Marek v Tregenza [1963] HCA 40; (1963) 109 CLR 1 (15 October 1963)

HIGH COURT OF AUSTRALIA

MAREK v. TREGENZA [1963] HCA 40; (1963) 109 CLR 1

Bankruptcy

High Court of Australia
McTiernan(1), Kitto(2) and Menzies(2) JJ.

CATCHWORDS

Bankruptcy - Annulment of sequestration order - Discretion of Court - Debts of bankrupt paid in full - Bankruptcy Act 1924-1960 (Cth), s. 124.

HEARING

Adelaide, 1963, September 30;
Melbourne, 1963, October 15. 15:10:1963
APPEAL from the Court of Insolvency of South Australia.

DECISION

October 15.
The following written judgments were delivered:-
McTIERNAN J. This is a case in which all the debts of a bankrupt were paid upon a Court of Bankruptcy to annul a sequestration order in such a case. This is a discretionary power and the Court may refuse for good cause to act under the provision even though all the debts of the bankrupt are paid. The appellant applied under s. 124(1) to annul the sequestration order made against him. Paine J. refused the application. This appeal is brought against his order on the ground that it is an erroneous exercise of the discretion vested in a Court by s. 124(1). The materials on which the application fell to be decided are the facts to which the applicant deposed in his affidavit and the materials in the report which the official receiver made on the application. There is nothing in the affidavit or the report adverse to the application. It is not necessary to repeat what is in either document. His Honour's views were expressed during the address of counsel for the applicant. Nothing which was said imputes dishonesty or fraud to the applicant and no issue of commercial morality or public interest was raised against him. See In re Beer; Ex parte Beer (1903) 1 KB 628, at pp 633, 634 I apprehend the effect of what the learned judge said to be this: the sequestration order gave the applicant respite from the demands of creditors enabling arrangements to be made resulting in the payment of his debts, and it was therefore rather incongruous to seek the annulment of the sequestration order. His Honour considered that it was more appropriate to pursue an application for an order of discharge. In my opinion there was no relevant reason for refusing the application for the annulment of the sequestration order. The appeal should in my opinion be allowed. (at p3)

KITTO AND MENZIES JJ. In this case the appellant seeks the reversal of an order of the Court of Insolvency of the State of South Australia refusing to annul a sequestration order. The Court of Insolvency has federal jurisdiction in bankruptcy under s. 18(1)(b) of the Bankruptcy Act 1924-1960 (Cth). In exercise of that jurisdiction it made a sequestration order against the appellant on 19th February 1960 on a creditor's petition. On 22nd August 1962 the appellant applied to the Court to annul the sequestration order under the provisions of s. 124(1)(b) of the Act, and in particular upon the ground that it was proved to the satisfaction of the Court that his debts were paid in full. (at p3)

2. He established that he had paid in full (with interest so far as claimed) all the debts that had been proved in his bankruptcy. They were debts owing to nine creditors, amounting in all to less than 650 pounds. He had also paid in full (with interest) a debt of 260 pounds which at the date of the sequestration order was secured by a first mortgage of certain land, said to have been worth 3,000 pounds, of which the bankrupt and his wife were the registered proprietors. His only other liabilities at the date of sequestration were under hire-purchase agreements, and although no debt was proved in respect of any of them he had completed the purchases provided by the agreements before applying to the Court for annulment. (at p4)

3. All this he had managed to perform partly by means of his personal savings but mainly by raising with his wife's co-operation two mortgages for 1,000 pounds and 500 pounds respectively on the security of the land that has been mentioned. In the result, when he came before the Court on his annulment application he had no debt or obligation of any kind that had been incurred before he became bankrupt. Accordingly the Court was necessarily satisfied that the appellant's "debts" had all been paid in full; for whether the word "debts" in s. 124(1)(b) refers only to proved debts, as Cross J. has held in More v. More (1962) Ch 424 (see also In re Ward (1942) Ch 294), or includes all debts existing at the date of the sequestration order whether proved or provable and whether secured or unsecured, as has been held in such cases as Re Suttor; Ex parte Suttor (1901) 1 SR (NSW) B & P 13 and Re Gay (1943) 13 ABC 134, it cannot include debts incurred after sequestration. As Farwell J. observed of the United Kingdom legislation in In re Ward (1942) Ch 294, at p 297, throughout the Act it will be found that the word "creditors" is used as meaning either persons who have claims against the bankrupt (at the date of sequestration) or persons who have proved in the bankruptcy, and it is not always easy to ascertain which meaning is intended in a particular provision. Something similar may be said of the word "debts". But with debts incurred after sequestration the administration of a bankrupt's estate has no concern, and for that reason the Act cannot be understood as referring to such debts when it speaks of the debts of a bankrupt. (at p4)

4. The learned Judge who heard the appellant's application expressed no doubt as to this. He was satisfied that the condition of his jurisdiction to grant annulment was fulfilled. But he nevertheless refused annulment in the exercise of his discretion. The power of the Court to annul a sequestration order where the debts are paid in full is undoubtedly discretionary: In re Keet (1905) 2 KB 666, at p 677; but the discretion is judicial, and the intention appearing from the section is that the fulfilment of the condition is sufficient reason for restoring the bankrupt to his former condition (so far as that can be done without invalidating acts done by the Court or by bankruptcy officials in the meantime: see sub-s.(2)) unless in the circumstances of the case, and speaking generally that means in the conduct of the bankrupt, there is to be seen a reason to the contrary, being a reason relevant to the purposes of the Act. In order to deal with the appeal, therefore, it is necessary to consider the circumstances in which the appellant's application for annulment came before the Court. (at p5)

5. He came to Australia from Czechoslovakia in 1949. In 1957 he obtained a taxi from a company called the Silver Top Taxi Service Pty. Ltd. under a hire-purchase agreement. He also hired from the same company a taxi licence. He fell into arrears with his hire payments, not through any remissness but deliberately, he and nine other drivers similarly situated having decided to withhold payments until certain grievances they considered they had against the company in relation to service (apparently to their cars) should be rectified. The company sued the appellant, and he set up by way of defence that the company had failed to perform its obligations under what he has described, no doubt loosely, as a "partnership" agreement, and, as a second ground, that the agreement was void by reason of some statutory provisions which we do not need here to discuss. The case, he has said, was in the nature of a test case in the interests of all the taxi operators working under the agreement. His defences failed, and judgment passed against him on 11th November 1959 for 128 pounds and costs which were taxed at 77 pounds. On 9th December 1959 a warrant of execution was issued to enforce the judgment and was returned unsatisfied. On the act of bankruptcy thus committed the company presented a bankruptcy petition. It came on to be heard on 19th February 1960. The bankrupt then and there offered to pay 260 pounds in settlement, but the offer being refused the sequestration order was made. (at p5)

6. Apart from the mortgagee of the land and companies from which the appellant had obtained goods under hire-purchase agreements, there were only nine creditors. The Silver Top company was the largest of these, with a debt of 414 pounds. Only one other unsecured creditor was owed more than 50 pounds. Altogether the unsecured debts, as we have said, came to less than 650 pounds, and the appellant had assets, apart from goods under hire purchase, worth more than that. He had about 465 pounds in cash, and his share of the equity in the land was valued at more than 1,200 pounds. (at p5)

7. The appellant had kept daily work cards, bank statements and cheque butts, which the official receiver considered sufficient records for so simple a case. His conduct during his bankruptcy had been satisfactory. He had committed no offences under the Bankruptcy Act, and none of the facts existed which s. 119(7) specifies as facts on proof of which a discharge may be refused, suspended or made conditional upon submitting to a judgment for amounts to be paid out of future earnings or after acquired property. (at p6)

8. The sequestration order having been made, the appellant, aged thirty-six and a married man, might well have looked upon bankruptcy as giving him a fresh start without the burden of his past debts. But he took a more commendable view. He continued to work as a taxi-driver, and on 14th July 1960 with his wife's co-operation he raised the mortgage for 1,000 pounds which has been mentioned, paid off the mortgage that existed at the date of sequestration, and paid the balance of the mortgage money to the official receiver, thereby enabling the unsecured debts to be paid in full and some payments to be made to the hire-purchase creditors. On 25th August 1960 he and his wife borrowed from his solicitor 200 pounds, and on 5th October 300 pounds, on second mortgage of the land. This enabled him, with the aid of his earnings, to pay off his old taxi and get a new one, pay off 110 pounds accumulated taxi licence fees, pay 105 pounds which he owed his solicitor for costs, and complete (by May 1962) the purchase of the articles under hire-purchase agreements. At the end of May 1961 he sold his taxi to Silver Top Taxi Services Pty. Ltd., which took over his liability under the hire-purchase agreement relating to it, and he entered the South Australian Government Service as a photo-lithographer in the Lands Department. (at p6)

9. The case, then, is one of a man in a small way of business who became bankrupt as a result of litigation arising out of a dispute connected with his work, at a time when he owed less than the value of his assets, without his having been guilty of any breach of commercial morality or any conduct frowned upon by the Act, who has paid in full all his unsecured debts within six months after sequestration and his debts of all kinds within a little more than two years thereafter. He comes to the Court seeking an order of annulment, having met every penny of his pre-sequestration obligations and done more than all that was required of him in connexion with his bankruptcy. (at p6)

10. This Court will not, of course, interfere with the exercise of the discretion conferred by s. 124 unless it can see that the primary Judge has acted upon a wrong principle, given weight to extraneous or irrelevant matters or failed to give due weight to relevant matters, or proceeded on a mistake of fact, or for some other reason has failed to exercise the discretion properly: cf. House v. The King [1936] HCA 40; (1936) 55 CLR 499, at pp 504, 505, Mace v Murray [1955] HCA 2; (1955) 92 CLR 370, at p378 and cases there cited In the present case the learned Judge did not deliver a statement of his reasons, but they may be collected from the record that was kept of the discussions between himself, the official receiver, and counsel for the appellant. His Honour made it clear that a consideration weighing with him was that for two years the appellant had been "enabled by the shelter afforded him by the sequestration order to work off his creditors". It was pointed out to his Honour that in fact no creditor had been pressing the bankrupt except Silver Top Taxi Service Pty. Ltd., and that even that creditor was paid off, together with the others, not in two years but in six months. Nevertheless his Honour insisted in effect, and correctly so far as the fact is concerned, that the appellant was insolvent in the sense that he could not pay his debts immediately but had to have time in which to raise money by mortgage of the land, and that the bankruptcy had given him the time required. As regards the hire-purchase creditors, his Honour said that he assumed that the whole of the unpaid instalments became due (scil. on the bankruptcy supervening), and that on that assumption the bankruptcy had given the appellant eighteen months in which to meet his hire-purchase obligations. This may have been true, but there was force in counsel's rejoinder that the hire-purchase creditors were paid as they would have been paid if there had been no bankruptcy, receiving the agreed stipulated interest in the meantime. His Honour's answer was that the case was one for an order of discharge but not for an annulment. This view he took notwithstanding that to qualify for a discharge unimpeded by s. 119(6) the appellant need only have paid ten shillings instead of twenty shillings in the pound. (at p7)

11. It is not altogether easy to see what shelter, in any practical sense, the appellant gained from the sequestration order. The only importunate creditor had already failed to gain anything by issuing execution. The best that that creditor or any other could very well expect was that the appellant might be able to pay his debts in a few months' time by raising a loan on the security of the land which he and his wife owned, and by diligent work and economical living. That is what in fact he did; after being made bankrupt, it is true, but acting voluntarily and in excess of his strict legal obligations as a bankrupt. While performing these obligations to the letter, instead of leaving the official receiver to get what he could by trying to sell his undivided interest in the equity of redemption in the land, he applied himself, and with success, to the task of getting his debts paid in full by a method which gave the official receiver the minimum of trouble and within as short a time as could reasonably have been expected if the bankruptcy had not taken place. It seems to us that the most that can fairly be said as to the effect of the bankruptcy upon the appellant is that a dislike of its incidents may have spurred him to action. The important fact is while the "shelter" of bankruptcy ordinarily entails loss for the creditors, the creditors in this case have suffered no loss at all. Without delay of any consequence the appellant has produced such a situation that the bankruptcy has proved of no significance to any but himself; and if it be considered as a shelter, it certainly was not a shelter of his seeking. (at p8)

12. With great respect to the learned Judge, we find ourselves driven to the conclusion that his Honour failed to give due weight to the considerations which were favourable to the application, and that without sufficient reason he withheld from the appellant the reward which the Act intends for such a case as his. Apart from the initial misguided but evidently quite honest opposition to the claim of Silver Top Taxi Service Pty. Ltd., which in the end caused that company no loss, the appellant's conduct has been exemplary. His bankruptcy was not caused or contributed to by extravagance, recklessness or reprehensible conduct of any sort, and we see no reason why, his debts which were small having all been paid, he should not be absolved from the stigma of bankruptcy. No purpose, so far as we can discover, is served by refusal of the application. All the circumstances being viewed in due proportion, it seems to us to be the proper conclusion that considerations of general policy and of particular justice combine to entitle the appellant to have the sequestration order annulled. (at p8)

13. The appeal will therefore be allowed. (at p8)

ORDER

Appeal allowed. Order appealed from discharged. In lieu thereof order that, the debts of the bankrupt having been paid in full, the sequestration order dated 19th February 1960 be annulled.