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Gabrielle v Palmer & Anor [2011] FMCA 44 (27 January 2011)

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Gabrielle v Palmer & Anor [2011] FMCA 44 (27 January 2011)

Last Updated: 10 February 2011

FEDERAL MAGISTRATES COURT OF AUSTRALIA

GABRIELLE v PALMER & ANOR

BANKRUPTCY – Annulment of bankruptcy – petitioning creditor’s judgment debt set aside – sequestration order ought not have been made – discretionary considerations – long delay – failure to comply with obligations on a bankrupt – no opposition from creditors or trustee – expenses of trustee recoverable from vested property – annulment granted.


Bulic v Commonwealth Bank of Australia Limited [2007] FCA 307
Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378
Re Zagoridis & Another; Ex parte Q’Plas Group Pty Ltd [1990] FCA 459; (1990) 27 FCR 108

Applicant:
CARLO CHAKIB GABRIELLE
A.K.A. CHAKIB CARLO GABRIELLE

First Respondent:
CHRISTOPHER JOHN PALMER

Second Respondent:
BUILDING INSURERS’ GUARANTEE CORPORATION

File Number:
SYG 1651 of 2010

Judgment of:
Smith FM

Hearing date:
27 January 2011

Delivered at:
Sydney

Delivered on:
27 January 2011

REPRESENTATION

Counsel for the Applicant:
Mr J Horowitz

Solicitors for the Applicant:
Beswick Solicitors

Counsel for the First Respondent:
Mr P Wayne

Solicitors for the First Respondent:
Peter M Wayne & Associates

Counsel for the Second Respondent:
No appearance by or behalf of the Second Respondent

ORDERS

(1) The sequestration order made on 25 July 2006 against the estate of Chakib Carlo Gabrielle is annulled pursuant to s.153B(1) of the Bankruptcy Act 1966 (Cth).
(2) No orders as to costs.
(3) Liberty to the first respondent to apply for orders in relation to his costs, fees, and expenses in the event that any difficulty arises in relation to the operation of s.154 of the Bankruptcy Act 1966 (Cth).
(4) The applicant must give a copy of this order to the Official Receiver in Sydney within 2 working days.
FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 1651 of 2010

CARLO CHAKIB GABRIELLE
AKA CHAKIB CARLO GABRIELLE

Applicant


And


CHRISTOPHER JOHN PALMER

First Respondent

BUILDING INSURERS’ GUARANTEE CORPORATION

Second Respondent


REASONS FOR JUDGMENT

(revised from transcript)

  1. This is an application by Mr Gabrielle for annulment of a sequestration order which was made on 25 July 2006. He has not been discharged from bankruptcy, since he has only recently filed a statement of affairs. An annulment is not opposed by any creditor, nor by his trustee, but the circumstances require careful consideration by the Court.
  2. Mr Gabrielle was in business as a licensed builder in the 1990’s and early 2000’s. In the course of that activity, three building claims were made under the home owners’ builders warranty scheme, and payments were made by the statutory insurers to the building owners. Indemnity was then claimed by them from Mr Gabrielle. The situation was complicated by reason of the collapse of HIH Insurance. Ultimately, the Building Insurers’ Guarantee Corporation (“BIGC”) obtained a judgment against Mr Gabrielle in relation to a payout concerning a building project involving Mr Adamson, that judgment being obtained in the District Court of New South Wales on 2 June 2005 in the amount of $134,778.80.
  3. A bankruptcy notice served on Mr Gabrielle relied on his indebtedness under that judgment, together with interest which had accrued. Non-compliance with the bankruptcy notice occurred on 1 August 2005. Based upon that act of bankruptcy, a sequestration order was made by a Registrar on 25 July 2006.
  4. Throughout the proceedings in the District Court and in this Court, Mr Gabrielle from time to time had instructed a solicitor to appear, but he failed to give timely instructions to his solicitors and they withdrew, both in the District Court and in this Court. Both judgments were therefore made in circumstances of default of appearance and opposition by Mr Gabrielle.
  5. Shortly before the sequestration order was made, the BIGC obtained another default judgment in the District Court against Mr Gabrielle in relation to a building project involving Mr Kyriacou, that judgment being obtained on 17 July 2006 in the amount of $292,495.44. A third and earlier indemnity payout had been made in relation to a building project involving Mr and Mrs Terza, by the Fair Trading Administration Corporation formerly the Building Services Corporation.
  6. Following the making of the sequestration order, Mr Palmer was appointed trustee in bankruptcy of Mr Gabrielle’s estate. The BIGC lodged proofs of debt in relation to the two District Court judgments and interest accrued up to the time of bankruptcy, and the Fair Trading Administration Corporation lodged a proof of debt for a claim for $100,000, arising from the third building project, the indebtedness being identified as “payment of insurance claim against the Statutory Comprehensive Insurance Scheme” between 1997 and 2002.
  7. Mr Gabrielle throughout all the proceedings, and currently, has lived at the same address, which appears to be his home where he lives with an elderly mother and possibly other relations. Shortly after his appointment, Mr Palmer posted to him the usual detailed letters informing him of the sequestration order and his obligations under the Bankruptcy Act 1966 (Cth) and the penalties for non-compliance. Those obligations included the requirement that he lodge a statement of affairs within 14 days. Mr Gabrielle was also reminded of obligations to cooperate with the trustee, and to complete income declarations. Mr Gabrielle did not comply with any of the obligations drawn to his attention at that time.
  8. He did meet with Mr Palmer or an employee and discussed his situation in late 2006, and it seems that at that time he foreshadowed a desire to have his bankruptcy annulled on the basis that he had substantial equity in real estate which would exceed the liabilities of his creditors. Mr Gabrielle did not indentify the properties in a statement of affairs, and continued to draw income by way of rents from four of the properties without accounting for that money to Mr Palmer. However, Mr Palmer was able, unaided by the required disclosure by Mr Gabrielle, to identify the properties. He also identified the National Australia Bank as the security holder over all of them, on a series of loans owed by Mr Gabrielle and various co-owners. Mr Palmer participated in the sale of one property.
  9. Events over the subsequent four years are not explained in detail in the evidence before me. It is suggested that Mr Gabrielle from time to time contemplated instructing lawyers to take a variety of actions, including reopening the District Court proceedings involving the BIGC, and applying for annulment of his bankruptcy.
  10. However, nothing happened until last year, when his current solicitors on 27 July 2010 applied for annulment of the bankruptcy under s.153B of the Bankruptcy Act. They foreshadowed the bringing of an application to set aside both of the District Court judgments, and Mr Palmer gave his consent to the bringing of those motions.
  11. The annulment application was adjourned on many occasions until it was listed for hearing late last year and again today. Meanwhile, on 14 December 2010, a deed of agreement was entered into between the Building Insurers’ Guarantee Corporation and Mr Gabrielle, to which Mr Palmer was also a party, arriving at an accord and satisfaction in relation to the two disputed District Court proceedings.
  12. Under the deed, the BIGC consented to the setting aside of both District Court judgments, including the District Court judgment upon which the bankruptcy notice and petition had been based. The consent is said to be given under r.36.15 of the Uniform Civil Procedure Rules 2005 (NSW), which gives the District Court a discretion to set aside its judgments in a variety of situations.
  13. Under the terms of the settlement, the BIGC also agreed to accept $50,000 in settlement of both District Court proceedings, provided that that sum was paid before 9 September 2011, and provided this Court annulled the bankruptcy. The deed contained other provisions governing the contingency that an annulment was not approved, and these appear to recognise that the trustee would then have a discretion as to how to deal with the proofs of debt lodged by the BIGC.
  14. The deed did not deal with Mr Palmer’s costs and expenses and remuneration in relation to the administration of the bankrupt estate over the years since 2006, nor his costs in the present proceedings to which he was named as a respondent.
  15. The BIGC was also named as a respondent to the present annulment application, and initially foreshadowed that it intended to oppose the proceedings. However, it was a term of the deed that it would “withdraw from the Federal Magistrates Court Proceedings at the first available opportunity, with no order as to costs and will not oppose the orders sought by Gabrielle in those proceedings”. It did not appear today, and has made no submissions.
  16. The situation therefore is that Mr Gabrielle, at present, has no liability to the BIGC, but will owe it $50,000 in September 2011, or will face a need to litigate the building disputes underlying the BIGC claims for indemnity.
  17. In relation to other unsecured creditors, only the National Australia Bank has lodged a proof of debt for a small amount, which may or may not be recoverable under the bank’s security over the five pieces of real estate. It has indicated awareness of the pendency of the present proceedings, and said that it “will neither consent nor oppose your client’s application”. It has not sought to appear on any occasions. It has more than ample security for all indebtedness of Mr Gabrielle.
  18. On its part, the Fair Trading Administration Corporation, who was represented by an officer of the Department of Fair Trading, has indicated that “there is no objection from the former BSC to the application for annulment of the bankruptcy”. It also has not sought to appear in the proceedings.
  19. Very belatedly, Mr Gabrielle did lodge a statement of affairs on 24 December 2010, probably as a response to statements made by me when adjourning the hearing in the matter. Mr Palmer has now had an opportunity to examine that statement of affairs, as well as a detailed affidavit by Mr Gabrielle which was filed at around that time setting out Mr Gabrielle’s financial affairs at the time of the sequestration order and currently. Mr Palmer reported to the Court, essentially, that he is unaware of any significant discrepancy in the information contained in Mr Gabrielle’s affidavit and statement of affairs. It confirms the situation reported by Mr Palmer to creditors in a report dated 17 August 2010. This suggested that, taking into account the full, joint and several liabilities of Mr Gabrielle to the National Australia Bank under the securities over the jointly owned property, and also taking into account the full amount of the BIGC’s proofs of debt, and without having admitted those proofs, there was an estimated deficiency in the bankruptcy of $405,687.
  20. However, the evidence points to the securities held by the National Australia Bank substantially exceeding the indebtedness of Mr Gabrielle and his joint owners, and it appears that the National Australia Bank has no intention to pursue Mr Gabrielle separately for the full amount of his indebtedness. Apportioning the indebtedness of the co-owners to the bank by reference to their titles in the five properties, Mr Gabrielle’s share in the total indebtedness to the National Australia Bank is more than amply covered by his equity in the properties. There is evidence as to their values from a qualified valuer, and Mr Palmer does not take issue with those valuations. On that basis, there is currently a net equity held by Mr Gabrielle in the amount of approximately $760,000.
  21. Once the settlement with the BIGC is taken into account, and the apparently diminishing prospects that the other government agency will be disposed to pursue Mr Gabrielle in relation to its claim, Mr Gabrielle can therefore point to equity in real estate exceeding substantially the amount of all currently known unsecured indebtedness.
  22. I note that Mr Gabrielle’s statement of affairs referred to relatively small amounts of rates owing to two local councils in relation to the properties. It may well be that the statement of affairs was inaccurate by including these debts, since, in fact, his interests in the properties had vested in Mr Palmer, who was probably the person responsible for the payment of the rates. Mr Palmer also points out that the councils probably have statutory charges in relation to any outstanding rates. In those circumstances, I did not feel it necessary to further adjourn the proceedings to require the councils to be served with notice of them.
  23. Section 153B provides:
  24. The consequences of an annulment are referred to in s.154:
  25. The principles upon which the power to annul are exercised have been discussed in a number of authorities. They were recently summarised by Tracey J in Bulic v Commonwealth Bank of Australia Limited [2007] FCA 307 at [12]:
  26. The proposition that the pre-condition to the power requires the Court to decide whether, using hindsight in the permitted manner, the Court making the sequestration order “would have been bound not to make the sequestration order” is open to some discussion in the authorities.
  27. For present purposes, I am content to take a broader view of that test, considering whether on the evidence now before me I can conclude with confidence, that it would not have been open to a Registrar to make the sequestration order in the circumstances now known, and that for that reason it “ought not to have been made”. It is in that sense that the Court regularly annuls sequestration orders, as a result of debtors belatedly obtaining the setting aside of judgment debts upon which acts of bankruptcy have occurred and sequestration orders have been made, and where there is no detriment to creditors or the public interest if the bankruptcy is annulled.
  28. Counsel for Mr Gabrielle has presented in his written submissions a detailed argument, with citation to authority, contending that the District Court default judgment entered on 2 June 2005 was a nullity which can be recognised by the Bankruptcy Court, by treating it as ineffective at all times for the purposes of giving rise to an act of bankruptcy and supporting a sequestration order. His submission conceded that authority in the Federal Court appeared to be against him in this respect, in particular drawing my attention to Re Zagoridis & Another; Ex parte Q’Plas Group Pty Ltd [1990] FCA 459; (1990) 27 FCR 108.
  29. I am not able to accede to counsel’s submission that I should conclude that that case was wrongly decided, and indeed I take the view that I am bound by its ratio decidendi. I also with respect can see no error in its reasoning. Spender J in that case relied upon an analysis of Gibbs J in Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378. However, the points of law were not the subject of contested proceedings before me, and I have not felt it necessary to reflect on the point further.
  30. It appears to me that I do not need to decide whether the District Court order was a nullity at the time that it was made, since the consent setting aside of the District Court judgment provides sufficient evidence with hindsight, for concluding that the sequestration order ought not have been made because the indebtedness upon which it relied upon can now be said not to have existed, being the indebtedness arising from the judgment that has been set aside by consent.
  31. I would not in this case construe the circumstances of the setting aside, and in particular the recent deed of agreement, as containing admissions of any indebtedness existing in 2006 apart from the judgment debt, upon which the sequestration order would have been able to have been supported. As I have noted, the effect of the accord and satisfaction is only to substitute a future state of indebtedness of Mr Gabrielle to the BIGC, with the risk of the revival of the contested building case if that debt is not met.
  32. I am therefore satisfied that the pre-condition to s.153A(1) has been met in the present case, and it is then necessary to consider the discretion which is referred to in the authorities cited by Tracey J.
  33. The heart of the discretion must address considerations relevant to the Bankruptcy Act and the purposes of a bankruptcy administration. From that perspective, in my opinion, notwithstanding the long delay, the balance points towards annulment rather than the contrary. I have given particular weight to Mr Palmer’s consideration of the situation and his explanation in his affidavit sworn on 20 January 2011 as to his reasons for not opposing annulment, provided that his costs and expenses and remuneration can be satisfactorily met. In paragraph 15 of his affidavit under the heading, “Trustee’s Attitude”, he states:
  34. Mr Gabrielle has accounted for his financial affairs at the date of bankruptcy and over the intervening years in a less than satisfactory manner, and on the evidence before me I cannot be totally confident that he has not been trading. However, there is certainly no evidence that there are past or current creditors who would be disadvantaged by an annulment of his bankruptcy. The contrary indeed might be implied by the attitudes taken of such creditors as have come to the attention of Mr Palmer, and are disclosed by Mr Gabrielle in his recent affidavit and statement of affairs.
  35. In effect, an annulment would restore to Mr Gabrielle his equity in his properties, allowing that equity to be attached by all his past and current creditors, to the extent that it survives the interest of the secured creditor. On present evidence, that equity is ample to cover all his secured and unsecured liabilities, albeit facing some hurdles before it could be realised.
  36. If there were no assurance that Mr Palmer’s expenses would be satisfactorily met, I would not annul the bankruptcy. Mr Palmer’s recent affidavit explains in detail his expenses of administration including, as I understand it, his participation in the present proceedings, and deposes to an amount of $86,487.55 as outstanding. There may be further expenses that have not made it into that account.
  37. I canvassed with counsel the effect of s.154(1) in relation to the re-vesting of property which had vested in Mr Palmer, in particular the real estate interests which are vested in Mr Palmer. Mr Gabrielle’s counsel accepted that under s.154(1)(b), Mr Palmer would have an enforceable charge over the property, and that any re-vesting to Mr Gabrielle would be subject to that charge. The evidence points to it being more than sufficient security for all amounts recoverable by a trustee under s.154.
  38. As presently advised, although this was not a matter of detailed submission, I would expect Mr Palmer to be able to protect his charge by appropriate annotation or caveat on the titles. If so, it does not appear to me that any further orders would be needed to protect Mr Palmer’s position in relation to the payment of the costs, charges and expenses of the administration. I shall, however, reserve liberty to apply in the event that any problem arises for Mr Palmer.
  39. The substantial countervailing considerations to annulling the bankruptcy concern the delays of Mr Gabrielle in seeking annulment, and his disregard for his obligations under the Bankruptcy Act in the course of his bankruptcy.
  40. I was invited to find that both of these matters were fully explained by Mr Gabrielle’s state of mind which was considered by a psychiatrist, Dr Sharon Reutens. Dr Reutens wrote two reports at the request of Mr Gabrielle’s solicitors last year. She accepted a history given to her by Mr Gabrielle that he was in a state of stress and inability to cope which accounted for his failure to defend and instruct lawyers in 2005 and 2006 in the District Court and this Court. She also accepted to some extent that he had an ongoing disorder affecting his capacities to conduct his affairs over subsequent years. Her second report dated the onset of a ‘Major Depressive Disorder’ or ‘anxiety disorder’ in the year 2000 which “continued at least until the time I saw him in March 2010”. She accepted that the depression would affect ability to “take in information, process, and act upon it quickly”, and also affect “attention, memory problems and executive dysfunction (cognitive abilities that control and regulate other abilities and behaviours)”.
  41. Dr Reutens was not specifically asked to address how this condition affected his ability to comply with the particular requirements on a bankrupt which were drawn to his attention by Mr Palmer. However, I was invited to infer from her report that Mr Gabrielle’s mental illness fully accounts for his behaviour.
  42. I am not sure that it does. His behaviour over the years may equally be open to an interpretation that there was a conscious defiance of legal obligations and a tactic of protraction when dealing with the trustee and creditors.
  43. Over that period Mr Gabrielle has continued to manage and take rents from the rental properties, in disregard of the vesting of his interest in those properties in Mr Palmer. However, this has happened with the knowledge and acquiescence of Mr Palmer. I am informed that the rents were paid to the National Australia Bank, although there is no evidence before me that it had any entitlement to receive rents until recent times when it took possession of at least one of the securities.
  44. If Mr Gabrielle’s behaviour had adversely affected the abilities of Mr Palmer to manage the estate and pay creditors in a timely fashion, then I would have refused annulment. But Mr Palmer tells the Court that it has not had this effect, and Mr Gabrielle’s past and current financial situation is as I have explained it above.
  45. It may be that Mr Gabrielle’s behaviour has exposed him to prosecution, even serious prosecution, under the Bankruptcy Act. This is not a matter upon which I have ultimately decided that it is necessary or appropriate for me to decide in the annulment application. It appears to me that the public interests in relation to such a prosecution could be better addressed by the relevant authorities. I would not wish anything I have said in this judgment to indicate that that should happen, or what its outcome should be. I note that s.275 of the Bankruptcy Act provides:
  46. Balancing all the considerations, I have arrived at the conclusion that in the special circumstances before me, it is not in the interests of Mr Gabrielle’s creditors, past or present or future, nor of the general interests of the public interest addressed by the Bankruptcy Act, that this bankruptcy should continue.
  47. In circumstances where I have been satisfied that the sequestration order ought not have been made, I have decided that an order for annulment should be made.

I certify that the preceding forty-seven (47) paragraphs are a true copy of the reasons for judgment of Smith FM


Date: 9 February 2011

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