In a recent decision, the Federal Court of Australia declined to annul a bankruptcy in circumstances where the bankrupt claimed the proceedings should have been adjourned given his incarceration and solvency at the time the order was made: Mehajer v Weston in his Capacity as Trustee of the Bankrupt Estate of Salim Mehajer  FCA 1713. The judgment is useful in reiterating what factors the Court will consider when deciding whether to order an annulment under section 153B(1) of the Bankruptcy Act 1966 (Cth) (the Act).
In 2015, Salim Mehajer came to public prominence in Australia and overseas after his wedding video was widely publicised in the media.
In June 2017, Mr Mehajer was charged with over 100 electoral fraud offences while he was the deputy Mayor of Auburn City Council in Sydney.
On 20 March 2018, at a time when he was incarcerated, Mr Mehajer became a bankrupt as a result of a sequestration order made by the Federal Court of Australia.
On 4 April 2018 Mr Mehajer was released after $200,000 bail was posted.
Mr Mehajer was subsequently found guilty of 77 counts of electoral fraud and sentenced to 21 months in prison with a non-parole period of 11 months. He was released on 21 May 2019.
Mr Mehajer sought an annulment of the bankruptcy on three grounds:
- there were alleged defects in the creditors' petition (Defects Contention);
- he claimed to have had sufficient funds to repay his debts as at the date of the sequestration order (Ability to Pay Contention); and
- an adjournment of the creditors' petition ought to have been granted given that Mr Mehajer was incarcerated at the time of the hearing (Adjournment Contention).
The annulment application was set down for hearing in October 2019, by which time Mr Mehajer had dropped the Defects Contention. As a result of how the evidence panned out during the course of the hearing before Lee J, Mr Mehajer also conceded the Ability to Pay Contention during his closing submissions. Accordingly, the only case that Mr Mehajer pressed was the Adjournment Contention.
A bankruptcy can be annulled in one of two ways:
- If the trustee in bankruptcy is satisfied that the bankrupt's debts have been repaid in full; or
- By an order of the Court pursuant to s 153B of the Act if the Court is satisfied that a sequestration order or debtor's petition "ought not to have been made...or presented".
An annulment has the effect of reverting the property vested in the trustee in bankruptcy back to the bankrupt (subject to any payments of costs associated with the administration of bankruptcy).
Lee J's judgment highlighted several key principles that the Court will consider in applications for annulment.
An applicant seeking an annulment carries a heavy onus – it is not something that the court will order lightly. The applicant should make sure that all material relevant to his or her financial affairs is before the Court so that it can make a properly informed judgment.
2. Whether the sequestration order ought to have been made
In determining whether a sequestration order ought to have been made, the Court will consider:
- the facts known to the Court at the time of making the order; and
- any additional facts known at the time of the annulment application hearing (even if these were not evident at the time of the order).
A sequestration order ought not to have been made if the circumstances failed to justify the making of the order, or if subsequent evidence disclosed that not "all of the true facts" were before the Court when the order was made.
The Court at first instance has a wide discretion when deciding whether to make a sequestration order – the Court considering an annulment application will not readily find that the sequestration order ought not to have been made.
3. Discretionary power
The Court's power to annul a bankruptcy is discretionary. Accordingly, even if it determines that the sequestration order ought not to have been made, the Court can refuse to annul the bankruptcy.
The considerations that may have a bearing on the exercise of the Court's discretion include:
- the commercial morality of the bankrupt's conduct prior to bankruptcy;
- whether there was a failure by the bankrupt to oppose the creditor's petition and attend the sequestration order hearing;
- whether the factors against granting a sequestration order were capable of being raised at the hearing of the petition; and
- whether the applicant is solvent at the time of the hearing of the annulment application.
As mentioned above, the only argument that Mr Mehajer pressed in closing submissions of his annulment application was the Adjournment Contention – that is, that the sequestration order should not have been made because the bankruptcy proceedings should have been adjourned due to Mr Mehajer's incarceration. Mr Mehajer claimed that he needed to be released on bail in order to provide proper instructions in relation to the hearing of the bankruptcy proceedings and in order to communicate effectively with others including funders and creditors.
Mr Mehajer had apparently given instructions to his solicitor to seek an adjournment, while he was in gaol, pending an application for a Supreme Court bail application. For reasons unexplained on the evidence, no application was made to adjourn the proceedings, notwithstanding the instructions Mr Mehajer said he gave his solicitor.
Mr Mehajer decided not to press the Ability to Pay Contention in closing submissions in consideration of overwhelming evidence that he was at least $24 million in debt at the time of the sequestration order, including a debt owed to the Australian Taxation Office of somewhere in the region of $8.6 million.
Consistent with the principles set out above, the main issue was whether the sequestration order ought not to have been made.
Lee J agreed with Mr Mehajer that there were sound reasons for adjourning the hearing of the bankruptcy proceedings on the basis of his incarceration at the time (at least until his application for bail had been determined by the Supreme Court).
However, Lee J found that this was significantly outweighed by the conclusion that Mr Mehajer "was hopelessly insolvent at the time any such application for an adjournment would have been made …" Accordingly, Lee J held that it could not be said that had all the true facts before the judge at the hearing the Court would have been bound to adjourn, and not to proceed to make the sequestration order. In other words, Lee J was not satisfied that the sequestration order ought not to have been made. On that basis, his Honour dismissed Mr Mehajer's annulment application.
While it was strictly unnecessary to do so given that conclusion, Lee J also briefly considered the discretionary factors which arose in the circumstances of the case, including that no adequate and supportable proposal to pay the costs of the trustee of his bankrupt estate, which were approaching $1 million, had been proffered on behalf of Mr Mehajer. In short, his Honour held that Mr Mehajer's current insolvency "is so stark that it would overwhelm any other discretionary considerations".
The Court's power to order an annulment of a bankruptcy is highly discretionary.
The Court's main consideration in deciding whether to order an annulment is whether the sequestration ought not to have been made. However, even if the Court is satisfied that the sequestration order ought not to have been made, it is open to the Court to decline to annul the bankruptcy on other discretionary grounds.
As such, the applicant for an annulment order carries a heavy onus.
The decision in the above case reinforces that the Court will be reluctant to annul a bankruptcy where the weight of evidence is that the bankrupt was overwhelmingly insolvent at the time the sequestration order was made, and at the time of the hearing of the annulment application.