Hardaker v Phair trading as Proctor Phair & Associates, in the matter of Hardaker [2002] FCA 1176

FEDERAL COURT OF AUSTRALIA

Hardaker v Phair trading as Proctor Phair & Associates, in the matter of Hardaker [2002] FCA 1176 BANKRUPTCY – annulment of a sequestration order – whether the sequestration order ought not to have been made. Bankruptcy Act 1966 (Cth), s 153B Re Frank; Ex parte Piliszky (1987) 16 FCR 396 followed Re Gollan; Ex parte Gollan (1992) 40 FCR 38 referred to Re Sarina; Ex parte Wollondilly Shire Council (1980) 43 FLR 163 applied Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372 referred to In the Matter of Kenneth Reginald Hardaker Kenneth Reginald Hardaker v Russell Grant Phair trading as Proctor Phair & Associates N7212 of 2002 JACOBSON J 10 SEPTEMBER 2002 SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY N7212 OF 2002

BETWEEN: KENNETH REGINALD HARDAKER

APPLICANT

AND: RUSSELL GRANT PHAIR T/AS PROCTOR PHAIR & ASSOCIATES

RESPONDENT

JUDGE: JACOBSON J

DATE OF ORDER: 10 SEPTEMBER 2002

WHERE MADE: SYDNEY

THE COURT ORDERS THAT: 1. The application is allowed. 2. Upon the applicant by his counsel giving the undertakings to the Court in the terms stated by the applicant's counsel on 10 September 2002, under s 153B of the Bankruptcy Act 1966 (Cth), the sequestration Order made on 23 July 2001 and entered on the 24 July 2001 is annulled. 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 N7212 OF 2002

BETWEEN: KENNETH REGINALD HARDAKER

APPLICANT

AND: RUSSELL GRANT PHAIR T/AS PROCTOR PHAIR & ASSOCIATES

RESPONDENT

JUDGE: JACOBSON J

DATE: 10 SEPTEMBER 2002

PLACE: SYDNEY

REASONS FOR JUDGMENT (revised from transcript) 1 The applicant was made bankrupt by a sequestration order made by a Registrar of this Court on 23 July 2001. The order was entered on 24 July 2001. 2 The applicant now applies under s 153B of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act") for an annulment of the sequestration order. Section 153B provides that if the Court is satisfied that the sequestration order ought not to have been made, the Court may make an order annulling the bankruptcy. 3 I have emphasised the words "ought not to have been made" and the word "may" because those words encapsulate the two matters upon which I need to be satisfied for the purposes of making an annulment order. 4 I have been taken to a number of authorities on the interpretation of the words "ought not to have been made". The authorities establish that it is sufficient for an applicant under the section to bring evidence disclosing that all of the true facts were not before the Court when the sequestration order was made; see Re Frank; Ex parte Piliszky (1987) 16 FCR 396 ("Re Frank"). That was a decision of Fisher J which has been referred to with approval by Spender J in Re Gollan; Ex parte Gollan (1992) 40 FCR 38 at 40-41. 5 One of the circumstances in which it can be established that a sequestration order "ought not to have been made" was dealt with in a well-known authority, Re Sarina; Ex parte Wollondilly Shire Council (1980) 43 FLR 163 ("Re Sarina"), a decision of Deane J (as he then was). The decision was affirmed by the Full Court of this Court in a joint judgment of Bowen CJ, Sweeney and Lockhart JJ; Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372, especially at 376. 6 The effect of the decision in Re Sarina is that it would not be a proper exercise of discretion under s 52(2) of the Bankruptcy Act to make a sequestration order where the evidence established that the debtor was able to pay the debt due but was unwilling to pay it. 7 The discretion, which is conferred upon me to annul a sequestration order under s 153B, is to be exercised with great caution. This is established by a number of cases of high authority which are referred to in the decision in Re Frank. 8 Mr Blake of counsel who appears for the applicant has submitted that upon the evidence which is before me, if the facts which are now known about the financial position of the applicant at the time of the sequestration order were known at that time, the order would not have been made. 9 There is evidence before me that at the time when the petitioning creditor served the bankruptcy petition the applicant had given instructions to his lawyers to pay the necessary amount out of the proceeds of sale of a property. The settlement of the sale was anticipated to take place shortly after the date on which the petition was served. The amount due to the petitioning creditor was in the order of $2500 and there was more than enough moneys available from the proceeds of sale to discharge the debt due to the petitioning creditor. 10 The only other creditors whose debts were due at the date of the sequestration order were Vodafone to whom an amount of approximately $1300 was due and, although the debt is disputed, a debt of approximately $4300 claimed by Diners Club. 11 The property was sold for an amount in the order of $375,000 and after payment of various expenses the balance due to the applicant and his wife totalled approximately $32,000. 12 It seems to me that if that evidence was before the Court on 23 July 2001 the Registrar would have found that there were sufficient funds available to pay out the petitioning creditor. If necessary, a finding would also have been made that there was sufficient funds available from the proceeds of sale to pay out other creditors. 13 Mr Hardaker is a real estate agent who presently earns a salary of more than $90,000 a year. As I understand the evidence he was employed as a real estate agent at the time when the sequestration order was made and this would also have been evidence, which would have enabled the Court to make a finding that the debtor was solvent. 14 In those circumstances I accept the submission put to me that it is inconceivable that the Court would, in the proper exercise of its discretion, have made a sequestration order. To do so would have been contrary to the principle established in Re Sarina to which I have referred above. 15 As to the question of the exercise of my discretion under s 153B, Mr Blake submits that, on the evidence, all known creditors have been paid or will be provided for by undertakings to be given to the Court by the applicant. 16 In his six-paragraph affidavit sworn on 10 September 2002 the applicant annexes a copy of a bank statement in the name of the applicant and his wife, which discloses that, as at 9 September 2002 there was a balance in the account of approximately $24,000. The statement records a deposit to the credit of the account of an amount of over $5000, which is described as "salary". I infer that this is the payment of one month's salary after deduction of income tax. This further supports the evidence, which I have accepted that the applicant has a salary of approximately $90,000 per annum from his employment as a real estate agent. 17 I do not have evidence of the terms upon which the bank account was established. However, I have been informed from the bar table that the applicant is entitled to draw on the account on his sole signature so that all of the funds would be available to him if required. In view of the undertakings to the Court which he is prepared to give I would draw the inference that the terms upon which the account are operated are as I have been informed by counsel. The applicant is present in Court and understands the consequences of failure to comply with the undertakings to the Court, which I will refer to shortly. I infer in those circumstances that he would not give the undertakings lightly and that he is entitled to draw on funds in the Westpac account. 18 Accordingly, I find that the applicant has the financial capacity to pay the debts, which have been claimed, by Diners Club and Vodafone and that the applicant has the financial capacity to honour the undertakings to the Court, which will be given by him. 19 The discretion to make an order under s 153B is not ordinarily exercised unless all of the provable debts have been paid in full. There is evidence that the petitioning creditor has been paid in full and that the trustee in bankruptcy's expenses have been paid. 20 The applicant has sworn in his three paragraph affidavit sworn today that he undertakes to the Court that he will pay an agreed amount of $1000 to Vodafone. The affidavit annexes a copy of a fax from Vodafone of today's date confirming that company's agreement to accept $1000 as payment in full of the account. 21 As to the debt claimed by Diners Club, there is no evidence before me of the circumstances in which the claim has been made. Diners Club was referred to as a creditor in the applicant's statement of affairs but he stated in that document that the debt is disputed. The applicant has not brought with him to Court today any of the documents which give rise to the claim made by Diners Club. An explanation has been given to me for the reason why the documents are not in evidence and I accept the explanation. It is unnecessary for me to detail the reason why the documents have not been produced. 22 In order to overcome the absence of evidence in relation to the Diners Club debt, the applicant is prepared to offer an undertaking to the Court to pay the amount on a without prejudice basis to Diners Club, reserving to himself the right to claim repayment of any amount by which the debt has been overpaid. 23 I have borne in mind the need to exercise caution in making an order for annulment under s 153B. Although the debts due to or claimed by Vodafone and Diners Club have not been paid, in my opinion it is a proper exercise of my discretion to make an order in view of the fact that the applicant is offering undertakings to the Court to pay those debts. The undertakings will need to specify the date by which payment is to be made to the claimants. 24 There are a number of minor housekeeping matters, which I need to deal with. First, the rules provide that the trustee is to file a report under Bankruptcy Rule 44 and that the report be in the form of an affidavit. A report dated 30 August 2002 signed by the trustee was filed in the Registry on 10 July 2002. However, the report is not in the form of an affidavit. Nevertheless, it seems to me that it would be a proper exercise of my discretion to waive compliance with the rule in order to avoid incurring additional costs. 25 I note that there is a facsimile copy of a letter from the trustee dated today which is in evidence and which I have marked as exhibit A. The letter states that the trustee understands that the applicant anticipates establishing to the Court that he is solvent or that there are other grounds on which the bankruptcy should be annulled. The trustee states that on the basis that the applicant can satisfy the Court as to these matters, the trustee will not oppose the "bankrupt's application for discharge". Although the letter uses the word "discharge" rather than "annulment", I think it is evident from the letter that the trustee does not oppose the order for annulment so long as I am satisfied as to the grounds required to be made out under s 153B. As stated above, I am satisfied that there are grounds on which the sequestration order should be annulled. 26 The second matter to which I should refer is that creditors have not been served with the application as required by the Rules. It is clear that Vodafone is aware of the application, as that company has communicated with the applicant in the terms to which I have already referred. 27 The evidence does not establish that Diners Club has been served with the application. Nevertheless, it is the only other creditor and its position is sufficiently covered by the undertaking, which the applicant will give. Accordingly, in my view it is a proper exercise of my discretion to waive compliance with the Rule. 28 Upon the applicant by his counsel giving the undertakings to the Court in the terms stated by Mr Blake. I make the order under s 153B of the Bankruptcy Act that the sequestration order made by the Court on 23 July 2001 and entered on 24 July 2001 be annulled. I certify that the preceding twenty - eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.