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:
Lee J's judgment highlighted several key principles that the Court will consider in applications for annulment.
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.
The considerations that may have a bearing on the exercise of the Court's discretion include:
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 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.
McCabe Curwood has extensive experience in bankruptcy matters, including acting for both persons facing bankruptcy, creditors and trustees of bankrupt estates.