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Cuskelly v Kembrey [2010] FMCA 899 (15 December 2010)

Last Updated: 16 December 2010

FEDERAL MAGISTRATES COURT OF AUSTRALIA

CUSKELLY v KEMBREY

BANKRUPTCY – Creditor under costs order against deceased estate – Pt.IV bankruptcy proceedings against executor personally – sequestration order made by Registrar – delay in applying for review – sequestration order ought not have been made – order set aside – no orders as to costs including trustee costs.


Adams v Kennick Trading (International) Ltd (1986) 4 NSWLR 503
Allesch v Maunz (2000) 203 CLR 172
Austrust Ltd & Anor v Estate of the late Evan Schomburgk Herbert & Anor [1998] FCA 1621
Bovaird v The Trustee of the Bankrupt Estate of Frost [2010] FCA 1159
Chamberlain v Viterra Ltd & Anor [2010] FMCA 747
Colquhoun v Graffione [2000] FCA 325; (2000) 97 FCR 376
Cuttle v Brandt (1947) 64 WN (NSW) 96
Davidova v Murphy [2009] FCA 601
In the matter of the Will of Hill, Carter J, Supreme Court of Queensland, 17 June 1988
Jowett v Kelly [2008] NSWSC 1009
Juul v Northey [2010] NSWCA 211
Kembrey v Cuskelly [2008] NSWSC 262
Levy v Kum Chah [1936] HCA 60; (1936) 56 CLR 159
Liprini v Kerem & Anor (No.2) [2010] FMCA 244
Liprini v Liprini [2010] FMCA 687
Massih v Esber [2008] FCA 1452
Miller v Bondi Securities [1994] FCA 1304
Official Receiver in Bankruptcy v Schultz [1990] HCA 45; (1990) 170 CLR 306
Pattison v Hadjimouratis (2006) 155 FCR 226
Re Faulkner [1999] 2 Qd R 49
Rigg v Baker [2006] FCAFC 179; (2006) 155 FCR 531
SZAYF v Minister for Immigration & Multicultural & Indigenous Affairs [2005] FCA 489
Treadwell v Hickey [2006] FMCA 1727; (2006) 206 FLR 367
Vaughan v Pagotto & Ors [2006] FMCA 1287; (2006) 202 FLR 321
Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212

Applicant:
ELIZA CUSKELLY

Respondent:
MICHAEL KEMBREY

File Numbers:
SYG 2738 of 2009
SYG 1241 of 2010

Judgment of:
Smith FM

Hearing date:
30 July 2010

Date of Last Submission:
20 September 2010

Delivered at:
Sydney

Delivered on:
15 December 2010

REPRESENTATION

Counsel for the Applicant:
Applicant in person

Counsel for the Respondent:
Ms C Ross

Solicitors for the Respondent:
Turnbull Hill Lawyers

ORDERS

(1) Time is extended to allow the bringing of an application under s.104(2) of the Federal Magistrates Act 1999 (Cth) for review of the orders made by Registrar Segal on 11 March 2010 in proceeding (P)SYG2738/2009.
(2) The application for review is allowed.
(3) The orders are set aside, and the petition is dismissed.
(4) No orders as to costs in relation to that proceeding or the present proceeding.
(5) A copy of this order will be forwarded by the Court to the Official Receiver within 2 working days.
FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 2738 of 2009 & SYG 1241 of 2010

ELIZA CUSKELLY

Applicant


And


MICHAEL KEMBREY

Respondent


REASONS FOR JUDGMENT

  1. This case concerns a sequestration order made by a Registrar against Mrs Cuskelly on 11 March 2010 on a petition brought by Mr Kembrey. For the reasons which follow, I have decided that Mr Kembrey’s efforts to enforce a costs order against the estate of Mrs Cuskelly’s deceased husband by way of a bankruptcy notice and creditor’s petition against Mrs Cuskelly personally were misconceived in law from their commencement. The bankruptcy notice should not have issued, the sequestration order should not have been made, and the bankruptcy administration should not have commenced.
  2. Mrs Cuskelly has always maintained that she was not personally liable for Mr Kembrey’s costs in family provision proceedings in which the costs order was made, but she delayed making this contention in this Court until her trustee in bankruptcy took title to her home. She has explanations for her delay which are not fully persuasive. However, I have decided on balance that the clearly misconceived nature of the bankruptcy proceedings requires in the interests of the administration of justice that the sequestration order should be set aside under s.104(3) of the Federal Magistrates Act 1999 (Cth) and that the petition should be dismissed. In all the circumstances, I am not persuaded to make any orders as to costs.

The Family Provision Act proceedings and costs order

  1. Mrs Cuskelly married her deceased husband in 1982. They separated for some years and were divorced, but she returned to his house at Ashtonfield and cared for him until his death in May 2006. She obtained probate on his last will, in which she was executrix and sole beneficiary. The principal asset was the house at Ashtonfield, which became registered in her name. She also inherited some chattels which she applied in payment of her debts, a superannuation payment which she applied to reduce the mortgage on the house, and an expectation of a discretionary life insurance payment. Her income in 2008 was, and remains, almost entirely from a Centrelink pension.
  2. Mr Kembrey is the natural son of the deceased, who acknowledged their relationship, paid child maintenance, and had sporadic contact with Mr Kembrey until about 2000. In 2008, he and his wife had a very modest income from employment and few assets, and they lived in rented premises. He commenced proceedings in the Supreme Court of NSW, making application under s.7 of the Family Provision Act 1982 (NSW) (“the Family Provision Act”) for provision out of the estate or notional estate of the deceased. Mrs Cuskelly was joined as defendant in her capacity as executrix of the estate, in accordance with the Supreme Court Rules 1970 (NSW) Sch.J cl.6(1).
  3. The proceedings were heard by White J on 10 March 2008. Mr Kembrey was represented by counsel. Mrs Cuskelly was unrepresented, and opposed any orders. White J gave ex tempore reasons, which were later published as Kembrey v Cuskelly [2008] NSWSC 262. In his reasons, he examined the family background which I have sketched above. He said at [34]: “this, therefore, is a case of a small estate with two claimants, both with legitimate claims on the estate, where the estate is insufficient to meet both claims”. He considered the provisions of ss.7 and 9 of the Family Provision Act, and described Mrs Cuskelly’s claim:
  4. White J considered the submission of Mr Kembrey’s counsel that such a sum could be provided by designating as notional estate, the unpaid benefit under the deceased’s life insurance policy. His Honour accepted that there was a ‘prescribed transaction’ within ss.22 and 26, and addressed the statutory considerations under ss.27 and 28 of the Family Provision Act before declaring notional estate. He concluded:
  5. As [68] makes clear, White J specifically addressed the terms of a costs order favouring Mr Kembrey, and ordered that a capped amount be “paid ... out of the estate”. This was then reflected in the short minutes prepared by Mr Kembrey’s counsel, which followed the normal terms of such orders. As entered, the orders were:

The legal effect of the costs order

  1. In my opinion, both the order and the judgment of White J make clear that the legal burden of the costs order was placed on the deceased’s estate and not on Mrs Cuskelly personally in relation to her personal estate. As his Honour’s reasons show, he was well aware that there might no longer have been estate assets available to meet the costs liability his order imposed on the estate. However, Mr Kembrey did not seek an exercise of the power under s.24 of the Family Provision Act to designate as notional estate any of the property previously distributed from the estate to Mrs Cuskelly, so as to make it available for the payment of his costs. Nor does it appear that Mr Kembrey sought that a personal costs order be made against Mrs Cuskelly. Perhaps counsel for Mr Kembrey, and White J himself, hoped that Mrs Cuskelly might provide the funds from her own property to enable the estate to pay Mr Kembrey’s costs, but in my opinion such a hope did not manifest itself in a judgment debt for costs to be paid personally by Mrs Cuskelly, neither in the orders made on 10 March 2008 nor in any subsequent order of the Supreme Court.
  2. It is well established that the assets of a deceased estate are held by the executor for the purposes of the administration of the estate, and are in law distinct from the executor’s personal estate. An executor holds the whole property of the deceased “for the purpose of carrying out the functions and duties of administration, not for his own benefit” (see Official Receiver in Bankruptcy v Schultz [1990] HCA 45; (1990) 170 CLR 306 at 312, and Juul v Northey [2010] NSWCA 211 at [188]). In relation to debts owed by the deceased, a creditor must first obtain judgment against the estate, and then can only execute against the property of the executor in special circumstances (see Levy v Kum Chah [1936] HCA 60; (1936) 56 CLR 159). The personal estate of an executor is not immediately available for execution of an order expressly requiring costs to be paid from a deceased estate, even if the estate might appear to be insolvent as a result of assets having been distributed to the executor as a beneficiary.
  3. In my opinion, the right of Mr Kembrey to enforce the present costs order personally against Mrs Cuskelly required further orders of the Supreme Court, whether exercising jurisdiction under the Family Provision Act, or in its probate jurisdiction to remove or direct a recalcitrant executor, or in its equity jurisdiction to make general or specific administration orders under Pt.54 of the Uniform Civil Procedure Rules 2005 (NSW), or perhaps in some other jurisdiction in relation to a cause of action for devastavit or other personal claim against Mrs Cuskelly (cf. Re Faulkner [1999] 2 Qd R 49, In the matter of the Will of Hill, Carter J, Supreme Court of Queensland, 17 June 1988, Jowett v Kelly [2008] NSWSC 1009, Bovaird v The Trustee of the Bankrupt Estate of Frost [2010] FCA 1159, Juul v Northey [2010] NSWCA 211, and cases cited therein). Whether any of these avenues are now available to Mr Kembrey was not a matter upon which I received any submissions, and I am in no position on the evidence before me to form opinions about their availability and prospects of success.
  4. The central issue in the present case, is whether the Bankruptcy Act 1966 (Cth) allowed Mr Kembrey to rely upon the costs order against the estate and no other order, when applying for a bankruptcy notice and when bringing a creditor’s petition against Mrs Cuskelly under Pt.IV.
  5. The administration of an insolvent estate in NSW may, and normally is, performed by an executor by following the provisions of s.46C of the Probate and Administration Act 1898 (NSW). This requires payment of the expenses of administration, which could include costs orders against the estate, in priority to estate debts and before the distribution of the balance of the estate to beneficiaries. An executor who is derelict in performing duties in relation to the estate administration can be removed, or be directed to perform duties, or be subjected to other orders of the Supreme Court exercising one of the jurisdictions pointed to above. Such an insolvency administration, and the procedures for procuring its performance by an executor, do not involve the application of Commonwealth legislation on insolvency, except by limited adoption of some provisions of the Bankruptcy Act under Sch.3 Pt.1 of the Probate and Administration Act.
  6. Part XI of the Bankruptcy Act 1966 (Cth) provides an alternative scheme for insolvency administration of deceased estates, which is available if no administration proceedings are already on foot in another court (see s.244(13)). Among the persons with standing to petition for administration of a deceased estate in bankruptcy is a creditor in relation to a debt incurred by an executor in that capacity.
  7. Whether to invoke the Bankruptcy Act is not always a simple choice for an estate creditor. Administration under Pt.XI results in the appointment of an independent manager of the deceased estate, and a broader range of investigatory powers and insolvency remedies are available. However, in some cases it will only add additional layers of costs, complexities and delays, if additional litigation in the Supreme Court’s equity or other jurisdictions is inevitable to rectify past defects in the administration of the estate.
  8. Section 244(1) provides:
  9. It has been held that s.244(1)(b) encompasses an order made in probate proceedings that costs be paid out of the deceased’s estate. In Austrust Ltd & Anor v Estate of the late Evan Schomburgk Herbert & Anor [1998] FCA 1621, Mansfield J said:
  10. In my opinion, the reasoning of Mansfield J is directly applicable to the present costs order made by White J. I consider that it has the consequence that a creditor seeking to enforce under the Bankruptcy Act a costs order made against a deceased estate must follow the procedures of Pt.XI, and may not use a creditor’s remedies under Pt.IV, i.e. by way of a bankruptcy notice and creditor’s petition directed at an executor personally and in relation to the executor’s personal estate.
  11. The inappropriateness of the Pt.IV procedures is implicit from the scheme of the Act containing Pt.XI. Part IV procedures are directed towards an insolvency administration of the personal estate of a living person and not towards the administration in insolvency of deceased persons’ estates. If a debtor dies while Pt.IV bankruptcy proceedings are pending, then an outstanding bankruptcy notice becomes spent, and a pending petition may only be continued as an application against the debtor’s estate (see Colquhoun v Graffione [2000] FCA 325; (2000) 97 FCR 376 at [12]- [19]).
  12. Moreover, the service of a bankruptcy notice and petition under Pt.IV directed at the executor’s personal estate to enforce a judgment against a deceased estate is conceptually misconceived, because the executor’s personal estate is in law separate from the property liable to execution, at least, in the absence of a judgment against the executor personally which allows attachment of his or her personal estate to meet the estate liability. It is therefore futile to pursue the executor’s personal estate in bankruptcy in the absence of any orders attracting the executor’s personal liability, since his or her personal assets would not be available to his trustee in bankruptcy to satisfy the creditors of the deceased estate. Thus, in the present case, Mr Kembrey’s entitlements under the costs order did not make him a ‘creditor’ with an indebtedness able to be proven under s.82 of the Bankruptcy Act in relation to Mrs Cuskelly’s personal estate when administered in bankruptcy. In the absence of any evidence of any dissatisfied creditor of Mrs Cuskelly’s personal estate, there was no legal justification for making her bankrupt, nor for continuing the bankruptcy administration of her personal estate.
  13. I recently expressed the above opinion as to the exclusivity of procedures under Parts IV and XI of the Bankruptcy Act in Liprini v Liprini [2010] FMCA 687 at [35]. No submissions made in the present case persuades me to alter my opinion. The circumstances in that case, and in Liprini v Kerem & Anor (No.2) [2010] FMCA 244, which allowed me to find that a creditor’s judgment against an executor gave rise to personal liabilities in debt on the executor, are not found in the present case. As I have found above, the judgment obtained by Mr Kembrey for the payment of his costs in the Family Provision Act proceedings in its expressed terms created rights to assessment, execution and other enforcement only in relation to the estate of the deceased person, and not in relation to Mrs Cuskelly’s personal estate.
  14. I therefore consider that the costs order made by White J did not give rise to a judgment “obtained against the debtor” for the purposes of s.40(1)(g) and s.41(1) of the Bankruptcy Act able to support a bankruptcy notice addressed to Mrs Cuskelly in her personal capacity. Nor did it create “a debt” “owing by the debtor to the petitioning creditor” for the purposes of s.44(1) of the Bankruptcy Act, able to support the presentation of a petition and the making of a sequestration order under s.52.
  15. The costs order made by White J may have given rise to rights to enforce administration of the deceased estate which could have been pursued against Mrs Cuskelly, or against another executor appointed in her place, or against a trustee in bankruptcy for the deceased’s estate appointed under Pt.XI of the Bankruptcy Act. However, Mr Kembrey has not pursued those rights, but has attempted to short-cut them by taking misconceived proceedings against Mrs Cuskelly personally under Pt.IV of the Bankruptcy Act.
  16. In the history of the bankruptcy proceedings which I shall recount below, the consequence, in my opinion, has been a bankruptcy notice which was invalidly issued, a petition which was invalidly based upon an allegation of personal indebtedness which did not exist, a sequestration order which ought not to have been made by the Registrar, and some costs of a bankruptcy administration in relation to Mrs Cuskelly’s personal estate which should not have been incurred.
  17. The submissions of the solicitor for Mr Kembrey attempted to avoid the above analysis with contentions which, in my opinion, were insufficiently developed and were unpersuasive. In view of the clear terms of the costs order, I am unable to imply any legal obligation on Mrs Cuskelly to pay the costs from her personal estate. Nor can I locate in the evidence before me any conduct or representation on the part of Mrs Cuskelly which could give rise to an estoppel preventing her from reliance upon this point. I consider that, in essence, it is a point which she made to Mr Kembrey’s solicitor before the commencement of the bankruptcy proceedings.

The costs assessment and registration

  1. Subsequent to the orders made by White J on 10 March 2008, Mr Kembrey filed a notice of motion, seeking the joinder of ‘Australian Super’ to the proceedings, and an order that it pay the death benefit in respect of the late Mr Cuskelly to him. An affidavit in support noted that Mr Kembrey had not received the death benefit referred to in the first order made on 10 March 2008, and said: “nor has he received any monies from the Defendant Eliza Cuskelly in payment of his legal costs in accordance with Order 3”. However, it is notable that no orders were sought to vary that order, so as to impose a personal liability in costs on Mrs Cuskelly.
  2. The motion was heard by White J on 18 June 2008, and his Honour ordered:
  3. No transcript is before me as to the proceedings before White J, nor as to his reasons for making these orders. Mrs Cuskelly claims to have believed as a result of something said to her by White J, and as a result of the fourth order made on that occasion, that she had been told that she was under no obligation to pay Mr Kembrey’s legal costs incurred at any stage of the proceedings. However, I am not satisfied that this was the effect of that order, which appears to be confined to the costs of the motion.
  4. In any event, during late 2008, Mrs Cuskelly responded firmly to correspondence from Mr Kembrey’s solicitor demanding payment:
  5. Mr Kembrey then applied for a costs assessment under the Legal Profession Act 2004 (NSW) on 9 December 2008. Certificates of determination of party and party costs were issued on 30 April 2009, in the amount of $30,000 and $1,350.71 for the costs of the assessment. The reasons of the costs assessor make clear that the assessment relates to the costs order made by White J on 10 March 2008, and applied the capped amount specified in the order. The assessor reported that Mrs Cuskelly had made no submissions to the assessor.
  6. The costs certificates were filed in the Local Court and thereupon took effect as a judgment of that Court pursuant to s.368(5) of the Legal Profession Act. A certificate of judgment was issued on 24 July 2009 in the amount of $31,947.26. That procedure is necessarily ex parte (see Massih v Esber [2008] FCA 1452 (at [44], also Vaughan v Pagotto & Ors [2006] FMCA 1287; (2006) 202 FLR 321 and Treadwell v Hickey [2006] FMCA 1727; (2006) 206 FLR 367).
  7. The costs assessor’s certificates and the Local Court certificate of judgment show the person liable to the assessed costs as Mrs Cuskelly, with no notation identifying the capacity of her liability as being “as executor of the estate of Peter Samuel Cuskelly, deceased”. However, in my opinion, both documents should be understood as being intended to be so confined, in view of the clear terms of the costs order upon which they are founded.
  8. Alternatively, the confined nature of the costs order is a matter which a bankruptcy court is able to give effect to, in its powers to ‘go behind’ the ex parte judgment of the Local Court, so as to determine the true nature of the indebtedness of Mrs Cuskelly to Mr Kembrey (cf. Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212 at 223-224).

Mr Kembrey’s bankruptcy proceedings

  1. Mrs Cuskelly again maintained that she was not liable to pay Mr Kembrey’s legal costs, in response to correspondence from his solicitor which appears to have threatened enforcement action in relation to the costs certificate and Local Court judgment. In a letter dated 8 August 2009, she repeated her previous denial of liability, and said:
  2. A medical report from Mrs Cuskelly’s general practitioner, explains her responses to the correspondence and the subsequent bankruptcy proceedings. He said in a report dated 21 September 2009, which was repeated on 2 July 2010:
  3. However, Mr Kembrey’s solicitor commenced the mistaken course of pursuing Mrs Cuskelly under Pt.IV of the Bankruptcy Act.
  4. A bankruptcy notice attaching the Local Court certificate of judgment was issued on 20 August 2009. It names Mrs Cuskelly as ‘the debtor’ without referring to the costs order which explained the judgment debt. It contained an erroneous suggestion in the Schedule to cl.9 that Mrs Cuskelly had paid an amount of $100, but I do not need to examine the significance of this error.
  5. Service of the bankruptcy notice was effected on 11 September 2009 under Bankruptcy Regulations 1996 (Cth), reg.16.01(1)(c) by leaving it “in a sealed envelope marked with Eliza Cuskelly’s name affixed to the locked entrance door at her last known address, [at Astonfield]”. An affidavit by the process server suggests that it was probably found by Mrs Cuskelly, since he said:
  6. A petition relying on non-compliance with the bankruptcy notice was filed on 10 November 2009. It and the supporting affidavits were served by leaving them on Mrs Cuskelly’s screen door on 10 February 2010 and by being posted to her. This mode of service complied with a substituted service order made by Registrar Segal on 4 February 2010, upon evidence that Mrs Cuskelly was not answering calls by process servers and was rarely seen by neighbours.
  7. There was no appearance by Mrs Cuskelly before Registrar Segal on 11 March 2010, and he made a sequestration order against her in her absence. I note that neither the petition nor the affidavits of debt made mention of the terms or nature of the costs order underlying the indebtedness alleged against Mrs Cuskelly under the Local Court certificate of judgment. In fact, paragraph 1 of the petition erroneously asserted that:
  8. The Registrar appears to have allowed an amendment to this paragraph, without ordering re-verification and re-service. His reasons are not recorded. His orders were, as entered:
The Court notes that the date of the act of bankruptcy is 2 October 2009.
  1. Ms Sigelski was appointed trustee of Mrs Cuskelly’s estate, and commenced her administration on the day that she received notice of this, 17 March 2010. She instructed the same solicitors who had acted for Mr Kembrey to lodge a caveat on Mrs Cuskelly’s home, and made some preliminary inquiries into her financial affairs. Letters were sent by registered post to Mrs Cuskelly requiring her to complete a statement of affairs, but these were returned by the post office as uncollected.
  2. However, Mrs Cuskelly received notice of the caveat from the Lands Department, and she immediately commenced to seek advice from her bank and other sources. Soon after that event, the trustee was clearly put on notice that Mrs Cuskelly objected to the sequestration order and the caveat on her home, and that she denied owing the monies claimed by Mr Kembrey (see, for example the file note of an employee of the trustee dated 26 March 2010).
  3. On 3 May 2010, the trustee prepared a report to creditors which identified Mr Kembrey as the only creditor, in the amount of $31,947, i.e. the amount of the assessed and registered costs order. Her report said that the outstanding and estimated future remuneration and disbursements of the trustee would be $35,768, of which $11,101 had already been incurred. It suggested that all these amounts would be recovered fully by the sale of Mrs Cuskelly’s home.
  4. Ms Sigelski was told by Mr Kembrey’s solicitor on 17 May 2010 that Mrs Cuskelly had applied for review of the sequestration order. She subsequently received copies of Mrs Cuskelly’s applications to this Court, and has made an affidavit in the present proceedings. There is no evidence that Ms Sigelski has incurred any substantial expenses in relation to the administration of Mrs Cuskelly’s estate or the litigation since that time.

Mrs Cuskelly’s applications to the Court

  1. The Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), r.2.03 allowed 21 days for an application under s.104(2) of the Federal Magistrates Act to review the Registrar’s sequestration order made on 11 March 2010, but that time could be extended in the discretion of the Court. The time for an application for review ran from the making of the order, even though it was made in Mrs Cuskelly’s absence, and did not come to her attention until she received notice of the trustee’s caveat on around 23 March 2010. She had until 1 April 2010 to apply for review, and her application filed on 14 May 2010 in proceedings SYG2738/2009 required an extension of about 6 weeks (“the first application”).
  2. Mrs Cuskelly’s first application clearly invoked the Court’s powers under s.104(3), which allow it to “review an exercise of power by a Registrar ... and may make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised”. On review of a sequestration order made by a Registrar, the Court considers the making of the order de novo in the light of the evidence and circumstances at the time of its review. If the Court decides that a sequestration order should not have been made, then it has an option either to set aside the Registrar’s order under s.104(3), or, alternatively, to exercise the power of annulment under s.153B of the Bankruptcy Act (see Pattison v Hadjimouratis (2006) 155 FCR 226). The annulment power is available “if the Court is satisfied that a sequestration order ought not to have been made”, based on new evidence reflecting on the situation at the date of the sequestration order (see Miller v Bondi Securities [1994] FCA 1304 at [19]- [20], Rigg v Baker [2006] FCAFC 179; (2006) 155 FCR 531 at [59] and following paragraphs, and Davidova v Murphy [2009] FCA 601).
  3. When both powers are available, relevant considerations in choosing between them include the more absolute effect of a s.104(3) order, which “returns the relevant circumstances of the debtor to the condition in which they were before the wrongful making of a sequestration order” (cf. Pattison v Hadjimouratis at [14]). Subject to any conditions attached to the order, the vesting of the debtor’s property in the trustee is void, and the Court has a full discretion as to what orders it makes concerning the costs and expenses of the creditor and the trustee in relation to the bankruptcy proceedings.
  4. The alternative annulment power might be more appropriate where the matter does not “come before the court very soon after the order of sequestration has been made and before there has been any administration” cf. Pattison v Hadjimouratis at [15]. The Act contains provisions regulating the un-winding of a bankruptcy administration after an annulment by s.154, in particular by giving the trustee a right of recoupment of costs, charges and expenses from the previously vested estate.
  5. However, it may be more appropriate to set aside a sequestration order rather than annul it, if the Court concludes that it would be “quite wrong to burden the former bankrupt with the costs of administering a bankrupt estate that should never have been made the subject of a sequestration order”, even where substantial costs were incurred by the creditor and trustee (cf. Pattison v Hadjimouratis at [17], [75], [219], [229]). In such a case, the trustee is left to ‘the common law’ to recover his or her costs and expenses.
  6. These principles are applicable when considering the present application, since I have concluded that the present is a case where Mrs Cuskelly “should never have been the subject of a sequestration order in the first place” arising from the costs order made against the deceased estate. The choice between setting aside the order or annulling it is, however, made difficult not only by Mrs Cuskelly’s six week delay in bringing her first application and the incurring by the trustee of some expenses in that period, but also by the outcome of her first application and the bringing of a second application which is now before me.
  7. In support of her first application, Mrs Cuskelly filed an affidavit attaching various documents and asserting that she had no knowledge of her bankruptcy until receiving a Department of Lands’ notice of caveat dated 23 March 2010. She had initially addressed that notice, by filing a ‘lapsing notice’, before being advised to apply to this Court. Her affidavit attached her doctor’s medical report, and again asserted her belief that she was not liable to pay Mr Kembrey’s legal costs in the Family Provision proceedings.
  8. Her first application was returnable in this Court on 25 May 2010. Mrs Cuskelly attended, and the parties were referred to Driver FM. The brief proceedings before his Honour on that day are not explained in the evidence before me. No transcript was tendered before me, and the Court’s file does not contain revised ex tempore reasons given by his Honour when making the following orders:
  9. In the absence of Driver FM’s reasons, I have some difficulty understanding the making of order 3. There is no time limit on an application for annulment under s.153B, and Mrs Cuskelly did not need any ‘leave and liberty’ to file such an application. I also note that order 4 appears to be ineffective, since the respondent to the application was Mr Kembrey and not the trustee, and it is doubtful whether the trustee incurred any costs in relation to that application.
  10. On the evidence now before me, I consider that a reasonable inference from the orders made by Driver FM is that, notwithstanding that his Honour was not persuaded on that occasion to extend time under r.2.03 on the material then before him, his Honour’s intent was to reserve to Mrs Cuskelly a right to repeat her application under s.104 to set aside the sequestration order in combination with an alternative claim for annulment, supported by better evidence, and provided that she filed and served such an application before 15 June 2010. I therefore do not consider that the outcome of Mrs Cuskelly’s first application should cause me to decline to entertain a second application for an extension of time to seek a review of the Registrar’s sequestration order under s.104(2).
  11. Mrs Cuskelly did file a second application within that time. It was filed on 4 June 2010, and – as with the first application – revealed no legal assistance being obtained by her. She identified the following three orders being sought:
  12. The terms of this application and its supporting affidavit tend to confirm that it seeks a full review of the Registrar’s orders made on 11 March 2010, including those which gave rise to any liability on Mrs Cuskelly to pay the petitioner’s costs and those of the trustee arising under the sequestration order. Her affidavit sworn on 4 June 2010 filled gaps in her affidavit filed in support of her first application, by recounting her actions subsequent to receiving the trustee’s notice of caveat, and pointing to the terms of the costs orders in the Family Provision proceedings as the ground of her assertions that she was not made personally liable for Mr Kembrey’s legal costs.
  13. It is clear that after receiving notice of the trustee’s caveat she sought assistance from a variety of sources before being directed to the Court and becoming aware of the need to apply to set aside or annul the sequestration order. In all the circumstances, I consider that her present application should be regarded as both repeating her first application for review under s.104(2) with a further application for an extension of time, and as including an alternative application for annulment, in accordance with the directions of Driver FM.
  14. Taking into account her medical evidence, her difficulties in travelling between Newcastle and Sydney, her financial position shown in the documents she presented the Court, and her difficulties in obtaining legal assistance and other advice, I consider that she has presented an understandable, if not fully acceptable, reason for her delays in presenting her applications to this Court. As I have explained, the orders of Driver FM appear to explain and allow, rather than preclude, the making of a second application for review or annulment of the sequestration order. She has certainly acted promptly when bringing a second application in accordance with his directions.
  15. It is not necessary that I must be persuaded that her explanations for her delays are entirely acceptable before I can exercise my discretion to extend time for the making of an application for review under s.104(2) (cf. Adams v Kennick Trading (International) Ltd (1986) 4 NSWLR 503 at 506 and 510, citing Cuttle v Brandt (1947) 64 WN (NSW) 96, cited by Sackville J in SZAYF v Minister for Immigration & Multicultural & Indigenous Affairs [2005] FCA 489 at [6]). I must weight her explanations with all the circumstances narrated above, including the position of Mr Kembrey and the trustee in relation to the proceedings, and the merits of the substantive application, when deciding whether to extend time (cf Allesch v Maunz (2000) 203 CLR 172 at [48]).
  16. I have concluded that ultimately, the merits of setting aside a sequestration order which ought never have been made are so clear, that in my opinion they tilt the balance in favour of extending time under r.2.03 in relation to this second application, in so far as it should be treated as being a repeat application under s.104(2).
  17. Having extended that time, I find in the matter before me that the preconditions to the making of orders under either s.104(3) or s.153B are satisfied, and that I have the discretions either to set aside the Registrar’s orders and dismiss the petition, or to annul the bankruptcy on the ground that it ought not have been made. These discretions should be exercised in accordance with the guidance given by the judgments in Pattison v Hadjimouratis which I cited above.
  18. In my opinion, the circumstances strongly point towards a preference to exercise the s.104(3) powers. The proceedings before the Registrar gave rise to a sequestration order which ought not have been made at that time, and should not now be made by me de novo. Moreover, the bankruptcy proceedings giving rise to that order were invalid from inception, since both the bankruptcy notice and the petition asserted a personal indebtedness which did not exist. The proceedings before the Registrar were attended by some additional irregularities in relation to the wording of the bankruptcy notice and the petition. They occurred in the absence of Mrs Cuskelly, after the adoption of modes of service which, although consistent with the regulations and rules, did not involve personal delivery of the relevant documents to Mrs Cuskelly. The petition and its supporting documents did not refer to the terms of the underlying costs order, which would have alerted the Registrar to the legal misconception vitiating the whole proceedings. The creditor was alive throughout the proceedings to Mrs Cuskelly’s insistence that she did not personally owe Mr Kembrey the debt claimed. There is no creditor with liquidated claims against Mrs Cuskelly personally, with an interest in supporting her bankruptcy under Pt.IV either at the time when the sequestration order was made or now.
  19. All these matters point towards the setting aside of the sequestration order and the dismissal of the petition.
  20. I accept that it is unfortunate that the underlying flaw in the bankruptcy proceedings was never appreciated by Mr Kembrey’s solicitors nor by the trustee. It may be understandable that the solicitors did not pause to consider whether Mrs Cuskelly’s recalcitrance in relation to the bankruptcy proceedings might have a firm legal foundation, before this was better identified in the course of the present application. It may also be understandable that the trustee also did not examine the indebtedness asserted by Mr Kembrey against Mrs Cuskelly, to consider whether it was provable in relation to Mrs Cuskelly’s personal estate. Mrs Cuskelly’s responses to their attempted communications were not entirely rational nor easily understood. However, in my opinion, none of her actions disentitles her from asserting the invalidity of the whole bankruptcy proceedings, and obtaining relief under s.104(3).
  21. Significant in my mind when deciding to proceed under s.104(3) rather than s.153B, is the consideration that at all times Mrs Cuskelly has in law and fact been correct, when asserting that she is not insolvent, and that she has no current creditor who has an interest in her personal estate being administered in bankruptcy.
  22. Another important reason why I have concluded that an exercise of power under s.104(3) is preferable to an annulment, is that this is a case where I consider that the Court should have its full discretion in relation to the costs and expenses of the invalid bankruptcy proceedings and administration, and where s.154 of the Bankruptcy Act would not produce a just outcome in the circumstances.
  23. I have taken into account all the submissions on costs made by Mr Kembrey’s solicitors, but am unpersuaded that Mrs Cuskelly should be made liable for any of the legal costs of the bankruptcy proceedings, both in relation to the petition and the review proceedings. I consider that the flaw in the use of Pt.IV procedures to enforce a costs order which was expressly confined to the assets of a deceased estate should have been appreciated by Mr Kembrey’s solicitors at the start of the proceedings. I consider that it would be unjust for Mrs Cuskelly to be required to indemnify Mr Kembrey in relation to those costs, whether through a direct costs order or by the costs of the petition being recoverable from her property. I consider that it is sufficient to recognise Mrs Cuskelly’s delay in raising the circumstances evidencing the invalidity of the bankruptcy notice and petition, by declining to award any costs to either party.
  24. It has often been pointed out that a trustee in bankruptcy who accepts that office upon a sequestration order made by a Registrar in default of an appearance by a debtor, should appreciate a risk that the sequestration order might be set aside on appeal or review (c.f. Chamberlain v Viterra Ltd & Anor [2010] FMCA 747 at [49]- [51]). Where it is known by the trustee, or ought to be known, that the debtor is likely to challenge the sequestration order, the trustee should be slow to incur substantial expenses.
  25. In the present case, the trustee immediately engaged Mr Kembrey’s solicitors to lodge a caveat, and must soon have become aware that Mrs Cuskelly denied any personal indebtedness and was likely to challenge her bankruptcy once she appreciated the threat to her possession of her home. The trustee should then have exercised caution before incurring additional expenses pending the outcome of Mrs Cuskelly’s applications, particularly in view of the absence of any other creditors. The trustee has not participated in the proceedings, apart from making an affidavit which was filed by Mr Kembrey’s solicitors. In all the present circumstances, I am unpersuaded that I should make any costs orders in relation to the trustee’s remuneration, costs and expenses, nor that I should attach to my orders under s.104(3) any conditions in relation to these matters.
  26. I note that no application has been made by Mr Kembrey that I should, by amendment and other orders, direct that the petition should proceed as a petition under Pt.XI of the Bankruptcy Act, and I do not consider it appropriate to address whether I would have had power to do this and whether I would have been disposed to exercise any relevant discretions to allow that course.
  27. For the above reasons, I have decided to make the orders set out at the commencement of this judgment.

I certify that the preceding seventy-one (71) paragraphs are a true copy of the reasons for judgment of Smith FM


Date: 15 December 2010

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