Kallis v Supreme Concrete Pumping & Machinery Pty Ltd [2005] FMCA 1745

In this matter Jim Kallis (the Applicant) by an application filed

3 November 2005 seeks annulment of a bankruptcy which has arisen as a result of a Sequestration Order made on 13 September 2005. The application is made pursuant to s.30 and s.153B of the Bankruptcy Act 1966 (the Bankruptcy Act). The application itself however appears to be in part seeking to rely upon s.104(2) of the Federal Magistrates Act 1999 for review of the decision of a Registrar made on 13 September 2005 namely the Sequestration Order.

In any event it is common ground in this case and accepted by the respondent creditor and the Trustee that the person served with the creditor's petition was not the applicant but another person with the same name.

The petitioning creditor was Supreme Concrete Pumping and Machinery Pty Ltd (the respondent). In this Court it has relied upon an affidavit sworn by Jamie Alfred King on 23 November 2005 (the King affidavit).

In this case Paul Anthony Pattison (the Trustee) was appointed on 13 September 2005 by order of a Registrar and since the appointment it appears that the Trustee has commenced administration of the estate though before this Court only seems concerned with receiving compensation for legal costs of and incidental to the administration of the estate and including these proceedings. The Trustee relies upon an affidavit sworn by Dimitri Nuwan Peries on 18 November 2005 (the Peries affidavit).

The Applicant has relied upon an affidavit sworn by a Mr. Jim Kallis (Mr J Kallis) who is another person by the same name as the Applicant. That affidavit clearly sets out the background material which enables the Court to conclude that service of the petition appears to have been affected on a person of the same name as the Applicant but not of course the Applicant. As indicated earlier that is common ground. Perhaps more importantly the affidavit refers to correspondence received from the Trustee's office and the solicitors of the respondent. The first item of correspondence dated 27 September 2005 appears to be a standard letter from the Trustee enclosing usual documents including a notice requiring statement of affairs and a request that the document be completed within 14 days of receipt of the letter. Mr J Kallis upon receiving that letter then by letter dated 5 October 2005 advises the Trustee in the following terms:-

"I wish to advise that I am not the person named in this document. I have never lived at the address stated in this document and I have never had any dealings with the petitioning creditor Supreme Court Pumping.

As I have obviously received this notice because of a mistaken identity, could you please advise me of any steps I need to take that will officially disassociate me with the person named in this matter so that my excellent credit rating will not be affected."

After forwarding that letter to the Trustee the wrongly served Mr J Kallis apparently then received by post on or about 4 November 2005 a notice from Land Registry advising him that caveats had been lodged over two of his properties by the Trustee. The caveat attached to that correspondence is dated 28 October 2005 and appears to have been lodged the same day. Despite the correspondence from Mr J Kallis to the Trustee dated 5 October 2005 that caveat appears to have been lodged and it is not clear from the affidavit material before the Court whether a Withdrawal of Caveat has now been lodged though clearly that should occur.

It is perhaps useful to set out the exchange of correspondence which appears to have occurred amongst the parties. The first item of correspondence dated 14 November 2005 addressed to the solicitors for the Respondent from the solicitors for the Trustee refers to the solicitors having had "the opportunity to review the material in support of the bankrupt's application returnable 15 November 2005". The letter then states the following:-

"It is clear on the material before the Court that the Creditor's Petition was not served on Jim Kallis, the Applicant in this proceeding. After the making of the Sequestration Order against Mr Kallis, our client proceeded to undertake his duties as Trustee of the bankrupt estate of Mr Kallis, thereby incurring fees and expenses in the administration.

In the circumstances where the Creditor's Petition was not served, we are of the opinion that your client is liable to pay our client's fees and expenses of the administration to date.

We advise in this regard that our client's fees and expenses to 10 November 2005 total the sum of $15,266.79. Our client wishes to offer that your client agree by 12 pm on 14 November 2005 to pay this sum to our client. In the event that this offer is not acceptable by your client, our client shall make submissions with respect to his costs and produce a copy of this letter on the questions of indemnity costs from the time of expiration of this offer."

That letter from the Trustee's solicitors to the Respondent's solicitors generated a reply also dated 14 November 2005 forwarded by facsimile transmission which relevantly contains the following:-

"As you are aware, all matters in this proceeding were properly attended to by our client, save for the service of the bankruptcy petition, in relation to which our client relied upon the affidavit of the process server.

However, our client is prepared to agree to the following orders being made on 15 November 2005:

1. that the sequestration order made by Registrar Agnew on 13 September 2005 be set aside;

2. the petitioning creditor pay the applicant's costs of the application and the trustee's costs of the application to be taxed in default of agreement.

Our client will not pay the trustee's fees and expenses of the bankruptcy. The existing authority establishes that our client is not liable for the same.

Written agreement to this proposal from your client by 3.00pm today will dispense with any need to attend the hearing tomorrow at which our client undertakes to arrange the appropriate consent orders if agreed to by the applicant."

The letter from the Respondent's solicitors to the Trustee's solicitors then refers to other steps which may be taken in the event that the earlier decision is set aside and indeed suggests that the Trustee would be re-appointed if a further bankruptcy order was made.

The Respondent's solicitors also forwarded a letter to the Applicant's solicitors in a similar form to the letter which had been forwarded to the Trustee's solicitors. The first paragraph of both letters would appear to be identical. In the letter from the Respondent's solicitors to the Applicant's solicitors the following appears:-

"However, our client is prepared to agree to the following orders being made on 15 November 2005:

1. that the sequestration order made by Registrar Agnew on 13 September 2005 be set aside;

2. the petitioning creditor pay the applicant's costs of the application to be taxed in default of agreement;

3. the petition be set down for hearing on a date convenient to the court.

Written agreement to this proposal from your client by 3.00 pm today will dispense with any need to attend the hearing tomorrow at which our client undertakes to arrange the appropriate consent orders.

If your client does not agree with these orders being made, we give you notice that we require the attendance of both deponents filed on your client's behalf to attend court tomorrow for cross-examination."

Both the Peries and the King affidavits refer to alleged conversations and beliefs which in the absence of further evidence is difficult in my view for this Court to resolve. I would prefer to simply consider the contents of the relevant correspondence between the respective solicitors which continue with a letter dated 15 November 2005 where the Respondent's solicitors refer to their earlier letter dated 14 November 2005 and an alleged telephone conversation with the Trustee and then state:-

"We advise that we withdraw the offer contained in the said letter and replace it with the following offer.

Our client is prepared to agree to the following orders being made on 15 November 2005:

1. that the sequestration order made on Registrar Agnew on 13 September 2005 be set aside;

2. the petitioning creditor pay the applicant's costs of the application to be taxed in default of agreement."

The solicitors for the Trustee then by letter also dated 15 November 2005 does not refer to the facsimile transmission letter of the same date from the Respondent's solicitors but instead refers to the earlier 14 November 2005 correspondence and simply confirms that the solicitors act for the Trustee. It deals with the question of whether there had been an offer to pay the Trustee's legal costs of the annulment application and states:-

"We now understand that the offer to pay those costs has been withdrawn.

The letter then goes on to state the following:-

"In that letter, your client offered, amongst other things, to pay the trustee's legal costs of the annulment application. We now understand that the offer to pay those costs has been withdrawn.

In your letter you also indicated that your client would agree to an order setting aside the sequestration order (as opposed to an annulment, as sought in the application).

Our client does not agree that the proper course in this matter is to set aside the sequestration order.

It now appears clear that the creditor's petition was served on the wrong person. In those circumstances the sequestration order ought not to have been made (s153B(1) of the Bankruptcy Act 1966). An annulment is the appropriate application to make.

Since his appointment as trustee our client has taken some steps in the administration and he requires the protection afforded by s154(1)(a) of the Act.

We are instructed that, in the unusual circumstances of this matter, our client does not make a claim for his remuneration and expenses, other than legal costs.

Accordingly, our client requires your client to adhere to the offer to pay his legal costs of this proceeding as set out in your letter of 14 November 2005."

There are a number of conclusions which may be drawn from the correspondence. The first is that all parties agree that the wrong person was served with the creditor's petition. Further, it would appear that the parties understand and accept that this is a somewhat unusual case where perhaps the normal claims by a Trustee for remuneration and expenses should not be pursued.

In my view, it is perhaps not surprising the Trustee would not pursue costs and expenses associated with the administration of the estate in circumstances where the trustee had received in clear unequivocal terms correspondence from the wrongly served person dated 5 October 2005 and then some 3 weeks later still proceeds to lodge a caveat against that person. Whatever the outcome of this application, it is my view that the Court has a duty as a Court in bankruptcy to ensure that it makes orders that it considers necessary with the purpose of carrying out or giving effect to the Act and may do so pursuant to the general powers it has under s.30 of the Bankruptcy Act. In my view the issue of the Trustee's costs and expenses of the administration of the estate in the peculiar circumstances of this application fall within that general power as it would be undesirable for any party after this date to pursue each other in relation to the question of costs where clearly there is a fundamental error in relation to service acknowledged by all which has led to costs being incurred.

The first issue which I need to decide is whether it is appropriate to simply set aside the sequestration order of the Registrar or whether

I should make an order in the usual form annulling the sequestration order. The primary issue for the Court to determine is whether the sequestration order ought not to have been made. Section 153B of the Bankruptcy Act in my view clearly applies to the present circumstances. The significance of a sequestration order made in this instance in circumstances where the debtor was not served but another innocent third party wrongly served clearly provides a basis upon which this Court should be satisfied that the sequestration order ought not to have been made. I have little doubt that if the Registrar upon becoming aware that the wrong person had been served would not have made a sequestration order. It is therefore not a question of simply setting aside that order in these circumstances but properly exercising the Court's jurisdiction under s.153B of the Bankruptcy Act.

In my view the appropriate order is for an annulment. I accept the submissions for and on behalf of the Trustee that that is the appropriate order and note reference to the decision of Emmett J in Re Daskalovski; Ex Parte The Austral Brick Co Pty Ltd (23 June 1998) where in that case the bankruptcy was annulled and the Court stated the following:-

"However, such a power would normally be exercised in circumstances where the matter before the Court very soon after the order has been made and before there has been any administration in bankruptcy pursuant to a sequestration order."

This Court also made an order annulling a bankruptcy in the matter of Ivanhoe Grammar v Raschilla [2003] FMCA30 which I accept is consistent with the statement of general principle found in Re Deriu (1970) 16 FLR 420.

I accept further that in this case there can be no suggestion that the Registrar made any error on the material then before the Court and the only conclusion that I believe is appropriate is that the sequestration order ought not to have been made based upon the material now before the Court relating to service of the petition.

I further accept that in this instance the Court should make consequential orders that the Trustee be excused from reporting to the Court pursuant to Rule 35.04 of the Federal Magistrate Court Rules 2001 (the Rules) and further that the petitioning creditor should be excused from giving notice to creditors pursuant to Rule 35.03 of the Rules. I shall make those consequential orders dispensing with compliance accordingly.

The remaining question is whether or not the Court should make any order in relation to the costs.

It seems clear to me that in the circumstances at the very least the Respondent should pay the Applicant's costs of and incidental to the application to be taxed in default of agreement. I cannot see any fault at all on the part of the Applicant in this process which would deprive the Applicant of costs.

Nor in my view is there any basis upon which the Court could exercise discretion in a manner which would result in costs not following the event.

The more vexed question in this case is whether or not the Court should make an order for the payment of the costs of the Trustee.

In my view the submissions made for and on behalf of the Trustee in this instance in relation to the costs of and incidental to this application namely that the Respondent should pay the Trustee's costs are correct. It is, after all, the mistake of the petitioning creditor which has led to the difficulties in this instance. I do not accept that the Trustee should as a result of the annulment thereby be given the opportunity to further pursue the costs and remuneration of and associated with the administration of the estate given that within a very short time of the appointment the Trustee received notice from the wrongly served person and the Trustee then to his detriment continued to incur costs including the lodging of a caveat some weeks after being advised of the correct situation regarding service. As I understand the exchange of correspondence it would appear however that the Trustee does not pursue the costs of and incidental to the administration of the estate but rather the costs of and incidental to this application.

In my view it is appropriate in the exercise of the Court's discretion to not only make an order that the Respondent pay the Trustee's costs of and incidental to this application but to further fix those costs and bring an end to any further litigation amongst these parties. I shall hear the parties in relation to the costs to be fixed.

I further take the view that in the exercise of the Court's general powers pursuant to s.30 of the Bankruptcy Act 1966, it is appropriate to include in the orders that there be no further order in relation to the costs and expense of the Trustee arising out of the administration of the estate which was the subject of the sequestration order made on 13 September 2005 and I shall make an order accordingly. I make that order on the basis that the peculiar and somewhat unusual circumstance of this application and the chronology of events revealed in the correspondence including the early notice to the Trustee that the wrong person had been served with the documents in my view leads to a conclusion that it would be just and equitable to ensure that there are no further proceedings arising out of this unfortunate matter including any further claims the Trustee might otherwise have arising from the protection which would normally follow an order under s.154(1)(a) of the Bankruptcy Act.

For the reasons given it therefore follows that the proposed orders of the Court will be as follows:-

(1) The bankruptcy of Jim Kallis under the sequestration order made on 13 September 2005 be annulled.

(2) Pursuant to s.30 of the Bankruptcy Act 1966 there be no further order in relation to the costs and expense of the Trustee arising out of the administration of the estate which was the subject of the sequestration order made on 13 September 2005.

(3) Pursuant to Rule 1.06 of the Federal Magistrates Court Rules 2001 (the Rules) compliance by the Trustee under Rule 35.04 of the Rules shall be dispensed with.

(4) Pursuant to Rule 1.06 of the Rules compliance by the Respondent under Rule 35.03 of the Rules shall be dispensed with.

(5) The Respondent pay the Applicant's costs of and incidental to the application to be taxed in default of agreement.

(6) The Respondent pay the Trustee's costs to be fixed.

Upon announcing the proposed orders and publishing my reasons for judgment the Respondent and the Trustee agreed that the appropriate costs order should be that the Respondent pay the Trustee's costs of and incidental to the application including reserved costs to be taxed in default of agreement.

I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of McInnis FM