FEDERAL COURT OF AUSTRALIA Nathan v Burness (No 2) [2011] FCA 289 Citation: Nathan v Burness (No 2) [2011] FCA 289 Parties: KAILAI NATHAN v PAUL BURNESS AND MORGAN GERARD JAMES LANE AS TRUSTEES OF THE BANKRUPT ESTATE OF KAILAI NATHAN and CAPITAL FINANCE AUSTRALIA LTD (ACN 069 663 136) File number: VID 791 of 2010 Judge: TRACEY J Date of judgment: 31 March 2011 Catchwords: BANKRUPTCY – application for annulment of bankruptcy – default judgment said not to be obtained in a proceeding – two versions relied upon by creditor – differences between versions immaterial – creditor entitled to rely upon second version – valuation of security in creditor's petition – nil value given because true value unascertainable – not a capricious, false or excessively low valuation - petition not rendered defective – proof of debt estimated value of security interest above nil – discrepancy cannot found conclusion that sequestration order should not have been made – creditor's failure to comply with temporal requirements under Rules cannot render sequestration order one which Federal Magistrate was not bound to make – differences between characterisations of relevant agreement do not found conclusion that sequestration order should be set aside – other discretionary considerations do not support the making of an annulment Legislation: Bankruptcy Act 1966 (Cth) ss 81, 153B Federal Court (Bankruptcy) Rules 2005 rr 4.02, 4.08 Cases cited: Biron Capital Limited v Anstee [2005] FMCA 1100 compared Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239 cited Capital Finance Australia Pty Ltd v Nathan [2008] FMCA 1363 referred to Cottrell v Wilcox [2002] FCA 1115 cited Re Frank; Ex parte Piliszky (1987) 16 FCR 396 cited Re O'Leary; Ex parte Bayne (1985) 61 ALR 674 cited Re Papps; Ex parte Tapp (1997) 78 FCR 524 cited Re Williams (1968) 13 FLR 10 cited Rigg v Baker [2006] FCAFC 179 considered Dates of hearing: 3 & 4 March 2011 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 51 The Applicant appeared in person Counsel for the First Respondent: Mr R Harris Solicitor for the First Respondent: Lennon Mazzeo Lawyers Counsel for the Second Respondent: Mr W Smith Solicitor for the Second Respondent: Bartier Perry Lawyers IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 791 of 2010 BETWEEN: KAILAI NATHAN Applicant AND: PAUL BURNESS AND MORGAN GERARD JAMES LANE AS TRUSTEES OF THE BANKRUPT ESTATE OF KAILAI NATHAN First Respondent CAPITAL FINANCE AUSTRALIA LTD (ACN 069 663 136) Second Respondent JUDGE: TRACEY J DATE OF ORDER: 31 March 2011 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 791 of 2010 BETWEEN: KAILAI NATHAN Applicant AND: PAUL BURNESS AND MORGAN GERARD JAMES LANE AS TRUSTEES OF THE BANKRUPT ESTATE OF KAILAI NATHAN First Respondent CAPITAL FINANCE AUSTRALIA LTD (ACN 069 663 136) Second Respondent JUDGE: TRACEY J DATE: 31 March 2011 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 A sequestration order was made against the estate of Mr Kailai Nathan by Barnes FM in the Federal Magistrates Court on 7 October 2008: see Capital Finance Australia Pty Ltd v Nathan [2008] FMCA 1363. No appeal was lodged against her Honour's decision. 2 On 13 September 2010 Mr Nathan made application for an order, pursuant to s 153B of the Bankruptcy Act 1966 (Cth) ("the Act") for an order annulling his bankruptcy. The only respondent named in the application was Mr Paul Burness who was one of the two trustees who, the Federal Magistrates Court noted, had consented to act as trustees of Mr Nathan's estate. 3 On 5 November 2010 I ordered that the judgment creditor, Capital Finance Australia Ltd ("Capital Finance"), be added as a respondent. I also ordered that the other trustee appointed to administer Mr Nathan's estate, Mr Morgan Lane, be added as a respondent. 4 Mr Nathan had failed to comply with a bankruptcy notice which had required him to pay Capital Finance $70,181.44. This debt was said to be owed by reason of a default judgment obtained by Capital Finance in the County Court of Victoria on 11 August 2004. The debt arose as a result of Mr Nathan's failure to make required monthly payments under a term purchase agreement which he had entered into with Capital Finance in order to acquire a Mercedes Benz motorcar. The full history of Mr Nathan's legal dealings with Capital Finance following his default are set out at [2008] FMCA 1363 at [4][12]. 5 Mr Nathan argued that the bankruptcy should be set aside for five reasons. They were that: (a) The default judgment on which his bankruptcy was founded was not a judgment obtained in a proceeding. (b) Rule 4.02(1) of the Federal Court (Bankruptcy) Rules 2005 (Cth) ("the Rules") which requires that a creditor's petition be in accordance with Form 6 of the Rules had not been complied with. (c) A proof of debt, lodged on 18 December 2008 by Capital Finance, recorded that Capital Finance had a security interest in the car valued at $15,000 whereas, before the Federal Magistrate, Capital Finance had submitted that a nil valuation attached to the vehicle. (d) The failure of Capital Finance to comply with rule 4.08 following the making of the sequestration order. (e) Contradictory statements had been made by Capital Finance about whether the commercial agreement between that company and Mr Nathan was properly to be described as a hire purchase agreement or a lease agreement. 6 Some of these grounds were relied on by Mr Nathan before Barnes FM as grounds of opposition to the creditor's petition and were rejected by her Honour. 7 Relevantly, subsection 153B(1) of the Act provides that: "(1) If the Court is satisfied that a sequestration order ought not to have been made … the Court may make an order annulling the bankruptcy." 8 As French J observed in Rigg v Baker [2006] FCAFC 179 at [59], the power conferred by s 153B involves two elements, namely, the Court's satisfaction that the sequestration order ought not to have been made and the exercise, by the Court, of a discretion to make an order annulling the bankruptcy. His Honour (at [63]) also quoted with approval five propositions which emerged from earlier decisions relating to applications for annulment of bankruptcy. They were: "1. It is for the applicant for annulment who alleges, and it is therefore for him to bring himself within the section and satisfy the Court, that the sequestration order ought not to have been made. 2. The Court to whom the application is made seeks to ascertain the actual state of affairs at the time when the sequestration order is made. 3. In order to ascertain that actual state of affairs the Court hearing the application for annulment looks at the facts that were before the Court which made the sequestration order and at any other facts that were not before that Court but are shown on the hearing of the application for annulment to have been in existence when the sequestration order was made. 4. Having considered all the facts so looked at, the Court determines whether on those facts the applicant is satisfied it that the sequestration order ought not to have been made. 5. If it is so satisfied, the Court is not bound to annul the sequestration order but must consider in all circumstances of the case whether it ought to be annulled." 9 The word "ought" bears an imperative meaning. In the context of s 153B it requires the applicant for annulment to establish that the court which made the original order was "bound" not to do so: see Re Frank; Ex parte Piliszky (1987) 16 FCR 396 at 403 (per Fisher J). 10 An applicant who seeks an annulment of his or her bankruptcy "carries a heavy burden". It is incumbent upon such an applicant "to place before the Court all relevant material with respect to his or her financial affairs so that the Court may be properly informed and may make a judgment that is based on the full facts and actual circumstances of the applicant": Re Papps; Ex parte Tapp (1997) 78 FCR 524 at 531. 11 Considerations which may have a bearing on the exercise of discretion include unexplained delay in the making of the application, whether or not the applicant is solvent and whether or not the applicant has made full disclosure of his or her financial affairs: Re Williams (1968) 13 FLR 10 at 24-5; Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239 at 247; Re Papps at 531; Rigg v Baker at [79]; Cottrell v Wilcox [2002] FCA 1115 at [7]. 12 I turn now to an examination of the five reasons advanced by Mr Nathan, having regard in each instance to these principles. THE DEFAULT JUDGMENT 13 Mr Nathan contended that the default judgment on which his bankruptcy was founded was not a judgment obtained in a proceeding. This assertion is apt to confuse and does not accurately reflect the argument which he put. 14 In order to understand his argument it is necessary to return to 2004. When Mr Nathan defaulted in making periodic payments under his agreement with Capital Finance, the company retained solicitors in Melbourne to recover the debt. A proceeding was commenced by writ in the County Court and, when Mr Nathan failed to appear, a default judgment was entered. Shortly after the judgment was pronounced the solicitors drew up and lodged with the Registrar of the Court a document entitled "Default Judgment for Debt". It listed various amounts which it was said Mr Nathan owed Capital Finance. These included various costs incurred in prosecuting the proceeding. A Registrar of the Court authenticated the judgment on 11 August 2004 by signing the document prepared by the solicitors and applying to it the seal of the Court. Before doing so the Registrar adjusted the amounts of some of the costs claimed which reduced the total amount of the default judgment by a small amount. 15 In 2007 Capital Finance wished to issue a bankruptcy notice against Mr Nathan. In order to do so it was necessary for an authenticated copy of the 2004 default judgment to be obtained. Capital Finance instructed a Sydney firm to issue the bankruptcy notice. For reasons which were not explained in evidence it was thought necessary to obtain a fresh copy of the document authenticating the default judgment. The Sydney firm instructed its Melbourne agents to obtain such a document. The agents prepared a default judgment which varied in some minor ways from that which had been issued in 2004. The Court file number differed by one digit, apparently as a result of a typographical error. The name and address of the original solicitors were left on the document but the telephone number of the Melbourne agent was substituted for that of the original solicitors. The costs amounts and the totals were adjusted to conform with the handwritten amendments, made by the Registrar, on the original. The order was submitted to the Court Registry by the agent. In due course it was authenticated by being signed by an officer in the Registry. The Court's seal was applied bearing the date 11 August 2004. 16 This second version of the default judgment was filed in support of the application for the issue of a bankruptcy notice. 17 It emerged in argument that Mr Nathan had a number of concerns with this process. He did not consider that the second default judgment had been obtained in a proceeding because the proceeding had concluded, at the latest, in 2005 when an application which he had made to set aside the default judgment was dismissed. The subsequent obtaining of the second version of the default judgment in 2007 had not, therefore, occurred in the original proceeding. Moreover, the differences between the two versions of the default judgment meant that Capital Finance was precluded from relying on the later version when seeking the issuing of a bankruptcy notice. 18 The document which was authenticated, under the County Court Civil Procedure Rules, in 2007 provided a record of the making of the default judgment in 2004. It was a record on which Capital Finance was entitled to rely in seeking the issue of a bankruptcy notice and in establishing the existence of a judgment debt. The variations between the original authenticated order and the order obtained in 2007 were immaterial. Critically, both documents certified that Mr Nathan was indebted to Capital Finance to the extent of $70,181.44. 19 Capital Finance's reliance on the second version of the default judgment does not provide a reason for the annulment of Mr Nathan's bankruptcy. THE VALUATION ISSUE 20 Reasons (b) and (c) are linked. 21 As Mr Nathan asserts, rule 4.02(1) of the Federal Court (Bankruptcy) Rules 2005 ("the Rules") require that a creditor's petition be in accordance with Form 6 of the Rules. Form 6, in turn, requires that a creditor's petition contains one of the following statements: "2 The applicant creditor does not hold security over the property of the respondent debtor. OR The applicant creditor holds security over the property of the respondent debtor to the value of [$ amount] and consisting of [statement of particulars of security], and: (a) is willing to surrender this security for the benefit of creditors generally if a sequestration order is made against the respondent debtor; OR (b) the value of the property is [$ amount], which leaves an unsecured debt of [$ amount]." 22 The requirement for one or more of these statements to be made stems from the provisions of subsections (2), (3) and (4) of s 44 of the Act. 23 Paragraph 2 of the creditor's petition filed by Capital Finance read: "The applicant creditor holds security over a Mercedes Benz E280 V6 Elegance … the value of which is currently not ascertainable. The applicant creditor is the owner of the Vehicle and the respondent debtor has the Vehicle in his custody, possession and/or control." 24 Mr Nathan contended that Capital Finance had not complied with its statutory obligations because it had failed to provide an estimate of the value of its security interest in the car and had not said that it was willing to surrender its security. He pointed to the dictum of Sheppard J in Re O'Leary; Ex parte Bayne (1985) 61 ALR 674 at 682 that any estimate of the value of a security, appearing in a creditor's petition, "must bear a close relationship to the realities of the matter. It must certainly not be arbitrary or capricious." 25 Capital Finance had filed an affidavit in the Federal Magistrates Court in which one of its officers deposed, relying on an industry guide, that a car of the type and age which had been financed under the agreement with Mr Nathan was estimated to be worth in the range of $13,000 to $16,000 on the assumptions that it was in average condition and fell within a particular odometer reading range. If, however, the vehicle was in poor condition the value would be less than $13,000. Beyond this, Capital Finance could not go because it did not have access to the vehicle. 26 Capital Finance did not rely on this affidavit as evidence of the value of the car that provided the security disclosed in its petition. 27 Capital Finance submitted (as it had done before the Federal Magistrate) that the effect of paragraph 2 of the petition was to place an estimate of "nil" on the value of the car because its true value was not ascertainable: cf Biron Capital Limited v Anstee [2005] FMCA 1100 at [21] (per Driver FM). 28 Barnes FM accepted that the statements in the creditor's petition that the value of the security was "currently not ascertainable" and that Mr Nathan had the vehicle in his custody, possession and/or control amounted to an estimate of the value of the security at "nil" because of the creditor's inability to make a reliable estimate of its value. Such a nil valuation was not capricious, false or excessively low. Her Honour further held that there was no evidence that the "nil" valuation was contrived to avoid the obligation to make security available for the benefit of creditors generally. She was satisfied that the estimate of "nil" was a genuine one and that Capital Finance acted reasonably in making the statements which appeared in paragraph 2 of the petition. 29 I respectfully agree with the Federal Magistrate, for the reasons which she gave in [2008] FMCA 1363 at [82]-[100], that the creditor's petition was not rendered defective by the statements contained in paragraph 2. 30 On 18 December 2008 Capital Finance filed a proof of debt in which it estimated the value of its security interest in the car at $15,000. 31 Mr Nathan submitted that this estimate was inconsistent with the nil valuation which had been accepted by the Federal Magistrate some two months earlier. 32 Counsel for the respondents were unable to explain the basis for the $15,000, beyond speculating that it may have been founded on the estimate appearing in the affidavit which had been filed in the Federal Magistrates Court. 33 Whatever be the basis for the estimate appearing in the proof of debt, it cannot constitute a reason for concluding that the sequestration order ought not to have been made. The discrepancy, if there be one, was not and could not have been known to the Federal Magistrate. In any event, the estimated figure fell well short of the amount owed by Mr Nathan to Capital Finance. COMPLIANCE WITH RULE 4.08 34 Rule 4.08 of the Rules provides that, if the Court makes a sequestration order, the creditor must: "(a) on the same day as the order is made, notify the trustee, in writing, of his or her appointment; and (b) unless the order is entered in the Court at the time it is made, enter the order, within 1 day after it is made, by filing an order in accordance with Form 7." 35 One of the orders made by Barnes FM on 7 October 2008 was that: "Under the Bankruptcy Regulations a copy of this sequestration order be given to the Official Receiver in Sydney within two (2) days." 36 It was common ground that a copy of her Honour's orders were not lodged with the Insolvency Trustee Service Australia until 23 October 2008. 37 The reason for the delay appears to have been that Capital Finance's solicitors were expecting to receive a copy of the sealed order from the Registry of the Federal Magistrates Court through the document exchange. When it had not been received by 21 October 2008 the solicitors made contact with the Court Registry requesting the provision of a sealed copy of the orders so that they could be served on the Insolvency Trustee Service. The order was sealed the following day. 38 It is not immediately apparent how it is said that there has been a failure to comply with Rule 4.08. The order of Barnes FM may not have been complied with if the sequestration order referred to was an unauthenticated order. 39 Again, and in any event, the failure, if there be one, to comply with the temporal requirements in the Rules could not render the sequestration order one which the Federal Magistrates Court was bound not to make. Self-evidently, any failure occurred after the Federal Magistrate had made her orders. THE CONTRADICTORY STATEMENTS 40 In its statement of claim which was filed in the County Court, Capital Finance alleged that the individual motor term purchase agreement which had been entered into between it and Mr Nathan was an agreement "to finance the hire purchase of a motor vehicle". 41 On 27 January 2009 one of the trustees of Mr Nathan's bankruptcy estate, Mr Paul Burness, served on Mr Nathan a document entitled "NOTICE OF INTENTION TO DISCLAIM LEASE." In the body of the document the agreement between Capital Finance and Mr Nathan was described as "a leasing agreement". 42 In opening his case Mr Nathan identified the alleged differences in the characterisation of the agreement as being one of the reasons why the sequestration order should be set aside. In final submissions he did not press this as a reason which supported the making of the order which he sought. 43 The Federal Magistrate was well aware of the terms of the agreement between Capital Finance and Mr Nathan when she made the sequestration order. The question of whether the agreement had correctly been described as a hire purchase agreement or a leasing agreement would have had no bearing on the decision she was called on to make. EXERCISE OF DISCRETION 44 Had I been persuaded that, for some reason, the Federal Magistrate was bound not to have made the sequestration order, I would not have granted Mr Nathan's application for annulment. 45 There are many discretionary considerations which tell against an annulment. 46 There is, in the first place, the unexplained delay of some two years between the making of the sequestration order and Mr Nathan's application to have it set aside. 47 During this period Mr Nathan has been wholly unco-operative with his trustees. He has declined to file a statement of affairs. He has refused to participate in an examination under s 81 of the Act which would have enabled the trustees to question him about his financial affairs. As a result little is known about those affairs. 48 It is known that in June 2007 he transferred what he asserts to be his only real property to his wife. He did so without consideration. 49 There is no evidence before the Court to establish his present solvency. He said that he was unemployed and in receipt of social security benefits. As a result, there is no reason to believe that he is in a position to repay the debt he owes to Capital Finance. 50 It is also of concern that there are creditors other than Capital Finance who have filed proofs of debt in the bankruptcy. Their interests would, potentially, be prejudiced by the making of the order sought by Mr Nathan. So far as the Court is aware they have not been notified of his application. They did not appear. DISPOSITION 51 Mr Nathan's application should be dismissed with costs. I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tracey. Associate: Dated: 31 March 2011