debt of approximately $8,000 can be paid from the assets held by the bankrupts and all other creditors are either up to date or in an arrangement.' Mr Ward responded: 'The position of all creditors needs to be taken into account in any annulment of the bankruptcy, as well as the costs of the bankrupt estate, including the costs of the Trustee.' Mr Lander replied: 'My clients dispute the appointment of the Trustee and an application will be forwarded to turn over the sequestration order. My clients will also be disputing the fees of the Trustee.' On 23 September 2005, the Trustee replied to Mr Lander's letter of 21 September 2005, confirming his appointment as trustee and informing Mr Lander that the acts of bankruptcy relied upon occurred on 25 August 2004. 25 On 29 September 2005, Mr Lander conferred with the Debtors again, this time for approximately 50 minutes. During the course of discussions on that occasion, it became apparent to Mr Lander, for the first time, that there was an issue as to service of the Bankruptcy Notice on the Debtors and as to service of the Petition on Mr Daday. 26 Mr Lander wrote to the Trustee on 29 September 2005, informing him that he had received instructions to seek an order vacating the Sequestration Orders on the grounds that: