CATCHWORDS Bankruptcy - Sequestration order - Presentation of debtor's petition while creditor's petition pending - Statutory bankruptcy - Control order under s.50 - Whether order ceases to be operative by reason of bankruptcy - Whether sequestration order can still be made - Whether sequestration order can be backdated - Consideration of automatic appointment of trustees by force of para. 156A(3)(a) - Appointment of two trustees. Bankruptcy Act 1961, ss. 30(1), 50, 52, 55, 57A, 58, 115, 156A, 228(2). PETER LEOPOLD CLYNE v DEPUTY COMMISSTONER OF TAXATION & ORS DEPUTY COMMISSTONER OF TAXATION v PETER LEOPOLD CLYNE & ANOR NSW G287 and 319 of 1983 CORAM: Bowen C.J., St. John and Fisher J.J. 8 February 1984 Sydney IN THE FEDERAL COURT OF AUSTRALIA ) No. G287 of 1983 NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION wwe ww BETWEEN: PETER LEOPOLD CLYNE Appellant DEPUTY COMMISSIONER OF TAXATION First Respondent OFFICIAL TRUSTEE IN BANKRUPTCY Second Respondent AND WILLIAM EDWARD ANDREW Third Respondent ORDER JUDGES MAKING ORDER: Bowen C.J., St. John and Fisher J.J. WHERE MADE: Sydney DATE: 8 February 1984 THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. Peter Leopold Clyne pay to the Deputy Commissioner of Taxation his costs of the appeal. IN THE FEDERAL COURT OF AUSTRALIA No. G319 of 1983 NEW SOUTH WALES DISTRICT REGISTRY wevvwm GENERAL DIVISTON BETWEEN: DEPUTY COMMISSIONER OF TAXATION Appellant (Cross- Respondent ) AND PETER LEOPOLD CLYNE First Respondent {(Cross-Appellant) AND WILLIAM EDWARD ANDREW Second Respondent (Second Cross- Respondent ) ORDER JUDGES MAKING ORDER: Bowen C.J., St. John and Fisher J.J. WHERE MADE: Sydney DATE: 8 February 1984 THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The cross appeal be dismissed. 3. The order of 7 October 1983 be varied by substituting in order No. 1 the date "5 September 1983" for the date "6 September 1983" and deleting the declaration that William Edward Andrew is the trustee of the estate of the debtor. 4. Peter Leopold Clyne pay to the Deputy Commissioner of Taxation his costs of the appeal and the cross-appeal. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION No. G287 and 319 of 1983 wee eww ON APPEAL FROM NEAVES J. BETWEEN: PETER LEOPOLD CLYNE Appellant DEPUTY COMMISSIONER OF TAXATION First Respondent OFFICIAL TRUSTEE IN BANKRUPTCY Second Respondent AND WILLIAM EDWARD ANDREW Third Respondent ON APPEAL FROM BEAUMONT J. BETWEEN: DEPUTY COMMISSTONER OF TAXATION Appellant (Cross- Respondent) AND PETER LEOPOLD CLYNE First Respondent (Cross-Appellant) AND WILLIAM EDWARD ANDREW Second Respondent (Second Cross- Respondent ) -2- CORAM: Bowen C.J., St.John and Fisher JJ. 8 February, 1984 REASONS FOR JUDGMENT In these matters the essential facts are few and not in dispute. On 4 January 1983 the Deputy Commissioner of Taxation ("the Commissioner") presented a petition seeking a sequestration order against the estate of Peter Leopold Clyne ("the bankrupt"). The hearing of this petition was initially fixed for 12 April 1983 and it was based on the balance of a judgment debt of $1,300,844.68. The petition alleged that the bankrupt committed an act of bankruptcy on 24 December 1982 in that he failed to comply with the requirements of a bankruptcy notice served on him en 13 August 1982. On 12 January 1983 the bankrupt lodged a notice of opposition to the creditor's petition. The hearing of the creditor's petition was adjourned from time to time pending an appeal to the High Court by the bankrupt from a decision of the Full Court of this Court refusing to set aside the bankruptcy notice upon which the petition was based. This appeal was on 2 September 1983 unanimously dismissed by the High Court as being "without merit of any kind". At this time the hearing of the creditor's petition stood adjourned to 19 September 1983. However prior to the hearing before the High Court Neaves J. made on 17 August 1983 an order under s.50 of the Bankruptcy Act 1966 ("the Act") directing that the Official Trustee in Bankruptcy take control of the property of the bankrupt. That Judge made on 2 September 1983 further orders ancillary to the order made under s.50 of the Act, which orders were made with the consent of the bankrupt though without any admission by him. On 6 September 1983, that is 4 days after the High Court's dismissal of his appeal and 13. days before the Commissioner's petition was due to be heard again by this Court, the bankrupt presented a petition against himself pursuant to s.55 of the Act. This petition was on that day accepted and endorsed in accordance with sub-s.55(3) of the Act by the Registrar, and thereupon, by force of that sub-section, the bankrupt became a bankrupt. A Mr. William Edward Andrew, being doubtless a registered trustee who had under' sub-s.156A(1) consented to act as the trustee of the estate of the bankrupt, became, by force of sub-s.156A(3) of the Act, such trustee. On 13 September 1983 Neaves J. made further orders on the application of the Commissioner who sought clarification of the question whether the orders of 17 August and 2 September 1983 continued in force notwithstanding that the bankrupt had become a bankrupt on his own petition on 6 September 1983. His Honour declared that, subject to an immaterial variation of one of his orders made on 17 August 1983, the orders made on that date and on 2 September 1983 continued to operate according to their tenor until further order. on 19 September 1983 the Commissioner sought a sequestration order based on his petition. This was opposed by the bankrupt on a number of grounds. After hearing argument Beaumont J. on 7 October 1983 made orders, of which only the following are relevant: "1. I make a sequestration order against the estate of the debtor, such order to take effect on 6 September 1983 prior to the presentation by the debtor of his own petition pursuant to the provisions of s.55 of the Act. 2. I declare that William Edward Andrew is the trustee of the estate of the debtor." There were a number of appeals before us. The Commissioner appealed on 12 October 1983 from that part of the order of Beaumont J. whereby he declared William Edward Andrew trustee of the estate of the bankrupt. He contended in his notice of appeal that John William O'Brien who had in the creditor's petition consented to act as trustee, should be held, as amatter of law, to be the trustee of the estate of the bankrupt. On 18 October 1983 the bankrupt appealed from the whole of the judgment of Beaumont J., contending in his notice of appeal that since he became bankrupt on 6 September 1983, the Court had no power to make a sequestration order except in respect of debts incurred after that date. He further contended that, assuming there was power to make such a sequestration order, the Court had no power to backdate the order to 6 September or at all. On 30 September 1983 the bankrupt lodged an appeal against the judgment of Neaves J. of 13 September 1983 whereby he sought from this Court declarations that the orders of 17 August and 2 September 1983 ceased to be operative on 6 September 1983, the date of his bankruptcy on his own petition. The bankrupt's contention on the appeal from the judgment of Neaves Jd. was that as and from 6 September 1983 there was no property that the Official Trustee could control pursuant to the orders under s.50 of the Act. This situation was, he said, the necessary consequence of para. 58(1)(a) which immediately on his bankruptcy vested ail his property in his trustee. However that paragraph is expressly stated to be "subject to this Act", and thus must be read as subject to s.50 and any order made thereunder. This submission of the bankrupt must be rejected, for, as counsel for the Commissioner put it, the retention of control by the Official Trustee, at least for a limited time, is not inconsistent with the vesting of the bankrupt's property under para. 58(1)(a). Such retention of control is also not inconsistent with sub-ss.131(1) and (2) and from a practical point of view is highly desirable in the light of the problems arising out of the existence of two consenting registered trustees. It is proper that the Official Trustee remain in control of the bankrupt's property until it is determined to whom he should hand over that portion which is in his hands. The appeal from the orders of Neaves J. must be dismissed. The bankrupt also challenged the sequestration order and ancillary orders made by Beaumont J. on 7 October 1982 other than his declaration that Mr. Andrew was the trustee of the estate of the debtor. It is convenient to deal in the first instance with the bankrupt"s contention that his earlier statutory bankruptcy denied the Court power to make a sequestration order except on debts incurred subsequent thereto. This was said to be the nécessary consequence of the provisions of sub-ss.52(1) and 58(3) which are as follows: "52(1) At the hearing of a creditor's petition, the Court shall require proof of (a) ... (b) ... (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, subject to sub-section (1A), make a sequestration order against the estate of the debtor." -7- "58(3) Except as provided by this Act, after a debtor has become bankrupt, it is not competent fora creditor - (a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or (b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any final step in such a proceeding." It was common ground, that the reason for the making, on the application of the Commissioner, of the sequestration order was to gain the benefit for the estate of an earlier date for the commencement of bankruptcy. The provisions of s.115 of the Act make this benefit readily apparent. Sub-section 115(1) applies when a sequestration order is made andis, to the extent presently relevant, as follows: "115(1) The bankruptcy of a person who becomes bankrupt ona creditor's petition... shall be deemed to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by that person within the period of 6 months immediately preceding the date on which the creditor's petition was presented..." If this portion of s.115 is applicable the bankruptcy of the bankrupt would be deemed to have relation back to at least 24 December 1982. Sub-section 115(2) has application when the debtor files his own petition. As there was no evidence that the debtor had within 6 months of the date of this filing committed an act of bankruptcy, that section relevantly provides as follows: "115(2) The bankruptcy of a person who becomes a bankrupt by virtue of the presentation of a debtor's petition shall - (a) oo. (b) if he has not committed any such act of bankruptcy - be deemed to have commenced at the time of the presentation of the petition." The bankrupt argued that the sequestration order should not have been made on 7 October 1983 because there was not, as required by para. 52(1)(c), a debt "still owing" at that date. It was contended that the debt upon which the Commissioner relied had, in consequence of the statutory bankruptcy of 6 September 1983, ceased to be a debt due to or recoverable by or "owing" to the Commissioner. It had, by virtue of sub-s. 58(3), become a mere right to prove in the bankrupt's estate. Beaumont J. in our opinion correctly rejected this contention, and we agree with his reasons. There is no doubt that the bankruptcy denied to the creditor the right to exercise any of his normal remedies to enforce payment or recovery of his debt. His only remedy was to prove in the administration of the bankrupt's estate. However in our opinion it cannot be said that the debt was in consequence extinguished and thus no longer owing. There was no bar to the Commissioner proceeding with his application for a sequestration order notwithstanding the fact that at the date of hearing the bankrupt had presented his own petition. The Court however has wide discretionary powers under sub-s 52(2) to refrain from making such an order, namely, "52(2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by 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." In the normal run the fact that the debtor was already bankrupt and that there was no apparent benefit to his creditors in making a sequestration order would be "sufficient cause" for the Court to dismiss the petition. The existence and probable benefit to the estate of a longer period of relation back would without doubt justify the making of a sequestration order. The bankrupt's argument is based on the restrictions on rights of enforcement of debts imposed by sub-s.58(3). However that section is expressly made subject to the provisions of the Act. This supports the view that it applies only to the exercise of remedies outside the Bankruptcy Act and expressly preserves the right to proceed in accordance with the provisions of the Act and in particular to present and pursue a creditor's petition. -10- Simpson J. expressed this opinion in Re Mimna; ex parte Mimna (1897) 7 B.C. (N.S.W.) 43 and in our view it is the correct construction of the section. A comparison of sub-s.58(3) with sub-s.228(2) also lends support to this view. The contrary construction appears to have been adopted by Clyne J. in Re White (1960) 20 A.B.C. 11 and Lucas J. in Re Cole (1966) 9F.L.R. 190. In neither decision however was consideration specifically given to, or argument presented on, the alternative construction adopted by Beaumont J. and approved by us. In Re White Clyne J. appears to have been primarily concerned with the fact that the creditor's judgment was obtained in defiance of the provisions of the Act which were the predecessor to sub-s. 58(3). He made no reference to his earlier decision in Re Payne (1948) 15 A.B.C.1 and thus did not attempt to reconcile its apparent inconsistency. In Re Cole no argument appears to have been put before Lucas J. except those relevant to a claim by the petitioning creditor for its costs, and the learned judge merely applied Clyne J's decision in Re White. His actual decision was consistent with the dictum of Lord Wright M.R. in Re a Debtor £19351 W.N. (Eng.) 211 to the effect that a second receiving order was undesirable if made merely to enable a creditor to get costs out of the estate. -l1- In our opinion Beaumont J. was entitled to make the sequestration order notwithstanding the earlier statutory bankruptcy. Moreover the fact that a sequestration order extended the period of relation back and thus potentially was of benefit to the creditors made it a proper and appropriate exercise of his discretion. Courts have on a number of occasions made reference to the period of relation back as a consideration of relevance when exercising a discretion. (See e.g. Re Payne supra at p.2 and Re a Debtor supra per Lord Wright.) The bankrupt also challenged the order of Beaumont J. whereby he backdated the sequestration order to 6 September 1983 and ordered that it should take effect prior to the presentation of the bankrupt's petition. Beaumont J. made this order because he intended thereby to avoid the practical difficulties which would arise if there were two separate bankruptcies commencing at different dates but 1n respect of the same property and the same debts. We are of opinion that he was empowered and justified in backdating the order, though in our view such a power should be sparingly exercised. It should in particular be sparingly exercised because it can have the effect of varying the period in respect of which provisions creating criminal offences are by the Act given retrospective operation. -12- For the purpose of doing what he considered "fair and just" (see per Lord Esher in Re Thurlow ex parte Official Receiver [£1895] 1 Q.B. 724 at p.729 as approved by McTiernan J. in MeIntosh v Shashoua (1931) 46 C.L.R. 494 at p. 520) Beaumont Ju. backdated his order to the date of the statutory bankruptcy so as to take effect prior to the presentation of the bankrupt's petition. In our opinion he was entitied both in the exercise of the inherent or implied jurisdiction of the Court and also pursuant to the powers expressly conferred by sub.s.30(1) of the Act to make such an order. However, it appears that in directing that his order take effect prior to the presentation of the bankrupt's petition he overlooked, or alternatively his attention was not directed to, s.57A. It is a new provision inserted by Act No. 12 of 1980 and provides "S7A. Where, after the commencement of this section, a person becomes a bankrupt by virtue of the presentation of a debtor's petition, the person shall, for the purposes of this Act, be deemed to become a bankrupt at the first instant of the day on which the petition is accepted by the Registrar." A reading of Beaumont J's reasons leaves us in no doubt that in his words, he intended that his sequestration order should "take effect on the same day as but prior to the statutory bankruptcy". It follows that his order did not, in its terms, effect what he intended. It would have done so had it been expressed in the terms quoted from his reasons. The fact that s.57A deems the bankrupt to have become a bankrupt on the first to -13- instant of that day does not prevent his order taking effect on the same day but prior to "the first instant". Time like matter is said to be infinitely divisible (Wing v Angrave (1860) 8 H.L.C. 183 per Lord Campbeil L.C. at p.199 and Re Grosvenor, Peacey v Grosvenor £1944] 1 All E.R. 81 per Lord Greene M.R. at p.84). To avoid dispute it may have been preferable to order that his sequestration order take effect the day before i.e. 5 September 1983. It appears that Beaumont J. contemplated that, as a matter of convenience, he was entitled to declare that Mr. Andrew, the registered trustee who consented in the bankrupt's petition pursuant to para. 55(4A)(a) of the Act to act as trustee, was trustee of the estate of the bankrupt. He assumed that by so doing Mr. Andrew became trustee to the exclusion of the trustee who consented in the Commissioner's petition. However a consenting registered trustee becomes the trustee of the estate of a bankrupt by force of para. 156A(3)(a) upon the making of a sequestration order or the debtor otherwise becoming a bankrupt. The Court plays no part in the appointment of such a trustee who automatically assumes the position by force of law. The consequence was that by force of para. 156A(3)(a) two separate trustees each became a trustee of the bankrupt's estate. This situation does not appear to have been foreseen by -14- the legislature but in our opinion follows inexorably from the provisions of that paragraph which are as follows: "156A(3) Where (a) at the time when a debtor becomes a bankrupt, a registered trustee has, under sub-section (1), consented to act as the trustee of the estate of the debtor and the consent has not been revoked, the registered trustee becomes, at that time, by force of this sub-section, the trustee of the estate of the bankrupt,... (b) aoe" The evidence is that Mr. Andrew gave a consent to act as trustee, which was filed with the debtor's petition under s.50 and was not revoked. Mr. O'Brien gave his consent which was filed with the Commissioner's petition pursuant to para. 156A(1)(a) and rule 12(3)(ba) at the time when the petition was presented on 4 January 1983. Compliance with rule 15(b)(111) which requires a copy of the consent to be served on the debtor with the petition can doubtless be assumed. There was no evidence that Mr. O'Brien revoked his consent or that it was suggested prior to the making of a sequestration order that he do so. Problems have arisen in administering these provisions of the Act particularly when more than one trustee has executed a consent. These have been resolved by looking to the petition, be it of a creditor or the debtor, upon which the debtor becomes -15- bankrupt. The definition of a bankrupt provides that it "means a person - (a) against whose estate a sequestration order has been made; or (b) who has become a bankrupt by virtue of the presentation of a debtor's petition". If the debtor becomes a bankrupt in consequence of a sequestration order being made on a creditor's petition against his estate the trustee who consents in that petition becomes trustee of the estate to the exclusion of trustees who have given consents in other petitions (see Re Frederick Close, unreported decision of Fisher J. of 19 August 1983). Likewise if by force of law a debtor becomes a bankrupt upon acceptance of his petition, a registered trustee whose consent is filed with that petition becomes trustee to the exclusion of trustees who have given consents in creditor's petitions upon which a sequestration order has not been made. The situation is the same if no trustee has consented and the Official Trustee becomes by force of 8.160 trustee of the estate. (See Re Agostino, unreported decision of Fisher J. of 5 September 1983). In this matter we must conclude that by force of law each of the two trustees 1s a trustee of the estate of the bankrupt. This is in the circumstances the necessary consequence of the trial Judge's making, correctly in our opinion, a sequestration order on the creditor's petition. This consequence -16- was not contemplated by the legislation which intends initially at least only one trustee. Considerable confusion and practical difficulties will obviously result if each attempts to administer the estate. This problem can be resolved either by the creditors or the Court on application by one of the trustees or the controlling trustee under 5.50. The creditors have specified powers in respect of the control, appointment and removal of trustees (see for example sub.s. 156A(5) ss.177, 181 and 157) and either trustee can apply to the Court for directions (sub.s. 134(4)). They are, by virtue of their office, officers of the Court which has under s.30 wide powers which can be used to give effect to the Act. A direction can be given that one to the exclusion of the other get in and administer until further order the estate of the bankrupt. Our decision is that the appeal and cross appeal by the bankrupt be dismissed with costs and that the appeal by the Commissioner be allowed with costs. The order of Beaumont J. should be varied by substituting in order 1 the date "5 September 1983" for the date "6 September 1983" and by deleting the declaration that Mr. Andrew is the trustee of the estate of the debtor. I certify that this and the |S preceding pages are a true copy of the reasons for Judgment herein of the Court Mp arnt' Asai Liner associate Bes & fe