FEDERAL COURT OF AUSTRALIA Ozdil v Vrsecky (Trustee) [2016] FCA 881 File number: VID 301 of 2016 Judge: JESSUP J Date of judgment: 5 August 2016 Catchwords: BANKRUPTCY – Annulment of bankruptcy under s 153B of the Bankruptcy Act 1966 (Cth) – Whether sequestration order "ought not to have been made" – bankrupt's debt not effectively assigned. Legislation: Bankruptcy Act 1966 (Cth) ss 30, 40, 52, 153B Property Law Act 1958 (Vic) s 134 Cases cited: Re Vella; Ex parte Seymour (1983) 67 FLR 287 Stankiewicz v Plata [2000] FCA 1185 Date of hearing: 16 June 2016 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 19 Counsel for the Applicant: The applicant appeared in person Counsel for the First Respondent: Mr B Devanny Solicitor for the First Respondent: Smith Leonard Fahey Counsel for the Second Respondent: Ms D McCredden Solicitor for the Second Respondent: White Cleland ORDERS VID 301 of 2016 BETWEEN: BUKET OZDIL Applicant AND: PETR VRSECKY AS TRUSTEE OF THE BANKRUPT ESTATE OF BUKET OZDIL First Respondent BAYCORP COLLECTIONS PDL (AUSTRALIA) PTY LTD (ACN 119 478 778) Second Respondent JUDGE: JESSUP J DATE OF ORDER: 5 AUGUST 2016 THE COURT ORDERS THAT: 1. The applicant's bankruptcy be annulled. 2. The application otherwise be dismissed. 3. Pending the receipt of submissions from the parties, costs be reserved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT JESSUP J 1 The estate of the applicant, Buket Ozdil, was sequestered by an order made by the Federal Circuit Court on 5 August 2014. In this proceeding, she seeks the annulment of her bankruptcy pursuant to s 153B of the Bankruptcy Act 1966 (Cth) ("the Act"). She also seeks the setting aside of the bankruptcy notice upon which the petition, which led to the making of the sequestration order, was based pursuant to s 30(1) of the Act. 2 The only evidence before the court is that contained in the applicant's affidavit sworn on 11 April 2016, on which she was not cross-examined. The recitation of the relevant facts set out below is based on that affidavit. 3 In the Statement of Claim endorsed on the Complaint in a proceeding against the applicant commenced in the Magistrates Court of Victoria ("the Magistrates Court") on 8 July 2013, the second respondent, Baycorp Collections PDL (Australia) Pty Ltd ("Baycorp") made allegations which included the following: the applicant entered into a credit line/credit card contract with Westpac Banking Corporation ("Westpac"), which provided that Westpac would extend credit to the applicant upon the basis that she pay interest at the rate published by Westpac from time to time, and make minimum monthly payments to Westpac; the published interest rate was 12.99%; the applicant failed or refused to make payments to Westpac, thereby becoming indebted to Westpac in the sum of $12,196.53; by deed dated 27 May 2008, Westpac assigned the contract and the debt to Baycorp; notice of the assignment was given to the applicant on 6 May 2009; the applicant made part payments in the sum of $1600 to Baycorp from 29 July 2009 to 12 January 2011, thereby reducing the debt to $10,596.53; by notice of default dated 20 May 2013, Baycorp made demand from the applicant for payment of the debt and interest; and from 6 May 2009 to 8 July 2013, interest accrued in the sum of $5,961.67, bringing the applicant's indebtedness to Baycorp to $16,558.20; despite demand, the applicant failed and/or neglected to pay the outstanding amount of $16,558.20 to Baycorp. 4 The Complaint was endorsed with a notice that, if the applicant intended to defend the proceeding, she was required to give a notice in that behalf within 21 days of the service of the Complaint upon her. The notice included the statement that, if the applicant paid the sum of $16,558.20, together with costs in the sum of $1,303, she might avoid further costs. There is no specific evidence as to what happened next, but it may be inferred that the applicant took no further step in the proceeding, since a default judgment, for $16,558.20 plus costs of $1,381.50, was entered against her on 5 August 2013. This meant that the allegations referred to above were never tested in court, and were not the subject of any judicial determination. In the present proceeding, the applicant has given uncontradicted evidence that she did not receive a notice of the assignment of the debt from Westpac to Baycorp. In the setting of s 153B of the Act, and contrary to what would normally be the case, the merger of the debt in the judgment of 5 August 2013 does not disbar the applicant from challenging the reality of the debt on which Baycorp sought to rely. I shall return to these aspects of the matter presently. 5 On 21 November 2013, Baycorp caused a bankruptcy notice, issued on 13 November 2013, to be served on the applicant. The notice relied on the judgment of 5 August 2013. To the judgment debt of $17,939.70 there was added the sum of $477.25 by way of post-judgment interest. Thus the total sum to which the applicant was said to be indebted to Baycorp, as specified in the notice, was $18,416.95. The applicant did not comply with the notice, or do any of the other things for which s 40(1)(g) of the Act provides, within the time specified in the notice. In the result, the applicant thereby committed an act of bankruptcy on 12 December 2013. 6 On 13 May 2014, Baycorp petitioned in the Federal Circuit Court for the applicant's bankruptcy. The sum for which the applicant was said to be indebted to Baycorp was the judgment debt of $16,558.20, costs of $1,381.50 and post-judgment interest, which by then amounted to $1,447.46: a total of $19,387.16. It was that Petition which led to the making of the sequestration order to which I have referred in the first paragraph of these reasons. 7 The first of four broad allegations which the applicant makes is that she was not served with a notice of assignment of the debt from Westpac to Baycorp. As a matter of pure fact, this allegation must be upheld: as noted above, the applicant gave evidence to that effect which was neither challenged nor contradicted. The remaining questions are, first, what consequences it would have for the "reality" (as it has been put in the authorities) of the debt on which Baycorp sued in the Magistrates Court, and secondly, whether it is open to the applicant now to challenge the bankruptcy notice and/or the sequestration order upon this ground. 8 If the applicant was indebted to Baycorp by assignment, it could only have been because the requirements of s 134 of the Property Law Act 1958 (Vic) were satisfied. Relevantly, that section provides as follows: Any absolute assignment by writing under the hand of the assignor … of any debt or other legal thing in action, of which express notice in writing has been given to the debtor … shall be and shall be deemed to have been effectual in law … to pass and transfer from the date of such notice — (a) the legal right to such debt or thing in action; (b) all legal and other remedies for the same; and (c) the power to give a good discharge for the same without the concurrence of the assignor …. On the evidence, notice was not given to the applicant. She was not, therefore, indebted to Baycorp. 9 The answer to the second question referred to above is less straightforward, but ultimately no less clear. I shall commence by considering the applicant's ability to challenge the regularity of the bankruptcy notice. 10 It may be accepted that, on an application to set aside a bankruptcy notice, a bankruptcy court will be prepared to go behind the judgment on which the notice was based if it is shown that the debt relied on did not in truth exist. But different considerations apply where the notice has expired and s 40(1)(g) of the Act has done its work. The susceptibility of the underlying judgment to be set aside, or the actual (later) setting aside of the judgment, cannot alter the state of affairs brought about by operation of the statute. In Re Vella; Ex parte Seymour (1983) 67 FLR 287, the debtor had not complied with the bankruptcy notice by the time limited therein. Subsequently, she applied, in the court which had pronounced the judgment on which the notice was based, to have that judgment set aside. She also applied, in the Federal Court, to have the notice itself set aside. The former application was successful – the underlying judgment was set aside. The latter application was unsuccessful. Morling J said (67 FLR at 288-289): It is necessary to keep clearly in mind the effect of non-compliance with the bankruptcy notice. The effect was, of course, that the debtor committed an act of bankruptcy when she failed either to comply with its terms or to take appropriate action under s 41(6A). The subsequent setting aside of the judgment did not alter the fact that the act of bankruptcy had already been committed. The act of bankruptcy remained extant. No doubt, in the exercise of its discretion, the court would not make a sequestration order if at the time of the hearing of the petition it was shown that the judgment debtor was not in fact indebted to the judgment creditor. But the act of bankruptcy referred to in s 40(1)(g) would be complete. I cannot distinguish Vella. It is now too late for the applicant to challenge the bankruptcy notice served on her on 21 November 2013 on the ground that the debt on which the underlying judgment was based did not exist. 11 I turn next to the applicant's case under s 153B of the Act, subs (1) of which provides as follows: If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy. The question which arises in the present case is whether the sequestration order "ought not to have been made". 12 That question involves a consideration of the duty of the court upon the hearing of a petition. This matter is the subject of s 52 of the Act, subs (1) and (2) of which provide as follows: (1) At the hearing of a creditor's petition, the Court shall require proof of: (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (b) service of the petition; and (c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor. … (2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor: (a) that he or she is able to pay his or her debts; or (b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition. In the context of the present case, it was a requirement for the making of a sequestration order that the court was satisfied that the debt on which Baycorp relied was still owing. 13 In the affidavit on which Baycorp relied in support of its petition, reliance was placed only on the debt the subject of the default order of the Magistrates Court. The evidence before the court on the return of the petition was to the effect that this debt was still owing. On that evidence, it could not be suggested that the sequestration order ought not to have been made. However, in an application under s 153B, the court is not limited to the facts which were before the court on the making of the sequestration order. The "true facts", as they existed as the making of that order, may, and if conventionally placed in evidence should, be considered: Stankiewicz v Plata [2000] FCA 1185 at [19]-[20]. 14 On the making of the sequestration order, had the court been appraised of the facts in evidence in the present proceeding, specifically the fact that notice of the assignment of the debt from Westpac to Baycorp had not been given to the applicant, such an order would not have been made. While, in a sense, the making of a sequestration order under s 52 of the Act is discretionary, it would, in my view, have constituted an improper exercise of that discretion for the court to have proceeded to sequester the estate of the applicant against the knowledge that the one circumstance upon which Baycorp relied was an alleged debt which did not exist. In my view, the sequestration order of 5 August 2014 ought not to have been made. 15 It is true that the power arising under s 153B of the Act is itself discretionary, and there may be good reasons why, notwithstanding that a sequestration order ought not to have been made, the court would nonetheless decline to make an order under that section. On the present application, it was correctly submitted on behalf of Baycorp that the applicant had not led evidence as to her solvency. It was next submitted that failure to comply with a bankruptcy notice was prima facie evidence of insolvency. In the normal case, that is so. However, where the ground for acting under s 153B is the established circumstance that the debt on which the bankruptcy notice was based did not exist, it would, in my view, not be a proper exercise of the court's discretion to withhold the remedy for which the section provides because of the applicant's failure to take the additional step of proving her solvency. In the present case, the premise upon which the normal rule is based has been stripped away by the applicant's evidence that she was not notified of the assignment of the debt from Westpac to Baycorp. 16 I have also been troubled by what might be viewed as opportunism on the part of the applicant in making the present application. It appears that she did not contest Baycorp's proceeding in the Magistrates Court and did not appear on the return of the petition for her bankruptcy. She then stood by for about 20 months before making her application under s 153B. In another case, these factors might well have weighed powerfully against the making of an order under the section. In the present case, however, the fact on which the applicant relies strikes so fundamentally at the intrinsic merits of the case for the sequestration of her estate as to persuade me that discretionary considerations of the kind referred to in this paragraph should not stand in the way of the outcome which she seeks. 17 For the above reasons, I propose to order that the applicant's bankruptcy be annulled. 18 In her case in court, the applicant advanced a number of other reasons why an order of that kind should be made. Save to observe that those reasons were of no substance, and played no part in the conclusion which I have reached, I shall say nothing further about them. 19 I shall hear from the parties (including the trustee, who was joined as first respondent in this proceeding) on the question of costs. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup. Associate: Dated: 5 August 2016