Mouglalis v Bendigo and Adelaide Bank Ltd

1. Order 2 of the orders made by the Court on 20 May 2016 be amended such that the concluding clause of that order reads, "with the date of commencement of each of the bankruptcies being 19 February 2015".
2. Save as aforesaid, the appeal be dismissed.
3. The first respondent's costs be taxed and paid out of the estate of the appellants in accordance with s 109(1)(a) of the Bankruptcy Act 1966 (Cth). Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

BESANKO J: 1 I have had the advantage of reading in draft the reasons for judgment of Logan J. I agree with his Honour that, subject to the amendment to the order which he has identified (and which I will assume has been made for the purpose of these reasons), the appeal should be dismissed. I also agree, for the reasons his Honour gives, that s 222(8) of the Bankruptcy Act 1966 (Cth) ("the Act") does not give the Court the power to change or vary the date of discharge from bankruptcy determined in the manner laid down in s 149(4) of the Act. 2 I wish to make some observations about the appellants' submissions concerning the effect of the decision of the Full Court of this Court in Hingston v Westpac Banking Corporation (2012) 200 FCR 493 ("Hingston") and to reserve for future consideration the operation of s 115(1B) of the Act in a case such as the present case. 3 For the purposes of the reasons which follow, it is necessary to keep in mind five key dates. On 16 May 2012, the appellants were declared bankrupt by orders of the then Federal Magistrates Court of Australia. A trustee in bankruptcy was appointed to their individual estates and to their joint estate. The appellants lodged their respective statements of affairs on 12 December 2012. At meetings held on 3 December 2013, the creditors of the appellants accepted, by special resolution, a proposal by the appellants pursuant to s 73 of the Act for compositions satisfying their debts in respect of each of the three estates. On 19 February 2015, the first respondent applied for an order terminating or setting aside the compositions and for sequestration orders. On 20 May 2016, the primary judge made the orders which are the subject of the present appeal. 4 As in this case, Hingston concerned the setting aside of a composition in satisfaction of a bankrupt's debts. The primary judge in that case had made a sequestration order with effect from the date the bankrupt had become bankrupt by virtue of the presentation of his own petition. The Full Court held that the consequence of the making of a sequestration order in that case was that, absent an earlier act of bankruptcy, the date of bankruptcy was the date upon which the composition was set aside (at [116]). It is not necessary to examine the correctness of that proposition. The Court was concerned that that was not the correct result. The Court said (at [118]): Section 76B which applies s 222 in relation to a composition bears the heading in part "setting aside … a composition". The notion inherent in s 76B and s 222 in providing for the setting aside of a composition is that Dr Hingston, on the one hand, will be restored to his pre-composition position as a bankrupt, and the creditors, on the other hand, will be restored to their position as creditors of the bankrupt estate of the debtor. An order under s 222(8) as applied by s 76B, together with s 30(1)(b), that properly reflects the restoration of the pre-composition position (when a composition has been set aside in the circumstances prevailing in Dr Hingston's case), serves to protect the interests of the creditors by enabling the trustee to examine the conduct of the bankrupt (in terms of an examination of whether any voidable dispositions have occurred for the purposes of the Bankruptcy Act or other conduct) by reference to the date on which the debtor became bankrupt on his own petition arising out of the Official Receiver's acceptance of the petition and supporting Statement of Affairs, on 4 August 2009, rather than a postponed date much later in time (15 October 2010) which would apply as the commencement of the bankruptcy, on the making of a sequestration order under s 222(10). 5 I do not think the Court could have been formulating a general rule that applies in all cases or if it was, with respect, I would not follow it. I say that because a court quite clearly has the power by reason of ss 76B and 222 of the Act to make what will be, in effect, a second sequestration order at the time it sets aside a composition. The Full Court then proceeded on the basis that an order setting aside a composition did not have the effect of negating the annulment of the prior bankruptcy effected by s 74 of the Act by the passing of the special resolution in support of the composition (at [127]). The Court said (at [129]): The annulment effected by s 74(5) operates subject to remedial orders serving the purpose of the Bankruptcy Act made within power as conferred by s 222(8) and s 30(1) in the exercise of the Court's jurisdiction in bankruptcy under s 27. Section 222 contemplates by s 222(1) and s 222(5) the setting aside of the composition which involves setting aside the constituent elements of the particular composition, namely, the making of the proposal for compromise put to the meeting under s 73 and the acceptance of the proposal by the special resolution of the creditors on 2 October 2009 under s 73(4). Since the annulment of the bankruptcy takes effect by force of s 74(5) upon the passing of the special resolution, an order setting aside the composition comprising the proposal and its acceptance, sets aside the statutory event upon which the annulment depends, namely, acceptance by special resolution. It follows that upon setting aside the composition, the parties are to be restored to their pre-composition positions as bankrupt on the one hand, and creditors of the bankrupt on the other. 6 In the result, the Full Court set aside the sequestration order made by the primary judge and made the following order: 3. Order 2 of the orders of the primary judge is set aside and in its place the following order is made: 2. Consequent upon Order 1 of the orders of the primary judge as varied by these orders, Guy Richard Hingston ("Hingston") and the creditors of Hingston are restored to the positions they were in before the making by Hingston, and subsequent acceptance by his creditors by special resolution on 2 October 2009 of Hingston's composition proposal under s 73 of the Bankruptcy Act, such that Hingston, on the one hand, is and has been bankrupt on and from 4 August 2009 pursuant to the acceptance by the Official Receiver under s 55 of the Bankruptcy Act on 4 August 2009 of Hingston's debtor's petition presented under s 55 of that Act, and the creditors of Hingston, on the other hand, are and have been on and from 4 August 2009 creditors of the bankrupt estate of Hingston. 7 At the risk of stating the obvious, it is to be noted that this order is not a sequestration order and is perhaps an order in the nature of a declaration. At all events, it is not a sequestration order which was the order made in this case. The date of the commencement of bankruptcy in the case where a sequestration order is made is governed by the provisions of the Act and, in particular, s 115(1B) or if that is not the case, by the exercise of a judicial discretion. The important point to note is that in this case there was no challenge by the appellants on the appeal to the making of sequestration orders. 8 The primary judge ordered that the bankruptcies commence on the date the respondent issued its proceeding in which it included an application for sequestration orders pursuant to s 222(10) of the Act. In the circumstances of this case where no earlier act of bankruptcy was identified, that would be the appropriate date if s 115(1B) applied. It follows that the date identified by the primary judge was the appropriate date either by reason of the application of s 115(1B) or, assuming his discretion did not miscarry, by the exercise of the primary judge's discretion. The appellants argued that s 115(1B) is a "default" or "fall-back" provision (written submissions paragraph 8) and the first respondent was content to proceed on this assumption while at the same time not conceding that s 115(1B) did not have an inflexible operation (written submissions paragraph 26(2)(i)). In those circumstances, I am disposed not to decide the point about the operation of s 115(1B) if (as I think in this case) there was no error in the exercise of the primary judge's discretion. With respect, I would therefore reserve for future consideration Logan J's analysis of s 115(1B) which culminates in his conclusions in paragraph 43. 9 I have carefully considered the primary judge's analysis. He was aware that the three year period operated from the date the bankrupts filed their respective statement of affairs (at [46]). On the other hand, he said that his order would give the appellants the benefit of the "new bankruptcies commencing retrospectively" (at [52]). It is true that the bankruptcies commenced retrospectively, although for the purposes of discharge, the three year period specified in s 149(4) of the Act does not commence until after new statements of affairs have been filed following the sequestration orders. Even if the primary judge was mistaken as to the effect of his orders in terms of the date of the bankrupts' discharge from bankruptcy, I do not think that that was a material mistake in the exercise of his discretion. To conclude otherwise would be to conclude that he was bound to make an order that fixed the commencement of bankruptcy on a date prior to 12 December 2012 when the bankrupts filed their respective statements of affairs. In practical terms, that would be an order like that made in Hingston rather than a sequestration order. As I have said, there was no challenge to the primary judge's decision to make sequestration orders. 10 In any event, as I have said, I do not think a court which sets aside a composition is bound to make an order that the parties be restored to their pre-composition position. The fact that the bankrupts might lose the benefit of the filing of statements of affairs pursuant to the "first" bankruptcy and before the compositions were entered into (and I assume that to be the case rather than deciding the point), cannot "drive" the exercise of the discretion when a sequestration order is made. 11 I think that the primary judge's decision was correct. If there was an error in the exercise of the discretion, I would re-exercise it with the same result. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.