CATCHWORDS 'BANKRUPTCY - Notice of hearing date not received by debtor - Failure of agent employed by debtor to notify hearing date to debtor or arrange representation - Denial of natural justice - Inherent jurisdiction to set aside sequestration order and order rehearing of petition - Whether appropriate remedy is rescission or discharge of order or annulment - Considerations applicable to exercise of discretion to order rehearing - "Real question to be tried" - Meaning of "discharge" in 3.37. Bankruptcy Act 1966 - ss.37 and 154. Cameron v. Cole (1944) 68 CLR 571 Taylor v. Taylor (1979) 143 CLR 1 Balhorn v. Colby (1982) 45 ALR 174 The Commissioner of Police v. Tanos (1958) 98 CLR 383 Re Deriu (1970) 16 FLR 420 Re Bond (1978) 22 ALR 287 Clyne v. Deputy Commissioner of Taxation (No. 3) (1984) 58 ALJR Lamontagne v. Lamontagne (1964) 44 DLR (2d) 228 RE: JOHN ANASIS; EX PARTE: TOTAL AUSTRALIA LIMITED No. W.772 of 1985 Burchett J. Sydney 6 December 1985 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION No. W.772 of 1985 ween RE: JOHN ANASIS EX PARTE: TOTAL AUSTRALIA LIMITED MINUTE OF ORDERS Judge Making Order: Burchett Jd. Date of Order: 6 December 1985 Where Made: Sydney THE COURT ORDERS THAT: (1) (2) (3) (4) Note: The sequestration order made on 20 August 1985 be set aside and the bankruptcy of John Anasis thereunder be annulled. The petition be reheard and for that purpose be listed in the Bankruptcy Gist on 10 February 1986. The applicant pay the costs of the petitioning creditor of the application to set aside the sequestration order made on 20 August 1985, and of all steps properly taken under the sequestration order, and the costs of and expenses properly incurred by the Trustee. The costs of the petitioning creditor up to the making of the sequestration order be reserved, to be dealt with upon the rehearing of the petition. Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules, IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. W.772 of 1985 ween GENERAL DIVISION fe JOHN ANASIS EX PARTE: TOTAL AUSTRALIA LIMITED REASONS FOR JUDGMENT BURCHETT J. This is an application to set aside or annul a sequestration order. It raises questions which divided the High Court of Australia in Cameron v. Cole, (1944) 68 CLR 571. The problem has arisen in the following way. On 27 March 1985, a petition was presented on behalf of Total Australia Limited against John Anasis, alleging non-compliance with a Bankruptcy Notice issued in respect of a debt of $3,452-78. The petition was served on 23 April 1985. After the service of the petition, Mr. Anasis happened to receive through the mail a pamphlet advertising the services which a company, Precatus Pty. Limited, claimed to provide. The pamphiet indicated that the company, established since 1933, operated in Brisbane, Melbourne, 2. Sydney and Newcastle, providing specialist advice on how to avoid bankruptcy, and services "in conjunction with your accounting and legal advisers". The company claimed to have "access to the best professional advice for all aspects of business". Mr. Anasis called at the offices of the company where he saw a Mr. Hassan. Mr. Hassan, in his presence, telephoned the petitioning creditor''s solicitors and arranged for the adjournment of the petition. Subsequently, at a further meeting, Mr. Hassan told Mr. Anasis: "I have spoken to our solicitors, and they said that Total is agreeable to not proceeding in the matter if you obtain a letter from that Mr. Keight you told us about who, you say, owes you $3,500 and will pay you on settlement of his house. Provided you have a letter to that effect, then everything will be all right." Mr. Anasis told Mr. Keight what Mr. Hassan had said to him, and obtained from Mr. Keight's solicitors a letter dated 22 July 1985 in the following terms: "We advise we act for Mr. John Keight. We are instructed to advise that Mr. Keight agrees to pay you the sum of $3,500.00 upon sale of his property known as Lot 6 Tindall Street, Mittagong." At the time, Mr. Keight said he would have been able to raise the money to make payment immediately, but was suited by the arrangement which had been negotiated, because it would save him interest. Had Mr. Anasis not believed what Mr. Hassan had told him, I am satisfied upon the evidence that he would have insisted 3. upon immediate payment by Mr. Keight or, alternatively, would have sought a loan from his brother or elsewhere. Mr. Anasis had paid his brother $60,000-00 a few months previously as the balance of the purchase price of a house. In fact the petition was adjourned from 18 June 1985 to 23 July 1985, and again from 23 July 1985 to 20 August 1985. On each of those occasions, the petitioning creditor was ordered to notify the debtor of the new date by certified mail. Mr. Winters, the solicitor for the petitioning creditor, gave evidence which confirmed that Mr. Hassan did indeed telephone him on 17 June 1985, claiming to be a business consultant, alleging that a debtor owed Mr. Anasis $3,500-00 and also that Mr. Anasis had a third-party claim worth $40,000 to $50,000 (of which I shall say more below), and indicating that his organisation would be seeking to arrange for payment of the petitioning creditor's debt. Mr. Winters consented to an adjournment "for about a month". Thereafter, he heard no more from Mr. Hassan. Mr. Winters appeared on 18 June and again on 23 July, when the matter was adjourned, and on neither occasion was there any appearance for the debtor. On the second occasion, Mr. Winters sought the adjournment simply on the basis that he was still expecting to hear from Mr. Hassan, and thought it desirable to give him some further time. On one of the occasions mentioned, a solicitor spoke to Mr. Winters outside the Court about the adjournment of the matter, but on being asked "Are you 4. appearing for Anasis?" replied "Not really". On or about 6 August 1985 Mr. Winters attempted to telephone Mr. Hassan, but was unable to speak to him. As required by the order of the Court, Mr. Winters arranged for a letter to be sent by pre-paid certified mail, addressed to Mr. Anasis, advising the adjournment of the petition to 20 August 1985, I am satisfied on the evidence that this letter was never received. The solicitors now acting for Mr. Anasis obtained from Australia Post a letter dated 22 November 1985 which indicates that there is no record at Kogarah Post Office, Mr. Anasis' address being 40 Carroll Street, Kogarah, of the certified letter ever having been received at the Post Office, and that the Post Master is, at the present time, unable to say exactly what happened to the letter. Mr. Anasis has sworn he did not receive it. Had Mr. Anasis been aware of the hearing date, and appeared to oppose the petition, I am satisfied there would have been a serious question to be tried. There are before me two reports pursuant to Rule 57, prepared by the trustee, which indicate a substantial surplus of assets over liabilities. It is true that the evidence has cast doubts upon some of the figures, and that most of the assets are not liquid. On the other hand, it seems likely that the debtor would not in fact have been required to make immediate payment in respect of the debts other than that of the petitioning creditor, or certainly not of the 5. bulk of then. He had obtained the agreement of FNCB Finance Limited to his paying a debt owed to it, which amounted to a substantial part of his total unsecured indebtedness, by instalments which that company had been accepting for a number of years. There is in evidence a letter indicating that the company was appreciative of his efforts to maintain his payments. It and other creditors may well have been sympathetic, particularly having regard to the fact that the debtor's current difficulties seem to have been largely contributed to by his sustaining injuries, preventing him from working for a number of months, in a motor vehicle accident. The accident occurred on15 March 1985, and he did not resume work till about mid-October. His solicitor gave evidence that proceedings for damages have been commenced, that liability is clear, and that an award from $22,000 up to $40,000 is probable. In any case, the evidence indicates that Mr. Anasis would probably have been able to obtain the relatively small amount required to effect payment to the petitioning creditor, either by insisting upon immediate payment of the money owed him by Mr. Keight, or in some other way. Upon the view which I take of the facts, Mr. Anasis has been deprived of the opportunity to present his case to the Court on 20 August 1985, whether that case would then have been' that the petition should have been adjourned for a further period, or that it should have been dismissed. His side of the controversy 6. between the petitioning creditor and himself was not heard, through no fault of the Court, or the petitioning creditor, but also I think not through his own fault. The certified letter, which was intended to accord him the opportunity which was his right, was not received, and Mr. Hassan neither arranged for his representation at Court nor advised him that he would be unrepresented. It would appear on the evidence likely that Mr. Hassan in fact had left his employment with Precatus Pty. Limited. In these circumstances, I think justice requires that an order be made which will enable a hearing to be given to the contentions of both sides, if I have power to undo what has occurred. But it is argued that, under the provisions of the Bankruptcy Act 1966, I am deprived of any jurisdiction of that kind. It is pointed out that the very wide powers contained in 3.37 of the Act, to rescind or suspend the operation of an order, cannot be utilised, in the case of a sequestration order, once it has been signed and sealed as provided by the Rules (see 8.37(2)). I note, however, that there is no such limitation upon the power in s.37(1) to "discharge an order". It is further argued that the power of annulment contained in s.154 of the Act is not appropriate to such a case since, the respondent asserts, that section would not allow for the setting aside of an order upon a basis not going to the merits of the case and simply in order to enable the matter to be reheard. The argument is that once a sequestration order is made upon a petition, the petition 7. is spent, and it cannot be revived for rehearing following an annulment. Counsel for Mr. Anasis counters these arguments with the proposition that the Court has an inherent jurisdiction to ensure that its procedures are not, however unwittingly, misused to deny natural justice to a litigant. Each of these questions was debated in Cameron v. Cole (supra). In that case, as in the present, a Bankruptcy Petition was adjourned with a direction from the Court designed to ensure that the debtor was notified of the date of hearing. The debtor was not in fact notified, and a sequestration order was consequently made in his absence. Upon the facts becoming known, the Federal Court of Bankruptcy made an order which annulled the sequestration order and directed that the petition be reheard. Then, at the subsequent rehearing of the petition, a second sequestration order was made, and appealed against to the High Court. The majority of the High Court held that the order of annulment was, in the circumstances, rightly made, and that it did not prevent the Court proceeding to a hearing of the petition or the making of the second sequestration order. Latham C.J. at p.585 agreed with the comments of Rich J. (to which I shail refer) upon a distinction between judgments and orders of a superior court and those of an inferior court, but he regarded 8. the Federal Court of Bankruptcy as an inferior court. In his view, the first sequestration order was not merely voidable but void. At p.586 he said: "In order to keep the record clear, the court could set aside the order under an inherent jurisdiction, but there was no necessity to do so... and there was no need to order a rehearing when there had been no true and legal hearing." He expressed agreement with the appellant's argument that there was no power, under the provision of the then Bankruptcy Act equivalent to the present 3.154, to order a rehearing after annulment of a sequestration order, but regarded this as irrelevant in the circumstances of the case. The difficulty about the judgment of Latham C.J., for present purposes, is that the present case ig concerned with an order of an unquestionably superior court (see Federal Court of Australia Act 1976, 3.5). Rich J., on the other hand, considered the Federal Court of Bankruptcy to be a superior court, and the first order therefore not to be void, but he nevertheless considered the Court had inherent jurisdiction to set that order aside in the circumstances, and that the order in fact made was appropriate and effective. At p.589 he said: "The next ground taken is that his Honour had no jurisdiction to direct a rehearing of the petition. I am unable to agree with this. It is a fundamental principle of natural justice, applicable to all courts whether superior or inferior, that a person against whom a claim or charge is made must be given a reasonable opportunity of appearing and presenting his case. If this principle be not observed, the person affected is entitled, ex debito justitiae, to have any determination which affects him set aside; and a court which finds that it has been led to purport to determine a matter in which there has been a failure to observe the principle has inherent jurisdiction to set its determination aside (Craig v. Kanssen £1943] 1 KB 262). In such a case there has been no valid trial at ail. The setting aside of the invalid determination lays the ghost of the simulacrum of a trial, and leaves the field open for a real trial (Crane v. Director of Public Prosecutions £1921] 2 AC 332). In principle, therefore, there is no objection to the course taken by the learned judge in proceeding to rehear the petition when the invalid order has been set aside." Rich J. then referred to an argument that the only power to set aside the order was to be found in the express provisions of the Act, and that these provisions excluded the operation of the power in such a case. In answer to this argument he declared that: "(I)n the absence of clear words, a statute should not be treated as depriving a court of the inherent jurisdiction possessed by every court to ensure that trials before it are conducted in accordance with the principles of natural justice." He held: "Agguming that (the then section equivalent to s.154) should now be regarded as the governing section when the setting aside of a sequestration order is concerned, the effect of any particular setting aside necessarily depends on the circumstances. If the order is set aside on the merits, on the ground that it ought never to have been made, that is no doubt an end of the petition. But if 10. it is set aside because the hearing of the petition was invalid for some reason which prevents it in law from being regarded as ever having been heard at all, there is nothing in (the section equivalent to 5.154) which prevents the Court from hearing, or absolves it from its duty of proceeding to hear, the petition in due course of law." Rich d. proceeded to discuss, at pages 590 and 591, the distinction between a purported trial affected by a fundamental irregularity in the case of a superior court, and the effect upon such a trial in the case of an inferior court. In the first case the decision of the court may be voidable, being valid unless and until it is set aside, whereas in the latter case it may be void. He found nothing in the Bankruptcy Act 1924 which indicated an intention on the part of the legislature to interfere with this common law position. He held the provisions dealing with rescission and annulment were concerned, not with the inherent jurisdiction to set aside irregular trials, but with exempting courts exercising jurisdiction in bankruptcy from the rule that where there has been a real trial, leading to a valid decision, a court has normally no power subsequently to recall its decision. He concluded: "In my opinion, the formal annulment of a sequestration order, which is voidable because made in a proceeding which was not a real hearing of the petition, leaves it competent to the Court to proceed to exercise its statutory jurisdiction to hear the still unheard petition. There is nothing inconsistent with this in the provision of s.56(3)(a) that if the Court is not satisfied with the proof of the service of the petition it may dismiss it. This is designed to prevent the making of voidable ordera. Tt 11. enables the Court in such a case either to dismiss the petition or to grant an adjournment to allow proper service to be effected. If, however, a voidable order had been made, the Court has, in my opinion, jurisdiction, when annulling the order, to make provision for hearing the petition if it thinks fit to do so." Starke J. at p.593 also held, of the failure to notify the debtor of the day fixed for the adjourned hearing, "That was a good ground for ordering a rehearing of the petition"; but, although he did not express a final opinion upon the point, he was inclined to think the Judge should not have annulled the existing sequestration, saying: "Perhaps the better course would have been to rescind or discharge the order for sequestration rather than annul it." One may comment that if it be correct that the appropriate course in guch a case is to discharge the order for sequestration, the literal words of s.37 of the present Act, as I have pointed out above, offer no obstacle. But McTiernan J. took the same view as Rich J. He held at p.600 that: "(I)t was clearly a good ground for the annulment of the sequestration order that the Judge made it, but not knowingly, in violation of the rule audi alteram partem." He added: "It is a necessary preliminary to a sequestration order which would exhaust a petition that the debtor should have a fair opportunity of showing cause against the making of the order. Here that preliminary was not fulfilled before the first sequestration order was made. The petition 12. upon which the sequestration order, the subject of this appeal, was made was, therefore, not spent by reason of the making of the first sequestration order, and the order directing the rehearing of the petition waS a proper exercise by the Court of its jurisdiction." Williams J. dissented. He agreed with all the members of the High Court, other than Latham C.J., that the Federal Court of Bankruptcy was a superior court, but he did not think that after an annulment, even one in the circumstances in question, there was any power to make a second sequestration order. He did consider that there might have been power to rescind the order of annulment, thereby reviving the original sequestration order, but thought such a course would have been improper, for reasons which are peculiar to the facts of Cameron v. Cole. The view that a court exercising jurisdiction in bankruptcy has an inherent power to set aside a sequestration order in certain circumstances, notwithstanding that there may be express provisions in the relevant Bankruptcy Act in terms corresponding to those of ss.37 and 154 of the present Act, received, in Cameron v. Cole, its most detailed statement in the judgment of Rich J. But it was expressed by other Judges also, and receives support from the Family Law case Taylor v. Taylor (1979) 143 CLR 1 (as to which see too McLachlan v. Pilgrim [1980] 2 NSWLR 422). In Taylor v. Taylor at p.8 Gibbs J. (as he then was) said: "It is clear that the majority of the Court in Cameron _v. Cole accepted that a court, 13. whether superior or inferior, has inherent power to set aside an order made against a person who did not have a reasonable opportunity to appear and present his case." At p.7 Gibbs J. had said: "The judgment of Rich J. is particularly important." In Taylor v. Taylor Stephen J. with Gibbs J. Mason J. at p.16 said: "Three members of this Court (Latham C.J., Rich and Williams JJ.) concluded in Cameron v. Cole (1944) 68 CLR 571, that the Federal Court of Bankruptcy had = an inherent jurisdiction to set aside its orders, notwithstanding that it was a statutory court and, further, that it was a court of limited jurisdiction. A jurisdiction to set aside its orders ig inherent in every court unless displaced by statute. In my opinion the jurisdiction extends not only to the setting aside of judgments which have been obtained without service or notice to a party (Craig v. Kanssen (£1943] KB 256) but to the setting aside of a default or ex parte judgment obtained when the absence of the party is due to no fault on his part." agreed Murphy J. did not refer to Cameron v. Cole, but Aickin J. at p.22 expressed agreement with the reasons of Mason J. and added for himself: "The principle that parties to litigation are entitled to be present and heard, either in person or by a duly authorized legal representative, is of fundamental importance and involves the consequence that, where through no fault of his own, a party is deprived of that entitlement, prima facie any order of a court made against him may be set aside by that court. I can see no basis for confining the application of that principle to cases where there has been a failure to serve the process or give other appropriate notice. No doubt in other cases it may often 14. be that terms as to costs would be imposed on the applicant." In my view, any doubts which may have continued to obscure the position after the decision in Cameron v. Cole were cleared up by the judgments in Taylor v. Taylor. I respectfully accept the judgment of Rich J. inthe earlier decision as delineating the Court's powers and the orders which may be made in an appropriate case, I have power, under an inherent jurisdiction, to set aside the sequestration order and at the same time to order a rehearing of the petition. But whether such orders should be made depends upon the exercise of a discretion. In Taylor v. Taylor Gibbs J. (as he then was) referred to this aspect of the matter at pp. 6-9. He took as decisive the fact that there was "a real question to be tried", and upon the same basis I think the applicant is here entitled to relief. Although I think the applicant's case would satisfy the test of a "defence on the merits", as that test has been understood in relation to applications to set aside default judgments, I do not understand the expression "a real question to be tried" as, in this context, demanding so much. Even an unwitting denial of natural justice is so fundamental a fauit in the structure of a decision of a dispute that a party who has not been heard is, in my opinion, entitled to a hearing unless there is shown to be in fact nothing genuinely in dispute (Balhorn v. Colby (1982) 45 ALR 174). The lines in Seneca's Medea to which Dixon C.J. and Webb J. refer in The Commissioner of Police v. 15. Tanos (1958) 98 CLR 383 at 395-6, assert that a judge who, though he has not heard the defence, happens to reach a just decision, has nonetheless not been just. Through the inherent jurisdiction, the law provides a remedy to avoid this reproach, and provides it as a prima facie right. It remains to be considered whether the appropriate orders, in the exercise of the inherent jurisdiction, include an order of annulment. This was the form of order actually made in Cameron v. Cole, though Starke J. seemed to prefer the alternative of rescission or discharge. The sequestration order, though voidable, is not void (Deputy Commissioner of Taxation v. Clyne (1984) 4 FCR 156 at 158). Once a sequestration order has been made, s.43(2) provides that the debtor not only becomes a bankrupt but continues to he a bankrupt until he is discharged by s.149, he is discharged by order of the Court, or his bankruptcy is annulled under s.74 or 154. Accordingly, it has been held that a rescission under s.37 would "not put an end to the bankruptcy" (Re Deriu (1970) 16 FLR 420 at 422), and that where a sequestration order ought not to have been made, because in truth the debt upon which it was based did not exist or because the bankruptcy notice and petition had not been served, the proper way of getting rid of the order is by annulment under s.154 (Re Deriu, supra; Re Bond (1978) 22 ALR 287; Clyne v. Deputy Commissioner of Taxation (No. 3) (1984) 58 ALJR 398 at 400 and 401-2). 16. In the present case, even if the power to rescind could otherwise appropriately be resorted to, s.37(2) would stand in the way, since the sequestration order has been signed and sealed as provided by the Rules. Curiously, 3.37(2) does not forbid the "discharge" of a sequestration order in such circumstances under sub-s.(1). It is to be noted that sub-s.(1) refers to the discharge of an order, and not to the discharge of a bankrupt. I have not been referred to any case which explains the meaning of "discharge" in s.37(1), nor has any explanation been suggested for the distinction which 3.37(2) appears to make between a discharge and a rescission of an order. I have found nothing in the Clyne Report, which led to the present Act, to elucidate this problem. In ordinary legal usage, such a distinction would be hard to define. The Shorter Oxford English Dictionary (1980 Reprint) indicates that the relevant meaning of the word "discharge" is "cancel, annul". In Lamontagne v. Lamontagne (1964) 44 DLR (2d) 228 at 237 Freedman J.A., speaking for the majority of the Manitoba Court of Appeal, discussed the meaning of the word "discharge" in a statutory power to "alter, vary, or discharge any order". He said: "Counsel for the wife would have us give a narrow interpretation to the word "discharge" - aS meaning something less than the power to rescind or to revoke, but as meaning simply "put an end to", and hence effective so far only as future operation is concerned. By so narrowing the term he would deprive the Court of any power to deal with arrears. But in my view the term "discharge" has, and should here be given, a broader meaning. It connotes nothing less than a power to revoke or to rescind." 17. In Dodd. v. Dodd £19203 1 KB 71 at 75, "discharged" was treated as equivalent to "revoked". The same view was taken in Bowen v. Bowen C1958] 1 All ER 770 at 772. However there would seem to be no obvious reason why the legislature should forbid, in particular circumstances, the rescission of an order, and in the same section permit the discharge of the same order in the same circumstances, unless it was intended to make some clear distinction between the meaning of the word "rescind" and the meaning of the word "discharge". Furthermore, the context of 3.37 ig one much more susceptible of accommodating the construction suggested by counsel in Lamontagne v. Lamontagne than was the context there under consideration. It is not necessary to reach a firm conclusion as to the meaning of the word "discharge" in the context of s.37 since, on any meaning it could bear, the reasoning in Re Deriu and Re Bond would still apply to indicate that annulment is the appropriate remedy to adopt in such a case as the present. In the result, I shall make orders in terms similar to those upheld in Cameron v. Cole. Although the applicant debtor succeeds, as between the parties involved in this matter I think that he, having employed Precatus Pty. Limited, must bear the costs incurred as a result of its neglect. 18. I order that the sequestration order made on 20 August 1985 be set aside, that the bankruptcy be annulled, and that the petition be reheard and for that purpose be listed in the Bankruptcy List on 10 February 1986. I further order that the applicant pay the costs of the petitioning creditor of this application and of all steps properly taken under the sequestration order made on 20 August 1985, and the costs of and expenses properly incurred by the trustee. The costs of the petitioning creditor up to the making of the sequestration order are reserved, to be dealt with upon the rehearing of the petition. I certify that this and the preceding seventeen (17) pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Burchett. \ ae Associate Dated: 6 December, 1985,