FEDERAL COURT OF AUSTRALIA BANKRUPTCY - application to set aside bankruptcy - allegation by bankrupt of negligent failure of his legal representation to appear at hearing of creditor's petition - sequestration order made ex-parte - nature of jurisdiction under s 153 Bankruptcy Act 1966 - must be real question to be tried as to whether, in substance, the sequestration order ought not to have been made Bankruptcy Act 1966 (Cth), s 153B Re Anasis; Ex Parte Total Australia Ltd (1985) 63 ALR 493, referred Taylor v Taylor (1979) 143 CLR 1, applied MUSTAFA HANNOUF v ROGER HEDWAN NG 7863 oF 1997 MADGWICK J SYDNEY 13 FEBRUARY 1998 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 7863 of 1997 BETWEEN: MUSTAFA HANNOUF Applicant AND: ROGER HEDWAN Respondent JUDGE(S): MADGWICK J DATE OF ORDER: 13 FEBRUARY 1998 WHERE MADE: SYDNEY MINUTES OF ORDER THE COURT ORDERS THAT: 1. The application to annul the bankruptcy and set aside the sequestration order be dismissed. 2. The bankrupt is to pay the costs of the petitioning creditor including the reserved costs. 3. The trustee's costs (including reserved costs) are to be paid as an expense of the estate. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 7863 of 1997 BETWEEN: MUSTAFA HANNOUF Applicant AND: ROGER HEDWAN Respondent JUDGE(S): MADGWICK J DATE: 13 FEBRUARY 1998 PLACE: SYDNEY EX-TEMPORE REASONS FOR JUDGMENT (revised from transcript) HIS HONOUR: This is an application under section 153B of the Bankruptcy Act 1966 (Cth) by the bankrupt to annul his bankruptcy and to set aside the sequestration order made against him on 27 June 1997. The application was made on 28 July 1997 and is said to have been made on the grounds set out in an affidavit dated 25 July 1997 and filed in proceedings in the New South Wales Supreme Court. Difficulties with lawyers: version 1 In that affidavit the applicant bankrupt, Mr Hannouf, indicated that in or about June 1996 he had instructed solicitors known as Ayoubi & Associates (then trading as Leslie Abboud, Solicitors) to defend the summons filed against him in the Equity Division of the Supreme Court. Mr Hannouf claimed that on or about 9 July 1997 he had received a letter from the Insolvency & Trustee Service Australia telling him that the sequestration order had been made against him on 27 June. He said he proceeded to the offices of Ayoubi & Associates and asked Mr Ayoubi what was going on. The latter replied that he had briefed a barrister to appear on Mr Hannouf's behalf to set aside the judgment obtained in the Supreme Court proceedings and also to appear in the bankruptcy proceedings. Mr Hannouf asserted indignantly that he was unaware that judgment had been obtained against him and that he was about to be made bankrupt. Mr Hannouf said Mr Ayoubi told him that everything would be "fixed up" by the barrister. Mr Ayoubi then handed him a copy of the brief which Mr Ayoubi said he had given to the barrister. Mr Hannouf's affidavit annexed a copy of the brief to appear, addressed to a well-known member of the Bar. The observations to counsel were about 15 lines long. They indicated that counsel was briefed with the summons and supporting affidavit against Mr Hannouf in the Supreme Court, and with a further affidavit of Mr Hedwan, the plaintiff in those proceedings and the petitioning creditor. Mr Ayoubi told the barrister that judgment had been entered against Mr Hannouf on 4 March 1997, but that that had not been brought to his (Mr Ayoubi's) attention until Mr Hannouf had brought in the bankruptcy notice and creditor's petition. Counsel was asked to draft the necessary documentation to have the judgment set aside and to attend the bankruptcy hearing on 27 June in order to adjourn the proceedings so that the judgment might be set aside. Counsel was asked to contact Mr Ayoubi on receipt of the brief. There is no indication of when, if ever, these documents may have been delivered to the barrister concerned. It is to be noted that, in that affidavit, aimed at persuading the Supreme Court to set aside the judgment, there was no suggestion that Mr Hannouf had any difficulty in comprehending written English; indeed, the inferences from the affidavit are that he understood perfectly well and with alarm what the letter from the Insolvency and Trustee Service was saying to him, and that he accordingly repaired in a hurry to his solicitor. Version 2 When the matter came before me, a further affidavit was filed in Court on Mr Hannouf's behalf in which he said he could not read or write English. He sought leave to refer to the affidavit which I have mentioned, and to an earlier affidavit which he had sworn on 11 July 1996 in the Supreme Court proceedings. He said in this third affidavit that, when he was served with a bankruptcy notice in March 1997, he immediately took it to his solicitor's office, and when he was served with the creditor's petition in June 1997 he immediately took it to his solicitor's office. He was then told that "you have nothing to worry about, I have a barrister that will win the case for you". He said, for the first time, that when he took the bankruptcy notice and the creditor's petition to the solicitor, he did not understand what they meant and his solicitor did not explain the documents to him. I interpolate that, in light of the history of the matter, including that Mr Hannouf had entered into partnership with Mr Hedwan to run a service station business, it is very unlikely that Mr Hannouf would not have understood the bankruptcy notice and the creditor's petition, in a broad way, when he took them to see his solicitor. His son had an association with his father in the business and there is nothing to suggest that Mr Hannouf's son had any difficulty understanding English. In the third affidavit Mr Hannouf also stated that he was unaware that any orders had been made against him in the Supreme Court or in this Court until about 9 July 1997. However, that cannot be right because, on his own evidence, his solicitor had briefed counsel before 27 June 1997 to have the judgment set aside. Mr Hannouf continued that, until about 9 July, he was under the impression that his solicitor was acting under his instructions vigorously to defend the bankruptcy proceedings and to do what was necessary to set aside the orders made in the Supreme Court proceedings. He said that on many occasions he would ask his solicitor how matters were progressing and on those occasions the solicitor would tell him that everything was all right and there had been an adjournment. The real issues between Messrs Hedwan and Hannouf The earliest affidavit sworn by Mr Hannouf and before me was dated 11 July 1996. It had been filed in the Supreme Court of New South Wales by way of setting out his defence to the proceedings in the Equity Division. As I understand it, those proceedings sought an account of profits to be taken in relation to the dissolution of the partnership. Mr Hannouf said that it had been agreed that he and Mr Hedwan would purchase the service station business for $35,000 plus $14,000 stock in trade, and that a further $11,000 would be invested for working capital, making a total of $60,000. Mr Hannouf's case was that Mr Hedwan would pay the full amount of $60,000 and that Mr Hannouf would repay the sum of $30,000 upon request to do so by Mr Hedwan. About a month after the business began, Mr Hannouf and Mr Hedwan agreed that the business should be terminated and that Mr Hannouf should take over the business. Mr Hedwan was to work out what he was to be paid, and Mr Hannouf would borrow the money to pay him out. Two months later, when Mr Hedwan furnished documents showing that he had paid $59,000, Mr Hannouf disputed the figure, claiming that $6000 of this was for food for Mr Hedwan's own personal use. Mr Hannouf also claimed that, on or about 7 September 1995, he purchased petrol for the business in the sum of $13,215. His third answer to the claim was that, although it had been agreed that the profits from the business would be shared equally, Mr Hedwan had kept all profits in relation to the sale of petrol and car care products whereas Mr Hannouf had received profits only from the mechanical repair side of the business. This really goes no higher than saying that Mr Hannouf thought that there may be some money owing to him on a proper accounting of the profits, but there was then, and has since been, no attempt to quantify any set-off or cross-claim that he might have on that account. Mr Hannouf completed a statement of affairs on 4 August 1997. He suggested therein that he had assets of about $189,000 and debts of about $152,000 quite apart from anything owing to Mr Hedwan. However, the Official Receiver's report suggested that his assets were about $24,300 and Mr Hedwan was regarded as an unsecured creditor in the amount of $67,445.80. The course of proceedings Cohen J in the Supreme Court said that a certain chronology could be taken to be agreed in the proceedings before him seeking the Court's leave to have the judgment debt (by virtue of which Mr Hannouf became bankrupt) set aside. This agreed chronology suggested that on 9 June 1997 the creditor's petition had been served on Mr Hannouf and that he then took the notice and petition to Mr Ayoubi, who, of course, did not outline any grounds of defence or explanation for the delay in his observations to counsel. His Honour refused leave. The creditor, Mr Hedwan, had to defend the present application on the basis of what had been filed in this Court before the hearing date, namely, the affidavit of 25 July 1997 prepared for the Equity proceedings. In that state of the evidence, no notice was given on behalf of Mr Hedwan that Mr Hannouf should be present for cross-examination. Mr Hannouf was, however, present in the Court. It is fair to say that, for reasons that will be apparent from the transcript and which need not be referred to here, the matter proceeded before me with an unusual degree of informality. Upon reference by Mr Hannouf's solicitor to other materials, Mr Burchett of counsel, who appeared for Mr Hedwan, sought to cross-examine Mr Hannouf. Mr Assi, Mr Hannouf's solicitor in these proceedings, told me that he had made some efforts to have an interpreter present; however, none was present. Mr Hannouf affected not to be able to repeat in English the word "solemnly" so that he could not be affirmed. I have no way of judging from my own observations whether Mr Hannouf was being truthful or untruthful. Conclusions The power of the Court in a proper case to make the orders sought is undoubted. The test as set out in section 153B is that the Court must be satisfied that the sequestration order in question ought not to have been made. It has been accepted that there is nevertheless a discretion in the Court, even if the sequestration order in question ought not to have been made, as to whether an order annulling the bankruptcy will be made. For myself, I think it would be an unusual case in which, if a sequestration order ought not to have been made, the Court ought not to make an order annulling the bankruptcy. The purpose of section 153B is evidently to prevent injustice. There needs to be shown "a real question to be tried": Taylor v Taylor (1979) 143 CLR 1 at 9 per Gibbs J. However, what this means may vary with the circumstances, as Burchett J recognised in Re Anasis; Ex parte Total Australia Ltd (1985) 63 ALR 493 at 499: "Even an unwitting denial of natural justice is so fundamental a fault in the structure of a decision of a dispute that a party who has not been heard is ... entitled to a hearing unless there is shown to be in fact nothing genuinely in dispute." But the reference to a denial of natural justice and to a party who has not been heard implies, of course, that the failure of the opportunity to be heard should not have been the fault of the party claiming such a failure. It is for the person so claiming affirmatively to make out his or her case upon this issue. The essence of Mr Hannouf's case is that he was a victim of the incompetence of his then legal advisors. It is a fairly spectacular claim that his solicitor would have done nothing about the bankruptcy notice and would have so cavalierly assured him as is alleged in relation to the creditor's petition. It is strange that Mr Hannouf was apparently not asked to provide funds in order that counsel and the solicitor might be sure of being paid, an omission which, one might say with restraint, given the nature of the proceedings, was very unusual. It is even stranger that neither counsel nor solicitor should without warrant have failed to appear at the hearing of the creditor's petition. One might understand Mr Hannouf's failure to call his former solicitor to give evidence, although Mr Assi says he made unsuccessful efforts to have Mr Ayoubi appear as a witness in order that he could tender an affidavit of the latter. (I refused to allow that affidavit to be tendered because it would have been quite wrong to receive it without giving Mr Hedwan, through his counsel, the opportunity to test the entire story.) But the same cannot be said about the barrister concerned, or for that matter, the barrister's clerk. The story as a whole is so unlikely that, if there were no other reason to doubt Mr Hannouf's credit, the matter would call for such corroboration as could reasonably be provided, but that has not been forthcoming. In the case of the barrister, no explanation at all has been offered from the bar table as to why he, or his clerk, have not been called. I was tempted for a time to think that a very benevolent view of these matters should be taken because it would appear that Mr Assi has a degree of inexperience in these matters, although this should not be overstated. However, on reflection, such an approach is not justified. Mr Hannouf admits owing $30,000 to Mr Hedwan and to having owed that money for a long time. There was no suggestion that a cent of it has been paid or offered and there is reason to think, as I have indicated, that he owes a good deal more, even given a very generous view of the partial answers that he says he might have made to the claims which culminated in the judgment against him (which was given ex-parte by Cohen J). It is not Mr Hedwan's fault that Mr Hannouf could not be cross-examined. The original question of his being cross-examined arose when the matter was before me yesterday. In some exasperation at trying to have the proceedings take an orderly course, I adjourned the matter until the following day to enable Mr Hannouf, if he wished, to obtain advice from an insolvency law specialist. Today, Mr Hannouf has not seen fit to attend. No explanation has been offered for this. Again, the circumstances do not enable the drawing of a positive inference against Mr Hannouf, but it would be wrong to make benevolent assumptions in his favour. At the end of the day, making all appropriate cultural assumptions in favour of a man whose first language is not English and whose station in life is that of becoming a partner in a business involving manual trade skills that could not sustain him and his partner, I am simply not satisfied that, if there was any failure of an opportunity to be heard, Mr Hannouf did not materially contribute to it. Indeed, I am not satisfied that he did not have an opportunity to be heard. Sufficient doubt has been cast by his own varying approaches to the matter to compel a failure to believe his remarkable story about a solicitor and a barrister, regrettable as it is that such a story is not entirely outside the bounds of possibility. In my opinion, there has also not been shown to be, as Gibbs J put it, a real question to be tried. Mr Hannouf has not shown that the admitted debt could possibly be reduced to a level that would either disable the failure to comply with the bankruptcy notice, as an act of bankruptcy, or make him solvent. In deference to the argument before me, I should add that I was initially attracted to the submission that, assuming Mr Hannouf was denied the right to be heard, he was (among other things) denied the right simply to seek an adjournment and that the exercise of the right to seek an adjournment could involve a "real question to be tried". Ms Nash, who appears as a matter of courtesy to the Court for the Trustee, informed me that the practice of the Registrars is that, had anyone (legal practitioner or otherwise) appeared on behalf of the debtor and sought an adjournment in order that proper legal representation might be arranged, a short adjournment would have been granted almost as of course. The argument was that, if an adjournment would probably have been granted, then one might say that the sequestration order, made that day in the absence of an adjournment application, ought not to have been made. Upon reflection, however, I think that this is an approach which is altogether unfair as between the debtor and creditor and was not what was intended by section 153B or by the analogous, established principles for exercise of the inherent jurisdiction of the Court to set aside orders for the purpose of preventing the entrenchment of injustice. I cannot believe that section 153B intended that the inherent requirement of a "real question to be tried" can be satisfied by an assertion that an adjournment might properly have been sought and would have been granted. Re Anasis does not go that far. Section 153 provides a quite unusual statutory ground for annulling a Court order. It should not be taken to have been intended to operate in such a way that it would simply stave off the inevitable because of the Court's anxiety to enable persons facing bankruptcy the better to be heard. It is necessary, in my opinion, that there be shown a real question to be tried as to whether, assuming that procedurally the petition was then ready to be heard, as a matter of substance the sequestration order ought not to have been made. Re Anasis may require a shift in the evidential onus of proof but, even so, that was well-satisfied here. An application has been made that I order the bankrupt's solicitor to pay the costs of the second day of the hearing. Even without any default which may have occurred, as to which I say nothing, the matter would have run into a second day so that no costs have been thrown away on that account. For these reasons, the application for annulment of the bankruptcy and to set aside the sequestration order will be dismissed. The bankrupt is to pay the costs of the petitioning creditor including the reserved costs. The trustee's costs, including reserved costs, of this application are to be paid as an expense of the estate. I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Madgwick Associate: Dated: 13 February 1998 Solicitor for the Applicant: Janus Lawyers Counsel for the Respondent: S Burchett Solicitor for the Respondent: Andrews Solicitors Date of Hearing: 13 February 1998 Date of Judgment: 13 February 1998