FEDERAL COURT OF AUSTRALIA Bryant, in the matter of Adrian Cecil Bryant v Australia & New Zealand Banking Group Ltd [2000] FCA 367 BANKRUPTCY – application for annulment of a sequestration order – whether sequestration order should have been made – whether existence of a claim against a third party constitutes a ground for annulment pursuant to s 153B of the Bankruptcy Act 1966 (Cth) – where no evidence of substance of claim – where claim not prosecuted by the Official Trustee – where claim not prosecuted by the respondent PRACTICE & PROCEDURE – where order for substituted service of creditor's petition – where no appearance by debtor at the hearing of the petition – whether denial of procedural fairness or natural justice – whether debtor given reasonable opportunity of appearing and presenting his case Bankruptcy Act 1966 (Cth), ss 60(3) & 153B Federal Court Rules, O 77 r 19 Cameron v Cole (1943) 68 CLR 571, applied IN THE MATTER OF ADRIAN CECIL BRYANT ADRIAN CECIL BRYANT v AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 552) N 8123 OF 1999 EMMETT J 15 MARCH 2000 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 8123 OF 1999 BETWEEN: ADRIAN CECIL BRYANT Applicant AND: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 552 Respondent JUDGE: EMMETT J DATE OF ORDER: 15 MARCH 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs of the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 8123 OF 1999 IN THE MATTER OF ADRIAN CECIL BRYANT BETWEEN: ADRIAN CECIL BRYANT Applicant AND: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 552 Respondent JUDGE: EMMETT J DATE: 15 MARCH 2000 PLACE: SYDNEY REASONS FOR JUDGMENT 1 On 30 June 1999, a sequestration order was made in respect of the estate of Adrian Cecil Bryant. On 11 October 1999, Mr Bryant applied for an order under section 153B of the Bankruptcy Act 1966 (Cth) ('the Act') that the sequestration order be annulled on the basis that it ought not to have been made. I gave leave this morning for an amended application to be filed in which the grounds upon which annulment is sought are stated to be as follows: "(a) The sequestration order ought not to have been made; (c) The applicant's request for adjournment of the hearing of the creditors [sic] petition as per Messrs Jackson Smith's Solicitors letter dated 29 June 1999, should have been granted. (e) The petitioning creditor may be joined as a party to proceeding commenced by the applicant against Armstrong & Partners, solicitors (Common Law Division Supreme Court No. 20990 of 1997). (f) The Court should have exercised its discretion in favour of the applicant in granting an adjournment of the hearing of the creditors [sic] petition to allow the respondent to full [sic] consider the offer and allow the applicant the opportunity to make alternate offers." Those grounds will become clearer when I say something about the circumstances that led up to this application. 2 It is necessary to say something about the background to the arrangements and relationship between Mr Bryant and the respondent, Australia and New Zealand Banking Group Limited ('the Bank'). On 14 May 1990, the Bank advanced to Mr Bryant a sum of approximately $2 million. As security for that advance, Mr Bryant gave mortgages to the Bank over rural properties owned by him. Apparently there was default in the performance by Mr Bryant of his obligations in respect of the loan, as a consequence of which the Bank commenced proceedings in the Supreme Court of New South Wales, seeking possession of the rural properties. 3 On 18 November 1993, the Bank was granted judgment for possession of the properties and leave was given to issue a writ of possession. On the same day, Mr Bryant agreed to release the Bank from all claims, demands and legal proceedings arising out of the mortgages, the parties' banker/customer relationship and the loans and advances in question. 4 In May and June 1994, writs for possession were actually issued and possession was delivered to the Bank by the sheriff. On 6 June 1994, Mr Bryant and the Bank entered into an agreement which entitled Mr Bryant to remain in occupation of the properties for an agreed period for the purpose of allowing him to remove his livestock and personal belongings. The agreement provided that failing vacation and removal of the livestock, the Bank was empowered to sell the Mr Bryant's livestock. By 19 August 1994, the majority of Mr Bryant's livestock had not been removed from the properties by him. 5 The Bank then made arrangements, through its agents, for the livestock to be sold. On 26 August 1994, Mr Bryant removed in excess of 340 head of cattle with the permission of the Bank. The balance of the livestock on the properties was then sold by the Bank. The net proceeds of sale amounted to $381,667.99. That sum was credited against the moneys due by Mr Bryant to the Bank. It is common ground that in 1994 a drought was affecting the New England area where Mr Bryant resided and where the stock was located. 6 In November 1997, Mr Bryant commenced proceedings in the Common Law division of the Supreme Court of New South Wales against Armstrong & Partners, solicitors ('Armstrongs'). The following significant allegations were made in that proceeding: "5. On about mid May 1993 the Plaintiff [Mr Bryant] instructed and retained the Defendant [Armstrongs] who agreed to act as solicitors for Mr Bryant to advise, correspond with the Bank, and take all necessary steps, including preparations of a defence, and cross claim as required to protect the Plaintiff's interest and state the Plaintiff's case against the Bank. 6. The Plaintiff also instructed the Defendant that in demanding payment of the full amount the Bank was in breach of an understanding with him to assist him in difficult times including droughts, floods, and low livestock prices. 7. The Plaintiff further instructed the Defendant that he had provided the Bank with ample security so that he could obtain additional funds as and when required to enable him to stock his properties and make and operate profitably. The Defendants were further instructed that the Bank indicated willingness to provide financial assistance to the Plaintiff as and when required. 8. In the premises it was an implied term of the instructions and the retainer that the Defendants would exercise all due care, skill and diligence in advising the Plaintiff, corresponding with the Bank, preparing and advising on defence and cross claim, instructing counsel, and taking all necessary steps to represent the Plaintiff's interests and put his case. 9. In breach of the said term and/or duty and negligently, the Defendant failed to exercise any due care skill or diligence in corresponding with the Bank, representing the Plaintiff's understanding with the Bank for financial assistance, warn the Bank against enforcing its securities, the fact that the Plaintiff was facing a severe drought, explaining to the Plaintiff the meaning and significance of the Bank's claim, the merits of the defence and a cross claim to the Bank's proceedings for possession. ……………………… 10. By reason of the matters aforesaid the Plaintiff had lost the opportunity of presenting his case against the Bank as a consequence of which the Bank obtained possession of all of the Plaintiff's five grazing properties and sold the same as mortgagee in possession at greatly reduced prices. 11. As a result of the Defendants [sic] negligence the Plaintiff incurred a loss estimated in the region of $2,470,000…due to underselling. ……………………… 12. Due to the Defendants [sic] negligent conduct, the Plaintiff on or about 6th June 1994 had no option but to execute to the Bank a document entitled 'Acknowledgment and Undertaking' pursuant to which the Bank sold the Plaintiff's livestock causing the Plaintiff a loss due to underselling of the said livestock, estimated to be in the region of $350,000. 13. The Plaintiff maintains that had the Defendants informed and advised him of the merits of his defence and cross claim against the Bank's proceedings for possession in particular the time process involved in the hearing he would not have executed the same [the acknowledgment and undertaking] or given instructions for execution on its behalf. 7 Armstrongs filed a defence to that statement of claim. By the defence it was admitted that Armstrongs were retained to act in the proceedings brought against Mr Bryant by the Bank. However all other allegations as to the terms of the retainer were either not admitted or denied. The defence admitted the existence of the implied term and duty as alleged in the statement of claim. However, any breach of such a term or of any such duty was denied. 8 In proceedings brought in this Court in 1994 against the Bank, Mr Bryant sought to ventilate alleged breaches of duty and breaches of contact by the Bank. On 17 November 1997 Lindgren J ordered that certain paragraphs of the third further amended application filed by Mr Bryant be dismissed. Further, certain paragraphs of a third further amended statement of claim filed on behalf of Mr Bryant were ordered to be struck out. Lindgren J ordered that Mr Bryant not be granted further leave to re-plead his claim. On the same day, Lindgren J ordered that the Bank be granted summary judgment on its cross-claim for the sum of $393,532.62. 9 On 15 October 1998, a bankruptcy notice, issued at the behest of the Bank, was served on Mr Bryant. The bankruptcy notice required payment of the amount of the judgment directed to be entered by Lindgren J. On 5 November 1998 Mr Bryant applied for an order that the bankruptcy notice be set aside. On that day, the time for compliance with the bankruptcy notice was extended to 26 November 1998. On that day, the application for the bankruptcy notice to be set aside was dismissed and the time for compliance with it was extended to 10 December 1998. 10 The bankruptcy notice was not complied with and, accordingly, an act of bankruptcy was committed by Mr Bryant on 10 December 1998. On 12 January 1999 a petition was filed by the Bank seeking an order for the sequestration of the estate of Mr Bryant. The return day for the petition was extended on several occasions. On 11 May 1999, the solicitors for the Bank wrote to Messrs John McEncroe & Company, solicitors, who had, at some time, been acting for Mr Bryant. The letter refers to "...your client's offer regarding final resolution of this matter communicated to us on 4 May 1999." That offer was rejected by the letter of 11 May 1999. I do not have details of that offer before me. The letter of 11 May 1999 also enclosed a copy of the creditor's petition and said that the creditor's petition was for hearing in the Federal Court on 24 May 1999. The Bank's solicitors asked Messrs John McEncroe & Company whether they had instructions to accept service of the petition. There was no evidence before me of any immediate response to the letter of 11 May 1999 11 On 13 May 1999 a notice of motion was filed on behalf of the Bank seeking an order for substituted service of the petition. That notice of motion was made returnable before a Registrar on 24 May 1999. It is not clear whether the notice of motion was served on anyone. I draw the inference that it was not. Mr John McEncroe, in an affidavit, denied that he received notice of the application or that the notice of motion was served on him. 12 On 24 May 1999 an order was made that personal service of the petition be dispensed with. The Court also ordered that a signed and sealed copy of the petition and copies of the affidavits in support of it and a sealed copy of the order, be served on any person apparently over the age of 16 years at the office of John McEncroe & Company. The order provided that the petition was to be deemed to have been served on Mr Bryant 5 days after service in accordance with that order. The order also provided that the hearing date of the petition be amended to 9.15 am on 30 June 1999. 13 Some attempts were made on behalf of the Bank to serve the petition at the office of John McEncroe & Company on 2, 3, and 7 June. On 8 June Ms Natasha Banfield, a solicitor employed by the agent of the Bank's solicitors, had a conversation with Mr McEncroe in the following terms: Ms Banfield: "I act for ANZ in a bankruptcy proceedings against Adrian Bryant who I understand was a client of yours. We recently obtained substituted service orders whereby the creditor's petition would be served upon you. My clerk has attended your office several times and has been unable to find you in to effect service. When will you be in your office?" Mr McEncroe: "I am away at the moment but I should be in my office on Thursday. I spoke to your clerk the other day by telephone and told her that I did not act for Mr Bryant anymore." Ms Banfield: "Yes I know that's what you told my clerk however I would have thought that you would be able to contact him." Mr McEncroe: "Yes, I'll certainly contact him or his solicitor. I know who his new solicitors are and I'll certainly let one or the other of them know about the proceedings." 14 On 11 June 1999 a clerk in the employ of the Bank's solicitors left the following documents with a person, apparently over the age of 16 years, at the offices of John McEncroe & Company: · order of the Registrar made on 24 May 1999; · creditor's petition; · affidavit verifying the creditor's petition; · affidavit of search under Order 77 rule 19; · affidavit verifying paragraph 4 of the petition; and · affidavit of service of the bankruptcy notice. 15 On 29 June 1999 Messrs Jackson Smith, solicitors, of York Street, Sydney, wrote to the Bank's solicitors saying relevantly as follows: "We act on behalf of Adrian Bryant in the above matter. We have received from John McEncroe & Company Solicitors on 25 June 1999 an order for substituted service in these proceedings and other pleadings. We have been recently instructed to take over conduct from our client's former solicitors what should be best described as "Law Cover" proceedings in the Supreme Court of New South Wales (No 20990 of 1997) against his former solicitors Armstrongs Solicitors. ……………………… The purpose of this letter is to seek your client's consent to an adjournment of the bankruptcy petition listed for hearing tomorrow for a period of one month in order that your client may consider the following proposal. We are instructed that our client has no assets and little or no regular income with which to either meet or reduce the debt owed to your client over the usual three year bankruptcy period should the petition proceed tomorrow. Our client proposes: 1. The bankruptcy proceedings be withdrawn; 2. Subject to our clients [sic] expeditious prosecution of the Law Cover proceedings, your client await the conclusion of those proceedings before seeking to enforce any recovery rights; 3. Our clients reach agreement as to the distribution of any proceeds on the successful completion of the Law Cover claim. In view of the circumstances we do not consider that the adjournment will prejudice your client. We are reviewing several boxes of files obtained from the solicitors who formerly acted in the Law Cover proceedings and upon completion of our review we will be in a better position to advise our client and your firm as to the merits of same and the likely range of damages should the claim prove successful. Will you please obtain your earliest instructions and advise accordingly. Our client has no funds and we are not instructed to appear at tomorrow's hearing of the petition. If your client is agreeable to the suggested one month adjournment we would ask that you mention our clients [sic] appearance." 16 On 30 June at 9.06 am the Bank's solicitors responded to Messrs Jackson Smith by facsimile communication referring to the letter of 29 June 1999 and saying: "We are instructed that our client does not agree to an adjournment of the Bankruptcy Proceedings." 17 Ms Banfield appeared on the hearing of the Bank's petition on 30 June 1999 before Registrar Hedge. A file note of Ms Banfield's appearance records the fact that the Court was informed that Ms Banfield had spoken to Mr McEncroe three days prior to service. Ms Banfield said in an affidavit, to which there was no objection, that she: "...would have recounted to the Court the fact that Mr McEncroe advised me that he would contact the debtor or the debtor's solicitor." 18 As I have already said, the sequestration order was in fact made on that day. Mr McEncroe, in an affidavit, said that he was not informed of the hearing date for the notice of motion of 24 May 1999 until he saw affidavits filed in these proceedings, in particular Ms Banfield's affidavit. He acknowledged in his affidavit that he was served with "some documents" by the Bank: "...following its advice that an order for substituted service had been made that service of the Petition was to be made on me." 19 He also says that he does not recall: "...receiving any document advising me of the hearing date of the Petition nor of being advised that the hearing date was 30 June 1999." That is a strange statement since there is amended to his affidavit a copy of the letter of 11 May 1999, which says unequivocally that the creditor's petition is for hearing in the Federal Court on 24 May 1999. 20 Mr McEncroe in his affidavit also made the following somewhat obscure statement: "If I became aware of the Notice of Motion seeking an order for substituted service on me I would have attended the Court on the return day and informed the Court of my instructions." However, Mr McEncroe did not see fit, in his affidavit, to say what those instructions were. 21 On 7 December 1999 the Official Trustee in Bankruptcy filed a report in connection with Mr Bryant's application for annulment. That report indicated that, in his statement of affairs, Mr Bryant disclosed assets comprising a motor vehicle, household furniture, tools of trade and a camera, having a value in total of $2,800. It also indicated that Mr Bryant disclosed as an asset under the heading: "Money Owed to You" a debt alleged to be owed by the Bank in the sum of $2 million, of which Mr Bryant apparently considered "that the entire amount was likely to be received." The debt was described as being"...Stolen properties, stolen cattle and sheet + interest on above + loss of income from stealing my assetts [sic]." That appears to have been an allusion to the proceedings which had been the subject of the orders for summary dismissal made by Lindgren J. No mention was made of the proceedings against Armstrongs. The report also stated that in his statement of affairs Mr Bryant disclosed liabilities as follows: · Burt & Allen, $11,000; · AMP Life, $49,000; · the Bank, $390,000, · making $450,000 in total. 22 In a supplementary report of 3 February 2000, filed on 4 February 2000, the Official Trustee stated that a notice under section 60(3) of the Act was served on the Official Trustee on 22 November 1999 by the solicitors acting for Armstrongs with respect to the proceedings in the Supreme Court of New South Wales commenced by Mr Bryant. In the supplementary report the Official Trustee went on to say as follows: "The notice requiring the Official Trustee to make an election in writing within a period of 28 days, whether to prosecute or discontinue the action. Notification of the notice was effected upon John McEncroe, solicitors acting for the bankrupt and Everingham Solomons, solicitors acting for Australia and New Zealand Banking Group Limited, requesting their opinion as to the prospects of success in proceeding with the action and the provision of funding to appoint legal representatives. As no response was received from the bankrupt's legal representatives, the Official Trustee made no election and pursuant to Section 60(3) of the Bankruptcy Act, the Official Trustee is deemed to have abandoned the action." 23 I have been informed that the proceedings in the Supreme Court are listed for mention or directions on 4 April 2000 and that the proceedings had been adjourned to that date pending the outcome of this application for annulment. I must consider the application for annulment against the background of the circumstances that I have outlined above. 24 As I apprehend the submissions on behalf of Mr Bryant, there are in substance two grounds upon which it is said that the sequestration order ought not to have been made. The first is that there was a denial of procedural fairness or natural justice insofar as the sequestration order was made in the absence of Mr Bryant. Secondly, it is contended that the asset of the estate comprising the claim against Armstrongs is such that, if those proceedings were prosecuted to a successful end, there would be adequate funds to meet all of the liabilities of Mr Bryant. 25 It is a fundamental principle of natural justice applicable to all Courts, whether superior or inferior, that a person against whom a claim or charge is made must be given a reasonable opportunity of appearing and presenting his case. That principle applies to bankruptcy proceedings as well as to any other proceeding - see Cameron v Cole (1943) 68 CLR 571 at 589 per Rich J. That principle was not contested by the Bank, as indeed it could not be. The question is whether, in the circumstances that I have outlined above, it could be said that Mr Bryant was not given a reasonable opportunity of appearing and presenting his case. I consider that in the circumstances that I have outlined, such a proposition cannot be established. 26 It may be, and it seems to be clearly the fact, that the petition was not served personally on Mr Bryant. However, this Court made an order for substituted service and there has been no attack on that order. One does not know what might have happened had Mr McEncroe been aware of the application for an order for substituted service. He has not seen fit to tell the Court, nor has Mr Bryant seen fit to tell the Court, what either of them might have done had they been aware of the motion. In any event, Mr McEncroe was certainly aware of the hearing date fixed for the petition no later than 11 June when the order of 24 May 1999 was served. What he did between 11 June and 25 June 1999 is a mystery insofar as he has not deigned to tell the Court what he did with the documents. 27 It does appear that by 25 June 1999 the documents were received by Jackson Smith, who were then acting for Mr Bryant. Clearly by 29 June 1999, Jackson Smith had received instructions from Mr Bryant to seek an adjournment so that the Bank might consider the proposal. The proposal in essence was for the joint prosecution of the proceedings against Armstrongs. That proposal was unequivocally rejected on the morning of 30 June. 28 I have no evidence before me as to the circumstances in which Jackson Smith received instructions from Mr Bryant. There is no evidence from Jackson Smith at all and Mr Bryant makes no mention of the matter in his affidavit. In the circumstances it seems to me that Mr Bryant had ample opportunity to appear on 30 June 1999 and to present his case in opposition to the petition if he had one. The proposal that was put to the Bank's solicitors certainly did not entail any basis upon which the petition could be opposed. It was simply an invitation for the Bank to make a concession in order to participate in the possible proceeds of the proceedings against Armstrongs. This ground is not made out. 29 The second ground, if it is a ground allowable under section 153B of the Act, has no substance in my view. I have no evidence at all concerning the allegations made in the statement of claim in the proceeding against Armstrongs. It appears that at this stage no legal adviser has yet expressed a view as to whether or not the proceedings have any prospect of success. Jackson Smith indicated they had several boxes of files which they had not, as at 29 June 1999, reviewed. 30 Even when the Official Trustee called upon John McEncroe & Company to indicate whether there was any substance in the claim, there was no response. I have set out in some detail, the significant allegations made in the statement of claim. They are denied by Armstrongs. All that I know of the claim is that it is asserted. There is nothing before me to suggest that it has any substance. Indeed, the absence of any legal advice indicating there is any substance in the claim may well give rise to an inference that it has none. 31 Even so, however, that is not the real issue. The claim is an asset in the bankruptcy. If it has any value, or if it did have any value, it could have been prosecuted by the Official Trustee, no doubt with the assistance of Mr Bryant. It could have been prosecuted, of course, only if funds were available, since there were clearly insufficient funds in the estate to enable the proceedings to be prosecuted effectively. Had some material been put before the Bank, it may be that the Bank would have been prepared to consider funding the proceedings, since it would have a great deal to gain from the success of the proceedings. 32 There is no evidence that any attempt has been made, other than the somewhat cursory attempt of 29 June 1999 to indicate to the Bank the likely merits of the claim and the prospects of realising any assets. Even if there were, that is not a basis upon which it could be said that the sequestration order ought not to have been made. The fact that the total assets of a debtor exceeds his total liabilities, is not of itself a basis for refusing a sequestration order. The bankruptcy jurisdiction exists for the purposes of ensuring the proper administration of insolvent estates. 33 It is clear beyond doubt that the estate of Mr Bryant is insolvent in that he can only meet his debts if and when the proceedings in the Supreme Court of New South Wales result in a successful judgment. Even if I could assume there was a degree of likelihood that the claim of some $2 million would succeed, it would be many months, and probably years, before those funds would be available. The fact that there is an asset of a debtor due to be realised, which would enable the debtor to meet his liabilities as and when they fall due, may be something to be taken into account by a Court in the exercise of its discretion in deciding whether or not to adjourn the hearing of the bankruptcy petition or perhaps to dismiss it. Nothing was put before the Court on 30 June to indicate that there was the faintest prospect of the proceedings against Armstrongs realising a fund that would enable the debtors, that is Mr Bryant's debts, to be paid as and when they fall due I do not consider that this is a ground upon which the sequestration order ought not to have been made. 34 It follows, in my view, that the application should be dismissed with costs. Accordingly, I order that the application be dismissed. I order the applicant to pay the respondent's costs of the application. I certify that the preceding thirty four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 4 April 2000 Counsel for the Applicant: Mr M Abdul-Karim Solicitor for the Applicant: John McEncroe & Company Counsel for the Respondent: Mr R E Montgomery Solicitor for the Respondent: Everingham Solomons Date of Hearing: 15 March 2000 Date of Judgment: 15 March 2000