Some history
35 Annulment is an old concept in bankruptcy law, and annulment in the Act must be understood against the background of the legislation from which it can be traced and decisions on that legislation. Bankruptcy in English law has long been a creature of statute, with varying attention to the positions of debtors and of creditors. The earliest statute was in 1542, and more comprehensive statutes followed, see Holdsworth, History of English Law, Vol VIII, pp 23-40.
36 The notion of "annulment" has itself varied. As Smallcombe v Olivier (1844) 13 M & W 77; 153 ER 32 shows, in the early 19th century when annulment took the form of superseding a commission (a commission was in effect a bankruptcy order and superseding reflected a procedure by a writ of supersedeas) it had been regarded as putting all parties "in the precisely same position as if no commission had been issued" (at 87). That was thought in Smallcombe v Olivier "a very startling position" (ibid). It was held that the new procedure annulling a fiat, by statute having the same effect as superseding a commission, did not have that effect, so that a sheriff correctly made a return of nulla bona on a writ of execution against a bankrupt notwithstanding that the bankruptcy had later been annulled. Delivering the judgment of the Court, Pollock CB said at 87-8 -
"While the commission was in force, (assuming, of course, that there were all the legal requisites to support it), the assignees might bring an action against the bankrupt's debtor, and compel him to pay to them the debt which he owed to the bankrupt. The debtor could have no defence to such an action. The argument of the plaintiff is, that, if the commission should be afterwards superseded, the debtor must pay his debt over again to the bankrupt. Again, the assignees contract to sell, and a stranger contracts to purchase, the bankrupt's real estate. A court of equity will, on a bill filed by the assignees, compel the purchaser to perform his contract, pay his purchase-money, and accept a conveyance; and yet the plaintiff here contends, that afterwards, by an act to which the purchaser is no party, over which he has no control, and after any lapse of time, (unless protected by the Statute of Limitations), he may be wholly deprived of his property. But there are other more startling consequences resulting from the doctrine contended for. If the bankrupt does not duly surrender at the time required by the statutes, he is guilty of a felony, now punishable by transportation for life, and which, until lately, was capital. And yet what is contended for is, that, before conviction, it is in the power of the Lord Chancellor to convert that which was a capital felony into a perfectly innocent act. Again, while the fiat is in force, if the bankrupt has omitted to surrender, and has so committed felony, it may become necessary for peace officers or others to use force towards him in order to his apprehension and, under certain circumstances, even to take away his life, if he cannot otherwise be taken. Can it be possible that the Lord Chancellor, by superseding a commission, or now, by annulling the fiat, can make a man a criminal and a murderer, who, at the time of the act done, did no more than his duty? These are, no doubt, extreme cases, but they serve to test the correctness of the proposition contended for, which undoubtedly leads to all the consequences we have pointed out, and to many others equally absurd."
37 Provisions in the nature of s 154 of the Act were thereafter enacted, giving continuing effect to the bankruptcy notwithstanding annulment to the extent of the savings but construed so as to otherwise give retrospective operation to annulment. As will be seen, the robust rejection of retrospective operation in Smallcombe v Ollivier appears to have been overtaken by construction of those provisions and an expansive view of retrospectivity beyond dealings with property.
38 The Bankruptcy Act 1869 (UK), described as an act to consolidate and amend the law of bankruptcy and accompanied by the Debtors Act 1869 abolishing imprisonment for debt, substantially recast the law, and the provisions for annulment began to take on their nature under the Act.
39 Bankruptcy came about by an order adjudging the debtor to be bankrupt (s 8). By s 28, the bankrupt's creditors could accept a composition or assent to a scheme of arrangement, and if the composition or scheme so required the order of adjudication could be annulled by order of the Court "from and after the date of the order annulling the same". There did not have to be annulment: the composition or scheme could bring "closure" of the bankruptcy and an order of discharge (ss 47, 48). By s 81, broadly equivalent to ss 74(5) and (6) of the Act -
"Whenever any adjudication in bankruptcy is annulled all sales and dispositions of property and payments duly made, and all acts theretofore done, by the trustee or any person acting under his authority, or by the Court, shall be valid, but in such case vest in such person as the Court may appoint, or for all his estate or interest, therein upon such terms and subject to such conditions, if any, as the Court may declare by order. A copy of the order of the Court annulling the adjudication of a debtor as a bankrupt shall be forthwith published in the London Gazette and advertised locally in the prescribed manner, and the production of a copy of the Gazette containing such order shall be conclusive evidence of the fact of the adjudication having been annulled, and of the terms of the order annulling the same."
40 There could also be annulment if the creditors failed to appoint a trustee or the office of trustee fell vacant and was not fulfilled (s 84). There was no equivalent to s 153A(1) of the Act, although payment of creditors in full could bring an order of discharge under s 48. Nor was there an equivalent to s 153B of the Act.
41 In ex parte Ashworth, in re Hoare (1874) LR 18 Eq 705 Sir James Bacon CJ held that "without any special enactment" the Court of Bankruptcy "has power at any time, for good reason, to annul any bankruptcy in which an adjudication may have been made" (at 713). This illustrates a notion of annulment going beyond the statutory use of the term. The Bankruptcy Act 1883 (UK) included an equivalent to s 153B of the Act (s 35). In re Gyll, ex parte The Board of Trade (1888) 5 Morr 272 it was held that the act was a complete code on annulment, see also in re Hester, ex parte Hester (1889) 22 QBD 632, on the cognate New South Wales statute re Blakemore, ex parte Blakemore (1892) 3 BC 5, and on the Commonwealth act of 1924 Cameron and Cole (1944) 68 CLR 571 as explained in Taylor v Taylor (1979) 143 CLR 1. This has remained the position, although accompanied by the court's jurisdiction to prevent abuse of its process (see for example ex parte Painter; re Painter (1895) 1 QB 85; Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509).
42 Bailey v Johnson (1872) LR 7 Ex 263, a decision on the 1869 act, set the law on a path different from that of Smallcombe v Olivier. After an order of adjudication the bankrupt's property was realised and the creditor was paid in part. The creditor himself then became bankrupt. The order of adjudication was then reversed on appeal. The creditor's trustee brought an action against the former bankrupt to recover the debt, and the defendant claimed to set off the part repayment. It appears to have been thought that, in order that there could be the set-off as an item of mutual credit, it was necessary that at the time of the creditor's bankruptcy the money paid to the creditor was money of the defendant. It was held that it was.
43 All members of the Court addressed s 81 of the 1869 act, Cockburn CJ saying (at 264) that it "applies to the case of a bankruptcy being annulled by whatever means" and was not limited to annulment under ss 28 and 81. Again, the notion of annulment was not confined to the statutory use of the term; but the decision was by explanation of the statutory use.
44 Cockburn CJ said at 265 -
"The effect of s 81 is, subject to any bona fide disposition lawfully made by the trustee prior to the annulling of he bankruptcy, and subject to any condition which the Court annulling the bankruptcy may by its order impose, to remit the party whose bankruptcy is set aside to his original situation. Here the Court of Bankruptcy has imposed no condition; the general provision of the section has therefore its full effect, and that effect is to remit the bankrupt, at the moment the decree annulling his bankruptcy is pronounced. We must therefore look at the money as though it were money paid in his name instead of in the name of Bullard, for having become his by virtue of the annulling of his bankruptcy, it is to be considered as his at the moment when it was paid in; as his, therefore, at the time of the bankruptcy of Harvey and Hudson."
45 Blackburn J was less explicit, saying at 205 that "[w]ithout determining whether the effect of s 81 is in every case to go back to the beginning, and to place the bankrupt in the position of having always owned what is by the section to 'revert' to him" the annulment "created at least an inchoate equitable claim of such a kind as ought to be taken into account". The extent of the concurrences of Keating, Mellor, Lush and Grove JJ is not entirely clear, but Keating J said at 266 that the annulment "does, at all events to this extent, remit him to his former estate so as to make the payment a matter of set-off" and Mellor J said at 266 that the effect of the annulment was "to declare that the money was the defendant's". Brett J agreed with Cockburn CJ's "full interpretation" of s 81.
46 The "full interpretation" was in essence that the direction in s 81 that the bankrupt's property revert to the bankrupt had retrospective effect. Consequences of the kind described in Smallcombe v Olivier do not seem to have received consideration, and that case does not seem to have been cited. The statutory use of the notion of annulment under ss 28 and 81, where the bankrupt properly became bankrupt but the bankruptcy came to an end upon coming to an arrangement with creditors, was applied when the bankruptcy should not have come about. Cockburn CJ's language of remission to the bankrupt's original situation was used only to describe the effect of s 81 in relation to the bankrupt's property, but had a wider influence in later cases, and in the later cases the equation of annulment when the bankruptcy should not have come about and annulment when the bankrupt had properly been made bankrupt continued.
47 Moving to the Bankruptcy Act 1914 (UK), in force and available as a model at the time of the first Commonwealth bankruptcy legislation, s 29 provided that the Court could by order annul the adjudication "where in the opinion of the court a debtor ought not to have been adjudged bankrupt, or where it is proved to the satisfaction of the court that the debts of the bankrupt are paid in full" (s 29(1)). There was a saving of the trustee's acts and provision for vesting or reversion of the bankrupt's property to the same effect as s 81 of the 1869 act. This was broadly equivalent to ss 153B, 153A(1) and 154 of the Act. Section 21 provided for an order annulling the bankruptcy and vesting the bankrupt's property in him or such other person as the court might appoint if the creditors accepted a proposal for a composition or a scheme of arrangement. This was broadly equivalent to s 74(5) and (6) of the Act. By s 21(3), the annulment could itself be annulled and the debtor adjudged bankrupt if the composition or scheme was obtained by fraud, if there was default, or if the composition or scheme could not proceed without injustice or undue delay.
48 Australian provision for bankruptcy under Commonwealth legislation began with the Bankruptcy Act 1924. It was relevantly in similar form to the United Kingdom legislation. The Court could "annul the sequestration order" if in the Court's opinion a sequestration order ought not to have been made or it was proved to the satisfaction of the Court that the debts of the bankrupt were paid in full (s 124(1)), with the by now familiar provision saving the trustee's acts and provision for vesting or reversion of the bankrupt's property (s 124(2)). The bankrupt could also apply for "an order of discharge for the release of his estate" if his creditors had been paid in full or a legal acquittance of the debts had been obtained (s 123). Section 71 provided for proposal and Court approval of a composition or scheme of arrangement and an order "annulling the sequestration order and vesting the property of the bankrupt in him or in such other person as the Court appoints … " (s 71(18)). The composition or scheme could itself be annulled, without prejudice to the validity of anything done under it (s 71(15)). Nothing was said about a consequential order for bankruptcy.
49 The 1924 act was replaced by the Act in 1966, following the 1962 report of the Committee appointed to review the bankruptcy law. It relevantly took substantially the same form.
50 As the Act then stood, by s 154 the Court could make an order "annulling the bankruptcy" if it was satisfied that the sequestration order ought not to have been made or the debtor's petition ought not to have been presented or accepted, or that the debts had been paid in full or the debtor had "obtained a legal acquittance of them" (s 154(1)); the validity of the trustee's acts was saved and the property of the bankrupt vested in such person as the Court appointed or reverted to the bankrupt (s 154(2)). By s 74, the Court could approve a composition or scheme of arrangement, and if it did so could make an order "annulling the bankruptcy" (s 74(1)-(4)), with like saving of the trustee's acts and provision for vesting or reversion of property (s 74(6)). The composition or scheme of arrangement could itself be annulled by reason of default or injustice or undue delay in proceeding with it, or if approval was obtained by fraud (s 75(4)), and now a consequential sequestration order could be made (s75(6)). There was, however, a change in language, from annulment of the sequestration order to annulment of the bankruptcy. The report does not refer to such a change, which so far as appears was no more than a drafting matter.
51 The Act relevantly took its form as at 23 March 2000 with amendments made by the Bankruptcy Amendment Act 1991. Sections 153B and 154A(1) came to provide separately for annulment, and annulment upon payment of debts in full and upon approval of a composition or scheme of arrangement was automatic, without the need for approval by the court or a court order.