- — 'JUDGMENT No. Sh / a1 CATCHWORODS BANKRUPTCY - Application for annulment of sequestration order - Whether sequestration order "ought not to have been made" - Sequestration order not to be annulled unless Judge bound in the circumstances not to have made the order - Residual discretion not to annul. Bankruptcy Act 1966 S.37,38,52(1),154(1) RE: JOSEF VICTOR FRANK EX PARTE: JOZSEF PILISZKY CORAM ; FISHER J. ADELAIDE 23 OCTOBER 1987 26.0CT 1987 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTAY IN THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIA DISTRICT REGISTRY) GENERAL DIVISION No.258 of 1987 BANKRUPTCY DISTRICT OF THE STATE ee ee OF SOUTH AUSTRALIA Re: JOSEF VICTOR FRANK Ex Parte: JOZSEF PILISZKY JUDGE MAKING ORDER FISHER J. WHERE MADE ADELAIDE 23 OCTOBER 1987 DATE OF ORDER THE COURT ORDERS THAT: 1. The application is dismissed with costs. Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY BANKRUPTCY DISTRICT OF THE STATE ) ) GENERAL DIVISION ) No.258 of 1987 ) ) ) ) OF SOUTH AUSTRALIA RE: JOSEF VICTOR FRANK EX PARTE: JOZSEF PILISZKY CORAM: FISHER J. 23 OCTOBER 1987 REASONS FOR JUDGMENT This is an application under s.154 of the Bankruptcy Act ("the Act") for an annulment of a sequestration order made by Forster J. on 9 March 1987. The hearing of the application was conducted in extremely difficult circumstances doubtless because the applicant Josef Victor Frank ("the bankrupt") was and has " been in the past extremely litigious and was at all relevant times unrepresented. The bankrupt had lodged a notice of appeal seeking the setting aside of the sequestration order and included therein a request for its annulment. A separate application was subsequently made on 2 July 1987 for an annulment and the hearing of the appeal was stood over until this application is disposed of. On 25 August 1987 the bankrupt filed an affidavit in which he inferentially stated that he relied upon the contention that the sequestration order ought not to have been made 2. (para.154(1)(a) of the Act). He also set out in this affidavit the grounds upon which he said the sequestration order ought not have been made. It is necessary, unfortunately, to set out in full these grounds, which in the affidavit he calls "15 Grounds of Appeal" (of which there are in fact 13) and which are the grounds relied upon in his notice of appeal against the sequestration order. These grounds do to some extent identify his complaints. These grounds were- "(1) That the learned Judge in making the Sequestration Order on the 9th of March 1987 did not, in the respectful view of the appellant, paid due regard to the matters set out in the appellant's written submissions of the 2nd and 9th March 1987, which were delivered on the respective days to the learned judge. (2) That the written submissions contained matters relevant to the amount of the petition and the order of Sequestration. (3) That the learned judge did not in his order of Sequestration take into account in particular, that the appellant had appealed against the order of Senior Judge Brebner on the lst day of December 1986, which sum in the learned Senior Judge's order was the subject of the Bankruptcy petition. (4) That the learned judge, Mr. Justice Forster did not take into account also, that the submissions contained a reference to a sum of $5,000.00, which was either deductible from the amount claimed in the petition, or if not, that it was the subject of appeal before the Supreme Court. (5) That the learned Judge, Mr. Justice Forster in granting the Sequestration order did not consider the submissions made by the appellant, that in ordinary circumstances, the creditor should have exhausted other means of enforcing the judgment of Senior Judge Brebner, and that in the circumstances it was a precipitate step resulting in social, legal, and economic consequences of very serious nature. (6) That the learned Judge, Mr. Justice Forster should have in all the circumstances of the case, and having regard to the written submissions of the appellant, adjourned the Bankruptcy Hearing to enable the appellant to (7) (8) (9) (10) (11) (12) (13) 3. proceed with the pending litigation before the Supreme Court. That the learned Judge, Mr. Justice Forster was entitled in law, and in the circumstances of the case to exercise his discretion in favour of the appellant having regard to the matters, that were put to the learned Judge, to have desisted from making the order that the learned Judge did on the 9th of March 1987. That the learned Judge did not take into account in making his order on the Sth of March 1987, that the appellant had been awarded cost,(sic) and that there were other application (sic) for costs, which were awaiting taxation such costs being in the amount of approximately $10,000.00. That the learned Judge, Mr. Justice Forster did not take into account as a matter "Of significance and relevance, that there were other claims before the Supreme Court and the District Court, which were in substantial sums more than sufficient to offset the amount contained in the Bankruptcy petition, which said amount was on the 9th of March 1987 under appeal, and pending a setting of the date for the Hearing. That having regard to all of the circumstances it was proper both in equity and in law for the learned Judge, Mr. Justice Forster to have adjourned the case pending the outcome of the litigation before the District Court and the Supreme Court. That the learned Judge by making the order that the learned Judge did on the 9th of March 1987, fettered the appellant from prosecuting the balance of the litigation before the court, and more importantly, as the learned Judge, Mr. Justice Forster was aware, that the appellant was unrepresented, and therefore needed every opportunity to remain free to prosecute his claims in courts of justice. That in all the circumstances, and particularly as the order has drastic economic and social consequences, the appellant is unable to act unless through the Trustee, who would, at any rate, take a considerable time to appreciate all of the litigation between the parties before the court. That the learned Judge, Mr. Justice Forster by reason of the written submissions made on the 2nd and 9th of March 1987 by the appellant, should have been aware, that litigation has been 4. in train since March 1980, and that to have made a Sequestration Order on the 9th of March 1987 was to course (sic) considerable delay in the finalisation of the litigation before the court which so far has taken 7 years andno_ result appears in sight." The bankrupt also deposed inthe affidavit that he believed that his trustee had discontinued a substantial number if not all of his proceedings against the judgment creditor. He stated on a number of occasions during the hearings before Forster J. that he had 18 proceedings then on foot. The majority of these proceedings were against the judgment creditor and the balance were against the members of his family. He also deposed in his affidavit that at the time of the making of the sequestration order there were 4 appeals pending in the Supreme Court and that there were 8 District Court Actions on foot. It is pertinent to note that all of these particular actions were commenced after the service of a bankruptcy notice and one of them was commenced after the making of the sequestration order. The matter arises in circumstances which are difficult to be certain are stated with complete accuracy as there was much vague and conflicting testimony in the bankrupt's own case. There does appear to have been bad blood and extensive litigation between him and the judgment creditor over a number of years. It culminated for the purposes of these proceedings in a judgment of the Senior Judge of the District Court against the bankrupt and in favour of the creditor for $20,708.96 for money due and interest thereon. The judgment was entered on 28 November 1986 for this amount together with costs which have yet to be taxed. On 1 December 1986 the bankrupt lodged a notice of 5. appeal to the Supreme Court against this judgment. It appears that the ground of appeal was that the Senior Judge overlooked two amounts which the bankrupt said he was entitled to have set off against the judgment sum, namely $5,000 which was allegedly payable to him and $8,000 which he said he had paid into Court. He did not appear to dispute the balance of the judgment debt. The creditor issued a bankruptcy notice based on this judgment on 5 December 1986 which was served on 12 December 1986. A creditor's petition was presented to the Court on 6 February 1987, in which it was stated that the bankrupt was indebted to the creditor in the sum of $20,708.96 abovementioned, the sum of $988.57 for costs on a Supreme Court judgment which sum together with costs (sic) and interest to 10 February 1987 was said to amount to $1,207.40 and the sum of $900.00 due ona District Court judgment which sum together with costs and interest to 10 February 1987 was said to amount to $1,000.00. The creditor relied upon 3 acts of bankruptcy, namely failure to comply with the abovementioned bankruptcy notice, the return unsatisfied of a warrant of execution issued out of the Local Court and the return unsatisfied of a writ of Fieri Facias issued out of the Supreme Court. The bankrupt in reply filed on 20 February 1987 a "Notice of Disputing or Denying" in which he said he had appealed against the judgment of the Senior Judge, that he "proposed" to appeal against the judgment for the sum of $988.57 and that the sum of $900 was "the subject of or relevant to" an appeal in the 6. Supreme Court. The contentions of the bankrupt were disputed by or on behalf of the creditor. The creditor's petition came before Forster J. on 2 and 9 March 1987. On each occasion the bankrupt was unrepresented. He gave evidence on one occasion, presented on both occasions written submissions and there was much oral argument. On one occasion he expressly conceded he did not have on foot an appeal against the two judgments for the two smaller amounts referred to in the creditor's petition. The bankrupt also conceded that he was insolvent and unable to pay any of the judgment debts and on no occasion departed from this concession. On 9 March 1987 a sequestration order was made, against which, as previously related, an appeal was lodged which included therein the request for an annulment. As previously mentioned the grounds upon which the bankrupt relied in contending that the sequestration order should be annulled were essentially the grounds of his appeal against the making of the sequestration order. As he at all times acknowledged that he was unable to pay his debts as they fell due the appeal must amount to an appeal against the exercise by Forster J. of his discretion under para. 52(2)(b), namely his decision that he was not satisfied that there was sufficient cause to dismiss the petition. In the application before me I am not engaged in a_ review of this exercise of discretion but am required to determine whether I am satisfied that the sequestration order "ought not to have been made". I see this is a very different question. 7. A perusal of the bankrupt's summaries of argument presented to Forster J. and the summary tendered to me indicated that the bankrupt was in essence re-running his arguments already heard by Forster J, although directed to a different end. His case was that the sequestration order ought not have been made because the consequence thereof was that he could not continue with the litigation currently on foot against the creditor. He also stated that a sequestration order should not be made until all other avenues of recovery have been exhausted. I think I should also accept that he was, inferentially, contending that a sequestration order should not have been made until his appeals, actual and purported, against the judgment debts upon which the creditor relied in his petition had been heard by the Supreme Court. At the time of the hearing before me the bankrupt had issued 4 subpoenas, directed to the creditor, his wife and their two children. All of these persons attended in Court in answer to the subpoenas. However after going carefully with the bankrupt through the grounds upon which he was relying he agreed that none of them could give any evidence relevant to any of the grounds. Each of the persons subpoenaed was excused from further attendance, with a direction that the bankrupt pay to each of them a witness fee. I can deal at once with the bankrupt's second ground, namely that a sequestration order should not be made until all other avenues have been exhausted. I know of no authority for this proposition and there appears to be nothing in the Act to 8. support it. Moreover the creditor had issued both a warrant of execution and a writ of fi fa prior to presenting a creditor's petition. In my opinion the bankrupt can not rely upon this submission. The question whether the sequestration order "ought" not to have been made in the light of "appeals" against 'judgments against the bankrupt, and in particular the judgment of Senior Judge Brebner relied upon in the creditor's petition is more difficult. Lucas J. gave consideration to the words "ought not to have been made" in Re Scott (1975) 6 ALR 558. The judgment debt in that matter relied on in the petition was set aside after the making of the sequestration order. Lucas J. said on p.559: "The first question for my decision in these circumstances is whether the bankrupt brings himself within the words of s.154(1)(a) in the sense that he can show that the sequestration order ought not to have been made. And it has been remarked that these are words of wide import and one test which has been applied from time to time is that the matter should be considered as if all the true facts as shown in the application for the annulment had been before the court when the sequestration order was made. These words, however, in my opinion, have to be read in the light of the words of the section and they are that the sequestration order 'ought not to have been made'. It seems to me that the facts - the true facts - which this principle must refer to are the facts as they existed upon the date when the sequestration order was made and that facts which have come into existence since that date cannot be considered for the purpose of seeing whether it ought to have been made. I have been referred to various decisions in which this principle has been considered. Bayne v Baillieu (1907) 5 CLR 64 was a case in which the High Court upheld an appeal from the Supreme Court of Victoria and annulled the sequestration order, but the facts in that case were that the sequestration order had been made upon a petition, the foundation of which was a judgment from 9. which notice of an appeal had been given and the appeal was pending at the time at which the sequestration order was made." In Bayne v Baillieu supra at page 67 Griffith C.J. said: "Without saying that under all circumstances proceedings for sequestration founded upon a judgment, from which notice of appeal to this Court has been given must fail, it is sufficient in this case to say that, in the absence of any evidence that the appellant had an estate which the respondents desired to have administered in the Insolvency Court, they must fail. There is no evidence on that point at all. Upon the facts I have stated it appears to me, and I think to my brothers, that the order for sequestration ought not to have been made, but the motion should properly have been adjourned or perhaps dismissed." This matter is however not as straightforward as that before the High Court in Bayne v Baillieu supra. There are a number of aspects which require my careful and eritical consideration before I can say that in this case Forster J. "ought not to have made the sequestration order". The question whether or not an order should be made in any particular instance remains a question of discretion. I do not think that the dicta of Griffith C.J. necessarily requires me to start from any different point or to ignore the discretion in 8.52. This section provides to the extent relevant: "52(1) At the hearing of the creditor's petition, the Court shall require proof of - (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (b) service of the petition; and 10. (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. 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. I draw attention to the crucial elements of sub.s.52(2), Namely that the debtor carries the obligation to satisfy the Court "that for other sufficient reason" a sequestration order "ought" not to be made and that if so satisfied the Court has a discretion to dismiss the petition. Thus, if satisfied by the debtor, for a reason which it sees as sufficient that it ought not to make an order, the Court may dismiss the petition. I have emphasized the relevant words. Section 154 uses somewhat similar language when it empowers the Court to annul a_ sequestration order if it "is satisfied that an order ought not to have been made". Once the Court has, in the exercise of its discretion,refrained from dismissing the petition and made a sequestration order, the Act provides that that order may be set aside in a number of ways. Section 37 indicates a number of such ways - 11. "37(1) Subject to subsections (2) and (3), the Court may rescind, vary or discharge an order made by it under this Act or suspend the operation of such an order. (2) The Court shall not, after a sequestration order has been signed and sealed as provided by these rules, rescind or suspend the operation of the order. n ooe Thus prior to a sequestration order being signed and sealed, it may be rescinded or discharged by the Court making the order. After such signing and sealing it appears that it may be discharged or varied, but not rescinded. Section 38 provides for an appeal against the making of the sequestration order, namely - "38. An appeal from a judgment, order or sentence given or pronounced after the commencement of this section by a State Court exercising jurisdiction in bankruptcy or by the Federal Court of Bankruptcy may be brought' to the Federal Court of Australia and not otherwise." The Full Federal Court on hearing such an appeal would be entitled to exercise the very wide powers granted to it by sub.s.28(1) of the Federal Court Act, there being no restrictions on such an appeal imposed by the Bankruptcy Act. There remains the power expressly given to the Court by sub.s.154(1) of the Act to annul, in the circumstances specifically there set out, the bankruptcy. It should be set out in full: "154(1) Where the Court is satisfied - (a) that a sequestration order ought not' to have been made, or in the case of a debtor's petition, that the petition ought 12. not to have been presented or ought not to have been accepted by the Registrar; or (b) that the unsecured debts of the bankrupt, being debts that have been proved in the bankruptcy, have been paid in full or the bankrupt has obtained a legal acquittance of them, the Court may make an order annulling the bankruptcy." In my opinion it is proper to contrast the position of a Full Court on hearing of an appeal seeking the setting aside of a sequestration order and that of this Court when an annulment under para.154(1)(a) is sought. Particularly this is so when the judge making the order did so in the exercise of his discretion. It would be strange if in a matter such as this I was called upon to review the order of Forster J. on the same grounds as_ the bankrupt requires it to be reviewed by the Full Court. In Cameron v Cole (1943) 68 C.L.R. 571 Latham C.J. at p.583 said of the power to annul in the then Bankruptcy Act - "There is no power to annul a valid sequestration order without observance of what have been described as 'the very careful provisions' which are applicable in the case of an application to annul (In re A Debtor; Ex parte Official Receiver (1937) 106 L.g.Ch.225)." Likewise on page 594 Starke J. said: "This power of reviewing or rehearing any order is one that must be exercised with great caution and should not be exercised unless in special circumstances (Ex parte May, in re May (1884) 12 Q.B.D.497." In Re Williams (1968) 13 F.L.R. 10 at p.23 Gibbs J, as he then was, said - "If the Court is satisfied that the order ought not' to have been made, it is not bound as a matter of course to annul the order, but must consider in the light of 13. all the circumstances of the case whether the order ought to be annulled (Delph Singh v Wood (1918) 25 C.L.R. 497 at 498-499, Re Lawson (1939) IT a.B.c. 137 at 139)." In the light of the various contrasting avenues open to a bankrupt to approach the Court to have the sequestration order set aside, it is in my opinion necessary to attach significance to the "careful provisions" of s.154, and in particular the words "ought not to have been made". In my opinion it can be said that a Judge "ought" not to have made an order only if he was "bound" not to make the order. In circumstances where it was open to a Judge to make an order in the exercise of his discretion, it can only be said he "ought not to have made the order" if none of the circumstances could justify the making of an order. Alternatively it can be established that an order "ought" not to have been made because subsequent evidence discloses that all of the true facts were not before the Court when the order was made (Re Cook (1946) 13 A.B.C. 245 at p.249). The word "ought" as it appears in the English Rules of Court was given the meaning of "must" in Comber v Leyland and Bullins [1898] A.C. 524 by the Lord Chancellor at p.528 and Lord Herschell at p.529. Black's Law Dictionary 5th Ed. says of the word "ought" that although generally directory only, it will be taken as mandatory if the context requires it. However in Grundt v Great Boulder Proprietary Mines Limited [1948] 1 ch.145 at p.150 Cohen L.J. said: "It is to be observed that the word "ought" is not necessarily of imperative significance and is certainly not synonymous with the word ''must'." 14. It is trite to say, as the above excerpts acknowledge, that the appropriate meaning is determined by the context. In my opinion "ought" in para.154{1)(a) is of imperative significance and an order should not be annulled unless the Judge was in the circumstances bound not to make it and even then there is a residual discretion not to annul. It is apparent that Forster J. was aware of the existence of the relevant circumstances in this matter, notwithstanding the difficulties occasioned by the fact that the bankrupt was unrepresented and the extensive litigation in which he was involved. This is not a matter in which additional relevant facts have been established before me which Forster J. would have taken into account if they had been disclosed at the time of the hearings. The crucial circumstances were that the bankrupt acknowledged that he was unable to pay his debts as they fell due. Furthermore all of the requirements of sub.s.52(1) had been established. The bankrupt contends that the primary judge was, using my terminology, bound to refrain from making an order and thus to dismiss or adjourn the creditor's petition. He based this contention expressly or inferentially on these grounds, Namely that the consequence of an order would be that he could not continue his litigation, that an order should not be made until all other avenues of recovery had been exhausted and finally that an order could not be made until the appeals which he contended he had on foot had been heard. I have read the transcript of the proceedings before Forster J. on 2 March and 9 March 1987 and also the written 15. submissions of the bankrupt on these occasions. In my opinion he was entitled, in respect of the alleged appeals, to proceed on the basis of two assumptions, first that even if the bankrupt succeeded in his appeal against the orders of Senior Judge Brebner he could not, on his version of the facts, reduce the judgment below the requisite amount, namely $1,500. Secondly there were no appeals on foot in respect of the two smaller sums relied upon in the creditor's petition. I have not seen any documents which satisfy me that the bankrupt has on foot appeals against these judgments. In relation to each of these three alleged appeals Forster J. found that the bankrupt had been unable to persuade him that he had a reasonable prospect of success. When the circumstances are added to the fact that the bankrupt was unable to pay his debts as they fell due, Forster J. was entitled to exercise his discretion and to make a sequestration order if he considered such an order appropriate. Even if I might have been inclined in the exercise of my discretion to adjourn or dismiss the petition, which as it happens is not the case, I can not say that Forster J. was "bound" not to make a sequestration order and "must" dismiss or adjourn. Because he was acting in the exercise of his discretion the circumstances in which an appellate Court would intervene are limited. However, they must be even more s0 when I am asked to determine "whether an order ought not to have been made". I should conclude by referring to the reasons of the Full Court of this Court in Ahern v Deputy Commissioner of 16. Taxation an unreported decision delivered in Sydney on 15 September 1987. This was an appeal from the making of a sequestration order and not an application to annul. On page 21 of the typescript reasons for judgment the Full Court said: "It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds: Re Rhodes; ex parte Heyworth (1884) 14 Q.B.D. 49; Bayne v Baillieu C1307) 5 C.L~.R. 64 and Re Verma: Ex arte Deputy Commissioner of Taxation (1985) 7 F.C.R. m These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt. Bankruptcy is not mere inter partes litigation. It involves change of status and has quasi-penal consequences." The circumstances are very different here in that it was impossible for the primary judge to be satisfied that an appeal was pending against the totality of the three amounts specified in the petition. Furthermore he found that he was not satisfied that the bankrupt had reasonable prospects of success on the appeals. It can not in these circumstances be said that he was not entitled, in the exercise of his discretion, to make a sequestration order. It follows that the bankrupt has failed to satisfy me that the order sought ought not to have been made. Even if he had , I am not convinced that it would have been, in the light of the bankrupt's insolvency, proper to annul the order. The application must be dismissed with costs. I certify that this and the '!S preceding pages are a true copy of the Reasons for Judgment of Mr Justice Fisher. Associate Dated: ZO sake, ISLT Otte Ce 17. Date of Hearing 8 September 1987 Bankrupt Represented himself Counsel for Respondent Mr. W.H. Hall Solicitors W.H. Hall & Associates.