The Federal Magistrates Court of Australia decision of Dubow v Official Receiver & Anor [2013] FMCA 217 confirms that the Court’s discretion to annul bankruptcy is limited.  Even if the discretion is enlivened, it appears that the Court will be reluctant to exercise its discretion where the bankruptcy has come about by the bankrupt’s own petition.

The Facts

On 13 March 2012, the bankrupt submitted a debtor’s petition to ITSA by post. She did so having previously received advice from a bankruptcy trustee in relation to her financial affairs.

The statement of affairs attached to the debtor’s petition disclosed a number of prospective and contingent liabilities, including liabilities to Fitness First for costs orders that had been made in the course of a civil dispute. The bankrupt gave evidence that one of the reasons why she presented her petition was to avoid the legal proceedings commenced against her by Fitness First.

The decision

The bankrupt sought to have her bankruptcy annulled under section 153B of the Bankruptcy Act 1966 on the basis that:

  • her debtor’s petition should not have been presented to the Official Receiver; and
  • her debtor’s petition should not have been accepted by the Official Receiver when presented.

The bankrupt advanced two arguments in support of her application.

First, she argued that she was solvent at the time the petition was presented and accordingly, the petition should not have been presented at all. She did so on the basis that none of the debts referred to in her petition were actually “due” and that Fitness First had not requested payment of the Costs order.

Jarrett FM rejected this argument. The Federal Magistrate was not satisfied that the bankrupt was solvent at the time of presenting her petition, nor was he satisfied that the bankrupt was solvent at the time of the application as she had not satisfied the Court that she could realise assets quickly in order to become solvent.

Secondly, the bankrupt argued that the Official Receiver should not have accepted the debtor’s petition because it didn’t disclose the existence of any outstanding debts. 

Jarrett FM also rejected this argument. While s55(3AA)(a) of the Bankruptcy Act provides that the Official Receiver may reject a petition if it appears from the information in the statement of affairs that the debtor will be able to pay all their debts, there is no requirement on the Official Receiver to do so.

As both arguments put by the bankrupt had failed, Jarrett FM held that the Court had no jurisdiction to annul the bankruptcy at all.

Comment

Even if the Court had jurisdiction to annul the bankruptcy, Jarrett FM held that he would have declined to do so. This is because the bankrupt had brought about her own bankruptcy having received advice and did so in an attempt to avoid legal proceedings that had been commenced against her.

This case is a reminder that bankruptcy is a serious process with wide ranging consequences and ought not be employed in an attempt to secure a tactical advantage.