FEDERAL COURT OF AUSTRALIA Health Insurance Commission v Trustee in Bankruptcy of the Estate of Ioakim Alekozoglou [2003] FCA 848 BANKRUPTCY – whether proof of debt in bankruptcy wrongly admitted by trustee –whether withdrawal of proof of debt under s178 of the Bankruptcy Act 1966 (Cth) would be just and equitable – power to expunge proof of debt under s99 of the Bankruptcy Act – whether debt a "contingent" debt Bankruptcy Act 1966 (Cth) ss 82, 99, 102(1), 104(1), 153(1) and 178, Health Insurance Act 1973 (Cth)ss 106L, 106Q(1), 106S, 106T, 106U, 129AD In re Holcombe (1888) 4 WN(NSW) 129, referred to Commissioner of Taxation v Jones (1999) 86 FCR 282, applied Jones v Deputy Commissioner of Taxation (1998) 157 ALR 349, referred to Lyford v Carey (1985) 3 ACLC 515, referred to Gaffney v Commissioner of Taxation (1998) 81 FCR 574, referred to Lofthouse v Commissioner of Taxation [2001] VSC 326, referred to Re Kavich; Kavich v Official Trustee in Bankruptcy (1995) 58 FCR 82, referred to HEALTH INSURANCE COMMISSION -v- TRUSTEE IN BANKRUPTCY OF THE ESTATE OF IOAKIM ALEKOZOGLOU and IOAKIM ALEKOZOGLOU V7039 OF 2002 MARSHALL J 13 AUGUST 2003 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V7039 OF 2002 BETWEEN: HEALTH INSURANCE COMMISSION APPLICANT AND: TRUSTEE IN BANKRUPTCY OF THE ESTATE OF IOAKIM ALEKOZOGLOU FIRST RESPONDENT IOAKIM ALEKOZOGLOU SECOND RESPONDENT JUDGE: MARSHALL J DATE OF ORDER: 13 AUGUST 2003 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. Pursuant to s 99(1) of the Bankruptcy Act 1966 (Cth), the proof of debt provided by the applicant which was admitted by the first respondent as a provable debt in the bankruptcy of the second respondent, be expunged. 2. The application otherwise be dismissed. 3. There be no order as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V7039 OF 2002 BETWEEN: HEALTH INSURANCE COMMISSION APPLICANT AND: TRUSTEE IN BANKRUPTCY OF THE ESTATE OF IOAKIM ALEKOZOGLOU FIRST RESPONDENT IOAKIM ALEKOZOGLOU SECOND RESPONDENT JUDGE: MARSHALL J DATE: 13 AUGUST 2003 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 On 1 November 2002, the Health Insurance Commission ("the HIC") made application pursuant to ss 99(1), 104(1) and 178 of the Bankruptcy Act 1966 (Cth)("the Act"). The question for determination in the proceeding is whether the first respondent, the trustee of the estate of Dr Alekozoglou, was correct to admit a proof of debt submitted by the HIC. The proof of debt was admitted by the trustee in or about November 1997 after Dr Alekozoglou's declaration of bankruptcy on 23 June 1997. In the course of oral argument senior counsel for the HIC abandoned reliance on s104 of the Act, so that the proceeding was heard by reference only to ss 99 and 178. Factual background 2 From 1 July 1994 until 30 June 1995, Dr Alekozoglou received payments of Medicare benefits under the Health Insurance Act 1973 (Cth) ("the HI Act") totalling $480,609.15. 3 On 26 June 1995, a Professional Services Review Committee ("PSRC") set up under s93 of the HI Act reported, pursuant to s106L of the HI Act, that Dr Alekozoglou had engaged in inappropriate practice as defined in s82 of the HI Act. 4 On 26 March 1997, a Determining Officer, appointed under s106Q(1) of the HI Act, made a draft determination under s106S(1) of the HI Act in accordance with s106U of the HI Act. The draft determination was that Dr Alekozoglou repay to the Commonwealth $264,187.85, being an amount equivalent to the Medicare benefits paid for 55% of the "inappropriate services" rendered during the period 1 July 1994 until 30 June 1995. 5 On 30 May 1997, Dr Alekozoglou made written submissions to the Determining Officer. 6 On 18 June 1997, Dr Alekozoglou completed a statement of affairs for the purposes of the Act. In that document Dr Alekozoglou said that he owed $2,524,379 to unsecured creditors, including $264,000 by way of a debt incurred to the HIC in 1994, described as "Medicare refundable". Dr Alekozoglou claimed to have assets of $46,133.13. 7 On 23 June 1997, Dr Alekozoglou's debtor's petition was accepted by the official receiver. Consequently, Dr Alekozoglou was declared bankrupt on that day. 8 On 17 July 1997, the trustee gave the HIC and other creditors notice of Dr Alekozoglou's bankruptcy and notice of a creditor's meeting to be held on 31 July 1997. 9 On 2 September 1997, the trustee notified the HIC and other creditors of his intention to declare a first dividend and required the creditors to lodge a proof of debt and supporting documentation on or before 30 September 1997. The HIC did not respond to that notice. 10 On 5 September 1997, a Determining Officer made a final determination in accordance with s106U of the HI Act. The final determination included a determination that Dr Alekozoglou repay to the Commonwealth the amount of $168,054.10, being an amount equivalent to the Medicare benefits paid for 35% of the inappropriate services rendered during the period of referral. A copy of the final determination was given to Dr Alekozoglou in accordance with s160UA of the HI Act on 10 September 1997. 11 On 9 October 1997, pursuant to the then provisions of s106V(1) of the HI Act, the final determination took effect. The amount of $168,054.10 became recoverable by the HIC, on behalf of the Commonwealth, from Dr Alekozoglou as a debt due to the Commonwealth pursuant to s129AD of the HI Act. 12 On 14 October 1997, the Acting Manager Professional Services Branch of the HIC, wrote to Dr Alekozoglou requesting that he repay $168,054.10 to the HIC. 13 On 23 October 1997, the trustee wrote to the HIC inviting it to complete a proof of debt and to lodge that proof together with all supporting documentation. 14 Under the cover of a letter dated 27 October 1997, the HIC sent the trustee a proof of debt dated 27 October 1997. The proof identified the debt as $168,054.10 being owed to the HIC and stated that the debt was incurred on 9 October 1997. 15 On 27 November 1997, the trustee advised the HIC that a first dividend of 1.9390 cents in the dollar had been declared and enclosed a cheque for $3,258.56. That cheque was subsequently presented. 16 On 24 June 2000, Dr Alekozoglou was discharged from his bankruptcy pursuant to the provisions of s149 of the Act. 17 On 30 April 2001, the HIC received a cheque for a final dividend of $2,968.66. That cheque was subsequently presented. 18 On 4 January 2002, the trustee advised Insolvency and Trustee Service Australia that the administration of Dr Alekozoglou's bankrupt estate was finalised on 3 January 2002. 19 On 4 February 2002, the HIC's solicitors wrote to the trustee. Inter alia the letter stated: "The debt to the Commonwealth of $168,054.10, based on the final determination made on 5 September 1997 and taking effect on 9 October 1997, was not a debt provable in the bankruptcy of Dr Alekozoglou because it was a debt incurred after the date of bankruptcy. …Accordingly, we are instructed to request that you revoke your decision to admit the proof of debt… in whole under s102(3) of [the Act] …." 20 On 21 March 2002, the trustee wrote to the HIC stating that he considered that the proof of debt was "appropriately submitted and admitted to dividend". The letter concluded in the following way: "Failing the provision of any additional information that you believe is relevant to this matter, I do not feel a revocation of my admission of the proof is appropriate." 21 On 4 April 2002, the HIC's solicitors wrote to the trustee putting further argument and renewed their request that the trustee revoke the admission of the debt. 22 On 3 June 2002, solicitors for the trustee wrote to the HIC's solicitors stating that the trustee did not accept the withdrawal of the HIC's proof of debt. The legislative context - bankruptcy 23 Section 153(1) of the Act provides, so far as is presently material: "…where a bankrupt is discharged from a bankruptcy, the discharge operates to release him or her from all debts (including secured debts) provable in the bankruptcy, whether or not, in the case of a secured debt, the secured creditor has surrendered his or her security for the benefit of creditors generally." 24 Section 82(1) of the Act provides: "Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy." The legislative context – health insurance 25 Section 106L of the HI Act at all material times provided: "(1) The Committee must give to the Determining Officer a written report setting out its findings on whether: (a) if the person under review was a practitioner and a specialist when the referred services were rendered or initiated – the practitioner's conduct in connection with rendering or initiating the referred services was, in the Committee's opinion, unacceptable to the general body of the members of the specialty in which the practitioner was practising at that time; or (b) if the person under review was a practitioner but not a specialist when the referred services were rendered or initiated – the practitioner's conduct in connection with rendering or initiating the referred services was, in the Committee's opinion, unacceptable to the general body of the members of the profession in which the practitioner was practising at that time; or (c) if the person under review was not a practitioner when the referred services were rendered – the person's conduct in connection with rendering or initiating the referred services is conduct of a kind referred to in subsection 82(2). (2) If the Committee members are not unanimous in their findings, an additional written report setting out the findings of the minority may be given to the Determining Officer. (3) If the person under review is a practitioner, the report under subsection (1) may, with the person's written consent, include recommendations: (a) for disqualification of the practitioner; and (b) about the nature and period of the disqualification. 26 Section 106S of the HI Act at all material times provided: "(1) If the report contains a finding that a person under review has engaged in inappropriate practice in connection with rendering or initiating some or all of the referred services, the Determining Officer must: (a) make a draft determination in accordance with section 106U relating to the person under review; and (b) within 14 days after receiving the report, give copies of the draft determination to the person under review and to the Director. (2) The draft determination must be accompanied by a statement inviting the person under review to make written submissions, within 14 days, suggesting changes to the draft determination. (3) Within the 14 day period starting on the day on which the person under review receives a copy of the draft determination, he or she may make such written submissions to the Determining Officer. (4) Failure to comply with paragraph (1)(b) within the 14 day period does not affect the validity of the draft determination." 27 Section 106T of the HI Act at all material times provided: "(1) After the end of the 14 day period during which the person under review may make submissions, and with 35 days after receiving the Committee's report under section 106L, the Determining Officer must make a final determination in accordance with section 106U relating to the person under review. (2) Failure to make the determination within the 35 day period does not affect the validity of the final determination." 28 Section 106U of the HI Act insofar as is material, at all material times provided: "(1) A determination must contain one or more of the following directions: (a) that the Director, or the Director's nominee, reprimand the person under review; (b) that the Director, or the Director's nominee, counsel the person under review; (c) that the person under review repay to the Commonwealth an amount equivalent to any medicare benefit paid for inappropriate services (whether or not the medicare benefit was paid to the person), and that any medicare benefit that would otherwise be payable for those services cease to be payable; … ." 29 Section 106V(1) of the HI Act at all material times provided: "Subject to subsections (2) and (3), the final determination takes effect 28 days after the Determining Officer gives a copy of it to the person under review." 30 Section 129AD of the HI Act at all material times provided: "Where a final determination under section 106T, or a determination by a Medicare Participation Review Committee under subsection 124FB(1), 124FC(1) or 124FF(5), that an amount be payable to a person (in this section referred to as the payee) by another person takes effect or takes effect as varied, the amount specified in the determination, or in the determination as varied, is recoverable by the payee from the other person as a debt due to the payee." Sources of the Court's power 31 At all material times, s99 of the Act provided: "(1) Where a creditor or the bankrupt considers that, by virtue of a decision of the trustee under sub-section 102(1), (3) or (4), a proof of debt has been wrongly admitted, he or she may apply to the Court for an order that the proof be expunged or that the amount of the admitted debt be reduced, and the Court may make an order accordingly. (2) Notice of an application under sub-section (1) shall be given in accordance with the rules of the Court, to the creditor by whom the proof of debt was lodged. (3) The costs in relation to an application under sub-section (1) are in the discretion of the Court. (4) Where the Court makes an order under this section that a proof of debt be expunged or that the amount of an admitted debt be reduced, the person who proved the debt shall forthwith pay to the trustee any amount received by way of dividend in excess of the amount that he or she would have been entitled to receive if his or her debt had been originally admitted for the reduced amount, as the case requires." 32 Section 102(1) of the Act at all material times provided: "Where the trustee considers that a proof of debt has been wrongly admitted, he or she may: (a) revoke the decision to admit the proof of debt and reject it in whole; or (b) amend the decision to admit the proof of debt by increasing or reducing the amount of the admitted debt." 33 At all material times s178 of the Act provided that: "If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable." (emphasis supplied) The exercise of power under s178 34 Under s178, the Court has a discretion to make an order "as it thinks just and equitable". The HIC, as a creditor, was affected by the act of the trustee on 3 June 2002 not to accept the withdrawal of its proof of debt. Under the section, the Court's powers are conditioned by reference to the concepts of justice and equity. Therefore it is not necessary, when considering the application under s178, to form any conclusive view on whether the trustee was wrong, as a matter of law, to refuse to accept the withdrawal of the proof of debt. 35 In the context of s178, I consider that it would be unjust and inequitable to permit the HIC to have the benefit of an order overturning the trustee's decision. The HIC sought to prove a debt in the estate and received two dividends. The trustee and Dr Alekozoglou were entitled to consider that the proof of debt was advanced by the HIC in accordance with its considered view that it should be so advanced. Further, as counsel for Dr Alekozoglou noted, the HIC did not file the application until almost eighteen months after its receipt of its final dividend. All these factors occurred in the shadow of what Dr Alekozoglou and the trustee were entitled to consider was "closure" with respect to the bankruptcy as at 24 June 2000 and 3 January 2002 respectively. 36 The delay in filing the application was chiefly caused by the leisurely approach taken by the HIC and its legal advisers to finalising its position on whether to apply to the Court. Instructions were not sought from the HIC's lawyers until sixteen days after the trustee's decision. When instructions were sought, the lawyers chose to brief a particular senior counsel to give advice notwithstanding that he was shortly to depart Australia for one month. It was not until approximately two weeks after receipt of senior counsel's advice that the HIC set in train its internal processes concerning whether an application would be made to the Court. It was not until a further month later that a decision was made to apply to the Court, subject to the receipt of an estimate of the lawyer's cost which subsumed another ten days. Formal instructions were not given to the lawyers for a further month, after which it took them a further two weeks to file the application. 37 The delay referred to in the previous paragraph must be considered in the context of its effect upon Dr Alekozoglou and the trustee. Until the filing of the application, Dr Alekozoglou was entitled to consider that upon his release from bankruptcy he was entitled to put behind him the events that led to his bankruptcy including his indebtedness to the HIC. The trustee was entitled to consider, until the filing of the application, that he had concluded his role in relation to the bankrupt estate of Dr Alekozoglou. 38 Accordingly I would dismiss the application in so far as it seeks to attract the Court's powers under s178 of the Act. The exercise of power under s99 39 The question for the Court to determine under s99 of the Act is whether the proof of debt should be expunged. In this context the Court is required, without reference to time limits or the interests of justice or equity, to consider whether the trustee was correct, as a matter of law, to admit the HIC's proof of debt. Section 99(3) of the Act reminds the Court of its discretion with respect to costs, which includes the possibility that a successful applicant not receive its costs. 40 The Court's power to expunge a proof of debt is not affected by the fact that payments of dividends have been made to creditors. This much is clear from s99(4); but see also In re Holcombe (1888) 4 WN(NSW) 129. 41 The question for the Court to determine under s99(1) is whether the HIC's proof of debt was wrongly admitted by the trustee. The answer to that question depends on whether the debt was a provable debt in the bankruptcy. Under s82, debts which are provable in a bankruptcy include those which are: "…present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy" Such debts also include those to which the bankrupt: "… may become subject before his … discharge by reason of an obligation incurred before the date of the bankruptcy." 42 Counsel for the HIC submitted that Dr Alekozoglou's debt to it was not incurred until after the date of the bankruptcy. The date of the bankruptcy was 23 June 1997. The obligation of Dr Alekozoglou to make the relevant payment to the HIC did not arise until 9 October 1997; see [12] above. Accordingly it was contended that the obligations to the HIC "only mature(d) as a debt due and payable" after the taking effect of the final determination; see Commissioner of Taxation v Jones (1999) 86 FCR 282 at 290; [1999] FCA 308 at [34]. I agree with these submissions, but they do not answer the question whether, in any event, the debt was a "contingent" one as at 23 June 1997. 43 On the issue of "contingent" debt, counsel for the HIC submitted that under the HI Act there is no obligation, whether contingent or final, on the part of a medical practitioner to make payment to the Commonwealth by way of refund of Medicare benefits until a final determination is made under s106T of the HI Act. It was further contended that the HI Act prescribed "essential preliminaries" to a final determination. They were: · a report by the PSRC under s106L; · a draft determination by the determining officer under s106S; and · the lapse of 14 days to allow the medical practitioner to make submissions. 44 The report under s106L was provided on 26 June 1996. The draft determination under s106S was made on 26 March 1997. Written submissions were provided by Dr Alekozoglou to the Determining Officer on 30 May 1997. The draft determination was that Dr Alekozoglou pay $264,187.85. The final determination was made on 5 September 1997. It required Dr Alekozoglou to pay $168,054,10. It became thereafter recoverable by the Commonwealth under s129AD of the HI Act. 45 It is difficult to see how, as at 23 June 1997, Dr Alekozoglou had a "contingent" debt to the HIC of $168,054.10. As at 23 June 1997, the Determining Officer was considering his position with respect to a final determination. Such consideration included an assessment of the written submissions provided by Dr Alekozoglou on 30 May 1997. 46 Counsel for Dr Alekozoglou submitted that Dr Alekozoglou's obligation to the HIC "crystallised" on 26 June 1995 on the provision of the report under s106L. It was contended that once a report is provided under s106L, "there is an inevitability that an amount will be payable". It was also submitted that the liability exists prior to the making of the final determination but cannot be recovered until the final determination takes effect. 47 That submission begs the question as to what the liability is. It is possible that after considering the submissions of a practitioner, a determining officer will not consider the practitioner to be liable at all to the HIC. The facts of this case show that an amount referred to in a draft determination may be substantially reduced in a final determination. 48 Counsel for Dr Alekozoglou submitted that the object of the Act and s82 in particular is to relieve a bankrupt from all liability to which he was subject at the commencement of his bankruptcy. This again begs the question as to what the liability was. Giving s82 a generous construction, and for the reasons set out in the ensuing paragraphs, it is difficult to see how Dr Alekozoglou's debt to the HIC of $168,054.10 could, as at 23 June 1997, be considered to be a contingent debt. A debt in that sum was in no-one's contemplation as at 23 June 1997. Additionally, there was no existing obligation for Dr Alekozoglou to pay the HIC $168,054.10 as at 23 June 1997. 49 There are a number of cases which deal with whether certain debts are provable in a bankruptcy under s82 of the Act. Counsel for Dr Alekozoglou conceded that none of them are determinative of the outcome in this case. Each counsel sought, however, to gain some assistance from those authorities. 50 In my view, the following pertinent matters can be discerned from a number of the cases referred to by counsel: · A debt need not be due and payable at the date of bankruptcy to be provable in the bankruptcy, but there must be an obligation upon which the debt is founded, being an obligation which was incurred before the date of bankruptcy: Jones v Deputy Commissioner of Taxation (1998) 157 ALR 349 at 354, per Branson J (at first instance). · For a debt to be "contingent", "there must be an obligation upon which the contingency can operate", being an obligation which "must exist as at the date of bankruptcy": Lyford v Carey (1985) 3 ACLC 515 at 518, per Franklyn J. · Where discretion is required to be exercised, in a way which impacts on or is relevant to a debt, there is no obligation to pay until the discretion is exercised: Lyford at 519. · For a debt to be provable in bankruptcy, in the current context, there must be: "… existing circumstances which (give) rise to a contingent debt or liability, and which would crystallise by the happening of some future event": Gaffney v Commissioner of Taxation (1998) 81 FCR 574 at 578, per Mansfield J. · A contingent liability within s82 of the Act can include a potential liability arising from an obligation: Lofthouse v Commissioner of Taxation [2001] VSC 326, per Warren J. · "The questions for determination must be decided by reference to the language of the relevant statutes, rather then by resort to consequences which … would appear to produce injustice …": Re Kavich; Kavich v Official Trustee in Bankruptcy (1995) 58 FCR 82 at 86-87 per Hill J. (at first instance). 51 I accept the submission of senior counsel for the HIC that an obligation must be a recognisable one created by law and must not be some amorphous vulnerability to a possible debt. I also accept that the obligation in this case arose from the final determination. As at the date of the final determination, a contingent liability existed in Dr Alekozoglou to the HIC for a debt in the amount specified in the final determination, made on 5 September 1997. That obligation crystallised when the final determination became effective on 9 October 1997. 52 Accordingly, it is my view that the trustee erred in law on 3 June 2002 by not accepting the withdrawal of the HIC's proof of debt. I consider that the proof of debt was wrongly admitted, despite the fact that it was submitted by the party which has successfully contended that it was wrongly admitted. 53 Counsel for Dr Alekozoglou submitted that the Court should exercise its discretion not to make any order under s99(1) having regard to the conduct of the HIC, including its delay in bringing the application, its initial submission of the proof of debt and its receipt of dividends. 54 In my view it is important, in considering s99(1) of the Act, that the correct legal position should apply with respect to the admission of proofs of debt. If the Court considers that the facts of a case show that a proof of debt should be expunged, it would require an extraordinary series of circumstances for it to exercise its discretion not to make any order. The current circumstances, although containing an element of injustice and inequity, are not sufficiently far reaching for the Court not to make an order. In my view something in the nature of fraudulent conduct would be required for no order to be made. Accordingly I will order that the proof of debt be expunged. It will follow from s99(4) of the Act that the HIC is obliged to repay the trustee the dividends that it received from him. Costs 55 In the event that the HIC succeeded before the Court in seeking to expunge the proof of debt, it did not seek its costs. There will be no order as to costs. Order 56 The Court will order as follows: 1. Pursuant to s99(1) of the Bankruptcy Act 1966 (Cth), the proof of debt provided by the applicant which was admitted by the first respondent as a provable debt in the bankruptcy of the second respondent, be expunged. 2. The application otherwise be dismissed. 3. There be no order as to costs. I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Marshall. Associate: Dated: 13 August 2003 Counsel for the Applicant: Mr P J Hanks QC Solicitor for the Applicant: Minter Ellison Counsel for the 1st Respondent: Mr M Harrick Solicitor for the 1st Respondent: Ponte Earle Harrick Counsel for the 2nd Respondent: Mr R S Randall Solicitor for the 2nd Respondent: O'Donnell Frampton Salzano Date of Hearing: 30 July 2003 Date of Judgment: 13 August 2003