Case: Capsalis v Ozdemir [2005] FMCA 1163
Outcome: referred to
Federal Court is a superior court (FCA Act, s 5(2)) and therefore, whatever the nature of the defect or defects in the proceedings, the sequestration order is not void or a nullity in the sense that it is without legal effect: see Cameron v Cole [1944] HCA 5 ; (1944) 68 CLR 571 at 590 per Rich J; Emanuele v ASC [1997] HCA 20 ; (1997) 188 CLR 114 at 119, 120 per Brennan CJ and at 156 per Kirby J; Re Anasis; Ex parte Total Australia Ltd (1985) 63 ALR 493 at 496 and Re Fuller [1999] FCA 1811 at [13] [16] per Hill J. This principle applies to orders made by registrars of the Federal Court pursuant to the scheme of delegation of powers under s 35A of the FCA Act: Official Trustee v Nedlands [2000] FCA 599 ; (2000) 173 ALR 255 at [22] [25] per Finn J. 88 In Cameron v Cole the High Court held that the Federal Court of Bankruptcy was a superior court and Williams J, whose dissent was not on this point, said (at 607): 'When, therefore, the Federal Court of Bankruptcy has made a sequestration order under the Act, it is not, in my opinion, a nullity, so that, even if it has been irregularly obtained, it operates until it is set aside and causes the debtor to become a bankrupt and his property to vest in the official receiver...' The sequestration order in the present case is therefore, at worst, voidable and was effective to bankrupt Ms Cross when it was made. The question of whether it can truly be seen to be voidable depends upon the applicability and operation of s 306. Section 306 only applies to a formal defect or an irregularity but where that precondition is satisfied, it operates automatically: Kleinwort Benson Australia Ltd v Crowl [1988] HCA 34 ; 165 CLR 71 at 81. As the High Court said in Adams v Lambert [2006] HCA 10 ; (2006) 225 ALR 396 at [24] , the composite expression 'a formal defect or an irregularity' conveys a meaning with elements of both inclusion and exclusion. The Court went on to say (at [26]): 'The question of construction raised by the words "a formal defect or an irregularity" is one to be decided by reading s 306 in the context of the whole Act, informed by the general purpose of the legislation, and the particular purpose of the provisions relating to bankruptcy notices. It is similar to the question that, in former times, would be explained by asking whether a statutory requirement was mandatory or directory. In Project Blue Sky Inc v Australian Broadcasting Authority it was said: "A better test ... is to ask whether it was a purpose of the legislation that an act done in breach of [a] provision should be invalid ... In determining the question of purpose, regard must be had to 'the language of the relevant provision and the scope and object of the whole statute'".' The High Court also held that the kind or degree of breach is relevant to a consideration of s 306 and that if a defect could cause substantial injustice, it may not easily be classified as a formal defect or irregularity: see [18], [22]. Ultimately, the characterisation of a defect as formal or substantive is a matter for judgment, however, it is first necessary to consider, as the High Court has indicated, the legislative regime in relation to, in this case, creditors' petitions. A useful starting point is the analysis of Burchett J in Re Millar; Ex parte Commonwealth Development Bank of Australia (No 388/1993, unreported, 27 April 1993), where his Honour first set out what the Full Court had said in Ginnane v Diners Club Limited (1993) 120 ALR 375 at 376: 'Paragraph 52(1)(b) of the Bankruptcy Act provides that at the hearing of a creditor's petition, the Court shall require proof of the service of the petition and, if it is satisfied with the proof of that service, as well as the other matters specified in sub-section 52(1), it may make a sequestration order against the estate of the debtor. Sub-section 52(2) provides, among other things, that if the Court is not satisfied with the proof of the service of the petition, it may dismiss the petition. These provisions illustrate a unique prescription relating to a petition for a sequestration order. A sequestration order affects the status of a person. The Legislature, in recognition of this feature, has insisted that the petitioner must prove, among other things, service of the petition on the debtor.' Burchett J went on to say: 'If one turns to s 52 of the Act, the force of what their Honours say is immediately apparent. It is a peculiar feature of litigation under the Bankruptcy Act , upon a creditors petition, that the court is expressly required to hear proof of service of the petition, and is expressly required, if it is not satisfied with the proof (among other things) of that matter, to dismiss the petition. It seems to me very difficult to regard s. 306 as capable of avoiding the consequences of any serious default, in respect of the requirements regarding the service of the petition so specifically stated in s. 52 , on the basis that such a serious default would be a mere formal defect or an irregularity. The requirements of s. 52 are essential requirements for the proof of the petition. They are made essential, no doubt, because the law recognises that proceedings in bankruptcy have an extraordinarily far reaching effect, not only upon the status of the debtor but also so as to convert, in some cases, actions and omissions of his in the past which at the time they were done or omitted did not constitute any offence into serious criminal offences.' It is clear from what his Honour said that having regard to the purposes of the statutory regime a serious breach of the requirements of service was intended by the legislature to lead to invalidity, in the sense that it would not constitute a mere formal defect to which s 306 would apply. This analysis echoes what the High Court said in Adams v Lambert , namely that the kind or degree of the breach is relevant to a consideration of s 306. In Re Ditfort; Ex Parte DCT (1988) 19 FCR 347, which was an application for annulment, Gummow J expressed agreement with the proposition, advanced by Walters J in Re Long; Ex parte Fraser Confirming Pty Ltd (1975) 12 SASR 130, that there is a necessity for strictness of proof in observance of the requirements for service of bankruptcy notices and bankruptcy petitions. His Honour said (at 359 360): 'Whilst not necessarily being of the view that s 306 can never apply in such a case in any circumstances, I respectfully agree with what was said by his Honour as to the importance of proper proof in these cases, and as to the salutary consequences for creditors of failure to comply with the rules...' In this case the relevant rules are, of course, the provisions of O 43 r 13 which set in place a special regime for service. The provisions of sub-rule 13(6) reflect the position in England as it became after Judicature: See, T Snow et a., The Annual Practice , 11 th edn, Sweet &amp; Maxwell, London, 1893 at 248; T W Chitty, Chitty's Archbold's Practice of the Queen's Bench Division of the High Court of Justice 14 h edn, H Sweet &amp; Son, London, 1885 at 1144. The practice in Chancery before Judicature was that 'service of a copy of the bill was effected in the ordinary manner' ( Annual Practice, supra, at 248). The Rules of Court in the First Schedule to the Supreme Court of Judicature Act (1873) 38 &amp; 39 Vict. c. 77 provided, relevantly in O 9 r 5: 'When a lunatic or person of unsound mind not so found by inquisition is a defendant to the action, service on the committee of the lunatic, or on the person with whom the person of unsound mind resides or under whose care he or she is , shall unless the Court or Judge otherwise orders, be deemed good service on such defendant.' (Emphasis added) In The Fore Street Warehouse Company Limited v Durrant &amp; Co. (1883) 10 Q.B.D. 471 the writ had been served on the lunatic defendant's business manager. Grove J said of the rule (at 473): 'I think the principle of this rule is that the service should be on some person qualified to act for the lunatic or most likely to know to whom the fact of service ought to be communicated. The manager of the lunatic's business might be ignorant of these matters. Where the writ is served in such a manner that it may probably never reach the lunatic, I do not think it can be valid and proper service. The plaintiffs may reasonably be required to go through the formalities which may give the friends of the lunatic a proper opportunity of appearing.' It is also useful to consider what has been said about the next step in the process contemplated by the rules, namely the appointment of a next friend or tutor. The Rules of the Supreme Court of New South Wales, and in particular those which preceded the recent uniform civil procedure regime, are in a similar form to those which operate in this Court. In State Rail Authority of New South Wales v Hammond (1988) 15 NSWLR 395 Kirby P, with whom Hope and Mahoney JJA agreed, explained (at 400) that: '... the provisions of Pt 63, r 2 [which establishes the procedural requirement of a next friend] are simply machinery or procedure provisions. They are designed, principally, to ensure that there is someone answerable to the court on behalf of the litigant, with a disability; that crucial decisions affecting that litigant can be properly and responsibly made; and that a person exists who can bear any costs as are ordered against the person with the disability at the end of the litigation.' Two features of the language of O 43 r 13 merit particular consideration. First, while the machinery provisions of O 43 r 13, namely, sub-rules (3) (6) use the word 'may', one must take into account sub-rule (2) which provides: '(2) Personal service on a person under a disability shall not be effected otherwise than in accordance with this rule.' Second, a certain tension seems to arise within the rule when ones comes to sub-rule (4), which provides: '(4) The document may be served on any person (including the person under disability) whom the Court may, before or after service , approve.' However, when one bears in mind the purpose of this rule and its place in the broader rules as to litigation involving disabled persons, there is no tension between sub-rules (2) and (4). One can readily imagine a case where the Court would approve a particular person upon whom service could be effected. Indeed, it would be a prudent course to obtain such approval in advance of proceeding against a disabled person. On the other hand, where service has taken place in breach of the rule but those who care for the disabled person nevertheless appear at Court and no injustice has been occasioned by the breach of the rules, one appreciates how the Court might approve service which has already taken place. The discretion in sub-rule (4) is premised upon the mandatory nature of the rule, as reflected in the language of sub-rule (2). Where the objects of the rule have otherwise been achieved, it facilitates the proceedings moving forward by validating service which would have otherwise been prohibited. It is also important to note that the rules expressly reject the idea that one might serve, perhaps out of an abundance of caution, both the person designated by sub-rule 13(6) and the mentally disabled person with an initiating process such as a creditor's petition. The course which is not only to be preferred but which appears to be required is to approach the Court for a grant of approval. Only in relation to the limited class of documents in sub-rule (8) is a different approach to be adopted. Thus, in their general application the special rules as to service firmly ensure that their aim is attained, namely that an opportunity is afforded to those who care for a mentally disabled person to appear before the Court and to represent and protect that person's interests where by definition he or she does not have the capacity to do so alone. The existence of a facility for the proceedings to move forward once that aim has been achieved does not detract from the control which the Court maintains over this step in proceedings against mentally disabled persons. In bankruptcy proceedings the legislature has protected all debtors by requiring proof of service of the petition in every instance. In the case of mentally disabled persons that protection extends to the requirement to serve in accordance with the special rules designed to ensure that the opportunity is a real one. In my judgment, strict compliance with the provisions of O 43 r 13 is necessary in bankruptcy proceedings. A breach of these rules could result in substantial injustice being visited upon the disabled respondent. Moreover, a serious breach could defeat the intention of the O 43 altogether and lead to a breach of the fundamental rules of natural justice. The FCR require service upon a particular person and that was not done. The FCR also prohibit service upon the disabled person and that was ignored. The conduct of the Creditor constituted a serious breach of the FCR and resulted in a defect in the proceedings which was not a formal one. Section 306 does not apply and the sequestration order is voidable. The separate question of whether substantial injustice has been occasioned by the defect in these proceedings does not arise. In any event, I am of the opinion that in all the circumstances of this case substantial injustice has been occasioned by the defect which cannot be remedied by order of the Court save to set aside the sequestration order and dismiss the petition. The Annulment Issue It is quite clear that Ms Cross should not have been bankrupted. She was solvent at the time. A creditor who issues a creditor's petition runs the risk that if the debtor is solvent, the likelihood is that the petition will be dismissed with costs. The evidence suggests that Ms Cross, due to her state of mind, may have thought that the body corporate of her home unit building did not exist and that she therefore did not owe it any money. Whether that be right or not, bankruptcy proceedings are not for debtors who won't pay debts. They are for debtors who can't pay debts. As the Full Court said in Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372 at 376: 'In bankruptcy, rights of creditors to sue the bankrupt are converted into rights of proof against his estate and he is protected from suit. The avoidance of preferences, voluntary settlements and fraudulent dispositions of property by the bankrupt is intended to restore the property or money of the bankrupt to his estate to achieve a fair and rateable division of the bankrupt's property among his creditors. The bankrupt is disqualified from holding certain offices. Bankruptcy involves a change of status and quasi-penal consequences. Upon discharge from bankruptcy, the bankrupt is released form his debts subject to certain exceptions. These considerations negate the existence of any policy underlying the Act that a debtor should be made bankrupt if he is able to pay his debts but is unwilling to do so. If a debtor is able to pay his debts but is recalcitrant, his creditors may resort to the remedies otherwise afforded by the law such as execution against his property and garnishee proceedings. The words "able to pay his debts" in s. 52(2) of the Act do not mean "willing and able" to do so .' (Emphasis added) The parties are agreed that the bankruptcy should be brought to an end, the only question being how that should be achieved. By her motion, Ms Cross seeks to have the sequestration order made by the registrar on 9 August 2004 set aside. In opposing the motion, the Creditor and the Trustee contend that the appropriate course is to make an order pursuant to s 153B(1) of the Act annulling the bankruptcy. In a normal case, annulment is undoubtedly the appropriate course; but this is anything but a normal case. The matter which evokes the response on the part of the Trustee to oppose the motion is that in the case of annulment, the Trustee gets the benefit of s 154(1)(b) of the Act, namely, he may apply the property of Ms Cross still vested in him the home unit at 12/28 Tullimbar Road, Cronulla in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the Trustee; whereas, if the sequestration order is set aside, he has no such right of application. The Creditor's opposition to the setting aside of the sequestration order is no doubt sourced in the consequential orders I would make of dismissing the petition and revoking the costs order made by the registrar on 9 August 2004. At the outset, it may be said that there is no longer any third course, for example, rescission of the sequestration order: See s 37(2) of the Act; Vaucluse Hospital Pty Ltd v Phillips &amp; Anor [2006] FMCA 44 at [19] and [20]. On the other hand, reviews of registrar's orders, like appeals to the Full Court, are outside the intended ambit of s 37. At the forefront of Ms Cross' case is that she was bankrupted on the first return date of a creditor's petition which was left with her while she was an involuntary patient in the Psychiatric Unit of Sutherland Hospital, but which I have found was not properly served, for a debt in respect of unpaid body corporate levies of $1,813.58, increased to approximately $2,400 by debt collection, legal and court costs of obtaining a default judgment in respect thereof; when, on the evidence before me, she owned assets in excess of half a million dollars including the home unit worth $375,000, money on deposit with major banks of more than $130,000 and shares and securities in major listed companies worth approximately $90,000. Moreover, Ms Cross was not present when the sequestration order was made. Had she, or representatives on her behalf, been present on the day, or if her circumstances and the circumstances of service of the Creditor's petition had been ventilated with the registrar on 9 August 2004 rather than being left buried in some affidavit of service, I have no doubt that the sequestration order would not have been made. Mr Bentley, in his submissions, said: 'At this point I would just like to also make this quite clear that my friend made some submissions about what happened in front of Registrar Tesoriero but that affidavit of Mr Wellmeela clearly says that she was served in a psychiatric unit. There is no hiding that, the documentation which was presented to the court clearly stated the fact. Now I presented that petition but unfortunately so long ago I can't remember what was said. I have a vague recollection that something may have been said about it but I can't recall and I am unable to assist the court or swear an affidavit so I haven't but there is no doubt that it is quite clear in evidence from Mr Wellmeela's affidavit what happened, where it happened and what was going on, so it is not as if anyone has tried to conceal this from the court or from the Registrar.' The fact is that Mr Bentley was the only person present before Registrar Tesoriero on 9 August 2004. He would not have been surprised at that. He certainly did not expect Ms Cross to be present. That he cannot remember what was said before the registrar on that day suggests to me that none of the relevant surrounding circumstances were brought to the registrar's attention because he, Mr Bentley, was blinded by an obsession to ensure that whatever else happened, Registrar Tesoriero made the sequestration order on that day. As an officer of the Court, he had an overriding duty to do more to draw to the Court's attention Ms Cross' circumstances and the circumstances under which she was purportedly served with the Creditor's petition. It is true that there has been some effluxion of time between the making of the sequestration order on 9 August 2004 and the filing of the motion on 7 November 2005. At least three things can be said about this, maybe more. First, there is no time limitation in which to bring a motion to set aside an order after it has been entered where the order has been made in the absence of a party: O35 r 7(2)(a) of the FCR, cf., s 35A(5) of the FCA Act and O 77 r 8 (now repealed) of the FCR. Second, there is a dearth of evidence as to what occurred in the period from 9 August 2004 until April 2005. It seems that the Trustee applied to become and became the registered proprietor of the home unit at Cronulla on or about 19 October 2004 but otherwise there was no administration of the bankrupt estate. The Legal Aid Commission became aware of Ms Cross' bankruptcy on or about 30 September 2004, nearly two months after she was made bankrupt. But otherwise there is no evidence as to what happened, if anything happened at all, in addition to the matters mentioned, during this period. In all the circumstances, I do not think this period should be counted as part of the effluxion of time. Third, on the evidence before me, the second period in the effluxion of time (from 11 April 2005 until 7 November 2005) was taken up by the OPC discovering the relevant evidence as to what took place, obtaining legal advice thereon and, on the basis of that advice, deciding what action was to be taken. In all the circumstances I do not find the second period so long as to militate against exercising my discretion to set aside the sequestration order rather than annul the bankruptcy. In re Daskalavski (Applicant); Ex parte The Austral Brick co Pty Ltd [1998] FCA 782 , Emmett J (in a short ex tempore judgment) concluded that, in circumstances where his Honour was satisfied that the sequestration order ought not to have been made, it was appropriate to annul the bankruptcy rather than set it aside where the estate had already been administered in bankruptcy. But that is not the case here. Only one asset of Ms Cross, her home unit at Cronulla, has been vested in the Trustee and the debt on which she was bankrupted, together with subsequent unpaid strata levies, was paid out by the OPC, not the Trustee, following the Protective Commissioner being appointed the financial manager of Ms Cross' financial affairs by order of the Guardianship Tribunal dated 11 April 2003. Notwithstanding the Trustee's claim for remuneration to 3 June 2005 ($13,990) and his anticipated claim for additional remuneration ($5,500), there was no evidence that the Trustee had been actively involved in the administration of Ms Cross' bankrupt estate. CONCLUSION When this choice as between an order that the sequestration order be set aside on the one hand and an order for annulment of the bankruptcy on the other has come before the courts on earlier occasions, the courts have consistently stressed that a balance must be struck between the rights of the applicant, who should never have been made bankrupt in the first place, and the Trustee who has simply done what the Act requires him to do: Kyriackou v Shield Mercantile Pty Ltd (No. 2) [2004] FCA 1338 at [43] per Weinberg J; followed in Capsalis v Ozdemir [2005] FMCA 1163 at [17] per Connolly FM; Hadjimouratis v Casanova [2005] FMCA 1468 at [13] and [16] per Connolly FM; and in Vaucluse Hospital Pty Ltd v Phillips at [70] and [71] per Riethmuller FM. The rights of the petitioning creditor have never been referred to as a relevant factor, and understandably so. This is not a case where the pendulum of balance tilts in favour of Ms Cross (compare Kyriackou ) as against the Trustee; on the contrary, I have come to the firm conclusion that it would be totally unfair, indeed a miscarriage of justice, for Ms Cross to be saddled with any of the relatively considerable costs of the administration of her estate. While that may involve the invocation of some injustice on the Trustee, in the circumstances of this case it seems it must be tolerated in the face of an inability of the Court to order the petitioning creditor to bear such costs: Kyriackou at [39] per Weinberg J. For present purposes, I am prepared to accept that as being the correct position, however, I do not think it is free from doubt. The powers of the Court under s 30 of the Act are expressed in extremely wide terms. In the circumstances of this case, it seems unjust to me that the Creditor only has to pay the costs of the motion even though it also loses the registrar's order as to costs of the petition. Because of the conclusion I have come to as expressed in [116] supra, I propose to exercise my discretion under O 35 r 7 of the FCR to set the sequestration order aside. In the circumstances, it is only appropriate that I summarise the matters I have taken into account in exercising my discretion to do so: 1. The inappropriateness of bankruptcy proceedings as a debt collection remedy or mechanism. Such proceedings were never intended to operate against debtors who could, but would not, for whatever reason, pay. 2. The size of the debt originally less than $2,000. 3. The aggregate value (free of encumbrances) of Ms Cross' assets closer to $600,000 than $500,000, approximately $200,000 of which were in liquid form. 4. The size of the actual and anticipated costs and expense of administering the estate: In excess of $35,000, when, on the evidence, there was minimal administration. 5. The circumstances of Ms Cross' mental condition and her admissions (once involuntarily) to the Psychiatric Unit of Sutherland Hospital during 2004 for a total of over three months. 6. My finding that Ms Cross was not properly served with the Creditor's petition. 7. The fact that she was not present or represented at the hearing at which the sequestration order was made. 8. The fact that the circumstances referred to in 5 and those underlying my finding in 6 were not ventilated before the registrar on 9 August 2004 (the first return date of the petition) when the sequestration order was made. 9. The fact that those involved in ensuring that Ms Cross was bankrupted on 9 August 2004 Messrs Meuller and Bentley were officers of the Court. The orders of the Court will be: 1. Michael Gregory Jones, trustee of the bankrupt estate of Isabell Jean Cross, be joined as a party (second respondent) to the proceeding, effective 6 December 2005. 2. The orders of Registrar Tesoriero made 9 August 2004 be set aside and the Creditor's petition dated 4 March 2004 and filed 23 March 2004 be dismissed. 3. The costs of Ms Cross and of the Trustee of the motion be paid by the Creditor on an indemnity basis. I certify that the preceding one hundred and eighteen (118) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate: Dated: 14 July 2006 Solicitor for the Applicant: Mr B Bentley of J S Meuller &amp; Co Counsel for the First Respondent: Ms P Gormly Solicitor for the First Respondent: Office of the Protective Commissioner Solicitor for the Second Respondent: Merewether &amp; Co Date of Hearing: 6 December 2005 Date of Judgment: 14 July 2006 AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback URL: http://www.austlii.edu.au/au/cases/cth/FCA/2006/900.html