lu{ SS IN THE FEDER4¢L COURT OF AUSTRALIA EXERCISING FEDRRAL JURISDICTION IN BANKRUPTCY BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY Plaint No. B 942 of 1983 re; DIANNE VELLA EX parte: MICHAEL THOMAS SEYMOUR CORRIGENDA ~ Amendment to the judgment of his Honour Mr Justice Morling of 10 June 1983: p. 9 1.3 "upon" altered to "Upon" p. 9 1.13 "(1989) altered to "(1898)" R.A. MORLING 22 August 1983 ASSOCIATE TO MORLING J. CATCHWORDS Bankruptcy - default judgment in District Court - service of bankruptcy notice ~- expiry of bankruptcy notice - subsequent setting aside of District Court judgment - application to set aside bankruptcy notice after commission of act of bankruptcy - application refused Bankruptcy Act 1966 (as amended) ss. 30(1), 40(1) (qa), 41(6A) DIANNE VELLA v. MICHAEL THOMAS SEYMOUR No. B942 of 1983 Moriing J. 10 June 1983 Sydney. IN THE FEDERAL COURT OF AUSTRALIA EXERCISING FEDERAL JURISDICTION IN BANKRUPTCY Plaint No B942 of 1983 BANKRUP''CY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: DIANNE VELLA RESPONDENT : MICHAEL THOMAS SEYMOUR ORDER JUDGE MAKING ORDER : Morling J. DATE OF ORDER 1G June 1983 WHERE MADE : Sydney THE COURT ORDERS: 1. Application dismissed. 2. Debtor to pay petitioning creditor's costs. IN THE FEDERAL COURT OF AUSTRALIA EXERCISING FEDERAL JURISDICTION IN BANKRUPTCY Plaint No B942 of 1983 BANKRUPTCY DISTRICT OF THE STATE OF MEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY re: DIANNE VELLA Ex parte: MICHAEL THOMAS SEYMCUR Morling J. 10 June 1983 REASONS FOR JUDGMENT Dianne Vella ("the debtor") has applied to have a bankruptcy notice served upon her set aside. Mhe application raises a nice point of law which, so far as counsel's and my own researches go, is free from authority precisely in point. The application arises in this way. On 6 December 1982 Michael Thomas Seymour ("the petitioning creditor") ' a obtained a default judgment against the debtor . aun the Pistrict Court of New South Wales. The judgment not having been satisfied, the judgment creditor served a bankruptcy notice upon the debtor on or about 29 March 1982. There 1S some uncertainty as to the exact date of service, but nothing turns , 2. upon that. lt was a fourteen Gay bankruptcy notice. the Gebtor did not comply with it. During the currency of the notice the debtor did not apply to have the jidgment set aside nor did she apply to set aside the béenkruptcy notice. cn 2 May 1983 the debtor applied to the Cistract Court to have the judgment set aside. On the same day she made an epplication to this court to have the bankruptcy notice be set asidc. in due course the application in the District Court céme on for hearing and was successful. As a result, the judgment was set aside. The guestion for decision is whether this court should set aside the bankruptcy notice which was itself "founded upon a Listrict Court judgment which was subsequently set aside. Counsel for the judgment creditor submitted that the court does not have power to make the order sought and, #wzlternatively, that even 1f there 1s power no sufficient reason 1s shown for the exercise of the power. Counsel for the debtor submitted that s.30(1) of the Bankruptcy Act 19€6, as amended, gives the court power to grant his clicnt's application. Sub-section (1) cf s.30 provides, in part, as follows: "30(1) The Court - ' ; . \ (b) may make such orders (ancluding declaratory orders énd orders granting injunctiens or other equitable remedies) as the Court considers necessary for the Purfoses of carrying out or giving effect to this Act in any such case or matter." No reliance was placed upon s.41(6A) of the Act which gives the court power to extend the time for ccmpliance with a bankruptcy notice. hr Lowdy, who appeared for the debtor, conceded, in my view correctly, that he could not found an argument ufon that sub-section because of his client's failure to apply to have the judgment set aside or to have the bankruptcy notice set aside before the erypiretien of the time fixed for compliance with the requirements of the notice. By s.40(1) of the Act it 1s provided, inter alia, that a debtor commits an act cf benkruptcy if a creditor who has cbtained against the debtor a final judgment upon whict execution has not been stayed has served upon the debtor a bankruptcy notice and the debtor does not within the time fixed for compliance with the notice comply with its requirements or satisfy the court that he has a counter-claim, set-off or cross demand equa] to cr exceeding the amount of the judgment debt, being a counter-claim, set-off or cross Gemana that he cculcd rot have set up in the action in which the judgment was obtained. It was common ground between counsel that the debtor's failure to comply with the requirements of the bankruptcy notice resulted in the commissicn ot an act of bankruptcy on or ebout 12 April. But 1t was submitted on behalf of the debtor that 'since the basis upon which the bankruptcy notice was founded was the District Court judgment, the setting aside of that judgment gave this court power to set aside the bankruptcy notice because the taking of such a ccurse was "necessary for the purposes of carrying out or giving effect to this Act" within the meaning of those words in s.3C(1){b). At first blush this argument has some attraction. Eut upon reflection I have come tc the view that 1t 1s not sound. It 1s necessary to keep clearly in mind the effect of non-compliance with the bankruptcy notice. The effect was, of course, that the debtor committed an act of bankruptcy when she failed eithctr to comply with ats terms ocr to take appropriate action under s.41(6A). The subsequent setting aside of the judgment did not alter the fact that the act of bankruptcy hed already been ccmmitted. the act of bankruptcy remained extant. ho doubt, in the exercise of its discretion, "the court would not make a sequestration order if at the time of the hearing of the petition it was shown that the judgment debtor was net in fact indebted to the judgment creditor. bCBut the act of bankruptcy referred to in s.40(1)(g) would be complete. . That the position is as I have stated it appears from the judgment of Gibbs J. (as he then was) in Re Hanby; Ex parte Flemington Central spares Pty. Limited (1967) 10 E.L.F. 378%. In that case a petitioning creditor cbtained a Judgment ian the District Court against a debtor. A bankruptcy notice addressed to the debtor was issued. it was a fourteen day notice and was served on the debtor on 1€ May 1966. As in the present case, the debtor did not either comply with its requirements or apply for an extension of time to comply with them. Nor did he apply to the Distract Court to have the judg 5. ment set aside. A petition seeking the sequestration of the debtor's estate was returnable on 10 February 1967 but the hearing on that date was adjourned because the debtor hea taken proccedings in the Listrict Court to set the default judgment aside. The judgment was, in fact, set aside on z9 March 1967 and the debtor was let in to defend the action. The proceedings in the Listrict Court were subsequently settled upon terms that there should be a verdict for the plaintiff 1n a sum somevhat smaller than the amcunt for vhich the Gefault juagment hac been entered. When the petition subsequently came on for hearing 1t was contended on behalf of the Gebtor that as the judgment had been set aside, it could no longer be treated as a final judgment for the purposes of s.52 find application was made to Gibbs J. (3) of the Bankruptcy Act 1924-1965, a provision which s it counterpart in s.40(1){g) of the present Act. ho to set eside the bankruptcy notice, but what he hed to say in deciding the point which arose in the casc is apposite to the present case. p.38l1: "It was, however, said on behalf of the debtor that once the judgment was in fact set aside it could no longer be treated as a final judgment. However, the critical time for determining whether an act of bankruptcy has been committed is the date on which the period limited by the bankruptcy notice expired - see Re Grace; Lx parte Castling (1931) 3 A.B.C. 131; Fe McDLonalé (1934) € A-B.C. 184, at p. 193; Re Eémunds (1936) 9 A.B.C. 1, at p.5. At the time when the bankruptcy notice expired in the present case, namely 3Cth May, 1966, the judgment had not been set aside and remained a final judgment. Since the debtor had not by that date complied with the reguirements of the notice, He said at €. the act of bankruptcy was then ccmpleted. It as not possible tc say that by reason of subsequent circumstances an act of bankruptcy once ccmmitted ceases to have been committed or must be treated as though 1t had never been committed. Of course this does not mean that a sequestration order may be made if a judgrent has been set aside in circun- stances that show that the debtor was under no liability to the petitioning creditor, for the court must inguire whether there is a debt due by the debtor to the petitioning creditor, and if not, wijl refuse an order notwithstanding the commission of an act of bankruptcy. lf, however, a judgment 1s set side after an act of bankruptcy has been completed, and subsequently the existence of the Gebt 1S established by a further judgment after a new trial, or by & cempromise of the proceedings, the conditions which entitle the petitioning cre@€itor to a sequestration order will have becu established." It 1s true that in Hanby's Case the issue before the Court was whether & sequestration order shoula be made on the hearing of @ petition and not whether a bankruptcy notice shoula be set asidc. The Gecision is not directly in point in the present case but it does make clear that a subsequent event, namely, the setting aside of a jJudgnient upon which a bankruptcy notice is based, does not nullify the consequence of non-compliance with the notice. Applying Gibbs J's reasoning, with which I respect- fully agree, it follcws that in the present case 1t wovla not be correct to treat the act of bankruptcy caqmmitted, by the debtor as 1£ 1t had never been committed. I1f the existence of the judgment creditor's debt is established by a further judgment an the District Court after a new trial (as ain Hanby's Case) the conditicns which will entitle him to a sequestration order will have been established. It will not be necessary for him to serve a fresh bankruptcy notice on the Gebtor. 1t will be sufficient for him to rely upon the act of bankruptcy committed on or about 12 April 1983. In these circumstances, 1t cannot be said, in terms of s.ZU(1)(k) of the Act, that the court should consider it necessary to set aside the barkruptcy netice for the purpose of carrying out or giving effect to the Act. Mr Dowdy referred me to the decision of Lochhart oc. in ke Sterling (1980) 30 A.L.R. 77. that was a case in vhich an application was made to set aside < bankruptcy notice. However, the application was made before the expiretion of the tame fixed for ccmpliance with the notice. Time for "compliance was subsequently extended. Thus no act of bankruptcy had been committed by the debtor. tis Honour found that s.30(1) as a source of the court's power to set aside bankruptcy notices. I respectfully agree with that decision, but 1 do not think it is of relevance to the determination of the real question in the present case, which 1s whether the court should set aside a bankruptcy notice after non-compliance with it has led to the commission of an act of bankruptcy. Mr Dowdy also relied upon Streamer v Tamas (1961) 37 ' . 2R.L.R. 211, a decision of a Full Court of this court. That was @ case in which an extension of time was sought, and obtained, to comply with the requirements of a bankruptcy notice. The facts were quite special. A bankruptcy notice besed on a judgment cbtained by the appellant against the &. respondent in the hew South wales District Court was issued at the request of the appellant on 26 November 1980. Extensions of time for compliance with the requirements of the bankruptcy notice were grentee by McGregor J. until 6 April 1981. On that date the mztter was not reached by the court and was adjourned tc 7 April 1961. MeGregor J. was not requestec, hovevr.s, te méhe an cracr further ¢>tending the time fer compliance with the benkruptcy notice ard dic not do sc. ie € result, notice the extendec time fer compliance with the bankruptcy expired at midnight on 6 April 1981. Lefore BeGregcr J. 1t was argued for the appellant that an act of barkruptcy hed alr eady been committed by the respondent. On 7 April 1981 tame for compliance with the bankruptcy notice was extended end a further extension was made appeal whether to the Full Court failcd. until further order. An lhe guestion for decision in Streimer's Case was s-41{6A) of the Act conferred jurisdiction upon MeGregor J. tc make an order extending the time for compliance with the bankruptcy notice the time the order was made on 7 April 1981, for conplaance ith the notice had already expired. joint Jj udgment Deane and Ellicott Jd. said: ' 1 . > "it was argued on behalf cf the zppellant that a long line of authority makes it apparent that s.41(6A) should not be construed as conferring Jurisdiction to make an order extending time for compliance with the requirements of a bankruptcy notice in e1rcumstancées where, at the time of the proposed order, the time originally fixed and any previously granted extension or extensions thereof have expired. the reason for this, it notwithstanding the fect that, at the extended time in their was salad, is that the Act confers no authority upon the court to annul an act of bankruptcy Which has been committed. pupon the expiry of the time criginally fixed and any extension or extensions thereof without ccmpliance with the terms of the bankruptcy notice, an ect cf bankruptcy is compicte. Any subsequent extension of time would, sO the ara_ment proceeds, be futile, since it could not annul the act of bankruptcy whack had already been committed and which would remain. in particuler, reliance was placed upon hing v Henderson (1369) AC 720 at 728; ke Grace (1¢21) of 3S ABC 131; Re McLonald (1934) & ABC 184 at 193; Re Edmunds (1936) 9S ABC 1; Re Panby (1967) 10 FLR 378 at 381; Re hayes (1970) IG FLR 216." (37 A-L.k. 211 at 214) After stating that this argument possessed considerable force end referring to the terms of s.41(€A) of _the Act Deane and Ellacott JJ. continued: "We de not accept the proposition that, in the absence of an independent power to annul an act of bankruptcy, an order extending the time fer compliance with the requirements cf a bankruptcy notice would be futile if 1t were not made vithin the tame ainitially fixed for compliance or some persisting extension thereof. The power conferred a power to establish @ new, dastinct and andependent period of time for compliance. lhe effect of tn order extending the time for compliance, which is made after the expiry of the tame criginally fixed and any previous extensicn thereof, will be to enlarge the overall time allowed for compliance with the result that what would otherwise have constituted an act of bankruptcy no longer does +e. (T)has dces not mean that s 41(6A) operates SO aS retrospectively to divest rights, to rely upon en ect of bankruptcy which would ctherwise €xist. What s.41(6A) does is to modify, by the introduction of a contingency, the actual and potential rights and libilities resulting from farlure to ccmply with the requirements of a bankruptcy notice within the time allowed by the notice in a case where, within tha time, one of the two conditions specified in the sub-section has been fulfilled." (27 A.-L.R. 211 at 215). . 1d. Whilst the effect of the decision in Streimer's Case wes to relieve retrospectively the debtor in that case from the consequences of his brief non-compliance with the requirements of the bankruptcy notice served upen him, the decision cannot be taken as authority for the proposition that the setting aside cf a bankruptcy notice after the tame for compliance with it has expired has the effect of annulling the act of bankruptcy already committed. the effect of the order made by McCregor ¢. (and affarmed on appeal) in that case was to enlarge the overall time allowed for compliance with the result that no act of bankruptcy was committed. 'lhe order did net have the effect of retrospectively divesting raghts to rely upon an act of bankruptcy. I was also referred to Re Hayes; ex parte Thomas Borthwick & Sons (Australasia) Limited (1970) 1€ F.L.R. 216. In that case Street J. (es he then was) applied the decision of Gabbs J. in he Hanby (supra). street J. held that failure to comply with a bankruptcy notice requiring payment of a judgment debt constitutes an act of bankruptcy notwithstanding that the judgment is later set aside and the debtor allowed in to Gefend the creditor's action. He held that any creditor, able to prove another debt of sufficient amount, may prosecute a creditor's fetatacn upon that act of bankruptcy - "In the report of the case it 1s stated that "the bankruptcy notice was set aside yesterday" (37 Bek. R. Z1G6 et 216). Lut it is plain frcem a reading of the facts of the case that what vas set aside vas the default judgment upon which the bankruptcy . il. notice was based, not the notice itself. This appears from the fourth paragraph on p.217 of the report, where it 1s Clearly stated by his honour that he had been "informed ttat the Listrict Court had yesterday morning set aside the original petitioner's judgment and allowed the debtor in to defend." I have confirmed that the bankruptcy notice was net set aside by reference to Street J's notes, which his honour has kindly made ava1lakle to me. The relevance for present purroses of Re Hayes' Case 1s that his Honour treated Nanby's Case as clear authority that non-compliance with a bankruptcy notice will bring about an available act of bankruptcy notwithstanding that the judgment upon which it 1s based may "subsequently be set aside. I respectfully agree with Street J. that Hanby's Case is authority for that proposition. In Wilde v. Australian Trade Equipment Co. Pty. Limited (1961) 34 A.1I.R. at p. 151 , Gibbs dG. referrcd with obvious approval to both Hanby's Case and Hayes' Case. It 1s unnecessary in the present case to determine the ambit of the court's power under s.30(1). It is not in deubt that the sub-section gives the court power to set aside a bankruptcy notice in some circumstances. See Sterling's Case (supra). It 1s sufficient for present purposes to say that no sufficient basis has been shown for setting aside the bankruptcy notice in this case. Setting aside the notice would not nullify the act of bankruptcy committed by the debtor on or about 12 April. in the events that may happen, the judgment creditor may be able to rely on that act of ' lz. bankruptcy should he subsequently petition to sequestrate the debtor's estate. Mr Lewdy submitted that setting aside the bankruptcy notice would be of some value to the debtor insofar as its continued existence 1s an embarrassment to her. He argued that, accepting that she committed an act of bankruptcy by not complying with the notice, the debtor still Gesircd to have the notice set aside. I can understand her desire, but 1 do not think it is a sufficient basis for exerciging the fower under s.30(1). If the notice were now to be set aside the impression might be created that no act of bankruptcy had been committed. But in the view I take of the law, that is not so. Thus the impression would be mislcading.- Certainly I am unable to find, in terms of s.30(1), that 1t is necessary to make an order setting aside the bankruptcy notice for the purpose of carrying out or giving effect to the Act. Vhilst this mey seem a hara result from the debtor's point of view, it 1S a direct consequence of her failure tc take the steps available to her to avoid that result and of the conseguence which the Act gives to that failure. had 1 been of the view that setting aside the bankruptcy rotice would operate retrospectively to nullify the debtor's act of bankruptcy I would have come to a different conclusion' on the present application. but I cannot find anything in the Act or the authorities to support that proposition. .* 13. Accordingly the application is dismissed. the debtor must pay the judgment creditor's costs. I certify that this and tne hack (2) preceding pa area true copy of the Reasons fa~ widen nent herein of his Honour Mr. Justice WZoriing. elt m vated: /0/6/¥3