CATCHWORDS Bankruptcy Act 1966 - petitioning creditor on proof of facts set out in s.52(1) prima facie entitled to an order of sequestration; held other sufficient cause not having been shown why an order ought not be made, order of sequestration made. RE: Robert Ian MITCHELSON EX PARTE: Carolyn Eva MITCHELSON SWEENEY J. 19 December 1979 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION No. P741 of 1978 BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA Re: Robert Ian MITCHELSON a debtor Ex parte: Carolyn Eva MITCHELSON a creditor C.A. Sweeney J. 19 December, 1979 REASONS FOR JUDGMENT The petitioning creditor obtained judgment against the debtor, her former husband, on 12 July 1978 in the Supreme Court of Victoria in the sum of $7,797.26 (being the amount claimed of $7,659.60 together with interest of $137.66) and $166.00 costs. A bankruptcy notice claiming the sum of $7,963.26, being the amount of the judgment and costs, was issued on 19 September 1978 and served on the debtor on 26 September. In the petition, dated and presented on 23 November 1978, the petitioning creditor alleged the existence of the judgment debt and the commission of an act of bankruptcy in failing on or before 9 November 1978 either to comply with the requirements of the bankruptcy notice or to satisfy the Court that he had a counter-claim, set off or cross demand equal to or exceeding the sum specified in the bankruptcy notice. In paragraph 3 of the petition, the petitioning creditor said: "I do not, nor does any person on my behalf, hold any security over the property of the debtor, or any part of it for the payment of the amount specified in the last preceding paragraph." wee 2/ The debtor filed an affidavit on 10 October 1978 an which he claimed that he had a counter-claim, set off or cross demand against the petitioning creditor equal to or exceeding the amount of the judgment debt. The affidavit did not contain an allegation that the counter-claim, set off or cross demand was one which he could not have set up in the action, as required under the terms of ss.41(7) and 40(1) (g) of the Bankruptcy Act 1966. The Court on 9 November 1978 determined that it was not satisfied that the debtor had a counter-claim, set off or cross demand which he could not have set up in the action. From this determination the debtor appealed in vain. On 6 December 1978 each party was represented and, on the debtor's application the hearing was adjourned to 14 February 1979, with directions as to the filing of affidavits. On that day it was further adjourned and after the determination of the debtor's appeal, it was placed in the list for mention on 26 June 1979. On that day the Court was informed that an action to which the debtor was a party was proceeding in the Supreme Court of Victor1a an which the petitioning creditor was claiming that a mortgage held by her over certain property of the debtor was entitled to priority over another mortgage over the same property. The petition was stood out of the list generally, liberty being reserved to either party to apply for relisting when the outcome of the Supreme Court proceedings was known. The petition was relisted on 15 November 1979 when the evidence showed that the debtor had failed to establish that her mortgage had priority over the other mortgage in question, with the practical consequence that her mortgage was valueless, having regard to the value of the property and the amount secured by the other mortgage. .3/ The debtor's Notice of Intention to Oppose the Petition dated 10 July 1979 read as follows: "1. THAT contrary to the statement made by the Petitioner in paragraph 3 of the Petition she holds over property of the Debtor a security for the payment of the amount referred to in paragraph 2 of the said Petition, namely a mortgage dated the 24th December, 1976 over the whole of the land described in Certificate of Title Vol. 8310 Fol. 743, Vol. 8118 Fol. 908 and Vol. 8845 Fol. 460 and 486. 2. THAT the value of the security held by the Creditor 1s an amount the sum of which exceeds the debt owing to her. The Petitioner is therefore ineligible to present this Petition by virtue of the provisions of Section 44(2) of the Bankruptcy Act 1966 (as amended) ("the Act"). 3. THAT whilst the Petitioner, as a secured Creditor with a security the value of which exceeds the amount of the debt owing to her, 1s entitied to present a Petition pursuant to Section 44(3) of the Act providing that she states that she will surrender her security for the benefit of creditors generally, in the event of a sequestration order being made, she has not so done and the Petitioner is by reason of this ground ineligible to present the Petition. 4. SUB-SECTION (4) of Section 44 provides that where a Petitioner is a secured creditor the details of the particular security shall be set out in the Petition. This has not been done." By Notice dated 8 October 1979 the debtor set up an additional ground, in these terms: -4/ "5. THE Petitioner is a secured ~~ Credator and by reason of the provisions of Section 44(3) of the Bankruptcy Act 1966 is required to anclude in the Petition a statement that she 1s willing to surrender her security for the benefit of Creditors generally in the event that a sequestration order is made against the Debtor and she is required to do this whether or not the value of her security is equal to or greater than the debt, and she has not included such a statement in her Petition." At the outset of the hearing on 15 November the petitioning creditor was given leave to amend her petition so that it then read as follows: "1. The debtor was at the date of the commission of the act of bankruptcy specified in paragraph 4 of this petition personally present in Australia. 2. The debtor is justly and truly andebted to Carolyn Eva Mitchelson in the sum of $7,963.26 for which Judgment was obtained in the Supreme Court of Victoria on the 12th day of July, 1978. 3. I hold security over the property of the Debtor being a third mortgage dated 24th December 1976 executed by the Debtor over the land and premises situate at and known as Unit 53, 432 Cardigan Street Carlton securing payment of all sums due under an agreement executed by the debtor and myself on the Ninth day of December 1974 which security is subject to prior equities exceeding $60,000.00 in value leaving me unsecured in the full amount of the sum of $7,963.26 as stated in Paragraph 2 hereof. 2 -5/ The debtor, within six months before the presentation of this petition, committed the following act of bankruptcy namely that he failed on or before the 9th day of November 1978, either to comply with the requirements of a bankruptcy notice served on him on the 26th day of September, 1978, or to satisfy the Court that he/she had a counter claim, set-off or cross demand equal to or exceeding the sum specified in paragraph (a) of the bankruptcy notice. I am willing to surrender my security for the benefit of creditors generally in the event of a Sequestration Order being made against the debtor." The Court dispensed with reverification and a reservice of the petition as so amended. It will be seen that the amendment so made largely adopted the course which the debtor in his Notice of Intention to Oppose the Petition as originally drawn, submitted that the petitioning creditor should have followed. By Notice dated 14 November the debtor indicated that he proposed to rely on the following additional grounds: "6. 9. THAT the Court has no jurisdiction to make a sequestration order. THAT Sections 44 (1) (a) and (1) (b) of the Bankruptcy Act 1966 have not been complied with. THAT the debt referred to in the Petition herein is not verified as required by Section 52 of the said Act. THAT the Act of bankruptcy in Paragraph 4 of the said Petition is not verified." 2. .6/ 6. Counsel for the debtor, Mr P.J, Kennon, then applied for an adjournment of the hearing until 23 November, the day on which the petition was due to lapse. A ruling on this application was deferred until the close of the case for the petitioning creditor, when Mr Kennon renewed it. He relied upon two grounds, the first of which was in effect that he had prepared his defence to the petition in the form in which he expected to find it and was taken by surprise by the amendment to it and felt that, had the time spent on that preparation been devoted to a consideration of the petition in its amended form, it might have revealed some flaw on which a defence could have been based. The second ground was that on the previous day, 14 November, his client had signed an authority under s.188 of the Bankruptcy Act 1966 autho1izing a registered trustee to call a meeting of his creditors and to take control over his property. In Field v Commercial Banking Company of Sydney Limited (1978) 22 A.L.R. 403 an application for adjournment had been based upon the execution of an authority under s.188 on the day before the hearing of the petition. It was refused by the trial judge and an appeal against his refusal was dismissed. At this point the Court adjourned before the normal time for the luncheon adjournment to permit counsel to consider Field's case and whether he sought to point to any prejudice which his client might suffer if his application for adjournment were not granted. Upon resumption of the hearing, the debtor gave evidence in support of his application for an adjournment "for a period of 8 days or for such period as the Court considers necessary to allow a Deed of Composition or Deed of Arrangement to be executed according to the provisions of Part X of the Bankruptcy Act 1966". He also relied on his own affidavit in which he deposed that he had signed the authority and stated "my estate comprises of no assets". wee T/ In an affidavit sworn by Alex Neville Bird on 14 November 1979 he stated: "2. I have received from Robert Ian Mitchelson the judgment debtor in this matter a duly completed authority dated the 14th day of November 1979 in accordance with the appropriate form in the Third Schedule to this Act. I have consented in writing to exercise the powers conferred by the authority and am sending this day notice to the creditors of the said Robert Ian Mitchelson convening a meeting of them for the 22nd day of November 1979 at 10.30 A.M. in Rooms 5 & 6 of the Chamber of Manufacturers Building, St. Kilda Road, Melbourne. A Solicitor 1s holding the sum of TEN THOUSAND DOLLARS ($10,000.00) an his trust account being a sum advanced by John Andrew Sharman of 38 May Road, Hawthorn for the benefit of the creditors of the debtor. The advance 1s contingent upon the passing of a special resolution by the creditors consenting to the Debtor executing a Deed of Arrangement or Composition under Part X of the Act." John Andrew Sharman, an electronics engineer, made an affidavit on the same day in the following terms: a That on the 13th day of November 1979 I advanced the sum of TEN THOUSAND DOLLARS ($10,000.00) to a Solicitor. Alexander Neville Bird has consented to act as trustee of the estate of Robert Ian Mitchelson the judgment debtor herein for the purpose of applying the said sum for the benefit of the judgment debtors creditors. The said advance is contingent upon the creditors of the judgment debtor passing a special resolution consenting to the judgment debtor executing a Deed of Assignment or Arrangement under Part X of the Bankruptcy Act 1966." It will be observed that Sharman stated that the advance was contingent upon the passing of a special resolution "consenting to" the debtor executing a Deed of Assignment or Arrangement, whereas in Bird's affidavit 1s was described as contingent upon the passing of a special resolution "consenting to" the debtor executing a Deed of Arrangement or Composition under Part X. In his viva voce evidence the debtor stated that he had debts totalling over $200,000, ancluding $138,000 owing to various proprietary companies with which he had been associated. He said that the only point in endeavouring not to go bankrupt was that he might be able to get a job and hold his estate agent's licence. He saad "It 18 a full licence; that was the only point ... otherwise there was no point in trying to get funds ... I was chasing around trying to get a scheme ... without that licence I may have gone bankrupt 12 months ago. That is the only work I have known for 20 years". Later he said that he had not been working for the last three years because of bankruptcy proceedings placing his licence constantly under threat. He had spoken to the directors of the proprietary companies in the last week "and they said they would be prepared to go to the meeting of creditors and vote that the companies stand back, or if they have voting power not to participate in the dividend to be paid", Cross-examined by Mr E.W. Gillard, counsel for the petitioning creditor, he agreed that he was a potential beneficiary under certain trusts, that he had been unable to pay his debts throughout the previous twelve months and that he had the benefit of legal advice in relation to the bankruptcy proceedings since October 1978. He said that he had been a director of some of the companies and a shareholder in some of them, but he could not recall their names. 1 9/ When the evidence had been concluded, Mr Kennon was asked whether as a result of consideration over the adjournment he could point to any possibility of injustice arising to his client by reason of the amendment of the petition and the hearing proceeding and he was unable to do so. Mr Kennon then recalled the debtor who gave evidence that the proprietary companies would be prepared to sign releases in respect of the debts owed to them. Cross- examined by Mr Gillard he said that his understanding was that the companies would give proxies for the meeting but not participate in the distribution. Mr Kennon agreed that there was a real danger that these companies would control the meeting, if Beneficial Finance Corporation Limited relied solely on its security and did not take part in the meeting. The debtor's application for the further adjournment of the hearing was refused. Mr Kennon did not seek to call any further evidence but was given leave to add a fresh ground to his notice of opposition, in the following form: "10. The Court in the exercise of its discretion under s.52 of the Bankruptcy Act 1966 should dismiss the petition." He sought to support this ground by submitting that the Court ought to be satisfied by the debtor that for "other sufficient cause" within the meaning of sub-sec. (2) (b) a sequestration order ought not to be made. The suggested "other sufficient cause" was that it was not in the public interest to make the sequestration order, that the order would deprive the debtor of his real estate agent's full licence and of his means of livelihood. ...10/ -10- The Court was satisfied with the proof of the matters stated in the petition, of the service of the petition and of the fact that the debt on which the petitioning creditor relied was still owing. The debtor did not attempt to satisfy the Court that he was able to pay his debts and his evidence established the contrary. The High Court considered the provisions of s.56(2) of the Bankruptcy Act 1924, the predecessor of s.52(2) of the 1966 Act, in Rozenbes v Kronhill (1956) 95 C.L.R. 407 in which (at p. 414) Dixon C.J., Webb and Fullagar JJ. said: "In Cacn v Whyte (1), this Court expressed agreement with a judgment of the Supreme Court of Queensland (Henchman J.) in which his Honour said: '... prima facie, on proof of the matters mentioned in s.56(2), the Court will proceed to make an order for sequestration, and ... 1t is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become duc. Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause 1s shown against the making of a sequestration order'. (1) (1933) 48 C.L.R. 639". In my opinion the debtor fazrled to show "other sufficient cause" why a sequestration order ought not to be made. The case was a proper one in which to make the order of sequestration and the order for costs which have been earlier pronounced.