Rangott v Marshall

REASONS FOR JUDGMENT 1 On 13 August 2002 I made the following order: 'Upon amendment referred to in paragraph [39] of the reasons for judgment being made, the estate of the respondent debtor be sequestrated.' 2 The present respondent, Garry Brent Marshall, was the respondent debtor. The amendment referred to was made on 13 August 2002. On the same day the applicant William Balfour Rangott was appointed the trustee in bankruptcy of the estate of the respondent. 3 On 26 August 2002 I made the following orders: '1. Costs of the Applicant Creditor (including reserved costs) and the costs of EA Bourne Pty Limited up to and including 13 December 2001 of and incidental to the petition be taxed and paid out of the estate of the bankrupt in accordance with the Bankruptcy Act 1966 (Cth). 2. Further proceedings under the sequestration order be stayed until 4.30pm Wednesday, 28 August 2002. 3. No order as to costs of that application.' 4 On 18 March 2003 the Full Court made the following orders: '1. The appeal is allowed.

2. The orders made by Gyles J on 13 August 2002 are set aside.

3. That part of the order made by Gyles J on 26 August 2002 which relates to General Motors Acceptance Corporation Australia (General Motors), therein referred to as "the applicant creditor", are set aside, and in lieu thereof, order that General Motors is to pay the appellant's costs of the proceedings before Gyles J.

4. General Motors is to pay the appellant's costs of the appeal.' 5 The estate was actively administered from the appointment of the applicant on 13 August 2002. There is no need to set out the details in this judgment. Administration has effectively been on hold since the Full Court decision. 6 The point for decision is whether the respondent remains a bankrupt and whether the applicant remains his trustee in bankruptcy notwithstanding the orders of the Full Court. The short point is that the bankruptcy has not been annulled. There is importance in the point as bankruptcy is a status that has significant consequences for the bankrupt and for those with whom the bankrupt deals and has dealt. 7 The starting point of the argument is s 43(2) of the Bankruptcy Act 1966 (the Act) which provides as follows: '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.'

The equivalent in relation to a debtor's petition is s 55(8). In that case the bankruptcy takes place 'upon' endorsement of the petition (s 55(4A)(b)). 8 Section 74 deals with annulment of bankruptcy in the context of a composition or arrangement with creditors, in relation to which the following provisions apply: '(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.

(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.'

9 Annulment of bankruptcy otherwise is dealt with in Div 5 of Pt VII of the Act. Annulment on payment of debts is dealt with by s 153A. Annulment by the Court is dealt with by s 153B which is as follows: '(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.

(2) In the case of a debtor's petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented.'

10 Section 154 contains a set of provisions that relate to the effect of annulment including provisions like those in s 74 but with more detail. Counsel for the applicant makes the point that there are no equivalent provisions governing what should occur if the setting aside of a sequestration order brings the bankruptcy to an end. The ultimate disposition of an appeal, particularly if the High Court is involved, may take a considerable period of time, and much may have to be done in the administration of the bankrupt estate in the meantime. 11 It is submitted for the applicant that bankruptcy is not something declared or ordered by the Court as such. It is a status that arises by virtue of the statute upon the making of a sequestration order or acceptance of a petition in the case of a debtor's petition. The making of a sequestration order triggers the status of bankruptcy but, once triggered, the status remains until brought to an end by virtue of the provisions of the Act, namely by annulment or discharge. Some related issues have been discussed in M Quilter, 'The Federal Court's Powers to Deal With Sequestration Orders: the Bankruptcy Act 1966 (Cth) Section 37(2)', Australian Bar Review, Vol 15, 1997, pp 252-261, and DA Hassall, 'Annulment of Bankruptcy and Review of Sequestration Orders', Australian Law Journal, Vol 67, 1993, pp 761-771. 12 The applicant's argument has the direct support of Gibbs J (as he then was) in Re Deriu (1970) 16 FLR 420. A bankrupt applied for an order rescinding a sequestration order on the ground that he was never indebted to the petitioning creditor. The application was made pursuant to s 37 of the Act, as it then stood, dealing with rescission of orders. Gibbs J held that the judgment upon which the bankruptcy notice was founded was not founded upon a real debt and that the petitioner was not entitled to a sequestration order. The question considered was whether or not the sequestration order should be rescinded pursuant to s 37 or annulled pursuant to s 154. Gibbs J took the view that the High Court in Cameron v Cole (1944) 68 CLR 571 had held that the then annulment provision (s 124) completely regulated annulments and that a sequestration order could not be annulled under the provision for rescission, not following another single judge decision on the point. In the course of his reasons Gibbs J said (at 422): 'Indeed, as Williams J. pointed out in Cameron v. Cole (1944) 68 C.L.R., at p.610, the rescission of the sequestration order would not put an end to the bankruptcy (see s 43(2) of the Bankruptcy Act 1966-1969).' Section 43(2) was the same in principle then as now. 13 That indeed was one of the grounds of the decision of Williams J in Cameron v Cole. In considering whether use of the power to rescind was appropriate, his Honour said (at 610): '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.' Section 54(2) was the same in principle as the present s 43(2). 14 Williams J had earlier said (at 607-608): '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 still remain 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 a 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 recognized 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.' That passage supports the point referred to in [10] above. 15 Counsel for the respondent pointed out that Williams J was in dissent in the result in Cameron v Cole. That is true. However, there are many strands of reasoning in the judgments in that case and those issues were not relevant points of distinction between Williams J and the other members of the Court. The opinion of Williams J is at least persuasive and it was open to Gibbs J to adopt it. In one sense it does no more than recognise the express terms of the statute. 16 The applicant also relies upon the decision of the High Court in Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589. In that case the Deputy Commissioner of Taxation presented a petition for a sequestration order against the estate of Clyne based upon the debtor's failure to comply with the requirements of a bankruptcy notice served on him. John William O'Brien consented to act as trustee of the debtor's estate if he became bankrupt. On 6 September 1983 the debtor presented his own petition and William Edward Andrew consented to act as trustee if the debtor became bankrupt. The petition was accepted by the Registrar and the debtor thereupon became bankrupt by force of s 55(3) of the Act. At that date the creditor's petition stood adjourned to 19 September 1983. On 7 October 1983 a sequestration order was made on that petition 'to take effect on 6 September 1983 prior to the presentation by the debtor of his own petition pursuant to the provisions of s 55 of the Act' and it was declared that Andrew was to be the trustee of the estate. The Full Court varied the original order by substituting the date 5 September 1983 for the date 6 September 1983 because that date was necessary for the creditors' bankruptcy to precede the bankruptcy on the debtor's own petition. That decision was reversed in the High Court. 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.' It was held that, absent annulment of the bankruptcy consequent upon acceptance of the debtor's petition, there could be no later sequestration order. The Full Court also concluded that by force of law each of the two trustees was a trustee of the estate of the bankrupt and deleted the declaration that Andrew was the trustee. 17 The critical issue for the present case is the interplay between the provisions of the Act and the appellate jurisdiction of the Federal Court. It is argued for both the respondent and the Inspector-General in Bankruptcy, who was permitted to intervene, that the appeal provisions fundamentally alter the reasoning in the authorities to which reference has been made. If a sequestration order is set aside on appeal, it is as if it were never made and thus it is taken that there never was any valid triggering of the statutory consequence of bankruptcy. 18 In Simon v Vincent J O'Gorman Pty Ltd (1979) 41 FLR 95; 27 ALR 619 it was contended that no appeal lies from the making of a sequestration order, the person being made bankrupt being confined to making an application to the Court for annulment of or discharge from the bankruptcy, relying upon Re Deriu. The Full Court rejected that argument and distinguished Re Deriu on the basis that it was concerned with the rescission of a sequestration order rather than with the appeal provisions. Franki J said (at 41 FLR 102, 27 ALR 625-626): '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 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" (1972) 126 C.L.R., at p.238. A similar order was made by the Full Court of this Court in Re Schierholter; Ex parte Geis (1978) 32 F.L.R. 22. Both appellants appealed by filing the one notice of appeal, but there is evidence before us that, although the solicitors still remain on the record for both appellants, the second appellant does not wish to pursue the appeal. Since the order made by the trial judge was that the court "hereby makes a sequestration order against the estate of the debtors", it is appropriate to make an order that the appeal be allowed. I would order that the appeal be allowed and that the sequestration order of the Federal Court of Bankruptcy be set aside and in lieu thereof order that the petition be dismissed and that the first respondent pay the costs, including any reserved costs, of the appellants of the proceedings before the trial judge, of the proceedings in the High Court and of the appeal to this Court.' Lockhart J said (at 41 FLR 109, 27 ALR 631): 'In Wren v Mahoney (1972) 126 CLR 212 the High Court ordered that an appeal by the bankrupt against the making of a sequestration order be allowed, that the order of the Federal Court of Bankruptcy be set aside and in lieu thereof that the petition be dismissed. The Full Bench of this Court made an order to the same effect in Re Schierholter; Ex parte Geis (1978) 32 F.L.R. 22. These decisions confirm the view I have reached notwithstanding that the point asserted by the respondents does not appear to have been argued in either case.' 19 I was also referred to the decision of the High Court in Commissioner for Railways (NSW) v Cavanough (1935) 53 CLR 220 which confirms the principle that a judgment reversed is the same as no judgment. In that case the respondent was an officer of the Government Railways. The Government Railways Act 1912 (NSW) provided that an officer convicted of felony should be deemed to have vacated his office. The respondent was summarily convicted of larceny. He appealed to Quarter Sessions which upheld his appeal and set aside the conviction. During the period which elapsed from his conviction until its reversal he received no salary and the performance of his duties was suspended. It was held that he was entitled to his salary because, his conviction having been quashed, he could not be considered ever to have been convicted and could not be deemed to have vacated his office. As he was never out of office he was entitled to the salary attached to it. 20 The decision of the Full Court in Allanson v Midland Credit Ltd (1977) 30 FLR 108; 16 ALR 43 requires consideration. On 2 December 1976 a sequestration order was made against the estate of Mr Allanson. A notice of appeal to the High Court was filed seeking an order setting aside the sequestration order. Upon payment of a sum for security for prosecution of the appeal there was a stay of the judgment appealed from pursuant to O 70 r 12(2) of the High Court Rules. Thereafter, leave was sought to proceed in an action in the Supreme Court of New South Wales pursuant to s 58(3) of the Bankruptcy Act as it then stood. The first question for the Full Court was whether Mr Allanson was a bankrupt. Bowen CJ, Riley and Deane JJ said (at 113): 'One view may be that the stay of the judgment itself under r. 12(2) blocks it at source so as to render it completely ineffective for all purposes, except the hearing of the appeal. On this view, neither the judgment nor the sequestration order made in pursuance of it can, while the stay operates, be used as the basis for satisfying one of the statutory conditions precedent ("debtor has become a bankrupt") to the operation of s. 58(3). Such a situation could be compared with that which exists after the grant of a perpetual stay of a winding-up order under the Companies Act which operates to terminate the liquidation. Another view may be that the effect of the stay does not prevent the judgment and sequestration order remaining as a fact but that no step which depends for its effectiveness upon the judgment can be taken. If this view be correct, it might be argued that Mr. Allanson still had the status of a bankrupt, but that no step in which it was necessary to rely upon the order of sequestration could be taken. Subject to the interpretation of s. 58(3), it might then be argued that an application for leave to proceed was such a step. Whatever be the correct view of the effect of the stay brought about by the operation of r. 12 (2), the ultimate answer to the question must depend upon the operation, in the light of that view, of ss. 43(2) and 58(3) of the Act. Section 43(2) fastens upon "the making of the sequestration order" to give the debtor the status of a bankrupt. There is no doubt a sequestration order was made. Section 43(2) goes on to provide that he "continues to be a bankrupt" until discharge or annulment, neither of which events has occurred. Unless the view is taken that the stay under r. 12(2) has the effect of eliminating the fact of the sequestration order, it may be argued that Mr. Allanson became and continued to be a bankrupt by force of the Bankruptcy Act regardless of the view taken of the precise effect of the stay under r. 12(2).' The Full Court did not finally decide the issue. 21 In The Official Receiver in Bankruptcy v Todd (1986) 14 FCR 177 there was discussion about the effect of s 55(8) and its equivalents, including s 43(2), but in another context. 22 I have been referred to a series of decisions relating to the power to grant, and the effect of, a stay pending appeal including Re Wardle; Ex parte Widin v Australia and New Zealand Banking Group Ltd (1987) 70 ALR 633; Coleman v Lazy Days Investments Pty Ltd (1994) 55 FCR 297; Symons v Bateman [1999] FCA 658; and Guss v Johnstone [2000] FCA 1593. Those decisions, whilst of interest, do not solve the present problem. 23 It is useful to revisit Clyne v Deputy Commissioner of Taxation with this point in mind. Gibbs CJ, Murphy, Brennan and Dawson JJ said (at 597): 'Moreover, the court has, in our opinion, no power to backdate a sequestration order to make it take effect either before, or contemporaneously with, the commencement of the bankruptcy resulting from the acceptance of the debtor's petition. In a number of cases in which a bankruptcy petition was wrongly dismissed and the debtor was thereafter adjudicated bankrupt on his own petition, the appellate court, in allowing an appeal, has directed that the receiving order made against the debtor should be amended as if dated on the day on which the petition was wrongly dismissed, and should be deemed to be made on the creditor's petition: In re Haynes; Ex parte Kibble (1890) 7 Morr. 50; In re Johns; Ex parte Spears (1893) 10 Morr. 190; In re Teale; Ex parte Blackburn [1912] 2 K.B. 367. The practice established by those cases can be justified by the power that an appellate court has in allowing an appeal to make the order which should have been made in the first instance. However, the Act itself provides when a debtor becomes a bankrupt - either upon the making of a sequestration order (s. 43(2)) or upon the acceptance by the registrar of the debtor's petition: s. 55(3)(b). Apart from the power of an appellate court to put right what was wrongly done in the first instance, no court has power to cause a debtor to become a bankrupt on a date earlier than that for which the Act provides. Neither the general power conferred by s. 30(1)(b) of the Act to make such orders as the court considers necessary for the purpose of carrying out or giving effect to the Act, nor the power given to the Federal Court by its rules to antedate its orders (O. 35, r. 3) extends to permit the court to make an order which would bring about a result different from that prescribed by the express provisions of the Act and so serious in its possible consequences.' And (at 600-601): 'However, no annulment was sought either at first instance, or an appeal to the Full Court of the Federal Court, or in argument before us. Although no order annulling the bankruptcy resulting from the acceptance of the appellant's own petition can be made here, it does not follow that the setting aside of the sequestration order should be followed by a dismissal of the petition. That would sanction what appears to be an abuse of process. The appropriate course is to allow the respondent or any other creditor an opportunity to apply for annulment. Thereby the interests of the general body of creditors and the public may be protected. It is true that the respondent had an opportunity to apply for annulment and declined to take it, but he cannot be held to have elected finally not to apply for annulment. The respondent was contending that the petition could found a sequestration order though the existing bankruptcy were not annulled. In those circumstances, the respondent cannot be taken to have elected not to apply for annulment if his contention were rejected. Now that the question is resolved against the respondent's contention, he must elect whether to apply for annulment. Although we regret that these proceedings cannot be brought more speedily to finality, we find it necessary to set aside the sequestration order made on the creditor's petition, and to order that the matter be remitted to a judge of the Federal Court to enable him to consider any application that may be made for an annulment of the sequestration order made on the debtor's own petition and any application for the imposition of conditions on the making of any order for annulment. If no application for an annulment is successfully made, the creditor's petition for a sequestration order must be dismissed. If an application for an annulment is successful, a sequestration order may be made on the creditor's petition if the other necessary proofs are satisfactory.' Deane J, having formed the view that there was a gap in the legislation leaving it to speculation as to what the legislature would have done to reconcile the possibility of two bankruptcies, said (at 604-605):

'Moreover, whatever approach might have been thought appropriate, the inclusion of special procedural provisions would have been desirable. In particular, if the view had been taken that a sequestration order should be available against a bankrupt on the petition of a creditor whose debt was due and payable at the time when the debtor had become bankrupt on a debtor's petition, it would have been plainly desirable that special legislative provision be made either to avoid the existence of two distinct bankrupt estates or to deal with the problems involved in the concurrent existence of two such estates. There remains the question of what order should be made on the appeal. I agree, for the reasons which they give, with the conclusion reached by the other members of the court that the barrier to the making of a sequestration order would be removed in a case where the bankruptcy resulting from acceptance of a debtor's petition was first annulled. It may be that, if an application to annul the subsisting bankruptcy had been pursued, such an annulment order would have been made in the present case. No such application was however pursued at first instance. More importantly, no question of annulment was raised in the Full Court of the Federal Court, was mentioned in any notice of appeal or was sought to be raised by any party in this Court. To the contrary, when the subject of annulment of the subsisting bankruptcy was mentioned in argument in this Court, senior counsel for the first respondent was at pains to draw attention to "some real problems of fact and evidence and inference from evidence" which would "obviously" exist in relation to an application for annulment and to disclaim any suggestion that annulment was a live issue in this Court. That being so and notwithstanding that bankruptcy proceedings are not merely proceedings inter partes in that questions of status and the rights of third parties are involved (cf. Sarina v. Shire of Wollondilly (1980) 48 F.L.R. 372 at p.376), I do not consider that the appellant debtor should be refused the orders to which he is prima facie entitled upon his success on the only matters which any of the parties have raised on the appeal.' 24 It seems that the Act does not expressly address the imposition of an appellate regime upon the provisions in relation to sequestration and bankruptcy. That may be an accident of history. 25 The critical appellate provision is s 28 of the Federal Court of Australia Act 1976 that, so far as is relevant, is as follows: '(1) Subject to any other Act, the Court may, in the exercise of its appellate jurisdiction:

(a) affirm, reverse or vary the judgment appealed from;

(b) give such judgment, or make such order, as, in all the circumstances, it thinks fit, or refuse to make an order;

(c) set aside the judgment appealed from, in whole or in part, and remit the proceeding to the court from which the appeal was brought for further hearing and determination, subject to such directions as the Court thinks fit;'

Counsel for the applicant submits that full effect should be given to the words 'subject to any other Act'. 26 It has been pointed out by counsel for the respondent that the actual order in Re Schierholter (referred to by Franki J and Lockhart J in Simon v Vincent J O'Gorman Pty Ltd) was that the appeal should be allowed and the sequestration order made in respect of the estate of each of the appellants should be set aside and so was the same in substance as the orders of the Full Court in this case. There were apparently no other consequential orders. 27 It has been submitted for the respondent that one of the effects of the Full Court judgment was that there was no failure to comply with the bankruptcy notice and thus no act of bankruptcy, a circumstance upon which much turns in the administration of a bankrupt estate. 28 There is no decision precisely in point. The problem is real. What is the result of many months of active administration of the affairs of the respondent? He cannot be restored to his former position. By what mechanism is partial restoration to take place? Is the applicant immune from action? Is the applicant entitled to remuneration and, if so, from where? Could those issues have been dealt with by consequential orders of the Full Court? If so, what is the effect of no such orders having been made? 29 I am bound by Simon v Vincent J O'Gorman Pty Ltd to conclude that the appellate provisions apply to a sequestration order. That being so, they cannot be read down. It would follow from the Full Court decision that the sequestration order made on 13 August 2002 and the consequent appointment of the applicant as trustee are set aside. If full effect is given to these provisions it 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 trustee of the estate of the respondent and was not trustee at the date this proceeding was commenced. That conclusion appears to be consistent with the reasoning in Guss v Johnstone (2000) 74 ALJR 884; 171 ALR 598 at [56]-[63] that concerned a different, but not dissimilar, issue although no argument by counsel was directed to that decision. Precisely how the eggs broken from 13 August 2002 to the present day are to be unscrambled is a question that does not arise in the present proceeding (cf the authorities referred to by Sackville J in Shephard v Chiquita Brands South Pacific Limited [2004] FCAFC 76 at [65]). 30 The application is dismissed. The proceeding is adversary and therefore the applicant must pay the costs of the respondent. I refuse the application made by counsel for the respondent that an order for indemnity costs be made against the applicant. It will be apparent from the foregoing that hitherto the question at issue has not been directly resolved. In truth, the problem has emanated from the form of order made by the Full Court. Unfortunately the Federal Proceedings (Costs) Act 1981 does not apply. There will be no order as to the costs of the Inspector General. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

Associate: Dated: 23 July 2004 Counsel for the Applicant: DA Hassall

Solicitor for the Applicant: Gillespie-Jones & Co

Counsel for the Respondent: DPM Ash

Solicitor for the Respondent: B Killalea

Solicitor for the Inspector-General in Bankruptcy A Berger of Australian Government Solicitor

Date of Hearing: 6 May 2004

Date of Judgment: 23 July 2004