CATCHWORDS BANKRUPTCY - amendment of creditor's petition after sequestration order made - consideration of value of securities - inadvertence of solicitor in failing to include securities in creditor's petition - secured creditor presented as an unsecured creditor. Bankruptcy Act 1966 ss 44, 44(1), 44(2), 47(1)(a), 44(5) Re O'Leary; ex parte Bayne (1985) 61 ALR 674, 678 Foll Re Wiggins; ex parte Credit Assistance Pty Ltd (1979) 36 FLR 182 Cons Re Florance; ex parte Turimetta Properties Pty Ltd (No 2) (1980) 39 FLR 400 Refd Re Finn; ex parte Amoco Australia Ltd and Official Receiver in Bankruptcy (1982) 41 ALR 487 Refd In Re a Debtor; ex parte Okill v The Debtor [1977] 1 WLR 1308 Refd Re Kwiatek; ex parte Big J Ltd v Pattison (1989) 21 FCR 374 Cons In Re a Debtor [1922] 2 KB 109 Refd In Re Lewis; ex parte Stephens (1917) VLR 164 Refd Re: Desmond Gerard Nolan ex parte Westpac Banking Corporation No QB 2125 of 1996 Kiefel J Brisbane 4 October 1996 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND No QB 2125 of 1996 RE: DESMOND GERARD NOLAN Debtor EX PARTE: WESTPAC BANKING CORPORATION Applicant JUDGE MAKING ORDER: Kiefel J DATE OF ORDER: 4 October 1996 WHERE MADE: Brisbane MINUTES OF ORDERS THE COURT ORDERS THAT: 1. The creditor's petition number 128 of 1996 filed on 22 February 1996 and amended on 29 May 1996 be further amended in terms of Exhibit GDS-8 to the affidavit of G D Sheahan filed 19 September 1996. 2. Re-service of the further amended petition be dispensed with. 3. The request by the Trustee pursuant to s 44(5) Bankruptcy Act 1966 dated 17 September 1996 be set aside. 4. The applicant Westpac Banking Corporation pay the Trustee's costs of and incidental to the giving of that notice and of this hearing to be taxed on a solicitor and client basis. Note: Settlement and Entry of Orders is dealt with in Rule 124 of the Bankruptcy Act. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND No QB 2125 of 1996 RE: DESMOND GERARD NOLAN Debtor EX PARTE: WESTPAC BANKING CORPORATION Applicant CORAM: Kiefel J DATE: 4 October 1996 PLACE: Brisbane REASONS FOR JUDGMENT On 27 June 1996 the Estate of the debtor was sequestrated on the petition of Westpac Banking Corporation ("the Bank"). In its amended form, at the date that order was made, it provided in paragraphs 2 and 3 as follows: "2. The debtor is justly and truly indebted to the petitioning creditor in the sum of NINE HUNDRED AND EIGHTY TWO THOUSAND AND THIRTY SIX DOLLARS AND NINETY ONE CENTS ($982,036.91), in consideration for advances made by Westpac Banking Corporation to Blacktree Pty Ltd as Trustee for the Blacktree Unit Trust; Bremer Investments Pty Ltd; and Brixwood Pty Ltd as Trustee for the Wintergarden Tavern Trust, for which the said DESMOND GERARD NOLAN is liable under:- (a) a personal guarantee given by DESMOND GERARD NOLAN in favour of Westpac Banking Corporation, dated 6 February 1995; (b) a personal guarantee given by DESMOND GERARD NOLAN in favour of Westpac Banking Corporation, dated 15 March 1995; and (c) the personal covenants contained in Bills of Mortgage Registered No's 700525297, 700525259, 700525308, 700345394 and Equitable Mortgage dated 3 March 1995. 3. The petitioning creditor does not nor does any person on the petitioning creditor's behalf, hold any security over the property of the debtor or any part of it for the payment of the amount specified in the last preceding paragraph." The figure relied upon as the debt to found the petition in paragraph 2 was reduced, by amendment, following the sale of a property at a figure higher than was earlier contemplated. Indeed what the sum of $982,036.91 in fact represented was the amount which it was estimated would remain owing to the Bank after realisation of the securities. The amount owed under the debtor's personal guarantees was much greater. Section 44(1) Bankruptcy Act 1966 provides that a creditor's petition shall not be presented against a debtor unless there is a debt owing of $1500. The following sub-sections provide: "(2) Subject to sub-section (3), a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him exceeds the value of his security. (3) A secured creditor may present, or join in presenting, a creditor's petition as if he were an unsecured creditor if he includes in the petition a statement that he is willing to surrender his security for the benefit of creditors generally in the event of a sequestration order being made against the debtor. (4) Where a petitioning creditor is a secured creditor, he shall set out in the petition particulars of his security. (5) Where a secured creditor has presented, or joined in presenting, a creditor's petition as if he were an unsecured creditor, he shall, upon request in writing by the Trustee within the prescribed time after the making of a sequestration order, surrender his security to the Trustee for the benefit of the creditors generally. (6) A secured creditor to whom sub-section (5) applies who fails to surrender his security when requested to do so by the Trustee in accordance with that sub-section is guilty of contempt of court." What was not done in this case, to bring the Bank within s 44(2), was to set out the amount of the balance which would remain unsecured by reason of the value which the creditor estimated the security to have and to provide details of that. The giving of this information is provided for in Form 5, which is the form of petition required by virtue of s 47(1)(a) and Rule 12. The second of the three alternative paragraphs 3 is: "3. I hold security over the property (or part of the property) of the debtor, being (here specify particulars of the security), but the security is valued at $ , leaving an unsecured balance owing to me of $ ." The other two, alternative, forms provide, firstly, that neither the petitioning creditor nor anyone on that person's behalf holds any security and, lastly, that security is held, but the creditor is willing to surrender it. The Trustee has, pursuant to s 44(5), requested the surrender of all securities held by the bank on the basis that it has presented a petition as an unsecured creditor. In consequence orders are now sought by the Bank to amend the petition and it is accepted by the Trustee that such an order would result in his request being set aside. This course is opposed by the debtor and some creditors who appeared on the application. The purpose of s 44 is, as the title suggests, to provide the conditions on which a creditor may petition. Indeed that is its only purpose: see Re O'Leary; ex parte Bayne (1985) 61 ALR 674, 678. With respect to the position of a secured creditor, that person may not petition unless any security held is surrendered or it is shown that the realisation of the security will not yield sufficient to enable payment in full: O'Leary 678-9, Sheppard J there applying, in this respect Re Wiggins, ex parte Credit Assistance Pty Ltd (1979) 36 FLR 182, 184. In that case Lockhart J rejected an argument, for the debtor, that sub-sections (2) and (3) of s 44 were cumulative (p 184). To so hold would, in his Honour's view, more severely restrict the operation of s 44 than had been the case with respect to its earlier counterpart. There is also power to amend after an order of sequestration has been made: Re Florance; ex parte Turimetta Properties Pty Ltd (No 2) (1980) 39 FLR 400, 402; Re Finn; ex parte Amoco Australia Ltd and Official Receiver in Bankruptcy (1982) 41 ALR 487, 492-3. Indeed I did not really understand Mr Varley, Counsel for the debtor, to contend to the contrary of these decisions. His principal submission was that there was not sufficient reason shown to warrant amendment. I am satisfied that, as the solicitor responsible has sworn, the omission to detail the securities and to estimate their value so as to make apparent that the debt upon which the petition was founded is that which is said to remain owing, was due to inadvertence and that the petitioning creditor did not pretend to be an unsecured creditor. Indeed some support for this can be gained by the disclosure, in the description of the debtor's liability, of the registered and unregistered bills of mortgage which one might think were held by the Bank. It was however submitted that inadvertence is not alone sufficient to warrant leave to amend, and reliance was placed upon statements to that effect by Fitzgerald J in Re Finn (495). So much may be accepted. It will in each case be necessary to look to any practical effects and in particular whether any prejudice is now suffered by reason of others having acted upon the basis of what was contained in the petition. A finding of inadvertence serves however to distinguish a case such as this from those where what has been inserted in the petition, to obtain an order for sequestration, was appreciated: see for example, In Re A Debtor; ex parte Okill v The Debtor [1977] 1 WLR 1308. This appears to be one of the factors which influenced Northrop J in Re Kwiatek; ex parte Big J Ltd v Pattison (1989) 21 FCR 374. Other factors appear to be that the securities were still not estimated and that the material before his Honour in support of the application was in a state of disorder. In cases where one could infer a decision had been made to omit the necessary material it would be most unusual to permit an amendment. It was also pointed out in submissions that many of the cases involving inadvertence also related to securities which were of no value: see, for example, In Re a Debtor [1922] 2 KB 109 and In Re Lewis, ex parte Stephens (1917) VLR 164. Those cases do not however establish a lack of importance of the security as a requirement, although it is easy enough to understand that that factor could in some cases account for the inadvertence. Neither the debtor nor any creditor here can point to any disadvantage created by the omission in the petition save by the creation of the expectation of some payment. That seems to me to be an insubstantial basis for declining an order to amend which would have the very harsh result that securities would be denied to a party who had taken them for consideration and where its error, in the form of the petition, has not itself created any ostensible disadvantage to any other person. It was at no point suggested that the solicitor for the Bank did in fact appreciate the error which had been made. However it was sought to achieve the result that the securities be forfeited by deeming him and the Bank to have known. What was, with respect, not apparent to me was what basis existed for creating such a liability. Additionally it seems to me that there is some reason to doubt that the creditors had no understanding of the true position. I was referred to the debtor's statement of affairs which was amongst the documents forwarded to his creditors for the purpose of the meeting convened on 31 January 1996 to discuss a proposal by him. It was the calling of that meeting which provided the act of bankruptcy relied upon by the petitioning creditor. In that document particulars of the securities held by the Bank were given, and the extent of the debt owed to the Bank, over $2M, was stated. Whilst the shortfall there referred to, at $894,024 does not tally with the debt referred to in paragraph 2 of the petition, by reason of the estimates of the security made by the debtor or those acting for him, it conveys in general terms to those who may have perused it a reasonably accurate position. A finding as to the state of knowledge of the creditors is however unnecessary for two reasons. It is not essential to my reasoning that an order of amendment is warranted and, in any event, no person has asserted they have acted on the basis of some other belief. That leaves the position of the Trustee, who of course has incurred costs associated with the giving of the notice, in addition to those relating to this application. This position can however be remedied by an order of costs extending to one as between solicitor and client. With respect to the costs of the debtor it was submitted that no order ought be made requiring the Bank to pay them because the debtor had no interest in the matter. It was certainly not apparent to me why the debtor took the position it did. So far as the other creditors are concerned, they simply adopted the submissions made by Counsel for the debtor and did not add to them. On that account I would not be inclined to make an order for them. To that observation may be added the submission of Mr Sheahan for the applicant, which I accept, that the position adopted by the creditors, at a late stage, was to join with the debtor in the pursuit in an unmeritorious challenge in the hope that they might reap the benefits of the properties which might become available. The risk associated with that is that they might have to bear the costs associated with any unsuccessful opposition. In these circumstances apart from the order relating to the Trustee I do not propose to make any orders for costs. The applicant also submitted that amendment might not be necessary were I to view the matter as one of formal defect only. I am unable to view it in that way. And it seems to me there are practical considerations which suggest that amendment ought be effected. So far as the form of order with respect to amendment is concerned the applicant seeks an order for leave to amend in terms of Exhibit GDS-8 to the affidavit of Mr Sheahan, solicitor. The value of the security is there said to be some $672,000. It was pointed out in conclusion of argument that this might be incorrect, depending upon the extent of the debtor's interest in the property. I do not think this is the occasion to determine the correctness of the Bank's view. In any event the practical result, if it is wrong, would be that the Bank might prove for a higher figure in the bankruptcy. It is not held to its estimate when it comes to prove: see per Sheppard J in O'Leary 679. I certify that this and the preceding seven pages are a true copy of the reasons for judgment herein of the Honourable Justice Kiefel. Associate Date: 4 October 1996 Counsel for the applicant: Mr J D Sheahan Solicitors for the applicant: Allen, Allen & Hennsley Solicitors for the Trustee: Gadens Ridgeway Counsel for the debtor and creditors: Mr K B Varley Solicitors for the debtor and creditors: Gilshenan & Luton Solicitors for the Commonwealth Funds Management: Dunhill Madden Butler Solicitors for Memo Corporation Australia Pty Ltd: Ebsworth & Ebsworth Date of Hearing: 30 September 1996 Place of Hearing: Brisbane Place of Judgment: Brisbane Date of Judgment: 4 October 1996