ACM Group Ltd v Smedley
[2014] FCCA 494
•17 March 2014
FEDERAL CIRCUIT COURT OF AUSTRALIA
| ACM GROUP LTD v SMEDLEY | [2014] FCCA 494 |
| Catchwords: BANKRUPTCY – Creditor’s Petition – Sequestration order made by Registrar – Application seeking review of Registrar’s decision – Respondent debtor claims sequestration order ought not to have been made on basis of solvency – Sequestration order set aside – Creditor’s petition remains extant. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.52(2)(a), 153B Federal Circuit Court of Australia Act 1999 (Cth), s.104(3) |
| Deputy Commissioner of Taxation v Jaskola [2011] FMCA 67 Hashmi v Akter [2013] FCCA 728 Martin v Commonwealth Bank of Australia (2001) 217 ALR 634 Pattison v Hadjimouratis (2006) 155 FCR 226 Re Touma; Saparas v Touma (2000) 171 ALR 275 Sandell v Porter (1966) 115 CLR 666 |
| Applicant: | ACM GROUP LTD ACN 127 181 097 |
| Respondent: | GRAEME GILBERT SMEDLEY |
| Intervener: | JASON PORTER AND PAUL WESTON AS JOINT AND SEVERAL TRUSTEES OF THE BANKRUPT ESTATE OF GRAEME GILBERT SMEDLEY |
| File Number: | SYG 1867 of 2013 |
| Judgment of: | Judge Lloyd-Jones |
| Hearing date: | 26 February 2014 |
| Delivered at: | Sydney |
| Delivered on: | 17 March 2014 |
REPRESENTATION
| Solicitor for the Applicant: | Ms K Van Munster of MSB Lawyers |
| Counsel for the Respondent: | Mr D Allen |
| Solicitors for the Respondent: | Mr Y Chen of Juris Cor Legal |
| Solicitor for the Intervener: | Ms I Hoskinson of Jones King Lawyers |
ORDERS
Orders 1 and 2 of the orders made by Registrar Hannigan in these proceedings on 29 November 2013 be set aside.
The creditor’s petition filed on 9 August 2013 remain on foot.
The respondent debtor file and serve by 22 April 2014 an affidavit setting out what steps he has taken in respect of paying the debt owed in the creditor’s petition filed 9 August 2013.
The creditor’s petition be listed before this Court at 9.30am on 28 April 2014 at Level 6, John Maddison Tower, 88 Goulburn Street, Sydney.
The applicant creditor notify the Official Receiver in Sydney of these orders within two days of today’s date.
Costs be generally reserved.
There be liberty to the parties to apply to the Court for further directions on three clear days’ notice.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 1867 of 2013
| ACM GROUP LTD ACN 127 181 097 |
Applicant
And
| GRAEME GILBERT SMEDLEY |
Respondent
| JASON PORTER AND PAUL WESTON AS JOINT AND SEVERAL TRUSTEES OF THE BANKRUPT ESTATE OF GRAEME GILBERT SMEDLEY |
Intervener
REASONS FOR JUDGMENT
Introduction
On 9 August 2013 the applicant creditor, ACM Group Ltd ACN 127 181 097 (“ACM”), filed a creditor’s petition (the “Petition”) against the respondent debtor, Graeme Gilbert Smedley (“Smedley”). The Petition is founded on Bankruptcy Notice BN 8051 of 2012 (the “Bankruptcy Notice”) which was served on Mr Smedley on 10 May 2013 pursuant to orders for substituted service made in proceedings SYG396/2013 (ACM Group Limited ACN 127 181 097 v Graeme Gilbert Smedley). Mr Smedley failed to comply with the requirements of the Bankruptcy Notice on or before 19 April 2013 and committed an act of bankruptcy. The Bankruptcy Notice is founded on a default judgment of the Local Court of NSW entered on 23 August 2011 in favour of ACM. These issues are not disputed by the parties.
The Petition came before a registrar of the Court on three separate occasions where it was adjourned. On two of those occasions there was an appearance by or on behalf of Mr Smedley. The matter next came before a registrar of the Court on 29 November 2013. On that occasion there was no appearance by or on behalf of Mr Smedley and, on ACM’s moving, a sequestration order was made against his estate. No challenge is made to ACM’s fulfilment of the formal requirements prescribed by the Bankruptcy Act 1966 (Cth) (the “Bankruptcy Act”) and/or the Bankruptcy Regulations 1996 (Cth) (the “Bankruptcy Regulations”) for the Court’s satisfaction that a sequestration order should have been made in respect of the Petition.
Application for Review
On 20 December 2013 Mr Smedley, who at that time appeared to be represented by Sally Nash & Co. (though no formal notice of appearance was ever filed), filed with the Court an application for review (the “Review Application”) seeking to have the sequestration order made against him by Registrar Hannigan on 29 November 2013 set aside. The Review Application was supported by the Affidavit of Graeme Smedley sworn 20 December 2013 which, amongst other things, stated that:
a)Mr Smedley was unable to attend the listing of the Petition before Registrar Hannigan on 29 November 2013 because he had to take his son to a specialist appointment at Westmead Hospital on the same day;
b)Mr Smedley had approached the Court’s Registry seeking to have the listing of the Petition on 29 November 2013 adjourned, but was unsuccessful;
c)Mr Smedley was solvent and was seeking the adjournment as he had arranged funds to enable the payment of the entire judgment debt to ACM;
d)Mr Smedley owned a property at Telopea (the “Telopea Property”) he valued at between $1,000,000 and $1,100,000. There was a mortgage over the property for $565,946,41 which meant that Mr Smedley held approximately $430,000 equity therein;
e)Mr Smedley also had a number of credit cards with outstanding balances totalling approximately $116,000 on which he was able to maintain the monthly minimum payments; and
f)Mr Smedley disputed the debt owing and claimed the debt related to the company Graeme Smedley Auctioneers & Agents Pty Ltd and was not his debt. Further, the basis of the debt itself was disputed, but Mr Smedley decided, due to the small size of the debt, it would be easier if it were paid off in instalments.
Hearing 26 February 2014
After being referred to this Court on 17 February 2014 by a registrar of Court, the Review Application was set down for hearing on 26 February 2014. On 17 February 2014 the legal representatives for Jason Porter and Paul Weston of Pitcher Partners as Join and Several Trustees of the Bankrupt Estate of Graeme Gilbert Smedley (the “Trustee”) filed a notice of appearance in respect of these proceedings, indicating they would also take part at the hearing of the Review Application.
At the commencement of the hearing Mr Allen, appearing for Mr Smedley, indicated the sequestration order made would be challenged on two bases, being:
a)Mr Smedley was solvent at the time of the making of the sequestration order; or
b)There is some other reason why the sequestration order should not have been made.
Evidence
The following evidence was read on behalf of Mr Smedley:
a)Affidavit of Graeme Smedley sworn on 20 December 2013 and filed on 20 December 2013 (the “First Smedley Affidavit”);
b)Affidavit of Graeme Smedley sworn on 24 February 2014 and filed on 24 February 2014 (the “Second Smedley Affidavit”); and
c)Exhibit “R1”, being four letters sent by Mr Smedley’s solicitors to various creditors on 13 February 2014.
The following evidence was read on behalf of ACM:
a)Affidavit of David Newman affirmed on 26 February 2014 and filed on 26 February 2014 (the “Affidavit of Updated Debt”) (paragraph seven therein was not read);
b)Affidavit of Hayley Warren affirmed on 26 February 2014 and filed on 26 February 2014 (the “Affidavit of Updated Search”); and
c)The Affidavit of Service of Benjamin Clark sworn on 26 March 2013 and filed on 9 August 2013 (the “Affidavit of Service of the Bankruptcy Notice”).
The following evidence was read on behalf of the Trustee:
a)Affidavit of Jason Porter affirmed 17 February 2014 (the “Porter Affidavit”).
I note that Mr Smedley concedes that all formal requirements for a sequestration order to be made were complied with by ACM, and no challenge is made in that respect. Since the making of the sequestration order a further payment of $180 has been made by Mr Smedley to ACM, which is noted in the Affidavit of Updated Debt.
Mr Smedley’s Submissions
Mr Allen, appearing for Mr Smedley, submits that the Review Application seeks review of a sequestration order made by Registrar Hannigan on 29 November 2013. The review is a hearing de novo and Mr Allen refers the Court to the decision of his Honour Judge Raphael in Hashmi v Akter [2013] FCCA 728 at [10] where his Honour stated:
The second ground of application is for a review of the Registrar’s decision, and that poses different criteria. A court sitting in review of a Registrar’s decision is sitting in a hearing de novo, Martin v Commonwealth Bank of Australia (2001) 217 ALR 634, and so it must deal with the facts as they are on the day of that hearing, and not the facts as they were on the day of the hearing before the Registrar.
Mr Allen contends the onus is on the creditor to prove the matters required to found a sequestration order. In relation to this, his Honour Barwick CJ stated in Sandell v Porter (1966) 115 CLR 666 at 671:
Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time — relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.
In respect of a debtor, Mr Allen submits the onus is on the debtor to prove that he is able to pay his debts or there is other sufficient cause for a sequestration order not to be made.
Mr Allen contends that the debt in respect of these proceedings is $6,790.85, which is $1,790.85 above the statutory minimum required to commence bankruptcy proceedings. Mr Smedley is the sole registered proprietor of the Telopea Property which has been valued at $950,000. The Telopea Property is encumbered for $565,946.41 which leaves equity therein of approximately $380,000.
Mr Allen submits Mr Smedley also has a number of credit card debts, totalling approximately $116,000. These debts are being repaid from the account of Graeme Smedley Auctioneers & Agents Pty Ltd as an entitlement due to Mr Smedley for expenses. Regardless of whether the Court finds that these credit card debts must be paid in full or just that minimum payments need to be made, there is sufficient equity in the Telopea Property that could be realised by either sale or refinancing to pay these debts as well as the judgment debt to ACM. Accordingly, Mr Allen contends Mr Smedley is able to pay his debts, and this is confirmed by Annexure “A” to the Porter Affidavit, being the report to creditors in respect of Mr Smedley.
ACM’s Submissions
Ms Van Munster, appearing for ACM, submits that it is still not clear how Mr Smedley will be able to make payment, of the amount outstanding to ACM, noting that it is a relatively small amount of money. However, Mr Smedley was afforded multiple opportunities prior to the sequestration order to undertake any steps required to satisfy the debt owed to ACM and did not avail himself of those, despite having appeared in court on a number of occasions.
Further, Ms Van Munster submits there are a number of potential issues in respect of Mr Smedley’s wife’s interests in the Telopea Property which may become an issue, however, at this stage this was unclear. It is noted in the statement of affairs Mr Smedley and his wife are separated, but living under the same roof. If the trustee does take steps in relation to the recovery of the Telopea Property there may be an issue in respect of Mr Smedley’s wife’s position and it is a concern no evidence has been forthcoming in that respect.
Ms Van Munster also submits there has been no evidence put before the Court in relation to Mr Smedley’s income or in relation to the debt owed to ACM as to whether the funds to satisfy it are readily available.
Trustee’s Submissions
Ms Hoskinson, appearing for the Trustee, agrees that the total value of Mr Smedley’s assets are more than his total liabilities, however, the correct test to be applied by the Court is to ascertain how quickly these assets could be realised. It is noted the Trustee has not made any conclusions in respect of the solvency or otherwise of Mr Smedley because the administration of his estate is far from completed.
Ms Hoskinson refers the Court to the Annexure “2” to the Porter Affidavit which is a letter from the Australian Taxation Office (the “ATO”) to the Trustee dated 8 February 2014. The letter states that no tax returns have been filed by or on behalf of Mr Smedley since the financial year ending June 2006. There may be a further claim arising by the ATO when these claims are lodged and issued which could impact on any claim as to solvency.
In respect of Mr Smedley’s mortgage repayments and credit cards, Ms Hoskinson submits they are, in fact, mostly overdue and over limit. This does not support the argument that Mr Smedley is solvent and able to pay his debts as and when they fall due.
Mr Smedley’s Submissions in Response
Mr Allen contends in response that there is $380,000 in equity in the Telopea Property. The total debts owed amount to $123,000, which leaves a surplus of $257,000 being more that 25% of the value of the Telopea Property. This gives an indication that further finance could be obtained or the property definitely sold. However, there can’t be any attempt to realise the Telopea Property because a sequestration order has been made against the estate of Mr Smedley.
In respect of the possible interests of Mr Smedley’s wife in the Telopea Property, Mr Allen contends it is not for this Court to speculate, at the hearing that is presently before it, what claims may or may not be made in the future in that respect. Further, this evidence was unchallenged in cross-examination.
Prior to the sequestration order Mr Smedley’s income was $46,800.25 per annum with an additional allowance of $2,000.00 per week from Graeme Smedley Auctioneers & Agents Pty Ltd. Mr Smedley is currently the recipient of Newstart Allowance as his real estate licence has been suspended due to the sequestration order being made.
Mr Allen, in respect of Mr Smedley’s overdue and over limit credit cards and mortgage account, contends that being over limit does not mean the entire debt is payable, rather, it is a request by the bank or financial institution to bring the account back into its normal trading terms. On the evidence before the Court, minimum monthly payments were being made to these accounts at the time the sequestration order was made.
Consideration
On 20 December 2013 the respondent debtor, Mr Smedley, filed the Review Application seeking review of Registrar Hannigan’s sequestration order made against his estate on 29 November 2013. This application was heard on 26 February 2014 where judgment was reserved.
His Honour Lucev FM (as he then was) in Deputy Commissioner of Taxation v Jaskola [2011] FMCA 67 heard an application for review of a registrar’s decision making a sequestration order against the respondent. At [8]-[9] his Honour stated:
8. On an application for a review of a Registrar’s decision the court:
a) is engaged in a fresh proceeding;
b) does not scrutinise the original reasons to ascertain error;
c) makes its own decision on the merits of the case; and
d) in applications for review of a sequestration order, where a sequestration order is still sought, the petitioning creditor is required to prove all necessary matters, including those specified in s 52(1) of the Bankruptcy Act.
9. Under s 104(3) of the FM Act the court “may make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised” by the Registrar.
His Honour Jacobson J (with Nicholson J agreeing and Lander J dissenting) in Pattison v Hadjimouratis (2006) 155 FCR 226 at [41]-[43] stated:
41. The combined effect of ss 102(2) and 103(1) of the Federal Magistrates Act and r 20.A(1)(c) of the Federal Magistrates Court Rules is that the power to make a sequestration order under s 43(1) of the Bankruptcy Act is delegated to the registrars. As Lander J observes at [121], this is an exercise of judicial power.
42. The delegation of this power to a registrar is a valid exercise of the power of delegation. This is because the effect of s 104(2) of the Federal Magistrates Act, when read with r 20.03(a) of the court’s rules, is that the exercise of the power by a registrar is subject to a review by way of a hearing de novo: see Harris at CLR 95, 121–3, 164; ALR 198, 218–19, 249; Fam LR 597–8, 614–16, 644.
43. Thus, the Federal Magistrates Court commences afresh without in any way being fettered by the decision of the registrar. The review is a complete rehearing in the exercise of the original jurisdiction of the Federal Magistrates Court. It is for the party seeking the sequestration order to satisfy the Federal Magistrate that all of the necessary conditions have been satisfied to warrant the making of a sequestration order under s 43(1) of the Bankruptcy Act: Harris at CLR 124; ALR 220;Fam LR 617.
It is agreed by both parties to these proceedings that the formal requirements for the Court to be satisfied a sequestration order should have been made by Registrar Hannigan were met and no error arises from the learned Registrar’s decision. Rather, Mr Smedley contends that the sequestration order made against his estate should be set aside on two bases, being:
a)His solvency; or
b)That there is other sufficient cause why the sequestration order ought not to have been made.
Section 52(2)(a) of the Bankruptcy Act provides:
(2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:
(a) that he or she is able to pay his or her debts; or
(b) that for other sufficient cause a sequestration order ought not to be made;
it may dismiss the petition.
His Honour Barwick CJ stated in Sandell v Porter (supra) at 670-671:
Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time — relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.
Her Honour O’Connor J stated in Re Touma; Saparas v Touma (2000) 171 ALR 275 at [11]:
11. As was said in Re Lakatos; Ex parte Lakatos v DCT (1996) 33 ATR 145, the onus to establish solvency and also that the discretion should be exercised in the favour of the debtor, is one placed on the respondent. Whether the onus has been discharged is a matter of fact for the court to determine. …
In these proceedings it is submitted by Mr Smedley that he is solvent and the Court’s discretion should be exercised in his favour. In support of this contention Mr Smedley relies on the fact he is the sole proprietor of the Telopea Property and is able to either dispose of the Telopea Property to free up moneys or to refinance in order to satisfy the debt owing to ACM.
Exhibited to the Second Smedley Exhibited at “GS1”, “GS2” and “GS3” are two analyses of the Telopea Property giving a valuation of it of between $875,000 and 1,057,000. Annexed to the Second Smedley Affidavit at “B” is a statement of account in respect of the mortgage on the Telopea Property. This statement indicates that as at 17 December 2013 the balance owing in respect of the mortgage on the Telopea Property was $565,946.41. Based on the lowest valuation of the Telopea Property, there is equity of approximately $309,000 therein.
It is conceded by Mr Smedley he also has a number of credit cards with outstanding balances totalling approximately $116,000. These balances, along with the judgment debt owed to ACM, bring Mr Smedley’s liabilities that are before the Court to approximately $123,000. On this basis, there appears to be approximately to be a surplus of approximately $176,000 in respect of the debts owed by Mr Smedley. I note submissions have been made in respect of a potential tax liability owed by Mr Smedley as well as potential issues in respect of the ownership of the Telopea Property, however, neither of these were pressed to any extent at the hearing to the extent that the Court could have regard to them for the purposes of the current Review Application.
A court sitting in review of a registrar’s decision is sitting in a hearing de novo and must deal with the facts as they are on the day of the hearing and not as they were on the day of the hearing before the Registrar (see Martin v Commonwealth Bank of Australia (2001) 217 ALR 634). Mr Smedley, however, is not in a position to realise his major asset, the Telopea Property, and pay his debts as a result of the sequestration order being made against his estate on 29 November 2013.
Section 153B of the Bankruptcy Act states:
Annulment by Court
(1) If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor'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 bankruptcy.
…
(3) The trustee must, before the end of the period of 2 days beginning on the day the trustee becomes aware of the order, give to the Official Receiver a written certificate setting out the former bankrupt's name and bankruptcy number and the date of the annulment.
His Honour Judge Raphael stated in Hashmi v Akter (supra) at [6]-[8]:
[6] An annulment of a bankruptcy by the court can be obtained either under s 153A where the debtor has paid his debts in full or under s 153B…
[7] An example of when a sequestration order ought not to have been made might be because the bankrupt establishes that he was solvent at the time of the hearing; or perhaps because, mistakenly, an order was made in respect of an act of bankruptcy where the debt was under the statutory minimum of $5,000.00; or, as occurred in Re Raymond; Ex parte Raymond (1992) 36 FCR 424, where a court is satisfied that the judgment should never have been entered against the debtor; in that case because the agreement under which the creditor sued was an agreement between the creditor and a company and not the debtor at all.
[8] In coming to a decision as to whether or not a sequestration ought to have been made, the plurality of the Full Court in Rigg v Baker (2006) 236 ALR 6292., per Spender and French JJ, said, under the heading, “General principles”, at [61]:
In determining whether a sequestration order ought to have been made the court may consider “not only the case as disclosed at the time the order was made, but as it would have been disclosed had all the true facts been before the court on the making of the order”: Re Cook (1946) 13 ABC 245 at 259 per Clyne J; Re Williams [1969] ALR 179 at 181; (1968) 13 FLR 10 at 23 per Gibbs J. But facts which have come into existence since the making of the order are not relevant to the question whether it ought to have been made: Re Scott (1975) 6 ALR 558 at 559.
In my view, having regard to the evidence put on by Mr Smedley and in light of the judgment debt only being marginally over the threshold required to commence bankruptcy proceedings, the sequestration order made against Mr Smedley on 29 November 2013 should be set aside, however, the Petition should remain on foot. Mr Smedley does not dispute service of either the Bankruptcy Notice or the Petition and the Bankruptcy Notice was served in March 2013. An appearance was made either by Mr Smedley or a representative of his at two separate listings before a registrar of this Court during November 2013 and there is no evidence before the Court that any steps were taken by Mr Smedley to address the debt sought in the Petition. Accordingly, I intend to stand the Petition over for a period of six weeks to enable Mr Smedley to take steps to address the debt owed to ACM and inform the Court and ACM one week before the matter returns before the Court by way of sworn affidavit. I also intend to set aside the costs order made by Registrar Hannigan on 29 November 2013, but reserve any and all costs pending the ultimate outcome of the Petition.
I certify that the preceding thirty-eight (38) paragraphs are a true copy of the reasons for judgment of Judge Lloyd-Jones
Associate:
Date: 17 March 2014
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