CATCHWORDS BANKRUPTCY - power under s. 60 of the Bankruptcy Act to stay criminal process against the debtor in respect of the non-payment of a provable debt - condition of bond that compensation be paid - nature and purpose of Court's power - weight of discretion placed on bankruptcy and inability to pay - analysis of decisions - whether an exercise of the discretion would promote a "rogues' charter" - discussion of appropriate form of order. Bankruptcy Act 1966, s. 60 Storey v Lane (1981) 147 CLR 549 Tarea Management (North Shore) Pty Limited (In liquidation) v Glass (1991) 28 FCR 93 Re Lattouf (1994) 52 FCR 147 Re Sutherland-Cropper (1985) 11 FCR 156 Re Lenske; Ex parte Lenske (1986) 9 FCR 532 RE: THE BANKRUPT ESTATE OF ALLAN ANDREW KEOGH; EX PARTE: ALLAN ANDREW KEOGH v DIRECTOR OF PUBLIC PROSECUTIONS FOR THE STATE OF NEW SOUTH WALES NB 947 of 1992 Burchett J. Sydney 5 December 1995 IN THE FEDERAL COURT OF AUSTRALIA) GENERAL DIVISION ) BANKRUPTCY DISTRICT OF THE STATE ) NB 947 of 1992 OF NEW SOUTH WALES ) RE: THE BANKRUPT ESTATE OF ALLAN ANDREW KEOGH EX PARTE: ALLAN ANDREW KEOGH Applicant AND: DIRECTOR OF PUBLIC PROSECUTIONS FOR THE STATE OF NEW SOUTH WALES Respondent CORAM: Burchett J. PLACE: Sydney DATE : 5 December 1995 ORDER OF THE COURT THE COURT ORDERS THAT the Applicant bring in, on a date to be fixed, short minutes of orders appropriate to reflect the reasons of the Court. NOTE: Settlement and entry of Orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA) GENERAL DIVISION ) BANKRUPTCY DISTRICT OF THE STATE ) NB 947 of 1992 OF NEW SOUTH WALES ) RE: THE BANKRUPT ESTATE OF ALLAN ANDREW KEOGH EX PARTE: ALLAN ANDREW KEOGH Applicant AND: DIRECTOR OF PUBLIC PROSECUTIONS FOR THE STATE OF NEW SOUTH WALES Respondent CORAM: Burchett J. PLACE: Sydney DATE : 5 December 1995 REASONS FOR JUDGMENT BURCHETT J.: This is an application for a stay of certain proceedings in the criminal jurisdiction of the District Court of New South Wales, brought under s. 60(1) of the Bankruptcy Act 1966. That section relevantly provides: "60(1) The Court may, at any time after the presentation of a petition, upon such terms and conditions as it thinks fit: . . . (b) stay any legal process, whether civil or criminal and whether instituted before or after the commencement of this subsection, against the person or property of the debtor: (i) in respect of the non-payment of a provable debt or of a pecuniary penalty payable in consequence of the non-payment of a provable debt; or (ii)in consequence of his refusal or failure to comply with an order of a court, whether made in civil or criminal proceedings, for the payment of a provable debt; and, in a case where the debtor is imprisoned or otherwise held in custody in consequence of the non-payment of a provable debt or of a pecuniary penalty referred to in subparagraph (i) or in consequence of his refusal or failure to comply with an order referred to in subparagraph (ii), discharge the debtor out of custody." A sequestration order was made against the applicant upon a creditor's petition on 1 April 1992. He remains undischarged. It was plainly a bad bankruptcy. The statement of affairs disclosed unsecured creditors in a total exceeding $900,000 and no assets beyond $53.04, the balance in a current bank account. The debtor, upon whom a wife (also bankrupt) and two student daughters are dependent, has made no subsequent contribution to his estate; but it has not been suggested that his earnings would have permitted him to contribute. He has been paying for some time an amount of $100 per week in respect of certain taxation fines, from which the parties accept he can obtain no relief. That leaves him of the order of $300 per week net of tax from his earnings with which to support himself, his wife and his two daughters, one of whom is in her last year of school and the other, aged 20, is pursuing a course of study at a college of technical and further education. The applicant works as a tyre technician, and he does receive, for himself and his family, a house rent free as part of his remuneration. The address is lot 4, Bradley Street, Orchard Hills near Penrith. On 19 April 1982, the applicant had been found guilty upon two counts of obtaining money by false pretences. Sentence was deferred upon his entering into two bonds, each of three years, conditioned upon his paying compensation in a total amount of $13,644.10. The compensation was referable to moneys received upon cheques drawn by the applicant which were not met, and there is no dispute that, to the extent that the compensation has not been paid, it represents the sum of provable debts. A little over one half of the total has in fact been paid, leaving owing at the present time an amount of $6,200. This has not happened smoothly. On 15 May 1984, the applicant was called up to be dealt with on the basis that he was in breach of the condition, and two further bonds, each of three years, were entered into conditioned upon his paying the compensation. Between 1984 and 1990, he paid a total of $6,644.10. However, it may be inferred that subsequently his financial situation deteriorated, since it was on 17 July 1991 that the judgment, in the sum of $67,623.45, was entered against him upon which within nine months he became bankrupt. Shortly after his bankruptcy, on 27 July 1992, a judge of the District Court directed that the applicant not be called up for sentence, on condition that he pay compensation at the rate of $100 per month from 27 August 1992. Between then and 21 June 1993, he paid a further $300. On 30 May 1994, the applicant was again called up to be dealt with, being again in breach of the condition of his bonds. On this occasion he disclosed a tax debt of $100,000, but he did not mention his bankruptcy. I infer that he was unaware of the provisions of s. 60. Otherwise, there is no reason why he would not have made the present application at that stage, or even earlier. Saunders D.C.J. deferred sentence again, imposing a bond for a period of three years conditioned on the payment of compensation in the sum of $6,700 (the balance then owing) at the rate of $500 per month from 3 June 1994. On 21 June 1994, the applicant made a payment of $500, but has made no further payments in respect of this bond. He was called up to be dealt with by Saunders D.C.J. on 24 February 1995, but the proceedings were adjourned and this application ensued. Gummow J. initially, and I subsequently, granted relief on an interlocutory basis pending the determination of the application. Pursuant to those orders, the proceeding has been stayed up to the present, and the question is whether a permanent order should be made. A notice of intention to appear at the hearing of the application was filed on behalf of the Director of Public Prosecutions for the State of New South Wales, under rule 106 and in accordance with form 46, specifying the following ground of opposition to the application: "It is not appropriate that the Court exercise its discretion under s. 60(1)(b)(i) of the Bankruptcy Act 1966 as sought in the application dated 16 March 1995 herein." At the hearing, the learned Solicitor General for the State of New South Wales, Mr K. Mason Q.C., appeared and sought leave to amend by adding a further ground, as follows: "2. The Court does not have power under s 60(1)(b) of the Bankruptcy Act 1966 to make the order sought in the application dated 16 March 1995 herein." However it was conceded that this ground would fly in the face of the Full Court decision in Re Lattouf (1994) 52 FCR 147. See also the earlier Full Court decision in Tarea Management (North Shore) Pty Limited (In liquidation) v Glass (1991) 28 FCR 93 and the decision of the Full High Court in Storey v Lane (1981) 147 CLR 549. Had I granted the leave sought, a question might have arisen under s. 78B of the Judiciary Act 1903. I took the view, which I understood Mr Mason to accept, that he was protected by having sought leave, and I did not grant it. Although the sole ground raised before me was not concerned with the question of the power to grant relief, but only with its exercise, I must of course be satisfied that I have power before I can make an order. While Re Lattouf may have settled that issue for me, the nature of the power, and the purpose for which it has been granted to the Court, are matters going to the heart of the discretion conferred by the section. Accordingly, it is necessary to examine these matters before proceeding further. In its original form, s. 60 differed significantly from the provision with which I am concerned. Commissioner for Motor Transport v Train (1972) 127 CLR 396, a decision of the Full High Court, revealed severe limitations upon the scope of the section as enacted. Stephen J. put the matter (at 420) in terms that plainly invited enlargement by the Parliament of the scope of the section, when he said: "It follows that in my view persons serving terms of imprisonment for default in payment of road charges, and who may have already served terms of imprisonment for default in payment of pecuniary penalties imposed as a punishment for non-payment of those very charges, can nevertheless not be released from imprisonment under s. 60(1), despite the fact that bankruptcy has deprived them of the ability to pay and that it is that inability which may have led to their default in payment and, hence, to their imprisonment." This passage was referred to by Gibbs C.J. (with whom Mason, Wilson and Brennan JJ. agreed) in Storey v Lane (supra, at 554). The Chief Justice concluded that "parliament clearly intended, by the amendment to s. 60(1) in 1980, to give the courts of bankruptcy a wider power than had been vested in them by the sub-section in its original form". Storey v Lane concerned convictions under industrial legislation for failure to pay amounts of award wages and holiday pay, a court having imposed fines and made orders to pay the sums due, in default of which imprisonment was to be undergone for a total period of 12 months. Four months after these convictions, the convicted person filed a debtor's petition, and he was held entitled to relief under s. 60. It was suggested, during the argument before me, that in Storey v Lane their Honours looked only at the constitutional validity of the amended s. 60(1). It is true that this was the principal question debated. However, six judges of the High Court unanimously agreed upon an order that involved the exercise of the discretion conferred by the section. The very brevity of so much of the report as deals with the issue of discretion, as distinct from the validity of the power, seems to me to emphasize the conclusion of Pincus J., in a case to which I shall refer, who considered circumstances of the kind before the High Court would generally call for an exercise of the discretion. Of course, this is not to say that the features of a particular case may not point in the opposite direction. Gibbs C.J. summarized the provision as follows (at 556): "Stated shortly, the effect of the provision is to empower the court to relieve a debtor, against whom a petition has been presented, from process (civil or criminal) instituted against him because of his failure to pay a provable debt. The objects of the paragraph are to ensure that if a sequestration order is (or has been) made against the estate of the debtor his assets will be available for administration in the interest of his creditors generally, to prevent one creditor, who has the right to enforce payment of his debt under some other law, from exercising that right so as to gain an advantage over other creditors, and to protect the debtor from punishment because he has not paid the debt when payment might be a breach of the bankruptcy law. ... A provision such as s. 97(5) of the Industrial Act [Industrial Conciliation and Arbitration Act, 1961-1976 (Q.)], under which a debtor can be ordered to pay a debt and imprisoned if he failed to do so, would tend to defeat the policy of the Bankruptcy Act; if the debtor complied with the order, the result would be likely to impede the due administration of the estate; if the debtor failed to comply with the order, it would be unjust to commit him to prison if his failure was due to the fact that a bankruptcy petition had been presented against him or he had been made bankrupt. An essential feature of any modern system of bankruptcy law is that provision is made for the appropriation of the assets of the debtor and their equitable distribution amongst his creditors, and for the discharge of the debtor from future liability for his existing debts." The Chief Justice went on to cite the statement of James L.J. in Ex parte Walton; In re Levy (1881) 17 Ch D 746 at 756: "Now, the bankruptcy law is a special law, having for its object the distribution of an insolvent's assets equitably amongst his creditors and persons to whom he is under liability, and, upon this cessio bonorum, to release him under certain conditions from future liability in respect of his debts and obligations." It is interesting to follow up James L.J's mention of cessio bonorum. This was one of the procedures in the nature of bankruptcy available under Roman law. According to a note in The Institutes of Justinian, 5th ed (1912) by J.B. Moyle at 390, by this procedure, which may have dated back to Julius Caesar, debtors "escaped liability to arrest and imprisonment", which Roman law still visited upon some bankrupts. Imprisonment for debt has a long history, but it was recognized very early that if a debtor yielded up all his property to his creditors imprisonment might be more harsh than just. Section 60 applies this broad principle to the complexities of the modern law, by which a debtor is faced, not only with obligations directly imposed by orders of civil and criminal courts, but also, for example, with those imposed indirectly by the conditions of bonds. There is no reason why the principle should not apply equally in each of these situations. Accordingly, as Gibbs C.J. said (at 557), "the provisions of s. 60(1)(b) are designed to assist in ensuring that the assets of the insolvent debtor are distributed in the interests of creditors generally, to prevent one creditor obtaining an undue advantage over the others, and to prevent the scheme of the Bankruptcy Act from being defeated." Against the background of the bankruptcy law, and the place in it which he ascribed to s. 60(1), Gibbs C.J. came (at 558) to the exercise of the discretion he held to have been validly conferred on the court. He said: "Of course, under s. 60(1)(b) the court has a discretion to exercise, but it seems to me clear that in the circumstances of the present case, where the applicant is bankrupt, and unable to comply with the orders made by the industrial magistrate, the Court should exercise the power under s. 60(1)(b) and discharge him out of the custody in which he has been placed as a result of the orders made on his conviction ... ." It will be observed that this way of stating the matter puts the weight of the discretion on the bankruptcy and the inability to pay. It does not require some further positive basis for the making of an order, though undoubtedly factors tending to negate the justice of an order (if present) would have to be taken into account. The fact that the obligation arose from the commission of a criminal offence was not treated by Gibbs C.J. as such a factor. A further point was made by Aickin J. (at 563), when he said of the bankrupt: "It is obvious enough that his imprisonment deprives him of any opportunity of engaging in employment or any other permissible means of earning money to go towards the payment of his provable debts, whether those for the non-payment of which he was imprisoned, or others." He concluded (at 564): "I agree that in the circumstances the only proper order would be to discharge the applicant from custody." Less than four years later, an application under the provision came before Beaumont J. in Re Sutherland-Cropper (1985) 11 FCR 156. Unlike Storey v Lane, but like the present case, Re Sutherland-Cropper involved, not an order to pay compensation, but a recognizance conditioned upon payment of compensation. Also like the present case, the compensation was required to meet the amount of a dishonoured cheque out of which the offence had arisen. Beaumont J. drew attention to the terms of the explanatory memorandum that had accompanied the Bill by which s. 60 was amended. That explanatory memorandum nominated as purposes of the amendment, amongst others, a purpose "to overcome the use of criminal procedures to collect provable debts when bankruptcy proceedings have intervened" and a purpose "to ensure that bankrupts are not held in custody for the non-payment of debts provable in bankruptcy". His Honour held (at 161) that the criminal proceeding for breach of recognizance "does have a sufficient nexus with the non-payment of the debt ... to justify its description as a process against the person of the debtor `in respect of' the non-payment of the debt" within the meaning of s. 60(1)(b)(i). He added: "Such an interpretation would be consistent with the object of the amendment to s. 60(1) envisaged by the explanatory memorandum accompanying the Bill, that is to say, that a bankrupt should not be exposed to liability in any respect under the criminal law by reason of his failure to pay a debt which is provable in his estate." He rejected an argument, similar to one put to me in the present case, to the effect that relief should be withheld because it would interfere with the State court's sentencing process, saying (at 162): "(T)he stated objective of s 60(1) is to interfere in and even to frustrate the ordinary criminal process in the circumstances there stated. That legislative policy can only be given effect to in a case such as the present by granting the stay sought." In the next year, Pincus J. took the same view. The case was Re Lenske; Ex parte Lenske (1986) 9 FCR 532. That involved an order for restitution in respect of stealing offences. Pincus J. said (at 535), with reference to Storey v Lane: "(I)t was not the character of the offence, namely, one of failing to pay a debt, which the High Court referred to as warranting a favourable exercise of discretion. The Court said only that the applicant there was `bankrupt and unable to comply with the orders made by the industrial magistrate'. Here also the applicant is bankrupt and, because he has no money and is living on the dole, in addition to a small income from casual work, it would not be feasible for him to pay the sums ordered. I think there is substance in the contention on behalf of the applicant that the views expressed in Storey v Lane practically compel an exercise of the discretion in his favour. If that be not correct, however, apart from Storey v Lane the discretion should, in my view, be exercised in favour of the applicant. ... The central point to be considered, in my view, is that the offences in question, although no doubt serious enough, were not inherently of great heinousness; the sentencing court did not believe that a custodial sentence was warranted. While different considerations may apply where the compensation or restitution is ordered by reason of some truly vicious crime, it seems to me that, in an ordinary case such as this, prima facie the discretion should be exercised in favour of the applicant. I can see that it is a difficulty that ... the sentencing court may well have imposed a heavier sentence if no order for restitution, with its accompanying penalty in default, had been imposed. However, that will very often be so in cases of this sort and cannot, I think, justify the dismissal of the application." Much of this seems to me to be clearly applicable to the present case. It is plain that, on successive occasions, District Court judges have not considered imprisonment to be appropriate for the applicant. Most importantly, the judge who originally dealt with the indictment decided that it was a case in which the appropriate course was to require the applicant to enter into a bond in respect of each offence. Although, of course, any sentence imposed now would not be for breach of the condition of the bond, but for the earlier offences revived by its breach (R v E H Champion (1992) 64 A Crim R 244 at 248 et seq.; R v Kerr (unreported, NSW CCA, Kirby P., Badgery-Parker J. and Loveday A.J., 12 November 1993)), yet, in substance, what has set in motion the process which may lead to imprisonment, unless I make an order, is nothing other than the non-payment in full of a provable debt. Furthermore, it should be added that more than half of the original debt has been paid, and the applicant has been at liberty for well over ten years. This underlines the fact that what would produce any sentence would be his failure to continue payments in respect of the debt which, being bankrupt, he cannot pay because he has no money. I was also referred to another judgment of Beaumont J., Glass v Tarea Management (North Shore) Pty Ltd (In liquidation) (1990) 25 FCR 242, where his Honour followed his own earlier decision in Sutherland-Cropper. The later decision was taken on appeal as Tarea Management (North Shore) Pty Limited (In liquidation) v Glass (supra). Hill J. (with whom Lockhart and Einfeld JJ. agreed) said (at 96-97): "It is at the heart of modern bankruptcy law that, upon a person becoming a bankrupt, the remedies against that person and his property by creditors are taken away and there is substituted a right to prove against the estate which vests in the bankrupt's trustee." Like Beaumont J., he referred (at 97) to the explanatory memorandum which accompanied the amendments to s. 60. It was made clear by his Honour (at 101-102) that the exercise of Beaumont J's discretion was questioned upon the appeal, and alleged misconduct of the bankrupt was raised. But the Full Court dismissed that aspect of the matter without extended discussion. The basis on which it did so appears to me to be most clearly indicated by a passage at 101, as follows: "(T)he continued enforcement of [the order in the criminal proceedings] would tend to defeat the policy of the Act. To permit the appellant to recover the amount ordered ... would effectively satisfy the appellant's general law claim which was provable in the bankruptcy. To the extent that there was property that should have been divisible among creditors in the bankruptcy, that would advantage the appellant against the general body of creditors and the policy of rateable distribution of assets in bankruptcy, which is such an important aspect of bankruptcy law, would be frustrated." It is true that, in the present case, there do not appear to be any assets from which the general creditors may be satisfied, so far as is known at this stage of the administration. However, as Hill J. also pointed out in Tarea Management (at 99), the law of bankruptcy envisages the possibility, even after discharge, that further assets may be uncovered and future dividends may be declared. I do not think the principle upon which s. 60 depends is limited to cases where significant assets can be shown to be involved. That is certainly not how the explanatory memorandum is expressed, nor how Beaumont J. and Pincus J. saw the question. The purposes of bankruptcy may be served in a case where the assets are very small, as well as in a case where they are substantial, and those purposes include the interest of the bankrupt himself, and of the public, in the securing of a release from provable debts through the bankruptcy law. However, the learned Solicitor General placed heavy reliance on some remarks made at the conclusion of the judgment of a full court in Re Lattouf (supra). That case was concerned with the correctness of the decision of Beaumont J. in Re Sutherland-Cropper, which it affirmed. No question arose for the Full Court as to the exercise of the discretion, and Tarea Management v Glass was not cited. Nevertheless, in an obiter dictum which carries the weight of a full court, it was said (at 153): "It is important to emphasise that s 60(1)(b) confers a discretion on the Court. It ought not be thought that this power must be exercised in favour of a bankrupt in every case. To take that view would be to risk turning the paragraph into a `rogue's charter' whereby unmeritorious bankrupts could avoid the usual incidents of the criminal law. The exercise of the discretion must be carefully considered in each case." I do not think this dictum can bear the weight the learned Solicitor General seeks to place upon it. Section 60 assumes that the discretion it confers will be exercisable in favour of rogues, in so far as some of its provisions are predicated unqualifiedly upon criminal proceedings. A number of the cases to which I have referred involved conduct that cannot be condoned. No case has criticized the broad terms in which the Full High Court dealt with the exercise of discretion in Storey v Lane, nor have the decisions of Beaumont J. and Pincus J. received any adverse comment. The Full Court in Tarea Management says nothing to discourage the exercise of the discretion in circumstances such as those appearing in the reported cases. I think the reference to a "rogue's charter" in Re Lattouf is a reference to a case raising some special feature, such as the "heinousness" to which Pincus J. referred, or a case where a debtor might be shown to have inveigled a criminal court into granting a bond upon representations made without any intention of honouring them and, perhaps, in circumstances of gross deception of the court. In the present case, I think it is probable that the applicant did intend in the first place to perform his obligations, at least in significant measure. That is evidenced by the degree of performance which in fact occurred. On the occasion of the last bond, he was probably in a desperate state, and I think he intended to do whatever he could. He had three dependents. Although he was bankrupt, he was providing a roof over their heads, and keeping them. Even at that stage, he did make one further payment of $500. I accept that he was unaware of the terms of s. 60; no doubt if he had been aware of the terms of the section this application would have been made much earlier. In my opinion, the case is precisely the sort of case which the High Court had in mind in Storey v Lane. I also accept that the law should be understood in the sense explained both by Beaumont J. and by Pincus J. Accordingly, I am prepared to make an order in favour of the applicant. If, contrary to my view, the position might be different in a case where it was out of the question that the bankrupt would ever contribute to his estate, I would nevertheless not be prepared to see this as such a case. Although the applicant is not presently earning a sufficient amount to require him to contribute to his estate, he has two dependents whose ages suggest they may at any time cease to be dependent upon him. I do not know by how much the provision of his house raises his income towards the threshold, but it probably represents a significant amount. In my opinion, there is a real prospect that the applicant will at some stage be required to contribute to his estate under the provisions of the Bankruptcy Act. In the event I should reach this conclusion, the learned Solicitor General submitted that I should consider a limited form of order, leaving it open, for example, to the District Court to impose some form of community service, while staying the making of any order of actual imprisonment. It was suggested that this would leave the bankrupt able to continue to earn and would be consistent with the purposes of the Bankruptcy Act. I think the argument misconceives those purposes. According to the law as expounded in the authorities to which I have referred, in a case calling for the exercise of the court's discretion under s. 60, enforcement of recovery of the provable debt by some means short of actual imprisonment remains, as does punishment incurred in practical reality, if not theory, by the bankrupt's inability to pay the provable debt, fundamentally inconsistent with the bankruptcy law enacted by the Commonwealth. I do not think that law intends even a partial enforcement of the relevant obligation, in such a case, against a bankrupt whose estate is being administered for the benefit of his creditors under the Act. It was conceded that an order limited in the way contended for has never been made. As far back as the time of Justinian, it was recognized that there should be some limits upon the extent to which the law sought to keep on taking everything from a man who was bankrupt: "(F)or it would be inhuman to condemn a man to pay his debts in full who has already been once deprived of all his means": The Institutes of Justinian Translated into English, J.B. Moyle, 5th ed (1913) Book IV, Title VI. In my opinion, the appropriate form of order is that adopted by Beaumont J. in Re Sutherland-Cropper. The order that I make at this stage is to direct the applicant to bring in short minutes of orders in accordance with these reasons. I certify that this and the preceding seventeen (17) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Burchett. Associate: Date: 5 December 1995 Counsel for the Applicant: Mr P.M. Paish Solicitors for the Applicant: Reimer Winter Counsel for the Respondent: Mr K. Mason Q.C. (Solicitor General) Solicitor for the Respondent: Crown Solicitor Date of hearing: 11 April 1995