Farley v Official Trustee In Bankruptcy [2011] FMCA 10 (13 January 2011)

Last Updated: 3 May 2011

FEDERAL MAGISTRATES COURT OF AUSTRALIA

FARLEY v OFFICIAL TRUSTEE IN BANKRUPTCY

[2011] FMCA 10

BANKRUPTCY – Sequestration order – application for annulment by debtor – debtor’s petition – relevant legal principles.

Bankruptcy Act 1966, ss.55(3), 60(2), 60(3), 116(2)(g) & 153B Workers Rehabilitation and Compensation Act 1986 (SA), ss.42 & 43 Aged and Infirm Persons’ Property Act 1940 (SA)

Re Heenan; Ex parte Collins (Trading as Hertz Carnarvon Auto Rentals) v Official Receiver (1992) 39 FCR 428 Bulic v Commonwealth Bank of Australia [2007] FCA 307 D.A. Hassall “Annulment of Bankruptcy and Review of Sequestration Orders” (1993) 67 ALJ 761

Applicant:

NEIL ROGER FARLEY

Respondent:

OFFICIAL TRUSTEE IN BANKRUPTCY

File Number:

ADG 228 of 2010

Judgment of:

Lindsay FM

Hearing date:

22 November 2010

Date of Last Submission:

22 November 2010

Delivered at:

Adelaide

Delivered on:

13 January 2011

REPRESENTATION

Counsel for the Applicant:

Mr King

Solicitors for the Applicant:

Tindall Gask Bentley

Counsel for the Respondent:

Mr Gretsas

Solicitors for the Respondent:

Gretsas & Associates

ORDERS

(1) That the bankruptcy of the applicant which followed upon the presentation of his debtor’s position on 10 August 2009 be annulled.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT ADELAIDE

ADG 228 of 2010

NEIL ROGER FARLEY

Applicant

And

OFFICIAL TRUSTEE IN BANKRUPTCY

Respondent

REASONS FOR JUDGMENT

1. This is an application to annul a bankruptcy pursuant to s.153B of the Bankruptcy Act 1966 (Cwlth) (hereinafter referred to as the “Act”). That section provides in subsection (1) that:
   • If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor’s petition, that the petition ought not to have been presented or ought not to have been accepted by the official Receiver, the Court may make an order annulling the bankruptcy.
2. Mr Farley became bankrupt upon the presentation of his debtor’s petition on 10 August 2009. His annulment application is not opposed by the Official Trustee in Bankruptcy.
3. The applicant sustained a brain injury in the course of his employment in October 1992. The way in which the injury was sustained is somewhat of a mystery, as far as I read the various medical reports that were annexed to the applicant’s affidavit. In any event, he received weekly payments of compensation and in 1994 received a lump sum payment pursuant to s.43 of the Workers Rehabilitation and Compensation Act 1986 (SA). He received at that time an amount of approximately $130,000 and subsequently in June 1996 a further s.43 payment of approximately $11,500.
4. In June 1999 he received a payment in redemption of his entitlement to weekly payments pursuant to s.42 of that Act. He received the sum of $150,000 and then shortly after that a further sum of $17,000 from the Health Insurance Commission.
5. He says that at the time he received such payments he had a mental infirmity and that his solicitors ought to have ensured that steps were taken for the appointment of a manager pursuant to the Aged and Infirm Persons’ Property Act 1940 (SA).
6. Between 2006 and 20009 he accumulated a number of debts, principally credit cards but also a personal loan. He says that by 2009 his debts had grown to approximately $100,000 and he was unable to service them. By that time he had disposed of his real estate and had no assets to enable him to meet the debts.
7. He had on 27 March 2007 instructed his solicitors to institute legal proceedings on his behalf and damages against his previous solicitors for the breach of duty of care to him in not ensuring the appointment of a manager. He says that if that had occurred he would not have squandered his money.
8. The facts I have just recited are extracted from the affidavit the applicant filed in support of his application and its various annexures which annexures include a copy of the Statement of Claim in his action against his former solicitors. He was not required to be cross-examined on his affidavit.
9. In 2009 he contacted the Official Trustee at ITSA. He says that he telephoned them on between three to six occasions and on each occasion described his debt position, his lack of assets and in particular informed the officers of the Official Trustee that he had instituted proceedings against his former solicitors. He specifically says that he was advised that it was open to him to petition for bankruptcy and in that event he would still be entitled to pursue his claim against his former solicitors.
10. He did not wish to abandon his claim against those solicitors. He says that it was based on the advice he received from the staff at ITSA that he decided to petition for bankruptcy.
11. Following the sequestration order being made and on 31 August 2009 his current solicitors received a letter from an officer of the Official Trustee confirming that the legal proceedings against his former solicitors were, in the view of the Official Trustee, exempt pursuant to s.116(2)(g)(i) of the Act. Section 116 of the Act deals with the property that is divisible among creditors following a sequestration order. Subsection (1) of s.116 specifies that property that is not divisible among creditors. The property that is not divisible among creditors includes, in subsection (2)(g):
    • any right of the bankrupt to recover damages or compensation:
      • (i) for personal injury or wrong done to the bankrupt, the spouse or de facto partner of the bankrupt or a member of the family of the bankrupt; or
      • (ii) in respect of the death of the spouse or de facto partner of the bankrupt or a member of the family of the bankrupt;
    • and any damages or compensation recovered by the bankrupt (whether before or after he or she became a bankrupt) in respect of such an injury or wrong or the death of such a person;
12. The history of that section and the policy underlying it are the subject of a discussion by French J (as he then was) in Re Heenan; Ex parte Collins (Trading as Hertz Carnarvon Auto Rentals) v Official Receiver (1992) 39 FCR 428. That case involved an application by a creditor for annulment of the bankruptcy. The effect of the decision is described in D.A. Hassall “Annulment of Bankruptcy and Review of Sequestration Orders” (1993) 67 ALJ 761 at 766 as follows:
    • In the recent case of Re Heenan; Ex parte Collins, an application for annulment brought by a creditor was refused by French J in a case where an insolvent person in receipt of damages for personal injuries presented a debtor’s petition which, by virtue of s116(2)(g) of the Act, had the effect of protecting the award of damages. It was held that as the petition was, in the circumstances, neither a fraud upon the creditors nor an abuse of process, but merely an avenue properly and legitimately open to a debtor who was insolvent, annulment should be refused. French J reviewed the authorities relating to annulment in this type of case, including, inter alia, Re Mottee, Clyne v Deputy Commr of Taxation (Cth) and Re Moncada. However, his Honour also went on to examine in detail the policy underlying the exception to vesting created by s116(2)(g) of the Act and the origin thereof, referring in particular to what James LJ said in Ex parte Vine; In re Wilson, a passage cited with approval by Dixon J in Isaacs v McKinnon. French J referred to the “tracing” amendments made to the Act in 1980 and 1987 extending the exemption in s116(2)(g) as evincing a “strong legislative policy in favour of the exemption” such that “it cannot be said ... that an insolvent debtor who takes advantage of that exemption by filing a debtor’s petition does so for a purpose which is foreign to the bankruptcy law.”
13. The advice given to the applicant by the officers of ITSA before he filed his petition and the letter written to his solicitors of 31 August 2009 were both obviously incorrect. The action instituted on behalf of the applicant by his present solicitors in 2007 was not an action in the nature of damages or compensation for personal injury or wrong done to him as contemplated by s.116(2)(g)(i) of the Act. The action is one for damages for loss of money.
14. The Official Trustee subsequently realised this and wrote to the applicant’s solicitors on 20 April 2010 and candidly acknowledged their error.
15. The provisions of the Act, as French J described in Re Heenan; Ex parte Collins (Trading as Hertz Carnarvon Auto Rentals) v Official Receiver (supra) mirror the longstanding common law position that the protection which is afforded extends to rights of action “whether damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind or character: Beckham v Drake [1849] EngR 843; (1849) 2 HLC 579 at 604; [1849] EngR 843; 9 ER 1213 at 1222 (Erle J)” (see Re Heenan; Ex parte Collins (Trading as Hertz Carnarvon Auto Rentals) v Official Receiver (supra) at 432).
16. The action not being protected from becoming part of the trustee’s property, was then subject to the provisions of s.60 of the Act. Section 60(2) provides:
    • An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.
17. Subsection (3) provides:
    • If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.
18. The trustee not having made such an election the action was deemed to have been abandoned.
19. Subsequently the Official Receiver wrote to the creditors and asked them whether they wished to indemnify the Official Trustee in respect of the costs of a fresh action commenced in the name of the Official Trustee against the same defendants pleading the same cause of action but no response was received from creditors.
20. There are five creditors with liabilities totalling approximately $106,000. There are no assets in the bankrupt estate. The creditors will not receive any dividend.
21. The applicant wishes the annulment order to be made to enable him to be in the position of being able to continue to prosecute the action against his former solicitors instituted in March 2007. The annulment of the bankruptcy, it is said, will have the effect of putting the applicant in the position that he was in before he filed his own petition. That is to say, he will be able to continue to prosecute his claim for damages against his former solicitors. By virtue of the annulment, the action will not be taken to have been abandoned.
22. I did not hear argument on this specific point but I accept that that will be the position the applicant is left in if the sequestration order is determined to have been a nullity.
23. The applicant says that if he is able to prosecute his claim and it is successful that funds will be available to his creditors whereas no funds are available as a result of the present administration of his bankrupt estate.
24. The relevant principles relating to the statutory power of annulment are conveniently set out in Bulic v Commonwealth Bank of Australia [2007] FCA 307 at [12]
    • (1) An order can be made under s 153B(1) of the Act notwithstanding that the applicant has been discharged from bankruptcy; Re Oates; ex parte Deputy Commissioner of Taxation (1987) 17 FCR 402.
    • (2) An applicant who seeks an annulment of his or her bankruptcy "carries a heavy burden". It is incumbent on an applicant "to place before the Court all relevant material with respect to his or her financial affairs so that the Court may be properly informed and may make a judgment that is based on the actual circumstances of the applicant": Re Papps; Ex parte Tapp (1997) 78 FCR 524 at 531.
    • (3) In determining whether or not a sequestration order "ought not to have been made" the Court is not confined to a consideration of whether the order should have been made on the facts known to the Court at the time at which it was made. The Court must take account of facts, known at the time at which the sequestration order was made and at which it determines an annulment application, even if those facts were not before the Court at the time at which the sequestration order was made: Boles v Official Trustee in Bankruptcy [2001] FCA 639; (2001) 183 ALR 239 at 243; Re Raymond; ex parte Raymond (1992) 36 FCR 424 at 426.
    • (4) A sequestration order "ought not to have been made" if, on the facts known at the time of the annulment application, the Court would have been bound not to make the sequestration order: Re Frank; ex parte Piliszky (1987) 16 FCR 396.
    • (5) The Court will be so satisfied if it is established that the debtor was not, at the time the sequestration order was made, indebted to the petitioning creditor: Re Deriu (1970) 16 FLR 420 at 422.
    • (6) If the Court is so satisfied, it is not precluded from annulling the bankruptcy because the bankrupt had not sought to have the default judgment set aside or failed to oppose the creditor’s petition or failed to seek a review of the sequestration order: Re Raymond; ex parte Raymond (1992) 36 FCR 424 at 426.
    • (7) The power conferred on the Court by s 153B(1) is discretionary in nature. Even if persuaded that the sequestration order ought not to have been made, the Court can, in appropriate circumstances, decline to annul the bankruptcy: Boles v Official Trustee in Bankruptcy [2001] FCA 639; (2001) 183 ALR 239 at 243.
    • (8) Considerations which may have a bearing on the exercise of discretion include unexplained delay in the making of the application, whether or not the applicant is solvent, whether or not the applicant has made full disclosure of his or her financial affairs and a failure by the bankrupt to oppose the creditor’s petition and attend the hearing at which the sequestration order was made: Re Williams (1968) 13 FLR 10 at 24-5; Boles at 247; Re Papps; ex parte Tapp (1997) 78 FCR 524 at 531; Rigg v Baker [2006] FCAFC 179 at [79]; Cottrell v Wilcox [2002] FCA 1115 at [7]. Additional considerations are collected in D. A. Hassall, "Annulment of Bankruptcy and Review of Sequestration Orders" (1993) 67 ALJ 761 at 766
25. Most of the cases relating to the use of the power that deal with the annulments of sequestration orders deal with orders made pursuant to creditors’ petitions and address themselves to circumstances which relate to whether sequestration orders ought not to have been made by a Court.
26. But the section also deals with debtor’s petitions that “ought not to have been presented”. I do not think there is great utility in applying the case law that relates to the making of sequestration orders on creditors’ petitions by a Court to the task of determining whether a petition ought not to have been presented, or ought not to have been accepted. It is one thing to ask whether a Court would have been bound to have made an order had a different (and true) set of circumstances been known to it and asking that same question in respect of the state of mind of a debtor presenting his petition or an official trustee accepting it.
27. Furthermore, as the argument was developed on behalf of the applicant I understood, in any event, his case to be directed towards the act of his presentation of the petition rather than its acceptance by the Official Receiver. It is the fact that he was, he says, induced to petition for bankruptcy by incorrect advice from its officers prior to his presentation of the petition that makes it just and equitable to make the order of annulment.
28. There would be some difficulties associated in dealing with the matter on the basis of the acceptance of the debtor’s petition. As was pointed out by the learned author in the article referred to at [12], s.55(3) of the Act requires the Registrar to accept the debtor’s petition if it complies with the formal requirements of the Act. The high level of formal scrutiny of petitions adopted by Registrars in bankruptcy, means that annulments on such a basis are likely to be uncommon.
29. I think the answer to the matter lies in the fact that the applicant’s affidavit evidence as to his reliance upon the incorrect advice from the officers of ITSA in making his decision to present his petition is unchallenged. Given his uncontroverted assertion that he would not have presented the petition if he had not been given that incorrect advice it seems to me ineluctable for me to determine that the petition ought not to have been presented.
30. It should be remembered, of course, that the presentation of the petition was not in itself fatal to the cause of action. The action could have, by the trustee’s election, been continued by him. The affidavit of the applicant does not purport to say whether that is a possibility the applicant ever contemplated. In other words, it remains possible that even if he had been given the correct advice the applicant would have continued to present his petition on the assumption that he would be able to persuade the trustee to adopt the proceedings by his election. But the applicant does not say that in his affidavit and I should not make that assumption. What he expressly says is that he would not have presented the petition if he had been given the correct advice.
31. There are lingering concerns, too, given the material that is set out in the many medical reports that have been provided in respect of the consequences of the applicant’s brain injury, as to whether at the time of the presentation of his petition he would have understood the significance of the advice that he was given which he said induced him to present the petition. But these are matters that could have been pursued in cross-examination of the applicant and he was not asked to submit to cross-examination.
32. Even if I am satisfied that the petition ought not to have been presented, I still have a discretion as to whether or not the bankruptcy should be annulled. However, I cannot identify in any of the facts and circumstances relating to this case matters which would weigh against the exercise of the discretion in favour of the applicant.

I certify that the preceding 32Error! Style not defined.!Syntax Error, !Error! Style not defined.Error! Style not defined.!Syntax Error, !thirty-twothirty-two (32) paragraphs are a true copy of the reasons for judgment of Lindsay FM

Date: 13 January 2011