Official Trustee; in the matter of the Estate of Smith [1999] FCA 1755

REASONS FOR JUDGMENT 1 The Official Receiver for the Bankruptcy District for the State of Tasmania applies under s 153B of the Bankruptcy Act 1966 (Cth) (the Act) for annulment of the bankruptcy of Karyn Frances Smith. The application is brought on the basis that the petition ought not to have been presented by Miss Smith. It is said that in presenting her petition Miss Smith relied on incorrect advice. She did not realise that the practical effect of sequestration would be to prevent her pursuing an action against Mr Timothy Ernest Longden. The application is opposed by counsel for Mr Longden. 2 Between 1983 and 1993 Miss Smith and Mr Longden lived together in a de facto relationship. For a good part of that time they conducted the business of a Post Office at 18 Franklin Street, Swansea (the property). Mr Longden is the registered proprietor of the property. Miss Smith and Mr Longden parted in acrimonious circumstances. In 1995 she commenced action No. 50 of 1995 in the Launceston District Registry of the Supreme Court of Tasmania. She claimed a constructive trust based on (a) an agreement when the Swansea Post Office business was bought that in consideration of her giving up work in Hobart and moving to Swansea she would have an equal interest in the property; (b) an estoppel by conduct to the effect alleged in (a); (c) her contributions to the mortgage over the property, renovations and improvements of the property and to the partnership business run on the property; and (d) a return of capital invested in the partnership business together with interest; 3 Miss Smith also commenced an application No. M 37 of 1997 in the Supreme Court. Miss Smith had lodged a caveat on the property and brought this originating application to prevent registration of a lease. Her application for an injunction was dismissed by Crawford J on 12 June 1997. His Honour ordered Miss Smith to pay Mr Longden's costs. Those costs have not yet been taxed but are said by Mr Longden's solicitors to be of the order of $2,200. 4 In an affidavit sworn in support of the present application Miss Smith says that she initially funded the litigation but subsequently received a grant of legal aid. Until 1998 she worked part-time at a nursing home in Swansea but became ill and has since lived on social security benefits. Her financial situation deteriorated, partly because of the cost of litigation and also creditors' demands, in particular from Commonwealth Bank Mastercard and Connect Credit Union who have financed her car. 5 In about July 1999 she approached Anglicare in Hobart to seek counselling. She was referred to Ms Jane Hutchison, a financial counsellor, and saw her on three or four occasions. Ms Hutchison told her that if she went bankrupt she would be discharged from bankruptcy after six months and would then be able to pursue her litigation. Miss Smith had been told by her solicitor that the hearing was set for April 2000. She therefore thought she could wipe out all her debts through bankruptcy and "be discharged in time to have my case and pay my solicitors' costs from the case". She says that she was told about reaching an agreement with her creditors "but did not understand the ramifications of informal arrangements, debt agreements under Pt IX of the Act and arrangements under Part X of the Act." 6 On 8 September 1999 Miss Smith, with Ms Hutchison's assistance, completed a debtor's petition and a statement of affairs. She signed the documents and left them with Anglicare to be lodged. This was done on the following day. 7 In her statement of affairs she disclosed debts of $13,153 and assets of $7,000. She failed to disclose debts due to her solicitors of about $11,000 because she believed "this was part of the litigation which would return to me and be paid out of the proceeds of the litigation". Subsequently she became aware that her motor vehicle was secured to Connect Credit Union by Bill of Sale and she has reached an agreement with the Credit Union in respect of this debt. Other than solicitors' accounts and the costs incurred by the trustee in administration of the bankruptcy she believes she owes about $5,500 to creditors. It was accepted in the present application that she was insolvent at the time of presentation of her petition. 8 On 27 September 1999, on an application for injunction and for discovery coming before the Supreme Court, Miss Smith's solicitors informed the Court of her bankruptcy. The proceedings were stayed. On the same day her solicitors, Messrs Crawford & Crawford of Launceston, wrote to the trustee giving notice of the action under s 60(3) of the Act and requesting an election within 28 days as to whether the action would be prosecuted or discontinued. In the letter Crawford & Crawford stated that they did not know whether the Legal Aid Commission of Tasmania would be prepared to continue legal aid. The solicitors estimated Miss Smith's claim to be worth between $30,000 to $40,000 and that it was "a strong one". The letter stated: "As our client has no means, we imagine that there are only two alternatives, (a) legal aid is continued, (b) the creditors indemnify you as to legal costs of proceeding with the case." 9 The estimated cost of further steps, including trial, was $8,000. 10 To return to Miss Smith's affidavit, she deposes that she is currently on New Start Allowance and is studying to qualify as a trained auxiliary nurse. She is now doing her final subject and upon completing her training she expects to obtain full time employment at a rate of about $27,000 per annum. She deposes that she now understands that the legal action against Mr Longden forms property in her bankrupt estate and the estate can only proceed with the action if the creditors are willing to fund it. She deposes: "It was never my intention or understanding of the consequences of petitioning for bankruptcy that the action against Longden would be stayed, or that it would become the responsibility of my creditors." 11 She now understands that a debt agreement under Pt IX of the Act would have allowed her to retain the action against Longden and come to an arrangement with her creditors. She has discussed this with Australian Debt Counsellors and with their advice has prepared a debt proposal which she will put to creditors if the annulment application is successful. The proposal involves (a) continuing the Supreme Court action; (b) in the event of success in respect of that action she expects to be in a position to settle in full with her pre-bankruptcy unsecured creditors; (c) if the proceeds are insufficient, such proceeds will be applied to those unsecured creditors on a pro rata basis in full settlement of their claims for which she undertakes to appoint the Australian Debt Counsellors as administrators of her debt agreement and to pay the proceeds to them within seven days from receipt; (d) from the funds she authorises Australian Debt Counsellors to deduct $200 plus disbursements for their fees. 12 In an affidavit the Official Receiver Mr Brett Richard Geoffrey Harrison deposes, in addition to matters already referred to, that legal aid has been suspended as a result of Miss Smith's bankruptcy and that the unsecured creditors have indicated they are unwilling to fund the continuation of the action. In Mr Harrison's view this is not surprising given the small value of the unsecured debts compared with the value of the claim. Possible costs involved in proceeding with the action would be out of proportion with the amounts owed to the creditors. Mr Harrison continues: "23. Had the information now known to me been included in Miss Smith's Statement of Affairs, contact would have been made with her prior to the acceptance of the debtor's petition to discuss the options available under the Bankruptcy Act and to explain to her the ramifications of acceptance of her debtor's petition. I believe from discussions with Miss Smith, and from the file note prepared by Mr Spencer and Mr Sweeney, and from the affidavit filed by Miss Smith in this matter that she was not fully aware of the consequences of petitioning for bankruptcy and the effect that would have on the legal action against Mr Longden. 24. There are other options available under the Bankruptcy Act which would have better suited Miss Smith's circumstances and which would provide a more beneficial and equitable outcome for both Miss Smith's creditors and Miss Smith. 25. I have made this application to the court as I believe it is appropriate for Miss Smith and for her creditors that she be restored to a position where she can make a more informed decision as to the options available under the Bankruptcy Act 1966." 13 The operation of s 153B was considered by Drummond J in Re Coyle (1993) 42 FCR 72. Coincidentally that case also concerned an annulment application brought to enable the debtor to prosecute litigation. His Honour said (at 77-78): "It will in my view generally not be possible for a debtor to establish that his bankruptcy should be annulled on the ground that the 'petition ought not to have been presented' when it is clear that at that time he was insolvent. Although in contrast to earlier legislation, the provisions of the Bankruptcy Act 1966 (Cth) that now govern presentation of a debtor's petition do not require the debtor to admit his insolvency, the procedure available to a debtor to procure his own bankruptcy is only intended to be available to debtors who are insolvent: see Re Mottee; Ex parte Mottee and Official Receiver (1977) 29 FLR 406 at 412. Where an insolvent debtor presents his own petition, s 55 is being used for its intended purpose: it cannot be said, in such circumstances, that the petition ought not to have been presented. If a debtor is insolvent at the time he presents his own petition it cannot, in my view, be said that the petition ought nevertheless not to have been presented because the debtor then had a hope or even a reasonable expectation that his fortunes would improve either in the near future or in the long term. If, after becoming bankrupt on his own petition, the debtor is able for any reason to pay all his debts, then he will be entitled to an annulment of his bankruptcy under s 153A upon complying with the requirements of the section. But that such a situation arises, or may arise, after bankruptcy, in circumstances in which it was anticipated that it would arise at the time the debtor presented his own petition, provides no ground for saying that the petition ought not to have been presented, the debtor then being insolvent in the sense in which the term is used in Sandell v Porter (1966) 115 CLR 666 at 670, at that time. Given that the applicants were insolvent when they presented their petition, I am not prepared to find that it ought not to have been presented. Their application for annulment should be dismissed for that reason." 14 His Honour then went on to consider the application on the alternative basis that he had a discretion. His Honour found there were strong discretionary reasons why the annulment should be refused. 15 Notwithstanding the thorough argument that was advanced by counsel on behalf of the Official Receiver, I have come to the conclusion that Coyle is authority for the proposition that there is no discretion to grant an annulment under s 153B in the case of a debtor's petition when the debtor was in fact insolvent at the time of presentation of the petition. Notwithstanding the word "generally" at the start of the passage quoted above, I think that read as a whole it is a clear holding that if the debtor is insolvent there is no discretion to grant annulment. I respectfully agree. I think "ought not to have been presented" means that the legal precondition for bankruptcy on a debtor's petition, namely insolvency, was not in fact present. The section does not mean that the petition "ought not to have been presented" because in retrospect, and given better advice, other options might have been pursued. This view was also taken by Mansfield J in Re Almassy [1999] FCA 1004. 16 In any case, even if there were a discretion in the present case I would not be disposed to exercise it because on the evidence available to me there is no realistic prospect of Miss Smith's action proceeding. It seems legal aid has ceased, both because of the bankruptcy and also because of a policy change at the Legal Aid Commission of Tasmania announced in February 1999 to the effect that legal aid will no longer be available for civil matters. There was no assertion by Miss Smith that Crawford & Crawford have agreed to conduct the litigation on a no win no pay basis and their letter is quite inconsistent with such a proposition. Therefore I am not persuaded that an annulment, if granted, would serve any useful purpose. 17 There will be an order that the costs of the Official Trustee and Mr Longden be paid out of the estate of the debtor. 18 The application will be dismissed. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey .