Peter Leopold Clyne v Deputy Commissioner of Taxation & ors

(1984) 154 CLR 589
58 ALJR 398

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(Judgment by: Gibbs C.J., Murphy, Brennan, Dawson JJ.)

PETER LEOPOLD CLYNE v DEPUTY COMMISSIONER OF TAXATION AND OTHERS

Court:

Judges:
Gibbs C.J., Murphy, Brennan, Dawson JJ.Deane

Judgment date: 31 July 1984

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Judgment by:
Gibbs C.J., Murphy, Brennan, Dawson JJ.

This appeal raises for decision the question whether a debtor, against whom a petition for a sequestration order has been presented by a creditor, can, by presenting his own petition under s.55 of the Bankruptcy Act 1966 (Cth), as amended, ("the Act"), deprive the court of power to make a sequestration order on the creditor's petition. In the present case, if the answer to that question is in the affirmative, the period of relation back of the bankruptcy will be significantly shortened, and property which might otherwise have been divisible amongst the creditors may no longer be available for that purpose.

On 4 January 1983 the Deputy Commissioner of Taxation (the first respondent) presented in the Federal Court a petition for a sequestration order against the estate of Mr Peter Leopold Clyne ("the debtor"). The petition alleged that the debtor was indebted to the Deputy Commissioner in the sum of $1,300,844.68, the balance due under a final judgment recovered in the Supreme Court of New South Wales on 11 March 1982 , and that the debtor had committed an act of bankruptcy in that he failed on or before 24 December 1982 either to comply with the requirements of a bankruptcy notice served on him on 13 August 1982 or to satisfy the court that he had a counterclaim, set-off or cross demand equal to or exceeding the sum specified in paragraph (a) of the bankruptcy notice. It is not now disputed that the debtor was indebted as alleged, or that he committed the act of bankruptcy on which the petition was founded. However, the debtor took proceedings in the Federal Court to set aside the bankruptcy notice and the time for compliance with the notice was extended from time to time while those proceedings were pending. After those proceedings had proved unsuccessful, a further extension of time for compliance with the bankruptcy notice was refused, the act of bankruptcy was committed and the petition of the Deputy Commissioner of Taxation ("the creditor's petition") was presented. In the meantime the debtor had appealed to this Court against the decision of the Federal Court upholding the validity of the bankruptcy notice, and the hearing of the creditor's petition, which was originally fixed for 12 April 1983 , was adjourned from time to time while the appeal was pending. The appeal was dismissed on 2 September 1983 . On 6 September 1983 the debtor presented his own petition and it was accepted by the registrar. The debtor thereupon became a bankrupt by virtue of the presentation of the petition and by force of s.55(3) of the Act.

Orders had in the meantime been made in the Federal Court by Neaves J. under s.50 of the Act directing the official trustee to take control of the property of the debtor and by a subsequent order it has been declared that notwithstanding the bankruptcy those orders continue to operate according to their tenor until further order. The creditor's petition, which at 6 September 1983 stood adjourned to 19 September 1983 , came on for hearing on that date before Beaumont J. It appears that Mr John William O'Brien (the third respondent), a registered trustee, by instrument filed at the time when the creditor's petition was filed, consented to act as trustee of the estate of the debtor in the event that he became a bankrupt, and that Mr William Edward Andrew (the second respondent) by a similar instrument filed at the time of the filing of the debtor's petition also consented so to act. These instruments were filed for the purposes of s.156A of the Act. On 7 October 1983 Beaumont J. made a sequestration order "to take effect on 6 September 1983 prior to the presentation by the debtor of his own petition pursuant to the provisions of s.55 of the Act." He considered that for reasons of convenience the trustee of the estate of the debtor in his statutory bankruptcy should act also as trustee in the bankruptcy that resulted from the making of the sequestration order and he declared that Mr Andrew "is the trustee of the estate of the debtor". The Deputy Commissioner appealed to the Full Court of the Federal Court from that part of the judgment of Beaumont J. which declared that Mr Andrew is the trustee of the estate of the debtor. The debtor cross-appealed from the whole of the judgment. The Full Court of the Federal Court allowed the appeal and dismissed the cross appeal. The order of Beaumont J. was varied in two respects.

First, the learned judges who constituted the Full Court considered that Beaumont J., in ordering that the sequestration order take effect on 6 September prior to the presentation by the debtor of his own petition, overlooked s.57A of the Act, which provides in effect that a person who becomes bankrupt by virtue of the presentation of a debtor's petition is deemed to become a bankrupt "at the first instant of the day on which the petition is accepted by the Registrar". They thought that the order of Beaumont J. would have achieved the effect which was intended if it had provided that the sequestration order should "take effect on the same day as but prior to the statutory bankruptcy" but to put the matter beyond doubt they ordered that the order of Beaumont J. should be varied by substituting the date " 5 September 1983 " for the date " 6 September 1983 ". Secondly, their Honours concluded that by force of law each of the two trustees is a trustee of the estate of the bankrupt. They did not so declare, but deleted from the order of Beaumont J. the declaration that Mr Andrew is the trustee of the estate of the debtor. The debtor now appeals from the whole of the judgment and orders of the Full Court of the Federal Court. The Deputy Commissioner of Taxation cross-appeals from so much of the judgment as held that Mr Andrew and Mr O'Brien are both trustees of the estate of the debtor and seeks a declaration that Mr O'Brien is the sole trustee of that estate.

The main importance of the appeal, from a practical point of view, is in its relation to the question when the bankruptcy is to be deemed to have commenced. The bankruptcy of a person who becomes a bankrupt on a creditor's petition shall be deemed to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by him within the six months immediately preceding the date on which the creditor's petition was presented: s.115(1) of the Act. The bankruptcy of a person who becomes a bankrupt by virtue of the presentation of a debtor's petition shall be deemed to have commenced at the time of the presentation of the petition, unless he has committed an act or acts of bankruptcy within the six months immediately preceding the date on which the petition was presented, in which case the bankruptcy is deemed to have relation back to, and to have commenced at, the time of the commission of the first of those acts: s.115(2). In the present case, if s.115(1) applies, the bankruptcy of the debtor will be deemed to have commenced on 24 December 1982 , unless, of course, it is established that he committed an earlier act of bankruptcy within the six months immediately preceding 4 January 1983 . If s.115(2) applies, his bankruptcy will commence on 6 September 1983 , unless he committed an act of bankruptcy within the six months immediately preceding that date. Since the property divisible amongst the creditors of a bankrupt includes all property that belonged to, or was vested in, him at the commencement of the bankruptcy (s.116(1) of the Act), the date of the commencement of the bankruptcy may be a very important one from the creditors' point of view.

The Act does not expressly state whether a court may proceed to make a sequestration order on a creditor's petition when it appears on the hearing of the petition that the debtor has already become bankrupt by virtue of the presentation of his own petition. Of course if an undischarged bankrupt has, after the date of the bankruptcy, contracted new debts, a second sequestration order may be made, and s.59 of the Act will then become applicable. The Act, however, is silent as to what is to be done with a creditor's petition that is founded on a debt incurred before the date of the presentation by the debtor of his own petition. It seems to us for a number of reasons that it is not possible for the court in those circumstances to make a sequestration order while the bankruptcy which resulted from the acceptance of the debtor's petition continues to exist. Before the court can make a sequestration order, it must be satisfied that "the debt or debts on which the petitioning creditor relies is or are still owing" - s.52(1)(c). But since the debtor was already bankrupt when the petition came to be heard, the remedies against the person and property formerly available to the Deputy Commissioner had been taken away and there was substituted a right to prove against the estate which had become vested in Mr Andrew as trustee: see In re Thomas. Ex parte Commissioners of Woods and Forests (1888) 21 QBD 380 , at p 383. At that time the Deputy Commissioner "was not a mere creditor. (He) was a creditor whose claim was in proof. (His) claim was no longer a mere right of action for a debt. (He) could no longer have maintained an action as for a debt. The debt had been, at any rate provisionally, merged in an equitable execution ...": see In re Higginson & Dean. Ex parte Attorney-General (1899) 1 QB 325 , at p 333; Ex parte Trustee of the Property of Cork (1932) 5 ABC 1 , at pp 6-7; Re Cole; Ex parte Richards (1966) 9 FLR 190 , at p 191.

Amounts which were owed by a debtor at the date of the bankruptcy may, notwithstanding his bankruptcy, still be described as debts, and the Act refers to them as such: see, e.g., ss.58(3), 84(1), 85(1), 86(1), 153(1), 154(1)(b). They are "debts" from which the bankrupt is not released until he is discharged from bankruptcy: s.153. However in our opinion they are no longer debts "still owing" within the meaning of s.52(1)(c). Although, as was rightly observed in the Federal Court, one dictionary meaning of "owing" is "that is yet to be paid", the word connotes a sense of obligation to make the payment. The effect of the bankruptcy however is that the debtor is no longer obliged to pay his creditors; indeed he is disabled from doing so. If he offered payment they could not safely accept it; their right is a right of proof against the estate.

This view has, in effect, been taken in two cases - Re White (1960) 20 ABC 11 and Re Cole; Ex parte Richards. In each of those cases after the estate of a debtor had been sequestrated a second sequestration order was made on a petition founded on a debt provable in the existing bankruptcy. It was held that the creditor had no legal right to the second sequestration order which should be rescinded. The proper course was, in our opinion, to annul rather than to rescind the second order (see Re Deriu (1970) 16 FLR 420 , at p 421, and Re Bond (1978) 22 ALR 287 ) but that does not affect the present case. The judgment of Clyne J. in Re White in part rested on the view that the word "remedy" in s.60(2) of the Bankruptcy Act 1924 (Cth), as amended, (which in substance corresponded with s.58(3) of the present Act) includes a remedy by way of an action or suit - a construction which is open to doubt having regard to the express mention in the subsection of a legal proceeding. However the true ground of the decisions is that the earlier bankruptcy had converted the creditor's right to be paid by the debtor into a right of proof, and the debt was not still "owing" within the meaning of the statute.

There are three decisions which may appear to suggest a different view. In Re Strick. Ex parte Martin (1886) 3 Morr 78 receiving orders had been made on the same day against the debtor on petitions presented in Swansea, the debtor's place of business, and in London. Although the order on the London petition was made at an earlier time of the day, the appellate court refused to set aside the Swansea order and ordered that the proceedings be transferred to Swansea. In In re a Debtor (1935) WN 211 ; 79 Sol.Jo. 921 , a registrar made a receiving order on 11 July 1935 on a petition presented in May in respect of an act of bankruptcy committed in April. However on 5 July the County Court had made a receiving order on a petition presented in June in respect of an act of bankruptcy committed in May. (It appears from the report in the Solicitor's Journal that the year of the latter act of bankruptcy is misprinted in the report in the Weekly Notes.) An appeal to the Court of Appeal from the registrar's order was dismissed. The judgment of the court was very short. Lord Wright M.R. said that there appeared to be no legal objection to the receiving order in the case before him. He continued:

"The Registrar had jurisdiction to make it, the petition was properly presented and the debtor was within the district of the High Court. There might be a case in which it would be of real practical value that a second receiving order should be made, such as relation back of the trustees' title ... it would not be desirable to make a second receiving order unless there was satisfactory evidence before the Registrar at the time when he was asked to make a second receiving order that it was in the interests of the general body of creditors that such an order should be made."

In Re Payne (1948) 15 ABC 1 , Clyne J. purported to follow In re a Debtor and held that he could make a sequestration order against one of two partners on a creditor's petition, notwithstanding that, during the pendency of the petition, a sequestration order had been made against both partners on their own petition. This case was not mentioned by Clyne J. in his later decision in Re White. In Re Payne it was ordered that proceedings under both petitions be consolidated - consolidation would not appear to be possible in the present case, since the power to consolidate (now given by s.53 of the Act) exists only where two or more parties to a partnership or two or more joint debtors have become bankrupt.

It is unnecessary for present purposes to consider whether the two English decisions may be explained by differences between legislation in England and Australia or whether Re Payne can be justified because it concerned joint and separate estates. Those cases suggest no persuasive reason for holding that a person who is already bankrupt may be made bankrupt again on a petition founded on a debt provable in the existing bankruptcy. And there are other reasons which support the conclusion that a sequestration order cannot be made in circumstances such as the present, while the bankruptcy which resulted from the acceptance of the debtor's petition remains on foot. As a general rule, a sequestration order may not be made, and a debtor's petition may not be accepted, unless a registered trustee has, under s.52(1A)(a) and s.55(4A)(a), consented to act as the trustee of the estate. Section 156A(3)(a) provides that where, "at the time when a debtor becomes a bankrupt, a registered trustee has, under sub-section (1), consented to act as the trustee of the estate of the debtor and the consent has not been revoked, the registered trustee becomes, at that time, by force of this sub-section, the trustee of the estate of the bankrupt." We would agree with the conclusion of Fisher J. in Re Close; Ex parte Abbott (1983) 50 ALR 571 that where two petitions are presented, and an order is made on one but the other is dismissed, the trustee who had consented to act in relation to the petition upon which the sequestration order was made becomes the sole trustee of the estate of the bankrupt. However, that decision would not resolve the difficulty that would arise in the present case, when, if the debtor has become a bankrupt, both by the making of a sequestration order and by virtue of the debtor's petition, both trustees will be trustees of the estate - not jointly but separately.

It is true that the creditors might, by special resolution, remove a trustee (s.181) but that would of course depend upon agreement being reached by the requisite majority of creditors. The power of a court to remove a trustee is limited: see ss.156A(4) and (5) and 179(1)(a). It is unlikely that the Parliament intended that it should be possible for two persons to be, separately, trustees for what might be, virtually or even entirely, one estate, for this could lead to chaos in administration, and this supports the conclusion that it is contrary to the policy of the Act to make a sequestration order on a petition founded on a debt that is already provable.

Moreover, the court has, in our opinion, no power to backdate a sequestration order to make it take effect either before, or contemporaneously with, the commencement of the bankruptcy resulting from the acceptance of the debtor's petition. In a number of cases in which a bankruptcy petition was wrongly dismissed and the debtor was thereafter adjudicated bankrupt on his own petition, the appellate court, in allowing an appeal, has directed that the receiving order made against the debtor should be amended as if dated on the day on which the petition was wrongly dismissed, and should be deemed to be made on the creditor's petition: In re Haynes. Ex parte Kibble (1890) 7 Morr 50 ; In re Johns. Ex parte Spears (1893) 10 Morr 190 ; In re Teale. Ex parte Blackburn (1912) 2 KB 367 . The practice established by those cases can be justified by the power that an appellate court has in allowing an appeal to make the order which should have been made in the first instance. However, the Act itself provides when a debtor becomes a bankrupt - either upon the making of a sequestration order (s.43(2)) or upon the acceptance by the registrar of the debtor's petition (s.55(3)(b)). Apart from the power of an appellate court to put right what was wrongly done in the first instance, no court has power to cause a debtor to become a bankrupt on a date earlier than that for which the Act provides. Neither the general power conferred by s.30(1)(b) of the Act to make such orders as the court considers necessary for the purpose of carrying out or giving effect to the Act, nor the power given to the Federal Court by its rules to antedate its orders (O.35, r.3) extends to permit the court to make an order which would bring about a result different from that prescribed by the express provisions of the Act and so serious in its possible consequences.

It was submitted that the bankruptcy under s.55 would be superseded by the making of a sequestration order. This argument, which is based on authorities decided at a much earlier stage of the bankruptcy law, and on some cases under the companies legislation, cannot be accepted; it ignores the effect of ss.43(2) and 55(8) which make it clear that a bankruptcy continues until the bankrupt is discharged or the bankruptcy is annulled.

For these reasons, in our opinion, the Federal Court had no power to make the order that it did while the bankruptcy which resulted from the acceptance of the debtor's petition continued. It had, however, power to annul that bankruptcy, and the course open here was to annul the bankruptcy which arose by force of s.55 and then to make a sequestration order. Power to annul a bankruptcy is given by s.154(1) where the court is satisfied, 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 Registrar". The words of this paragraph show that the court has power to annul a bankruptcy resulting from the acceptance of a debtor's petition even though the petition was properly accepted by the registrar. If the presentation of a petition amounted to an abuse of the process provided by s.55 of the Act, it can rightly be said that the petition ought not to have been presented and in those circumstances power exists to annul the bankruptcy resulting from its acceptance. It has been consistently held in England that the court has power to annul an adjudication and rescind a receiving order based on a debtor's own petition if the presentation of the petition was an abuse of the process of the court, and that this is so even though s.6 of the Bankruptcy Act 1914 (U.K.), and the predecessors of that section, are mandatory in form and provide that the court "shall" make a receiving order on a debtor's petition which alleges that the debtor is unable to pay his debts: see In re Bond (1888) 21 QBD 17 ; Ex parte Painter. In re Painter (1895) 1 QB 85 ; In re Betts. Ex parte Official Receiver (1901) 2 KB 39 ; In re Hancock (1904) 1 KB 585 ; In re Dunn (1949) Ch 640 ; In re a Debtor (1967) Ch 590 . (The English legislation gave power to annul an adjudication, but not a receiving order, and it was therefore necessary to rescind the latter.)

The principle of those decisions applies equally, in our opinion, when there is an abuse of the process provided by s.55, notwithstanding that it cannot be said that there has been an abuse of the process of the court because no judicial order is made when a registrar accepts the petition under s.55. We agree with the conclusion stated in Re Mottee (1977) 16 ALR 129 , at p 135, that a bankruptcy resulting from the acceptance of a debtor's petition may be annulled if the presentation of the petition was an abuse of the procedure provided by s.55.

In the present case the debtor submitted that he had not been guilty of any abuse of process, and that he was entitled to present his own petition for the purpose, which he frankly admitted, of preventing the making of a sequestration order and thereby preventing his bankruptcy relating back to a time since when he has disposed of moneys to which the trustee's title may relate back. He relied on a dictum of Lord Evershed M.R in In re Dunn, at p 647:

"The circumstance that the debtor has filed his petition in order to protect himself from evils which he might otherwise suffer, and not with any benevolent intention of benefiting his creditors by securing a fair distribution of assets among them, is no reason why an order should not be made."

In re Dunn was the case of a gaming debt, which was possibly unenforceable, and it is not entirely clear from the report what were the "evils" to which Lord Evershed referred, unless it was the possibility of having to fight a doubtful claim. That decision, and others like Ex parte Painter. In re Painter and In re Hancock, where the object of the petition was to avoid the pressure of a committal order, and Re Mottee, where the debtor wished to avoid a possible claim by his wife under the Matrimonial Causes Act 1959 (Cth), may be explained as cases in which "the debtor was entitled to use the machinery of the Bankruptcy Act for his own purpose so as to shield himself from further liability to committal or other harassment" (see In re a Debtor, at p 596). In none of those cases however was the debtor seeking to avoid a liability or harassment of a kind that resulted from the operation of the bankruptcy laws. In our opinion, a distinction must be drawn between the pursuit of "an ulterior private purpose" - which may not necessarily amount to an abuse of process - and a purpose foreign to the nature of the process in question: see the discussion in Dowling v. Colonial Mutual Life Assurance Society Ltd. (1915) 20 CLR 509 , at pp 521-523. It is a purpose foreign to the bankruptcy laws, and an abuse of process, for a debtor to present a petition for the purpose of making it impossible for a creditor to obtain a sequestration order on a pending petition and with the further purpose of shortening the period of relation back, possibly placing beyond the reach of the trustee property which would otherwise vest in him.

For these reasons we have concluded that although the Federal Court could not make a sequestration order without first annulling the bankruptcy resulting from the acceptance of the debtor's own petition, it had power to make a sequestration order on the creditor's petition if it had first annulled the existing bankruptcy. If it had ordered an annulment, no difficulty would have arisen in relation to the appointment of the trustee, since once the existing bankruptcy had been annulled the second respondent would have ceased to be a trustee and the third respondent would have automatically become the trustee upon the making of the sequestration order. Further, there is no doubt that the court has power to impose conditions on the making of an order for annulment and it would have been competent for the court to order that any costs properly incurred by Mr Andrew should be paid out of the bankrupt's estate. It is not possible for the Court on the present material to say whether, having regard to the orders made under s.50 of the Act, Mr Andrew did properly incur any costs.

However, no annulment was sought either at first instance, or on appeal to the Full Court of the Federal Court, or in argument before us. Although no order annulling the bankruptcy resulting from the acceptance of the appellant's own petition can be made here, it does not follow that the setting aside of the sequestration order should be followed by a dismissal of the petition. That would sanction what appears to be an abuse of process. The appropriate course is to allow the respondent or any other creditor an opportunity to apply for annulment. Thereby the interests of the general body of creditors and the public may be protected. It is true that the respondent had an opportunity to apply for annulment and declined to take it, but he cannot be held to have elected finally not to apply for annulment. The respondent was contending that the petition could found a sequestration order though the existing bankruptcy were not annulled. In those circumstances, the respondent cannot be taken to have elected not to apply for annulment if his contention were rejected. Now that the question is resolved against the respondent's contention, he must elect whether to apply for annulment. Although we regret that these proceedings cannot be brought more speedily to finality, we find it necessary to set aside the sequestration order made on the creditor's petition, and to order that the matter be remitted to a judge of the Federal Court to enable him to consider any application that may be made for an annulment of the sequestration order made on the debtor's own petition and any application for the imposition of conditions on the making of any order for annulment. If no application for an annulment is successfully made, the creditor's petition for a sequestration order must be dismissed. If an application for an annulment is successful, a sequestration order may be made on the creditor's petition if the other necessary proofs are satisfactory.

For these reasons we would allow both the appeal and the cross appeal, and would set aside the order of the Full Court of the Federal Court, and in lieu thereof would order that paragraph 1 of the order of Beaumont J. and the declaration of Beaumont J. be set aside, and that the matter be remitted to the Federal Court to proceed in accordance with this judgment.

There should be no order as to the costs of the appeal to the Full Court of the Federal Court or to this Court.