CATCHWORDS Bankruptcy - creditor's petition - whether phrase in s. 52 (2 ) (a) "1s able to pay his debts" means "1s able and willing to pay his debts" - whether phrase "it may dismiss the petition" an s. 52 (2) is mandatory or discretionary Bankruptcy Act 1966 (Cth.) s. 52 RONALD GRAFTON SARINA v. THE COUNCIL OF THE SHIRE OF WOLLONDILLY NO. G53 OF 1980 CORAM: BOWEN C.J., C.A. SWEENEY AND LOCKHART JJ. MONDAY 17 NOVEMBER 1980 AT SYDNEY IN_ THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G53 of 1980 GENERAL DIVISION BETWEEN: RONALD GRAFTON SARINA Appellant and Cross-Respondent (Judgment Debtor) AND: THE COUNCIL OF THE SHIRE OF WOLLONDILLY Respondent and Cross—Appellant (Judgment Creditor ORDER JUDGES MAKING ORDERS: BOWEN C.J., C. A. SWEENEY AND LOCKHART Jd WHERE MADE: AT SYDNEY DATE OF ORDERS: MONDAY 17 NOVEMBER 1980 THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The cross-appeal be dismissed. 3. The appellant pay the respondent's costs of the appeal. 4. The respondent pay the appellant's costs of the cross- appeal. 5. The sum of $2,790.00 paid into Court by the appellant be paid out of Court to the appellant IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY )No. G53 of 1980 GENERAL DIVISION RONALD GRAFTON SARINA Appellant and Cross—Respondent (Judgment Debtor) THE COUNCIL OF THE SHIRE OF WOLLONDILLY Respondent and Cross—Appellant (Judgment Creditor) CORAM: BOWEN C.J., C. A. SWEENEY and LOCKHART JJ. 17 November 1980 At Sydney REASONS FOR JUDGMENT This appeal raises the important question in bankruptcy whether a sequestration order may be made against the estate of a person who proves to the Court on the hearing of the petition that he is able to pay his debts. We are not aware of any previous Australian decision upon the question. The learned primary Judge (Deane J.) heard a petition presented by the Council of the Shire of Wollondilly ("the respondent") for a sequestration order against the estate of Ronald Grafton Sarina ("the appellant"). It is common ground that the appellant 1s and was at all matenal times, capable of paying his debts. His failure to pay the judgment debt owing tothe respondent 1s not becaise he lacks the necessary means. He simply refuses to pay the debt. 26/2 The learned primary Judge held that the appellant was "able to pay his debts" for the purposes of s. 52 (2) (a) of the Bankruptcy Act 1966 ("the Act") as the word "able" should be given its ordinary meaning and not the meaning "willing and able". It was not suggested by the respondent that, in the event of such a finding, his Honour should do otherwise than dismiss the petition, and it was dismissed. His Honour ordered that the appellant pay to the respondent its costs of the proceedings up to and including 28 April 1980. It was on that day that the appellant first claimed in the proceedings that he was able to pay the debt owing to the respondent. The other order made by the learned primary Judge relevant to this appeal was for payment out of Court to the appellant of the sum of $2,790.00 previously paid into Court by him as an earnest or pledge of the genuineness of his case 1n opposition to the petition. At an earlier stage of the proceedings another Judge of this Court had granted an application by the appellant for an adjournment of the petition on the condition, which he had himself suggested, that the sum of $2,790.00 was paid into Court. The appellant appeals to this Court against the order for costs made against him. The respondent cross appeals against the order dismissing the petition and the order for payment out. The primary question involved in the appeal 1s the meaning of the phrase "able to: pay his debts" in s. 52 (2) (a) of the Act. Section 52, so far as relevant, provides:-— "(1) 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 26/3 -3- 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. (2) If the Court is not satisfied with the proof of any of those matters, or 1s satisfied py the debtor -- (a) that he is able to pay his debts; or (b) that for other sufficient cause a sequestration order ought not to be made, it may dismiss the petition." Counsel for the respondent submitted that the word "able" should be construed as "willing and able", otherwise bankruptcy could not be resorted to by creditors of a debtor who is solvent but recalcitrant. The creditors would then be left to remedies otherwise available such as execution against the debtor's property and garnishee proceedings. Reliance was placed upon the Canadian decision of In Re Freeholders Oil Co. Limited (1953) 33 C.B.R. 149 where McKercher J. took the view that the words "is able to pay his debts" 1n s. 21 (7) of the Canadian Bankruptcy Act 1949 meant in relation to the facts of that case "is able and willing to pay his debts". McKercher J. regarded the ability of the debtor (the company Freeholders Oil Co. Limited) to pay its debts as depending essentially upon the realisation of certain royalty interests ../4 of the debtor in minerals upon or under freehold land which required the voluntary co-operation of the debtor, and this co-operation it was unwilling to give. "In view of the facts in this case I think the words in s. 21 (7) 'is able to pay his debts! can rightfully be construed as meaning 'able and willing to pay his debts' which facts I find are not existent here." That case was considered in a later Canadian of Re Redbrooke Estates Limited (1967) 13 C.B.R. 117 O'Connor J. had this to say about it at p. 119:- decided "If the legislature had considered it advisable that a receiving order should be made against a wealthy but unwilling debtor it would have so provided in the statute by adding after the word 'able! the suggested words 'and willing'... If a debtor 1s able to pay immediately all his creditors, theoretically each of these creditors is fully protected and there is no need for bankruptcy proceedings. If a debtor, although having quite sufficient liquid funds to do so, is not willing to pay his creditors but has not committed any act of bankruptcy, he can be sued in the civil courts by every one of his creditors and thus each claim can be paid in full out of the debtor's property which is their common pledge: C.C. art, 1981. There is no need for a trustee to be appointed to the estate of such a wealthy but unwilling debtor. All of the credibrs wi ultimately be paid in such case by the ordina exercise of the1r civil rights under the Code of Civil Procedure." The Judge said at p. case where il ry 162:- The researches of counsel have not revealed any other cases directly touching this question. Counsel for the respondent argued that the po licy underlying the Act operated to give the words "able to pay his debts" the meaning of "able and willing". /5 He pointed to s. 40 -5- (1) of the Act as an indication that inability to pay debts is not a necessary ingredient 1n some of the acts of bankruptcy there prescribed. It is true that some acts of bankruptcy do not in terms refer to inability to pay debts but they are the traditional badges of insolvency; for example where with intent to defeat or delay his creditorsa debtor departs or remains out of Australia, departs from his dwelling house or usual place of business, otherwise absents himself or begins to keep house (s. 40 (1) (c) ). An act of bankruptcy is the foundation of the doctrine of relation back which operates, upon the making of a sequestration order, retrospectively to vest title to the property of the bankrupt in the trustee of his estate. When a person becomes bankrupt his property is vested in the trustee for the benefit of his creditors generally. His property is realised and distributed amongst his creditors rateably, subject to priorities. The very notion of priorities postulates an insufficiency of assets to pay all creditors the full amount of their debts. In bankruptcy, rights of creditors to sue the bankrupt are converted into rights of proof against his estate and he is protected from suit. The avoidance of preferences, voluntary settlements and fraudulent dispositions of property by the bankrupt 1s intended to restore the property or money of the bankrupt to his estate to achieve a fair and rateable division of the bankrupt's property among his creditors. The bankrupt 1s disqualified from holding certain offices. Bankruptcy involves a change of status and quasi-penal consequences. Upon discharge from bankruptcy, the bankrupt 1s released from his debts subject to certain exceptions. ..-/6 These considerations negate the existence of any policy underlying the Act that a debtor should be made bankrupt 1f he is able to pay his debts but is unwilling to do so. If a debtor 1s able to pay his debts but 1s recalcitrant, his creditors may resort to the remedies otherwise afforded by the law such as execution against his property and garnishee proceedings. The words "able to pay his debts" in s. 52 (2) of the Act do not mean "willing and able" to do so. The question now arises whether, as the appellant is able to pay his debts, the Court is bound to refuse to make a sequestration order or has a discretion to refuse to do so. This involves the construction of the word "may" in s. 52 (2) in the context "may dismiss the petition". The question 1s whether "may" 1s mandatory or facultative. The respondent did not dispute before the learned primary Judge that the word "may" used 1n sub-s. (2) was mandatory; nor was the point raised in thenotice of cross-appeal. The respondent applied for leave on the hearing of the appeal to amend the notice of cross-appeal and thus raise the question. The application was not opposed by the appellant and was granted by this Court. Prima facie facultative words bear their ordinary and natural meaning. ",.. the meaning of such words is the same, whether there is or is not a duty or obligation to use the power which they confer. They are potential, and never (in themselves) significant of any obligation. The question whether a Judge, or a public officer, to whom a power is given by such words, 1s bound to use it upon any particular occasion,or in any particular manner, must be solved aliunde, and, in general, it 1s to be solved from the context, from the particular provisions, or from the general scope and objects, of the enactment conferring the power": -7- Julius v. Lord Bishop of Oxford (1880) L.R. 5 A.C. 214 per Lord Selborne at p. 235. See also Ward v. Williams (1955) 92 C.L.R. 496 and Finance Facilities Pty. Limited v. F. C. of T. (1971) 127 C.L.R. 106. The Act, in many of its provisions, draws a careful distinction between mandatory and facultative powers: see for example s. 150 relating to applications for discharge. This 1s to be expected with legislation relating to bankruptcy which, by its very nature, calls for the exercise of discretionary powers by the Court in a wide variety of circumstances. The power conferred upon the Court by s. 52 (2) is permissive not mandatory, although 1t seems that the occasions on which the discretion not to dismiss the petition might be exercised would not be frequent. It may, in a proper case, require the refusal of a sequestration order yet permit the adjournment of the petition rather than 1ts dismissal. The variety of circumstances that may arise in particular cases renders plain the undesirability of seeking to define parameters of the exercise of the power. Counsel for the respondent submitted that notwihstanding the ability of the appellant to pay his debts within the meaning of s. 52 (2), the Court, in the exercise of its discretion, should make a sequestration order against the estate of the appellant. The essence of the argument was that as the appellant was able to pay the debt due to the respondent but was unwilling to pay it, the Court should make a sequestration order as a mark of its disapproval of such conduct. In our opinion that would not be a proper exercise of discretion on the facts of this case. This case does not fall within the ambit of the discretion conferred by s. 52 (2). Nor does it .-/8 call for the adoption of any course except dismissal of the petition. We turn to the remaining questions 1n the appeal. First, the question of costs. Counsel for the appellant submitted that the order for costs made by the learned primary Judge should be set aside on the ground that the reason given by his Honour to support the order, namely that the respondent could not be criticised for failing to anticipate a defence that the appellant was solvent and had the means available to pay all his debts, including that owing to the respondent, was not supported by the evidence. It was said that the undisputed evidence showed that the appellant owned land in the Shire of Wollondilly worth a great deal more than the amount owing to the respondent and that this must have been known by the respondent at all material times. The sources of that knowledge were said to be the fact that the respondent 1s the rating authority in respect of the appellant's land; that the appellant was himself a member of the respondent from 1965 to 1968 and that there had been for some time past a deal of litigation between the appellant and the respondent relating to a plurality of disputes in which the respondent must have acquired knowledge of the appellant's assets. Even if these matters were within the respondent's knowledge, it would not follow that the respondent would know the overall financial position of the appellant. Knowledge of certain of his assets does not necessarily involve knowledge of his liabilities, income and expenditure. ./9 It has not been established that his Honour erred in law in any relevant respect. No ground has been made out for interfering with the exercise by his Honour of his discretion on the question of costs. There remains the order for payment out of the sum of $2,790.00. It represents the amount of the debt alleged to be owing in the petition and some $500.00 on account of costs. The respondent contended that the learned primary Judge should have ordered that the money be paid out to it to be applied towards satisfying the debt owing by the appellant. His Honour sai1d:- "Examination of the transcript of the proceedings of 28 April 1980" (when the appellant applied for the adgournment of the petition) "indicates that the money was not paid into Court to await determination of the simple question whether the debtor actually owed to the petitioning creditor the amount alleged in the petition. It was, as I read the transcript, lodged essentially as a pledge of the genuineness of the debtor's case in opposition to the petition. The debtor has succeeded in that opposition. In my view, subject to the protection of the petitioning creditor's position in the event of an appeal, the appropriate order is that the moneys be paid out to the debtor." The money paid into Court was an earnest or pledge of good faith by the appellant of his intention both to prosecute his opposition to the petition diligently and to pursue the litigation in which he was the moving party against the respondent in other Court. It would be foreign to the purpose for which the money was paid into Court that it be paid out to the respondent, otherwise than with the consent of the appellant, which 1s not forthcoming. ../10 ~10— It has not been established that his Honour erred in any respect in relation to the order for payment out of the sum of $2,790.00. This case is illustrative of the difficulties that may arise when a debtor, anxious to prove his bona fides in opposing a petition to sequestrate his estate, offers, as the appellant did here, to pay money into Court to abide the further order of the Court as a pledge of the genuineness of his case. When the time comes for the money to be paid out of Court a variety of problems may arise, especially if there is doubt as to the debtor's solvency and the money is paid to the debtor himself or to a creditor within the period of relation back. In the result, the Court makes the following orders:- 1. That the appeal be dismissed; 2. That the cross-appeal be dismissed; 3. That the appellant pay the respondent's costs of the appeal; 4. That the respondent pay the appellant's costs of the cross-appeal; 5. That the sum of $2,790.00 paid into Court by the appellant be paid out of Court to the appellant. I certify that this and the preceding nine (9) pages are a true copy of the reasons for judgment herein of the Court. Associate Dated: 17 November 1980.