gupquent vn 5/7 BE: CATCHWORDS Bankruptcy - Presentation by debtor of own petition - whether bankruptcy should be annulled as an abuse of process. RE: DELIA MARY CROWL; EX PARTE KLEINWORT BENSON AUSTRALIA LTD. No. W188 of 1988 Beaumont J Sydney 29 February 1988 IN THE FEDERAL COURT OF AUSTRALIA ) ) BANKRUPTCY DISTRICT OF THE STATE OF') ) No. W188 of 1988 NEW SOUTH WALES AND THE AUSTRALIAN ) ) CAPITAL TERRITORY ) RE: DELIA MARY CROWL EX PARTE: KLEINWORT BENSON AUSTRALIA LIMITED CORAM: BEAUMONT J PLACE: SYDNEY , DATE: 29 FEBRUARY 1988 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The bankruptcy of Delia Mary Crowl by virtue of the presentation of her own petition on 11 February 1988 be annulled. 2. Delia Mary Crowl pay the costs of Kleinwort Benson Australia Ltd. of this application. Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) BANKRUPTCY DISTRICT OF THE STATE OF) ) No. W188 of 1988 NEW SOUTH WALES AND THE AUSTRALIAN ) ) CAPITAL TERRITORY ) RE: DELIA MARY CROWL EX PARTE: KLEINWORT BENSON AUSTRALIA LIMITED CORAM: BEAUMONT J . PLACE: SYDNEY DATE: 29 FEBRUARY 1988 REASONS FOR JUDGMENT Kleinwort Benson Australia Limited ("KBA") seeks ta annul the bankruptcy of Delia Mary Crowl in the following circumstances. On 3 July 1986, judgments were entered in the Supreme Court of New South Wales that Mrs. Crowl pay to KBA_ the sums of $1,399,085.81 and $834,879.82. On 18 October 1986, KBA served on Mrs. Crowl two 21 day bankruptcy notices based on these judgments. Mrs. Crowl did not comply with these notices. On 39 December 1986, KBA presented a petition seeking the sequestration of the estate of Mrs. Crowl under the Bankruptcy Act 1966 ("the Act"), alleging that Mrs. Crowl had committed an act of bankruptcy by failing to comply with the bankruptcy notices previously mentioned. On 6 May 1987, Jackson J. made a sequestration order. Mrs. Crowl appealed and on 10 July 1987, a Full Court, by a majority, allowed the appeal, set aside the sequestration order and dismissed KBA's petition. On 11 December 1987, the High Court of Australia granted KBA special leave to appeal. It is anticipated that the appeal to the High Court will be heard next April. On 11 February 1988, Mrs. Crowl presented a debtor's petition for the purpose of becoming a bankrupt by force of s.55 of the Act. At the same time, Mrs. Crowl filed a statement of her affairs and an affidavit verifying that statement. It showed an amount of $2,857,888.00 said to be owing to unsecured creditors (including $1,749,644.00 owing to KBA). No assets were disclosed. A Deputy Registrar accepted the petition on 11 February and endorsed it accordingly. Section 55(3) of the Act provides: "(3) Where it appears to the Registrar that a petition presented to him under this section is in accordance with the prescribed form and that' the statement of affairs accompanying the petition is also in accordance with the prescribed form or the Court directs, under sub-section (4), the Registrar to accept the petition - (a) the petition shall he accepted by the Registrar, who shall endorse it accordingly; and (b) thereupon, by force of this sub-section, the debtor becomes a bankrupt by virtue of the presentation of the petition." The present application is brought under s.154(1)(a) as follows: "154. (1) Where the Court is satisfied - (a) that a sequestration order ought not to have been made or, inthe case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Registrar; or (b) the Court may make an order annulling the bankruptcy." Apart from her statement of affairs, the only evidence of Mrs. Crowl's financial position is the material disclosed in the report of the Official Trustee which, so as releyant, is as follows: "2, In her statement of affairs the bankrupt did not disclose any assets. It appears that the bankrupt is the registered proprietor of land situated at 47 Wollundry Avenue, Wagga Wagga on which is erect a house. However the bankrupt's husband claims the property is held in trust for Frawood Trust (No 25) Pty Ltd. No funds have been brought to the credit of the estate. In her statement of affairs the bankrupt disclosed the following unsecured creditors:- Kleinwort Benson Australia Ltd. $1,749.644.00 ABN Australia 990,544.00 AMEV Finance Ltd 114,000.00 Deputy Commissioner of Taxation 3,700.00 $2,857,888.00 The debts apart from the Deputy Commissioner of Taxation relate to personal guarantees of company debts (see para.8). The bankrupt is a married women aged 52 years without dependants. The bankrupt resides with her husband and is engaged in domestic duties. The property in which she resides is owned by Sommerset Pty Ltd. She is not required to pay rent for the premises. The bankrupt was a director and shareholder of Camdox No 26 Pty Ltd and Waenganui Pty Ltd. The companies acquired the Revesby Pacific Hotel in September 1984. The purchase price of the hotels was $3.7 million. The purchase far of the hotel was obtained from loans obtained from AMEV Finance Ltd, ABN Australia and Klienwood (sic) Benson Australia Ltd. The loans were guaranteed by the bankrupt and the other directors. 9. The business operations of Camdox No 26 Pty Ltd and Waenganui Pty Ltd are not known and trading details of the hotel are also not known. 10. The Revesby Pacific Hotel was sold for $2.2 million and Condox No 260 (sic) Pty Ltd was put into receivership." On behalf of KBA, it is submitted that the present case is governed by the reasoning and decision in Clyne v. Deputy Commissioner of Taxation (1984) 154 C.L.R. 589. It was there held that this Court had power to annul a bankruptcy resulting from the acceptance of a debtor's petition notwithstanding that the Registrar had properly accepted it. If the presentation of the petition constituted an abuse of process, the Court should annul the bankruptcy. The majority (Gibbs C.J., Murphy, Brennan and Dawson JJ) said (at pp.599-600): "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 sequestration order ona 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." This statement was made in the context of a submission put on behalf of the debtor, Mr. Clyne, referred to by their Honours as follows (at p.599): "In the present case the debtor submitted that he had not been guilty of any abuse of process, and that he was entitled to present his own petition for the purpose, which he frankly admitted, of preventing the making of a sequestration order and thereby preventing his bankruptcy relating back to a time since when he has disposed of moneys to which the trustee's title may relate back." Whilst the general principle is plain enough, the question whether it is applicable to the facts of a particular case is often difficult to resolve. As Isaacs J. said in Dowling v. The Colonial Mutual Life Assurance Society Limited (1915) 20 C.L.R. 509 (at p.524): "The line of law between the two classes of cases Ci.e. between "use" and "abuse" of process] is clear, though the facts are not always easy to delimit." Clyne's case was applied by Morling J. in Re Cornish; Ex parte English (1984) 6 F.C.R. 257. His Honour said (at p.259): "T have no difficulty at all in forming the view that Mr. Cornish's purpose in presenting his own petition was to prevent Mr. English obtaining a sequestration order on the petition which has been pending in this Court now for some months. But the matter which has exercised my mind is whether there is sufficient evidence before the court for it to infer that it was Mr. Cornish's further purpose to shorten the period of relation back. It seems clear from the judgment of the High Court in Clyne's case that in a case such as the present this further purpose must be established before the court can exercise the power of annulment under s.154, I have come to the view that I can properly infer from the evidence that Mr. Cornish had this further purpose. There is evidence before the court that Mr. Cornish disposed of some of his property between February 1984 and November 1984. In particular there is evidence that he sold some of his real estate and paid many of his creditors during that period, for example, the sale on 27 July 1984 of lot 58 on registered plan number 162281 to Starworld Pty Ltd for the sum of $20,000. Mr. Cornish has not appeared and has not offered any opposition to the orders sought against him. It seems to me that, unless the bankruptcy which came into effect on 5 November is annulled, there is a real risk of prejudice to the creditors who might otherwise be deprived of the opportunity of realising on property which passed out of the ownership of Mr. Cornish before 5 November 1984." As has been noted, the application of general principle to the facts of the case is not always clear. This difficulty may be illustrated by reference to some of the decided cases. In Ex parte Painter; In re Painter £18953 1 Q.B. 85, a judgment creditor took out a judgment summons against a debtor who was entitled to an inalienable pension, seeking payment of the debt by instalments. The debtor, with the intention of evading such proceedings, filed his petition in bankruptcy. The judgment creditor was virtually the sole creditor and the debtor had assets of little value. It was held that the presentation of the petition was not an abuse of process. Painter's Case was distinguished in Re Betts; Ex parte Official Receiver [1901] 2 K.B. 39. In holding that the process had been abused, Wright J. said (at p.41): "There must, however, be a limit to a debtor's immunity; and if it appears as a fact that a debtor is in the habit of filing bankruptcy petitions, so that the bankruptcy law is really being made use of in order to assist him in his frauds on his creditors, and to enable him to get credit, while he all along has the intention of getting rid of his liabilities by filing his own petition, I cannot think that such a state of things comes within the protection of the bankruptcy law." (See also In Re Dunn £1949] 1 Ch. 640; In Re A Debtor £19671] 1 Ch. 590; Re Mottee; Ex parte Mottee (1977) 29 F.L.R. 406 at pp.413-415). In the present case, it is common ground that the first limb of the test in Clyne's Case was satisfied; that is to say, it is accepted on behalf of Mrs. Crowl that her petition was presented "for the purpose of making it impossible for CKBA] to obtain a sequestration order on a pending petition." What is in issue here is whether the second limb of Clyne's Case has been satisfied. In other words, was the petition lodged "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?" In Clyne's Case, such a purpose was admitted by Mr. Clyne. In Cornish, Morling J. could infer it from a number of dealings or transactions by the bankrupt in the relevant period. In the present case, there is no concession of the kind made by Mr. Clyne; nor is there specific evidence that in any relevant period, Mrs. Crowl entered upon any particular dealing or transaction which might he susceptible of challenge under the statutory doctrine of relation back. Mrs. Crowl was not called to give evidence. It is true that, because the matter was perceived by both parties to be urgent, the hearing was brought on at short notice. On the other hand, no application was made on behalf of Mrs. Crowl to seek an adjournment of the hearing. In the circumstances, it may he inferred that, if called, Mrs. Crowl would not have assisted her case. At the same time, as has been said, KBA did not seek to prove that any particular dealing or transaction occurred within the earlier relation back period which would apply if the appeal to the High Court were to be allowed and a sequestration order were to be made on its petition. On behalf of Mrs. Crowl, it is submitted that the absence of any evidence of any dealings or transactions on her part is fatal to the suggestion that one of her purposes was to shorten the period of relation back. It is true that KBA must bear the general onus of proving this allegation and that there is no specific evidence of any relevant dealings or transactions. The real issue here is whether it igs proper to infer the existence of such matters from the evidence as a whole, bearing in mind that the facts are peculiarly within the knowledge of Mrs. Crowl. This does not mean that "the peculiar means of knowledge of one party spares the other of the burden of adducing evidence on the issue, although very slight evidence will often suffice" (see Cross on Evidence, 3rd Aust. ed., D.M. Byrne Q.C., J.D. Heydon Q.C. at p.190). There is evidence that Mrs. Crowl was involved, as a director and shareholder, in corporate activities on a substantial scale; that, in this connection, she incurred significant liabilities to a number of creditors; that she Claims she has no assets; that she is the registered proprietor of the Wagga Wagga property which, it is claimed, is beneficially owned by another entity. In the absence of any testimony from Mrs. Crowl, it is possible to infer from what is revealed in the evidence available of her financial position in late 1987 and early 1988 that she could have engaged in one or more transactions or dealings with her assets within the relation back period calculated by reference to KBA's petition but which occurred before the relation back period of her own petition. This is not to say that it is certain or even probable that Mrs. Crowl had any particular transaction or dealing in mind when she presented her petition. Rather, it isa case of inferring from her financial difficulties in 1987 that it was possible that she had such a transaction or dealing in mind when she decided to present her own petition. Given that inference, in the absence of any other explanation from Mrs. Crowl, it is appropriate to find that she presented her petition for the purpose of shortening the period of relation back, possibly placing beyond the trustee property which might otherwise be available to the general body of creditors. This is not a proper use of the process. The bankruptcy must be annulled. Mrs. Crowl must pay the costs of the application. I certify this and the Ligue (7?) preceding pages to be a true copy of the Reasons for Judgment of his Honour Mr Justice Beaumont. Associate: = . Date: 29 February 1988 AR: Freav sont Counsel for the Applicant: R.J. Wright Solicitors for the Applicant: Clayton Utz Solicitor for the Respondent: D. Raphael Date of hearing: 24 February 1988 Date of delivery: 29 February 1988