Re O'Sullivan; Ex parte O'Sullivan v Commonwealth Bank of Australia

"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 Registrar, the Court may make an order annulling the bankruptcy." Service of the Petition One of the issues raised by Mr Freeman, who appeared on behalf of the applicant, was whether she had been served with the creditor's petition, and accompanying affidavits, in accordance with the Rules. The Bankruptcy Rules, r.15, provide as follows: "15.Unless otherwise ordered by the Court under sub-section 309(2) of the Act - (a) ...; and (b) service of a creditor's petition shall be effected on a debtor by delivering - (i) an official copy of the petition; (ii)a copy of the affidavit or of each affidavit verifying the petition; .... to the debtor personally...". An affidavit of service was filed by a commercial agent and was on the Court file at the time the sequestration order was made. That affidavit was read by Mr Merewether, who appeared on behalf of the respondent creditor in the present application. The relevant paragraphs of that affidavit read as follows: "1. On Thursday the second day of February 1995, at 12.24 o'clock in the afternoon, I served KATHLEEN WONG, with an official copy of the Creditor's Petition, together with an affidavit of Patricia May Elizabeth Robinson of Truth of Statements in Creditor's Petition, together with an Affidavit of Natalie Bugg, Verifying Paragraph 4 of the Bankruptcy Petition, by delivering them to her personally, at Level 5, Downing Centre, Liverpool Street, Sydney, in the said State. 2. I identified the person I served as the said KATHLEEN WONG as she was identified to me at the service by the Creditor Patricia May Elizabeth Robinson. I nevertheless asked her, 'Are you KATHLEEN WONG?' to which she replied, 'You can't serve that here'." The deponent was not cross-examined on this evidence. I should add that there was evidence that an unsuccessful attempt had been made earlier to serve a creditor's petition on the applicant at her home in December 1994. The applicant gave her version of events in an affidavit. She said that on 2 February 1995, she attended the Local Court with a barrister in relation to an application to pay the judgment debt in favour of the creditor by instalments. She deposed as follows: "4. On that same day whilst within the Court's precincts and before I had the opportunity to be heard by the Registrar I was approached by a person I now know to be Robert Canning who attempted to serve me with a document. He did not at any stage inform me of the nature of the document or what it purported to be. I did not say anything to Mr Canning. He placed the document on a chair that I had been sitting on previously but I had walked away from Mr Canning before he did this. I did not pick up the document at any stage. 5. Mr Cumberland as far as I am aware obtained the return date for the Creditor's Petition but advised me that it was not necessary for me to appear at any time with respect to the Creditor's Petition as the Creditor would be in contempt of Court if she sought to rely on a purported service having been attempted within the precincts of the Court.

On or about 17 March 1995 I was informed that a Sequestration Order had been made on the 13 March 1995 in my absence...." Mr Merewether chose not to cross-examine the applicant on her evidence. I infer from the applicant's evidence that she was well aware when approached by the commercial agent that he was attempting to serve her with a document. The first sentence of paragraph 4 of the applicant's affidavit is consistent with this conclusion. I also infer that the applicant moved away from the chair on which she was sitting in order to avoid the document being placed in her hands. I infer that she did this deliberately and also that she deliberately refrained from picking up the document. It is clear from paragraph 5 of the applicant's affidavit that, at some stage, she learned that the document which had been left on the chair was a creditor's petition. The applicant does not say in her affidavit that she did not realise at the time that the document, which the commercial agent had attempted to serve, was a creditor's petition. Had this been the position, it would have been very easy for the applicant to have included this in her affidavit. Since it is clear that her legal representative ascertained the date for the hearing of the creditor's petition and gave advice in relation to it, and since the legal representative was present on 2 February 1995, I infer that the applicant knew on 2 February 1995 that the document left by the commercial agent was a creditor's petition. (I should interpose here that Mr Freeman conceded that the advice given to the applicant, as recounted by her, was incorrect in the light of the subsequent decision of Lindgren J. in Re O'Sullivan; Ex parte O'Sullivan v Commonwealth Bank of Australia (1995) 129 ALR 295.) The Bill of Costs The judgment obtained by the creditor was in respect of a bill of costs rendered in Family Court proceedings. Mr Freeman conceded that the applicant had had the opportunity to tax the bill of costs in the Family Court prior to the making of the sequestration order on 13 March 1995, but had not availed herself of that opportunity. The applicant gave evidence that, on 2 May 1995, at a time when she knew that the sequestration order had been made, she lodged an application with the Family Court of Australia to have the creditor's bill of costs taxed. Not surprisingly, the Registry refused to accept the form, because it was out of time. First Annulment Application The present annulment application is not the first made by the applicant. An earlier application, according to her evidence, was listed before a Registrar of the Court on 2 May 1995. The applicant deposed that she was advised by her legal representative that she would save a lot of money in costs if she consented to her application being dismissed. She acted upon his advice and, accordingly, the first application for annulment was dismissed. The Dispute as to Quantum The creditor verified by affidavit the statement in the petition that the applicant owed the sum of $7,787.59, in respect of the judgment debt and costs. In her affidavit, the applicant disputed the amount due, but admitted that she "may owe the Creditor part of the amount claimed". The dispute, as outlined in the applicant's affidavit, appears to concern payments of $2,250.00 that the applicant claimed that she made on account of professional costs. However, although it is not entirely clear, her affidavit appears to concede that at least $1,536.00 of this amount was due in respect of an earlier memorandum of fees that was not included in the judgment debt. Report of Official Trustee The report of the Official Trustee was in evidence. This shows that the applicant described herself as a student and sole parent, and disclosed, in her statement of affairs, assets totalling $264,520 against unsecured liabilities totalling $7,787.59. The assets included a house, which was unencumbered and was valued by the applicant at approximately $145,000. The report also shows that the claim of the creditor was admitted in the sum of $8,127 (including accrued interest). The applicant has paid $10,500 into her estate, from moneys that she borrowed. An additional amount of approximately $7,695 was required (at the date of the Official Trustee's report) to pay the creditor in full. The difference between the sum of $10,500 paid in by the applicant and the total of $18,195 required to pay out the creditor was explained by various costs and expenses including the costs of the petitioning creditor ($2,646), the costs of administration ($1,753), statutory fees ($5,155) and additional interest ($514). It would seem clear enough that the applicant is entitled to an annulment of her bankruptcy if she pays the additional amount specified in the Official Trustee's report (and any additional expenses and interest incurred after the date of the report). This follows from s.153A(1) of the Bankruptcy Act 1966, which provides that: "If the trustee is satisfied that all the bankrupt's debts have been paid in full, the bankruptcy is annulled, by force of this sub-section, on the date on which the last such payment was made." Was there effective service? The principles relating to service of process in bankruptcy proceedings was dealt with in Gummow J. in Re Ditfort; Ex parte Deputy Commissioner of Taxation (NSW) (1988) 19 FCR 347. After analysing the authorities, his Honour stated the position, at 360, as follows: "I accept the submission by the respondent to the present application that there may be delivery personally to the debtor of process within the meaning of r 15 of the Bankruptcy Rules, even though the process has not been left in what Patteson J described [in Thomson v Pheney (1832) 1 Dowling's Practice Cases 441, at 443] as the "actual corporal possession of the defendant". If the debtor were refusing to take such actual corporal possession of the process, but the process server informed the debtor of the nature of the process and left it before or near the debtor so that the debtor had unimpeded and immediate access to the documents, that, in my view, should in general be sufficient to comply with r 15." Re Ditfort was followed in Ditfort v Temby (1990) 26 FCR 72, at 77. The circumstances of the present case satisfy the conditions for service specified by Gummow J., except in one respect. This is that, on the evidence, the commercial agent did not say specifically that it was a creditor's petition that was being served. However, I have found that the applicant not only deliberately moved away in order to avoid taking possession of the documents, but she understood that it was a creditor's petition that the commercial agent was attempting to serve. The applicant clearly had unimpeded and immediate access to the documents and the only reason she did not take physical possession of them was her desire to contend that she had not been properly served. The Sequestration Order Section 153B refers to the Court being satisfied that a sequestration order "ought not to have been made". This means that the order should not have been made in the light of the "true facts" as they existed at the time the sequestration order was made: Re Frank; Ex parte Piliszky (1987) 16 FCR 396 (FCA/Fisher J.), at 400; Re Raymond; Ex parte Raymond (1992) 36 FCR 424 (FCA/Spender J.), at 426-427. For reasons I have given, I do not think it has been shown that service was not effected in accordance with the rules. Nor do I think it has been shown that the judgment debt did not correctly state the indebtedness of the applicant to the creditor. The applicant claimed in her affidavit to have made some payments not taken into account in the bill of costs rendered by the creditor. While the applicant was not cross-examined, neither was the creditor, who deposed that the final judgment in the Local Court reflected fees for the provision of legal services in the sum of $7,071.61, together with costs and interest. The applicant plainly had the opportunity (as her counsel conceded) to tax the bill of costs, but did not do so prior to the making of the sequestration order. So far as the evidence shows, she either did not contest the creditor's claim in the Local Court or failed in any defence that may have been mounted. The assertions in the applicant's affidavit are not supported by detailed documentation. She did annex a statement of her account with a bank, showing two withdrawals in March 1993, each of $1,000. But there is no documentary material to support the claim that these payments had not been taken into account before the creditor obtained her judgment in the Local Court. However, in determining whether the sequestration order "ought not to have been made", it is appropriate to take into account the evidence relating to the applicant's financial position at the time the order was made. In particular, if the applicant was clearly solvent, ordinarily the Court would dismiss the petition even if she were unwilling to pay her debt: Re Gollan; Ex parte Gollan (1992) 40 FCR 38; Re D'Onofrio; Ex parte Blyth (1983) 76 FLR 136. The evidence of the Official Trustee shows that very shortly after the sequestration order, the applicant had unrealised assets with an estimated value of $245,000, including unencumbered real estate, against liabilities comprising the single debt due to the creditor. Had that evidence been before the Court, as was held in Re Gollan, the appropriate course would have been to dismiss the petition. It follows that the applicant has shown that the sequestration order ought not to have been made. Discretion That, however, is not the end of the matter. Even where the Court is satisfied that a sequestration order ought not to have been made, it has a discretion whether or not to make an order annulling the bankruptcy: Re Frank, at 401; Re Williams (1968) 13 FLR 10 (Fed Ct Bkpcy/Gibbs J.), at 23. The Court is to consider all the circumstances of the case, including any delay by the bankrupt and the interests of creditors. See generally Re Finn; Ex parte Finn v Amoco Australia Ltd (1982) 58 FLR 54 (FCA/Fitzgerald J.). In my view the circumstances of the present case are such that I ought not to exercise my discretion in favour of the applicant, unless appropriate arrangements are made to pay the costs and expenses of the bankruptcy and to pay the debt due to the creditor. The applicant had every opportunity to challenge the bill of costs that she received from the creditor and upon which the Local Court judgment was founded. She chose not to follow this course. The applicant was aware that the creditor's petition was to be heard in March 1995. She chose not to attend. It is said that she relied upon unsound legal advice. Be that as it may, ignoring the impending court proceedings was hardly a measure calculated to avoid bankruptcy. The applicant then brought proceedings to annul the bankruptcy, but acquiesced in the dismissal of her application. Again, it is said that she acted on advice. Nonetheless, she had legal representation and, rather than pursue her application in a timely fashion, she chose to accept the advice not to incur further costs in pursing the application. The present application was filed on 10 August 1995, some five months after the making of the sequestration order, and three months after the dismissal of the first application for annulment of the bankruptcy. In the meantime, the applicant has paid $10,500 to the trustee. Unlike the bankrupt in Re Gollan, no undertaking or offer has been made to pay the additional amount required to meet all expenses of the bankruptcy and pay out the creditor in full. As I have said earlier, even now it is open to the applicant to secure an annulment of her bankruptcy by paying the additional amounts required to satisfy the debt to the creditor, thereby enlivening the provisions of s.153A of the Bankruptcy Act 1966. I should add that no suggestion was made that the expenses specified by the Official Receiver were unreasonable or inappropriate. Nor has there been any suggestion that the creditor acted improperly or inappropriately in issuing the petition and obtaining a sequestration order. It is, of course, a most material consideration that the applicant was, at the date of the sequestration order, and is now, solvent. Had the applicant offered to pay, in an appropriate manner, the costs and expenses of the bankruptcy and to pay out the creditor in full, I would have been prepared to grant her application. But the trustee's costs and expenses have been incurred because of the course adopted by the applicant, coupled with the delay in pursuing proceedings for annulment. If an order annulling the bankruptcy is made, the trustee may apply the property of the former bankrupt still vested in him in payment of the costs, charges and expenses of the administration: Bankruptcy Act 1966, s.154(1)(b). To the extent that the property is insufficient, the amount of the deficiency is a debt due by the former bankrupt to the trustee and is recoverable by action in a court of competent jurisdiction: s.154(2). I think it is undesirable that either the trustee or the creditor, having regard to the applicant's course of conduct, should have to resort to further court proceedings, to recover the expenses of the bankruptcy or the balance of the debt. For these reasons I think that, if no appropriate arrangements are made by the applicant for the payment of outstanding fees, expenses and charges in relation to the bankruptcy (including the present proceedings) and for the payment of the outstanding debt, the application should be dismissed. However, the applicant should be given an opportunity to decide whether she wishes to make such arrangements. As I have noted, even if the application is dismissed, the applicant can secure an annulment of her bankruptcy by paying the outstanding debt and costs and expenses. Conclusion I propose to defer making these orders for fourteen days to give the applicant an opportunity, should she be so advised, to make appropriate arrangements for payment of outstanding fees, expenses and charges of the bankruptcy, and for payment of the balance of the debt due to the creditor. Arrangements would also need to be made in relation to the costs of the current application. If, at the expiration of the fourteen days, appropriate arrangements are made, I would be prepared to make an order annulling the bankruptcy. If they are not, I shall make orders dismissing the application and ordering that the costs of the trustee and the creditor should be paid out of the applicant's estate. I certify that this and the preceding 12 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville. Associate: Dated: 15 September, 1995 Heard: 11 September, 1995 Place: Sydney Decision: 15 September, 1995 Appearances: Mr R. Freeman appeared on behalf of the Applicant/Debtor. Mr Merewether of Sally Nash & Co appeared on behalf of the Respondent/Creditor. Mr D. Ronzani appeared on behalf of the Official Trustee in Bankruptcy.

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