Tooheys Ltd v Minister for Business and Consumer Affairs

REASONS FOR JUDGMENT Application pursuant to s 37 of the Bankruptcy Act 1966 (Cth) ("the Act") to rescind an order made on 2 April 1997 annulling the bankruptcy of Michael George Papps ("the debtor"). On 30 October 1996, Ms Raice Tapp applied for the issue of a bankruptcy notice directed towards the debtor. Her application was based on a judgment obtained by her in the Adelaide Magistrates Court (Civil Division) held at Adelaide on 17 May 1996. The judgment debt amounted to $5,497.75. A bankruptcy notice was duly issued and served on the debtor and, as a consequence of his failure to comply with the terms of that notice, he committed an act of bankruptcy on 19 November 1996. Thereafter a creditor's petition was served on the debtor on 16 December 1996 and in his absence a sequestration order was made against his estate on 10 February 1997. On 13 February 1997, the debtor filed an application in this Court seeking an order annulling his bankruptcy. He relied upon the provisions of s 153B of the Act which, so far as is relevant to these proceedings, are as follows: "If the Court is satisfied that a sequestration order ought not to have been made ... the Court may make an order annulling the bankruptcy." Before proceeding further in the narrative, it is necessary to mention two further creditors' petitions. The Workers Rehabilitation and Compensation Corporation ("Workcover") obtained two judgments against the debtor in the Adelaide Magistrates Court. The first judgment was obtained on 22 August 1995 and was in the sum of $4,039.30. The second judgment was obtained on 19 February 1996 and was in the sum of $3,028. In each case, the debtor failed to comply with the terms of a bankruptcy notice and in each case, as a result of that failure, a creditor's petition was served on the debtor. There is a note on the Court file, dated 11 December 1995, that the first judgment debt and costs had been settled. But the file further reveals that on 2 July 1996 the Australian Taxation Office ("the ATO") sought an order that it be granted leave to substitute as petitioning creditor. An order to that effect was made on 31 July 1996. Meanwhile, the file in respect of the second judgment debt reveals that on 8 May 1996, for undisclosed reasons, the creditor's petition was adjourned out of the list. The next event of importance occurred on 5 November 1996 when the petition based on the first judgment was dismissed. Subsequently, on 21 November 1996 the debtor was ordered to pay the costs of the ATO in the sum of $4,204.60. The role of the ATO as a substituted creditor and the events of November 1996 will assume significance later in these reasons when discussing the involvement of the ATO as a supporting party to the current application. On 2 April 1997 when the Court considered the debtor's application for annulment, it had before it the debtor's statement of affairs dated 5 March 1997 and the report of the Official Receiver for and on behalf of the Official Trustee dated 1 April 1997. The trustee's report reveals that the debtor's wife, Margaret Papps, is also bankrupt. A sequestration order was made against her estate on 24 February 1997. Although Mrs Papps is not a party to these proceedings, the fact of her bankruptcy is a matter of some significance, as will appear later in these reasons. The debtor is a medical practitioner in general practice; he conducts his surgery at 13 Semaphore Road, Semaphore using the registered business name "Semaphore Medical Centre". He has been in practice at that address for eleven years. The debtor's statement of affairs and the trustee's report disclose that the debtor owned four parcels of real estate, (some jointly with his wife) all of which had been re-financed in July 1996. The value of the four properties comprising that real estate was said to be, in total, $3,150,000. There were three secured creditors. The first two were the Independent Order of Odd Fellows ("IOOF") and the Australia & New Zealand Banking Group Ltd ("the ANZ"). The third secured creditor is, in fact, a group of many investors all of whom were clients of a Mr Barry Swincer, a finance broker ("the Swincer group"). This group had advanced $1,586,000 to Dr and Mrs Papps on 5 July 1996 upon the security of two mortgages over various parcels of real estate. The members of the Swincer group are the applicants in the current proceedings. The Official Trustee apparently made inquiries of Mr Swincer, for the trustee's report states that payments under the Swincer group mortgages were three months in arrears and that notices of default had been issued. Presumably, like inquiries were not made of IOOF and the ANZ, for if they had been made, they would have also revealed that those mortgages were in default. Those defaults were not referred to in the report nor in the statement of affairs. The trustee's report stated that the debtor advised that he had acquired a particular property at Kings Park in 1990 and that a building had been constructed from which he operated a nursing home. The business operated under the name of "Rest Care". According to the trustee's report however, the debtor ceased to be the proprietor of that business on 19 June 1994 and Mrs Papps is currently the registered proprietor. The debtor informed the trustee that the nursing home is currently unoccupied and that there are no staff. He stated that it had been his intention to convert the premises into a retirement village but that there had been a dispute with the Swincer group which had prevented the conversion taking place. Further information before the Court reveals that there is litigation in the Supreme Court of South Australia in which the debtor is the plaintiff and Mr Swincer and the Swincer group are the defendants. As I understand the position, the debtor is alleging that as a consequence of misrepresentations made by Mr Swincer the debtor has been unable to convert the Kings Park premises into a retirement village and has suffered consequential losses. In addition, in separate proceedings in the Supreme Court, the Swincer group is seeking orders permitting them to enforce their securities over the Kings Park property. The debtor's statement of affairs showed that his income from his medical practice in the preceding twelve months had been $350,000 and he estimated that his income for the next year would be the same. He also disclosed income of $300,000 from the operation of the nursing home but no income was shown as expected from this source for the next year. It may be that the figure of $350,000 was listed as his gross income for elsewhere in his statement he disclosed his income from his medical practice at $20,000 per calendar month. The statement of affairs showed book debts owing to the debtor from Medicare, Workcover and Veterans Affairs totalling $45,000 together with some small items of plant and equipment. Eight unsecured creditors were listed in the statement of affairs, totalling $70,675. Secured creditors were said to be $2,148,000. The final result showed a surplus of assets over liabilities well in excess of $1,000,000 with an income earning potential of between $240,000 and $350,000 per year. The unsecured creditors did not include Ms Tapp, the petitioning creditor, as her debt and costs had been paid out in full before the compilation of the statement of affairs. As presented, the statement of affairs gave the appearance that the debtor was substantially solvent and had an income potential more than adequate to meet his debts as and when they fell due and became payable. Any doubts arising as a result of information that the debtor and his wife were in default under their mortgage to the Swincer group were assuaged by the debtor's evidence that there was a buyer for the Kings Park property and that if an order of annulment were made, he would be able to execute a contract of sale. It was further stated that the proceeds of sale would be sufficient to pay all debts in full, including secured creditors, although, as a matter of fact, such a sale never took place. There being no opposition to the debtor's application, an order of annulment was accordingly made on 2 April 1997. Before the order of annulment was made there had been an earlier directions hearing in this matter on 17 February 1997. No transcript of that directions hearing exists. That lead to the following exchange as recorded in the transcript of proceedings on 2 April 1997: "His Honour: Ms Axford on the previous occasion - I have not got a transcript of the proceedings - my recollection is that I issued a direction that all creditors should be served with notice of these proceedings. Is my memory correct? Ms Axford: Yes your Honour. His Honour: Have you done that Mr Brook? Mr Brook: Your Honour, my instructions are that of the creditors who are listed on the unsecured creditors Dr Papps has been in contact with all of them. I took specific instructions on this point subsequent to your Honour's order and just before today. All of the creditors here apart from two or three of them have been paid out in full. They are aware of the orders and they have not insisted on a copy of the order being served upon them, a copy of the application being served upon them. (sic) But they have all in contact (sic) with Dr Papps and they have all been paid out in full so the short answer is I cannot give an unequivocal undertaking they have been served but my instructions are - Dr Papps is here today - my instructions are that they are all aware of the proceedings and they have all entered into negotiations to have their debts paid in full. His Honour: That is the degree of satisfaction I am looking for. Dr Papps can give evidence on oath or we can adjourn off and you can file an affidavit, but one way or the other I need to be satisfied that ... Mr Brook: That is why I have asked Dr Papps to be here today your Honour." Ms Axford is the Official Receiver and Mr Brook is the solicitor for the debtor. Thereafter Dr Papps gave evidence in terms consistent with the information Mr Brook had provided the Court and at the conclusion of his evidence the following exchange took place: "His Honour: What about secured creditors? Mr Brook: Secured creditors are affected by properties at Kings Park and Malvern and there is reference in the official receiver's report to those properties being in default. My instructions are that there is a buyer for the property at Kings Park and if the annulment is granted today my instructions are Dr Papps can execute a contract whereupon all debts will be paid in full including secured creditors. That is one of the delicacies ... His Honour: You heard what Mr Brooks said, Dr Papps. Is what he said an accurate summary of the position? ... Yes your Honour, that is exactly right." Regrettably both answers given to the Court by Mr Brook were inaccurate to a material degree. Why this occurred I do know as Mr Brook did not give evidence. As will become apparent there were creditors over and above those listed in the statement of affairs who had not been notified of the application for the order of annulment and the answer with respect to secured creditors did not include any reference to the actions taken by IOOF and the ANZ against the debtor as a defaulting mortgagor. I am prepared to assume that just as he failed to make a full and true disclosure to the Court, so also the debtor has failed to fully and adequately inform his solicitor of the true state of his financial affairs. However, members of the legal profession must always remember that over and above their duty to their client they have a higher duty to the court to assist the court in its deliberations. The onus is upon them to ensure, to the best of their ability, that any information that they give to the court is, in every respect, complete and accurate. THE APPLICATION TO ANNUL When the debtor brought on his application for an order annulling his bankruptcy he was required to comply with the provisions of r 57 of the Bankruptcy Rules as they existed prior to their recent amendment with effect from 31 July 1997. One of the obligations upon the debtor was to serve "a copy of the application on each of the creditors of the debtor ..." (r 57(2A)). The word "creditors" is not defined in the Rules nor in the Act and in my opinion it was therefore incumbent on the debtor to serve his secured creditors as well as his unsecured creditors with a copy of his application for an order annulling his bankruptcy. Independently of the contents of r 57, there was the oral direction of the Court when the matter first came on for hearing and when directions as to service were given. As has already been stated, the transcript of the proceedings of 2 April 1997 confirmed that there was an earlier direction that "all creditors" should be served and there was a specific question asked by the Court with respect to "secured creditors". The debtor was legally represented; there was ample opportunity for him to inform the Court that through accidental slip the secured creditors had not been served with notice of the application. Such advice would have, in the ordinary course of events, led to a short adjournment to enable the debtor to comply with the Bankruptcy Rules and the directions of the Court. Instead, unfortunately, the position was obfuscated by the answers that were given to the Court. WHETHER THE APPLICANTS HAVE STANDING Mr Frayne, counsel for the debtor, submitted that the applicants, by virtue of being secured creditors, have no standing to bring this application. The debtor had filed an application on the 18 September 1997 seeking an order that the applicants' application be struck out and argument on this issue was presented as a preliminary issue. At the conclusion of argument I ruled that the applicants did have standing. I now set out my reasons for coming to that conclusion. Section 37 of the Act does not identify those parties who may approach the court seeking an order of rescission; it merely states that the court "may rescind, vary or discharge an order made by it under this Act or may suspend the operation of such an order". However, s 303 of the Act provides: "Where in respect of any matter this Act provides that: (a) an application may be made to the Court; or (b) the Court or the Registrar may exercise a power; and does not specify the person by whom the application may be made or the person on whose application the power may be exercised, as the case may be, the application may be made by, or the power may be exercised on the application of, any person aggrieved by or interested in that matter." Therefore, any party who is "aggrieved by or interested in" the annulment order would appear to have locus to approach the Court seeking an order of rescission, variation or discharge of the earlier order of the Court. In my opinion, the applicants, notwithstanding that they are secured creditors of the debtor, were parties who, at the time of the annulment order and at the time of their application for its rescission, were materially interested in the affairs of the debtor. Their interest arose not only because they were creditors, but because the debtor was in default with the calendar monthly payments of interest that he was required to make under the mortgage. There is some dispute about the extent of that default but the debtor had not, at least, paid the monthly interest that was due in March 1997 and he has not paid anything since that date. Furthermore, the debtor had disclosed in his statement of affairs that he had not paid outstanding land tax and council rates. The interests of secured creditors would be further enlivened by this failure. Section 182 of the Local Government Act 1934 (SA) stipulates that rates imposed on land are a charge on the land and s 22 of the Land Tax Act 1936 (SA) states that land tax is, until payment, a first charge on the land in respect of which the tax is payable. Failure by a debtor to pay his rates and taxes could have an adverse affect on the value of the secured creditors' equity. Mr Frayne pointed out that a secured creditor may only present, or join in the presentation of, a creditor's petition if that creditor is willing to surrender his or her security for the benefit of creditors generally: see subs 44(3) of the Act. Mr Frayne used that statutory provision as his stepping stone for the proposition that a secured creditor is thereby denied the utilisation of s 37 unless he or she likewise surrenders his or her security. No authority was advanced in support of that proposition and, in my opinion, there is authority to the contrary. Re Barton (1980) 43 FLR 245 was a case dealing with a bankrupt's application for discharge from his bankruptcy. In the course of his reasons Lockhart J said: "There are sound reasons why all the debtor's creditors, not only those whose debts have been proved, should be given notice of the prospective hearing of an application for discharge. For instance there may be secured creditors of the debtor who, although standing outside the bankruptcy, may have an interest in the application for discharge." (at 254) In my opinion those remarks also apply to an application of this nature where secured creditors have established that they have an interest in the financial status of the debtor. For the reasons that I have already set out it would seem to me that the present applicants are persons who are particularly interested in the financial affairs of the debtor. If, as I suspect, he might be insolvent and unable to pay his debts as and when they fall due and become payable that may have some adverse material affect upon their security. Unlike subs 44(3) secured creditors are not singled out; there is no suggestion that they are prevented from utilising the provisions of s 303 and s 37. In Tooheys Ltd v Minister for Business and Consumer Affairs (1981) 36 ALR 64, Ellicott J examined the meaning of the expression "a person who is aggrieved" in the Administrative Decision (Judicial Review) Act 1977 (Cth) and said at 79: "The words "a person who is aggrieved" should not, in my view, be given a narrow construction. They should not, therefore, be confined to persons who can establish that they have a legal interest at stake in the making of the decision". In Ralkon v Aboriginal Development Commission (1982) 43 ALR 535 at 544 Keeley J quoted the passage set out above, adding that he agreed with the opinion there expressed by Ellicott J. I also agree, with respect, with that opinion and to it I add the observation that the additional words in s 303 "or interested in" express, in my opinion, a measure of involvement which is somewhat less than that of a person who is "aggrieved" by the matter. In other words, a liberal interpretation should be afforded with respect to the parties who may fall under the umbrella of the section. It is for these reasons that I was of the opinion that the applicants had locus to bring the present application before the Court. THE BURDEN OF PROOF Mr Frayne submitted that the Court should approach this matter on the basis that the applicants bear a burden similar to that borne by a party who seeks a new trial on the basis of the discovery of fresh evidence. He relied upon the decision in Re Edgar; Ex Parte Davidson (1973-74) 2 ALR 649 as authority for that proposition. In that case the debtor had executed a Pt X Deed of Assignment. On 13 June 1973 his trustee applied to the Court for leave to sell certain land to a nominated purchaser. The debtor opposed that application but an order was made on 11 September 1973 substantially in the terms sought by the trustee. Contracts were subsequently exchanged between the trustee and the purchaser. In the application that was before the Court the debtor sought rescission of the order of 11 September 1973. The application was dated 17 October but was not filed until 29 October 1973. The affidavit of the debtor's solicitor in support of the application asserted that the trustee's application had been heard in the morning of 11 September instead of in the afternoon as the deponent had understood and told his client it would be. The debtor had thereby been deprived of putting before the Court the fact that he had, that morning, received an offer to purchase the land for an amount in excess of the price approved by the Court. In dismissing the application, Riley J said that the debtor had been dilatory in making his application to the Court and such a matter weighed against him in seeking the exercise of the Court's discretion. His Honour went on to say that: "... the debtor, in my opinion, bears a burden similar to that borne by a party who seeks a new trial of an action on the ground of the discovery of fresh evidence." His Honour then quoted the following passage from the judgment of Dixon CJ in Orr v Holmes (1948) 76 CLR 632 at 642: "... new trials will not be granted because of fresh evidence unless it places such a different complexion upon the case that a reversal of the former result ought certainly to ensure. The fact which the new evidence tends to prove, if it does not itself form part of the issue, must be well nigh decisive of the state of facts upon which the issue depends. The evidence must be so persuasive of the existence of the fact it tends to prove that a finding to the contrary, if it had been given, would, upon the materials before the court, appear to have been improbable if not unreasonable"." In my opinion the decision in Edgar's Case cannot assist the debtor in his present predicament. In Edgar's Case the debtor had taken an active stand in opposing the application for leave to sell; in the present case the applicants were in no way involved in the making of the sequestration order nor in the making of the order of annulment. In fact they did not know of either event. Furthermore, in the present case, the applicants were denied any opportunity to put information before the Court relevant to the debtor's application for an order of annulment. That denial was not present in Edgar's Case. In my opinion it would be wholly inappropriate to consider this matter in the manner suggested by counsel for the debtor. The applicants in these proceedings are not to be equated with a party who seeks a new trial on the ground of the discovery of fresh evidence. Such a statement envisages an element of involvement by the applicants in the original proceedings. That element is absent in these proceedings. In my opinion the test to be applied when a person comes before the court seeking an annulment of his or her bankruptcy is one that is akin to "full and true disclosure". It is incumbent upon such an applicant to place before the court all relevant material with respect to his or her financial affairs so that the court may be properly informed and may make a judgment that is based on the full facts and the actual circumstances of the applicant. A person who seeks an annulment carries a heavy burden. If, as has occurred in this case, the application is made very quickly, the debtor's trustee would have little, if any, chance to investigate the affairs of the debtor. For that reason, the trustee would not be in a position to act as a contradictor to the application. Therefore the court is compelled to place its trust in the applicant, relying upon his or her integrity and honesty. If, subsequently, it is found that the court's trust has been misplaced, the confidence of the court in the applicant is thereby diminished and perhaps, destroyed. SHOULD THE ORDER OF ANNULMENT HAVE BEEN MADE? During the course of the present application, the applicants lead evidence which, if accepted, would lead to the conclusion that the debtor omitted seven unsecured creditors from his statement of affairs and understated the amount owing to an eighth creditor by about $50,000 and that as a result, debts to the value of $167,736.58 were not disclosed to the Court upon the occasion of the application for an annulment of his bankruptcy. The applicants submitted that these omissions and other aspects of the conduct of the debtor warranted, as a matter of fact, the making of an order of rescission. In addition, the applicants further submitted that, as a matter of law, the order of annulment should never have been made and, that being the case, it was appropriate that the Court should now rescind its earlier order. Before examining the evidence, it will be convenient to dispose of the question of law for I do not think that it applies in the circumstances of this case. Mr McNamara, counsel for the applicants, in submitting that the order of the annulment should never have been made, drew attention to the provisions of subs 52(1) which reads as follows: "At the hearing of a creditor's petition, the Court shall require proof of ; (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (b) service of the petition ; and (c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor." Mr McNamara submitted that the fact that a sequestration order had been made on the 10 February 1997 was an indicator of the Court's satisfaction of the proof of the three matters referred to in subs 52(1). Next Mr McNamara drew attention to the provisions of subs 52(2): "If the Court is not satisfied with the proof of any of those matters [ie the matters referred to in subs 52(1)] 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; it may dismiss the petition." Mr McNamara's proposition was that the Court was presumably not satisfied of the ability of the debtor to pay his debts or conversely was not satisfied that there was "other sufficient cause" to refrain from making a sequestration order. As to this proposition, it must be borne in mind that Dr Papps did not appear in Court on the day when the sequestration order was made; he did not thereby make any attempt to satisfy the Court of his ability to pay his debts or of the existence of any "other sufficient cause". Mr McNamara relied upon the decision in Re Frank; Ex parte Piliszky (1987) 16 FCR 396 as authority for his ultimate proposition that the order of annulment should never have been made. At the time of the decision in Re Frank the power of annulment was contained in subs 154(1) of the Act. The relevant subsection then read: "(1) Where the Court is satisfied - (a) that a sequestration order ought not 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; or (b) that the unsecured debts of the debtor, being debts that have been proved in the bankruptcy have been paid in full or the debtor has obtained a legal acquittance of them, the Court may make an order annulling the bankruptcy Although the language of s 153(B) differs from that of the former subs 154(1) the differences are not material for present purposes. In Re Frank, after quoting the provisions of subs 154(1) of the Act, Fisher J went on to say: "In my opinion it is proper to contrast the position of a Full Court on hearing of an appeal seeking the setting aside of a sequestration order and that of this Court when an annulment under s 154(1)(a) is sought. Particularly this is so when the judge making the order did so in the exercise of his discretion. It would be strange if in a matter such as this I was called upon to review the order of Forster J on the same grounds as the debtor requires it to be reviewed by the Full Court. In Cameron v Cole (1944) 68 CLR 571 at 583 Latham CJ said of the power to annul in the then Bankruptcy Act 1924 (Cth): "There is no power to annum a valid sequestration order without observance of what have been described as 'the very careful provisions' which are applicable in the case of an application to annul: Re A Debtor; Ex parte Official Receiver (1937) 106 LJ Ch 225." Likewise at 594 Starke J said: "This power of reviewing or rehearing any order is one that must be exercised with great caution and should not be exercised unless in special circumstances: Ex parte May; Re May (1884) 12 QBD 497." In Re Williams (1968) 13 FLR 10 at 23 Gibbs J, as he then was, said: "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 Singh v Wood (1918) 25 CLR 497 at 498-499; Re Lawson (1939) 11 ABC 137 at 139." In the light of the various contrasting avenues open to a bankrupt to approach the court to have the sequestration order set aside, it is in my opinion necessary to attach significance to the "careful provisions" of s 154, and in particular the words "ought not to have been made". In my opinion it can be said that a judge "ought" not to have made an order only if he was "bound" not to make the order. 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 word "ought" as it appears in the English Rules of Court was given the meaning of "must" in Comber v Leyland and Bullins [1898] AC 524 by the Lord chancellor at 528 and Lord Herschell at 529. H C Black's Law Dictionary (5th ed, 1979) says of the word "ought" that although generally directory only it will be taken as mandatory if the context requires it. However in Grundt v Great Boulder Proprietary Mines Ltd [1948] Ch 145 at 150 Cohen LJ said: "It is to be observed that the word 'ought' is not necessarily of imperative significance and is certainly not synonymous with the word 'must'." It is trite to say, as the above excerpts acknowledge, that the appropriate meaning is determined by the context. 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."(at 402-403)