Pattison v Hadjimouratis

History and Background facts 31 I will not repeat the background facts set out in the judgment of Lander J. 32 The significant fact to be borne in mind is that on 18 May 2005, two weeks after service of the sequestration order, Mr Hadjimouratis' solicitors wrote to the Trustee. The letter asserted that their client was solvent, that he wished to pay his debts and "discharge himself from bankruptcy as soon as possible". 33 The Trustee was therefore on notice at a very early stage that Mr Hadjimouratis' disputed his bankrupt status and intended to make an application to the Court. 34 Indeed, the Trustee accepted this in his letter of 25 May 2005 to Mr Hadjimouratis, in which he set out the amount required to annual the bankruptcy

The reasons of the federal magistrate 35 The learned Federal Magistrate said at [15] that in his view the letter of 18 May 2005 indicated that the Trustee had very early warning of what was asserted by Mr Hadjimouratis. 36 He went on to say, at [15] - [16] that the Trustee was on early notice that Mr Hadjimouratis intended to set aside or challenge the validity of the sequestration order. The Federal Magistrate said that the Trustee was therefore required to exercise caution in incurring expenses. 37 The approach which His Honour took to determining the matter was to decide, in the exercise of his discretion, to refuse to annul the bankruptcy. Rather, he ordered that the sequestration order be set aside. He said it would be unfair to burden Mr Hadjimouratis with the costs of administering the estate, and left the Trustee to pursue his remedies at general law. 38 The learned Federal Magistrate's approach was taken in accordance with the decision of Weinberg J in Kryiackou v Shield Mercantile Pty Ltd (No2) [2004] FCA 1338 ('Kyriackou'), to which he referred in his judgment.

whether the federal magistrate had power to dismiss and annul 39 The question of whether the Federal Magistrate had power to dismiss the petition and, at the same time annul the sequestration order, is one of statutory construction. It turns upon the provisions of the Federal Magistrates Act 1999 (Cth), the Rules of the Federal Magistrates Court and the provisions of the Bankruptcy Act 1966 (Cth) ('Bankruptcy Act'). 40 The particular question of statutory construction must be determined in light of the principles applicable to the delegation of a part of the jurisdiction of the Federal Magistrates' Court to the Registrars; see Harris v Caladine (1990) 172 CLR 84 ('Harris v Caladine'). 41 The combined effect of ss 102(2) and 103(1) of the Federal Magistrates Act 1999 (Cth) and Rule 20.00A(1)(c) of the Federal Magistrates Court Rules is that the power to make a sequestration order under s 43(1) of the Bankruptcy Act is delegated to the Registrars. As Lander J observes at [121], this is an exercise of judicial power. 42 The delegation of this power to a Registrar is a valid exercise of the power of delegation. This is because the effect of s 104(2) of the Federal Magistrates Act, when read with Rule 20.03(a) of the Court's rules, is that the exercise of the power by a Registrar is subject to a review by way of a hearing de novo; see Harris v Caladine at 95, 121-2, 164. 43 Thus, the Federal Magistrates Court commences afresh without in any way being fettered by the decision of the Registrar. The review is a complete re-hearing in the exercise of the original jurisdiction of the Federal Magistrates Court. It is for the party seeking the sequestration order to satisfy the Federal Magistrate that all of the necessary conditions have been satisfied to warrant the making of a sequestration order under s 43(1) of the Bankruptcy Act; Harris v Caladine at 124. 44 What then is the status of a Registrar's sequestration order pending a review by the Court? A review, like an appeal, is a creature of statute; The Commissioner for Railways (New South Wales) v Cavanough (1935) 53 CLR 220 at 225 ('Cavanough'). The scope and effect of the review must, as their Honours observed in Cavanough, be governed by the terms of the enactment creating it. 45 So too, the effect of the Registrar's order pending review must also be determined by the provisions of the Federal Magistrates Act, and perhaps by considering whether the Federal Magistrates Court is a superior or inferior court of record; see Cameron v Cole (1944) 68 CLR 571 at 584-585, 590-591, 598-599, 604-605. 46 However, it seems to me that no question arises as to whether the Federal Magistrates Court is a superior or an inferior Court. This is because the relevant statutes have created the Federal Magistrates Court as a court and have vested it with jurisdiction in bankruptcy; see s 10(1) of the Federal Magistrates Act, s 27 of the Bankruptcy Act. 47 The Federal Magistrates Act then goes on to provide in its own terms and its Rules for delegation of the power to make a sequestration order. Importantly, it also provides in s 103(2) for the effect of the exercise of power by a Registrar. That sub-section provides that: "A power delegated by rules of Court under subsection (1), when exercised by a Registrar, is taken, for all purposes, to have been exercised by the Federal Magistrates Court …"

48 In my view it follows from this that a sequestration order made by a Registrar is not a nullity but is merely voidable on review by a court. It is voidable in the same way as the order of a superior court of record affected by an irregularity; see Deputy Commissioner of Taxation v Clyne (1984) 4 FCR 156 at 158. 49 A sequestration order made by a Registrar must therefore affect the status of the person and trigger the operation of s 58(1) of the Bankruptcy Act. The property of the bankrupt vests immediately in the Official Receiver or a trustee, and the other consequences flowing from s 58 apply. 50 Moreover, upon the making of a sequestration order by a Registrar, the debtor becomes a bankrupt and continues to be a bankrupt until discharge or annulment; see Bankruptcy Act s 43(2); see also Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 598. 51 Nonetheless, it does not follow that where a sequestration order ought not have been made at first instance, annulment is the only course open to the debtor. If the sequestration order was wrongly made by a judge, a Full Court may correct it on appeal; Simon v Vincent J O'Gorman Pty Ltd (1979) 41 FLR 95 at 102, 108-109; cf Re Deriu (1970) 16 FLR 420. 52 In Simon v Vincent J O'Gorman, Franki J, at 102, made the point that if a sequestration order was wrongly made an appeal should be upheld in such a way as to avoid the consequences and stigma of bankruptcy attaching to a person who was the subject of the order. 53 The usual way in which an appellate court sets right the status of the wronged party is to allow the appeal, set aside the sequestration order and dismiss the petition; see Wren v Mahony (1972) 126 CLR 212. 54 In an application to review an order made by a Registrar, the Court has power to uphold the review, set aside the sequestration order and dismiss the petition; see Re Gollan; Ex parte Gollan (1992) 40 FCR 38 at 40 ('Gollan'). 55 In that case, Spender J observed that the power, formerly granted to the Court to rescind a sequestration order, no longer exists; see s 37(2)(a) of the Bankruptcy Act. Nonetheless, His Honour was of the view, at 42, that there remained a power in the Court to review a sequestration order and to set it aside, as well as to dismiss the petition. 56 As Lander J notes at [224], the repealed section of the Bankruptcy Act to which Spender J referred is not materially different to the provisions of s 102(2) of the Federal Magistrates Act, which provides for delegation of the power to make the order. 57 In my opinion the powers of the Federal Magistrates Court on a review of a sequestration order are no different from those to which Spender J referred in Gollan. 58 Furthermore, in my view, it follows from the observations of Spender J in Gollan, and from the extent of the power granted to a Federal Magistrate on review under s 104(2), that the Federal Magistrate may set aside the earlier order whilst at the same time annulling it. Of course, the necessary condition for this must be that the order ought not have been made in the first place. But that does not mean that it had no operation while it remained extant. 59 It is true that in an application for review under s 104(2) the Federal Magistrate considers afresh whether a sequestration order should be made, on the evidence before him or her at the hearing. However, the scope of the Federal Magistrate's powers on such an application are wide. This is because s 104(3) provides that the Federal Magistrates Court may make any order it thinks fit in relation to the matter in respect of which the power of the Registrar was exercised. 60 Sections 52(2)(b) and 153B of the Bankruptcy Act both depend upon the Court attaining a state of satisfaction for the exercise of the power. The state of satisfaction is that the sequestration order ought not to be made, or ought not to have been made. 61 Section 52(1) specifies the matters of which proof is required for the making of a sequestration order. Section 52(2)(a) provides that if, amongst other things, the Court is satisfied that the debtor is solvent or that a sequestration order ought not to be made, it may dismiss the petition. 62 Section 153B provides that if the Court is satisfied that a sequestration order ought not to have been made the Court may make an order annulling the bankruptcy. 63 In sitting on a review, the Federal Magistrates' Court exercises the powers and discretions contained in s 52, including the discretion to dismiss the petition because it ought not to be made. I do not see why s 104(3) of the Federal Magistrates Act does not also embrace a power in the exercise of the Federal Magistrate's discretion, to annul a bankruptcy. 64 This view seems to me to be supported by the authorities to which Spender J referred in Re Gollan at 40-41. 65 Moreover, in my opinion, this view is supported by the remarks of Emmett J in The Austral Brick Company Pty Ltd v Daskalovski (Unreported, Emmett J, 23 June 1998) ('Austral Brick') and French J in Symons v Bateman [1999] FCA 658 ('Symons'). 66 Both of those cases were concerned with application to set aside a sequestration order made in the absence of the debtor under the power in O35 r7 of the Federal Court Rules. That is to say, they dealt with the equivalent of the alternative procedure of an application under the equivalent of r16.05(2)(a) of the Rules of the Federal Magistrates Court, rather than a review under the equivalent of s 104(2) of the Federal Magistrates Act. 67 It is true that the application and scope of the Court's powers on a review must be determined in light of the fundamental constitutional requirement that the Court is to supervise the delegation of the power to the Registrars. 68 Nonetheless, in my view the scope of the power granted to the Federal Magistrates Court under s 104(2) is wide enough to take into account the considerations to which Emmett J pointed in Austral Brick without departing from the necessary requirement that the court supervise the exercise of the power. 69 In Austral Brick, Emmett J thought it was in appropriate to make an order under O35 r7 where the bankrupt estate had been partly administered. His Honour referred to the provisions made for the protection of creditors in the event of an annulment being made under s 153B of the Bankruptcy Act, ie to s 154. 70 Emmett J pointed out that no similar regime applies to the setting aside of an order for judgment entered by default. But he indicated that in an appropriate case an order simply setting aside the sequestration order may be made. This order, his Honour said, would normally be made where the matter comes before the Court at an early stage before there has been any administration of the estate. 71 In Symons, French J expressed serious reservations about the power of the Court to make orders under s 154 of the Bankruptcy Act as an incident of an order setting aside the sequestration order pursuant to O35 r7. 72 I respectfully agree with His Honour's reservations. Indeed, I would go so far as to say that such orders cannot be made. The power to make an annulment order and the consequences which flow from it under s 154 of the Bankruptcy Act depend upon the statute; Cameron v Cole at 584, 607-608, and 610. 73 But that is not the question which arises in the present case. The question is whether the Federal Magistrate, on a review, may make an annulment order. The observations of French J in Symons at [12] support the proposition that annulment is available where the trustee has commenced work on the administration. In coming to this view, I recognise that His Honour was not dealing with a review of a Registrar' sequestration order. 74 The decision of Weinberg J in Kyriackou v Shield Mercantile Pty Limited (No 2) [2004] FCA 1338 is on all fours with the present case. In my view His Honour's approach was correct and I would follow it. 75 Weinberg J pointed out at [41] that the Bankruptcy Act may be deficient in failing to provide for the summary recovery by a trustee of the costs of administering an estate. He also said that there may be circumstances in which it is appropriate to annul a bankruptcy under s 153B, thereby giving rise to the protective operation of s 154, rather than merely setting aside a sequestration order. If the latter course is adopted, the trustee will be left to his or her general rights of recovery; see Wenkart v Pantzer (2003) 132 FCR 204 at 207. 76 Weinberg J drew attention, at [42], to the need of a trustee to exercise caution in administering an estate where the trustee has knowledge that the bankrupt is challenging the validity of the order. He went on to say that a balance must be struck between the rights of the debtor and the rights of the trustee who has simply carried out the necessary statutory obligations. 77 The observations of Gyles J in Rangott v Marshall (2004) 139 FCR 14 at [28], though made in a different context, also point in favour of the view which I have adopted. 78 What seems to me to underlie the conclusion reached by Lander J is that, consistently with the constitutional constraints inherent in the delegation to the Registrars, a review determines, judicially, whether a sequestration order should be made. If the court decides that it should not, then it is as though the order of the Registrar were never made. 79 It may be accepted that the exercise of the annulment power is predicated upon the sequestration order being a valid order; Cameron v Cole at 583-584. But for the reasons I have given, the Registrar's Order is taken to have been effective until the Court determines, that it should not be made. 80 It follows in my opinion that it must be open to the Court on review to uphold the review, dismiss the petition and at the same time make an annulment order under s 153B of the Bankruptcy Act, to the extent that the Registrar's Order was on foot for the period from the date of the order to the date of the order of the Court. Of course, the proceedings will need to be properly constituted for such an order to be made. The proceedings were so constituted here, the trustee being present on the application, albeit not having been joined formally as a party. 81 Alternatively, in the ordinary case, the application before the Court will include a claim, in the alternative, for annulment under s 153B. I do not see why the Court could not simply annul the bankruptcy, rather than dismissing the petition if it be thought that some tension exists between dismissal and annulment.

Whether the Federal Magistrate erred in his discretion 82 I can see no error whatsoever in the exercise of the learned Federal Magistrate's discretion. He considered that the trustee was given sufficient notice of the debtor's proposed application so that it was unfair to burden Mr Hadjimouratis with the administration expenses which would have resulted from an annulment order. 83 It is true, as was pressed upon us by Counsel for the trustee, that the letter of 18 May 2005 did not specifically challenge the validity of the order. However, it is plain from the subsequent correspondence that the trustee proceeded on the basis that the sequestration order ought not to have been made. This was sufficient to warrant the exercise of caution by the trustee in the steps he took. 84 There was no error in the exercise of the Federal Magistrate's decision to leave the trustee to his remedies at general law.

I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

VICTORIA DISTRICT REGISTRY VID 1335 OF 2005

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

Introduction 85 This is an appeal and cross-appeal from orders made in the Federal Magistrates Court on 7 October 2005. 86 The respondent was made bankrupt by sequestration order of a Registrar of the Federal Magistrates Court on 3 May 2005. The appellant was appointed trustee of the bankrupt's estate.

The History 87 On 20 May 2004 the petitioning creditor, Lyrma Casanova, obtained judgment against the respondent in the Magistrates Court of Victoria. On 13 October 2004 the respondent was served with a bankruptcy notice. The trustee signed a consent on 8 March 2005. The creditor's petition was served on 23 March 2005. 88 On 3 May 2005 the sequestration order was made by the Registrar in the absence of the respondent. The respondent was served with both the bankruptcy notice, and the creditor's petition but he has deposed that he did not appreciate the seriousness of the matter. He passed both documents on to his then solicitor by leaving the documents at his solicitor's office. The respondent was under the impression that his solicitors would be dealing with the matter. The solicitor did nothing and, in particular, did not appear on his behalf at the hearing when the order was made. 89 After the sequestration order was made, the appellant began to administer the respondent's estate. 90 On 4 May 2005 the respondent was served with a number of documents including a statement of affairs, a personal questionnaire and a business questionnaire for completion. He was advised that the documents needed to be returned within 14 days. On 10 May 2005 the respondent instructed his present solicitors 'to take steps to seek a review of the sequestration order and to have that order set aside'. On 17 May 2005 the respondent cooperated with the appellant and completed the statement of affairs and other questionnaires as requested. 91 On 18 May 2005 the respondent, by his solicitors, wrote to the appellant in the following terms: 'We have received instructions from Mr. John Hadjimouratis who wishes to take steps to discharge himself from bankruptcy. We note that you have been communicating with his former solicitors, Valos Black & Associates. On our instructions Mr. Hadjimouratis is clearly solvent however he simply wishes to pay his debts and discharge himself from his bankruptcy as soon as possible. As a first step Mr. Hadjimouratis has completed all documentation requested by you and has provided it to our office for submission to you. Accordingly we enclose:

1. Personal Questionairre [sic]
2. Statement of Affairs in duplicate
3. Business Questionairre [sic] 4. Additional documentation in relation to our client's financial position We request that you confirm whether there is additional documentation that you require in this matter. Once again we reiterate that our client wishes to take urgent steps to pay his debts and to discharge himself from bankruptcy and we request that you confirm your requirements in order to attend to this. We look forward to hearing from you.' 92 The appellant replied to that letter on 25 May and sought payment by the respondent of $47,500, being the amount calculated by the appellant for the annulment of the respondent's bankruptcy under s 153A of the Bankruptcy Act 1966 (Cth) ('Bankruptcy Act'). The letter set out the amount as follows: ' $ $ Petitioning Creditors Costs (estimated) 3,000.00 Trustees Fees to 20 May 2005 3,630.90 Trustees Disbursements to 20 May 2005 248.96 Add: GST to Trustees Fees & Disbursements 387.99 4,267.85 Trustees Future Fees and Disbursements from 20,000.00 21 May 2005 to finalisation (estimated) Add GST to Trustees future fees & disbursements 2,000 22,000.00 From 21 May 2005 to finalisation (estimated) Unsecured Creditors 13,877.70 Add: Allowance for Interest payable of Judgment Debts and Interest Bearing Debts (estimated) 739.82 Add: Allowance for Statutory Realisation Charge (8% payable to the Commonwealth) (estimated at $43,885.37) 3,510.83 ESTIMATED FUNDS REQUIRED 47,396.20 SAY $ 47,500.00' 93 On 3 June 2005 the respondent's solicitors wrote to the appellant: 'We refer to your letter dated 25 May 2005. We wish to take issue with your estimated fees in the sum of $20,000.00 which we believe are excessive. In the circumstances we request that you agree to our client paying the sum of $40,000.00 in trust for the annulment of his bankruptcy pursuant to s.153A of the act. Our client requires 45 days to raise these funds as 30 days will not be sufficient time for him. We would be obliged if you confirmed your acceptance of this proposition. We look forward to your early reply.' 94 On 15 June 2005 the appellant responded reiterating his claim for $47,500 as set out in his letter dated 25 May 2005.

The notice of motion in the Federal Magistrates Court 95 On 20 July 2005 the respondent filed a notice of motion in the Federal Magistrates Court in the proceeding which had been brought by the petitioning creditor and which had given rise to the sequestration order. 96 The respondent sought the following orders: 'i. An order pursuant to sub-rule 20.02 of the Federal Magistrates Court Rules 2001 ("the Rules") extending the time fixed under sub-rule 20.01 for applying for a review of the sequestration order made on 3 May 2005. ii. An order pursuant to subsection 104(2) of the Federal Magistrates Act 1999 (Cth) and Rule 20.02 of the Rules setting aside the said sequestration order. iii. Alternatively, an order under rule 16.05(2)(a) of the Rules setting aside the said sequestration order on the ground that it was made in the respondent's absence. iv. Alternatively, an order pursuant to section 153B of the Bankruptcy Act 1966 setting aside the sequestration order on the ground that it ought not to have been made and annulling the bankruptcy thereunder. v. Such further or other orders as the Court deems necessary.' 97 The notice of motion was filed in the proceeding which had been brought by the petitioning creditor and which had given rise to the sequestration order. The appellant, of course, was not a party to that proceeding. 98 Notwithstanding the commencement of the proceedings, on 3 August 2005 the appellant's solicitors wrote to the respondent's solicitors making a further offer to agree to annul the respondent's bankruptcy upon payment of the sum of $71,985.70. A calculation of that sum was: 'Unsecured Creditors Australian Taxation Office $20,683.01 Lyrma Casanova $2,207.92 Commonwealth Bank of Australia $16.57 Interest to date on 29 August 2005 $925.66 We have been instructed that an amount of approximately (dependant on future creditor's claims and future estimated costs) is $71,985.70, calculated as follows: Trustees Remuneration (substantiation of charges attached) $10,501.92 Advertising $307.04 Insurance on Property (for 6 months) $791.18 Legal Costs for lodgement of Caveat $358.70 General Trustee Disbursements (facsimile, photocopying etc.) $309.97 Petitioning Creditors Costs (taxed) $2,624.87 Sub-Total $38,726.84 Plus estimated costs into the future Future Legal Costs associated with Federal Magistrates Application $5,500.00 Future Trustee's Remuneration (as previously advised) $22,000.00 Sub Total $66,226.84 Statutory Realisation Charge (8% payable to the Commonwealth) $5,758.86 Total Amount to Obtain Annulment (dependant on future creditor's claims and future estimated costs) $71,985.70'

The hearing before the Federal Magistrate and his orders 99 The notice of motion was heard on 3 October 2005. The respondent submitted that because he was solvent the sequestration order should not have been made and therefore should be set aside. The appellant, on the other hand, argued that the appropriate order was that the bankruptcy be annulled. The question before the Federal Magistrate was whether the order ought to be set aside or the bankruptcy annulled. The different positions taken by the parties were motivated by the respondent's wish to avoid the appellant receiving any payment in the administration of the respondent's estate and the appellant, on the other hand, seeking to be paid for the costs and expenses of administration to the date of the hearing. 100 On 7 October 2005 Federal Magistrate Connolly made the following orders: '1. The time for filing the application heard on 3 October 2005 be extended to 22 July 2005. 2. The sequestration order made on 3 May 2005 be set aside. 3. The applicant pay the Trustee in Bankruptcy's costs of and with respect to the proceedings; such costs to be agreed and failing agreement to be taxed. 4. The applicant pay the respondent petitioner's costs of and with respect to the proceedings; such costs to be agreed and failing agreement to be taxed. 5. Otherwise all extant applications be dismissed.' 101 Connolly FM set out his reasons in his judgment as follows: '14. The applicant was not present on 3 May 2005 when the sequestration order was made and I am satisfied on the basis of his affidavit material that he is solvent. In those circumstances and where the making of the orders to set aside the sequestration is not opposed, I am satisfied that the appeal should succeed and the sequestration order be set aside. Although there was as I have already indicated a short but unexplained delay in the filing of the application, I note that annexed to the Trustee's affidavit filed 19 August 2005 is a copy of a letter from the applicant's solicitors to the Trustee dated 18 May 2005.' 102 The Federal Magistrate then referred to the letter which is set out above. He continued: '15. In my view this letter indicates that the Trustee had very early warning of what was being maintained by the applicant. That is, that he was solvent, would pay the debt, and intended to make an application to set aside the sequestration order. 16. Notwithstanding this the Trustee did work up until 16 August 2005 costing a total of $24 125.95 of which $19 182.68 represented the Trustee's remuneration and of which all but $ 8 680.76 was incurred prior to 31 July 2005. While it is clear that the Trustee has certain obligations, the Trustee in this instance had knowledge very early on that the bankrupt was challenging the validity of the sequestration order and was required to exercise some caution when incurring expenses while the status of the bankruptcy remained uncertain. It would be quite unfair in my view to burden the applicant who is the successful applicant in this proceeding with the costs of administering the estate. For these reasons, I am satisfied it is appropriate to set aside the sequestration order but that it is not appropriate to make the order annulling the bankruptcy. This leaves the Trustee to pursue whatever remedies that he might have by virtue of the general law.'

The matters raised on the appeal 103 The appellant has appealed by leave of this Court against paragraphs 1 and 2 of the orders made by the Federal Magistrate. The appellant seeks an order of this Court setting aside paragraphs 1 and 2 of those orders and substituting orders: '9. The bankruptcy of the Bankrupt be annulled pursuant to s 153B(1) of the Act. 10. The Bankrupt pay the Trustee's costs of the appeal.' 104 The respondent has filed a notice of contention. The respondent contends that the Federal Magistrate's order should be affirmed on the ground that it is not open to the Court on the rehearing of a bankruptcy petition to annul the bankruptcy under s 153B of the Bankruptcy Act. It was the respondent's contention to the Federal Magistrate that that remedy ought only be granted if the Federal Magistrate was not inclined either to extend the time for applying for a review under s 104(2) of the Federal Magistrates Act 1999 (Cth) ('FMA') or review the Registrar's order and make an order dismissing the petitioning creditor's petition. It was the respondent's contention that if, however, the Federal Magistrate was prepared to extend time and review the Registrar's order and set it aside no order under s 153B of the Bankruptcy Act could be made. 105 The respondent has cross-appealed against paragraphs 3 and 4 of the Federal Magistrate's orders. The ground of appeal is that the Federal Magistrate erred in ordering the respondent to pay the appellant's costs in circumstances where the appellant was not a party to the proceeding. The respondent seeks an order of this Court 'That there be no order as to costs'. Although the Notice of Cross-Appeal does not say, it may be inferred that the respondent seeks an order setting aside the Federal Magistrate's order for costs. 106 The respondent's notice of motion in the Federal Magistrates Court sought three alternative remedies apart from the extension of time which was sought in paragraph 1 of the notice of motion. First, under s 104(2) of the FMA which provides for a review of the Registrar's order. Secondly, pursuant to r 16.05(2)(a) of the Federal Magistrates Court Rules (2001) ('FMCR') the setting aside of the order on the ground that the order was made in the respondent's absence. Rule 16.05 is in similar terms to O 35 r 7(2) of the Federal Court Rules. Thirdly, an order annulling the bankruptcy under s 153B of the Bankruptcy Act. 107 The Federal Magistrate did not deal with the second matter. The respondent has not contended that the Federal Magistrate's order can be supported on that ground. In those circumstances, it appears that this Court need give no further consideration to that part of the respondent's notice of motion on the appeal from the Federal Magistrate's orders. 108 The appellant contends that the Federal Magistrate erred in setting aside the sequestration order rather than ordering that the respondent's bankruptcy be annulled. In the alternative, it is put, that the Federal Magistrate erred in finding that if a sequestration order is set aside the Court has no power to further order that the bankrupt pay the remuneration and expenses of the trustee. 109 In advancing those contentions, the appellant points out that the application to set aside the sequestration order was made more than two months after the order had been made. The hearing did not occur until more than five months after the sequestration order was made. During both of those periods, the trustee carried out his obligations in the administration of the bankrupt estate. Because the notice of motion sought in paragraph iv, in the alternative, an order pursuant to s 153B that the bankruptcy be annulled, the trustee was obliged pursuant to r 35.04, as it then was, of the FMCR to prepare a report to the Court and did so and, in doing so, incurred expenses and became entitled to remuneration. 110 The respondent relies upon the reasons of the Federal Magistrate and the contention referred to above. However, on the cross-appeal, the respondent argues that the Federal Magistrate was wrong to order the respondent to pay the appellant's costs because the appellant was not a party to the proceeding.

The appellant's right to appeal 111 That last mentioned contention on the cross-appeal raises for consideration the appellant's right to appeal. The respondent has not argued that the appellant has no right of appeal or that the appeal is incompetent. The appellant was not a party to the proceeding in which the respondent brought his notice of motion. However, the appellant was served with the notice of motion and appeared before the Federal Magistrate and was heard. The order made by the Federal Magistrate has the effect of disentitling the appellant from the costs and expenses incurred in the administration of the respondent's estate. 112 Section 24 of the Federal Court of Australia Act 1976 (Cth) ('Federal Court Act') invests the Federal Court with the jurisdiction to hear appeals from judgments of the Federal Magistrates Court exercising original jurisdiction under a law of the Commonwealth other than particular laws identified in s 24(1)(d) which are not important for present purposes. 113 Section 24 does not indicate in its terms who may appeal from a judgment. In Commonwealth of Australia v Construction, Forestry, Mining and Energy Union (2000) 98 FCR 31, the Full Court of the Federal Court considered whether a non-party could appeal to the Full Court of the Federal Court from an order of a judge of the Federal Court. The Court referred to a number of authorities, mainly English, and said (at 37): 'Having regard to the legislation and the authorities discussed in the preceding paragraphs, we are of the view that s 24 picks up the long-established practice that permits non-parties to appeal by leave.' 114 In this case, a judge of this Court has granted leave to the appellant to appeal. In those circumstances, the appellant has standing on the appeal notwithstanding the appellant was not a party to the proceeding in the Court below.

Jurisdiction in bankruptcy 115 The Federal Court and the Federal Magistrates Court have concurrent jurisdiction in bankruptcy which is exclusive of the jurisdiction of any other court, except the High Court's jurisdiction under s 75 of the Constitution and the Family Court's jurisdiction under ss 35 and 35A of the Bankruptcy Act: s 27 of the Bankruptcy Act.

The Registrar's power to make a sequestration order 116 The sequestration order was made by a Registrar. Section 102 of the FMA identifies a number of powers of the Federal Magistrates Court which may, if the court or a magistrate has directed, be exercised by a Registrar. The power to make a sequestration order is not one of those powers. 117 However, s 102(2) provides: '(2) The following powers of the Federal Magistrates Court may, if the Federal Magistrates Court or a Federal Magistrate so directs, be exercised by a Registrar: … (i) a power of the Federal Magistrates Court prescribed by the Rules of Court;' 118 Subsections (1) and (2) of s 103 of the FMA provide: '(1) The Rules of Court may delegate to the Registrars any of the powers of the Federal Magistrates Court, including (but not limited to) all or any of the powers mentioned in subsection 102(2). (2) A power delegated by Rules of Court under subsection (1), when exercised by a Registrar, is taken, for all purposes, to have been exercised by the Federal Magistrates Court or a Federal Magistrate, as the case requires.' 119 Division 20.1 of the FMCR deals with the delegation of powers to Registrars. Rule 20.00A provides: '(1) For subsection 130(1) of the Act, the following powers are delegated to each Registrar: (a) the powers mentioned in subsection 102(2) of the Act; (b) … (c) a power of the Court under a provision of the Bankruptcy Act mentioned in Schedule 4.' 120 Item 5 of Schedule 4, as it then was, is the power to make a sequestration order pursuant to s 43(1) of the Bankruptcy Act. 121 The making of a sequestration order is an exercise of judicial power: The Queen v Davison (1954) 90 CLR 353. 122 A delegation by a Federal Court of its judicial powers to an officer of the Court, provided the exercise of that delegate's power is subject to review, does not offend Chapter III of the Constitution. In Harris v Caladine (1991) 172 CLR 84, Mason CJ and Deane J said at 95: 'It seems to us that, so long as two conditions are observed, the delegation of some part of the jurisdiction, powers and functions of the Family Court as a federal court to its officers is permissible and consistent with the control and supervision of the Family Court's jurisdiction by its judges. The first condition is that the delegation must not be to an extent where it can no longer properly be said that, as a practical as well as a theoretical matter, the judges constitute the court. This means that the judges must continue to bear the major responsibility for the exercise of judicial power at least in relation to the more important aspects of contested matters. The second condition is that the delegation must not be inconsistent with the obligation of a court to act judicially and that the decisions of the officers of the court in the exercise of their delegated jurisdiction, powers and functions must be subject to review or appeal by a judge or judges of the court. For present purposes it is sufficient for us to say that, if the exercise of delegated jurisdiction, powers and functions by a court officer is subject to review or appeal by a judge or judges of the court on questions of both fact and law, we consider that the delegation will be valid. Certainly, if the review is by way of hearing de novo, the delegation will be valid. The importance of insisting on the existence of review by a judge or an appeal to a judge is that this procedure guarantees that a litigant may have recourse to a hearing and a determination by a judge. In other words, a litigant can avail him or herself of the judicial independence which is the hallmark of the class of court presently under consideration.' 123 Dawson J said at 121-122: 'It merely means that the court may, subject to any restrictions imposed upon it by Parliament, delegate to such of its officers as are suitable such of its functions as it thinks fit. It may do so pursuant to express powers given to it, pursuant to its rule-making power or pursuant to an inherent power to order its own affairs. No doubt it is beyond the power of Parliament to compel a federal court to exercise any of its judicial functions through an officer of the court. The exercise of those functions by that officer would not then be as a delegate of the court and that would be inconsistent with the requirement that the court consist only of judges. For the same reason a federal court must retain effective supervision and control over the exercise of its functions by its officers. If it does not do so, those functions may be seen to be exercised by an officer of the court, not as a delegate, but as a person of independent authority. A federal court must be able to exercise a real choice for itself over those matters, if any, which are maintained if there are insufficient judges for the purpose or if for any other reason the court lacks the necessary capacity. Where the judicial power of the Commonwealth is vested in a federal court, the exercise of that power must be by or on behalf of the court itself, that is, the court consisting of judges, notwithstanding that the court may employ for that purpose an organization extending beyond the judges themselves. Whether or not the exercise of judicial power is by or through the court itself will be a matter of practical as much as of theoretical judgment.' 124 Later, Dawson J addressed the rehearing which he assumed to be a rehearing de novo. 125 At 164, McHugh J said: 'It follows, in my opinion, that this Court or a federal court created under s. 71 of the Constitution may be authorised to delegate the exercise of its judicial powers to an officer of that court provided that the exercise of the power is subject to review by way of a de novo hearing by a Justice or judge of that court who has been appointed in accordance with s. 72 of the Constitution. It goes without saying that the Parliament cannot require the court to delegate any of its powers. Nor, in my opinion, will anything less than a hearing de novo to review the exercise of the power by the officer be sufficient. That is to say, appellate review is an insufficient condition of the delegation of the exercise of the power; there must be a complete rehearing of the facts and the law as they exist when the Justice or judge reviews the order made by the officer. Otherwise, the officer and not the Justices or judges of the court would be exercising the original jurisdiction of the court.' 126 It is clear that any delegation of a judicial power by a Federal Court to an officer which was not subject to review would offend Chapter 3 of the Constitution because, in those circumstances, the officer, not those appointed pursuant to Chapter 3 of the Constitution, would be exercising the judicial power of the Commonwealth. 127 It is important, therefore, that the delegation be subject to a review. The review must be by way of a de novo hearing otherwise the delegation will again be invalid.

The right to review a sequestration order made by a Registrar 128 Section 104 of the FMA provides: '(2) A party to proceedings in which a Registrar has exercised any of the powers of the Federal Magistrates Court under subsection 102(2) or under a delegation under subsection 103(1) may: (a) within the time prescribed by the Rules of Court; or (b) within any further time allowed in accordance with the Rules of Court; apply to the Federal Magistrates Court for a review of that exercise of power. (3) The Federal Magistrates Court may, on application under subsection (2) or on its own initiative, review an exercise of power by a Registrar under subsection 102(2) or under a delegation under subsection 103(1) and may make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised.' 129 Section 104(2) requires a party seeking a review of a Registrar's exercise of power to make an application within the time prescribed by the Rules of Court or such other time as may be allowed by the Court. The Court can, however, pursuant to s 104(3), review the Registrar's exercise of power at any time. 130 Division 20.2 of the FMCR dealt with the review of exercise of Registrars' powers. Rule 21.01(1) provides: '(1) Subsection 104(2) of the Act, application for review of the exercise of a power by a Registrar must be made within: (a) for the exercise of a power of the Court under a provision of the Bankruptcy Act mentioned in Schedule 4 - 21 days; and (b) … (c) otherwise - 7 days. (2) A time prescribed under subrule (1) may be extended in a proceeding: (a) by the Court or a Registrar on any terms as the Court or Registrar thinks fit; or (b) with the consent of the parties to the proceeding.' 131 It is not inconsistent with the Federal Magistrates Court's obligation to exercise control over the delegated power to make a sequestration order for the Federal Magistrates Court to impose a time limit upon applications for review, provided that the Federal Magistrates Court can extend the time within which the application can be made (r 20.02(2)) or dispense with compliance with the rule generally (r 1.06(1)): Harrington v Lowe (1996) 190 CLR 311 at 321. 132 Rule 20.02(1) requires that the application for review of the exercise of power of a Registrar must be in accordance with the form of application for review set out in Part 1 of Schedule 2: r 20.02(1).

The power to set aside a judgment or order 133 There is an alternative procedure to review where a bankrupt seeks to set aside a sequestration order. Rule 16.05(2) of the FMCR provides: 'The Court may vary or set aside its judgment or order after it has been entered if: (a) the order is made in the absence of a party; or (b) the order is obtained by fraud; or (c) the order is interlocutory; or (d) the order is an injunction or for the appointment of a receiver; or (e) the order does not reflect the intention of the Court; or (f) the party in whose favour the order is made consents.' 134 As already observed, this rule is in pari materia to O 35 r 7(2) of the Federal Court Rules. 135 The respondent, in these proceedings, sought to utilise r 16.05(2) as an alternative procedure to the procedure for review under s 104(2) of the FMA. Again, as already observed, the Federal Magistrate did not deal with this part of the respondent's notice of motion and no complaint is made of that on this appeal. The procedure, however, must be noted because it is important in due course in an understanding of the authorities.

The proceedings before the Federal Magistrate 136 In this case, as already noticed, the respondent brought a notice of motion seeking the alternative relief referred to in the notice of motion. The notice of motion did not conform with r 20.02(1) of the FMCR because it was not in the form set out in Part 1 of Schedule 2. Nor does the notice of motion conform with Form 155 of that Schedule which provides for notice of an annulment application. No point was taken before the Federal Magistrate on the form and no point has been taken on appeal in that regard. 137 The notice of motion was served on the trustee (the appellant) and the appellant participated in the hearing. The respondent was right to serve the appellant. The notice of motion sought an order for annulment. Rule 35.02, as it then was, of the FMCR required an application of that kind to be served on the trustee. The appellant did not seek to become a party to the proceeding, nor did any other party seek to make the appellant a party to the proceeding. The petitioning creditor participated in the review. 138 The respondent's application for review was out of time and an extension of time was necessary for a review of the Registrar's decision. The petitioning creditor consented to an extension of time being granted. The appellant did not seek to be heard on the respondent's application for an extension of time. An extension of time was granted. On this appeal, the appellant did not challenge the grant of that extension of time. 139 On the hearing of the review of the Registrar's decision, the respondent sought an order that the Registrar's order be set aside. The petitioning creditor neither opposed nor consented to that order. The appellant did not seek to be heard on the application for a review because the trustee accepted that was a matter between the petitioning creditor and the respondent. 140 The appellant, however, sought an order that if the Registrar's order were set aside the appellant 'should be protected in respect of his remuneration and expenses, including his legal costs'. It was submitted that there should also be an order under s 153B annulling the respondent's bankruptcy. 141 In the alternative, the appellant sought an order that the respondent pay the remuneration and expenses of the appellant in the administration of the respondent's bankrupt estate. 142 Rule 20.02(2) of the FMCR requires the Court to list an application for review within 14 days of the date of filing. The application does not operate as a stay of the exercise of power under review unless an order is made by the Court or a Registrar: r 20.02(4). 143 Rule 20.03 of the FMCR provides: '20.03 The review of an exercise of power by a Registrar: (a) must proceed by way of a hearing de novo; and (b) may receive as evidence any affidavit or exhibit tendered before the Registrar; and (c) may with leave receive further evidence; and (d) may receive as evidence: (i) any transcript of the proceeding before the Registrar; or (ii) if there is no transcript, an affidavit sworn by a person who was present at the proceeding before the Registrar as a record of the proceeding.' 144 Chapter 4 of the FMCR, as it then was, applied to 'Bankruptcy Proceedings'. Part 29 of Chapter 4, as it was at the relevant time, was headed 'General'. 145 Rule 29.01(1) then provided that the Chapter applies to a proceeding to which the Bankruptcy Act applies. 146 Rules 29.04 and 29.05 provided: '29.04(1) In this rule: decision means a decision, direction or act of a Registrar. 29.04(2) An application for review of a decision must be made within 21 days of the date of the decision. 29.04(3) A decision must be reviewed by the Court. 29.05(1) The Court may grant leave to be heard in a proceeding to a person who is not a party to the proceeding. 29.05(2) The Court may grant the leave on conditions and may revoke the leave at any time. 29.05(3) The Court may order the person to pay costs if: (a) the granting of leave to the person causes additional costs for a party to the proceeding; and (b) the Court considers that the costs should be paid by the person. 29.05(4) The Court may also order that the person is not to be further heard in the proceeding until the costs are paid or secured to the Court's satisfaction. 29.05(5) The Court may grant leave or make an order under this rule on the Court's own motion or on the application of a party or another person having an interest in the proceeding.' 147 Rule 29.04(2) is consistent with r 20.02(1)(a). Rule 29 does not provide a procedure different to r 20.03, so it may be assumed that the appropriate procedure is that contained in r 20.03 as supplemented by r 29. Rule 29 would allow the Court to hear the trustee on a debtor's application for a review of a Registrar's decision to make a sequestration order.

The section 104(2) procedure is a hearing de novo 148 Rule 20.03 reflects the reasons for decision of the High Court in Harris v Caladine and obliges the Court to proceed by way of hearing de novo. In Harris v Caladine, Dawson J at 124 said: 'An order made by a Registrar is reviewable by way of a hearing de novo. That means that the court reviewing the order begins afresh and exercises for itself any discretion exercised below by the Registrar. The parties commence the application again, subject to any restrictions in the rules upon the calling of evidence or provisions relating to the use before the court of evidence or provisions relating to the use before the court of evidence called before the Registrar. A hearing de novo involves the exercise of the original jurisdiction and "the informant or complainant starts again and has to make out his case and call his witnesses": Builders Licensing Board v. Sperway Constructions (Syd.) Pty. Ltd.; see also Reg. v. Pilgrim; Campbell, "Judicial Review and Appeals as Alternative Remedies", Monash University Law Review, vol. 9 (1982), p. 14, n. 3.' (Footnotes omitted.) 149 In Sweeney v Fitzhardinge & Ors (1906) 4 CLR 716, the Court was concerned with the construction of the Liquor (Amendment) Act 1905 (NSW)which provided for an appeal to the Court of Quarter Sessions from the Licensing Court and, in particular, the form of the appeal. Griffith CJ said at 729: 'The practice of the Court is further stated by Lush J. in a passage quoted by the learned Judges of the Supreme Court from The Queen v. Pilgrim: - "Generally speaking," he said, "on appeal to the Quarter Sessions the justices are not limited to the evidence before the petty sessions, but they have to hear the whole matter de novo, and the issue is the same, and the justices are put in the same position as the justices in the Court below. It is only in cases in which the particular Statute giving the appeal limits the inquiry to the same evidence, that the Quarter Sessions are precluded from going into fresh evidence, . . . . but where there is no such limitation, either expressly or by implication, the matter is at large, and the Quarter Sessions are to rehear the whole matter, and give their judgment upon all the evidence that is brought before them."' 150 In Southern Motors Pty Ltd v Australian Guarantee Corporation Ltd [1980] VR 187, the Full Court of the Supreme Court of Victoria was considering the nature of an appeal from a Master. At 190, the Court said: 'The appeal is to be a re-hearing de novo. Re-hearings are of more kinds than one, but the expression "re-hearing de novo" shows that what is contemplated is (except to the extent to which r. 16(6) goes on to provide otherwise) a complete re-hearing, that is to say, the application is to be heard de novo in the sense that the party who was applicant before the Master is the party to begin, the appeal is determined on the evidence placed before the judge, no regard being had to the evidence placed before the Master, and the judge determines the appeal without being in any way fettered by the decision of the Master, but giving such weight to the decision of the Master as appears proper. The distinction between re-hearings de novo, other kinds of re-hearing and appeals in the strict sense has been considered in a large number of cases including Quilter v. Mapleson (1882), 9 Q.B.D. 672, at p. 676; Re Chennell, Jones v. Chennell (1878), 8 Ch. D. 492, at p. 505; Sweeney v. Fitzhardinge (1906), 4 C.L.R. 716; Wright v. Nettle, [1919] St. R. Qd. 300; Greater Adelaide Land Development Co. Ltd. V. Hamilton, [1930] S.A.S.R. 114; Victorian Stevedoring & General Contracting Co. Pty. Ltd. V. Dignan (1931), 46 C.L.R. 73, at pp. 107-10 and 113; Ex parte Mackaness & Avery Pty. Ltd., Re Royce (1943), 43 S.R. (N.S.W.) 239, Tidswell v. Tidswell (No. 2), [1958] V.R. 601; Ex parte Currie; Re Dempsey (1968), 88 W.N. (Pt. 2) (N.S.W.) 193; Bopark Building (No. 8) Pty. Ltd. V. Minister for Lands (1968), 88 W.N. (Pt. 2) (N.S.W.) 286; R. v. Syme, [1970] W.A.R. 153; Building Licensing Board (N.S.W.) v. Sperway Constructions (Sydney) Pty. Ltd. (1977), 51 A.L.J.R. 260.' 151 In Turnbull v New South Wales Medical Board (1976) 2 NSWLR 281, Glass JA said in the Court of Appeal, when discussing the nature of an appeal de novo, at 299: 'The second decision is one which we must follow. Their authority proclaims a hearing on appeal to a court, from an administrative or executive decision, to be a hearing de novo. The semantic identity of "anew" and "de novo" can be no accident. But the proposition rests on more cogent doctrinal factors. To describe the appeal court as exercising original jurisdiction means that a judicial investigation is being made for the first time. There is no judicial finding the correctness of which is to be presumed until its wrongness is exposed: McCaughey v. Stamp Duties Commissioner. To require the Commonwealth to win again the issue on which it had succeeded before the delegate is of the essence of a hearing de novo.' (Footnote omitted.) 152 A party seeking a review of an order made by a Registrar must bring the application in the time prescribed by the FMCR or within such further period as may be allowed by the Court. 153 Once the application is brought, a party, who is entitled to a hearing de novo under s 104(2) of the FMA is under no obligation to demonstrate error on the part of the Registrar who made the original order. Indeed, a hearing of this kind requires the party seeking the sequestration order to establish all of the matters upon which the order is based. In a case such as this the onus remains upon the petitioning creditor to show an entitlement to a sequestration order under s 43(1) of the Bankruptcy Act. 154 The parties are not confined to the evidence which was before the Registrar but both parties may rely on that evidence and any further evidence which is relevant to the issues to be considered on the rehearing. The Federal Magistrate should proceed as if he or she were considering the claim raised in the petitioning creditor's petition for the first time. If there be in this or any other case an exercise of discretion by the Registrar, the exercise of that discretion by the Registrar does not bind the Federal Magistrate in any way. Because the parties seeking the rehearing had no obligation to show error, the party does not have to establish that the exercise of the Registrar's discretion miscarried in the sense described in House v The King (1936) 55 CLR 499.

The difference between a section 104(2) review and an application under rule 16.05(2) 155 A rehearing under the FMA is quite a different procedure to an application to set aside a judgment or order where the order has been made in the absence of a party: r 16.05(2)(a) of the FMCR; O 35 r 7 of the Federal Court of Australia Rules. An application of that kind may require the applicant to establish that the applicant has an arguable case or an arguable defence: Registrar of Aboriginal Corporation v Murnkurni Women's Aboriginal Corporation (1995) 137 ALR 404. No such obligation is imposed upon an applicant for a rehearing under s 104(2) or r 20.03.

The difference between a section 104(2) review and discharge and annulment 156 An application under s 104(2) of the FMA and the FMCR is not an application to be discharged from bankruptcy. It is not such an application because it is a rehearing to determine whether or not a sequestration order should be made on the evidence before the Federal Magistrate. Nor is it an application of the kind contemplated in s 153B of the Bankruptcy Act which provides for annulment of a bankruptcy. Nor is the procedure in the nature of an appeal, even an appeal de novo. The Federal Magistrate who is hearing an application for review of a sequestration order made by a Registrar must approach the task as if the application for the sequestration order was being heard for the first time. It is procedure sui generis.

The power to make a sequestration order 157 The jurisdiction to make a sequestration order is contained in s 43(1) of the Bankruptcy Act which empowers the Court to make a sequestration order against the estate of a debtor if the petitioning creditor establishes that a debtor has committed an act of bankruptcy and one of the other matters (which are not relevant on this appeal) contained in s 43(1)(b) of the Bankruptcy Act has been made out. 158 Section 52 of the Bankruptcy Act identifies the matters of which the Court requires proof to make a sequestration order against the estate of the debtor. They need not be discussed. 159 Importantly, s 52(2) allows the Court not to make a sequestration order: 'If the Court is not satisfied with the proof of any of those matters [in s 52(1) of the Act] or is satisfied by the debtor: (a) that he or she is able to pay his or her debts; or (b) that for other sufficient cause a sequestration order ought not to be made;'. 160 Subsection 52(2) provides a discretion in the Court to make a sequestration order if the Court is satisfied by the debtor that he or she is able to pay his or her debts although it might be thought that it would be infrequent where an order would be made where the debtor has satisfied the Court that he or she can pay his or her debts: Re Sarina; Ex parte Wollondilly Shire Council (1980) 32 ALR 596 at 600; Re Stubberfield; Ex parte Paradise Grove Pty Ltd (1995) 134 ALR 169.

The effect of a sequestration order 161 Section 43(2) is relevant if a sequestration order is made. 162 Section 43(2) provides: '43(2) Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until: (a) he or she is discharged by force of subsection 149(1); or (b) his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B.' 163 Section 43(2) does not contemplate that a debtor will cease to become a bankrupt if the sequestration order which has brought about the bankruptcy is set aside, but only if one of the two circumstances in paragraphs (a) and (b) of s 43(2) occurs. 164 By force of s 58 of the Bankruptcy Act, where a debtor becomes a bankrupt the property of the bankrupt vests forthwith in the Official Trustee or a registered trustee: s 58(1). In this case, as I have already mentioned, the appellant was appointed trustee of the bankrupt's estate

The duties of the trustee of a bankrupt's estate 165 A trustee of a bankrupt's estate has statutory duties. Section 19 of the Bankruptcy Act requires a trustee to carry out all the duties mentioned in that section. One of the duties is to report to creditors within three months of the date of the bankruptcy on the likelihood of creditors receiving a dividend before the end of the bankruptcy: s 19(1)(c). A trustee could not provide such a report without first ascertaining the bankrupt's assets and debts. Schedule 4A of the Bankruptcy Regulations sets out standards for the conduct and performance of trustees. In particular, clause 2.6 sets out the preliminary inquiries and actions that a trustee must undertake. There can be no doubt that the Bankruptcy Act and the Bankruptcy Regulations contemplate that a trustee will, upon his or her appointment, act immediately to carry out the trustee's duties by getting in all of the assets in the bankrupt estate and identifying all of the creditors so that there may be an orderly administration of that estate. Ordinarily, it might be expected that the trustee would embark upon the administration immediately after his or her appointment and well within the 21 days allowed for a party to seek a review of the sequestration order which authorised implicitly the trustee's appointment. It therefore follows, as has been put by the appellant's counsel, that even if the person against whom a sequestration order had been made by a Registrar brings an application for a review of the Registrar's decision within the time prescribed by the Rules and if the application is granted and there is no order for an annulment, the trustee will be at risk of being unable to recover his or her remuneration or expenses incurred.

How a bankruptcy is brought to an end 166 The Bankruptcy Act contemplates that a bankruptcy may be brought to an end by way of discharge or annulment. First, the bankrupt may be discharged from bankruptcy in accordance with s 149 of the Bankruptcy Act which provides for automatic discharge at the end of the period of three years after the bankrupt filed his or her statement of affairs. The Bankruptcy Act contemplates that a bankrupt who is discharged under this section will not have met his or her debts in full: see s 153. The effect of a discharge is addressed in s 153 of the Bankruptcy Act and the discharge operates to release the bankrupt from all debts including secured debts provable in the bankruptcy. Section 153(5) provides that on discharge 'all proceedings taken in or in respect of the bankruptcy shall be deemed to have been validly taken'. 167 The second way in which a bankruptcy may be brought to an end is by annulment. An annulment can occur in one of three ways. First, a bankruptcy may be annulled by force of s 74 of the Bankruptcy Act which provides for annulment where the bankrupt has entered into a composition in satisfaction of his or her debts or a scheme of arrangement of his or her affairs: s 73(1). The effect of the annulment is dealt with in subsections 74(6) and 74(7) of the Bankruptcy Act which provide: '74(6) Where a bankruptcy is annulled under this section, all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment shall be deemed to have been validly made or done but, subject to subsection (7), the property of the bankrupt still vested in the trustee vests in such person as the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his or her estate or interest in it, on such terms and subject to such conditions (if any) as the Court orders. 74(7) Where a law of the Commonwealth or of a State or Territory of the Commonwealth requires the transmission of property to be registered, any such property vested in the trustee at the time of the annulment of the bankruptcy, notwithstanding that it vests in equity in such person as the Court appoints or in the bankrupt, as the case may be, does not vest in that person or the bankrupt at law until the requirements of that law have been complied with.' 168 Secondly, the bankruptcy is annulled if the trustee is satisfied that all of the bankrupt's debts have been paid in full on the date on which the last debt was paid: s 153A(1) of the Bankruptcy Act. 169 Thirdly, the Court may annul the bankruptcy under s 153B of the Bankruptcy Act which provides: '(1) If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.' 170 The exercise of the power in s 153B of the Bankruptcy Act is discretionary: Delph Sing v Wood (1918) 25 CLR 497 at 499. The Court can still decline to make an order annulling a debtor's bankruptcy even though the Court is satisfied that a sequestration order ought not to have been made or that, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver. In Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589, the Court said at 600 that the Bankruptcy Court has power to impose conditions on the order for annulment.

The effect of annulment 171 The effect of an annulment under s 153A is addressed in s 154 of the Bankruptcy Act. In particular, s 154(1) provides: '(1) If the bankruptcy of a person (in this section called the former bankrupt) is annulled under this Division: (a) all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment are taken to have been validly made or done; and (b) the trustee may apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee; and (c) subject to subsections (3), (6) and (7), the remainder (if any) of the property of the former bankrupt still vested in the trustee reverts to the bankrupt.' 172 Section 154 does, as the appellant has argued on this appeal, provide a level of protection to the trustee in relation to the trustee's remuneration and expenses. However, that is not that section's only function or purpose. Section 154 operates in a number of ways. First, it validates sales and dispositions of property, payments made and acts done by the trustee. Secondly, it authorises the trustee to apply the former bankrupt's property, still vested in the trustee, in payment of the remuneration and expenses of the trustee. If that property is insufficient to meet the remuneration and expenses, the amount of the deficiency is deemed to be a debt due to the trustee by the former bankrupt and recoverable by action. Thirdly, the remainder of the former bankrupt's property, still vested in the trustee, reverts to the former bankrupt. 173 It is not necessary here to address the precise legal effect of an annulment. There is a conflict in the authorities as to whether an annulment operates ab initio or whether it merely obliterates the annulment: Re Hayes; Ex parte Hayes (1984) 59 ALR 219; Re Coyle and Another (1993) 42 FCR 72; Oates v Commissioner of Taxation (1990) 27 FCR 289. Unlike a discharge, the debtor remains liable to his or her creditors.

Rescission of a sequestration order under the Bankruptcy Act 174 Prior to 1991 and the enactment of the Bankruptcy Act Amendment Act 1991 (Cth), a bankrupt was entitled to seek rescission of a sequestration order pursuant to s 37 of the Bankruptcy Act, at least before the order had been signed and sealed. Rescission of a sequestration order did 'not put an end to the bankruptcy': per Gibbs J in Re Deriu (1970) 16 FLR 420 at 422. That procedure no longer exists. Section 37 was amended in 1991 so as to disentitle a bankrupt from seeking rescission of a sequestration order: s 8 of the Bankruptcy Amendment Act 1991. Section 37(2) of the Bankruptcy Act now provides that the Court does not have power to rescind, discharge or suspend the operation of a sequestration order. However, it is relevant to have regard to that procedure in a consideration of some of the authorities referred to by the parties on this appeal.

Rule 16.05(2) of the FMCR 175 I have already addressed a bankrupt's right to apply to set aside a sequestration order using the procedure under r 16.05(2) of the FMCR. That is a quite separate procedure to a review or an application for annulment.

The section 104(2) procedure 176 An application for review of a sequestration order made by a Registrar, however, under s 104(2) of the FMA is not an application which, if granted, will bring the bankruptcy to an end either by way of discharge or annulment or in any other way. It will mean that the petitioning creditor's petition under s 43(1) of the Bankruptcy Act will be dismissed, either because the petitioning creditor cannot prove that which the petitioning creditor is bound to prove under s 52(1) of the Bankruptcy Act or the Court is satisfied that the debtor is able to pay his or her debts or that for some other sufficient cause a sequestration order ought not to be made: s 52(2) of the Bankruptcy Act. Subsections 104(2) and (3) of the FMCR do not provide that the Federal Magistrate on review make an order setting aside the Registrar's order in addition to any order dismissing the petitioning creditor's petition. However, s 104(3) of the FMA does allow a Federal Magistrate to make any order he or she thinks fit in relation to the matter in respect of which the power was exercised. 177 Ordinarily, a Federal Magistrate would approach the matter in the same was as a Court would on appeal. In Wren v Mahony (1972) 126 CLR 212, the appeal was against the making of a sequestration order. The Court was of the opinion that the sequestration order should not have been made because the Bankruptcy Court should have concluded that there was no debt owing by the appellant to the petitioning creditor at the relevant time. The Court ordered (at 238): 'Appeal allowed with costs. Order of the Court of Bankruptcy set aside and in lieu thereof order that the petition be dismissed with costs'. 178 The same form of order was made in Simon v Vincent J O'Gorman Pty Ltd (1979) 27 ALR 619. In that case, Franki J said at 625: 'Counsel for the official receiver cited a judgment of Gibbs J in Re Deriu (1970) 16 FLR 420, in which it was said that in circumstances where a sequestration order ought not to have been made because the debtor was not indebted to the petitioning creditor, the proper way of getting rid of the sequestration order was to annul it under s 154 of the Act. However, in that case his Honour was considering an application for recision under s 37 of the Act and not an appeal from the making of a sequestration order. In all the circumstances I consider that if we decide that the sequestration order was wrongly made we should uphold the appeal in such a way as to avoid the consequences and stigma of bankruptcy attaching to the appellants and possibly affecting the rights of any other creditors. The order which was made by the High Court in Wren v Mahony, supra, was: "Appeal allowed with costs. Order of the Court of Bankruptcy set aside and in lieu thereof order that the petition be dismissed with costs."' 179 Lockhart J said at 630: 'Before turning to these questions, I will deal with a preliminary question raised by the respondents. They contend that the appeal is misconceived on the ground that no appeal lies from the making of a sequestration order, the person made bankrupt being confined to making an application to the court for annulment of or discharge from his bankruptcy. The argument is said to be based on the decision of Gibbs J in Re Deriu (1970) 16 FLR 420, where a bankrupt applied for an order under s. 37 of the Bankruptcy Act 1966 (the Act) to rescind a sequestration order made against him, upon a creditor's petition, on the ground of his failure to comply with a bankruptcy notice.' 180 After discussing the provisions of the former s 37 and Gibbs J's dicta (to which I have referred at [174], he continued at 631: 'The question before us is quite different, namely, whether this court, on hearing an appeal against the making of a sequestration order, can uphold the appeal. There is nothing in his Honour's reasons for judgment in Re Deriu which bears on this question. Where an order has been correctly made in the first instance and a party seeks to introduce evidence of events that have subsequently happened which would justify the court in making an order for rescission of the original order, generally the proper course is to apply for an order for rescission under s 37; but if the order had been wrongly made in the first instance the usual course of appealing against it should be followed: see Re Norris; Ex parte Norris (1890) 7 Morr 8 at 10 and Re Edgar; Ex parte Davidson and Michael Hunt's Heath Club Pty Ltd (1973) 2 ALR 649. The original order which is the subject of the application for rescission, variation, discharge or suspension under s 37 should be taken out before the court hears an application under s 37: see Re McDonald (1893) 14 LR (NSW) B & P 11. These cases demonstrate the fundamental distinction between the rescission of an order under the express statutory power conferred by s 37 and orders made on an appeal from the original order.' 181 These cases demonstrate that the Court not only makes its own order to allow the appeal but discharges or sets aside the order made below. 182 On a review it might be prudent for the Magistrate, out of an abundance of caution, to set aside the Registrar's order as well as dismissing the petitioning creditor's petition. However, the effect of dismissing the petitioning creditor's petition on review is that no valid sequestration order was ever made.

The appellant's contentions on section 154 of the Bankruptcy Act 183 The appellant contends on this appeal that the Federal Magistrate should have considered whether it was appropriate to annul the bankruptcy in addition to the order setting aside the Registrar's sequestration order. The appellant submitted that if the Court concluded otherwise this trustee, and indeed any other trustee put in the same position, would not be able to recoup his remuneration and the expenses incurred in the administration of the respondent's estate. It was submitted that it would be contrary to the scheme of the Act to allow that to occur. It was put that a trustee was an officer of the Court and should enjoy the Court's protection in this regard. It was contended that s 154 supported those propositions. 184 Section 154 does allow the trustee to apply the former bankrupt's property still vested in the trustee in payment of the trustee's remuneration and expenses: s 154(1)(b). But, as already observed, it does much more than that. It protects the bankrupt by causing the property which has vested in the trustee to revert to the bankrupt: s 154(1)(c). It protects third parties and causes property to vest in those parties by force of the section and without the need for conveyance transfer or assignment.

The authorities 185 It was also contended that there was authority to support the appellant's contention. 186 In Cameron v Cole (1944) 68 CLR 571, the High Court was called upon to consider the validity of a sequestration order where a sequestration order had been made and subsequently annulled, and a second sequestration order made as a result of the Bankruptcy Court's order that the petition be reheard. The precise point under consideration was whether the Bankruptcy Court in annulling the sequestration order had power to order the petition be reheard and to make a sequestration order on the rehearing. The answer to that point depended largely on whether the Court was a superior court of record and a construction of s 124 of the Bankruptcy Act 1924-1933 which gave the Court power to annul a bankruptcy under the Bankruptcy Act 1924-1933. Section 26 of that Act was in similar terms to s 37 of the Bankruptcy Act prior to 1991. Section 124 of the Bankruptcy Act was in similar but not identical form to s 153B. Latham CJ said of s 26 at 581-582: 'On the other hand the respondent contends that s. 26 of the Bankruptcy Act was applicable. Section 26 (1) provides that the Bankruptcy Court may review, rescind or vary any order made by it in its bankruptcy jurisdiction. This is a very wide power and it has been held that it is almost without limit in proper cases (Ex parte Keighley; In re Wike). Under a similar provision a petition which had been dismissed has been reheard (Ex parte Ritso; In re Ritso). An order annulling an order of sequestration has been reviewed and discharged (Ex parte Jarvis; In re Spanton). But no authority was cited which decided that the power to rehear matters which is conferred upon the Court by s. 26 enabled the Court to rehear a petition after an Order of sequestration made thereon had been annulled.' (Footnotes omitted.) 187 The important point in that case was that the first sequestration order was not set aside under s 26 but was annulled under s 124 of the then Act. 188 Latham CJ said at 583-584: 'Section 124 is required to make it possible to reconsider and, if thought proper, to annul, subject to appropriate conditions, sequestration orders which would otherwise be valid. A court has no inherent power to set aside its valid orders which have been entered or drawn up (Hession v. Jones; Firm of R.M.K.R.M. v. Firm of M.R.M.V.L.; Kinch v. Walcott). Such a power must depend upon statute.' (Footnotes omitted.) 189 The power there identified by Latham CJ was to be exercised where a sequestration order was otherwise valid. In that case, Latham CJ held that the first sequestration order was, for reasons which are presently unimportant, null and void and 'there was no need to have recourse to the provisions of s 124 for the purpose of getting rid of it': at 586. 190 Williams J said at 607-608: 'When, therefore, the Federal Court of Bankruptcy has made a sequestration order under the Act, it is not, in my opinion, a nullity, so that, even if it has been irregularly obtained, it operates until it is set aside and causes the debtor to become a bankrupt and his property to vest in the official receiver: Cf. Smallacombe v. Olivier; Boaler v. Power; In re Forder; Forder v. Forder. Speaking generally, a court has an inherent power to set aside an order which has been made against a person without that person having notice of the application (Craig v. Kanssen). The way is then open for a rehearing of the application upon proper conditions. But the effect of a sequestration order is to vest the property of the bankrupt in the official receiver and the official receiver then proceeds to realize that property for the benefit of the creditors. If the Court were simply to set aside such an order under its inherent jurisdiction complete justice would not be done, because such of the bankrupt's property as has not been disposed of would remain still vested in the official receiver. The Court would therefore have to order the official receiver to do such acts and execute such instruments as were necessary to vest the property in the bankrupt. An order simply to set aside the sequestration order under the inherent jurisdiction of the Court or to rescind it under s 26 would not, therefore, be completely effective. This and other difficulties are recognised and provided for by s 124, which clothes the Court with special powers upon a rehearing where an application is made to annul a sequestration order.' (Footnotes omitted.) 191 Moreover, Williams J said at 610: 'It was contended that the order for the further hearing could be made under s. 26(1) of the Act, which provides that the Court may review, rescind or vary any order made by it in its bankruptcy jurisdiction. I agree with the Chief Justice that a sequestration order cannot be annulled under this section. In addition to the reasons which he has given, this result follows, in my opinion, from the provisions of s 54(2), because under that section the rescission of a sequestration order would not discharge the bankruptcy.' 192 The section to which Williams J was there referring was in similar form to s 43(2). 193 In Re Deriu, Gibbs J heard an application under s 37 of the Bankruptcy Act to rescind a sequestration order. Gibbs J suggested that there would need to be an annulment order made in addition to a rescission order which would not of itself put an end to the bankruptcy. 194 He said at 421: 'Under this section there are two matters which the Court has to consider, first, whether a sequestration order ought not to have been made, and then, if the Court is satisfied of that, whether in the exercise of the Court's discretion the order should be annulled.' 195 He said at 421: 'Subject to an order protecting the official receiver for the fees owing to him in respect of action taken under the sequestration order made on 9 October 1969, and subject to an appropriate order for costs in favour of the petitioning creditor, it seems to me that the sequestration order made on 9 October, 1969, ought to be annulled.' 196 However, his Honour observed that the application before him was not for an annulment but for rescission of the sequestration order. He said at 422: '… it seems to me that, where a sequestration order ought not to have been made, because the debtor was not indebted to the petitioning creditor, the proper way of getting rid of the sequestration order is by annulling it under s 154.' 197 The order made by Gibbs was in the following terms: 'I annul the bankruptcy under the sequestration order made on 9 October 1969 but order that such annulment shall not take effect until the bankrupt shall have paid to the official receiver the amount of $165.80 owing in respect of official fees.' 198 The matter which was before Gibbs J was brought under s 37 of the Bankruptcy Act seeking rescission of a sequestration order. As I have already observed, that procedure no longer exists. The difference between that procedure and an application for review is demonstrated by his Honour's reasons. The party seeking rescission was under an obligation to satisfy the Court that the sequestration order should not have been made. There is no such obligation under the review procedure given by s 104(2). 199 It was put that Cameron v Cole is authority for the proposition that an order made setting aside a sequestration order under s 26 of the Bankruptcy Act 1924-1933 or s 37 of the Bankruptcy Act 1966 prior to 1991 would not of itself be sufficient to bring a bankruptcy to an end and particular reliance was put upon the reason of Williams J. Although Williams J was in dissent in Cole v Cameron, I think the proposition is sound. So much was recognised by Gibbs J in Re Deriu. As I have already noted, of course, an application under s 104(2) of the FMA is not an application to set aside an otherwise valid or even an invalid sequestration order. Section 104(2) is a rehearing de novo. 200 In Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589, the Court was concerned with a circumstance where the Deputy Commissioner of Taxation petitioned for a sequestration order against the appellant. Shortly thereafter, the appellant presented his own petition and a consent for a person to act as trustee. The petition was accepted by the Registrar and the debtor therefore became bankrupt by force of the statute: s 55(4A) of the Bankruptcy Act. 201 The Deputy Commissioner wished to pursue his petition and have a different person appointed trustee of the debtor's estate. The Court made an order on the Deputy Commissioner's petition that the sequestration order date from one day before the appellant's own petition. The important question in that case was when the bankruptcy was deemed to have commenced and thereby the date the bankruptcy related back to. The Court held that the Bankruptcy Court could not make a sequestration order whilst the bankruptcy which came about by the debtor's own petition continued in existence. 202 Gibbs CJ, Murphy, Brennan and Dawson JJ said at 598: 'It was submitted that the bankruptcy under s. 55 would be superseded by the making of a sequestration order. This argument, which is based on authorities decided at a much earlier stage of the bankruptcy law, and on some cases under the companies legislation, cannot be accepted; it ignores the effect of ss. 43(2) and 55(8) which make it clear that a bankruptcy continues until the bankrupt is discharged or the bankruptcy is annulled.' 203 In that case, the High Court was not concerned with any review of any sequestration order. In that case, the debtor became a bankrupt by force of s 55 of the Bankruptcy Act. The matter before the High Court only concerned the Court's ability to make a further sequestration order whilst the debtor's bankruptcy continued in force. In that case, there was no exercise of a judicial power which brought about the bankruptcy of the debtor. As I have said above, the debtor became bankrupt by force of the statute itself. 204 In The Austral Brick Company Pty Ltd v Daskalovski (Unreported, Emmett J, 23 June 1998) ('Austral Brick') the Registrar of the Court made a sequestration order sequestrating the estate of the applicant. Twenty-two days later the applicant applied to the Court for an order that the sequestration order be set aside pursuant to O 35 r 7 of the Federal Court Rules upon the basis that the applicant had not in fact been served personally with the petition. 205 As I have already said, O 35 r 7 is in pari materia to r 16.05(2). Order 35 rule 7 relevantly provides: '(1) The Court may vary or set aside a judgment or order before it has been entered. (2) The Court, where it is not exercising its appellate or related jurisdiction under Division 2 of Part III of the Act, may if it thinks fit vary or set aside a judgment or order after the order has been entered where - (a) the order has been made in the absence of a party, whether or not the absent party is in default of appearance or otherwise in default and whether or not the absent party had notice of the motion for the order;' 206 The debtor satisfied Emmett J that he had not been served and was unaware of the petition until he was told by his solicitor that a sequestration order had been made. He filed a statement of affairs which disclosed that his assets exceeded his debts. 207 Emmett J said that he was satisfied that the sequestration order ought not to have been made and that he proposed to make an order pursuant to s 153B of the Act annulling the bankruptcy. He said: 'I should add that I would have been satisfied that the Court has jurisdiction and power pursuant to Order 35 Rule 7 to make an order setting aside the sequestration order made in the absence of the Debtor in circumstances where the Debtor was not served with the petition. However, it seems to me inappropriate to make an order under that rule where the estate has already been administered in bankruptcy, as is the case here. The Act, and the rules made under the Act which have now been incorporated into the Federal Court Rules, provide for the protection of creditors in the event of an order being made under section 153B. There is no similar regime applicable specifically for the setting aside of an order or a judgment pursuant to Order 35 Rule 7. That is not to say that, in an appropriate case, the power contained in Order 35 Rule 7 ought not to be exercised. However, such a power would normally be exercised in circumstances where the matter comes 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.' 208 In Symons v Bateman [1999] FCA 658 ('Symons'), sequestration orders were made against the applicants for failure to comply with a bankruptcy notice issued by the respondent. For reasons which are not relevant, the applicants applied, pursuant to O 35 r 7(2) of the Federal Court Rules for an order that the sequestration orders be set aside on the grounds that the orders were made in the absence of the applicants and other grounds. 209 The petitioning creditor agreed to the order being made but the trustee sought orders preserving his entitlement to remuneration and costs. French J said, after discussing O 35 r 7 and subsections 154(1) and (2) of the Bankruptcy Act: '10 There is no such provision attaching to the setting aside of a sequestration order pursuant to O 35 r 7. In this case the Trustee suggests that if the order sought by the Symons and Mr Bateman is made then there should be ancillary orders made which have the effect of s 154 in relation to the position of the Trustee and such steps as the Trustee has taken. 11 I have serious reservations about the power of the Court to make orders of the kind that the Trustee proposes as an incident of an order under O 35 r 7.' 210 His Honour then referred to Emmett J's reasons in Austral Brick and said, after referring to the observation mentioned above: '12 I agree, with respect, with his Honour's observations. I could not conclude on the materials before me at the moment that the Trustee was obliged by the notice given by Mr and Mrs Symons to hold his hand in relation to the administration of the estate. There is no evidence of the extent to which the Trustee has actually undertaken work on the administration of the estate and the extent to which there may be a need for the application of s 154. However, on the basis of the Trustee's contention and until that matter of fact is resolved I do not think it appropriate to make the consent orders which are sought. I would need to be persuaded that an order under O 35 r 7 would be appropriate where the estate has been administered.' 211 Both of those cases were applications under O 35 r 7, not applications for review of the Registrar's decision. 212 Order 35 rule 7 contemplates that a Court may set aside an order regularly made for any of the reasons in the rule itself. Clearly, if an order is made under O 35 r 7, the effect of the order is to set aside the sequestration order. It is right, as both Emmett J and French J have observed, that unless an order for an annulment is made at the same time, or instead of an order under O 35 r 7, the trustee will not be entitled to recover his or her remuneration and expenses. However, that procedure is quite different to the procedure which involves a review de novo of a Registrar's order. 213 As I have already explained, where the Court is reviewing a sequestration order made by the Registrar the petitioning creditor is bound to establish that the order should be made. If, in fact, on the rehearing of the creditor's petition the Court is not satisfied with the proof of any of the matters required under the Bankruptcy Act or if satisfied by the debtor that he or she is able to pay his or her debts, the Court may dismiss the petition. 214 Of course, the Court would have to make an order setting aside the order made by the Registrar but, because the Court is exercising its power by way of rehearing, the Court is, in my opinion, not obliged to make an order under s 153B of the Bankruptcy Act because the Court has dismissed the petition and there is no sequestration order. The Court is not obliged to make an order under s 153B of the Bankruptcy Act rather than an order under s 52(2) of the Bankruptcy Act dismissing the petitioning creditor's petition, because to do so would recognise that there has been a valid sequestration order made in circumstances where the Court would not make the order. The point is not only one of procedure. The purpose of s 104(2) of the FMA is to ensure that the delegated power to the Registrar is subject to the fullest review on an application to review a sequestration order made by a Registrar. If the Court made an order under s 153B of the Bankruptcy Act annulling the bankruptcy, it would be a recognition by the Court that the Registrar's order had been properly made in circumstances where the Court was proceeding upon the basis that no sequestration order should be made. 215 In Kyriackou v Shield Mercantile Pty Ltd (2004) 138 FCR 324, Weinberg J considered an appeal from a Federal Magistrate's order in circumstances where the Federal Magistrate was sitting on a review of a sequestration order made by a Registrar. The Federal Magistrate dismissed the application for a review. On appeal, the debtor argued that the Federal Magistrate was wrong in holding that the bankruptcy notice in that case was valid. 216 Weinberg J determined that the Federal Magistrate had erred in rejecting a challenge to the validity of a bankruptcy notice and held that the bankruptcy notice was invalid and ought to have been set aside, however, he refrained from making any final orders until submissions were made as to the form of the orders which should follow the reasons for judgment. 217 The appellant debtor, who was successful on appeal, did not seek to have the bankruptcy annulled and, indeed, argued that that was the inappropriate course: Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338. On the other hand, the Official Trustee argued that the Court should not set aside the sequestration order and dismiss the petition without also ordering that the bankruptcy be annulled pursuant to s 153B of the Bankruptcy Act. 218 Weinberg J's attention was drawn to the decisions in Austral Brick and Symons mentioned above. He said at [43]: 'In this case, a balance must be struck between the rights of the appellant, who should never have been made bankrupt in the first place, and the Official Trustee, who has simply done what the Act requires him to do. In my view the particular circumstances of this case require that that balance tilt in favour of the appellant. It follows that the Official Trustee must bear his own costs and expenses of the administration unless he elects to institute the proceedings to recover them: see generally Wenkart v Pantzer (2003) 132 FCR 204 at 207. That is a matter for the Official Trustee. It does not fall within the ambit of any costs order than can properly be made in relation to this appeal.' 219 The Court, in that case, approached the problem on the basis that the Court had a discretion whether to make the one order or the two orders. Whilst I agree with the result in that case, I do not agree that the question of making an annulment order at the same time as dismissing the petition was one that involved balancing the interests of the party. In my opinion, if the Magistrate on review had reached the conclusion that the petition should be dismissed, there would have been no valid sequestration order and no order to annul. 220 In Re Gollan; Ex parte Gollan (1992) 40 FCR 38, a Judge of this Court was called upon to review a sequestration order made against the debtor by the District Registrar. 221 Spender J said at 40: 'There are a number of matters thrown up by the application. The first concerns the repeal of s 37 of the Bankruptcy Act 1966 (Cth) (the Act) and the substitution of a new s 37 by the Bankruptcy Amendment Act 1991 (Cth) (Act No 9 of 1992). As a consequence of the new s 37, the court, subject to s 37(2), may rescind, vary or discharge an order made by it under the Act, or may suspend the operation of such an order. But by s 37(2), the court does not have power to rescind or discharge or to suspend the operation of, inter alia, a sequestration order. There would, therefore, be no power to rescind the making of the sequestration order of 11 November 1992 if that order had been made by the court. The order was made by the District Registrar in consequence of powers delegated to him pursuant to s 31A. It seems to me that the effect of s 37 is to abolish rescission as a means of bringing bankruptcy to an end, so that discharge and annulment are the only methods of terminating a bankruptcy. However, my view is that there still remains power in the court, pursuant to s 14(5) to review a sequestration order made by a registrar under the powers delegated pursuant to s 31A, and that it would be competent on summary application, to set aside the sequestration order made on the creditor's petition, and to dismiss the petition.' 222 Spender J was satisfied that at the time the sequestration order was made the debtor was solvent. The applicant undertook to pay the petitioning creditor's costs and to pay the costs of the Official Trustee incurred by him in the administration of the estate. 223 In relation to that matter, Spender J said at 42: 'It seems to me that I ought to exercise the review powers under s 14(5) and order that the order for the sequestration of the estate of Darryl Gollan made by District Registrar Ramsey on 11 November 1992 be set aside and in lieu thereof the petition be dismissed. I should indicate that if I were not minded to make those orders, I would have dispensed with compliance with requirements of r 57 in relation to service on the creditors and the requirement for a report by the trustee and made an order pursuant to s 153B annulling the bankruptcy of Mr Gollan. However, it is preferable to proceed on the basis that, had the material relating to solvency been before the District Registrar, the appropriate course would have been to dismiss the petition and on the summary review, provided by s 14(5), it seems to me that I ought to make orders setting aside the order sequestrating the estate of Mr Gollan on 11 November 1992 and in lieu thereof, dismiss the petition. I order that Mr Gollan pay the costs of the petitioning creditor of and incidental to the petition, including all reserved costs, to be taxed if not agreed. I order the applicant on this application to pay the costs of the petitioning creditors and of the Official Trustee, to be taxed if not agreed, and I order that Mr Gollan pay the reasonable costs of the administration undertaken by the Official Trustee of his estate to be taxed, if not agreed.' 224 The reference by the Judge in that case to s 31A is to a repealed section in the Bankruptcy Act which provided the delegated power to the Registrar. That repealed section is not materially different to s 102(2) of the FMA. For that reason, I agree with the Judge's opinion that it would be competent on an application for review to set aside the sequestration order made on the creditor's petition and to dismiss the petition. However, I cannot agree that on a review of this kind that an order pursuant to s 153B of the Bankruptcy Act could have been appropriate. In any event, in the end result, his Honour did not have to decide that matter. 225 In Rangott v Marshall (2004) 139 FCR 14, Gyles J considered the effect of an order of the Full Court setting aside a sequestration order made by a Judge of the Court and whether an annulment order ought to be made concurrently with the setting aside of the sequestration order. 226 He concluded, at 23, that an order of the kind made by the Full Court 'is as if the sequestration order had never been made and the respondent had never been a bankrupt. On that basis the applicant is no longer a trustee of the estate of the respondent and was not trustee at the date this proceeding was commenced'. That was a matter of appeal, but the effect of the order of the Full Court is as to the same effect as the order of the Magistrate in this case, which was that the petition ought to be dismissed. In my opinion, Gyles J was right to conclude that no annulment order needed to be made in those circumstances.

Conclusion on the appeal 227 The respondent was entitled, subject to obtaining an extension of time, to have the Registrar's sequestration order reviewed on a hearing de novo. The Federal Magistrates Court cannot delegate to a Registrar the power to make a sequestration order without at the same time giving the party affected by the making of that order a right to a review. That has been recognised in s 104(2) of the Federal Magistrates Court Act. That being the case, the Federal Magistrate was first bound to consider whether the respondent was entitled to be heard on an application for review of the Registrar's order. Therefore, in this case, he was first bound to consider whether the respondent was entitled to an extension of time within which to bring the application for review. 228 If the Federal Magistrate was of the opinion that the respondent was entitled to an extension of time within which to bring the application for review, then he had to consider the application for review de novo. That is to say, he had to consider whether a sequestration order ought to be made on the information available to the Federal Magistrate at the time that the Federal Magistrate heard the matter. 229 If the Federal Magistrate was of the opinion that the sequestration order should not have been made, then the Federal Magistrate would have had to dismiss the petitioning creditor's petition. The Registrar's order would be set aside. In those circumstances, no question of annulment would arise. No sequestration order would be made. 230 If, on the other hand, the Federal Magistrate was of the opinion that a sequestration order should be made on the information available to him at that time then, again, no question of annulment could ever arise. It could hardly be said that if on the application for review the Federal Magistrate was of the opinion that a sequestration order ought to have been made, that the respondent could ever satisfy the provisions of s 153B of the Bankruptcy Act. 231 In those circumstances, the question of annulment would never arise provided that the Federal Magistrate was of the opinion that an extension of time to bring the application for review ought to be made. 232 If, of course, the Federal Magistrate was of the opinion that the respondent was not entitled to an extension of time within which to bring the application for review, then the question of annulment might arise. That, no doubt, was why the notice of motion sought as an alternative remedy annulment under s 153B of the Bankruptcy Act. 233 In this matter, this Court has not been troubled by the question as to whether the Federal Magistrate was correct to extend time within which to bring the application. That application was not opposed by the petitioning creditor or was the subject of any comment by the trustee in the hearing before the Federal Magistrate. This Court, therefore, must assume the correctness of that order. 234 In those circumstances, the question is whether or not the Federal Magistrate was correct to make an order setting aside the sequestration order and dismissing the petition without, at the same time, making an order for annulment. For the reasons already advanced, in my opinion, the Federal Magistrate was not wrong to proceed in the manner that he did. 235 I think this case demonstrates a lacuna in the Bankruptcy Act in circumstances where the trustee has embarked on the administration of the debtor's estate and when in due course the petition is dismissed under s 52(2) of the Bankruptcy Act on the review of a Registrar's order for sequestration of the debtor's estate. It may be that on the regime as it presently applies that that lacuna cannot easily be addressed because the purpose of the s 104(2) procedure is to enable the Court to exercise control of the delegated judicial power. Any legislation that denies a party a full rehearing by way of a de novo hearing may not satisfy the constitutional obligation imposed by Chapter III.

The appellant's alternative submission 236 The alternative submission put by the appellant was that if the Federal Magistrate was right not to make an order under s 153B for an annulment, the Federal Magistrate should have still ordered that the respondent pay the trustee's remuneration and expenses. The first thing to observe is what is sought is not costs. The question of costs is another issue. What was sought was an order in favour of a party, not a party to the proceeding, to cover that party's remuneration and expenses. In that regard, the appellant relies on Re Gollan. In my opinion, there is no power vested in the Court to make an order of the kind sought by the appellant. Re Gollan does not support the appellant's proposition. In that case, an undertaking was given by the debtor that he would pay the trustee's remuneration and expenses. In those circumstances, the order was made. Whether the order was enforceable is another matter which need not be considered by this Court at this time. 237 In my opinion, the Federal Magistrate was not in error in failing to make any order for the trustee's remuneration and expenses. The trustee was not a party to the proceeding. In those circumstances, it would have been inappropriate to visit such an order upon the applicant in favour of a non-party. Costs orders can be made against non-parties but this was not an application for costs.

A trustee's right to recover expenses 238 If an annulment order is made under s 153B then, as mentioned previously, the trustee's position in relation to the trustee's remuneration and expenses is protected: s 153(1)(b). The trustee is given a statutory entitlement provided, of course, that there are assets vested in the trustee at the time of the annulment order. That does not mean if an annulment order is not made that the trustee may not recover the trustee's expenses. In Adsett v Berlouis (1992) 37 FCR 201 at 209-210, the Full Court of this Court said: 'A trustee in bankruptcy is governed by the general law relating to trustees save where the position of the trustee is modified by the Bankruptcy Act or Rules: see Re Ladyman (1981) 55 FLR 383 at 394-396. The Act confers no right on a trustee to be reimbursed in respect of the costs, charges or expenses incurred in the administration of the estate. The trustee's right to an indemnity is provided under the general law. Under that law a trustee is entitled as of right to a full indemnity out of the trust estate against all costs, charges and expenses properly incurred by the trustee: see Turner v Hancock (1882) 20 Ch D 303 at 305; Re Love; Hill v Spurgeon (1885) 29 Ch D 348 at 350; Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 558. A trustee's right to remuneration for his or her own efforts, as distinct from reimbursement of outgoings, is not conferred by the general law. A trustee, generally speaking, has no right to remuneration. Neither does the right to remuneration arise out of the indemnity in respect of "costs, charges or expenses". That collocation of words does not include the value of services provided by the trustee in administering the estate. The concepts of remuneration and outgoings are distinct. It is true that in some statutory provisions - for example, s 109 of the Bankruptcy Act - the trustee's remuneration is specifically included amongst the "costs, charges and expenses of the administration of the bankruptcy". But such special provisions, giving an extended meaning to "costs, charges and expenses", do not remove the conceptual dichotomy between remuneration and outgoings. Rather, they group the two concepts for the limited purposes of the relevant sections.' 239 This Court, however, does not need to address the trustee's right at law to recover his expenses or remuneration. It is enough to note that it may be that the trustee has other remedies apart from those under the statute.

The cross-appeal 240 Lastly, there is the question of the cross-appeal. The respondent complains about the order made in favour of the trustee for the trustee's costs in circumstances where the respondent was entirely successful. 241 It was submitted by the respondent that the trustee did not oppose the granting of the relief sought by the respondent but made an oral application that there should be a separate annulment order under s 153B of the Bankruptcy Act in order to secure the trustee's remuneration and expenses. It was contended that almost the whole of the hearing before the Federal Magistrate was taken up on the contest between the respondent and the appellant as to whether the Court should make an annulment order. Because the respondent was successful, the respondent argued that the Federal Magistrate should have exercised his discretion in relation to costs in favour of the respondent. 242 The Federal Magistrate's exercise of his discretion must be seen in the circumstances of the matter before him. First, the respondent sought an order for annulment. It may be conceded that the order was sought in the alternative: [96]. However, because that order was sought, the appellant was put to the cost and expense of preparing the report pursuant to r 35.04, as it then was, of the FMCR. The respondent concedes that it would be appropriate to order the respondent to pay the appellant's legal costs associated with the preparation of that report. However, that overlooks, in my opinion, the clearly expressed application of the respondent that, if an extension of time were not ordered and no relief given under r 16.05(2), the Court should make an order under s 153B. 243 In those circumstances, the appellant was, in my opinion, entitled to argue, as he did, that that order be made. 244 The Federal Magistrate had a discretion on the question of costs. He had to exercise it judicially. 245 There has been no material put before this Court which would indicate that he failed to exercise that discretion in accordance with his obligation. 246 For those reasons, I would dismiss both the appeal and the cross-appeal.

I certify that the preceding one hundred and sixty two (162) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander.

Solicitor for the Respondent: Tasiopoulos Lambros & Co