Pascoe v Erten [2011] NSWSC 769 (22 July 2011)

Last Updated: 25 July 2011

Supreme Court New South Wales

Case Title:	Pascoe v Erten
Medium Neutral Citation:	[2011] NSWSC 769
Hearing Date(s):	13 July 2011
Decision Date:	22 July 2011
Jurisdiction:	Common Law
Before:	Schmidt J
Decision:	The motion is dismissed with an order for costs in favour of the plaintiff.
Catchwords:	PROCEDURE - stay of proceedings sought pending Federal Magistrates Court decision - defendants are bankrupts - question of arguable point and balance of convenience - stay refused - costs
Legislation Cited:	Bankruptcy Act 1966 (Cth) Bankruptcy Regulations 1996 (Cth) Federal Court of Australia Act 1976
Cases Cited:	De Robilliard v Carver [2007] FCAFC 73; [2007] FCAFC 73; (2007) 159 FCR 38 Ferella v Official Trustee in Bankruptcy (as trustee of the bankrupt estate of Ferella) (No 2) [2011] FCA 619 Nilant v Macchia [2000] FCA 1528; (2000) 104 FCR 238 Simon v Vincent J O'Gorman Pty Ltd [1979] FCA 75; (1979) 41 FLR 95 Re Coyle [1993] FCA 161; (1993) 42 FCR 72 Re Schierholter; Ex parte Geis [1978] FCA 6; (1978) 32 FLR 22 Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212
Texts Cited:
Category:	Procedural and other rulings
Parties:	Scott Darren Pascoe as trustee of the Bankrupt Estate of Ozkan Erten and the Bankrupt Estate of Nurdan Erten (Plaintiff) Ozkan Erten (First Defendant) Nurdan Erten (Second Defendant)
Representation
- Counsel:	Counsel: Mr DE Baran (Defendants)
- Solicitors:	Solicitors: Grace Lawyers (Plaintiff) Maatouks Law Group Pty Ltd (Defendants)
File number(s):	2011/188559
Publication Restriction:

Judgment

1. By notice of motion filed in July 2011, the defendants seek orders staying these proceedings, pending the Federal Magistrates Court's disposition of applications for relief which they have brought under the Bankruptcy Act 1966 (Cth) ('the Act'). Both defendants are bankrupts. Mr Ozkan Erten has made an application for relief under s 179 of the Act and Ms Nurdan Erten under s 153B.
   
2. The application is opposed, notwithstanding that the matters are listed before the Federal Magistrates Court in August, when they may be heard or dealt with only for directions. The defendants have undertaken to take whatever steps are reasonably available to them, to have their applications expedited.
   
3. The proceedings were commenced in June 2011. By amended statement of claim the plaintiff, the defendants' trustee in bankruptcy, seeks judgment for possession of a property located at Dulwich Hill, where the defendants reside.
   
4. The motion was supported by an affidavit sworn by Mr Maatouk, the defendants' solicitor, which disclosed that Mr Erten was made bankrupt in July 2007 and that he had instructed in February 2011, that he understood that his three year bankruptcy period had expired in July 2010 and that he had been discharged from bankruptcy. Mr Maatouk had discovered, however, that Mr Erten had never filed a Statement of Affairs and that consequently, the trustee was refusing to consent to his discharge.
   
5. Mr Erten seeks to have the bankruptcy set aside, claiming that the former trustee, the Insolvency and Trustee Service Australia ('ITSA') never informed him of the need to file a Statement of Affairs and took no action to bring such a requirement to his attention. By letter of 5 July 2011, Mr Maatouk wrote to ITSA advising of his instructions, complaining about various of its actions and those of the current trustee and the fees they had incurred in the administration; and claiming that it had failed to take any action against Mr Erten, or to advise him of the requirement to lodge a Statement of Affairs. Similar matters were raised with the current trustee by letter of 11 July.
   
6. As to Ms Erten, Mr Maatouk was instructed that after she became a bankrupt, she filed an application in October 2010 to pay a default judgment obtained against her by weekly instalments. Orders to that effect were made by the Local Court. Even though she then made all payments due under the orders, still she was made bankrupt. In those circumstances, she too seeks to have the bankruptcy set aside.
   
7. The plaintiff relied on an affidavit sworn by his solicitor, Ms Teh. The plaintiff informed Mr Erten of his appointment and the need to file a Statement of Affairs in February 2011. This appears to have led Mr Erten to instruct Mr Maatouk. Annexed to the affidavit was a response by ITSA to Mr Maatouk's complaint of 5 July, dated 11 July. There it was advised that on ITSA's file was correspondence sent to Mr Erten at the Dulwich Hill address by registered mail in July 2007, after it was appointed trustee, which informed him of the bankruptcy, its appointment as trustee and the Statement of Affairs which he was required to provide. That letter was returned to sender unclaimed and a further letter was sent, in identical terms, in August 2007. There was no response. A further letter was sought to be served on Mr Erten in November by a mercantile agent at another address. An unidentified male at that address denied knowledge of Mr Erten.
   
8. Further attempts to communicate with Mr Erten, or Ms Erten at the Dulwich Hill property elicited no response. In August 2010, Mr Erten was informed by letter sent to the Dulwich Hill property that he could not be discharged, if the Statement of Affairs was not filed.
   
9. In November 2010, Ms Erten was made bankrupt in proceedings before the Federal Magistrates Court and the plaintiff was appointed trustee. In Local Court proceedings in May 2010, default judgment had been entered against her for unpaid strata levies in the amount of $12,565.83. A bankruptcy notice was issued in June, based on the judgment debt. The notice was served in August. Ms Erten failed to comply with the requirements of the notice. In October 2010, Ms Erten obtained orders from the Local Court, for payment of the judgment debt by weekly instalments of $300. In December 2010, the Federal Magistrates Court dismissed an application for review of the bankruptcy brought by Ms Erten. That order was made, by consent, together with an order for costs in favour of the creditor.
   
10. In December 2010, Ms Erten was informed of the need to complete a Statement of Affairs by letter sent to the Dulwich Hill address. The completed Statement was not provided until March 2011, in circumstances where, in the meantime, the trustee had received correspondence from the Australian Taxation Office, in relation to Ms Erten's tax returns.
    

The Bankruptcy Act

11. Section 54 of the Act makes it an offence for a bankrupt to fail to file a copy of a statement of his or her affairs with the Official Receiver within 14 days of receiving notification of the Bankruptcy and furnishing a copy to the trustee.
    
12. Clause 2.6(b) of Schedule 4A of the Bankruptcy Regulations 1996 (Cth) imposes various obligations on a the trustee, including in relation to 'obtaining and reviewing the statement of affairs of the bankrupt, debtor or deceased person'.
    
13. Sections 178 and 179 of the Act, provide:

"178 Appeal to Court against trustee's decision etc.

(1) If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.

(2) The application must be made not later than 60 days after the day on which the person became aware of the trustee's act, omission or decision.

179 Control of trustees by the Court

(1) The Court may, on the application of the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following:

(a) remove the trustee from office; and

(b) make such order as it thinks proper.

(2) The Inspector-General or a creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt's estate or affairs."

14. It is Mr Erten's contention that pursuant to s 179(1)(b) of the Act the Federal Magistrates Court has power to discharge him from his bankruptcy. That is the order which he will seek to press, if an inquiry into the trustee's conduct is ordered. On the plaintiff's approach, the Court has no power to make such an order under s 179 and there is no merit in the case which he advances, in any event.
    
15. The relief which Ms Erten seeks, is pursued under s 153B of the Act, which provides:

" 153B Annulment by Court

(1) 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) In the case of a debtor's petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented.

(3) The trustee must, before the end of the period of 2 days beginning on the day the trustee becomes aware of the order, give to the Official Receiver a written certificate setting out the former bankrupt's name and bankruptcy number and the date of the annulment.

Penalty: 5 penalty units.

Note: See also section 277B (about infringement notices).

(4) Subsection (3) is an offence of strict liability.

Note: For strict liability, see section 6.1 of the Criminal Code ."

16. It is Ms Erten's contention that she ought not to have consented to the orders made by the Federal Magistrates Court in December 2010 dismissing her application for review. In view of the Local Court's order for payment of the judgment debt by instalments, she ought to have sought to have the bankruptcy discharged or annulled.
    
17. The plaintiff's case was that Ms Erten's application involved an abuse of process. It is settled that a sequestration order may be made, notwithstanding an order to pay a debt by instalments. The entirety of the person's financial position has to be considered, when an application for the making of a sequestration order is determined. The consent orders made in December 2010, cannot be reviewed under s 153B.
    

The stay must be refused

18. The stay sought was pressed on the same basis, it was explained, as a stay was pressed when a judgment is appealed, in circumstances where to refuse to grant the stay, would render the appeal nugatory. Considerations of whether there is an arguable point thus arose, as well as the question of whether the balance of convenience favoured granting the stay. That approach appears to accord with that adopted when a stay of a sequestration order is sought under s 52(3) of the Act.
    
19. The stay was resisted by the plaintiff on the basis that the applications which have been made to the Federal Magistrates Court have little prospect of success; that the stay would fail to pay regard to the purpose for which the bankruptcy regime was established; and would pay no attention to the interests of creditors under that scheme, who remained unpaid.
    
20. In the case of Mr Erten, on the evidence it appears that Mr Erten's complaint that his bankruptcy has only continued because of the former trustee's failure to inform him of the obligation to provide a statement of his affairs, should lead to the discharge of his bankruptcy, has but little prospect of success.
    
21. On the material, it appears that the former trustee took various steps to draw that obligation to his attention, by correspondence sent to his residential address, as did the current trustee, the plaintiff. Mr Erten himself has given no evidence, but it is apparent that at least in February 2011, he had notice of his obligation to file a Statement of Affairs. None has been filed. There was no suggestion that when the former trustee earlier wrote to him, he did not reside at the Dulwich Hill property. Correspondence sent to Ms Erten at that address plainly reached her.
    
22. Mr Erten has to convince the Federal Magistrates Court that there should be an inquiry conducted into the trustees' conduct. In the circumstances, it is difficult to see that this application has much prospect of success, or that even if such an inquiry was ordered, that the result could be that he will be discharged from the bankruptcy, as he ultimately seeks.
    
23. Certainly there is a supervisory power over trustees, of the kind discussed by Yates J in Ferella v Official Trustee in Bankruptcy (as trustee of the bankrupt estate of Ferella) (No 2) [2011] FCA 619 at [11] - [20]. When seeking the exercise of that power, there is an onus falling on an applicant to establish that there are substantial grounds for believing that the trustee erred in the administration of the estate, or had engaged in misconduct. The likely utility of the conduct of the inquiry also has to be considered.
    
24. Mr Erten has failed to comply with the fundamental obligation falling upon him as a bankrupt, to provide a statement of his affairs. The policy behind s 54 was described by Hill J in Nilant v Macchia [2000] FCA 1528; (2000) 104 FCR 238 at 245 as:

"Given the penal nature of the obligation created by s 54, it is difficult to see that breach of the section, no matter how inadvertent, could be categorised as merely formal. The policy behind s 54 is clear. The obligation to file a statement of affairs in a public register is intended to make information concerning the bankrupt's affairs available to creditors and, for that matter, members of the public. The former may inspect without payment of a fee, the latter only on payment of a fee. But it is in the interests of the public in the encouragement of morality in trading that the financial situation of a bankrupt debtor be open to inspection. Because, ordinarily, the administration of the estate and ultimate distribution of dividends from the estate, will be dependent upon the trustee having full details of the trade dealings and debts of a debtor, the statement is to be made available as well to the trustee in bankruptcy. Given the scheme of the legislation and the important role that the statement of affairs plays in it, there is considerable difficulty in seeing that Parliament would have intended that the Court, through s 306, have the ability to treat non-compliance with the statutory obligation as merely formal."

25. It is also relevant that there does not seem to be any question that the basis upon which Mr Erten was made a bankrupt had a proper foundation. How, in those circumstances, the discharge order which he seeks could properly be made, is difficult to see. Such orders would be to the obvious and significant detriment of his creditors and to their rights under the Act. A fundamental purpose of the legislation is, after all, that a bankrupt's assets be taken and applied for the benefit of the bankrupt's creditors, and only if there is a surplus, for the benefit of the bankrupt. Even if Mr Erten had appealed his bankruptcy order, when it was made, he would have had to establish that on the evidence before the sequestration order was made, a doubt as to the correctness of the order arose. There is no suggestion that there was any such doubt in this case.
    
26. In those circumstances, it is difficult to see that even if a basis for the complaints made about the trustees' alleged failures could be established, that an order which would deprive Mr Erten's creditors of their rights under the Act could be made.
    
27. A similar conclusion must be reached in relation to Ms Erten, no matter that there must be some sympathy for her apparent situation.
    
28. It seems that the debt which led to Ms Erten's bankruptcy was not a large one. While she had taken steps to allow her to pay the debt by instalments, before the sequestration order was made, she did not take steps in relation to the bankruptcy notice. She later sought a review of the sequestration order, but at a time when the debt had seemingly not been repaid. Indeed, it was not suggested that the debt has even yet been entirely repaid. That perhaps explains why Ms Erten consented to the dismissal of her review application, with an order for costs in favour of the creditor in December 2010.
    
29. In those circumstances there appears to be a considerable impediment to the making of an order of the kind which she now seeks from the Federal Magistrates Court under s 153B. It has been held, for example, that it is generally not possible for a debtor to make out a case for annulment, if in fact insolvent at the time he or she was made bankrupt (see Re Coyle [1993] FCA 161; (1993) 42 FCR 72 at 77-78). It has not been suggested that she was then solvent.
    
30. As was argued for the trustee, the obvious available course, appealing the orders made, has not been taken. There is power to set aside a sequestration order on appeal, which seems not to be limited by the Act, but also to flow from the general appellate powers granted by s 28 of the Federal Court of Australia Act 1976 (see Simon v Vincent J O'Gorman Pty Ltd [1979] FCA 75; (1979) 41 FLR 95). In Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212 and Re Schierholter; Ex parte Geis [1978] FCA 6; (1978) 32 FLR 22, the effect of the view taken was that if the appeal bench decided that the sequestration order was wrongly made, the appeal could be upheld in such a way as to avoid the consequences and stigma of bankruptcy attaching to the appellants and possibly affecting the rights of any other creditors (see the discussion in De Robilliard v Carver [2007] FCAFC 73; (2007) 159 FCR 38 at [135] - [150].) It would seem to follow that an order dismissing a review application, which was wrongly consented to, could also be dealt with on an appeal, subject to questions of time limits. On the defendants' submissions, they are out of time to pursue any appeal and thus that avenue seems no longer available.
    
31. In all of those circumstances, that the approach which has been taken is an available course under this legislative scheme, or that Ms Erten has an arguable case for the relief which she seeks to pursue, is not readily apparent.
    
32. As to the balance of convenience, it seems to me that it cannot favour the defendants. While there was no evidence led about the position of individual creditors, given the time within which the stay application had been brought, the plaintiff argued that it would be taken into account that there was an outstanding mortgage, with a mortgagee who had not taken steps to obtain possession of the property, because of the bringing of these proceedings. There were also other unpaid creditors.
    
33. The defendants accepted that in the circumstances, delay had an impact on their declining equity in the property. There was no need for evidence to be led as to that matter.
    
34. In all of the circumstances, while the defendants undertook to seek to expedite the hearing of their applications, it seems to me that in the absence of any application being made which provides a clear avenue for the potential exercise of a power to annul or discharge either bankruptcy, the balance of convenience cannot favour the grant of the stay sought.
    
35. I am not of the view that the defendants have made out a basis upon which the stay sought could be ordered.
    

Orders

36. The motion is dismissed with an order for costs in favour of the plaintiff.
    

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