Federal Court Rejects Bankruptcy Annulment Application

OUTCOME: Dismissed

FEDERAL COURT OF AUSTRALIA

[NAME], Re [2000] FCA 1782 [NAME] made on basis that Court lacked jurisdiction to make sequestration order – Bankrupt departed Australia shortly before date of commission of act of [NAME] bankrupt was "ordinarily resident" in Australia at that date – Whether bankrupt had a "dwelling-house" in Australia at that date – Eight year delay in making application – Destructionin that period of [COMPANY] records relevant to question whether bankrupt was "carrying on business in Australia … by means of an agent" at date of commission of act of [NAME] – Applicant failed to demonstrate that sequestration order ought not to have been made. [NAME] 1966 ss 43(1), 153B Re [NAME] N7144 of 2000 [NAME] 13 DECEMBER 2000

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALESDISTRICT REGISTRY N7144 of 2000

RE: [NAME]

JUDGE: [NAME] OF ORDER: 13 DECEMBER 2000

WHERE MADE: SYDNEY

THE COURT ORDERS THAT:

1. The application for annulment made on 21 February 2000 be dismissed.

2. The applicant, [APPELLANT], pay the costs of the application incurred by the [NAME].

Note: Settlement and entry of orders are dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALESDISTRICT REGISTRY N7144 of 2000

RE: [NAME]

JUDGE: [NAME]: 13 DECEMBER 2000

PLACE: SYDNEY

REASONS FOR

JUDGMENT 1 [NAME]: This is an application by [NAME] for annulment of a sequestration order made against him on 3 December 1991. 2 Mr [NAME] brings his application under s153B of the [NAME] 1966. That section reads: "153B. If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a [NAME]'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 [NAME]." 3 Mr [NAME] contends the sequestration order ought not to have been made because the Court lacked jurisdiction to make the order. His argument is that none of the situations described in para (b) of s43(1) of the Act applied to him. Section 43(1) provides: "43.(1) Subject to this Act, where: (a) a [NAME] has committed an act of [NAME]; and (b) at the time when the act of [NAME] was committed, the [NAME]: (i) was personally present or ordinarily resident in Australia; (ii) had a dwelling-house or place of business in Australia; (iii) was carrying on business in Australia, either personally or by means of an agent or manager; or (iv) was a member of a [NAME] carrying on business in Australia by means of a partner or partners or of an agent or manager; the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the [NAME]."

The [NAME] proceedings 4 Mr [NAME] is apparently an Australian citizen. Prior to March 1991 he lived in Australia. Over many years, he engaged in a variety of business ventures. It seems many of these ventures failed and that, by the end of 1990, Mr [NAME] had significant debts. 5 In October 1988 proceedings were instituted against Mr [NAME] by the Receivers and Managers of [COMPANY] ("[NAME]"), a company of which Mr [NAME] was previously a director. The action was brought to recover monies allegedly paid out of the company's [COMPANY] account to or on behalf of Mr [NAME]. The amount claimed was $566,415.49. 6 The action was brought in the Supreme Court of New South Wales. The plaintiffs did not succeed in effecting personal service of the originating process on Mr [NAME]. However, they eventually effected substituted service and a notice of appearance was filed, on behalf of Mr [NAME], by [NAME]. Subsequently, [NAME] filed a notice of change of solicitor. On 14 March 1991 judgment was entered against Mr [COUNSEL] in the sum of $726,419.09. 7 On 22 April 1991 [NAME] filed a notice of motion in the Court of Appeal of New South Wales seeking an extension of time to appeal against the entry of judgment. So far as I am aware, that motion has never been heard. The reason, presumably, is that, on 10 April 1991, a [NAME] notice was issued against Mr [NAME] at the request of [NAME]. 8 Attempts were made to serve the [NAME] notice at Mr [NAME] last known address, [ADDRESS], [NAME]; but these attempts were unsuccessful. [NAME] then applied for an order for substituted service. An order for substituted service of the [NAME] notice was made on 16 May 1991 and service was effected on the following day by leaving the document with an unidentified woman at [ADDRESS], [NAME]. 9 The order for substituted service provided that the [NAME] notice shall be deemed to be served on the [NAME] on 10 June 1991. On that basis, Mr [NAME] was required by the notice to comply with its requirements on or before 1 July 1991. He did not do so. 10 On 12 August 1991 [NAME] filed the [NAME] petition pursuant to which the sequestration order was made. The petition alleged that, at the date of commission of the act of [NAME], Mr [NAME] was ordinarily resident in Australia: see sub-para (i) of s43(1)(b) of the Act. The petition further alleged that Mr [NAME] was indebted to the petitioning creditor in the sum of $763,297.30 (being the amount of the Supreme Court judgment with accrued interest) and that he had committed an act of [NAME] by failing, on or before 1 July 1991, to comply with the requirements of the [NAME] notice. 11 The petitioning creditor was unable to effect personal service of the [NAME] petition. However, substituted service was effected and a sequestration order was made. This was apparently done on the basis of the allegations made in the petition, including that Mr [NAME] was ordinarily resident in Australia on 1 July 1991.

The applicant's evidence 12 The evidence tendered in support of the application for annulment included two affidavits made by Mr [NAME], one affidavit of his wife, [NAME] [NAME], and one affidavit of a son, [NAME]. 13 In his first affidavit, dated 8 February 2000, Mr [NAME] gave as his address [ADDRESS], Columbus, Georgia, United States of America. He asserted that his first knowledge of either the [NAME] notice or sequestration order was gained in December 1996. He said he left Sydney on 22 March 1991 and arrived in the United States on 26 March 1991 and has not, since then, returned to Australia. He stated: "At the time of leaving Australia on 22 March 1991 it was not my intention to return to Australia. At no time since 22 March 1991 have I intended to return to Australia permanently." 14 Mr [NAME] entered the United States on a temporary visa, apparently valid for six months. However, on 24 September 1991, he applied for a non-immigrant visa valid until 30 September 1992. Mr [NAME] revealed his "permanent address outside the United States" as [ADDRESS], [NAME] and his United States address as [ADDRESS], Columbus, Georgia. He gave as the reason for the application: "To start up US company to assemble putter manufactured in Australia and sell in the US market. Market to Japan from US base". This application was approved. 15 Prior to the visa application, on 25 June 1991, Mr [NAME] executed a contract to purchase the property known as [ADDRESS], Columbus. This property apparently comprised a dwelling house. Mr [COUNSEL] deposed that he purchased the property as "agent for the [COMPANY]", although the contract itself does not so state. The contract contains a provision that the purchaser "shall be [NAME] or his assignee". 16 The house contract called for completion on 31 December 1991. However, Mr [NAME] deposed that "the seller and I had come to an informal understanding that actual completion would occur sometime in early 1992". Whether or not that statement is correct, completion did not take place until 13 February 1992. On that day the property was transferred to [COMPANY], a company formed by Mr [NAME] in Georgia. Apparently, the sole shareholder in that company is Mr [NAME] son, [NAME]. 17 This purchase price of the house was $US360,000, of which $US72,000 was paid in cash and $US288,000 by way of a five-year promissory note to the vendor. 18 Notwithstanding the terms of the contract, according to Mr [NAME], on the date of contract (25 June 1991) "my family and I moved into the property on a rent-free basis." 19 In his first affidavit, Mr [NAME] asserted that, at the time of moving into the Columbus house, and at all times since then, "I have regarded (this house) as my permanent home". Mr [NAME] also said: "During the period from March to 30 June 1991: (1) I had moved to the USA to live permanently; (2) shipped all personal belongings and furniture of my family to the USA (having sold all items that were not taken before 1 July 1991); and (3) was working permanently for a business in the USA." 20 According to Mrs [NAME] affidavit, she continued to reside at the [NAME] property, after her husband's departure, until 25 May 1991. She then joined him in the United States. She has continued to reside there ever since, with some visits back to Australia. 21 After Mrs [NAME] left the house at [NAME], [NAME], and perhaps also another son, [NAME], continued to reside there. [NAME] left Australia on 27 July 1991 to join his parents in America. According to his affidavit, when he left the property "to my knowledge it was left in the control of friends of my brother, [NAME]". 22 [NAME] continues to reside in the United States, although he has made some visits back to Australia. 23 Mr and Mrs [NAME] sons, [NAME] and [NAME], left Sydney for the United States in December 1991. Each of them returned after some time to Australia, although [NAME] now lives in the United States. 24 Mr [NAME] deposed: "On 1 July 1991 and at any time since, I did not and have not: (1) sought the payment in Australia or elsewhere of any debt due in Australia; (2) acted as a manager or director of any company or other entity in Australia; (3) placed any order for the provision of goods or services in Australia or which required any payment or step to be taken in Australia; (4) operated any [COMPANY] account with any [COMPANY] located in Australia; (5) supplied by sale or otherwise or offered to supply any goods or services in Australia; (6) carried on a business in Australia whether personally or by means of an agent or manager; (7) participated, either solely or jointly with any other person in any manner, in the conduct of any business in Australia; (8) controlled, either solely or jointly with any other person in any manner, any interest in any business conducted in Australia; (9) entered into any contract with any person in Australia; (10) employed any person who resides or who has conducted any business in Australia; or (11) held, either solely or jointly with any other person in any manner, any interest in any company or other entity which controlled any business conducted in Australia." 25 The property [ADDRESS], [NAME] was owned jointly by Mr and Mrs [NAME]. It was mortgaged to the [COMPANY] of Australia. The [COMPANY] sold the property, apparently in late 1992 or early 1993, but the proceeds of sale were apparently insufficient to discharge Mr [NAME] liability to the [COMPANY]. The [COMPANY] has lodged a proof of debt against Mr [NAME] estate claiming $588,877.43. 26 In his second affidavit, Mr [NAME] set out information about some of his business ventures. It is unnecessary to mention those disposed of before his departure from Australia in March 1991. However, at that time he still owned two businesses. One was the [COMPANY], of which Mr [NAME] was sole proprietor. The hotel was mortgaged to [COMPANY] which had threatened, by March 1991, to exercise its power of sale. However, shortly before the threat was carried out, [NAME] negotiated a sale of the hotel to his sister and brother in law. This was apparently done without the hotel being independently valued. The agreed price was less than the amount of the mortgage debt. A contract of sale was signed by Mrs [NAME], acting under power of attorney, after Mr [NAME] departed from Australia. The sale was settled in late May 1991. 27 The other business held by Mr [NAME] at the date of his departure from Australia was [NAME], a rural property at [COMPANY], New South Wales. The property was mortgaged to [COMPANY] ("[NAME]"). Mr [NAME] said in his second affidavit that "[NAME] took possession of the Station several months before I left in March 1991". He gave no information as to how this was done. He said he "had no direct knowledge of the acquisition of the Station", although he was aware that [NAME] caused most of the stock to be shot, presumably because of drought conditions and low stock prices. [NAME] sold the property in August 1992 but the sale price was apparently insufficient to pay the whole of Mr [NAME] debt to [NAME]. The [COMPANY] has lodged a proof of debt against his bankrupt estate claiming $1,319,541.65. 28 The circumstances of [NAME] taking possession of the property have not been established. Mr [COUNSEL] solicitor issued a subpoena to have [NAME] produce its records. No documents were produced. Apparently, they have been destroyed. One result of this is that it is not possible to determine whether the person appointed by [NAME] to manage the business was deemed to do so as agent of the mortgagor; that is, Mr [NAME].

The trustee's reports 29 The sequestration order made against Mr [NAME] on 3 December 1991 appointed [NAME] as the trustee of his estate. Mr [NAME] remained the trustee of the estate until 14 February 2000, when his registration to act as a trustee was cancelled. About that time, the [NAME] became trustee of the estate. 30 No evidence in relation to this application was adduced from Mr [NAME]. However, [NAME], Official Receiver for the [NAME] of New South Wales, has furnished two reports on behalf of the [NAME]. These reports draw on information obtained from Mr [NAME] file. 31 It appears that, shortly after his appointment, Mr [NAME] made some inquiries about possible assets of the estate, including three motor cars, a motor cruiser, three small boats and a light aeroplane. Mr [NAME] did not have great success in his inquiries, but he did establish that the motor cruiser and aeroplane were both transferred by Mr [NAME] to companies, apparently associated with [NAME], shortly before his departure from Australia and that [NAME] flew in the aeroplane on his departure, at least as far as Hawaii. 32 It appears from one of Mr [NAME] reports that Mr [NAME] dispatched three letters to Mr [NAME] in the period immediately following the sequestration order. The earliest letter, dated 5 December 1991 and headed "Notification of [NAME]'s Responsibilities", was addressed to Mr [NAME] at [ADDRESS], [NAME]. Another letter, similarly headed but dated 10 January 1992, was addressed to Mr [NAME] at [ADDRESS], Columbus, Georgia, 31904 USA. A few days later, on 15 January 1992, another letter, headed "Formal Notification of Bankrupt by Sequestration" [sic] was sent to the same address. 33 It further appears from Mr [NAME] file that, on 29 April 1992, there was a telephone conversation between Mr [NAME] and one [NAME], apparently an accountant in the employ of Mr [NAME]. On 17 July 1992 Mr [NAME] wrote a letter to Mr [NAME] at the Columbus address requesting details of his income. 34 Mr [NAME] did not lodge a Statement of Affairs. Nor did he disclose particulars of his income.

Accordingly, on 22 October 1992 Mr [NAME] lodged a Notice of Objection to Discharge: see ss 149 and 149A of the [NAME]. Mr [NAME] gave three grounds: (i) the bankrupt had left Australia and not returned; (ii) the bankrupt had failed to lodge a Statement of Affairs after the Trustee's request; and (iii) the bankrupt had failed to disclose particulars of his income. A copy of the Notice of Objection was sent to Mr [NAME] at the Columbus address. 35 It seems that, on 25 February 1993, Mr [NAME] wrote a further letter to Mr [NAME], at the Columbus address, advising him he may be able to compromise his debts with his creditors pursuant to the provision of s 73 of the [NAME]. 36 So far as appears from the file, Mr [NAME] received no response to any of his letters, but none was returned unclaimed. 37 Mr [NAME] first report states: "From February 1997 the bankrupt conducted negotiations with the former trustee through solicitors with a view to finalising the administration of the bankrupt estate. The negotiations were not successful. The bankrupt failed to provide any information relating to his assets or income, or to pay any money to the bankrupt estate for the benefit of creditors. On 20th November 1997 a statement of affairs of the bankrupt was filed with the Official Receiver. A copy was also sent to the former trustee. The trustee returned the statement of affairs to the bankrupt for completion under cover of a letter dated 26th November 1997. The trustee requested that the bankrupt answer all of the questions in the statement of affairs and provide full names and addresses for his creditors. No further information has been provided by the bankrupt. The bankrupt advised by letter dated 11th December 1997 from his solicitors to the trustee that he 'does not accept that the Federal Court had jurisdiction to make him a bankrupt'." 38 The application for annulment, presently before the Court, was filed on 21 February 2000. [NAME] reported that Mr [NAME] "has failed to produce any books or accounting records to the trustee, although requested to do so" and that details of his income and trading activities are not known. 39 Although the information about Mr [NAME] assets and liabilities is incomplete, it seems there is a substantial deficiency in his estate. Mr [NAME] disclosed asserts worth $10,400 and $46,274.23 has been received by the trustee. However, proofs of debt received by the trustee total almost $4 million.

Was Mr [NAME] "ordinarily resident" in Australia at 1 July 1991? 40 As I have mentioned, the petition on which the sequestration order was made alleged that Mr [NAME] was ordinarily resident in Australia at the date of commission of the act of [NAME], 1 July 1991. Counsel for [NAME], Mr [APPELLANT], contends the evidence now before the Court establishes this was not so; [NAME] had departed from Australia in March 1991 and established his permanent home in the United States. He says it is not enough that Mr [NAME] continued, at 1 July 1991, to be a joint owner (with his wife) of the house at [NAME] where he formerly resided; he was not ordinarily resident at that address. 41 On the evidence, this proposition seems irrefutable. By 1 July 1991 Mr [NAME] had abandoned his residence in Australia and executed a contract to purchase, in America, a house into which he and his wife had recently moved. [NAME] J observed in Re [NAME]; Ex parte [NAME] (1986) 9 FCR 518 at 525, "[i]t is a question of fact and degree at what point a temporary absence might, if sufficiently prolonged, prevent its being proper to continue to regard him as ordinarily resident in Australia". However, where there is cogent evidence that the absence was intended to be permanent, rather than temporary, that stage may be reached immediately after departure. 42 The concept of a person being "ordinarily resident" in Australia was also discussed, by Lockhart J, in [NAME]; Ex parte [COMPANY] (1992) 37 FCR 194 at 198-199. 43 The fact that Mr [NAME] was not "ordinarily resident" in Australia on 1 July 1991 means that the sequestration order was apparently made on a false understanding of a relevant fact. It does not necessarily mean the Court lacked jurisdiction to make the order; there may have been jurisdiction because of the existence of one of the other fact situations mentioned in s 43(1) of the Act. In order to establish that "a sequestration order ought not to have been made", Mr [NAME] needs to negative each of those fact situations.

Did Mr [NAME] have a "dwelling-house" in Australia at 1 July 1991? 44 One obvious possible fact situation, which was discussed at the hearing, is that Mr [NAME] "had a dwelling-house … in Australia" at 1 July 1991. In one sense, he clearly did; he continued to own the house at [NAME]. However, it is not enough that a [NAME] owns a property that may properly be described as a dwelling-house. 45 The proposition just stated is supported by Re [NAME]; Ex parte Maxim-Nordenfelt Guns and Ammunition Company [1895] 1 QB 151. The [NAME] in that case lived with his wife in Paris. However, he owned the lease of a house in England, which was left in the charge of a caretaker and available to be let. The [NAME] could have used the house on his occasional visits to England but did not, in fact, do so. [ADDRESS] of Appeal held it was incorrect to say the [NAME] "had a dwelling-house … in England" during the year before presentation of the [NAME] petition. Lord Esher MR said at 153: "I will not attempt to give an exhaustive definition, or indeed any definition, of the term 'dwelling-house' as used in this section. I only intend to say that what I think is not a 'dwelling-house'. If a man has a house belonging to him, but he has abandoned it as his dwelling-house, that house is not his 'dwelling-house' within the meaning of the section." Lopes LJ and [NAME] LJ agreed. Rigby LJ added some observations (at 154) relating to evidence of abandonment: "The [NAME] had, no doubt, had a dwelling-house at Beckenham, and he might very easily after he went away to Paris had adopted the house again as his dwelling-house. But when it appears, as it does, that he offered all his furniture in the house for sale, and had that which was not sold packed up in such a way that it could not, without some trouble and expenditure, be placed in a position to be used, I am satisfied that he had abandoned the house as his dwelling-house before the commencement of the critical year. I am satisfied also that he did nothing during the year to adopt it again as his dwelling-house." 46 [NAME] was considered by the [ADDRESS] of Appeal in Re [NAME] [COMPANY] [1977] 3 WLR 354. The [NAME] was a property speculator. For that purpose, he used numerous companies incorporated in the Channel Islands. Apparently he spent most of his time outside England. However, he sometimes stayed in premises in London, that were leased in his name and occupied by the mother of his son and members of her family. The [NAME] used these premises for business purposes when visiting England. The Registrar found the [NAME] did not come to England as a casual visitor, but on business; and that he spent significant time in England. Having regard to those circumstances, the Registrar held the [NAME] had a dwelling-house in England. [ADDRESS] of Appeal affirmed the Registrar. Goff LJ, with whom Buckley LJ and Orr LJ agreed, distinguished [NAME] on the basis that that was a case of abandonment. 48 [NAME], I do not think it would be correct to hold that Mr [NAME] "had a dwelling-house … in Australia" at 1 July 1991. Although he still owned the [NAME] property, with his wife, and could have reoccupied it at any time, he had abandoned its use as his residence.

Was Mr [NAME] "carrying on business in Australia by means of an agent"? 49 Another possibility is that, at 1 July 1991, Mr [NAME] "was carrying on business in Australia … by means of an agent or manager": see s 43(1)(b)(iii) of the [NAME]. It will be recalled that, at 1 July 1991, [NAME] was in possession of a rural property owned by Mr [NAME], [NAME]. Apparently somebody was carrying on the business of the station, limited though that business might have been. Presumably, that person was appointed by [NAME] pursuant to a power conferred on [NAME] by a mortgage document. However, it seems the mortgage document has been destroyed, so it is not possible to say whether it provided that any such appointee should be deemed to be the agent of the mortgagor. In my experience, such a provision is commonly included in [COMPANY] mortgages. If it was included, the Court probably had jurisdiction to make the sequestration order pursuant to s 43(1)(b)(iii) of the Act. 50 I am not in a position affirmatively to hold that the Court had jurisdiction pursuant to that provision. But, equally, I cannot hold to the contrary.

Accordingly, I cannot be satisfied that "a sequestration order ought not to have been made", as required by s 153B. It follows that the application must be dismissed. 51 In case it might be thought my conclusion is a harsh one, I point out it flows from Mr [NAME] delay in bringing this application. The evidence indicates that Mr [NAME] was apprised of the making of the sequestration order, at the latest, by early 1992. Had he mdae an application for annulment at that time, before [NAME] sold the property, it seems certain that the full [COMPANY] records would have been available; the possible application of s 43(1)(b)(iii) of the Act could have been explored. Even if Mr [NAME] had made his application within six years thereafter, the probability is there would have been no problem. But Mr [NAME] chose to delay for eight years, during which period the records have been destroyed. He has offered no explanation for this delay, other than to make the apparently false claim that it was not until December 1996 that he learnt of the making of the sequestration order. Mr [NAME] own delay has caused the deficiency in evidence which causes his application to fail. 52 The application will be dismissed with costs. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the [NAME].

Associate: Dated: 13 December 2000 Counsel for the Applicant: [redacted]

[NAME]: [APPELLANT]

[NAME]: [COUNSEL] of [NAME] ([COMPANY])

Solicitor for the Second Respondent: [redacted] [NAME] of Hearing: 27 October 2000

Date of Judgment: 13 December 2000