Re Vella, Dianne Ex Parte Seymour, Michael Thomas [1983] FCA 114

Bankruptcy - default judgment in District Court - service of bankruptcy notice ~- expiry of bankruptcy notice - subsequent setting aside of District Court judgment - application to set aside bankruptcy notice after

commission of act of bankruptcy - application refused

Bankruptcy Act 1966 (as amended) ss. 30(1), 40(1) (qa), 41(6A)

IN BANKRUPTCY Plaint No B942 of 1983 BANKRUP''CY DISTRICT OF THE STATE

RE: DIANNE VELLA RESPONDENT : MICHAEL THOMAS SEYMOUR ORDER JUDGE MAKING ORDER : Morling J.

IN BANKRUPTCY Plaint No B942 of 1983 BANKRUPTCY DISTRICT OF THE STATE

re: DIANNE VELLA Ex parte: MICHAEL THOMAS SEYMCUR Morling J. 10 June 1983

bankruptcy notice served upon her set aside. Mhe application

raises a nice point of law which, so far as counsel's and my

own researches go, is free from authority precisely in point. The application arises in this way. On 6 December

1982 Michael Thomas Seymour ("the petitioning creditor")

Court of New South Wales. The judgment not having been

satisfied, the judgment creditor served a bankruptcy notice upon the debtor on or about 29 March 1982. There 1S some

uncertainty as to the exact date of service, but nothing turns

upon that. lt was a fourteen Gay bankruptcy notice. the Gebtor did not comply with it. During the currency of the notice the debtor did not apply to have the jidgment set aside nor did she apply to set aside the béenkruptcy notice. cn 2 May 1983 the debtor applied to the Cistract Court to have the judgment set aside. On the same day she made an epplication to this court to have the bankruptcy notice be set asidc. in due course the application in the District Court céme on for hearing and was successful. As a result, the judgment was set aside.

The guestion for decision is whether this court should set aside the bankruptcy notice which was itself "founded upon a Listrict Court judgment which was subsequently set aside. Counsel for the judgment creditor submitted that the court does not have power to make the order sought and, #wzlternatively, that even 1f there 1s power no sufficient reason 1s shown for the exercise of the power. Counsel for the debtor submitted that s.30(1) of the Bankruptcy Act 19€6, as amended, gives the court power to grant his clicnt's

application. Sub-section (1) cf s.30 provides, in part, as

follows: "30(1) The Court - ' ; .
(b) may make such orders (ancluding

declaratory orders énd orders granting injunctiens or other equitable remedies) as the Court considers necessary for the Purfoses of carrying out or giving effect to this Act in any such case or matter."

No reliance was placed upon s.41(6A) of the Act which gives the court power to extend the time for ccmpliance with a bankruptcy notice. hr Lowdy, who appeared for the debtor, conceded, in my view correctly, that he could not found an argument ufon that sub-section because of his client's failure to apply to have the judgment set aside or to have the bankruptcy notice set aside before the erypiretien of the time fixed for compliance with the requirements of the notice.

By s.40(1) of the Act it 1s provided, inter alia, that a debtor commits an act cf benkruptcy if a creditor who has cbtained against the debtor a final judgment upon whict execution has not been stayed has served upon the debtor a bankruptcy notice and the debtor does not within the time fixed for compliance with the notice comply with its requirements or satisfy the court that he has a counter-claim, set-off or cross demand equa] to cr exceeding the amount of the judgment debt, being a counter-claim, set-off or cross Gemana that he cculcd rot have set up in the action in which the judgment was obtained. It was common ground between counsel that the debtor's failure to comply with the requirements of the bankruptcy notice resulted in the commissicn ot an act of bankruptcy on or ebout 12 April. But 1t was submitted on behalf of the debtor that 'since the basis upon which the bankruptcy notice was founded was the District Court judgment, the setting aside of that judgment gave this court power to set aside the bankruptcy notice because the

taking of such a ccurse was "necessary for the purposes of

carrying out or giving effect to this Act" within the meaning of those words in s.3C(1){b).

At first blush this argument has some attraction. Eut upon reflection I have come tc the view that 1t 1s not sound. It 1s necessary to keep clearly in mind the effect of non-compliance with the bankruptcy notice. The effect was, of course, that the debtor committed an act of bankruptcy when she failed eithctr to comply with ats terms ocr to take appropriate action under s.41(6A). The subsequent setting aside of the judgment did not alter the fact that the act of bankruptcy hed already been ccmmitted. the act of bankruptcy remained extant. ho doubt, in the exercise of its discretion, "the court would not make a sequestration order if at the time of the hearing of the petition it was shown that the judgment debtor was net in fact indebted to the judgment creditor. bCBut the act of bankruptcy referred to in s.40(1)(g) would be complete. .

That the position is as I have stated it appears from the judgment of Gibbs J. (as he then was) in Re Hanby; Ex

parte Flemington Central spares Pty. Limited (1967) 10 E.L.F.

378%. In that case a petitioning creditor cbtained a Judgment ian the District Court against a debtor. A bankruptcy notice addressed to the debtor was issued. it was a fourteen day notice and was served on the debtor on 1€ May 1966. As in the present case, the debtor did not either comply with its requirements or apply for an extension of time to comply with

them. Nor did he apply to the Distract Court to have the

ment set aside. A petition seeking the sequestration of

the debtor's estate was returnable on 10 February 1967 but the

taken proccedings in the Listrict Court to set the default

judgment aside. The judgment was, in fact, set aside on z9

March 1967 and the debtor was let in to defend the action.

proceedings in the Listrict Court were subsequently

settled upon terms that there should be a verdict for the

plaintiff 1n a sum somevhat smaller than the amcunt for vhich

Gefault juagment hac been entered. When the petition

subsequently came on for hearing 1t was contended on behalf of

Gebtor that as the judgment had been set aside, it could

no longer be treated as a final judgment for the purposes of

(3) of the Bankruptcy Act 1924-1965, a provision which

notice, but what he hed to say in deciding the point which

that once the judgment was in fact set aside it could no longer be treated as a final judgment.

However, the critical time for determining whether an act of bankruptcy has been committed is the date on which the period limited by the bankruptcy notice expired - see Re Grace; Lx parte Castling (1931) 3 A.B.C. 131; Fe McDLonalé (1934) € A-B.C. 184, at p. 193; Re Eémunds (1936) 9 A.B.C. 1, at p.5. At the time when the bankruptcy notice expired in the present case, namely 3Cth May, 1966, the judgment had not been set aside and remained a

final judgment. Since the debtor had not by that date complied with the reguirements of the notice,

circumstances an act of bankruptcy once ccmmitted ceases to have been committed or must be treated as

does not mean that a sequestration order may be made if a judgrent has been set aside in circun-

stances that show that the debtor was under no liability to the petitioning creditor, for the court must inguire whether there is a debt due by the debtor to the petitioning creditor, and if not, wijl refuse an order notwithstanding the commission of an act of bankruptcy. lf, however, a judgment 1s set side after an act of bankruptcy has been completed, and subsequently the existence of the Gebt 1S established by a further judgment after a new trial, or by & cempromise of the proceedings, the conditions which entitle the petitioning cre@€itor to a sequestration order will have becu

It 1s true that in Hanby's Case the issue before the Court was whether & sequestration order shoula be made on the hearing of @ petition and not whether a bankruptcy notice shoula be set asidc. The Gecision is not directly in point in the present case but it does make clear that a subsequent event, namely, the setting aside of a jJudgnient upon which a bankruptcy notice is based, does not nullify the consequence of non-compliance with the notice.

Applying Gibbs J's reasoning, with which I respect- fully agree, it follcws that in the present case 1t wovla not be correct to treat the act of bankruptcy caqmmitted, by the debtor as 1£ 1t had never been committed. I1f the existence of the judgment creditor's debt is established by a further

judgment an the District Court after a new trial (as ain

Hanby's Case) the conditicns which will entitle him to a

sequestration order will have been established. It will not

be necessary for him to serve a fresh bankruptcy notice on the Gebtor. 1t will be sufficient for him to rely upon the act of bankruptcy committed on or about 12 April 1983. In these circumstances, 1t cannot be said, in terms of s.ZU(1)(k) of the Act, that the court should consider it necessary to set aside the barkruptcy netice for the purpose of carrying out or giving effect to the Act.

Mr Dowdy referred me to the decision of Lochhart oc. in ke Sterling (1980) 30 A.L.R. 77. that was a case in vhich an application was made to set aside tending the time fer compliance with the benkruptcy notice ard dic not do sc. ie €

the extendec time fer compliance with the bankruptcy

expired at midnight on 6 April 1981. Lefore BeGregcr

J. 1t was argued for the appellant that an act of barkruptcy

eady been committed by the respondent. On 7 April 1981

tame for compliance with the bankruptcy notice was extended

MeGregor J. tc make an order extending the time for compliance

with the bankruptcy notice the time the order was made on 7 April 1981,

"it was argued on behalf cf the zppellant that a long line of authority makes it apparent that s.41(6A) should not be construed as conferring Jurisdiction to make an order extending time for compliance with the

requirements of a bankruptcy notice in e1rcumstancées where, at the time of the proposed order, the time originally fixed and any

previously granted extension or extensions thereof have expired. the reason for this, it

notwithstanding the fect that, at the extended time

was salad, is that the Act confers no authority upon the court to annul an act of bankruptcy Which has been committed. pupon the expiry of the time criginally fixed and any extension or extensions thereof without ccmpliance with the terms of the bankruptcy notice, an ect cf bankruptcy is compicte. Any subsequent extension of time would, sO the ara_ment proceeds, be futile, since it could not annul the act of bankruptcy whack had already been committed and which would remain. in particuler, reliance was placed upon hing v Henderson (1369) AC 720 at 728; ke Grace (1¢21) of 3S ABC 131; Re McLonald (1934) & ABC 184 at 193; Re Edmunds (1936) 9S ABC 1; Re Panby (1967) 10 FLR 378 at 381; Re hayes (1970) IG FLR 216."

(37 A-L.k. 211 at 214) After stating that this argument possessed

considerable force end referring to the terms of s.41(€A) of

"We de not accept the proposition that, in the absence of an independent power to annul an act of bankruptcy, an order extending the time fer compliance with the requirements cf a bankruptcy notice would be futile if 1t were not made vithin the tame ainitially fixed for compliance or some persisting extension thereof. The power conferred a power to establish @ new, dastinct and andependent period of time for compliance. lhe effect of tn order extending the time for compliance, which is made after the expiry of the tame criginally fixed and any previous extensicn thereof, will be to enlarge the overall time allowed for compliance with the result that what would otherwise have constituted an act of bankruptcy no longer does +e. (T)has dces not mean that s 41(6A) operates SO aS retrospectively to divest rights, to rely upon en ect of bankruptcy which would ctherwise €xist. What s.41(6A) does is to modify, by the introduction of a contingency, the actual and potential rights and libilities resulting from farlure to ccmply with the requirements of a bankruptcy notice within the time allowed by the notice in a case where, within tha time, one of the two conditions specified in the sub-section has been fulfilled."

Whilst the effect of the decision in Streimer's Case

wes to relieve retrospectively the debtor in that case from the consequences of his brief non-compliance with the requirements of the bankruptcy notice served upen him, the

decision cannot be taken as authority for the proposition that the setting aside cf a bankruptcy notice after the tame for compliance with it has expired has the effect of annulling

the act of bankruptcy already committed. the effect of the order made by McCregor ¢. (and affarmed on appeal) in that case was to enlarge the overall time allowed for compliance with the result that no act of bankruptcy was committed. 'lhe order did net have the effect of retrospectively divesting

Borthwick & Sons (Australasia) Limited (1970) 1€ F.L.R. 216.

In that case Street J. (es he then was) applied the decision of Gabbs J. in he Hanby (supra). street J. held that failure to comply with a bankruptcy notice requiring payment of a judgment debt constitutes an act of bankruptcy notwithstanding that the judgment is later set aside and the debtor allowed in to Gefend the creditor's action. He held that any creditor, able to prove another debt of sufficient amount, may prosecute a creditor's fetatacn upon that act of bankruptcy - "In the report of the case it 1s stated that "the bankruptcy notice was set aside yesterday" (37 Bek. R. Z1G6 et 216). Lut it is plain frcem a reading of the facts of the case that what vas

set aside vas the default judgment upon which the bankruptcy

notice was based, not the notice itself. This appears from the fourth paragraph on p.217 of the report, where it 1s Clearly stated by his honour that he had been "informed ttat the Listrict Court had yesterday morning set aside the original petitioner's judgment and allowed the debtor in to defend." I have confirmed that the bankruptcy notice was net set aside by reference to Street J's notes, which his honour has kindly made ava1lakle to me. The relevance for present

purroses of Re Hayes' Case 1s that his Honour treated Nanby's

Case as clear authority that non-compliance with a bankruptcy

notice will bring about an available act of bankruptcy notwithstanding that the judgment upon which it 1s based may "subsequently be set aside. I respectfully agree with Street J. that Hanby's Case is authority for that proposition. In

Wilde v. Australian Trade Equipment Co. Pty. Limited (1961) 34

A.1I.R. at p. 151 , Gibbs dG. referrcd with obvious approval to

the ambit of the court's power under s.30(1). It is not in

deubt that the sub-section gives the court power to set aside

a bankruptcy notice in some circumstances. See Sterling's Case (supra). It 1s sufficient for present purposes to say

that no sufficient basis has been shown for setting aside the bankruptcy notice in this case. Setting aside the notice would not nullify the act of bankruptcy committed by the debtor on or about 12 April. in the events that may happen,

the judgment creditor may be able to rely on that act of

bankruptcy should he subsequently petition to sequestrate the debtor's estate.

Mr Lewdy submitted that setting aside the bankruptcy notice would be of some value to the debtor insofar as its continued existence 1s an embarrassment to her. He argued

that, accepting that she committed an act of bankruptcy by not

complying with the notice, the debtor still Gesircd to have the notice set aside. I can understand her desire, but 1 do not think it is a sufficient basis for exerciging the fower under s.30(1). If the notice were now to be set aside the impression might be created that no act of bankruptcy had been committed. But in the view I take of the law, that is not so. Thus the impression would be mislcading.- Certainly I am unable to find, in terms of s.30(1), that 1t is necessary to make an order setting aside the bankruptcy notice for the purpose of carrying out or giving effect to the Act.

Vhilst this mey seem a hara result from the debtor's point of view, it 1S a direct consequence of her failure tc take the steps available to her to avoid that result and of the conseguence which the Act gives to that failure. had 1 been of the view that setting aside the bankruptcy rotice would operate retrospectively to nullify the debtor's act of bankruptcy I would have come to a different conclusion' on the present application. but I cannot find anything in the Act or

preceding pa area true copy of the Reasons fa~ widen nent herein of his Honour