aren IN THE FEDERAL COURT OF BANKRUPTCY BANKRUPTCY DISTRICT OF THE STATS OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY ) ) No. N.S.W. 532 of 1975 ) ) RE: JACK PETER MOTTEE EX PARTE: GLORIA ANN MOTTEE, Applicant THE OFFICIAL RECEIVER, Respondent REASONS FOR JUDGMENT Riley J. 18 May 1977 This is an application by Gloria Ann Mottee, the former wife of the bankrupt Jack Peter Mottee who on his own petition became bankrupt pursuant to s. 55 of the Bankruptcy Act 1966 on 19 December 1975, Though dated 3 June 1976, the application was in fact filed on 2 June 1976. It is opposed by the Official Receiver, the trustee of the bankrupt's estate. As amended by leave, the application seeks: (1) an order that the bankruptcy be annulled, on the ground that the petition presented by the bankrupt ought not to have been presented; (2) or, alternatively, a declaration that (a) the property of the bankrupt does not include the sum of $15,000 which sum is portion of the moneys realised or brought to credit in the estate From the sale of the forrer matrimonial home known as 7 Woodward Flace, St. Ives, together with interest thereon calculatece at the rate of 12% per annum From 2 April 1976; or cette Mies ah de pve emremep tin mi Re arttareead te er ew Eth. Me Po lta Only td hikes ein, ee aliens it ni sh I A lle salen ~2- (b) the Official Receiver as trustee of the estate of the bankrupt shall be at liberty to pay to the applicant the said sum of $15,000 together with interest thereon calculated at the rate of 12% per annum from 2 April 1976 until date of payment; (3) an order for costs. Mr. and Mrs. Mottee were married in 1959 and lived together until 1973 when Mr. Mottee left his wife. At that time they were living in the matrimonial home 7 Woodward Place, St. Ives, near Sydney. Title to the house was registered in their joint names. On 4 April 1974 Mrs. Mottee presented a petition to the Family Law Division of the Supreme Court of New South Wales in which she sought dissolution of the marriage on the ground of adultery. She alsc sought inter alia orders for maintenance and, as to the former matrimonial home, orders that Mr. Mottee transfer to her his one half interest in it, subject to an existing mortgage, and make the repayments under the mortgage to the mortgagee. The parties apparently conducted the proceedir in a leisurely manner until in June 1975, payments under the mortgage having fallen into arrears, the mortgagee threatened to enter into possession and sell the matrimonial home. The petitioner thereupon applied for an expedited hearing. On 8 December 1975 the Court fixed a later date for the hearing of the cause, and also made orders as to the matrimonial home. The husband's solicitor had asked for an order that the home - be sold and that the husband's share of the proceeds remain in trust pending the hearing of the suit. Because the wife's share would be insufficient to enable her to buy a home for a ee ee cele ne nh tl ee en ae Oe, Bee ae ee cae Re et wee ee ee cA Pepa emer meme see aed -3- herself and the children of the marriage, and in order to avoid her capital being wasted in rent, and her retention of it, if not invested in a home, jeopardizing her pension rights, the Court made the following orders: "(a) (b) (c)} (a) (e) (£) The Petitioner is hereby appointed the agent of the Respondent for the purpose of selling the said property and the Respondent is hereby directed, at the request of the Petitioner, to execute all contracts, instruments and transfers to give effect to a sale of the said property as negotiated by the Petitioner, and the Petitioner is further hereby appointed to execute any contract instruments or transfers in the name of the Respondent and to do all things necessary tc give validity and operation to the sale and transfer of the said property. Upon completion of any sale as aforesaid or of any sale negotiated by agreerent of the Petitioner and the Respondent and after paying all mortgages, encumbrances and charges in respect of the said property the Petitioner is ordered to cause the net proceeds of sale to be retained in her solicitor's trust account and to use the same only as hereinafter ordered. The Petitioner is hereby directed to enter into an agreement to purchase a home for the occupation of herself and the children of the marriage within the Sydney Metropolitan Area, at a price which wiil enable the purchase to be corpleted and all ccsts duties and expenses therefor paid out of the moneys held in her solicitor's trust account in accordance with order (b) above. For the purpoca of the purchase hereby directed and not otherwise, the Petitioner is authorised to use the said moneys When the home is purchased by the Petitioner, as hereinbefore directed she is ordered not to sell, mortgage, encumber, lease or otherwise deal with the said property, but to hold the same to abide the further order of the Court. The home so purchased by the Petitioner is to be treated as the property claimed by the Petitioner and Respondent, as the subjcct of orders sought under Section 86 of the Matrimonial Causes Act, in lieu of the property 7 Woodward Place, St. Ives, and what is just and equitable in the circvmstanve: of the case is to be adjudged regardicss of the sale of that property and the purchase of a different home as directed by these orders. The Petitioner is ordered to give notice of any proposed sale of the property 7 Woodward Place, St. Ives, and to forward a copy of the propos¢d ~4- contract of sale to the Respondent's solicitors 72 hours before exchanging contracts with a proposed purchaser. (g) The Petitioner is ordered to give notice of any proposed purchase of a home and to forward a copy of the proposed contract of purchase to the Respondent's Solicitors 72 hours before exchanging contracts with a proposed vendor. (h) The parties are granted liberty to apply in relation to these orders." An appeal against those orders was lodged and a stay of proceedings was sought by the husband, but the stay was refused on or about 16 December 1975; and on 18 December the husband presented his own petition in bankruptcy. It was accepted, and the husband therefore became a bankrupt, on 19 December. The statement of affairs accompanying the debtor's petition presented in purported compliance with s. 55 of the Bankruptcy Act was not strictly in accordance, as the section requires, with the prescribed form, which by Rule 24(c) is Form 11 in the First Schedule to the Rules. Part III shows only a debt of "approx. $28,000" secured on a property the value of which is estimated at $86,000, yet also shows an estimated surplus of $55,000. Part I (Summary), on the other hand, shows inter alia the "amount by which the secured debts due to creditors are less than the value of the securities according to Part III" as $6,500 approx.", and is not completed. The failure of the statement of affairs to accord with the prescribe: form is not so serious as to require annulment of the bankruptcy if annulment were sought on the ground that the petition ought not to have been accepted, but in my view the petition and statement of affairs should not have been accepted without the latter being correcteac. Section 55 goes to some pains to state the requirement that the petition and the statement of nh ete ee nee A ee ee a le ne es em, Le eee -5-+ affairs shall each be in the prescribed form, and it is only if they both appear to the Registrar to be so that acceptance and consequently bankruptcy may follow. Had it been corrected the statement of affairs would have shown unsecured creditors for amounts totalling $20,940, and the following assets: Household property 7 Woodward Place 86,000 Less: amount owing under mortgage 28,000 58,000 Less: wife's one~half share 29,000 29,000 Household furniture 5,000 Other assets ___68 $34,068 The matrimonial home 7 Woodward Place was not sold pursuant to the order of 8 December. On 26 February 1976 the first meeting of the bankrupt's creditors authorized the Official Receiver to join with Mrs. Mottee in accepting an offer of $85,000 for it. After payment of the amount due to the mortgagee, rates and legal costs, the sale realized $53,170, of which one half ($26,585) has been brought to the credit of the bankrupt's estate together with other amounts which bring the total credit to $27,726. On 2 April 1976 Carmichael J. made a decree nisi for divorce on the wife's petition and made certain orders for the payment of maintenance, including an order for the payment of a lump sum of $15,000, which on 8 October 1976 the Full Court of the Family Court of Australia varied by substituting $6,C00O for $15,000. As I understand the basis of the applicant's case that the petition should not have been presented and that therefore the bankruptcy should be annulled, it is that the wee ee tr ee te te eR A oe haat ene ee a er ane a8 re t -6- bankrupt was not insolvent, and took advantage of the procedure available under s. 55 not for the purposes of having his estate administered in bankruptcy for the benefit of his creditors and ultimately obtaining a release from his debts by discharge, but for the ulterior purpose of causing his interest in the matrimonial home 7 Woodward Place to vest in the Official Receiver and so defeat the order of 8 December and indeed prevent the Matrimonial Causes Court from settling that interest on his former wife or otherwise dealing with it in her favour. The submissions on behalf of the Official Receiver on this part of the case were: 1. that the applicant was not competent to make the application; 2. that the grounds of the application had not been established; 3. that even if they had I should in my discretion not annul the sequestration order. So far as they are material to this case, s. 154(1) provides that "Where the Court is satisfied ... , in the case of a debtor's petition, that the petition ought not to have been presented ... , the Court may make an order annulling the bankruptcy"; and s. 303 provides that "Where in respect of any matter this Act provides that ... the Court ... may exercise a power, and does not specify ... the person on whose application the power may be exercised, ... the power may be exerciscd on the application of any person aggrieved by or interested in that matter". There have been judicial decisions on each of the expressions "a person aggrieved" and "a person interested", and the intention in using both expressions in s. 303 was obviously to allow resort to all those decisions. The words "in that matter" help to explain the nature of the aggrievednecs or interest: cf. In re Rochampton Swimming Pool Limited, (1968) we ree -7- 1 W.L.R. 1693, 1697. They refer to the matter "in respect of" which "this Act provides that ... the Court may exercise a power". The power which s. 154 provides that the court may exercise is a power to "make an order annulling the bankruptcy". The matter in respect of which the power of annulment may be exercised is "the bankruptcy". The applicant, then, must be aggrieved by or interested in the bankruptcy. The applicant's complaint about the bankruptcy here is that the result of it was that, while proceedings by her for maintenance were pending in the Matrimonial Causes Jurisdiction, it effectively prevented the Matrimonial Causes Court from making in the pending proceedings for maintenance any order, burdening her husband's interest in the former matrimonial home in her favour, such as Carmichael J. said after the bankruptcy he would have made had the bankruptcy not intervened; and instead of such an order she could obtain only the order that her bankrupt husband pay her a sum of money. "The words 'person aggrieved' are of wide import and should not be subjected to a restrictive interpretation. They ... do include a person who has a genuine grievance because an order has been made which prejudicially affects his interests": A.-G. of the Gambia v. N'Jie, (1961) A.C. 617, 634 per Lord Denning. Though technically a bankruptcy under s. 55 of the Bankruptcy Act does not come about by an order of the Court, the applicant here in my opinion is in the same position as the person described by Lord Denning, and is a persor aggrieved by the bankruptcy. I also think she may be properly described as a person interested in the bankruptcy if she has a proprietary or pecuniary interest in it or in having it annulled; In re Roehampton Swimming Pool Limited (supra); cf. Re Beesley, -8- (1975) 1 All E.R. 385, 388 (where the question put aside by Goulding J. at 387, (b), (c), is similar to that which has arisen here). I am of opinion that as the bankruptcy prevented the Matrimonial Causes Court from subjecting her husband's interest in the matrimonial home to an order in her favour she had such a pecuniary interest, and therefore for that reason also was competent to make this application. The next question is whether, within the meaning of s. 154(1) (a), the debtor's petition ought not to have been presented. The enactment of s. 55 marked a departure from English and Australian legislative precedent in two ways. First, the legislature did not re-enact the requirement of s. 57 of the Bankruptcy Act 1924 that a debtor's petition should allege that he was unable to pay his debts. I am nevertheless of opinion that the facility provided by s. 55 was not intended to be, and is not, available to a solvent debtor. "The essential featurcs of a bankruptcy system are sequestration and distribution - an initial taking into custody of an insolvent debtor's property, and the subsequent realization and division among creditors": R. v. Davison (1954), 90 C.L.R. 353, 375-6 per Fullagar J. (my underlining). Secondly, the legislature eliminated the need for the making in every case of a judicial order, and instituted the procedure whereby on his own petition a debtor may become bankrupt by force of the Act without the intervention of such an order. Thus it is true, as is stated in the Bankruptcy Practice, 4th edn, 124 (para. 277), that the presentation of a debtor's petition cannot be an abuse of proces: in the strict sense; but in my opinion the consequent bankruptcy may be annulled where a debtor was not "entiticd to use the machinery of the Bankruptcy Act" (In re a Debtor, (1967) Ch. 590, 596) and the presentation of his petition may properly we eee ee ae ewe eee -9- be characterized as an abuse of the procedure provided by s. 55. (C£. Re Pepper (1969), 14 F.L.R. 282, 283.) The basic evidence as to whether or not the bankrupt was solvent when he presented his petition is his sworn statement of affairs, which showed that as at 18 December 1975 his unsecured debts amounted to $20,940 and his assets to $34,068, of which $29,000 was represented by his one-half interest in the matrimonial home. The realization of that interest was at that time a remote prospect, and in effect he had according to his statement of affairs $5,068 (of which furniture in the matrimonial home represented $5,000) with which to meet his unsecured debts. I do not think that the applicant contended that, if those figures correctly showed the bankrupt's financial position, he was not then insolvent in the sense described in Sandell v. Porter (1966), 115 C.L.R. 666, 570. But an attack was launched on the correctness of the statement of affairs. In my view it did not succeed. An attempt was made to challenge certain debts shown in the statement of affairs, in particular those there said to be owing to Wright Swimming Pools ($3,400), Miss Lennon ($500) and Mr. Bizannes ($4,850). Miss Lennon (now Mrs. Mottee) submitted a proof of debt for $1,548 which she reduced to $1,493 and which has becn admitted by the Cfficial Receiver. Mr. Bizannes (the bankrupt's solicitor) submitted a proof of debt for $7,051 which has not been admitted, and Wright Swimming Pools has not submitted a proof. The evidence led in respect of the last two debts indicated the necessity for careful investigation of them by the Official Receiver. But the applicant did not establish that the dcbtor's statement of affairs had overstated his indebtedness or that he was not insolvent; and on the whole ef the evidence it was not shcwn tha' ee oe a -10- when he presented his petition he did not honestly believe on reasonable grounds that he was unable to pay his debts: cf. In re Dunn, (1949) Ch. 640, 648; In re a Debtor, (1969) Ch. 590, 595. The next question is whether the bankruptcy should be annulled on the ground that the presentation of the petition was for other reasons an "abuse of process". There is no direct evidence before me showing that Mr. Mottee presented his petition for any reason other than that he was, or at any rate thought he was, insolvent; and the factual foundation for this part of the applicant's case is the sequence of events shortly preceding the presentation, from which it is sought to draw the inference that his purpose was the ulterior purpose I have mentioned of withdrawing his interest in the matrironial home beyond the reach of the Matrimonial Causes Court. (As I have said, it was not shown that he was solvent.) Assuming that that inference should be drawn, I do not think it would follow that the bankrupt was guilty of an abuse of the procedure provided by s. 55. The only case to which counsel referred me in argument on this point was Ex parte Painter, (1895) 1Q.B. 85, where a debtor became bankrupt on his own petition in order to defeat proceedings as a result of which he might have been required to pay a judgment debt by instalments which he would have had to pay out of his inalienable pension. Vaughan Williams J. said (at 91): "I have come to the conclusion that we are not entitled to annul an adjudication made on a debtor's own petition merely because the debtor has no assets, nor because he is possesseé of an inalienable pension, nor because, bavang no assets and heine in possession of such a pension, he has presented his petition for the express purpose of preventing the application of the Debtors Act to compel him to ray this debt out of his pension ... It seems to me thar -ll- if it cannot rightly be said that the receiving order ought not to have becn made because it was on a petition presented for a purpose foreign to the bankruptcy laws, we cannot ... annul it". And Kennedy J. said (at 91 - 92): "No doubt the object of the debtor in this case in presenting his petition was to protect himself from the payment of this debt; but can we say ... that this is a purpose so foreign to the administration of the bankruptcy law as to be an abuse of the process of the Court? I do not think that we can. No doubt in passing the Bankruptcy Act of 1883 the legislature had in view the interests of creditors and of the commercial community generally; but they had also regard to the interest of the debtor; and I think that although the primary object of a debtor is to shield himself against the remedies of his creditors by making himself a bankrupt, that in itself is not sufficient to deprive him of his right to an adjudication on his own petition. There may be cases in which the debtor's object in presenting a petition is so distinctly foreian to the purposes of the Bankruptcy Acc that it is a mere abuse of the process of the Court; but in my om) opinion this is not such a case, and I think that the adjudication ought to stand." In In re Hancock, (1904) 1 K.B. 585, the debtor failed to pay a judgment debt, whereupon the creditor obtained an order for payment by instalments. The instalments fell into arrear, and the creditor obtained a committal order, under pressure of which the debtor paid the arrears. Again the instalments fell into arrear, and again a committal order was obtained. This time, the debtor presented his own petition and obtained a receiving order and adjudication. There was no creditor other than the judgment creditor, and the bankrupt had no assets beyond his personal earnings. So much of those earnings as was not necessary for the support of himself and his family would be available in the bankruptcy for payrent of the judgment creditor. Vaughan Williams L.J. said (at 590): "Under these circumstances it seems to me impossible to say that the presentation of this petition was an abuse of the process of the Court. Jt is true that the result of the receiving ordcr will be that this debtor will not be liable to pressure from time to alee we a ee re ae eae dente cence Dee meat te ened my ee IS IR al aS MI ee eR lA (RL Temata Des YR AREER a + eee RL Ae -12- time by the obtaining of a committal order against him; but I am not at all prepared to say that the Legislature did not intend that a debtor who had been subjectcd to such pressure shovld relicve himself from that pressure by obtaining an adjudication in bankruptcy against himself". In In re Dunn, (1949) Ch. 640, 647, Evershed M.R. said of Ex parte Painter: "... I think it clearly emerges from that case that the circumstance that the debtor has filed his petition in order to protect himself from evils which he might otherwise suffer, and not with any benevolent intention of benefiting his creditors by securing a fair distribution of assets among them, is no reason why an order" (of adjudication) "should not be made." And in In re a Debtor, (1967) Ch. 590, 596, Goff J., delivering the judgment of himself and Stamp J., said that the ratio decidendi of Ex parte Painter and In re Hancock was "that the debtor was entitled to use the machinery of the Bankruptcy Act for his own purpose so as to shield himself from further liability to committal or other harassment". In In re Betts, (1901) 2 K.B. 39, 41, R. S. Wright J. said of Ex parte Painter that it established "that where a debtor files his own petition the proceedings in bankruptcy ought not to be stopped merely on the ground that his object in filing the petition is to escape the effect of an order against him under the Debtors Act", and added that he did not wish to criticize a word that was said in that case; but the decision in In re Betts shows that that principle will not extend to the length of allowing the debtor to use the bankruptcy law in order to assist him in committing frauds on his creditors, e.g. by becoming a "professional bankrupt". The principle which I think may he extracted from the cases to which I have referred is that, where a man who is insolvent, or reasonably believes that he jis insolvent, presents a petition against himself, and dees not thereby commit (as in ~13- In re Betts, supra) a fraud on his creditors, his bankruptcy will not be annulled merely because his motive in presenting his petition was, in the words of Evershed M.R., "to protect himself from evils which he might otherwise suffer". Other instances of abuse of process have been discussed in cases where petitions have been presented not by debtors but by creditors, who have opportunities for abuses such as extortion and oppression not so readily open to petitioning debtors: see e.g. King v. Henderson, (1898) A.C. 720; Dowling v. Colonial (1915), 20 C.L.R. 509; Mutual Life Assurance Society Ltd. 95 C.L.R. 407. There is, I think, Rozenbes v. Kronhill (1956), nothing in those cases to deny the principle I have tried to state above. I am therefore of opinion that, assuming that it should be inferred that the bankrupt had the motive the applicai.t seeks to attribute to him, the applicant has not made a case for annulment of the bankruptcy. Purther, if I am wrong, and if as a matter of law the petition ought not to have been presented or ought not tc have been accepted, I think that my discretion should not be exercised by making an order of annulrent. The bankruptcy occurred on 19 December 1975, but the application for annulment was not made until 2 June 1976. In the intervening six ronths, the applicant joined with the Official Receiver in selling the matrimonial home and received her share of the proceeds, the Matrimonial Causes Court made an order for maintenance on the basis that the husband was a bankrupt, and the Official Peceiver made considerable progress in the administration of the estate Proofs of debt have been lodged, and investigation of them has proceeded. The evidence in this case as to the bankrupt's -14- affairs, incomplete as it was, indicates that he is insolvent and that administration of his estate in bankruptcy is desirable. In the circumstances I think that as a matter of discretion the bankruptcy should not be annulled. I dismiss the application for annulment. The applicant claims in the alternative a declaration in her favour as to the sum of $15,000, part of the amount brought to the credit of the estate as a result of the sale of the matrimonial home. The argument, as I understand it, is as follows. When the applicant presented her petition to the Family Law Division of the Supreme Court of New South Wales on 4 April 1974, that Court acquired jurisdiction under Part VIII of the Matrimonial Causes Act 1959 to make an order pending the disposal of the proceedings, The order of 8 December 1975 was such an order. Its effect was to operate as a conversion, so that from its date the proceeds of sale of the matrimonial heme must be regarded as personalty. It also divested the husband of his interest in the land, and substituted an expectancy of a contingent interest in that personalty. That expectancy was not guantified or identifiable until the order of 2 April 1976, when it could be identified as amounting to one-half of the balance left after deducting $15,0C0O plus interest from the net proceeds of sale. (The order of 8 October 1976 made on appeal increased that expectancy by $9,000, as it reduced the $15,000 to $6,000). Therefore at the date of the bankruptcy the bankrupt's interest in the matrimonial home did not pass to the Official Receiver: Re Inkson's Trusts (1855), 21 Beav. 310; 52 E.R. 878. Some part of the argument was based on the assumption that the bankruptcy related back to a date carlier than 19 December 1975; but as there is no evidence that on any earlier date an act of bankruptcy was committed, there 1s no a er oe -15- relation back: s8.115(2) (b). That argument fails in more than one respect. First, the order of 8 December was to the effect that the matrimonial home be sold and the proceeds applied in the purchase of another home; therefore if it worked a conversion it worked a double conversion, and the proceeds are to be regarded as realty and not as personalty: Megarry & Wade, Law of Real Property, 2nd edn, 280; 16 Halsbury, 4th edn, para. 1372; In re Grange, (1907) 1 Ch. 313, 316; (affd.) (1907) 2 Ch. 20, 22. The order of 8 December contemplated that the matrimoniae. home should be sold and its proceeds used in the purchase of another house which would take its place and for all purposes of the Matrimonial Causes Court be regarded as the matrimonial home as though the substitution had not been made. The intent of para. (e of the order clearly was that the new home should be treated as "property to which the parties are ... entitled" within the meaning of s. 86 of the Matrimonial Causes Act 1959. At that stage the matrimonial cause had not been heard, and the parties had been before the Court only on the questicn of maintenance pending the hearing of the suit. The order appointed the applicant to be her husband's agent for the purpos? of selling the original property, but in my opinion did not divest him of his interest in that property. In any event, the applicant by joining with the Official Receiver in selling the property is I think now precluded from asserting that no interest at all in the property had vested in the Official Receiver as a result of the bankruptcy. Finally I think that the order of 8 December gave the applicant nothing more than the right to proceed under it to the sale of the matrimonial hore and the purchase of another el ee ee me ee a ee ~16- property, acting as her husband's agent so far as his interest in the property was concerned. It did not give her any interest, by way of charge or otherwise, in her husband's interest, and the latter interest became vested in the Official Receiver free of any encumbrance as one of the assets in the bankrupt's estate. The order of 2 April 1976, varied by the order of 8 October 1976, means that the applicant became a creditor of the bankrupt after the date of the bankruptcy and therefore has not a debt provable in the bankruptcy. Accordingly I am of opinion that the application for a declaration fails. The order I make as to the applicaticn of 3 June 1976 is: Application dismissed, with costs including reserved costs.