Ottley v The Owners of Strata Plan No.4390 [2005] FMCA 466

2. The sequestration Order making me bankrupt was based on a Creditor's Petition that was filed on 8 December 2004 in the Federal Magistrates Court of Australia in Hobart. A true copy of the Creditor's Petition together with the Affidavit verifying is annexed hereto and marked with the letter "B". The Applicant on the Petition is the Owners of Strata Plan No. 43980, and the said Body Corporate claims a total of $11,575.30 for unpaid strata levies pursuant to Default Judgments it obtained in the North Sydney Local Court on 22 September 2004. There are two properties within this strata plan, Unit 1 and Unit 152. The unpaid strata levies relate to both of them. There is an issue in relation to damage caused by a pool within the strata plan to one of the units. I am a co-owner with my wife, Jennifer Lee Middleton-Ottley, of the two units occupied by or on behalf of my wife, and not by myself personally. One of the properties is occupied by my wife and the other property is occupied by a tenant who pays rent direct to my wife.

3. My wife and I separated on 1 July 2003 after a period of marriage and cohabitation which started in October 2000. There are proceedings for property settlement before the Family Court of Australia at Parramatta, file number PAF1246 of 2004. These proceedings were listed for hearing before Judicial Registrar Halligan on 16 and 17 December 2004. I received the Creditor's Petition on 8 December 2004 and provided the same to my solicitor, Justin Dowd, a partner of Watts McCray on

13 December 2004 when I had a conference with him and my barrister. The Petition was listed for hearing in Hobart on

16 December 2004, the same day as my property settlement proceedings before the Family Court at Parramatta. I instructed my solicitor to telephone the solicitor for the Judgment Creditor to discuss the proceedings. I believe there was a discussion between the solicitors. As we were all preoccupied with the commencement of the property settlement proceedings on

16 December 2004, I thought nothing further about it until

I became aware that I had been made a bankrupt, some time on Friday, 17 December 2004. When Judicial Registrar Halligan was advised of my bankruptcy, my Application for property settlement was adjourned.

4. I believe that I am solvent. My weekly income is greater than my weekly expenditure. The total value of property owned by me is greater than the sum total of my liabilities. Annexed hereto and marked with the letter "C" is a true copy of the Financial Statement sworn 24 August 2004 and filed in my Family Court proceedings.

5. I believe that my wife is also solvent. She has sworn a Financial Statement indicating that her weekly income is greater than her weekly expenditure and that the total value of property owned by her is greater than the total liabilities for which she is responsible. Annexed hereto and marked with the letter "D" is a true copy of the Financial Statement sworn by her on 24 August 2004 and filed in the Family Court property settlement proceedings.

6. An issue in the property settlement proceedings is how exactly certain liabilities are to be allocated as between my wife and I. Immediately after separation, I moved away from the former matrimonial home which was one of three properties owned by my wife and myself. For a period after separation I paid the mortgage and all the expenses on the three properties. Since about May or June 2004 I ceased making the mortgage and other related payments for the property occupied by my wife, and also the property occupied by her adult son. It is these two properties in respect of which the liability referred to in the Judgments obtained by the Judgment Creditor originated. The properties in question were jointly owned and the liability for the debts in question are joint ones with my wife. One of the issues in the property proceedings is how responsibility for these debts is to be allocated as between my wife and myself".

Although the Debtor says in paragraph 3 of his affidavit that he received the Creditor's Petition on 8 December 2004, an affidavit sworn by Stuart Ecob on 14 December 2004 states that the Creditor's Petition was served upon the Debtor in Sydney on 9 December 2004 at 12.10 p.m. Seeing that the Creditor's Petition was only filed in Hobart on 8 December 2004, it is clear that the Debtor is mistaken and Mr. Ecob's evidence about the date of service is correct.

When I was giving thought to this matter following the hearing on

9 March 2005, it appeared to me that there may not have been compliance with the Rules in relation to the time period between service of a Creditor's Petition and the hearing. Consequently, I raised that matter with the parties' legal representatives at a later mention of the matter and sought further submissions. Those further submissions were subsequently heard by telephone on 24 March 2005.

Rule 31.05 of the Rules provides that the Creditor's Petition (and other documents) must be served upon the Debtor "at least five days before the date appointed for the hearing, unless the Court otherwise orders".

Rule 3.04 of the Rules provides in part as follows:

3.04(1) This rule applies to a period of time fixed by these Rules or by a judgment, decree, order or any document in a proceeding.

3.04(2) If a period of more than 1 day is to be calculated by reference to a particular day or event, the particular day or the day of the event must not be counted.

3.04(3) If a period of 5 days or less would, but for this subrule, include a day when the registry is closed, that day must not be counted.

The Creditor's Petition was served at 12.10 p.m. on Thursday

9 December 2004.

It is clear that the Registry in Hobart would have been closed on Saturday 11 and Sunday 12 December 2004. It is also clear that the day of the hearing must not be counted, because that is a particular day by reference to which the period is calculated.

Consequently the only days that can be counted are Friday 10, Monday 13, Tuesday 14 and Wednesday 15 December 2004.

This means that, according to the Rules, the Creditor's Petition was served only four days before the hearing and this was accepted by the legal representatives for the parties when submissions were made to me on 24 March 2005.

The legal representative for the Debtor then submitted that this failure to comply with the Rules in relation to time was a further reason why the sequestration order should be set aside. However, the legal representative for the Creditor submitted that the sequestration order should stand. He relied upon Section 57 of the Federal Magistrates Act 1999 and Rule 1.06 of the Rules.

Section 57 provides as follows:

57(1) Proceedings in the Federal Magistrates Court are not invalidated by a formal defect or an irregularity, unless the Federal Magistrates Court is of opinion that:

(a) substantial injustice has been caused by the defect or irregularity; and

(b) the injustice cannot be remedied by an order of the Federal Magistrates Court.

57(2) The Federal Magistrates Court or a Federal Magistrate may, on such conditions (if any) as the Federal Magistrates Court or Federal Magistrate thinks fit, make an order declaring that the proceeding is not invalid:

(a) by reason of a defect that it or he or she considers to be formal; or

(b) by reason of an irregularity.

The wording of that Section is very similar to the wording of s.306 of the Bankruptcy Act 1966. Both Sections provide that proceedings are not invalidated by a formal defect or irregularity unless the Court is of the opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of the Court.

Sub-rule 1.06(1) of the Rules provides:

1.06(1) The Court may in the interests of justice dispense with compliance, or full compliance, with any of these Rules at any time.

In this matter, if the Registrar had been alerted to the fact that the time limit had not expired, it is likely that he would have adjourned the proceedings to another date and made some directions for the Debtor to be notified of that adjournment. Clearly, that did not happen and a sequestration order was made.

It is my view that the failure to adjourn the proceedings and provide the Debtor with notification of a new listing has created a "substantial injustice" to him because he has been made a bankrupt in circumstances in that should not have occurred.

It is also my view that that injustice cannot be remedied simply by making an order under Rule 1.06 that compliance with the time limits be dispensed with.

In those circumstances, I am of the view that the sequestration order should be set aside. However, even if I am wrong about that, there are other reasons why the sequestration order should be set aside and

I shall refer to those below.

However, before I turn to the other reasons for setting aside the sequestration order, I consider that it is appropriate to again state my concerns about Bankruptcy matters being instituted in Tasmania in circumstances where the debt, the Judgment, the debtor and the creditor have no connection with Tasmania.

In Cary & Anor v The Owners of Strata Plan No. 7241 [2002] FMCA 18, Driver FM said the following at paragraph 7:

I do have some concern about the fact that bankruptcy proceedings have been instituted in this matter in Tasmania in circumstances where both the creditor and the debtors are located in New South Wales. This is not the first time this has occurred. In each case the creditor has been the owners of a strata plan, possibly acting through the same debt collection agency. Reasons for this approach being taken are not apparent to me but there is potential for mischief in that approach. It could amount to forum shopping. It certainly has the effect of substantially increasing the difficulty faced by the debtors in responding to the bankruptcy proceedings.

It seems clear to me that this case no different. While I have found that there has not been compliance with the prescribed time limit, I am of the view that the time limit is so short that the "mischief" that Driver FM refers to in Cary, is likely to occur in such cases where the hearing date is set so soon after the filing of the Creditor's Petition.

Section 52(2)(a) of the Bankruptcy Act 1966 states that, if the Court is satisfied that a debtor is able to pay his or her debts, it may dismiss the Bankruptcy Petition. This was the Section upon which the Debtor relied in the submissions put to me by his legal representative on

9 March 2005. In essence, it was his case that he was and is solvent, and that he can pay his debts. The Creditor's legal representative submitted otherwise.

The legal representatives for the Debtor referred me to the decision of Driver FM in Barber v Bone Thorpe International Pty. Ltd. (2001) FMCA 4 ("Barber"). He submitted that the considerations relevant to a review of a Registrar's decision were well set out in that case and I agree with that submission.

In paragraph 6 of Barber, Driver FM referred to there being no evidence of any other unsecured creditor who may wish to prove in the bankruptcy. That is also the case in this matter.

In paragraph 8 of Barber, Driver FM indicated that while the Court has a discretion to make a sequestration order even though it is satisfied that the debtor can pay his or her debts, the Court will not exercise that discretion in cases where the Creditor has other means, legal or equitable to enforce payment of its debt and the debtor has sufficient assets or other resources to pay the debts though unwilling to do so.

The Debtor's legal representative referred me to the Family Court of Australia proceedings in which the Debtor and his wife are currently involved. Although those proceedings are not progressing at this time, the Debtor is hopeful that my decision will enable some life to be breathed back into those proceedings.

The Debtor's legal representative appeared to suggest that the position of the Creditor will be protected by those proceedings. In my view that is not correct. While it is true that the Family Court of Australia will take account of any debt that it is aware of when coming to a decision in relation to a property dispute between a husband and wife, it is quite a different matter to suggest that the Family Court of Australia will always enforce the payment of a debt to a third party. It is clear that the proceedings between the Debtor and his wife in the Family Court of Australia do not provide the Creditor with "other means, legal or equitable to enforce payment of its debt".

I was also referred to paragraph 15 of Driver FM's decision in Barber. In that paragraph he said:

When reviewing a decision of a Registrar to make a sequestration order a judge can take into account considerations relevant to the making of an annulment order pursuant to s.153B of the Bankruptcy Act: BBC Hardware Ltd v Boutros (unreported, FCA, 6 March 1998, Emmett J). Apart from the considerations already mentioned, the factors relevant to the exercise of the Court's discretion to annul a bankruptcy are first, whether the bankrupt was represented on the return date of the creditor's petition and whether the matters raised in the application could have been raised before the court at the hearing of the creditor's petition.

It is clear that in this case the Debtor was not represented on

16 December 2004. Although that was candidly described by the Debtor's legal representative as "an embarrassing blunder", it is clear that the Debtor had no opportunity on that day to convince the Registrar of his solvency or otherwise.

Paragraph 16 of Barber refers to the Debtor's commercial morality before the sequestration order as being a relevant factor. It is the Debtor's position that this is not a concern and that was not challenged by the legal representative for the Creditor.

Similarly, the submission on behalf of the Debtor that the Court did not have to be concerned about the Debtor's conduct since the making of the sequestration order was not challenged by the legal representative for the Creditor.

Paragraph 18 of Barber refers to the next relevant factor being whether the bankrupt was at the relevant time insolvent.

At the time that the sequestration order was made, the Debtor was the joint owner of three properties with his Wife (and two of those are properties to which the relevant debts relate). In his material before this Court and the Family Court of Australia, the Debtor has attributed certain values to those properties. However, the Trustee has obtained independent appraisals of the properties, so for the exercise of assessing the Debtor's solvency, I shall have regard to the Trustee's report to the lawyers for the parties dated 3 March 2005.

Pages 2 and 3 of that report show that the Debtor's share of the net equity in those properties, after realisation costs is $22,922.50.

For the purpose assessing the Debtor's solvency, I intend to ignore the estimates of the Creditor's legal costs and the Trustee's remuneration. It seems to me that a proper way to assess his solvency is to exclude any costs or expenses that have or may come about solely because of his deemed insolvency.

On page 4 the Trustee states:

"It would appear at best that Mr. Ottley would have available to him funds in the order of $30,847 to satisfy all outstanding unsecured debts which would include the RAMS Mastercard, the NAB Visacard and his debt to Watts McCray."

The only information available to me is that there is no current debt to Watts McCray, so the total of those unsecured debts is $12,000. Consequently, the Debtor has an excess over that of more than $18,000.

Clearly, on a "balance sheet" test he appears to be solvent. However, it is clear that the test of solvency is not simply an excess in assets over liabilities. The Debtor will be considered to be solvent if he has an ability to pay his debts as they fall due, or at least within a reasonable time, including by resorting to borrowing funds.

The Debtor has an income from his employer that is in excess of $60,000.00 per annum. In addition, he receives a car allowance of nearly $11,000 per annum. Further, the Debtor has a legal entitlement to half the rent paid by the tenants of the properties that he owns jointly with his wife.

The Debtor's evidence is that his total weekly income is $1,594 and his total weekly expenditure is $1,257. That gives him an excess of income over expenditure of more than $300 per week.

I note also that the Debtor's expenses include the minimum payments in relation to his credit cards so I must conclude that the Debtor is able to meet those particular debts as they fall due.

The Debtor's salaried income of more than $60,000 per annum must also give him a capacity to borrow funds on an unsecured basis.

I therefore conclude that he has an ability to meet his debts when they fall due, or at least within a reasonable time of them falling due by resorting to borrowing money. In this regard, I conclude that the Debtor could borrow funds to pay what he concedes he owes to the Creditor.

Consequently, I conclude that the Debtor is solvent and I am of the opinion that it would also be appropriate to set aside the sequestration order pursuant to s.52(2)(a) of the Bankruptcy Act 1966.

In view of the matters set out above, I am also of the opinion that the costs order against the Debtor of 16 December 2004 should be set aside.

In my view it is appropriate to adjourn the further hearing of the Creditor's Petition to my circuit to Hobart in June because that will give the Debtor sufficient time pay his debt to the Creditor. I would expect that, if he has not done so by that time, I will be asked to make a sequestration order.

I do not consider it appropriate to tie the further hearing of this matter in any way to the Debtor's proceedings in the Family Court of Australia at Parramatta. The Creditor is not a party to those proceedings and there is no reason why the Creditor's rights under Bankruptcy legislation should be subordinate to any rights that the Debtor may have under Family Law legislation.

At the further hearing of the Creditor's Petition, submissions can be made in relation to the costs of the parties and the Trustee.

I will therefore make Orders that provide for the following:

a) The setting aside of the sequestration order

b) The setting aside of the costs order

c) The adjournment of the further hearing of the Creditor's Petition to my list in Hobart at 10.00 a.m. on Tuesday 7th June 2005.

d) The provision of a copy of these Orders to the Official Receiver in Hobart within two days of them being entered.

I certify that the preceding fifty-three (53) paragraphs are a true copy of the reasons for judgment of Roberts FM