The Culleton bankruptcy – part 4 of 4 – and the effect of a “stay”

The end of this saga came on 10 February 2017, when the Full Federal Court made orders amending para 2 of its 3 February orders to re-state that the appeal of Mr Culleton be dismissed and adding that Balwyn’s legal costs be paid out of Culleton’s bankrupt estate. Brief reasons for making the costs order in favour of the respondent to the appeal were given: Culleton v Balwyn Nominees (No 2) [2017] FCAFC 12.

The bankruptcy of Mr Culleton is now activated, if that is the word for what happens when a stay of a sequestration order ends.

The effect of a stay

An important legal issue for lawyers and trustees is the effect of a stay.

Does it operate to stop a person becoming a ‘bankrupt’, despite the sequestration order, as Mr Culleton argued, or does it merely stay the effect of the order?

That question was raised in the Court of Disputed Returns before Gageler J who commented that

“A view had been taken that ss 44(iii) and 45 of the Constitution have operated in light of the sequestration order made by Barker J on 23 December 2016 to cause Senator Culleton’s place to be vacated notwithstanding that the order is the subject of an appeal to the Full Court of the Federal Court and that all proceedings under the sequestration order have been stayed pending the determination of that appeal …”.

However, Justice Gageler did not decide that issue, the High Court being concerned only with the impact of the criminal conviction, under s 44(ii) of the Constitution, on which the Court found against Mr Culleton: Re Culleton [2017] HCA 3.

The issue was also raised before the Full Federal Court, which dismissed Culleton’s appeal from his sequestration order: Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8.

The judgment records a submission for Mr Culleton that the effect of a stay is “to nullify or stay the effect or the operation of the sequestration order itself”. The Full Court said

“it has not been necessary to decide whether this is correct. It should not be thought that by extending the stay we agree with that submission”.

Case law confirms the Full Court’s caution. A series of older cases have held that if a stay is granted by the court, the person is still a bankrupt at the date of the order, but the consequences of the Bankruptcy Act do not operate while the stay is in operation. It is not the sequestration order itself which operates to change the debtor’s status or vest his/her property in the trustee: the making of the order is simply the event upon which the Act (particularly s 43(2) and s 58(1)) operates to bring about the consequences for the debtor’s status and property: see Evans v Heather Thiedeke Group Pty Ltd [1990] FCA 376 referring also to Re Wardle; Ex parte Widin [1987] FCA 14 and Allanson v Midland Credit Ltd [1977] FCA 14.

The sequestration is still recorded on the NPII even though a stay is in operation: Watts v Bendigo & Adelaide Bank Ltd (No 2) [2010] FCA 1429.

‘Suspension’ of a sequestration order would have had the effect for which Mr Culleton contended. However s 37 of the Bankruptcy Act is not available. It was amended by the Bankruptcy Amendment Act 1991, to remove the power of a court to rescind or suspend a sequestration order, so as to confirm annulment and discharge as the two ways that bankruptcy ends. (It also ends when the sequestration order is set aside on appeal).

One issue that perhaps remains open is whether a stay under s 52(3) of the Bankruptcy Act for the first 21 days – “stay all proceedings under a sequestration order for a period not exceeding 21 days” – has a different effect than a stay for more days under FCR r 36.08(2) “stay the execution of the proceeding”.

Photo: UN Vienna

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