le.) 2738/87... "I T > HWORDS Bankruptcy - application for annulment of bankruptcy - application made five years after bankrupt discharged by operation of law - bankrupt desirous of setting off losses incurred prior to bankruptcy against taxable income earned after dischargecompetency of application - bankrupt guilty of serious default in lodgment of income tax returns. Bankruptcy Act 1966, ss. 149, 153 and 154 Income Tax Assessment Act 1936, s. 80 RE JOHN WILLIAM OATES; EX PARTE: THE DEPUTY COMMISSIONER OF TAXATION No. P218 of 1979 and No. 310 of 1979 Coram: Sheppard J. Place: Sydney Date : 23 December 1987 IN_TH ERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) ) GENERAL DIVISION ) ) No. P218 of 1979 BANKRUPTCY DISTRICT ' No. 310 of 1979 ) OF_THE OF NEW SOUTH WALES ) ) AND THE AUSTRALIAN CAPITAL TERRITORY ) RE: JOHN WILLLIAM OATES EX PARTE: THE DEPUTY COMMISSIONER OF TAXATION MINUTES OF ORDER JUDGE MAKING ORDER: SHEPPARD J. DATE OF ORDER : 23 DECEMBER 1987 WHERE MADE : SYDNEY THE COURT ORDERS THAT the bankruptcy be annulled. 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. P218 of 1979 No. 310 of 1979 GENERAL DIVISTON BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES -~ Sse ee ewe err ree AND THE AUSTRALIAN CAPITAL TERRITORY RE: JOHN WILLIAM OATES EX PARTE: THE DEPUTY COMMISSIONER OF TAXATION CORAM: SHEPPARD J. DATE : 23 DECEMBER 1987 HIS HONOUR: This ts an application by a former bankrupt for an order annullinag his bankruptcy. The application is not opposed by the bankrupt's Trustee but is opposed by one of his creditors, the Deputy Commissioner of Taxation. The application is unusual. The sequestration order was made on 18 April 1979 and the bankrupt was discharged from his bankruptcy by force of s. 149 of the Bankruptcy Act 1966 three years later. The Deputy Commissioner opposes the application on the grounds that' the bankrupt is not a bankrupt within the meaning of s. 154 of the Act and/or that, because of the conduct of the bankrupt during and after his bankruptcy, the Court ought to refuse the order sought in the exercise of its discretion. The reason why the bankrupt wishes the bankruptcy annulled is to enable him to obtain the benefit of tax losses incurred by him 2. prior to his bankruptcy in order to set them off against taxable income which he has earned since his discharae. Tr.e relevant section of the Income Tax Assessment Act 1936 is s. 80. Sub-section (4) of that section provides that, notwithstanding any other provision of the section, where prior to the year of income a taxpayer has become a bankrupt or, not having become a bankrupt, has been released from any debts by the operation of an Act related to bankruptcy, no loss incurred by him prior to the date on which he became a bankrupt or the date on which he was so released, as the case may be, shall be an allowable deduction. The question whether sub-sec. 80(4) will have the operation contended for by the bankrupt in the event of an order for annulment of his bankruptcy being made is not a question which arises for determination in these proceedings. If the order is made, that matter, inthe event that the Deputy Commissioner disallows the losses. will need to be determined pursuant to the procedures provided for in Part V of the Income Tax Assessment Act. Section 154 of the Bankruptcy Act. so far as it is material, is as follows:- "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 ouqht 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 then, 3. the Court may make an order annullina the bankruptcy. (2) Where a bankruptcy is annulled tinder thic section, all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment, shall be deemed to have been validly made or done but, subject to sub-section (3), the property of the bankrupt still vested in the trustee vests in such person as' the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his estate or interest in it. on such terms and subject to such conditions, if any, as the Court orders". It is unnecessary to refer to the detail of sub-sec. (3) which provides for the transmission of property vested in the Official Trustee in Bankruptcy. A report provided by the Official Receiver on behalf of the Official Trustee in Bankruptcy dated 13 November 1987 shows that the bankrupt had secured and unsecured creditors at the time of his bankruptcy. His unsecured creditors were owed sums totalling $33,871 and a further $939 for interest. The amounts owing for interest were treated, in accordance with the rule of practice which exists in that regard, as deferred. Prior to his discharge in 1982, the bankrupt paid his secured and unsecured creditors in full and also paid the costs, fees and administration charges which had been incurred in respect of his bankruptcy. He did not, however, then pay the sum of $939 which was owing for interest. That amount has been paid recently. It would appear that the bankrupt, if he had been so minded. could have made an application for an annulment pursuant to the provisions of para. 154(1)(b) of the Bankruptcy Act in 1982. Presumably he would 4. have had little difficulty in finding the additional $939 which he would have needed to pay out his creditors in full. The bankrupt owes the Deputy Commissioner a sum in excess of $79,000 for income tax incurred in respect of income earned in vears after 1979, His conduct in relation to the lodament of returns has not been satisfactorv. Evidence led on behalf of the Deputy Commissioner establishes that on 30 November 1982 the bankrupt was fined small amounts of monev for failure to lodae returns for the years ending 30 June 1979, 1980 and 1981. On 4 October 1983 the bankrupt was again fined for failing to lodge his income tax returns for the years ending 30 June 1979 and 30 June 1981. On 27 June 1984 fines were again imposed for failure to lodge these returns and also the 1980 return. On 7 December 1987, when the affidavit was sworn, the sum of $550 was outstanding for fines. The bankrupt did not lodge his return for the year ending 30 June 1979 until 17 July 1984. On 26 March 1987 he lodged returns for the years of income endina 30 June 1980 to 30 June 1985 inclusive. He has not yet lodged a return for the year ending 30 June 1986. Although there is no evidence about it, it would seem to follow that no return for the year ending 30 June 1987 has been lodged either. As the Deputy Commissioner has submitted, the record is indeed a sorry one. There is no satisfactory explanation for it in the evidence. In the submission of counsel for the bankrupt the record is either irrelevant to the application now made. or 5, not such that it should dissuade me from exercising my discretion in the bankrupt's favour. I deal first with the question whether the application is competent. The Court's power to annul a bankruptcy is contained in a provision which is independent of the sections dealing with discharge. Section 153 provides for the effect of an order of discharge. It operates to release the bankrupt from all debts (including secured debts) in the bankruptcy. However the discharge does not release a bankrupt from certain classes of debt including debts incurred by means of fraud or a fraudulent breach of trust to which he was a party. The discharge does not affect the right of a secured creditor to realize or otherwise deal with his security. Of relevance also are the provisions of s. 58 of the Bankruptcy Act dealing with the vesting of property upon bankruptcy. The property of the bankrupt, except for after-acquired property, vests forthwith in the Official Trustee. After-acquired property vests in the Official Trustee as soon as it is acquired by or devolves upon the bankrupt. In the event of a bankrupt being discharged the discharge does not affect the Official Trustee's title to property which has already vested in it. An order annulling a bankruptcy has a very different operation. Subject to the operation of sub-sec. 154(2). the order places the bankrupt in the same position as he was prior to the making of the sequestration order. Thus property which has 6. vested in the Trustee pursuant to s. 58. subject to sub-secs. 154(2) and (3), revests in the bankrupt He is not released from any of his debts and. at least in leqal theory, he is treated as if he were never bankrupt. The purpose of the forgoing analysis is to demonstrate that the effects of a discharge and the effects of an order annulling a bankruptcy are not the same. That alone would suggest that the Court has power to make an order annulling a bankruptcy notwithstanding that the bankrupt has been discharged. What the Deputy Commissioner relies upon, however, is the use of the word "bankrupt" twice in para. 154(1)(b) and the operative words of the section which empower the Court to make an order annulling "the bankruptcy". In the submission of the solicitor for the Deputy Commissioner the bankrupt, having been discharged, is no longer a bankrupt to whom the section can apply and there is no bankruptcy to annul. The question is whether the words of the paragraph should be construed in this way. Guidance as to the way in which the section should be construed is, I think, to be found in a consideration of para. (1)(a) thereof. That empowers the Court to make an order annulling a bankruptcy where the Court is satisfied that a sequestration order ought not to have been made. That is a very wide provision empowering the Court to act in all sorts of circumstances including cases where sequestration orders have been obtained improperly. Such cases would include not only cases where there has been fraudulent conduct on the part of the petitioning creditor, but also cases of mistake such as cases 7, where service of the petition has not been effected on the debtor or where it has been wronaly concluded that an act of bankruptcy has been committed. There seems to me to be no reason why one would restrict the operation of para. (1)(a) of the section to cases where the bankrupt was still an undischarged bankrupt. It would seem to me that the legislature could not have intended the paragraph to be limited in this way. There may be more reason for reading such a limitation into para. (1)(b) if it stood alone, but it does not. The solicitor for the Deputy Commissioner submitted that different considerations applied to each paragraph. He conceded that the Court could act under para. (a) at any time but, nevertheless. contended that the Court could not act under para. (b) after discharge. I do not think that, on ordinary principles, one would give to one paragraph of a section such as Ss. 154, a different operation from that of another paragraph of it unless there were a clear legislative intention to that effect found in the language of the provision. That seems to me to be particularly so when the operative words of the section empower the making of an order annulling the bankruptcy in either case. I am therefore of opinion that the application is competent and that the use of the words "bankrupt" and "bankruptcy" has no significance other than as a reference to the person who may make the application and to the status he had because of the making of a sequestration order. B. T turn to the matters raised in opposition to my making an order of annulment based on the bankrupt's conduct. The bankrupt's conduct 1s a material circumstance to be taken into account. There are manv authorities on this question and I do not refer to them except to mention Marek v. Tregenza (1963) 109 C.L.R. 1 where the High Court dealt with an application for annulment made pursuant to s. 124 of the Bankruptcy Act 1924. In that case Kitto and Menzies JJ. said (p. 8):- "His bankruptcy was not caused or contributed to by extravagance, recklessness or reprehensible conduct of any sort, and we see no reason why, his debts which were small having all been paid, he should not be absolved from the stigma of bankruptcy. No purpose, so far as we can discover, is served by refusal of the application. All the circumstances being viewed in due proportion, it seems to us to be the proper conclusion that considerations of aeneral policy and of particular justice combine to entitle the appellant to have the sequestration order annulled". Every case must depend upon its own facts. Here the Official Receiver in his report has said that the bankrupt's conduct during his bankruptcy was satisfactory. He did not report any of the matters specified in sub-sec. 150(6) but did say that the bankrupt had produced no records or other books of account in relation to building work in which he was engaged prior to his bankruptcy. It was the Official Receiver's opinion that these activities were adversely affected by an economic. recession in the building industry and that this recession coupled with hich interest rates and under capitalization of the bankrupt's business brought about the bankruptcy. 93. The Official Receiver was not of course addressing himself to the bankrupt's failure to comply with his obligations under the Income Tax Assessment Act which is the matter upon which the Deputy Commissioner most strongly relies. I do not reqard that matter as irrelevant but it must be put in context. It is plain from the evidence that the bankrupt was able to apply for an order annulling the bankruptcy before his discharge came about by operation of law. Before that time he had paid all his creditors in full except for the sum of $939 which he owed for interest. It seems to me to be likely that if an application had been made for an annulment early in 1982, the order would have been qranted. I say that notwithstanding the bankrupt's failure to lodge income tax returns for the 1979, 1980 and 1981 tax years. The question is whether I should accord the bankrupt's continuing failure to comply with his obligations under the Income Tax Assessment Act such overwhelming weight as to conclude the application against him. I do not think I should take that view. In reaching that conclusion I have not minimized the seriousness of the bankrupt's failures to comply with his obligations. but TI point out that many of these occurred after his discharge in April 1982. The Deputy Commissioner has a number of remedies available to him under the Income Tax Assessment Act and has pursued some of these. At least returns have now been lodged for all years up to and including 1985. The position remains unsatisfactory because the 1986 and 1987 returns have not been lodged. On the other side of the scales are the facts that the creditors were paid out over five years ago and that the bankrupt's conduct prior to and during his bankruptcy 10, was not the subject of any criticism by the Official Receiver. In all the circumstances 1 think that the case for an order annulling the bankruptcy has been made out and I propose to make an order accordingly. \ certify that this and the ? preceding pages are a true copy of the reasons for Judgment herein of The Honourable Mr Justice Sheppard. / ch. , Assoctate Dated 23 DECEMBER /787 Counsel for Applicant: Mr. J. Fernan Solicitors for Applicant: C.R. Potts Latimer & Co. Counsel for Respondent: Mr. A. Tesoriero Solicitors for Respondent: Australian Government Solicitor Official Receiver in Bankruptcy: Mr. D.J.N. Bluett Date of hearing: 7 December 1987