Rigg v Baker

Federal Court of Australia (Full Court)|1977-05-31|Before: Cooper J, French J, Cowdroy JJ, Spender J

1 I have had the benefit of reading, in draft form, the reasons for judgment of French J. I am thus relieved of the need to set out the facts in this matter and the issues for determination on the appeal. 2 In my opinion, the appeal should be allowed because the primary judge erred in his decision that a sequestration order against the estate of Mrs Baker ought not to have been made. I agree generally with the reasons of French J for reaching that conclusion, but because I am disagreeing with the primary judge on this central question, I want shortly to state my own reasons for so concluding. 3 Before doing so, I respectfully disagree with the conclusion of French J on the alternative basis for allowing the appeal, namely, that even if the sequestration order ought not to have been made, the primary judge erred in the exercise of his discretion in granting an annulment. 4 I do not take the primary judge's statement at par 31 that, 'There was no discretionary factor pointing against annulment…' literally. What his Honour was meaning to indicate was that, in the circumstances of the case, the discretion ought not be exercised against granting the annulment. 5 The two factors which are said to direct the discretion against the making of an annulment order (in the context of a conclusion that the sequestration order ought not be made) are said to be first, Mrs Baker's failure to take any steps to oppose or appear at the hearing of the petition; and secondly the absence of any undertaking to pay Mr Rigg's costs thrown away in the annulment proceedings. In my respectful opinion, neither of these factors, or indeed the decision of Mrs Baker to proceed to seek to annul the bankruptcy only after the application for her daughter to 'take over' the appeal proceedings in the Supreme Court of New South Wales was not successful, are factors which required the discretion to be exercised against making the annulment order. 6 It almost invariably is the case that a bankrupt applies to annul his or her bankruptcy after having failed to oppose or appear at the hearing of the petition. Frequently this is because, as in this case, the debtor had no assets, and was of the belief that nothing could be done to avoid the bankruptcy. There is then a change of mind. The failure to oppose or appear at the petition, or to delay applying for an annulment until other avenues are explored, is not necessarily fatal, in my opinion, to an application to annul the bankruptcy. 7 It follows, in my opinion, that if it had been the case that the sequestration order against the estate of Mrs Baker ought not to have been made, no error has been shown in the exercise of the primary judge's discretion to make an order annulling her bankruptcy. I would therefore not allow the appeal on the basis of the second ground referred to by French J. 8 In my opinion however, the primary judge did err in concluding that the sequestration order made by Registrar McIllhatton on 5 September 2005 ought not to have been made. 9 The decision of the primary judge in this respect depends upon the correctness of his Honour's finding at par 29: 'It seems to me that, on these facts, a sequestration order ought not to have been made. If the Registrar had known the full facts, she would have realised it was not clear that Mrs Baker was a net debtor to Mr Rigg. The proper order would have been to adjourn the hearing of the bankruptcy petition until determination of the appeal to the Court of Appeal.' 10 This view of the 'full facts' is the consequence of his Honour's analysis of the obligations by Mrs Baker to Mr Rigg, and the obligations by Mr Rigg to Mr Baker. 11 As the observations of Riley J in Re Calderon (unreported, Federal Court of Bankruptcy, 31 May 1977) adopted by Carr J in Pollock v Deputy Federal Commissioner of Taxation 94 ATC 4148 at p 4153 make plain, the applicant for annulment bears the onus of satisfying the Court that the sequestration order ought not to have been made. 12 Mrs Baker's claim for an annulment was based on her contention that: '(b) I have a counter-claim, set-off or cross-demand exceeding the amount referred to in the creditor's petition which I could nothave set-up in any of the related proceedings described in Mr Stubbs' affidavit. The cross-demand is in respect of breach of covenant given by Mr Rigg to maintain me, my daughter, and my grand-daughter in my former home during the life of the survivor of us. This claim was inconsistent with the rights I sought to establish in the related proceedings which depended for their success on setting aside various instruments including the deed by which the covenant was given.' 13 The primary judge noted at par 13: 'It is conceded [that] … Mr Rigg has breached his obligations under the deed and was liable to pay damages for that breach to Mrs Baker. No formal claim has yet been made for the damages. Nor has their amount been quantified.' (Emphasis added.) 14 I do not regard the judgment debt on which the petition was founded as being part of those damages. The judgment was the costs order in respect of the caveat removal proceedings, to which Mrs Baker consented. That costs order arose as a consequence of Mrs Baker's unfounded claim that she had a caveatible interest in the property. The making of that unfounded claim cannot be fairly regarded as a step to mitigate her damages. 15 The costs Mrs Baker was ordered to pay Mr Rigg arose because of her failure to have the deed set aside for unconscionable conduct and undue influence on the part of Mr Rigg. They can hardly be part of her damages for breach of Mr Rigg's covenant contained in that very deed. 16 The 'full facts' in existence at the time the Registrar made the sequestration order was that there was in existence a debt of $5,991.17 owed by Mrs Baker to Mr Rigg. Secondly, Mrs Baker had a claim against Mr Rigg for damages for breach of his covenant of quiet enjoyment arising from the deed which Mrs Baker had sought to challenge, but that claim was unquantified. Thirdly, it is likely that the debt of $46,918.36 assigned by the bank to Mr Rigg would be a component of the damages to which Mrs Baker was entitled for the breach of covenant of Mr Rigg. 17 On the other hand, the proposed appeal against the rejection of her claim challenging the various instruments, including the deed in question, on grounds of unconscionability and undue influence, and the consequential costs order, faces formidable difficulties in light of the 'credit based findings'. There is also the finding by Mason P that Mrs Baker had not prosecuted her appeal. The costs payable to Mr Rigg by Mr Baker in the judgment under appeal was said by Mason P to be in the order of 'hundreds of thousands of dollars'. In my view, the prospects of success by Mrs Baker in an appeal based on the negligence of her solicitor, against the solicitor, is irrelevant for the present inquiry. 18 For the above reasons, the conclusion by the primary judge at par 27 that, 'it is clear that, at the date of the sequestration order…Mr Rigg was liable to pay damages to Mrs Baker in an amount that would undoubtedly exceed the amounts which she owed to him at the date of sequestration' is wrong, in my respectful opinion. 19 This was the basis for his Honour's conclusion that the sequestration order ought not to be made, which is the condition for annulment specified by s 153B of the Bankruptcy Act 1966 (Cth). 20 It follows that there was no power to annul the bankruptcy pursuant to s 153B of the Bankruptcy Act 1966 (Cth). Mrs Baker had not demonstrated that the sequestration order ought not to have been made. 21 I agree with the orders proposed by French J. I certify that the preceding twenty one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender.

Associate: Dated: 8 December 2006 IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALESDISTRICT REGISTRY NSD 2546 OF 2005

On appeal from a single Judge of the Federal Court of Australia

REASONS FOR JUDGMENT FRENCH J: Introduction 22 On 5 September 2005 Dawn Marie Baker was made bankrupt. Her bankruptcy flowed from a sequestration order made on a creditor's petition brought by her late husband's former business partner, Stephen James Rigg. The petition was based on her failure to comply with a bankruptcy notice demanding satisfaction of a costs order of $5,995.60 made in favour of Mr Rigg in the Local Court of New South Wales. The judgment was for the amount of an assessor's fee and legal costs in relation to a caveat lodged by Mrs Baker over her former home which had been transferred to Mr Rigg pursuant to agreements entered into in November 1996. 23 Mrs Baker did not seek to set aside the bankruptcy notice nor to oppose the making of the sequestration order. She did not appear at the hearing of the petition. However for reasons relating to the prosecution of an appeal, in the Supreme Court of New South Wales, in proceedings against Mr Rigg and her former solicitors relating to the transfer of the home into Mr Rigg's name, Mrs Baker subsequently applied for an annulment of the sequestration order. On 1 December 2005 Wilcox J hear her application and made an order annulling the sequestration. Mr Rigg has appealed against that decision. 24 For the reasons which follow his Honour erred in concluding that the sequestration order ought not to have been made. He also erred in exercising his discretion to make an annulment order in favour of Mrs Baker. The appeal should be allowed and the annulment order set aside with costs. Factual and procedural history 25 Dawn Marie Baker is the widow of Kenneth William Baker who died on 25 April 1996. She was executrix of his will and the sole beneficiary of his estate. The estate comprised various parcels of real estate and items of plant, equipment and livestock. Mr Baker had operated a substantial farm near Kempsey. He and his wife had lived in a homestead on the farm. It had been their matrimonial residence for 30 years. 26 At the time of his death Mr Baker had been in partnership with Stephen James Rigg in a car repair business known as Kempsey Kar Kare. Mr Rigg was the active and managing partner of the business. Mr Baker was a silent partner. The partnership owed money to the Commonwealth Bank at the time of Mr Baker's death. 27 The gross value of Mr Baker's estate was sworn for probate at $959.680.83. Its net value was said to be $731,794.17. Mr Baker's half share of the Kempsey Kar Kare partnership debts to the Commonwealth Bank was $77,905. He also owed $50,000 to a man named Trott, which was a liability of the estate. 28 Following her husband's death, Mrs Baker conferred on a number of occasions with Paul Sheridan, a solicitor who had acted on behalf of her husband. He was retained to act on behalf of the estate. Mr Rigg attended the bulk of these conferences. Mr Rigg was under some pressure to finalise loan security arrangements that were incomplete at the time of Mr Baker's death. 29 On 25 November 1996 Mr Sheridan prepared two deeds between Mrs Baker, Mr Rigg and Mr and Mrs Baker's son, Trevor Baker. The arrangement reflected in the deeds effected a transfer from the estate to Mr Rigg and Mr Trevor Baker of the greater part of the deceased's real estate including the homestead. Mr Rigg and Mr Trevor Baker covenanted to take over all of the debts of the estate and to permit Mrs Baker, together with her daughter, Cathy Alexander, and Mrs Alexander's daughter to continue to live in the homestead free of rent and of any liability for outgoings. The two women and Ms Alexander's daughter were living in the homestead at the date of execution of the deed. 30 The operative clauses of the second deed which contained the relevant promises were in the following terms: '1. THE transferor and her said daughter and grand-daughter shall continue to reside in the said house property rent free and without being liable for costs such as rates, insurance and maintenance at any time. 2. THE consideration for the terms of this Agreement is that consideration as is more fully particularised in the Deed of even date between the parties. 3. THE Transferees shall allow the Transferor and her said daughter and said grand-daughter full free and unfettered access to the said house property at all reasonable times. 4. THE said Transferees will at their own expense continue to maintain the subject house property and ensure that it is at all times habitable to the said Transferor, her said daughter and her said grand-daughter. 5. THE said Transferees will in addition to maintaining the property pay all Council rates, Water rates, Land tax and insurance and other charges associated with the said building.' 31 Title to the property was transferred pursuant to the promises in the first deed and Mr Rigg became the sole proprietor of the homestead block. He then reorganised his dealings with the bank so as to increase his indebtedness to it. That indebtedness was secured, inter alia, by a mortgage over the homestead block. He continued to perform his obligations towards the bank. Mrs Baker continued to live in the house with her daughter and grand-daughter. 32 In 2000 or 2001 Mr Rigg defaulted in his repayments to the bank. The bank then sought to obtain possession of the block to exercise its power of sale as mortgagee. In 2001 Mrs Baker commenced proceedings in the Common Law Division of the Supreme Court of New South Wales against her former solicitors, Mr Rigg and her son, Mr Trevor Baker. She alleged that the transfer arrangement was the result of undue influence and/or unconscionable conduct on the part of Mr Rigg. The solicitors were sued in negligence for failing to advise her not to enter into the transaction and for facilitating it through provision of their legal services. Mr Rigg cross-claimed against the solicitors and Trevor Baker. His central complaint was described, later in the New South Wales Court of Appeal, as a complaint that the solicitors had failed to protect him from the stresses and costs involved in becoming embroiled in the main proceedings. 33 On 2 January 2001 Mrs Baker, through her new solicitors, lodged a caveat against the title to the homestead block. She brought a separate proceeding in the Supreme Court of New South Wales seeking to uphold the caveat. Evidently it became apparent that the caveat was defective. On 14 February 2003 Mrs Baker consented to an order for the lifting of the caveat. She also agreed that the proceedings she had commenced in relation to the caveat should be dismissed with costs. Those costs were assessed at $4,452.17. They were not paid and Mr Rigg obtained a judgment in the Local Court of New South Wales in the sum of $5,991.17 including an assessor's fee and legal costs. 34 In 2004 James J heard the action brought by Mrs Baker in the Supreme Court of New South Wales against her former solicitors, Mr Rigg and her son. These resulted in verdicts for each defendant against Mrs Baker with costs. Mr Rigg's cross-claim against the solicitors also failed, resulting in a verdict for the cross-defendants with costs - Baker v Sheridan [2005] NSWSC 89 and Baker v Sheridan (No 2) [2005] NSWSC 121. 35 James J found that the solicitors had not been in breach of their professional duty save for one minor aspect. He dismissed the claim in negligence. He found that Mrs Baker would not have acted any differently if she had received fuller advice. As to her claim against Mr Rigg, James J rejected her evidence about critical conversations between her and Mr Rigg and about her allegations of special disadvantage. He found in favour of Mr Rigg that, contrary to the allegations against him, he had not deliberately manufactured a false sense of crisis or otherwise exercised undue influence or acted unconscionably in 1996. Mr Rigg's cross-claim against the solicitors failed as there was no conflict of interest between him and Mrs Baker and also on causation grounds. In his reasons for judgment his Honour found that Mr Rigg's recollection of events and credibility as a witness was considerably greater than that of Mrs Baker. In so saying his Honour did not find that Mrs Baker was anything other than an honest witness. However she had "no recollection of many events" and in some respects gave "internally inconsistent answers". While some aspects of Mr Rigg's evidence were the subject of criticism by his Honour it was, for the most part, accepted. 36 It followed from the findings made by James J that the second deed under which Mrs Baker was entitled to occupy the homestead was valid. It is not in contention that Mr Rigg had breached his obligations under the deed and was liable to pay damages for that breach to Mrs Baker. However, no claim has been made for the damages nor has their amount been quantified. 37 In order to retain a right of occupation of the homestead Mrs Baker had agreed with the bank in 2001 to pay the interest that would accrue in the future on the balance of Mr Rigg's debt to the bank. The bank obtained judgment against her in relation to that obligation on 19 May 2005 in the amount of $46,918.36 inclusive of costs. That judgment was thereafter assigned to Mr Rigg. Mrs Baker was forced to vacate the homestead by the bank on 26 May 2005. The homestead was sold by the bank in the exercise of its mortgagee's power of sale. 38 On 1 July 2005 Mr Rigg served a bankruptcy notice on Mrs Baker demanding payment of $5,995.60 which was the amount of the Local Court judgment together with interest. The notice demanded payment within 21 days. Mrs Baker did not make the payment. On 9 August 2005 Mr Rigg filed a creditor's petition in the Federal Magistrates Court based on Mrs Baker's failure to comply with the requirements of the bankruptcy notice. The petition was returnable on 5 September 2005. Mrs Baker did not appear on the return of the petition and a registrar of the Court made a sequestration order on that day. 39 At the time she was made a bankrupt Mrs Baker's appeal in the Court of Appeal was pending. The Official Receiver elected not to discontinue the appeal but assigned Mrs Baker's chose in action in the appeal to her daughter, Ms Alexander. 40 On 23 November 2005 Mason P in the Court of Appeal, dealt with motions filed by the solicitors and Mr Rigg each seeking dismissal of the appeal against them for non-prosecution. A third motion filed by Mrs Baker's daughter, Ms Alexander, sought her joinder as appellant on the basis of the assignment to her of Mrs Baker's rights in the proceedings. Her application was supported by the third respondent, Mr Trevor Baker, who had apparently supported his mother's position both at trial and on the appeal. 41 Mason P noted in the course of his judgment that despite the Rules and despite directions made by a Registrar of the Court, Mrs Baker had not prosecuted her appeal. She had become a bankrupt and had not filed written submissions which were due on 13 July 2005, later extended to 15 August 2005. Nor had she filed the requisite appeal books. He observed that her appeal ought to be dismissed for non-prosecution subject to matters which he then went on to address. 42 Mason P looked to the history of Mrs Baker's bankruptcy and the assignment of her rights in the appeal to her daughter. His Honour took the view that the stance adopted by the trustee in bankruptcy evinced clearly to the Court and to the parties to the appeal that the trustee did not intend to take any steps in the prosecution of the appeal. If they were to be taken the moving party would be Ms Alexander, the assignee. His Honour said (at [52]): 'Nothing indicates that Mrs Baker intends or has the capacity to stay or annul the bankruptcy. The Bank obtained against her a substantial judgment for costs which has been assigned to Mr Rigg. Additional costs orders have been made against her and they too will be provable debts in the bankruptcy. Mrs Baker's costs payable to Mr Rigg in the judgment under appeal appear to be in the hundreds of thousands of dollars.' His Honour accepted that Ms Alexander wished to prosecute the appeal but that she lacked the capacity to meet any costs orders that would inevitably flow were the appeal to be dismissed. Indeed, the parties were agreed, for the purposes of the proceedings before Mason P, that Ms Alexander would be unable to pay Mr Rigg's costs of the proceedings to completion, to date or of the proceedings at first instance. 43 His Honour said he was firmly of the view that the appeal before him would be a proper case in which to order security. It would be most unfair to permit the litigation to go on without fully protecting the respondents from the risk of further wasted costs. He said (at [63]): 'I am prepared to assume that the appeal is arguable. But nothing that I have seen indicates that it is a strong one. The first instance judgment contains significant credit-based findings both adverse to Mrs Baker and in favour of Mr Rigg and the solicitors.' He took the view that the joinder of Ms Alexander as sole appellant would be a futility. It would be subject to an order that the proceedings be stayed pending the provision of security which could not be provided. Nevertheless he allowed a little over a week to elapse between the publication of his reasons and the making of orders which he foreshadowed. The formal order he made at the time was that the motions before him stand adjourned to 2 December 2005. He indicated that at that time he would dismiss Ms Alexander's application with no order as to costs and would make orders dismissing the appeal and cross-appeal. 44 The day before the matter was to come back before Mason P Mrs Baker filed an application in the Federal Court to annul her bankruptcy. In an affidavit in support of that application Mrs Baker said she had not taken any action to set aside the bankruptcy notice upon its service in June 2005 as she had no assets and did not believe she could avoid the bankruptcy. In relation to the delay in bringing the annulment application she said: '4. I had not brought the present application sooner as I was desirous of allowing assignment of the chose in action in relation to my Appeal that vested in the Official Trustee to bring some resolution of my desire to pursue the Court of Appeal proceedings as explained in more detail in Mr Stubbs' affidavit.' 45 Mrs Baker set out the following grounds in support of her annulment application: 'a) the debts relied on in the creditor's petition, as explained in Mr Stubbs' affidavit, were liabilities incurred by me in proceedings relating to the "Baker Proceedings". I am pursuing an appeal from the judgment in the Baker Proceedings. b) I have a counter-claim, set-off or cross-demand exceeding the amount referred to in the creditor's petition which I could not have set-up in any of the related proceedings described in Mr Stubbs' affidavit. The cross-demand is in respect of breach of covenant given by Mr Rigg to maintain me, my daughter, and my grand-daughter in my former home during the life of the survivor of us. This claim was inconsistent with the rights I sought to establish in the related proceedings which depended for their success on setting aside various instruments including the deed by which the covenant was given. c) On the material set out in Mr Stubbs' affidavit, the creditor's petition was brought against me for the purpose of frustrating my statutory right of appeal from the judgment in the Baker Proceedings.' 46 According to Mrs Baker as at 9 August 2005 when the creditor's petition was filed in the Federal Magistrates Court the only debts she had were debts that arose out of her endeavours to save herself from having to move out of her homestead. Other than those debts she was solvent. As at the date of the sequestration order she did not have any means to satisfy any judgment against her. 47 A further affidavit in support of the application was sworn by Mr Paul Stubbs, Mrs Baker's solicitor. In his affidavit, at [11], Mr Stubbs said that Mrs Baker had lodged a caveat to protect her 'interest' in the homestead property in an attempt to preserve the status quo. The existence of a caveatable interest was challenged in proceedings in the Supreme Court and on 13 February 2003 orders were made by consent dismissing Mrs Baker's proceedings in support of the caveat. The proceedings had sought an extension of the operation of the caveat. That caveat had affected various properties which were the subject of the transfer from Mrs Baker to Mr Rigg and which included the homestead. Mrs Baker agreed to pay Mr Rigg's costs with respect to the caveat proceedings. 48 According to Mr Stubbs, should the Court of Appeal proceedings meet with success, Mrs Baker would seek to categorise the debt in respect of the costs of the caveat proceedings as part of the costs of mitigating her loss and therefore recoverable as an element of the monetary compensation she sought. Mr Stubbs said that in the event the annulment were granted the consequence would be: (a) Ms Alexander would immediately upon the annulment of the Bankruptcy re-assign the chose in action to Mrs Baker; (b) The Court of Appeal proceedings would be pursued by Mrs Baker; (c) Outstanding matters with respect to the prosecution of the Court of Appeal proceedings would be attended to within 14 days; (d) Mrs Baker would pay the costs of the Official Receiver, with respect to the administration of her bankrupt estate upon the successful conclusion of the Court of Appeal proceedings. The annulment application was heard by Wilcox J on 1 December 2005. His Honour gave judgment on the same day. The reasons for decision of the primary judge 49 After setting out the somewhat convoluted procedural history of the matter, his Honour referred to s 153B of the Bankruptcy Act 1966 (Cth) and said (at [23]): 'Three principles must be noted. First, the relevant facts are those in existence at the date of the sequestration order. However, in considering that situation, the Court is not confined to the evidence that was before the judge or registrar who made the sequestration order. Fresh evidence may be placed before the Court in the annulment application. Second, the Court should not hold that a sequestration order ought not to have been made unless the person who made the order was bound, on the facts now known to the Court, not to have made the order. Third, even if that was the situation, the Court retains a discretion whether or not to annul a sequestration order.' 50 His Honour considered the situation as it existed on 5 September 2005 when the sequestration order was made. At the time Mrs Baker was indebted to Mr Rigg in the amount of $5,595.60. That debt was the sole basis of the bankruptcy petition. She also owed Mr Rigg $46,918.36 which was the amount of the judgment debt owed to the Commonwealth Bank of Australia which had been assigned by the bank to Mr Rigg. The amount of the judgment however would be included in any damages payment that Mrs Baker was entitled to recover against Mr Rigg arising out of his breach of covenant in the second deed. She was also entitled, so his Honour observed, to recover other damages arising out of Mr Rigg's breach of the covenants contained in the second deed, being those damages which were consequential upon her dispossession from the homestead. 51 His Honour noted that costs orders had been made by James J against Mrs Baker in favour of both the solicitors and Mr Rigg. The ultimate fate of those orders was related to the fate of the undetermined appeal. His Honour then said (at [25]): 'Finally, Mrs Baker wished to pursue her appeal, it being an appeal that Mason P has described as 'arguable'. I respectfully agree with that description. Indeed, in relation to the solicitors, I think the appeal has substantial prospects of success. It was obviously of vital importance to Mrs Baker that she be able to continue to reside in the homestead with her daughter and grand-daughter as long as she wished. In 1996 Mrs Baker was only 61 years of age. It was foreseeable that she would wish to stay in the house for many years, yet Mr Sheridan took no steps to protect her against alienation or mortgage of the property by the transferee. Neither, it seems, did he take steps to drive home to Mrs Baker the risk of this occurring and ensure she had independent advice as to whether she wished to take that risk.' 52 His Honour observed that the order which founded the bankruptcy petition, namely the costs order in the caveat proceeding, had not been the subject of any appeal. It was, however, closely related to the subject matter of the pending appeal in the New South Wales Court of Appeal. Absent the conduct complained of in the proceeding the subject of that appeal, the caveat costs order would not have been made. His Honour said (at [27]): 'Further, and perhaps more importantly, it is clear that, at the date of the sequestration order (and assuming James J was correct in regarding the second deed as valid), Mr Rigg was liable to pay damages to Mrs Baker in an amount that would undoubtedly exceed the amounts which she owed to him at the date of sequestration.' 53 His Honour found that Mrs Baker's damages must include the amount for which she became liable to the bank as the price of mitigating her loss and staying in her home together with damages for the loss of her home during the period 26 May to 5 September 2005 and ongoing. Although the latter sum was not quantified, it must exceed the judgment debt of $5,995.60. His Honour then said (at [29]): 'It seems to me that, on these facts, a sequestration order ought not to have been made. If the Registrar had known the full facts, she would have realised it was not clear that Mrs Baker was a net debtor to Mr Rigg. The proper order would have been to adjourn the hearing of the bankruptcy petition until determination of the appeal to the Court of Appeal.' 54 His Honour found no discretionary factor pointing against annulment. Accepting the conclusion by James J that Mr Rigg had not exerted undue influence or engaged in unconscionable conduct, it was nevertheless the case that the whole problem arose out of his failure to honour his obligations under the second deed. The bank took the action to evict Mrs Baker. But its action was only possible because Mr Rigg had encumbered the homestead property with a mortgage obligation he was unable to satisfy. 55 His Honour made orders in the following terms: '1. The Bankruptcy of the Applicant be annulled. 2. The Sequestration Order made on 5 September, 2005 in the Federal Magistrates Court be set aside. 3. That the Respondent Stephen James Rigg pay the Applicant's costs of the annulment application.' The Grounds of Appeal 56 The grounds of appeal against his Honour's decision are as follows: '1. His Honour erred in holding that, for the purposes of section 153B of the Bankruptcy Act 1966 (Cth), the sequestration order made against the estate of the Respondent ("the Bankrupt") on the petition of the Appellant ("the Creditor") ought not to have been made, in that: (a) his Honour erred in finding that Mason P had found the Bankrupt's appeal to the New South Wales Court of Appeal, number 40511 of 2005 ("the Baker Appeal") against the judgment given in favour of the Creditor in Supreme Court of New South Wales proceedings number 20124 of 2001 ("the Baker Proceedings") was arguable; (b) his Honour erred in holding that if the Bankrupt succeeded in the Baker Appeal, her damages or compensation as against the Creditor would include her liability under the judgment against her in Supreme Court of New South Wales proceedings number 13225 of 2001 ("the Bank Proceedings"); (c) his Honour erred in holding that, the circumstances of the case as presented on the annulment application were such that, had those circumstances been presented to the Court when the Court was hearing the petition, the Court would have had no alternative but to refuse to make a sequestration order. 2. His Honour erred in the exercise of the (sic) his discretion not to make an annulment order, in that: (a) his Honour failed to take account of relevant considerations, namely: (i) that the Bankrupt had made a deliberate decision not to contest the petition despite her legal representatives having been aware of it; (ii) that after the sequestration order had been made, the Bankrupt had adopted an alternative approach to keeping the Baker Appeal on foot, namely obtaining an assignment of the cause of action from the Trustee, and had applied for annulment only after that manoeuvre had proved unsuccessful in the New South Wales Court of Appeal. (b) his Honour's exercise of the discretion was so unreasonable in the circumstances that it bespeaks error.' Statutory Framework 57 Part VII of the Bankruptcy Act deals with discharge and annulment. Division 5 deals with annulment. It comprises ss 153A, 153B and 154. Section 153A provides for annulment in the event that the bankrupt's debts have been paid in full. Section 153B 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. (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.' 58 The effect of annulment is set out in s 154, which provides, inter alia: (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.' The remaining subsections of s 154 are not material for present purposes. General principles 59 The power of the Court to annul a bankruptcy derives from s 153B of the Act. In the case of a bankruptcy created by a sequestration order on a creditor's petition, the power involves two elements:

The Court's satisfaction that the sequestration order ought not to have been made.
The Court's exercise of a discretion to make an order annulling the bankruptcy. 60 The power to annul a sequestration order is to be distinguished from a power to vary or rescind an order: 'When an order for sequestration is annulled the debtor, in respect of his property, is restored to the status quo ante, subject to any order which the Court may make under that sub-section.' Cameron v Cole (1943) 68 CLR 571 at 583 (Latham CJ). By virtue of s 37(2) of the Bankruptcy Act rescission has been abolished as a means of bringing a bankruptcy to an end: Re Gollan (1992) 40 FCR 38 at 40 (Spender J). Nevertheless the nature of annulment with its restorative consequence invites caution in its application: Cameron v Cole at 583 (Latham CJ); 594 (Starke J). 61 In determining whether a sequestration order ought to have been made the Court may consider "not only the case as disclosed at the time that the order was made, but as it would have been disclosed had all the true facts been before the court on the making of the order": Re Cook (1946) 13 ABC 245 at 259 (Clyne J); Re Williams (1968) 13 FLR 10 at 23 (Gibbs J). But facts which have come into existence since the making of the order are not relevant to the question whether it ought to have been made: Re Scott [1975] Qd R 125 at 126-127 (Lucas J); Re Frank; Ex parte Piliszky (1987) 16 FCR 396 at 400 (Fisher J); Re Ditford; Ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347 at 350 (Gummow J). 62 The circumstances under which a sequestration order "ought" not to be made were described by Fisher J in Frank (at 403): '… a judge "ought" not to have made an order only if he was "bound" not to make the order.' And further (at 403): 'In my opinion "ought" in s 154(1)(a) is of imperative significance and an order should not be annulled unless the judge was in the circumstances bound not to make it and even then there is a residual discretion not to annul.' That proposition was quoted with evident approval by the Full Court in Hudson v Whalen [1999] FCA 189 at [10]. 63 In Pollock v Deputy Federal Commissioner of Taxation (1994) 94 ATC 4148, Carr J set out five propositions relevant to applications for annulment. They were derived from the judgment of Riley J in Re Calderon (unrep Federal Court of Bankruptcy, 31 May 1977, No NSW 573 of 1976) as follows (at 4153-4154): '1. It is for the applicant for annulment who alleges, and it is therefore for him to bring himself within the section and satisfy the Court, that the sequestration order ought not to have been made. 2. The Court to whom the application is made seeks to ascertain the actual state of affairs at the time when the sequestration order is made. 3. In order to ascertain that actual state of affairs the Court hearing the application for annulment looks at the facts that were before the Court which made the sequestration order and at any other facts that were not before that Court but are shown on the hearing of the application for annulment to have been in existence when the sequestration order was made. 4. Having considered all the facts so looked at, the Court determines whether on those facts the applicant has satisfied it that the sequestration order ought not to have been made. 5. If it is so satisfied, the Court is not bound to annul the sequestration order but must consider in all the circumstances of the case whether it ought to be annulled.' 64 Generally speaking the true facts, which if known to the person making the order may have led him or her to refuse the order, relate to the financial circumstances of the debtor. They may, however, extend to procedural issues: Maxwell-Smith v S & E Hill; In the matter of Maxwell-Smith [2004] FCA 840 at [20] (Moore J). 65 One basis upon which a creditor's petition may be dismissed is that the debtor has a cross claim against the creditor: Ling v Eurobrook (1997) 74 FCR 19 at 25. In St George Bank Ltd v Helfenbaum [1999] FCA 1337, Sundberg J said (at 9): 'The existence of a cross-claim may be "a sufficient cause" within s 52(2)(b) for declining to make a sequestration order. It is for the debtor to establish the existence of "sufficient cause". He must establish that he has a real claim against the creditor that is likely to succeed. If the Court is satisfied that there is such a claim, and that its quantum is likely to equal or exceed the creditor's claim, it will not make a sequestration order. If the claim is likely to be less than the creditor's claim, the Court will require the debtor, if he is to avoid a sequestration order, to pay the difference between the judgment debt and the amount he is likely to recover on his claim. A debtor does not establish a real claim that is likely to succeed merely by producing a statement of claim in an action against a creditor … or by pointing to the existence of current litigation against the creditor. While the Court does not try the cross-claim in advance, the debtor must adduce sufficient evidence to show that it is a real claim which is likely to succeed.' 66 A distinction has been drawn between a claim against the petitioner creditor which is likely to succeed and which would warrant refusal of a sequestration order and a "real claim" which has sufficient prospect to warrant the debtor being granted an opportunity to have it litigated. In the latter case an adjournment of the petition may be appropriate: In the matter of Jovanovic [1998] FCA 463 citing Re James, Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14 at 22 (Olney J). The existence of a cross-claim against the petitioning creditor which is likely to succeed may support the proposition that the sequestration order ought not to have been made and should be annulled. On the other hand the existence of a real claim which might have warranted adjournment would not necessarily support that conclusion. That is not to exclude the possibility that in appropriate circumstances the registrar or judge hearing the petition ought to grant an adjournment on the basis of a "real cross-claim". 67 When the creditor's petition is based upon a judgment debt, the existence of a pending appeal against that judgment may also be a ground for adjourning the petition. In Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 the Full Court said that: 'It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds.' That observation arose in the context of an appeal against a sequestration order made after the primary judge had refused to adjourn a petition based on a default judgment then subject to appeal. Ground 1 - whether the sequestration order ought not to have been made 68 The Registrar of the Federal Magistrates Court who made the sequestration order against Mrs Baker on 5 September 2005 did so on the basis of a creditor's petition backed by an unanswered bankruptcy notice. Mrs Baker made no appearance at the hearing. On the facts as known to the Registrar there is no ground for saying that the sequestration order ought not to have been made. The question remains whether the facts shown to the learned primary judge were such that if known to the Registrar they would have led him to conclude that the sequestration order ought not to have been made. 69 His Honour rightly confined himself to a consideration of the relevant facts in existence at the date of the sequestration order. He also accepted that he could only make an annulment order if the Registrar would have been bound, on the facts known to his Honour, to refuse the sequestration. 70 The relevant facts identified by his Honour as at 5 September 2005 were:

NEW SOUTH WALES DISTRICT REGISTRY NSD 2546 OF 2005

On appeal from a single Judge of the Federal Court of Australia

REASONS FOR JUDGMENT COWDROY J: 82 I have read the reasons for judgment of Spender J and of French J. I do not agree that the Registrar, had she known of all of the facts at the time the sequestration order was made, was bound to make such order. I consider that the order ought not to have been made and I set out hereunder my reasons.

FACTS 83 Mrs Baker was the sole beneficiary of the estate of her late husband, Kenneth William Baker, who died on 25 April 1996 ('the deceased'). Included in the assets of the estate was a house ('the homestead') in which the deceased and Mrs Baker had resided near Kempsey. 84 Mr Rigg is a nephew of Mrs Baker. At the time of his death, the deceased operated a business with Mr Rigg in Kempsey known as Kempsey Kar Kare. At the date of the deceased's death, a half share of the partnership debts was owed to the Commonwealth Bank of Australia amounting to $77,905. 85 On 25 November 1996, Mrs Baker executed two deeds made between herself, her son Trevor William Baker and Mr Rigg. Under the first deed, Mrs Baker agreed to transfer to Mr Rigg and/or her son the entire estate comprising parcels of real estate, including the homestead, plant, equipment and livestock. The second deed gave Mrs Baker, her daughter and granddaughter the right to reside in the homestead rent free and free of outgoings. 86 The transfer of the estate assets was duly affected and in consequence Mr Rigg became the sole registered proprietor of the deceased's land including the homestead. Thereafter Mr Rigg mortgaged such lands to the Commonwealth Bank ('the Bank'). Subsequently he defaulted in his payments to the Bank and in consequence the Bank instituted proceedings in the Supreme Court of New South Wales to obtain possession as a prelude to its exercise of power of sale as mortgagee. 87 On 2 January 2001 Mrs Baker lodged a caveat against the title to the homestead land. She then commenced proceedings in the Supreme Court seeking to uphold her entitlement to maintain the caveat (proceeding No. 91226/03), but ultimately consented to an order for its removal and for the dismissal of the proceedings. She was ordered to pay costs which were assessed at $4,452.17. Judgment for such costs and assessor's fees in the sum of $5,991.17 was duly obtained by Mr Rigg in the Local Court of New South Wales. To delay eviction, Mrs Baker agreed to pay the Bank interest accruing on Mr Rigg's debt to it. However, on 19 May 2005 the Bank recovered judgment for $46,918.36 against Mrs Baker in consequence of her default under the agreement. The Bank thereafter assigned this debt to Mr Rigg. 88 Mrs Baker, who had used the same solicitor as Mr Rigg and her son in the preparation of the deeds, retained a new solicitor. She instituted proceedings in the Supreme Court of New South Wales (proceeding 20124/01) alleging negligence against her former solicitors. Claims of undue influence and unconscionable conduct were made against Mr Rigg and her son Trevor Baker. 89 These claims were heard in the Supreme Court of New South Wales before His Honour Justice James. On 24 February 2004 judgment was entered in favour of all defendants and accordingly Mrs Baker's actions were unsuccessful. An appeal to the Court of Appeal of New South Wales was duly filed by Mrs Baker which was due to be heard on 31 January 2006. 90 On 1 July 2005 a Bankruptcy Notice was served on Mrs Baker demanding payment for the unpaid judgment for costs of $5,995.60 of proceeding No. 912261/03. Such debt was not paid and on 5 September 2005 a sequestration order was made against her by Registrar McIllhatton. Mrs Baker did not appear at that hearing. 91 The Official Receiver subsequently assigned the conduct of Mrs Baker's appeal from the judgment in proceeding 20124/01 to her daughter, Ms Alexander. In a judgment delivered on 23 November 2005 Mason P upheld the entitlement of Ms Alexander to prosecute the appeal but proposed that an order be made for security for payment of the defendant's costs. Ms Alexander was unable to provide such security. 92 Subsequently Mrs Baker applied to have the sequestration order set aside, and on 1 December 2005 Wilcox J made orders annulling the bankruptcy pursuant to s 153B(1) of the Bankruptcy Act 1966 ('the Act') which provides: '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.'

FINDINGS OF THE COURT 93 Wilcox J observed that Mrs Baker owed the sum of $5,595.60 for costs and also an amount of $46,918.36 being the value of the judgment that had been recovered by the Bank against Mrs Baker. However His Honour observed that as this latter amount was assigned by the Bank to Mr Rigg, it would be included in the claim for damages that Mrs Baker might be entitled to recover against Mr Rigg arising out of the breach of covenant in the second deed. It was conceded before Wilcox J by counsel for Mr Rigg that Mr Rigg had breached his obligations under the deed and was liable to pay damages in respect of that breach to Mrs Baker. 94 Wilcox J also observed that Mrs Baker was entitled to recover other damages arising out of Mr Rigg's breach of the covenants contained in the second deed. His Honour noted that costs orders had been made by James J against Mrs Baker in favour of the defendants in proceeding 20124/01 but that the fate of those orders were also linked to the outcome of the appeal before the Court of Appeal. Wilcox J observed that Mason P had described the appeal as 'arguable'. Wilcox J also considered that Mrs Baker had substantial prospects of success in her action against her former solicitors. 95 Wilcox J found that the order for costs upon which the sequestration order was based was closely related to the subject matter of Mrs Baker's appeal and, more importantly as at the date of the sequestration order Mr Rigg might be liable to pay damages to Mrs Baker 'in an amount that would undoubtedly exceed the amounts which she owed to him at the date of sequestration.' 96 His Honour found that in these circumstances the sequestration order should not have been made. Accordingly His Honour annulled Mrs Baker's bankruptcy and ordered that the sequestration order be set aside.

THIS APPEAL 97 Mr Rigg claims that Wilcox J erred in respect of several findings, including the finding that Mason P had considered that Mrs Baker's prospects before the Court of Appeal were 'arguable'; the finding that if Mrs Baker succeeded in her appeal, her damages or compensation would include her liability under the judgment recovered against her by the Bank; and the finding that the circumstances were such that had those facts been presented to the Court when it heard the petition, the Court would have had no alternative but to refuse the making of a sequestration order. Mr Rigg also claims that His Honour failed to take account of relevant considerations, namely that Mrs Baker had deliberately chosen not to contest the bankruptcy petition and that after the making of the sequestration order Mrs Baker had only then obtained approval from the trustee of her estate to assign the appeal to Ms Alexander; and that Mrs Baker had applied for annulment only after that procedure had proved unsuccessful in the Court of Appeal. It was submitted that the appeal was merely a tactical device. The appellant further submits that His Honour took into account an irrelevant consideration being the prospect of success of Mrs Baker against her former solicitors. 98 Wilcox J found Mrs Baker to be a net debtor to Mr Rigg and his judgment referred to the decision of Ahearn v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 148 wherein the Full Court observed that in general a court exercising jurisdiction in bankruptcy should not sequestrate the estate of a debtor if an appeal is pending against the judgment relied upon. However, Mr Rigg submits that in this instance there was no doubt concerning the validity of the judgment that gave rise to the sequestration order, and that Mrs Baker's appeal was unquantified and the likelihood of her succeeding was open to speculation. 99 Mr Rigg relies upon the word 'ought' in s 153B of the Act as indicative that the Court's power to set aside a sequestration order should not be exercised unless the order ought not to have been made. Mr Rigg submits that there is no suggestion that Mrs Baker was solvent; and that the annulment application assumes that a sequestration order should have been refused under s 52(1) or that there was some 'other sufficient cause' which required dismissal of a petition under s 52(2) of the Act. Mr Rigg submits that the sequestration order was correctly made and relies upon the observations of the High Court of Australia in Cain v Whyte (1933) 48 CLR 639 at 646, which held that if all the statutory requirements for making a sequestration order are satisfied, a creditor is prima facie entitled to such an order. Mr Rigg submits that the only justification for declining to make a sequestration order could have been the existence of a cross-demand by Mrs Baker which raises discretionary issues such as its quantum, merit and the prospect of success on appeal. Such matters are to be weighed up against the degree or otherwise of the Court's satisfaction with proof of the s 51(1) matters.

THE MAKING OF A SEQUESTRATION ORDER 100 The making of a sequestration order is recognised as having significant consequences. As was observed by the Full Court in Ahearn v Deputy Commissioner of Taxation (Qld) at 148: 'These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt. Bankruptcy is not mere inter partes litigation. It involves change of status and has quasi-penal consequences.'

101 In recognition of the significant consequences resulting from the making of a sequestration order, s 52(1) of the Act requires the Court to be satisfied of specific criteria prior to making such order. Section 52(2) empowers the Court to dismiss a bankruptcy petition. It provides: 'If the Court is not satisfied with the proof of any of those matters, 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;

102 In Sandell v Porter and Another (1966) 115 CLR 666 at 670 Barwick CJ (with whom McTiernan and Windeyer JJ agreed) said of the words in s 95 of the Bankruptcy Act 1924 - 1960 (Cth) 'unable to pay his debts as they become due from his own money': 'Insolvency is expressed in s. 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.'

103 In Bank of Australasia v Thomas Murray Hall, Trustee of the Estate of James Robertson in Liquidation [1907] 4 CLR 1514 at 1527-28, Griffith CJ said of the phrase '… any debtor unable to pay his debts as they become due from his own monies' as contained in s 107 of the Insolvency Act 1874 (Qd) : 'Another answer is that the debts referred to are not his debts " then " payable, but his debts " as they become due " - a phrase which looks to the future. No doubt, only the reasonably immediate future is to be looked to, but the anticipated verdict was not beyond this limit.'

104 Although s 52(2) of the Act does not refer to the words 'as they become due from his own money', but rather 'that he or she is able to pay his or her debts' (s 52(2)(a)), the approach referred to in Sandell v Porter and Hall has been applied to the current section: see Lawman v Queensland Building Services Authority [1999] FCA 1781 (Full Court at [21]); Stankiewicz v Plata [2000] FCA 1185 (Full Court at [30]); St George Bank Ltd v Helfenbaum [1999] FCA 1337 at [22]; Re Eather; Ex parte Palada (unreported 30 May 1996 FCA, Cooper J); McVey, re Ex Parte Carswell & Company (unreported 22 May 1996 FCA, Cooper J) and International Alpaca Management Pty Ltd v Ensor [1999] FCA 72. In the latter decision Katz J said (at [19]): 'On the narrower construction of par 52(2)(a) of the Act which I am hypothesising…, relevant considerations in the exercise of the discretion under subs 52(2) of the Act would, in my view, nevertheless be whether the debtor also has the ability to pay debts becoming payable in the reasonably immediate future and whether the debtor has the ability to pay the debtor's debts from the debtor's own money.'

In that decision, His Honour considered not only the ability of the debtor to pay the petitioning creditors claim, but other considerations which gave rise to the debt. 105 It has further been held that a set-off, cross-claim or cross-demand may be a 'sufficient cause' not to make a sequestration order under s 52(2)(b); see Ling v Enrobook Pty Ltd (1997) 74 FCR 19. At [25] the Court said: 'A review of the authorities discloses that in certain circumstances, but not in all circumstances, the fact that the debtor has pending before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor's debt will amount to "other sufficient cause" not to make a sequestration order (Re Yeatman; Ex parte Yeatman (1880) 16 Ch D 283; Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303; Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14; Ling v Commonwealth). The circumstance that the legitimate claim of the debtor is one against the judgment creditor is likely to be a significant circumstance for the purposes of s 52(2)(b).'

106 From these decisions it is apparent that a debtor may not be considered to be insolvent merely because he or she does not have ready funds available to meet a debt. Further, the existence of a cross-claim might be a valid reason to adjourn the hearing of a bankruptcy petition. However, the existence of a cross claim might not, of itself, be sufficient to justify a court from refraining to make a sequestration order. It will depend upon an assessment of its merits. In Westpac Banking Corporation v Tsatsoulis [2003] FCA 406, Branson J held that a bankruptcy petition should not be stayed on the ground of a possible claim against another party unless the party's action was one with sound prospects of success.

Should the sequestration order have been made? 107 In Re Williams (1968) 13 FLR 10 Gibbs J referred to the approach to be taken to the equivalent of s 153B of the Act (at 23) as follows: 'In determining the question whether the sequestration order ought not to have been made, the Court is entitled to consider not only the case as disclosed at the time the order was made, but as it would have been disclosed had all the true facts been before the Court on the making of the order (Re Cook (11)). If the Court is satisfied that the order ought not to have been made, it is not bound as a matter of course to annul the order, but must consider in the light of all the circumstances of the case whether the order ought to be annulled (Delph Sing v Wood, at pp.498-499; Re Lawson (12)).'

108 The above extract suggests that although Mrs Baker was not present at the date of the sequestration order, it was correct for Wilcox J to take into account the matters which could have been placed before the Court at the time the order was made. Such finding is consistent with the observations of Gummow J in Re Ditford; Ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347 where His Honour observed (at 350) that the facts to be considered are those known at the hearing of the annulment application but which exclude the facts which have occurred since such order was made: see also Re Ginnane; Ex parte Ginnane (1994) 60 FCR 429 at 445-446; Re Gollan; Ex parte Gollan (1992) 40 FCR 38 at 40-41; Maxwell-Smith v S & E Hall, in the matter of Maxwell-Smith [2004] FCA 840 at [20]. 109 In Re Frank; Ex parte Piliszky (1987) 16 FCR 396 Fisher J considered an application made under s 154(1)(a) of the Act as it then existed (which is for present purposes essentially identical to the current s 153B of the Act) to annul a sequestration order. His Honour held that an order should not be annulled unless the Judge who made it was, in the circumstances, bound not to make it. Even then there was a residual discretion not to annul. His Honour said at page [403]: 'In circumstances where it was open to a judge to make an order in the exercise of his discretion, it can only be said he "ought not to have made the order" if none of the circumstances could justify the making of an order. Alternatively it can be established that an order "ought" not to have been made because subsequent evidence discloses that all of the true facts were not before the court when the order was made: Re Cook (1946) 13 ABC 245 at 249.'

The above extract was quoted by the Full Court without comment in Hudson v Whalen [1999] FCA 189 at [10]. 110 It is apparent however that each case must be considered in light of the facts existing at the time when the sequestration order was made, including those facts which existed at that time but which were not known when the order was made. 111 Applying the above principles to the present proceedings it is apparent that Wilcox J was mindful of the circumstances leading to the financial predicament of Mrs Baker. His Honour found at [27]: 'Further, and perhaps more importantly, it is clear that, at the date of the sequestration order (and assuming James J was correct in regarding the second deed as valid), Mr Rigg was liable to pay damages to Mrs Baker in an amount that would undoubtedly exceed the amounts which she owed to him at the date of sequestration.'

112 It appears that His Honour considered that Mrs Baker had a potentially valid claim against Mr Rigg. His Honour said at [31]: 'Accepting for present purposes James J's conclusion that Mr Rigg did not exert undue influence or engage in unconscionable conduct, it is nevertheless the case that the whole problem arose out of his failure to honour his obligations under the second deed. It was the bank who took the action to evict Mrs Baker. However, the bank's action was only possible because Mr Rigg had encumbered the homestead property with a mortgage obligation he was unable to satisfy.'

113 Additionally, but not of direct relevance to the petitioning creditor, His Honour observed that Mrs Baker had 'substantial prospects of success' in her cross-claim against her former solicitors. The potential appeal against the solicitors could result in an award of damages to Mrs Baker. His Honour referred to the fact that Mason P considered that the appeal against Mr Rigg and the Bank was 'arguable'. In fact Mason P said: 'I am prepared to assume that the appeal is arguable. But nothing that I have seen indicates that it is a strong one.'

Notwithstanding Mason P's reservations, Wilcox J independently considered that Mrs Baker had sound grounds for the appeal. His Honour was not bound by the observations of Mason P. 114 In Mrs Baker's affidavit filed in support of the annulment application, she deposed that she did not take action to set aside the bankruptcy notice because she had no assets and did not believe that she could avoid the bankruptcy. Mrs Baker's affidavit also provides an explanation for her delay in bringing her application, namely her desire to assign her appeal. Wilcox J considered these facts, and observed that Mrs Baker was not required for cross-examination. Accordingly Mr Rigg did not dispute the reasons advanced by Mrs Baker for her failure to oppose the making of a sequestration order, and her non-appearance before the Registrar. 115 Wilcox J referred to the reasoning of Emmett J in Eumina Investments Pty Ltd v Westpac Banking Corporation (1998) 84 FCR 454 in which the Court exercised its discretion to set aside a statutory demand where there existed 'an appeal based on reasonable and arguable grounds which, if successful, would result in the existence of an offsetting claim'. Wilcox J, applying such reasoning by analogy observed: 'The situation must be a fortiori where the offsetting claim does not depend on success in a forthcoming appeal. See Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 25-26.'

116 Whilst it would obviously have been preferable for Mrs Baker to have been present before the Registrar when the application for the sequestration order was made I do not consider that the events demonstrate a deliberate course to frustrate or delay the proceedings. The fact remains that at the date of the making of the sequestration order Mrs Baker had an appeal pending which, if upheld, might result in her being awarded damages against Mr Rigg. His Honour did not find such appeal to be hopeless or to have poor prospects. 117 Based upon these facts, I consider that His Honour was entitled to take into account this consideration and the fact that the petitioning creditor was one of the respondents to her appeal. I agree with His Honour's finding, where he said: 'It seems to me that, on these facts, a sequestration order ought not to have been made. If the Registrar had known the full facts, she would have realised it was not clear that Mrs Baker was a net debtor to Mr Rigg. The proper order would have been to adjourn the hearing of the bankruptcy petition until determination of the appeal to the Court of Appeal.'

118 Adopting the words of Fisher J in Frank, I consider that in light of all the facts which would have been known to the Registrar had Mrs Baker appeared, it could not be said that Mrs Baker was a net debtor to Mr Rigg at the date of the making of the sequestration order. In these circumstances the Registrar ought not to have made the order. 119 For the above reasons I would dismiss this appeal. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cowdroy.

Counsel for the Appellant: Mr TGR Parker SC, Mr J Conomy

Solicitor for the Appellant: Maurice Blackburn Cashman

Counsel for the Respondent: Mr G Laughton SC, Mr C.P Taylor

Solicitor for the Respondent: Paul Stubbs Law Office

Bankruptcy Act 1966(Cth)s 153B, 154

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