CATCHWORDS Bankruptcy Act 1966 ~- application for annulment of bankruptcy on debtor's own petition - whether abuse of process - whether order should be made - conditions. DEPUTY COMMISSIONER OF TAXATION V PETER LEOPOLD CLYNE AND WILLIAM EDWARD ANDREW No W.838 of 1983 Sweeney J. Melbourne 12 October, 1984. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION, BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY BETWEEN: NO. W.838 OF 1983 eh ad DEPUTY COMMISSIONER OF TAXATION Applicant AND / PETER LEOPOLD CLYNE First Respondent AND WILLIAM EDWARD ANDREW Second Respondent ORDER JUDGE MAKING ORDER: Sweeney J. DATE OF ORDER WHERE MADE 12 October 1984 : Melbourne THE COURT ORDERS THAT: 1. the bankruptcy of the debtor be annulled. _ 2. the property of the debtor presently vested in the second respondent be vested in John William o'Brien, a registerted trustee, of 50 Bridge Street Sydney, on terms that John William O'Brien. take control of the said - property upon trust for the creditors of the debtor, subject to payment thereout of the proper costs, disbursements and remuneration of the second respondent as trustee of the property of the debtor under debtor's petition W838 of 1983 in the Bankruptcy District of New South Wales and subject to any further directions or orders which may be given or made by any judge of the court, with liberty being reserved to any party to apply to any judge of the court, on two days notice. the debtor pay the taxed costs of the applicant and the second respondent, and the creditors petition of the applicant against the debtor (No P4 of 1983) be adjourned to a date to be fixed by the Registrar for hearing before any judge of the court. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION, BANKRUPTCY DISTRICT NO. W.838 OF 1983 OF THE STATE OF NEW SOUTH WALES AND Oded THE AUSTRALIAN CAPITAL TERRITORY +... +> BETWEEN: DEPUTY COMMISSIONER OF TAXATION Applicant AND PETER LEOPOLD CLYNE First Respondent AND WILLIAM EDWARD ANDREW Second Respondent Coram: Sweeney J. Place: Sydney Date : 12 October 1984. Reasons for Judgment In this, the most recent chapter in the long history of the litigation between the Deputy Commissioner of Taxation (the applicant) and Mr Peter Clyne (the debtor), an order is vw sought annulling the bankruptcy of the debtor which arose on the acceptance by the Registrar in Bankruptcy of his own petition on 6 September 1983. The application is made pursuant to 8.154 of the Bankruptcy Act 1966 (the Act) on the ground that the petition ought not to have been presented or alternatively ought not to have been accepted by the Registrar. Counsel for the applicant stated that the reason why the petition ought not to have been presented or accepted was that it was an abuse of process. The history of the litigation prior to this application may conveniently be adopted from the reasons for judgment of the majority in the recent judgment of the High Court (Clyne v Deputy Commissioner of Taxation and others, 31 July 1984, unreported). On 4 January 1983 the applicant presented in this court a petition for a sequestration order against the estate of the debtor. The petition alleged that the debtor was indebted to the applicant in the sum of $1,300,844.68, the balance due under a final judgment recovered in the Supreme Court of New South Wales on 11] March 1982, and that the debtor had committed an act of bankruptcy in that he failed on or before 24 December 1982 either to comply with the requirements of a bankruptcy notice served on him on 13 August 1982 or to satisfy the court that he had a counterclaim, set-off or crosa-demand equal to or exceeding the sum specified in paragraph (a) of the bankruptcy notice. It was not disputed before the High Court that the debtor was indebted as alleged, or that he had committed the act of bankruptcy on which the petition was founded. However, the debtor had earlier taken proceedings in this court to set aside the bankruptcy notice .and the. time for compliance with the notice was extended from time to time while those proceedings were pending. After they had proved unsuccessful, a further extension of time for compliance with the bankruptcy notice was refused, the act of bankruptcy was committed and the petition of the applicant (the creditor's petition) was presented. In the meantime the debtor had appealed to the High Court against the decision of this court upholding the validity of the bankruptcy notice, and the hearing of the creditor's petition, which was originally fixed for 12 April 1983, was adjourned from time to time while the appeal was pending. The appeal was dismissed on 2 September 1983. On 6 September 1983 the debtor presented his own petition and it was accepted by the registrar. The debtor thereupon became a bankrupt by virtue of the presentation and acceptance of his petition and by force of s.55(3) of the Act. Orders had in the meantime been made in this court by Neaves J. under s.50 of the Act directing the Official Trustee to take control of the property of the debtor and by a subsequent order it has been declared that notwithstanding the bankruptcy those orders continue to operate according: to their tenor until further order. The creditor's petition, which at 6 September 1983 stood adjourned to 19 September 1983, came on for hearing on that date before Beaumont J. It appears that Mr John William O'Brien, a registered trustee, by instrument filed at the time when the creditor's petition was presented, consented to act as trustee of the estate of the debtor in the event that he became a bankrupt, and that Mr William Edward Andrew (the second respondent) by a similar instrument filed at the time of the filing of the debtor's petition also consented so to act. These instruments were filed for the purposes of s.156A of the Act. On 7 October 1983 Beaumont J. made a sequestration 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." His Honour considered that for reasons of convenience the trustee of the estate of the debtor in his statutory bankruptcy should act also as trustee in the bankruptcy that resulted from the making of the sequestration order and he declared that the second respondent "is the trustee of the estate of the debtor". The applicant appealed to the Full Court of this court from that part of the judgment of Beaumont J. which declared that the second respondent was the trustee of the estate of the debtor. The debtor cross-appealed from the whole of the judgment. The Full Court of this court allowed the appeal and dismissed the cross-appeal. The order of Beaumont J. was varied in two respects. First, the learned judges who constituted the Full Court considered that Beaumont J., in ordering that the sequestration order take effect on 6 September prior to the presentation by the debtor of his own petition, overlooked s.57A of the Act, which provides in effect that a person who becomes bankrupt by virtue of the presentation of a debtor's petition is deemed to become a bankrupt "at the first instant of the day on which the petition is accepted by the Registrar". They thought that the order of Beaumont J. would have achieved the effect which was intended if it had provided that the sequestration order should "take effect on the same day as but prior to the statutory bankruptcy" but to put the matter beyond doubt they ordered that the order of Beaumont J. should be varied by substituting the date "5 September 1983" for the date "6 September 1983". Secondly, their Honours concluded that by force of law each of the two trustees was a trustee of the estate of the bankrupt. They did not so declare, but deleted from the order of Beaumont J. the declaration that the second respondent was the trustee of the estate of the debtor. The debtor appealed to the High Court from the whole of the judgment and orders of the Full Court of this court. The applicant cross-appealed from so much of the judgment as held that the second respondent and Mr O'Brien were both trustees of the estate of the debtor and sought a declaration that Mr O'Brien was the sole trustee of that estate. - The High Court allowed the appeal and the cross-appeal, ordered that the order of the Full Court of this court be set aside and the cross-appeal allowed and that paragraph 1 of the order of Beaumont J. and the declaration of Beaumont J. be set aside, and remitted the matter to a judge of this court "to enable him to consider any application that may be made for an annulment" of the bankruptcy resulting from the acceptance of the debtor's own petition and "any application for the imposition of conditions on the making of any order for annulment." In the majority opinion, it was said:- "It is a purpose foreign to the bankruptcy laws and an abuse of process, for a debtor to present a petition for the purpose of making it impossible for a creditor to obtain a sequestrastion order on a pending petition and with the further purpose of shortening the period of relation back, possibly Placing beyond the reach of the trustee property which would otherwise vest in him." The debtor submitted that the High Court's statement was obiter dicta, but it was upon the basis of the opinion expressed in it that the Court decided that, rather than merely allowing the appeal and the cross-appeal, it would remit the matter. I have therefore, in the first place, to answer the question whether the evidence before me brings the debtor within the operation of the doctrine so laid down. In the course of his final submission to me the debtor eaid that he asked for a finding that he had no other purpose than the choice of his own trustee and the shortening of the period of relation back. I am satisfied that the debtor wished to make it impossible for the applicant to obtain a sequestration order on his pending petition, and to avoid having as his trustee the person chosen by the applicant. I am also satisfied that he had the purpose of shortening the period of relation back:i: -The debtor conceded,-as was 'the fact, that the possibility existed that this would place beyond the reach of his trustee property which would otherwise vest in him. Having regard to the debtor's legal qualifications and experience and to his extensive writings and speeches on the subject of bankruptcy law and in particular on the steps which are open to a debtor who wishes to place obstacles in the path of a petitioning creditor, it is easy to conclude, as I do, that he was aware of the possible advantages to him of the shortening of the period of relation back. It is unnecessary and undersirable for the court to attempt to decide the effect in money terms of the shortening of this period. That is a question for examination in the course of any administration of the estate of the debtor. In the present case it was common ground that there were at least two transactions by the debtor with his property during the period of relation back which would not have been open to attack by his trustee if the bankruptcy resulting from the acceptance of the debtor's own petition had remained on foot. The debtor submitted that..if the court were eatisfied, as it is, that there was .an abuse of- process, it should.in the exercise of its discretion refuse to make an order of annulment. It is clear that the court has a discretion under 6.154. The grounds relied upon by the debtor may be summarised as follows: 2. the progress already made by the second respondent in the administration of his estate; the lengthening of the time before which he could apply for discharge; the effect of the longer period of relation back upon possible criminal liability of the debtor; the possibility that the applicant's petition might not result in an order of sequestration, on the gound, for example, that it might be held to have lapsed after the expiration of the period of 12 months commencing on the date of its presentation (see s.52(4) of the Act); the facts, of which I am satisfied, that he had advised the legal representatives of the applicant that he intended to present his own petition if the High Court found against him, and that the applicant's representatives had not suggested to him that such an action would be opposed, or done anything to prevent him from taking it. Once the court is satisfied that there has.been an abuse of process, it cannot lightly refuse an order annulling a bankruptcy so obtained. In my opinion, no reason has here been shown to justify such a course. It is a question for future determination whether there should be an order of sequestratian on the applicant's petition and it is not appropriate to attempt any prediction of the outcome. It is necessarily implicit in any order of annulment that the work already done in the course of administration will be to a greater or lesser extent thrown away. If the period of relation back is extended, it must follow that there will be a lengthening of the time during which the conduct of the debtor may expose him to criminal liability. Similarly, an order of annulment followed by a later order of sequestration will delay the debtor's opportunity to apply for discharge, but this must be accepted if the debtor by his abuse of process has brought about his own bankruptcy and so exposed himself to the risk of an order of annulment being made. The facts that the debtor gave notice of his intention to present his own petition and that the applicant failed to react in any way should not, in my opinion, lead the court to refuse an order of annulment, even in a case such as the present where the applicant is upon the facts so far known by far. the largest creditor. The alternative ground upon which the applicant sought annulment was that the debtor's petition should not have been accepted by the Registrar. In my opinion, there is no substance in this ground. The terms of 8.55 of the Act make it plain that the discretion of the Registrar in respect of. debtors' petitions is limited to a consideration of the questions whether it appears to him that a petition, and the statement of affairs accompanying it, are in accordance with the prescribed forms (sub-sec 3) and whether the conditions laid down in sub-sec. 4A relating to trustees have been met. This view of the section is reinforced by the history of the amendment of s.55 after the case of The Queen v Davison (1954) 90 CLR 353 in which was pointed out the way in which it would be constitutionally valid to enact that voluntary sequestration might result from the performance by the Registrar of a purely administrative act, without resort to the exercise of judicial power (see pp.365-6, 384 and 390). The court orders that:- 1. the bankruptcy of the debtor be annulled. 2. the property of the debtor presently vested in the second respondent be vested in John William o'Brien, a registerted trustee, of 50 Bridge Street Sydney, on terms that John William O'Brien take control of the said property upon trust for the creditors of the debtor, subject to payment thereout of the proper costs, disbursements and remuneration il of the second respondent as trustee of the property of the debtor under debtor's petition W838 of 1983 in the Bankruptcy District of New South Wales and subject to any further directions or orders which may be given or made by any judge of the court, with liberty being reserved to any party to apply to any judge of the court, on two days notice. the debtor pay the taxed costs of the applicant and the second respondent, and the creditors petition of the applicant against the debtor (No P4 of 1983) be adjourned to a date to be fixed by the Registrar for hearing before any judge of the court. The debtor was agreeable, in the event of there being an order for annulment, that an order be made in the terms contained in paragraph 2 above. He indicated this agreement after it became clear that the second respondent was not willing to consent to an order that, as was the original wish of the debtor, he should be appointed to take control of his property. I certify that this and the eleven (11) preceding pages are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice Sweeney for Associate Date: 12 October 1984