] mo ara AAA i S&S ~~ i CATCHWORDS BANKRUPTCY - Application to set aside the signing and sealing of sequestration order by Registrar - extension of time - application to suspend/rescind or annul sequestration order - whether a sequestration order ought not to have been made - comparing rescission and annulment of sequestration order - going behind judgment debt - deed of arrangement - omission of information in statement of affairs by bankrupt — interests of commercial community and public. Bankruptcy Act 1966 — ss 14, 33, 37, 73, 74, 149, 150, 154, 188, 189, Bankruptcy Rules - Rule 158 Re KURT AND GERLINDE PICCARDI Ex parte GEORGE GREGORY GRIVAS W 1607 of 1986 . CORAM: Einfeld J. DATE: 3 August 1988 PLACE: Sydney IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT IN THE No. W 1607 of 1986 STATE OF NEW SOUTH WALES AND THE wwe ww weve www AUSTRALIAN CAPITAL TERRITORY Re: KURT AND GERLINDE PICCARDI Applicants Ex Parte: GEORGE GREGORY GRIVAS Respondent CORAM: Einfeld J. DATE: 3 August 1988 PLACE: Sydney MINUTE OF ORDERS 1. The bankruptcy 1s annulled. 2. The objecting creditors, being Dick & Dons Pty Ltd, B.W.Modern Interiors Pty Ltd, Fire Fighting Sprinkler Co Ltd, and Boral Johns Perry Industries Pty Ltd, are to pay the applicants' costs. NOTE: Settlement and entry of these orders 1s dealt with in accordance with Order 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT IN THE No. W 1607 of 1986 STATE OF NEW SOUTH WALES AND THE wwe wwe vewwwvew AUSTRALIAN CAPITAL TERRITORY Re: KURT AND GERLINDE PICCARDT Applicants Ex Parte: GEORGE GREGORY GRIVAS Respondent CORAM: Einfeld J. DATE: 3 August 1988 PLACE: Sydney REASONS FOR JUDGMENT On 18 November 1986, a sequestration order was pronounced against Kurt and Gerlinde Ptccardi (the applicants) on the petition of the respondent (Grivas). Immediately afterwards the applicants sought rescission or suspension of the order. On 27 January 1987, before the matter had been ruled on, the sequestration order was signed and sealed by the Registrar in Bankruptcy. Although in the circumstances set out in my earlier judgments in this matter on 8 and 24 July 1987, this administrative act was unknown to the applicants until 29 May 1987, section 37(2) of the Bankruptcy Act (the Act) prevents the suspension or rescission of this sequestration order. Hence by application dated 5 June 1987, the applicants moved to have set aside the signing and sealing of the sequestration order by virtue of sections 14(5) and 30(1)(b) of the Act and section 23 of the Federal Court Act. Judgment on this matter was reserved on 24 July 1987 to permit the simultaneous litigation of the rescission/suspension application together with the subsequently added application to annul the bankruptcy. All three of these applications are now for resolution and judgment. In substance the parties sought and were given leave to use the evidence in any application in support of the others. At first Grivas opposed the orders sought, but when this matter came on for hearing, he withdrew his opposition. On the other hand, four unsecured creditors (the objecting creditors) opposed the making of the orders sought by the applicants. They are Dick and Dons Pty Ltd, whose creditor's petition was dismissed upon the making of the sequestration order, claiming a debt of $67,073.25 under judgment recovered on 15 May 1986 in the New South Wales District Court; B.W. Modern Interiors Pty Limited who claim a debt of $167,700 for material and labour supplied to the applicants between February 1982 and December 1985 and who lodged a proof of debt dated 18 May 1987 with the trustee; Fire Fighting Sprinkler Co.Ltd who claim a debt of $19,403 for goods sold and delivered to the applicants between July and December 1985 (this debt was disputed by the applicants in District Court proceedings which have been discontinued but this creditor proved its debt in the bankruptcy); and Boral Johns Perry Industries Pty Ltd who obtained a default judgment against the applicants on 18 June 1986 for $23,387.25 in the New South Wales District Court. Two other creditors filed notices of intention to oppose the rescission application on 29 May 1986. These creditors were Ries Plumbing Pty Limited, who claimed a debt of $30,875.10 by a judgment obtained on 29 December 1986 in the New South Wales District Court; and lIinsid Pty Limited, to whom was owed $50,869.70 by a judgment obtained on 19 November 1986 in the Distict Court of New South Wales in Newcastle. In the event, they did not appear at the hearing to oppose the orders sought. Background 18 November 1936 1. An authority under section 188 of the Act was executed by the applicants appointing Geoffrey Ralph James, a partner of Arthur Young & Co Accountants, as controlling trustee of the estate and requiring him to call a meeting of creditors under Part X of the Act (Part X trustee). The proposed Part X arrangement was to be based principally on the redevelopment by the applicants of Lot 7, 93 Bailey Street Adamstown (the proposal). 2. An application was made to Justice Neaves for an adjournment of the creditor's petition to permit this meeting to take place. 3. Justice Neaves refused the adjournment and made the sequestration order on the petition of the respondent in the sum of $26,615.57. 4. The applicants filed an application to rescind or suspend the sequestration order, in order to allow a Part X meeting of creditors to be called. Their solicitors asked the court registry not to sign or seal the sequestration order, and the papers were so marked. 5. The Court appointed Brian Raymond Silvia of Ferrier Hodgson as trustee pursuant to the sequestration order (the Court trustee). 11 December 1986 Grivas filed a notice of intention to oppose the applicants' application for rescission/suspension. 15 December 1986 The application to rescind/suspend was listed for directions before Jackson J. This hearing is analysed in my previous judgment and although there are some ambiguities in the transcript of those proceedings making it unclear precisely what they were about, 1t appears that no orders were made, the parties were sent to the Registry for a hearing date and directions were given to re-list the matter for return of subpoenas. 27 January 1987 Unknown to the applicants the sequestration order was entered, signed and sealed by the Registrar in Bankruptcy. 4 March 1987 The first affidavit verifying the applicants' statement of affairs was signed by the applicants. The statement of affairs disclosed the fact that the applicants had sixty five unsecured creditors who were owed $1,832,917.54; they had assets totalling $10,181 and the amount owed to secured creditors was unknown. 5 March 1987 A creditors' meeting was called by the Court trustee. At this meeting the following took place: 1. The Court trustee was advised that rescission of the sequestration order was supported by a substantial number of creditors in the light of and on the basis of the proposal. 2. The Court trustee advised the meeting that the bankrupts had not filed a statement of affairs, nor provided information and their books and records to enable him properly to determine their financial position. Mr Piccardi then handed the Court trustee an unsigned copy of the statement of affairs of 4 March 1987, advising that the signed document would be available by the end of the meeting. That statement of affairs revealed an unlikelihood that there would be moneys available to unsecured creditors. 3. Mr Fox, solicitor for the applicants at the meeting, advised that the 4 March statement of affairs had been prepared and that he was awaiting signed copies to be delivered from his office. 4. The proposal was discussed only generally, mainly in the context of the applicants' financial position. 5. In a vote, twenty four creditors were in favour of supporting the applicants' rescission application and nine were against (including Grivas). The debts to those against amounted in total to $419,214 while the debts to those in favour amounted to $1,164,109.05. 25 March 1987 Agreement was reached (it was signed on 26 March) between Grivas and the applicants whereby, subject to certain conditions, Grivas agreed to withdraw his opposition to the orders sought, to allow the Part x meeting of creditors to be called, and to authorise the Part X trustee to call the meeting. The main object of the meeting would be to enable the unsecured creditors to consider the proposal and the agreement between Grivas and the applicants under section 189 of the Act. 13 April 1987 By consent the sequestration order was suspended by this Court up to and inciuding 29 May 1987, to permit a Part X meeting of creditors to take Place on 25 May 1987. 22 May 1987 A second affidavit verifying the applicants' statement of affairs was signed by the applicants. This statement of affairs disclosed the same information regarding liabilities of the applicants as that of 4 March 1987 except that the assets totalled $5090.50. 25 May 1987 A creditors' meeting was convened by the Part xX trustee. At this meeting the following took place: The joint and individual statements of affairs of the applicants were tabled. The Part X trustee advised that the statements of the joint estate were identical in content to those provided at the 5 March 1987 meeting. He also advised that the individual statements contained all the liabilities of the joint estates and one half of each debtor's interest in the joint assets. The Part X trustee stated that, as he understood it, a copy of the statement of affairs of the previous meeting was available upon request by the creditors. Information regarding the proposal was placed before the meeting. Essentially the proposal involved the applicants obtaining a discharge of the mortgage which the ANZ Bank held over the property at 6 Bailey Street, Adamstown. The applicants were then seeking to obtain the sum of $85,000, the amount required to pay out the bank, from a number of people. The evidence established that these people and funds were then and still are available. Having paid out the bank, the applicants propose to keep the property in their names and then to put in train the necessary steps for the redevelopment of the property such as negotiating finance for the cost of the development and the lodging of the Development Application to the relevant council. The evidence is slight, but it appears that' these various steps can be achieved. Prior to the commencement of any works on the property, the property would be put up for the sale of the completed redevelopment for a sum which would be sufficient to provide an estimated profit of $400,000 for unsecured creditors after utilising available tax losses. The profit would then be paid to the trustee for pro rata distribution to creditors. The proposal is put by the applicants upon the following two crucial conditions: (a) that in the event that the redevelopment does not proceed for any reason or no funds become available at the end of the development, then the creditors will be precluded from taking further bankruptcy action against the applicants; (b) that the applicants' secured creditors must agree not to participate in the distribution of surplus funds for the successful completion of the proposal to make up for any shortfall that they might suffer in realising or otherwise dealing with their securities. The only secured creditor who indicated that it would not seek to recover any loss above the money realised from the sale of their securities was a subsidary or associate of the ANZ Banking Group Limited to whom the applicants are indebted for the staggering sum of at least $6 million. The evidence established that this creditor had arranged and provided most or all of the funds for the applicants' offshore borrowings, secured by mortgage on a number of the applicants' properties. Another secured creditor, the CitiBank/CitiCorp Group, said that it would not surrender its rights as an unsecured creditor. The evidence hefore me suggested that this attitude may be reversed. Another two unsecured creditors, Beneficial Finance Corporation Limited and the State Superannuation Board, opposed the proposal and said that they would prove as unsecured creditors for any excess of debt to them above that realised from the sale of their securities. Subsequent events have removed these impediments to the proposal. The resolution that Mrs Gerlinde Piccardi execute a deed of arrangement embodying the proposal resulted in the following vote: In favour: 18 in number 64.28% Value $8,952,667.11 95.42% . Against: 10 1n number 35.71% Value $429,427.14 4.58% The resolution that Mr Kurt Piccardi execute a deed of arrangement embodying the proposal resulted in the following vote: In Favour: 19 in number 65.52% Value: $8,954,055.30 95.42% -10- Against: 10 in number 34.48% Value: $429,427.14 4.58% 9. The voting on the resolution approving the agreement between Grivas and the applicants was: In Favour: 11 in number 52.38% Value $1,062,885.69 74.89% Against: 10 tn number 47.62% Value $356,291.87 25.11% All the resolutions therefore obtained the necessary majority in value. 29 May 1987 Attention was drawn in Court to the fact that one copy of sequestration order in the Court file had apparently been signed sealed, although another copy had not. To enable the applicants opportunity to consider their position, the application was stood to 10 June 1987. 5 June 1987 the and the over The applicants filed their application seeking an order that the signing and sealing of the sequestration order on 27 January 1987 be set aside. 10 June 1987 This application was adjourned to 8 July 1987. 8 July 1987 The application to rescind the sequestration order and to review its Signing and sealing were part heard, a partial or preliminary judgment was given and the matter was stood over to 23 July 1987. The applicants were ordered to file within 14 days any application to annul the sequestration order. 23 July 1987 The hearing of the application to review the signing and _ sealing continued, at which the Registrar was represented, and the Court was informed of the earlier practice of the Registry to delay signing and sealing if an application to rescind was being made. 24 July 1987 Further argument took place, a further judgment was given and ail the Matters were fixed for hearing on 7 September 1987. 7 September 1987 Grivas no longer opposed the application. Without determining whether they could appear as of right, leave was granted to the objecting creditors to participate in the proceedings. Petitioning Creditor's (Grivas') Debt It appeared that the debt owed to Grivas arose pursuant to a partnership between Grivas, Peter James Evans and the applicants which owned premises at 97-105 Scott Street, Newcastle. The evidence established that Grivas had capital invested in the partnership and on 21 November 1978 the partners agreed that Grivas would receive a refund of his capital from the proceeds of a refinancing operation, which would in turn not take place until the premises were fully renovated. -12- However, on 5 March 1980 the partners agreed that to assist the financing of the renovation work, Grivas would leave $50,000 in _ the partnership account, with interest being paid to Grivas at $625 per month. The capital sum was to be repaid from a refinancing of the premises when the premises were redeveloped and fully tenanted. The petition claimed the payment of this interest. As the premises were never redeveloped nor fully refinanced, the applicants say that the debt claimed by Grivas is not owing and has never become payable. Applicants' Statement of Affairs A question was raised at the hearing regarding whether the applicants had made full disclosure of their company and trust interests in their statements of affairs. This problem partly arose because of the fact referred to earlier that two statements of affairs had been prepared — one sworn on 4 March 1987 for the first creditors' meeeting called by the Court trustee on 5 March 1987 and another sworn on 22 May 1987 and prepared for the 25 May 1987 Part X creditors' meeting. The alleged problem with the first statement of affairs was that 1t makes reference to a personal questionnaire completed by the applicants containing some details of the applicants' company and trust interests. The objecting creditors argued that the statement of affairs 1s not properly constituted where it makes reference to another document in this way. Mr Piccardi's evidence was that two questionnaires had been submitted for completion by the Court trustee. He stated that one of the personal questionnaires was in fact available in March at the time of Mr Piccardi's 4 March 1987 affidavit verifying the statement of affairs and -13- the second one was available at the May meeting. The allegation concerning the second statement of affairs was that the contents of two statutory declarations dated 15 September 1983 and 15 November 1984 respectively were not disclosed. In short the declarations state that Mr Piccardi has various company and trust interests. The objecting creditors stated that the failure to disclose all their interests was misleading to the creditors at the creditors' meetings. Applicants' Financial Position The evidence established that at the time of the creditors' meetings, the applicants were involved in the following partnership interests which all dealt in the business of real estate development: (a) Partnership with Peter James Evans and Suzanne Eileen Evans which was entered into in 1980. The applicants had a 50% share and the principal assets of this partnership were properties at 42-46 Hunter Street Newcastle and 406-408 King Street Newcastle. According to the information provided in the questionnaire attached to the statement of affairs of 4 March 1987, this partnership has been dissolved. Although the questionnaire states that the dissolution agreement was reduced to writing, no copy of the document evidencing the dissolution was ever produced. (b) Partnership between the applicants and Neville Amos 4111 entered into in October 1979. The applicants had a 50% interest in this partnership which has also been dissolved. The same questionnaire indicates that the dissolution agreement was reduced to writing but no document of dissolution was produced. (c) Partnership with Doylpic Pty Limited, Peter Doyle and Peter and Suzanne Evans entered into in 1980. The applicants had a 25% interest in this partnership. Its principal asset was the Royal Theatre. The evidence showed that a Mr B. McGuigan bought Doylpic's share for $150,000 and paid off the mortgage on this property. This partnership is still continuing. (da) Partnership with Peter and Suzanne Evans and Grivas and his wife, Janice Grivas. This partnership owned the George Hotel and the applicants and the other two couples each had a one third interest in the property. The same partnership, excluding only Mrs Grivas, owned the adjacent property known as the Royal Court. This partnership is still continuing. Both the George Hotel and the Royal Court were subject to a mortgage in favour of the ANZ Bank. Originally the amount secured was $505,000 but by the time of the hearing, it had escalated to $562,000 and is currently approximately $570,000. The George Hotel The evidence showed that the partners were interested in selling this property. After paying off the current mortgage to the bank, 1t was thought by some partners that they might each remain with approximately $100,000. Mr Piccardi believed that there would probably be no surplus after the sale and payout of the mortgage. A factor influencing his belief was that a sum of money was claimed by Mr and Mrs Grivas for wages relating to work done at the hotel. Mr Piccardi entered into an arrangement with the other partners so that the other partners would share Mr Piccardi's portion. Mr Piccardi said that he had entered into the arrangement with Grivas in March 1987 in the hope that Grivas would withdraw his opposition to the rescission of the sequestration order. The evidence was that this agreement was disclosed at the second creditors' meeting. Grivas and his wife claimed to be owed about $79,800 in unpaid wages between 1 July 1985 and the date of the hearing. Despite working throughout the period, Grivas claimed that he, his wife and the family trust received nothing betweeen 1 July 1985 and 30 June 1986 and said that he had drawn about $20,000 in wages altogether. Despite an alleged agreement by the partnership on 29 May 1987 pursuant to which Mr and Mrs Grivas were to receive $800 per week 1f they both worked or $600 per week 1£ only Mr Grivas worked, the evidence of Grivas was that he and his wife received into their family trust $700 per week from which they drew $300 each. Grivas says that in the first six months of that year, no money was paid. In the second half of the year, he said that he drew $200 per week, and from March 1987, he started to pay himself and his wife $600 per week. Grivas also claimed to be owed $60,900 by virtue of this agreement. Jontria Pty Ltd In May 1986 the applicants caused to be registered a company called Jontria Pty Ltd, the principal shareholder of which 1s the applicants' twenty year old son Kurt Anthony Piccardi. Its principal asset is a lease over the premises operating as a coffee shop at 6-12 Pacific Street, Newcastle. Mrs Piccardi said that she works there with her son. The company has paid on behalf of the applicants certain mortgage instalments on the applicants' residential home at 14 Wattle Street, Bolton Point. The mortgage 1s owed to the Advance Bank (formerly the NSW Building Society) and the evidence was that the applicants were at the time of the hearing already some two to three months in arrears. The company had also, on behalf of the applicants, paid accounts incurred in the development of properties in Pacific Street, Newcastle. One Dollar Transfer To Hill It was also established that the applicants entered into an arrangement with Mr Hill in May 1986 involving the transfer of several properties to him for the sum of §1. The total value of these properties, as at 30 June 1984, was $2.315m. At May 1986 valuations the total was $3.1m of which Mr Piccardi had a one half interest of over one million dollars. All these properties were mortgaged to Citicorp. In return for this transfer, the agreement was that the partnership would be dissolved and that Mr Hill was to take over the liability under the mortgages secured over those properties. Mr Hill's current claim against the applicants 1s some $814,000, although as at 30 August 1986 the amount alleged to be owing was $899,736. It 18 based on a deficiency of funds on the properties. Mr Piccardi relinquished his interest in the partnership between Mr Hill and himself but did not relinquish or acknowledge or receive absolution from the debt that he owed the partnership. Mr Hill therefore retained the right to claim money that Mr Piccardi owed to the partnership. The matters for determination in this case are: 1. The review of the signing or sealing of the sequestration order. 2. The suspension or rescission of the sequestration order. 3. The annulment of the bankruptcy. -17- 1. THE REVIEW OF THE SIGNING AND SEALING For the reasons and in the circumstances outlined in my reasons on 8 and 24 July 1987, I am satisfied that the signing and sealing of the sequestration order was effected on 27 January 1987 in the Registry without notice to the applicants. This was due to an accidental and erroneous reading and interpretation of some of Justice Jackson's remarks on 15 December 1986. I am satisfied that the applicants received, and proceeded in the belief that they had received, an undertaking from the Registry that nothing would be done and no. step would be taken, at least without prior notice to them, to prejudice or forestall their section 37 application to rescind. It is not disputed that at the time of this occurrence, the practice of the Registry was to give and comply with such undertakings unless the Court intervened, although I am informed that this practice has been subsequently altered to ensure that the matter comes promptly before a Judge. In my earlier reasons of 8 July 1987, I expressed the view that the Court has power under section 14(5) of the Act to review the signing and sealing by Registrars of sequestration orders. The question is whether I can and now should do so in the circumstances which exist here. The applicants submitted that section 306 can be used for this purpose, but I doubt that an administrative mishap in the Registry can be described as a 'formal defect or irregularity' within the meaning of that section. On the other hand, rule 158 provides: "An application under sub-section 14(5) of the Act may be made within 21 days from the date on which the order, direction or act sought to be reviewed was made, given or done " This period had long since expired when this application for review was made. However, section 33(1)(c) provides that the Court may extend this time. If this is a case for rescission, I think it would be appropriate to extend the time and to grant the review. For the reasons given here and in the earlier judgments, I would then order that the signing and sealing of the sequestration order be quashed. 2. THE SUSPENSION OR RESCISSION This is an entirely discretionary order provided for by section 37 (1) of the Act. Essentially the applicants maintained that rescission should be effected because the petitioning creditor no longer opposed the order and because the creditors' meeting on 25 May 1987 resolved in favour of the deed of arrangement being put into effect and the proposal proceeding. The applicants say that I must consider the circumstances of the making of the sequestration order. They claim that a Part X scheme of arrangement was* being proposed and an authority from the trustee was to be available at a later stage on the day the sequestration order was pronounced. I should also consider the fact that the applicants filed their application for rescission of the order on the same day that it was made; that the reason as to why Neaves J refused to grant an adjournment was because he believed that the applicants had had sufficient time to formulate a Part X scheme. The applicants also attack the judgment debt of Grivas which they say was not immediately payable on 19 November 1986. - 19 - On the other hand, the objecting creditors argued that the applicants had had numerous opportunities to oppose Grivas' claim. One objecting creditor pointed to the applicants' failures: (a) to lodge a notice of grounds of defence in the District Court; (b) to lodge an intention to oppose the petition filed in the Federal Court; (c) to file an application to extend time to comply with the bankruptcy notice; and (d) to lodge an application to set aside the judgment of the District Court either after service of the bankruptcy notice or after service of the petition. This objecting creditor pointed out that the debt was acknowledged in the deed of 26 March 1987 entered into with Grivas and that the debtors were represented before the court when the application for the sequestration order was made. Alternatively, the applicants could have appealed Justice Neaves' decision not to grant an adjournment on 18 November 1986. A creditors' meeting could then have been arranged pursuant to section 73(2) and then an annulment could have been sought pursuant to section 74. On the substance of the matter, the applicants explain that the predominant reason for their predicament is because of the adverse movements in the Australian dollar as against the Swiss Franc (substantially affecting their offshore borrowings made in March 1985) - 20 - and the downturn in the Newcastle economy consequent upon Australian and Hunter District economic problems after the international trade crisis. It 1s clear that if a sequestration order ought not to have been made, the appropriate remedy 1s annulment and not rescission: Re Deriu [1970] 16 FLR 420; Re Bond [19781 22 ALR 287. See also section 43(2). The objecting creditors argued that if rescission is to be considered the tests to be applied are similar to those where there 1s an application to set aside judgment: Balhorn v Colby [1982] 45 ALR 174 at 180-81; Re Anasis [1985] 63 ALR 493 at 500 where the distinction between rescission and discharge is explained. The objecting creditors, while allowing for the Court's wide discretion in the matter, argued that the paramount consideration was that justice should be done. They submitted that there should be no departure from the general rule that all available evidence must be produced at _ the original hearing: Re Buckley [1975] 27 FLR 496, and in particular that the applicants should have done something before 18 November 1986. It was argued that because a person continues to be bankrupt until discharged under sections 149 or 150 of the Act or there is an annulment under sections 74 or 154, rescission does not put an end to the sequestration order. In Simon v Vincent J.O'Gorman Pty Ltd [1979] 41 FLR 95 at 108, when speaking of Gibbs J's decision in Re Deriu [abovel, Lockhart J stated: "His Honour held that he was satisfied that the sequestration order ought not to have been made and annulled the bankruptcy He said that the rescission of a sequestration order does not put an end to the bankruptcy and relied for that conclusion on the reasons for judgment of Williams J in Cameron v Cole [1944] 68 CLR 571 and the terms of s.43 (2) of the Act which provide: " Lockhart (2) Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until - (a) he 1s discharged by force of section 149 of this Act; (b) he is discharged by order of the Court; or {c) the sequestration order is annulled.' His Honour was considering a different question to the one before us. His Honour did not say that there was no power in the court to rescind a sequestration order under s 37; but rather that, in the circumstances of the case before him, as the rescission of the sequestration order would not put an end to the bankruptcy, 'the proper way of getting rid of the sequestration order is by annulling it under s.154 '" J went on to say : "Where an order has been correctly made in the first instance and a party seeks to introduce evidence of events that have subsequently happened which would justify the court in making an order for rescission of the original order, generally the proper course 1s to apply for an order for rescission under s.37; but if the order had been wrongly made in the first instance the usual course of appealing against it should be followed . " In Re Bond l[above] Sweeney J at 288-89 stated: "It 1s argued for the petitioning creditor that this 1s not a matter where the court can be satisfied that a sequestration order ought not to have been made and that s 154 (1)(a) therefore does not apply Reliance was placed on Re Norris [1890] 7 Mor 8 at 10. In a case in which application was made under this section to annul a bankruptcy on the ground that the judgment on which proceedings were founded was not a real debt, Gibbs J said: 'In my opinion, the English decisions as to the power to rescind a receiving order (some of which are referred to 1n the judgments in Cameron v Cole [1944] 68 CIR 571 at 583-4, 600, 608 and 610) mst be applied with caution to the Australian statute, since the English section which corresponds to s 154 of the Bankruptcy Act 1966-69 (s 29 of the Bankruptcy Act 1914) although it gives power to annul an adjudication, does not give power to annul a receiving order. With the greatest respect to the view of Manning J, 1t seems to me that, where a sequestration order ought not ax to have been made, because the debtor was not indebted to the petitioning creditor, the proper way of getting rid of the sequestration order is by annullling it under s 154 Indeed, as Williams J pointed out in Cameron v Cole, the rescission of the sequestration order would not put an end to the bankruptcy (see s 43(2) of the Bankruptcy Act 1966- 1969)' (Re Deriu [1970] 16 FIR 420 at 422)." Similarly Burchett J in Re Anasis [1985-86] 63 ALR 493 at 499-500 stated: "Once a sequestration order has been made, s 43(2) provides that the debtor not only becomes a bankrupt but continues to be 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 FIR 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] 55 ALR 143; 58 ALUR 398 at 400 and 401-2) " This 1s not an easy case to fit clearly into those statements. On the one hand the applicants rely on events after the sequestration order was made. On the other hand they say that if the adjournment application had been granted, as they claim it should have been, all these later events would have happened before any sequestration order could have been made and would have prevented or made unnecessary a sequestration order. Further, the applicants rely on the probable non accrual of the Grivas debt as contradicting the petitioning creditor's right to a sequestration order. They also point to the withdrawal by Grivas of his opposition to the orders now sought, against his last minute notification on 17 November 1986 that he would oppose the adjournment, to support their case that the sequestration order ought not to have been made. I am doubtful of the efficaciousness to the applicants of rescission in the circumstances that exist here. In any event, it is my view that this case 1s one for annulment and not rescission. If this conclusion is wrong, I would rescind the sequestration order. 3. ANNULMENT The order sought by the applicants is annulment as provided in section 154(1)(a) of the Act. This provides: "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 not to have been accepted by the Registrar; the Court may make an order annulling the bankruptcy." The applicants say that I should take particular note of the fact that the petitioning creditor no longer opposes the orders sought and the fact that the applicants discovered only the day before the hearing of 18 November 1986 that the petitioning creditor would oppose an application for an adjournment. The applicants submit that bankruptcy would be a greater detriment than benefit to the creditors. Having regard to the facts and arguments earlier outlined, and on the basis of the explanations provided in the authorities to which reference has been made, it seems to me that the applicants have made out a case for the annulment of their bankruptcy. The objecting creditors argued that in considering whether a bankruptcy should be annulled on the ground that the sequestration order ought not to have been made, the Court must have regard to the facts in existence at the time the order was made: Re Scott [1975] 6 ALR 558; Re Calderon Riley J [unreported 31 May 1987]. However, on this question, the authorities seem to be conflicting. For example, in Re Kenneth Leslie Hatcher Ex Parte K.L. Hatcher [unreported 6 November 1987], Justice French followed Re Scott [abovel, as did Jackson J 1n Re Kenneth Johnson & Dianne Jobnson [unreported 5 February 1987]. Yet, in Re Bond [abovel, Sweeney J stated at 289: "In the judgment of Williams J referred to, his Honour referring to the predecessor to s 154 said: 'By s 124(1)(a) the court 1s given the fullest power to remedy any injustice that the debtor may have suffered through a sequestration order having been improperly obtained. It can annul the order whenever in the opinion of the court it ought not to have been made. It can decide, therefore, at a properly constituted hearing whether the order should have been made on the merits in the light not only of the evidence which was available at the date the sequestration order was made, but also of any evidence that has subsequently become available before the date of the application to annul' (Cameroh v Cole [1944] 68 CLR 571 at 608) Having considered the English Act as 1t then stood and these cases, I am of opinion that I should not follow the dicta in Re Norris. In my view annulment is = an appropriate procedure here. In the light of the evidence then available and of the evidence which has now become available, the sequestration order should not have been made and the proper way of getting rid of the order is by annulment under s 154." The issue here is whether the expression 'ought not to have been made' means: 5) 1. ought not to have been made on that date on the basis of the information then available; or 2. ought not to have been made if the facts associated with the creditor's petition had been known as the Court now knows them; or 3. ought not to have been made on the basis of the total knowledge of the debtors' affairs which the Court now has, including the current facts relating to the creditor's petition. Having regard to the untrammelled width of the statute, and the authorities, especially Re Bond [above)], I am of the opinion that the third of these alternatives represents the correct approach. But is 1t subject to any limitations or qualifications? The objecting creditors submitted that the reasons for the debtors' insolvency was irrelevant to a consideration of whether the sequestration order should have been made. However, the following two points were made by Gibbs J in Re Deriu [above] at 420-1 on what 1s required in a section 154 application: "Section 154(1) of the Bankruptcy Act 1966-1969 provides that where the court is satisfied (inter alia) that a sequestration order ought not to have been made, the Court may make an order annulling the bankruptcy Under this section there are two matters which the court has to consider, first, whether a sequestration order ought not to have been made, and then, 1f£ the Court 1s satisfied of that, whether in the exercise of the Court's discretion the order should be annulled (Re Williams [1968] 13 FIR 10 at 23)." In considering whether a sequestration order ought not to have been made, the court may go behind the judgment debt in order to ascertain whether in fact there is a real debt. In Simon v Vincent J. O'Gorman Pty Ltd [1979] 41 FLR 95 at 110, Lockhart J stated: "The Federal Court of Bankruptcy, and later this Court, has jurisdiction upon the hearing of a petition to go behind a judgment and inquire whether 1t was founded on a real debt: see Corney v Brien [1951] 84 CIR 343 and Wren v Mahony [1972] 126 CLR 212. The jurisdiction arises because s 52 (1) of the Act requires that, at the hearing of a creditor's petition, the court shall require proof, inter alia, of the fact that the debt or debts on which the petitioning creditor relies 1s or are still owing. Sir Garfield Barwick referred in Wren v Mahony (1972) 126 CLR 212 at 223 to: 'the dominant place the mandatory words of s 52 (1) occupy in relation to the making of a sequestration order and that the resolution of the question whether or not the proof of the petitioning creditor's debt is satisfactory does not concern only the immediate parties to the petition': {1972] 126 CIR at 223." Lockhart J at 111 adopted with approval the basis and rationale of this jurisdiction defined by Lord Esher in Re Hawkins; Ex parte Troup [1895] 1 QB 404 at 408-9: "We have said that the Court will go behind the judgment, and I think the cases shew that the Court will go behind a judgment by consent. I am also of the opinion that a judgment obtained by a compromise does not of itself stop the Court from going behind it We have tried to say that the Court will go into the whole transaction, because the question is not one of a dispute between the two parties; it is a matter which will affect, and materially affect, the rights of all the creditors who are not before the Court when it has to determine whether a rece1ving order should or should not be made, which will or may result in the debtor being made a bankrupt. The Court will go into the whole matter, and see whether upon the whole 1t 1s fair to the whole body of creditors that the man, on the particular transaction between himself and the petitioning creditor, should have a receiving order made against him. In the same way, when a creditor comes to prove in bankruptcy the Court will go behind the judgment, and inquire into the whole transaction which preceded it. To make a man a_ bankrupt is obviously a strong interference with the rights of the general body of his creditors. Each creditor is materially affected to the -27- extent that he cannot by his own diligence get the whole of his debt. From the moment of bankruptcy, though he be the most diligent of his creditors, he has to go into equal competition with the most idle " Lockhart J considered that "the circumstances in which the court will inquire into the validity of a judgment debt are not closed", but that the court will not inquire into the question as a matter of course. His Honour said that: "Circumstances tending to show fraud, collusion or Miscarriage of justice or that a compromise was not a fair and reasonable one are the most frequent examples of the exercise by the court of this jurisdiction . " In Cameron v Cole [above] at 587, Latham CJ adopted the statement in Re Flatau; Ex Parte Scotch Whisky Distillers Ltd [1888] 22 QBD 83 at 85: "'When an issue has been detemmined in any other court, if evidence is brought before the Court of Bankruptcy of circumstances tending to show that there has been fraud, or collusion, or miscarriage of justice, the Court of Bankruptcy has power to go behind the judgment and to inquire into the validity of the debt' .. The Court in so exercising its discretion does not (and cannot) set aside the judgment, but it declines to allow 1t to be relied upon in the* bankruptcy jurisdiction .. A creditor is not allowed in the bankruptcy jusrisdiction to rely upon a judgment dishonestly obtained. There is every reason for applying the same rule to a debtor in that jurisdiction." The applicants submitted, and I agree, that this principle should be applied here and that I should go behind the judgment on the ground of miscarriage of justice. They said, and I agree, that the debt of Grivas would only have been due and owing if the property had been redeveloped, when the partnership came to an end, or when refinancing occurred. As none of these happened, there was no debt. #6 The objecting creditors submitted that the sequestration order was properly made as the act of bankruptcy had been proven along with the debt owed by the petitioning creditor. They stated that the debt had become due on Mr Piccardi's default in paying interest and that the applicants themselves admitted owing the money. I reject these contentions. Having heard Grivas and the applicants in the witness box, I have come to the conclusion that Grivas' evidence about the debt is very dubious. I prefer and accept the evidence of Mr Piccardi. In my opinion, the sequestration order ought not to have been made. On the discretionary considerations, the objecting creditors submitted that annulment should be refused even if the Grivas debt was not due and owing. Their arguments were: (a) It is not in the general interest of the creditors: Re Williams (1968) 13 FLR 10 at 20-25, which held that if a substantial miscarriage of justice results from the acts of the bankrupts then an appeal should not be allowed. (b) Consideration must be given to the fact that one of their number (Dick and Dons Pty Ltd) had a petition served upon which a sequestration order could have been made and that therefore another act of bankruptcy had been proven: Re Finn [1982] 41 ALR 487 (c) There was an act of bankruptcy in the signing of the section 188 authority. (d) The applicants were clearly insolvent. (e) (£) Their status of bankruptcy would give the trustee the opportunity to investigate transactions with which the applicants had allegedly been involved within the six month relation back period (as provided by sections 120 and 121 of the Act). There is a need for public examination of the affairs of the applicants in view of the size of the debt involved. Having heard the applicants give oral evidence regarding their affairs during which they were hoth extensively cross examined, I believe that little would be gained by this exercise now to the benefit of the creditors or the public. It is difficult to imagine that the Newcastle business community would not know if the applicants, themselves or in collusion with others, had significant assets hidden away from their creditors. Reliance was also placed on the following matters put by way of submissions: The applicants did not have substantial reasons for failing to provide the Court on 18 November 1986 with reasons not to sequestrate. The only alternative available to the Court on the day of the sequestration order was to adjourn the matter to allow a Part xX meeting to be held. The Part X creditors' meeting had no force in law because of the signed and sealed sequestration order. This is apparently correct. 4. Weight should not be given to a _ creditors' meeting where the substantial creditors, e.g. ANZ Capital Markets Pty Ltd, Mr Hill, Mr Doyle, and Mr and Mrs Evans, voted because the applicants hope or expect that these creditors will not have to be repaid. The objecting creditors doubted whether Mr Hill could vote at all, and queried whether the information presented at the creditors' meeting was sufficient. 5. The transactions with Messrs Grivas, Hill and Evans should be investigated by a trustee be in the interests of all the creditors. 6. The deed of arrangement is contrary to the public interest because the applicants would have to borrow further funds, the proposal is too speculative, and the ultimate fate of the unsecured creditors is unknown. 7. There was not full disclosure in the statement of affairs. As arguments against annulment, I reject these submissions. In my view it would not only be in the interests of the creditors, which are Paramount, to grant an annulment but also in the interests of the public. Public interest was an important factor in considering an application under section 37 to rescind/vary or discharge an order pursuant to section 37 of the Act in Re Buckley & Another Ex Parte James Hardie & Co Pty Ltd [1976] 27 FIR 496. In Re Gordon McFarlane Moore-Smith Ex parte The Bankrupt [unreported, 3 November 1987], Pincus J held that in considering the granting of an early discharge, the Court could have regard of the interests of the - 31 - commercial community. Bearing 1n mind the fact that the total debt is so large and the fact that so many persons are directly or indirectly going to be affected by the applicants' fate, I think it is proper to have regard to commercial interests of the public in this case. In this case, they seem to me to be overwhelmingly supportive of annulment. There 1s ample evidence of the applicants' contribution to Newcastle and its community. Its commercial establishment will have the certainty of heavy losses if the applicants remain bankrupt but have a chance of significant recovery 1f the proposal is allowed to proceed. As with the creditors, the interests of the public and the commercial community will be served by annulment. The relevant provision regarding statements of affairs 1s found in section 195(2) of the Act. In essence, it requires that a debtor must give particulars, in respect of each asset and particulars of each liability whether secured or not. If secured, particulars of the security must be given. In Re Segal; Lensworth Finance Ltd v Segal [1975] 45 FLR 85 at 88, Riley J stated that it 1s essential that the information given should be full and correct. See also Chicagakis v Deputy Commissioner of Taxation [1981] 36 ALR 527 at 533-34; Beard v Prestige Baking Industries Pty Ltd [1981] 36 ALR 307 at 319, Fox J; Re Augustyn; ex parte Bernard Putnin the trustee of the Property of Augustyn v Michael Edward Augustyn Lee J [unreported, 8 July 19881. However, these cases also show that the Courts have always examined complaints of non disclosure to discover their circumstances, and put aside defects or omissions which were not material or intentional and which did not in fact mislead the trustee or creditors. Taking - 32 - into account the powerful testimonials to the applicants' character, the interests of the creditors and the public, and the facts attested to or documented in the evidence, the following matters appear to me to point to the appropriateness of annulling the bankruptcy: 1. The applicants developed an impressive reputation as hardworking people dedicated to the appealing development of Newcastle and 1ts environs. They were apparently truthful witnesses, who were fundamentally not the authors of their bankruptcy. They have enlisted substantial support from their creditors, especially those who know the applicants and the standard of work attained by the applicants. The proposal is framed so that, 1f successful, creditors will obtain more than they would obtain from the applicants remaining bankrupt. There are in my view grave doubts about the Grivas debt to the point where on the evidence before me, I would have had doubts about pronouncing the original judgment and would on _ the evidence here have set it aside. The circumstances of the applicants' insolvency were not brought about through lack of industry or recklessness but primarily through the attraction to them, and many others in the community at the time, of the seductively low interest rates of overseas loans. The principal cohorts of the applicants in these - 33 - activities are now commendably standing back from' the bankruptcy to permit the proposal to proceed. 7. The other factor related to the applicants' circumstances was the downturn in the Newcastle property market which was not easily predictable. 8. Whatever disclosures were not made by the applicants to one or other of the creditors' meetings, I am satisfied that nothing of substance was withheld. Further I do not believe that there was an intent on the part of the applicants to mislead or deceive either the trustee or the creditors. Nor have any creditors appeared here to claim that they were actually misled. 9. Perhaps most persuasively of all, the justice or injustice of the matter must take account of the fact that the overwhelming majority of creditors believe that their best interests lie in the Part X deed taking effect and the proposal proceeding. As it happens, I share this view with these creditors, but' the Court should be cautious in substituting its own judgment for that of the creditors who are involved and have significant financial interests at stake. I therefore make an order annulling the bankruptcy of the applicants. The objecting creditors are to pay the applicants' costs. 1 cortfy that this aed the diy two (32) preced ng ciges are a true copy of the Reesons 'cr Judgment herein of his Honour Mir, Justice Enfeld Laranne ogove Assceciate Dated: 2, August i967 Counsel and solicitors for the applicant Counsel and solicitors for Boral Johns Perry Industries Pty. Ltd. Counsel and solicitors for Dick and Dons Pty. Ltd. Consel and Solicitors for B.W. Modern Interiors Counsel and solicitors for Fire Fighting Sprinkler Co. Ltd. Solicitors for the respondent/petitioning creditor Mr. G.A. Moore instructed by Turnbull Hill Partners Mr. B.J. Skinner instructed by the Lobban McNally and Harney Mr. P. Brereton instructed by Trisley and Kilmurray Mr. P. Brereton Instructed by Wood Roberts and Rayfield Mr. P. Brereton instructed by J.F. Lamich and Co. Parker and Randall