Angelo Ferella v Otvosi

[2006] FMCA 231

FEDERAL MAGISTRATES COURT OF AUSTRALIA

ANGELO FERELLA v OTVOSI & ANOR [2006] FMCA 231

BANKRUPTCY – Sequestration order – review of Registrar’s decision –admissibility of opinion evidence – whether wholly or substantially based on specialised knowledge – need for satisfaction in relation to matters required by s.52(1) of the Bankruptcy Act – whether evidence should be excluded under s.135 of the Evidence Act – whether debtor satisfied Court that able to pay his debts – whether other sufficient cause – where non-disclosure to the Court of complete financial position.

Bankruptcy Act 1966 (Cth), ss.40(1)(g), 43, 52, 82, 142, 153A, 153B.
Evidence Act 1995 (Cth), ss.55, 56, 60, 76, 76(1), 79, 80, 135 & 136.
Corporations Act 2001 (Cth), s.95A
Federal Magistrates Act 1999 (Cth), s.104.
Federal Magistrates Court (Bankruptcy) Rules 2006, rr. 4.06(3), 4.06(4).
Civil Procedures Act 2005 (NSW), s.101.
Real Property Act 1900 (NSW), s.57(2)(b).

Federal Magistrates Court Rules 2001, rr.31.06, 31.06(3), 31.06(4).
Federal Court Rules
Federal Magistrates Court (Bankruptcy) Rules 2006 rr.4.06(3) & 4.06(4)

Otvosi & Anor v Angelo Ferella [2005] FMCA 1632
Gustavo Ferella v Otvosi & Ors [2006] FMCA 334
Martin v Commonwealth Bank of Australia [2001] FCA 87
Adelaide Bank v Badcock [2002] FMCA 10
Londish v Gulf Pacific Pty Ltd (1993) 45 FCR 128
Re Lowe; Ex parte Lowe (1890) 7 MOR 25
Re Gentry (1910) 1 KB 825
McIntosh v Shashoua (1931) 46 CLR 494
Rigby v Beames [2002] FMCA 101
Cottrell v Wilcox [2002] FCA 232
Pownall v Conlan Management Pty Limited (1995) 12 WAR 370
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705
Quick v Stoland Pty Ltd (1998) 87 FCR 371
HG v R (1999) 197 CLR 414
Sydneywide Distributions Pty Ltd v Red Bull Australia Pty Ltd (2002) FCAFC 157
Australian Securities and Investments Commission v Rich & Others (2005) 218 ALR 764
Ocean Marine Mutual Insurance Association (Europe) OV v Jetopay Pty Ltd [2000] FCA 1463
Brodie v Singleton Shire Council (2001) 75 ALJR 992
Welsh v R (1996) 90 A Crim R 364
Dean-Willcocks v Commonwealth Bank of Australia [2003] NSWSC 466
Dyson v Pharmacy Board of New South Wales [2000] NSWSC 981
Estee Lauder Pty Ltd v Drew [1999] FCA 642
Clarke v Ryan (1960) 103 CLR 486
Switz Pty Ltd v Glowbind [1999] NSWSC 1296
ASIC v Rich [2005] NSWSC 149
ASIC v Rich (2005) 218 ALR 764
ASIC v Vines (2003) 48 ACSR 2913
Evans Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171
Roach v Page (No.11) [2003] NSWSC 907
Re Sarena; Ex parte Wollondilly Shire Council (1980) 43 FLR 163
Sarena v Wollondilly Shire Council (1980) 48 FLR 372
Sandell v Porter (1966) 115 CLR 666
Australia & New Zealand Banking Group v Foyster (2000) FCA 400
International Alpaca Management Limited v Ensor (1999) FCA 72
Lewis v Doran (2004) 184 FLR 454
Harrison v Lewis (2001) 19 ACLC 566
Re Sanders; Knudson and Yates(T/A The Hargreaves Practice) v Sanders (2003) FCA 1079
Otvosi & Anor v Angelo Ferella (No.2) [2005] FMCA 1647
Love v Pattison [1998] FCA 967
Re Betts; Ex parte Betts [1897] 1 QBSO
Radich v Bankruptcy of New Zealand (1993) 45 FCR 101

Applicant: ANGELO FERELLA

Respondents: ERVIN & KEIKO OTVOSI

File Number: SYG2381 of 2005

Judgment of: Barnes FM

Hearing dates: 14 December 2005, 6 February 2006.

Date of Last Submission: 16 February 2006

Delivered at: Sydney

Delivered on: 10 March 2006

REPRESENTATION

Counsel for the Applicant: Mr C Stomo

Counsel for the Respondent: Mr J.T. Johnson

Solicitors for the Respondent: Landerer & Co

ORDERS

1. The application for review of the Registrar’s orders made on 14 October 2005 be dismissed.

2. The costs including reserved costs of the creditors be paid from the estate of the debtor in accordance with the Federal Court Rules.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG2381 of 2005

ANGELO FERELLA

Applicant

And

ERVIN & KEIKO OTVOSI

Respondents

REASONS FOR JUDGMENT

Background

1. Before the Court is an application by Angelo Ferella seeking review of a decision of Registrar McIllhatton making a sequestration order against the estate of Mr Ferella on 14 October 2005.  On the same date Registrar McIllhatton made a sequestration order against the estate of Mr Ferella’s father, Gustavo Ferella.  Gustavo Ferella also filed an application for review of that decision.  The review applications were, by consent, heard at the same time.  The respondents, Ervin and Keiko Otvosi, were the petitioning creditors in the proceedings before the Registrar. 

2. On 27 April 2005 the creditors obtained a judgment in the Supreme Court of New South Wales in proceedings 2583 of 2003 in which it was ordered that the Ferellas pay their costs in the sum of $74,656.  Bankruptcy notices founded on the judgment were issued on 19 May 2005.  The bankruptcy notice addressed to Angelo Ferella was served on him on 26 May 2005.  Mr Ferella failed, on or before 16 June 2005, to comply with the bankruptcy notice. 

3. On 16 June 2005 Mr Ferella applied have the bankruptcy notice set aside.  That application was dismissed on 5 July 2006.  On 26 August 2005 the Otvosis presented a creditor’s petition which was filed in this Court.  Registrar McIllhatton made a sequestration order against Mr Ferella’s estate on 14 October 2005.  Mr Ferella filed an application for review on 17 October 2005.  He sought a stay of proceedings under the sequestration order.  On 11 November 2005 the application for a stay was refused (see Otvosi & Anor v Angelo Ferella [2005] FMCA 1632). The application for review was listed for hearing on 14 December 2005. The debtor did not file and serve written submissions as ordered or a notice of intention to oppose setting out the grounds on which he sought to oppose the creditors’ petition.

4. By a further application filed on 1 December 2005 the debtor sought in the alternative that the order for bankruptcy be annulled pursuant to the provisions of s.153A [sic] of the Bankruptcy Act 1966 (Cth) (the Act).

5. Written submissions were filed for the creditors which referred to the application for an annulment. It was contended that if either application was intended to be an application for annulment under s.153A of the Act no such order could be made. To the extent that the reference to s.153A of the Bankruptcy Act 1966 was intended to refer to s.153B it was said to be clear that there had been no compliance with the Federal Magistrates Court Rules 2001 in relation to the procedural requirements for dealing with such an application.  It was submitted that the applications ought to be dismissed with costs. 

6. At the start of the hearing on 14 December 2005, Mr Stomo, Counsel for both Ferellas, indicated that his understanding was that an annulment of each bankruptcy was sought.  However after a short adjournment to enable Mr Stomo to obtain clarification from his clients, he stated that he was instructed that neither of the Ferellas wished to proceed on an application for an annulment and that his instructions were to proceed by way of review in both matters.  The applications for annulment were withdrawn.  The hearing then proceeded as a review of each of the decisions of the Registrar to make a sequestration order against the estates of Angelo and Gustavo Ferella respectively.  This judgment relates to the review application filed by Angelo Ferella.  It is, however, necessary to refer to the position of Gustavo Ferella as discussed below. 

The statutory framework

1. This is a review under s.104 of the Federal Magistrates Act 1999 (Cth) of a decision of a Registrar to make a sequestration order. The relevant legislative provisions are contained in Part IV of the Bankruptcy Act 1966. In particular s.43 of the Act relevantly provides:

   1.  Subject to this Act, where:

   (a)  A debtor has committed an act of bankruptcy;

   (b)  At the time when the Act of bankruptcy was committed, the debtor:

   (i) Was personally present or ordinarily resident in Australia;

   (ii)     Had a dwelling house or place of business in Australia;

   …

   the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.

2. Section 52 of the Act provides:

   (1) At the hearing of a creditor's petition, the Court shall require proof of:

   (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);
   (b) service of the petition; and
   (c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing;

   and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor.

   …

   (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.

3. It is not disputed that Mr Ferella committed an act of bankruptcy under s.40(1)(g) of the Act when he failed to comply with the requirements of the bankruptcy notice on or before 16 June 2005. This failure satisfies s.43(1)(a). Nor is it disputed that at that time Mr Ferella was personally present and ordinarily resident in Australia. He remains in Australia. Hence s.43(1)(b) is satisfied. The Court has jurisdiction to make a sequestration order against the estate of Mr Ferella (s.43).

Proof of formal matters under s.52(1) of the Act

1. The following material was relied on by the petitioning creditors:

   ·The creditor’s petition presented on 26 August 2005;

   ·

   The order for substituted service made by Registrar Segal on

   
   

   23 September 2005;

   ·Affidavit of Ervin Lloyd Otvosi sworn 26 August 2005 verifying the creditor’s petition;

   ·Affidavit of John Arthur Jenner sworn 25 August 2005 as to payment into Court;

   ·Affidavit of Sally Harris sworn 26 August 2005 as to search;

   ·Affidavit of John Arthur Jenner sworn 25 August 2005 verifying paragraph four of the creditor’s petition;

   ·Affidavit of Terrance Hargraves sworn 29 May 2004 as to service of bankruptcy notice;

   ·Affidavit of Keiko Otvosi sworn 13 October 2005 as to debt;

   ·Affidavit of Sally Harris sworn 13 October 2005 as to search;

   ·

   Affidavits of Leslie Michael Steven Pozniak sworn 17 October 2005, 28 October 2005, 1 December 2005, 3 February 2006 and

   
   

   9 February 2006; and

   ·Affidavit of Peter Ewan Kennedy sworn 16 February 2005. 

2. I note as a preliminary point that the creditors had filed affidavit evidence as to the formal matters in s.52 in the proceedings before the Registrar. No issue was taken with the service of the creditor’s petition and supporting affidavits. No further affidavits under the then applicable Rule 31.06 of the Federal Magistrates Court Rules 2001 were filed for the creditors prior to the hearing on 14 December 2005. However a review under s.104(3) of the Federal Magistrates Court Act 2001 requires to the Court to hear de novo the creditor’s petition: Martin v Commonwealth Bank of Australia [2001] FCA 87, Cottrell v Wilcox [2001] FCA 866 and Adelaide Bank Limited v Badcock [2002] FMCA 10. As Federal Magistrate Raphael pointed out in Adelaide Bank Limited v Badcock at [12]:

   “In order to hear the creditors petition de novo it is necessary for the judicial officer to be satisfied with the proof of the matters which subsection 52(1) of the Bankruptcy Act 1966 requires the Court to be satisfied. Those requirements include matters which have to be proved by way of affidavit evidence. Rule 31.06 of the Federal Magistrates Court Rules sets those out in detail.”

3. It is perhaps not entirely surprising, given the uncertainty as to whether the applicant sought review or an annulment, that while the necessary affidavits had been provided to the Registrar at the time of the making of the sequestration order, I was not provided with any further affidavits under Rule 31.06 on the first hearing date. While the Full Court of the Federal Court suggested in Martin at [16] that, in the absence of fresh affidavits from a creditor on the debtor’s application for review, the primary judge could ‘presumably’ have regard to the affidavits earlier filed by the creditor and used before the Registrar, the Court went on to point out that in that case two of those affidavits did not comply with the timing requirements imposed for their swearing by the then applicable provisions of the Federal Court Rules (which requirements the Court took to be applicable to a review by a judge of the making of a sequestration order by a Registrar). Similarly in this case while all relevant earlier affidavits had been filed, two of those earlier affidavits, that is the affidavits required by Rule 31.06(3) and Rule 31.06(4), did not comply with the timing requirements imposed by the Federal Magistrates Court Rules as they stood at the time of the hearing of the review application. In particular the affidavit as to search in the national personal insolvency index was required under Rule 31.06(3) to be an affidavit of a person who searched the index “no earlier than the day before the hearing date” for the petition. The affidavit required by Rule 31.06 stating that the debt on which the creditor relied was still owing was to be sworn “as soon as practicable before the hearing date for the petition” (although there was in this case evidence that the tender of an amount had not been accepted by the creditor in payment of the debt as discussed further below).

4. In similar circumstances in Adelaide Bank Ltd v Badcock Federal Magistrate Raphael allowed an adjournment for determination of the formal matters of proof referred to in s.52(2) of the Act. However in this case, after the hearing, but before the delivery of judgment, the creditors sought and were granted leave to re-open their case against each debtor (see Londish v Gulf Pacific Pty Ltd (1993) 45 FCR 128 at 139). On 6 February 2006 Counsel for the creditors’ sought to bring to the attention of the Court evidence that was said to establish that each of Angelo and Gustavo Ferella had a further undisclosed substantial creditor in existence at the date of bankruptcy. This issue is discussed further below. In order to address the issues raised in Martin v Commonwealth Bank the creditors were given leave to file affidavit evidence to meet the requirements of Rules 4.06(3) and (4) of the Federal Magistrates Court (Bankruptcy) Rules 2006 (which relevantly replaced Rules 31.06(3) and (4) of the Federal Magistrates Court Rules 2001 from 6 February 2006). An affidavit of Mr Pozniak was filed on 9 February 2006 addressing these and other matters. In relation to the affidavit required under Rule 4.06(4) as to debt and satisfaction of s.52(1)(c) of the Act, Mr Pozniak stated that the amount of $74,656 owing by the debtors to the creditors pursuant to judgment recovered by the creditors against the debtors in the Supreme Court of New South Wales, on 27 April 2005 in file 2583 of 2003 was still wholly due and owing.

5. The matter was adjourned for further hearing on 17 February 2006 in the event that either debtor took issue with whether the formal matters of proof referred to s.52(1) were satisfied (or if a hearing was otherwise required). Counsel for the debtors did not take issue with the creditors’ compliance with Rule 4.06 and did not require the matter to be further heard on 17 February 2006. On this basis, lest there be any doubt about the compliance of the applicant creditors with the time limits applicable to the affidavits required under Rule 4.06 (in particular Rule 4.06(3)), in so far as it is necessary I consider it is in the interests of justice to dispense with compliance with the requirement that the search required under Rule 4.06(3) be no earlier than the day before the hearing date for the petition. I am satisfied as to proof of the formal matters in s.52(1) of the Act.

Whether the debt on which the petitioning creditor relies is still owing.

1. The debt on which the petitioning creditors rely is a debt of $74,656 recovered by judgment against each of the Ferellas in Supreme Court proceedings no.2583 of 2003 on 27 April 2005, on which the bankruptcy notice was founded and which the creditor’s petition of

   
   

   26 August 2005 claims is owed to the creditors by the debtor.  Angelo Ferella tendered to the solicitors for the creditors a bank cheque in the amount specified in each bankruptcy notice ($74,656) on 29 November 2005.  He contended that the debt owed to the creditors had been satisfied by payment.  However by letter dated 1 December 2005 the solicitors for the creditors declined to accept the cheque as payment of the debt.  This letter stated that the cheque did not include any interest accruing after 27 April 2005 pursuant to s.101 of the Civil Procedures Act 2005 that there were other costs orders in favour of their clients against the Ferellas which were awaiting assessment and which in the normal course would be provable in the bankruptcy and that in any event while the sequestration orders remained in place it was not open to the Otvosis to accept payment in respect of a provable debt otherwise than through the trustee in bankruptcy.  On this basis it was stated that the Otvosis could not accept the tender of the cheque and that the receipt for payment was simply an acknowledgement of receipt of the letter and cheque.  The cheque was retained on file pending the outcome of the hearing of the review application.  In the event that the review application was unsuccessful it would be delivered to the Official Trustee in Bankruptcy as the party entitled to hold property of the bankrupts.  A similar letter was sent by the solicitors for the Otvosis to the Ferellas’ then solicitors, Klimt & Associates, in response to their letter of 30 November 2005 referring to payment of the sum of $74,656. 

2. It was submitted by counsel for the Otvosis that it was entirely appropriate for the Otvosis to reject a tender of the amount of $74,656 and that s.52(1)(c) of the Act was satisfied as the debt was still owing at the time of the sequestration order and thereafter. First the payment was provided on the basis that it was in satisfaction of the entirety of the Otvosi’s claim as a creditor. However it was submitted that the creditors had a statutory right to interest under the Civil Procedures Act 2005.  There was no tender of such interest. 

3. Further, it was submitted that the creditors were entitled to refuse payment, consistent with what was said by Gavin Duffy CJ and Dixon J in McIntosh v Shashoua (1931) 46 CLR 494 at 505:

   A petitioning creditor is entitled to refuse payment and proceed with the petition … the refusal of the tender in this case is consistent with the conclusion, if it does not strengthen it, that the petitioner truly desires to obtain a sequestration order; and it in no way tends to show that the reason why such an order was desired was anything but legitimate.

4. Critically, counsel for the creditors contended that on the making of a sequestration order the entitlement to recover any debt which was a provable debt within s.82 of the Act was converted into an entitlement to lodge a proof of debt in each of the estates and that it was not open at law to the creditors to accept the payment in satisfaction of the debt.

5. There is longstanding authority that a creditor with knowledge of an act of bankruptcy committed by a debtor is justified in refusing to accept payment and that the debtor in such circumstances cannot successfully set up the tender to reduce the petitioning debt below the requisite amount as a ground of objection to a sequestration order (Re Lowe; Ex parte Lowe (1890) 7 MOR 25.  Also see s.123(3)).  Further, even if a debtor admits the debt and pays the amount with costs into court, the petitioning creditor is not bound to accept payment by taking the money out of court and may in such circumstances proceed with a petition (Re Gentry (1910) 1 KB 825; McIntosh v Shashoua).  In Rigby v Beames [2002] FMCA 101 it was suggested that the mere holding of a cheque, even in the amount of the debt, by the creditor’s solicitors without it being banked or presented for payment is not such as to prevent the creditor issuing or proceeding with a creditor’s petition based on the debt. As contended for the creditors I accept that following the making of the sequestration order the tender of the cheque did not operate to repay the debt. It was not open to the creditors to accept the proffered payment in satisfaction of the debt. On the basis that it was a debt to which the debtor was subject at the date of the bankruptcy, the creditors’ right was converted to a right to prove for it in the bankruptcy (s.82). I also note that the cheque did not in any event include interest. Nor is this an application for an annulment (cf Cottrell v Wilcox [2002] FCA 232 at [25] – [29]). In all the circumstances I am satisfied, as required by s.52(1)(c) of the Act, that the debt on which the creditor relies is still owing.

Solvency of debtor – evidentiary issues

1. No notice of opposition to the creditor’s petition was filed. Counsel for Mr Ferella contended that a sequestration order ought not to have been made because Mr Ferella was able to pay his debts within s.52(2)(a) of the Act. The debtor sought to rely on affidavits of Angelo Ferella sworn on 17 October 2005, 25 October 2005, 1 December 2005,

   
   

   6 December 2005 and 14 February 2006 and an affidavit of Christopher Mel Chamberlain sworn on 13 December 2005. 

2. There was no affidavit evidence from Gustavo Ferella before the Court other than an affidavit of 14 October 2005 stating that he gave authority to Angelo Ferella to act on his behalf in relation to the proceedings as he was “too ill to attend”.  Counsel for the Ferellas tendered a handwritten letter said to be from Gustavo Ferella indicating that he understood that Angelo Ferella normally looked after his affairs together with a copy of a medical report. 

3. Counsel for the debtor sought to file in court on 14 December 2005 the affidavit of Christopher Mel Chamberlain sworn 13 December 2005 annexing a document headed ‘Report as to Solvency’ which refers to s.153B of the Bankruptcy Act 1966.  A preliminary point arose as to the admissibility of this document.  Mr Johnson for the creditors did not object to leave being granted for the filing of the affidavit but objected to it being read in its entirety.  It was agreed that the question of admissibility of this affidavit should be dealt with as part of the judgment.

4. Mr Johnson for the creditors objected to the affidavit being read on the basis that what was said in the report annexed to the affidavit of Mr Chamberlain was hearsay, that the report was reliant to some extent upon documentation that had not been put before the Court, that it went to the final issue and that it did not address materials that were otherwise before the Court. Moreover Mr Chamberlain was not made available for cross-examination at the hearing. It was also contended that the report referred to and was intended to be relied upon in proceedings under s.153B of the Act, which was not the application before the Court. Hence the report was not prepared for the purposes of the application before the Court. It was contended that this fact, coupled with the nature of the material relied on, meant that the report could not give any assistance to the Court on matters of fact. It was further contended that because of the prejudice the creditors would suffer if the affidavit was even allowed into evidence it should be rejected in its entirety (including the accompanying report) under s.135 of the Evidence Act 1995.

5. In response counsel for the debtor contended that the report was admissible as Mr Chamberlain had stated the basis upon which he drew his conclusions, identified the basis for forming his opinion and how he came to that conclusion based on the information and had the appropriate qualifications to do so.  It was contended that the absence of Mr Chamberlain for cross-examination was not a great difficulty because the matters dealt with in the report could be addressed by submissions. 

6. Mr Chamberlain’s affidavit recites his position as a chartered accountant and registered trustee in bankruptcy and his practice in the field of insolvency.  It annexes a copy of his curriculum vitae and a report headed “Report as to solvency” which refers to a request from Angelo and Gustavo Ferella to undertake an “investigation into their affairs” to determine whether they were in fact solvent as at 14 October 2005.  It is stated that if it is established the estates were solvent then pursuant to s.153B the sequestration orders ought not to have been made.  The report lists information relied on.  Mr Chamberlain proceeded on the basis of property and liabilities of Gustavo Ferella said to be disclosed in documents before him to express a view as to the dollar amount of property of Gustavo Ferella divisible in bankruptcy (excluding a beneficial interest in a Unit Trust discussed below) from which he subtracted the liabilities said to be disclosed in Gustavo Ferella’s statement of affairs to conclude:

   “Therefore in summary at the 14^th October 2005 Sequestration date Mr Gustavo Ferella had at worst-case scenario approximately $1,589,342 worth of divisible assets to settle liabilities of $84,410.79 and as a consequence was quite clearly solvent and the Sequestration Order ought not to be made.”

7. Mr Chamberlain’s report continued that a receipt and bank cheque he had sighted “would indicate” that the two debts disclosed by Gustavo Ferella had been “settled in full” and that Gustavo Ferella’s estate “has nil liabilities”. 

8. As to Angelo Ferella, Mr Chamberlain referred to his statement of affairs as disclosing “nil assets outside a beneficial interest in the Cavallaro (sic) Unit Trust which was previously advised on the 30^th June 2005 had net assets of $1,172,106.00”.  The report stated that Angelo Ferella’s liabilities “are disclosed as identical to those of Mr Gustavo Ferella i.e. Ervin Otvosi and Keiko Otvosi $74,656.00, Woollahra Municipal Council $9,754.79”.  It concluded:

   “Appreciating Mr Gustavo Ferella at Sequestration date had more than sufficient divisible property to satisfy these debts and that they have now been settled from those assets than Mr Angelo Ferella has no liabilities and the Sequestration Order of the 14^th October 2005 ought not have been made.” 

9. Finally Mr Chamberlain suggested that a judgment in favour of Gadens Lawyers Sydney Pty Ltd had “no bearing” on this application “as at all times Gustavo Ferella was solvent and had the capacity to pay his debts as and when they fell due and as a consequence Angelo Ferella had no liabilities and was also solvent.”  Annexed to the report were copies of a number of documents. 

10. It is relevant to have regard to the material referred to by

    
    

    Mr Chamberlain.  The report states that he relied on the affidavit of Angelo Ferella dated 6 December 2005.  This affidavit is before the Court.  In that affidavit Mr Ferella stated that in addition to the debt of the petitioning creditor (which he claimed had been satisfied) “the only  other debt which was satisfied on 24 November 2005” was an amount of $9,754.79 due to Woollahra Municipal Council.  However in cross-examination Mr Ferella conceded there were debts other than those disclosed, as discussed below. 

11. The report is also said to rely on statements of affairs filed by Gustavo and Angelo Ferella.  These were not put before the Court by the applicant.  In cross-examination Mr Ferella acknowledged that certain debts had not been disclosed to the trustee.  Reliance was also placed on the Cavallino Unit Trust Financial Report for the year ended

    
    

    30 June 2005.  This has not been adopted by the Trustees.  A copy is otherwise before the Court as an annexure to the affidavit of Angelo Ferella sworn on 1 November 2005.  However the accountant’s compilation report states that it was prepared on the basis of information provided by the Trustees and is a ‘special purpose’ financial report.  The purpose is said to be set out in Note 1.  There is no such ‘Note 1’ to the copy of the Financial Report.  The accountant’s compilation report also states that he dealt with the information provided, that his procedures did not include verification or validation procedures and that no audit or review had been performed.  Such qualifications mean that little weight can be given to such a ‘financial report’.  Mr Chamberlain’s report stated that he omitted the trust interests in calculating Gustavo Ferella’s divisible property.  However he also stated that he relied on the statement of affairs for Angelo Ferella as disclosing nil divisible assets “outside a beneficial interest” in the Trust and he referred to the net assets “advised” in the Financial Report. 

12. Mr Chamberlain’s report referred to a copy of a Commonwealth Bank pensioner security account in the joint names of Gustavo and Nida Ferella – only part of which is annexed to the report and refers to a credit balance at 2 December 2005.  This material is not otherwise before the Court.  There is no evidence from Nida and/or Gustavo Ferella (apart from the affidavit of Gustavo Ferella of 14 October 2005).  Finally reference is made to attached kerbside ‘market appraisals’ on four properties for which copy land title searches stating that the properties are owned by Gustavo and Nida Ferella as joint tenants are also attached.  This evidence is not otherwise before the Court.  Angelo Ferella attributes different values to these four properties. 

13. Mr Chamberlain expressed his opinion as to solvency of Gustavo Ferella as at 14 October 2005 based on the ‘fact’ that the assets disclosed exceeded the liabilities disclosed.  He expressed the opinion that because Gustavo Ferella was solvent, as a consequence Angelo Ferella was also solvent.  The basis for this opinion is not disclosed except insofar as it relies on the fact that the disclosed debts were said to have been settled.  There was no evidence from Gustavo Ferella in relation to these matters. 

14. In support of his contentions in relation to the admissibility of this evidence, Mr Johnson for the creditors referred to the decision of the Western Australian Court of Appeal in Pownall v Conlan Management Pty Limited (1995) 12 WAR 370 suggesting that it was authority for the proposition that an expert can only express an opinion on matters where they go to facts that are in evidence or are to become evidence before the Court. It was suggested that the decision of the New South Wales Court of Appeal in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 was consistent with what was stated by the Western Australian Court of Appeal in Pownall to the effect that if an expert is to express any opinion drawn from matters of fact which are or should be before the Court he can only do so where those materials are otherwise in evidence before the Court.  On this basis it was contended that as the only relevant matters otherwise in evidence before the Court were the affidavits of Angelo Ferella (which did not put all such matters before the Court) what was said by Mr Chamberlain was hearsay and should be rejected.  Reference was also made to the decision of the Full Court of the Federal Court in Quick v Stoland Pty Limited (1998) 87 FCR 371.

15. Pownall v ConlanManagement Pty Limited considered the admissibility of an expert opinion substantially based on hearsay information that had not been evidenced in court.  It addressed the common law rule that the admissibility of such opinion evidence depended on proper disclosure and proof of the factual basis of the opinion and not the operation of the Evidence Act 1995.

16. In Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 Heydon JA (as he then was) addressed the question of the admissibility of expert evidence at length and the impact of ss.76 – 80 of the Evidence Act 1995.  (Also see HG v R (1999) 197 CLR 414 at [39] – [44] per Gleeson CJ). In particular Heydon JA stated at [85] in Makita:

    In short, if evidence tendered as expert opinion is to be admissible, it must be agreed or demonstrated that there is a field of ‘specialised knowledge’; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be ‘wholly or substantially based on the witness’s expert knowledge’; so far as the opinion is based on facts ‘observed’ by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on ‘assumed’ or ‘accepted’ facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert’s evidence must explain how the field of ‘specialised knowledge’ in which the witness is expert by reason of ‘training, study or experience’, and on which the opinion is ‘wholly or substantially based’, applies to the facts assumed or observed so as to produce the opinion propounded.  If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert’s specialised knowledge.  If the court cannot be sure of that, the evidence is strictly speaking not admissible, and, so far as it is admissible, of diminished weight.  And an attempt to make the basis of the opinion explicit may reveal that it is not based on specialised expert knowledge, but, to use Gleeson CJ’s characterisation of the evidence in HG v R (at 428 [41]), on ‘a combination of speculation, inference, personal and second-hand views as to the credibility of the complainant, and a process of reasoning which went well beyond the field of expertise’.

17. In that case no objection was taken to the expert evidence in issue and, as Heydon JA stated at [86], the only issue for the Court was its weight.  (Also see Sydneywide Distributions Pty Ltd v Red Bull Australia Pty Ltd (2002) FCAFC 157 at [87] per Weinberg and Dowsett JJ and cf Australian Securities and Investments Commission v Rich & Others (2005) 218 ALR 764). Nonetheless his Honour’s views as to the admissibility of evidence tendered as expert opinion are of considerable assistance. Heydon JA expressed the view that the statement of the law in HG v R (1999) 197 CLR 414 which he set out prior to his summary of the law at [85] corresponded with the views of the Full Court of the Federal Court in Ocean Marine Mutual Insurance Association (Europe) OV v Jetopay Pty Ltd [2000] FCA 1463 at [21] – [23]. In particular the Court (Black CJ, Cooper and Emmett JJ) stated [23]:

    “The further requirement that an opinion be based on specialised knowledge would normally be satisfied by the person who expresses the opinion demonstrating the reasoning process by which the opinion was reached.  Thus, a report in which an opinion is recorded should expose the reasoning of its author in a way that would demonstrate that the opinion is based on particular specialised knowledge …”

18. In Makita v Sprowles, Heydon JA stated, at [86], that evidence not complying with the principles referred to “might be inadmissible as irrelevant (s.56(2)), as not complying with s.79, or on discretionary grounds (s.135)”. 

19. In Quick v Stoland, Branson J pointed out at 373, in the context of considering similar submissions about Pownall’s case, that the admissibility of evidence is now governed, not by the common law but by the Evidence Act 1995. Chapter 3 of that Act deals with admissibility of evidence. Relevantly s.56(1) provides that “Except as otherwise provided by this Act, evidence that is relevant in a proceeding is admissible in the proceeding.” Subsection 56(2) provides that evidence that is not relevant in a proceeding is not admissible (see s.55(1) which defines relevant evidence as evidence that if it were accepted could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding.)

20. Part 3.3 of the Evidence Act 1995 deals with opinion evidence. While s.76(1) provides that “Evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed” this is subject to exceptions, relevantly that “If a person has specialised knowledge based on the person’s training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge (s.79)”. It is this provision which is relied upon by counsel for the Ferellas in support of the contention that the affidavit and report of Mr Chamberlain is admissible as an opinion based on specialised knowledge.

21. Section 80 provides that evidence of an opinion is not inadmissible only because it is about a fact in issue or an ultimate issue. However, as Heydon JA observed in Makita v Sprowles at [89] the Court is not bound is accept such evidence, even if uncontradicted, particularly where it is on ultimate issues (Brodie v Singleton Shire Council (2001) 75 ALJR 992 at [355] per Callinan J).

22. If evidence of opinion is admissible, s.60 of the Evidence Act 1995, (which does not reflect the common law) becomes relevant.  It provides “The hearsay rule does not apply to evidence of a previous representation that is admitted because it is relevant for a purpose other than proof of the fact intended to be asserted by the representation”.  In its final report on evidence, the Australian Law Reform Commission (ALRC Report No.26) acknowledged that the effect of such a provision would be that evidence relevant for a non-hearsay purpose (for example to prove the basis of an expert’s opinion) would be admissible also “as evidence of the facts stated” ALRC 26, vol 1, para 68).  See Welsh v R (1996) 90 A Crim R 364.

23. As Branson J pointed out in Quick v Stoland Pty Ltd at 373 – 374 the Evidence Act 1995 does not contain a provision that the admissibility of expert opinion depends upon proper disclosure and proof of the factual basis of the opinion. The ALRC considered that the general discretion of a court to refuse to admit evidence (see s.135 of the Evidence Act) was sufficient to deal with problems that might arise in respect of expert opinions the basis of which was not disclosed.  Her Honour also suggested (at 378) that “In cases where there is a genuine dispute as to relevant facts it might be expected that a court would ordinarily limit the operation of s.60 of the Act by exercising the power to limit the use to be made of evidence within s.136” and that even where s.136 of the Act is not invoked, the weight to be accorded to any particular evidence “remains a matter for the court.” 

24. Sections 135 and 136 the Evidence Act are as follows:

    General discretion to exclude evidence

    135. The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might:

    (a) be unfairly prejudicial to a party; or

    (b) be misleading or confusing; or

    (c) cause or result in undue waste of time.

    General discretion to limit use of evidence

    136. The court may limit the use to be made of evidence if there is a danger that a particular use of the evidence might:

    (a) be unfairly prejudicial to a party; or

    (b) be misleading or confusing.

25. In Quick v Stoland Emmett J (at 379) agreed with Branson J’s analysis of the scheme of the Evidence Act 1995. Finkelstein J suggested, at 382, that in many cases the ‘extraordinary effect’ of s.60 would be unfair to the party against whom the evidence is tendered. He continued:

    “For example, where the hearsay involves ‘facts’ that are in conflict or ‘facts’ that are unreliable it is quite unsatisfactory for those ‘facts’ to be proved by the operation of s.60.  One way in which this problem can be overcome is by an order under s.136 limiting the use to be made of that evidence.

26. There is no suggestion that Mr Chamberlain does not have specialised knowledge based on his training, study or experience (he is a chartered accountant and registered trustee in bankruptcy).  Mr Chamberlain’s report ‘as to solvency’ expressed an opinion as to the solvency of Gustavo Ferella and his capacity to pay his debts as and when they fell due, that he has no liabilities and that “as a consequence” Angelo Ferella “had no liabilities and was also solvent”. 

27. Initially it was contended that one reason the report was inadmissible was because it went to the ‘final issue’ for the court in the sense that the report addresses solvency, a fact in issue because s.52(2) of the Bankruptcy Act 1966 provides that the Court may dismiss a creditor’s petition if it is satisfied by the debtor that he is able to pay his debts (although at the same time issue was taken with the fact that the report refers to s.153B of the Act).  However as Austin J stated in Dean-Willcocks v Commonwealth Bank of Australia [2003] NSWSC 466 at [15] (also see Dyson v Pharmacy Board of New South Wales [2000] NSWSC 981 at [25] – [35] and Makita at [89]):

    “…the general position after the enactment of s.80 is that evidence going to an ultimate issue, which is tendered as expert opinion evidence, is admissible (subject to discretionary considerations) unless it is not relevant, or the witness does not have specialised expertise to support his or her opinion.”

1. Nor am I persuaded that the mere fact that the report refers to s.153B of itself renders it inadmissible.  There is authority in the context of s.153B that if a bankrupt can adduce evidence that he was solvent at the time of the hearing of the creditor’s petition the Court would ordinarily annul the bankruptcy subject to any discretionary factors weighing against making the order.  (See Estee Lauder Pty Ltd v Drew [1999] FCA 642). However, solvency is also relevant under s.52(2) of the Bankruptcy Act 1966.

2. More pertinently, an opinion is not admissible under s.79 unless the court is satisfied, on the balance of possibilities (s.142), that the opinion is based wholly or substantially on the expert’s specialised knowledge. In Quick v Stoland Emmett J at 381 expressed doubt as to whether the expression of opinion as to solvency in issue was substantially based on specialised knowledge or on matters such as examination and analysis of specific material and the inferences drawn from that material. Finkelstein J suggested (at 382 – 383) that if an accountant “seeks to do no more than state what is obvious” from certain books and records made available for his inspection “his evidence is not receivable”, although  Branson J at 375 considered the better view was that “other than in obvious cases a statement of a qualified accountant and insolvency practitioner, made on the basis of an examination of financial accounts and other company records, that a particular company is, or is not, insolvent is an expression of opinion.”  However her Honour went on to refer to the complexity of corporate accounts and corporate accounting practices suggesting that “persons with the training, study and experience of the kind enjoyed by [the expert in question] possess peculiar skills in an area which ‘inexperienced persons are unlikely to prove capable of forming a correct judgment upon it without such assistance’” (see Dixon CJ in Clarke v Ryan (1960) 103 CLR 486 at 491).

3. In this case the only examination of financial accounts on which Mr Chamberlain’s opinion is based is a reference to (but no assessment of) the amount stated to be “net assets” in the Financial Report for Cavallino Unit Trust.  There is no assessment of the assets of the debtors to determine the extent to which such assets are realisable within a time frame to allow debts to be paid as they become payable, or consideration of the cash flow of any business engaged in by the debtors or of the availability of borrowings.  Mr Chamberlain did not reconstruct or perform a detailed review of financial accounts.  He simply deducted the debts as at 14 October 2005 which had been disclosed to him from the assets disclosed, expressing an opinion as to solvency based on the amount of the net assets as disclosed, and stated that based on the indications the debts had been settled in full neither estate had any liabilities.  There is no suggestion that there is a question of accounting practice involved in the manner in which the amounts were determined.  There is nothing to suggest that Mr Chamberlain’s conclusion that if Gustavo Ferella was solvent so, as a consequence, was Angelo Ferella was based in any way on his training, study or experience or specialised knowledge as a qualified accountant and insolvency practitioner.  The report does not expose his reasoning process in this respect such as to demonstrate that this opinion was based on particular specialised knowledge (Ocean Marine v Jetopay at [23]).

4. In these circumstances I am not satisfied that Mr Chamberlain gave the evidence of an expert.  This is the sort of ‘obvious case’ (Branson J in Quick v Stoland at 375) in which the Court needs or derives no assistance in the assessment of solvency from such a report. The court is able to reach its own conclusions on the material relied upon. (See Switz Pty Ltd v Glowbind [1999] NSWSC 1296 at [35]). The ‘opinion’ evidence is not wholly or substantially based on specialised knowledge within s.79 of the Evidence Act 1995.  (See the discussions of the law in ASIC v Rich [2005] NSWSC 149 at [281] – [284] (reversed on appeal for other reasons in ASIC v Rich (2005) 218 ALR 764)).

5. I note further that there is authority that opinion evidence that is merely argument in support of a litigant’s case is not admissible under s.79 of the Evidence Act 1995 (notwithstanding s.80). Even though an accounting expert may give an opinion as to insolvency (Quick v Stoland and see ASIC v Vines (2003) 48 ACSR 291 at [27]) that part of Mr Chamberlain’s report that draws the inference that on the assumption Gustavo Ferella is solvent so consequently is Angelo Ferella is based not on the specialised knowledge of Mr Chamberlain but rather is “essentially an argument or submission in favour of an interpretation of the evidence” (ASIC v Rich [2005] NSWSC 149 at 286 per Austin J referring to Dean Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564). It consists of an “assertion, not apparently based on accounting expertise”: Evans Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171 at [674] per Allsop J. For the reasons given I reject the whole report.

6. Further, if I am wrong in finding that the report is inadmissible because s.79 of the Evidence Act is not satisfied, I would in any event exercise my discretion to exclude the evidence under s.135 of the Evidence Act 1995.  As contended for by the creditors, I am satisfied that the probative value of the report is substantially outweighed by the danger that the evidence might be unfairly prejudicial to the creditors.

7. If contrary to my view, the report is technically admissible, it is of sufficient probative value (see the definition in the Dictionary to the Evidence Act 1995) to come within s.55 as evidence of the facts stated and an opinion in relation to the critical issue of solvency, despite the fact that part of the opinion is essentially advocacy, having a minimum probative value. Taken at its highest I am satisfied, for the reasons given below that its probative value is substantially outweighed by the danger that it might be unfairly prejudicial to the creditors. Apart from the concern that the report addresses a fact in issue and was prepared for the purposes of a an application under s.153B of the Bankruptcy Act 1966, the objections raised by Mr Johnson to Mr Chamberlain’s affidavit and report relate primarily to the fact that the opinion was based on hearsay evidence and, to some extent, documentation not before the Court, that Mr Chamberlain was not available for cross-examination, that the report did not address materials filed in court by the creditor and that the opinion was expressed as based on ‘facts’ in dispute.  In these circumstances counsel for the creditor contended that there was a significant danger that the evidence might be unfairly prejudicial to the creditors if it was allowed into evidence.

8. Mr Chamberlain’s opinion is expressed on the basis that the facts are that the liabilities were limited to debts of $74,656 to the Otvosis and $9,754.79 to Woollahra Municipal Council, that these debts had been paid and that the respective estates had nil liabilities.  This is disputed by the creditors.  The debt to the Otvosis also includes interest not taken into account and the tender of payment has not been accepted.  There is evidence before the Court that the debts are not limited to those taken into account by Mr Chamberlain.  Further, the ‘facts’ relied on by Mr Chamberlain as to the ownership, encumbrance and value of properties and assets are ‘facts’ which are not all otherwise in evidence before the Court, are in some respects hearsay evidence, conflict in part with the evidence of Angelo Ferella or are disputed. 

9. Mr Chamberlain was not made available for cross-examination on the hearing day.  He was not asked to express his opinion in answer to a hypothetical question leaving it to the debtor to prove the facts on which the opinion was based (see Quick v Stoland at 382 per Finkelstein J).  The other evidence the debtor put before the Court did not prove all the ‘facts’ relied on by Mr Chamberlain in expressing his opinion.  There was no evidence as to his financial affairs from Gustavo Ferella before the Court.  The report relied on the statements of affairs for both Ferellas.  Neither statement was before the Court.  The Cavallino Unit Trust Financial Report for the year ended 30 June 2005 was also relied upon.  It has not been adopted by the trustees.  Mr Chamberlain relied on ‘kerbside’ letters from real estate agents about possible sale prices for properties.  These are not valuations and are not otherwise before the Court.  In any event, Angelo Ferella suggested different values for such properties.  Mr Chamberlain stated that certain property was unencumbered (except for a caveat) despite the fact that the copy title search for one of those properties annexed to his report referred to a mortgage to Perpetual Trustee Company Ltd.  There was no evidence on this issue otherwise put before the Court.  A reference was made to a joint interest of Gustavo Ferella in a bank account in relation to which a partial statement was annexed.  There was no explanation for why Mr Chamberlain relied on the credit balance at

   
   

   2 December 2005 in relation to solvency at 14 October 2005. 

10. The creditors did not have the opportunity to test the evidence presented in the report and on which it relied, including hearsay evidence (see Roach v Page (No.11) [2003] NSWSC 907 at [34] and at [74] per Sperling J and cases cited therein). It is unfair, in the sense referred to by Finkelstein J in Quick v Stoland, that Mr Chamberlain’s reliance on ‘facts’ not proved before the Court should by virtue of s.60 mean that his account of these ‘facts’ is to be taken as evidence of the truth of the facts so stated. The facts stated are disputed or contentious. In these circumstances there is a danger (which substantially outweighs the probative value of the evidence) that use of the evidence not only as opinion evidence but also to establish the truth of the ‘facts’ relied on by Mr Chamberlain not otherwise before the Court or in dispute might, taken together with the other difficulties with the report outlined above, be unfairly prejudicial to the creditors. Even if it is technically admissible the whole of the report and affidavit should be excluded under s.135 of the Evidence Act 1995.

Whether debtor able to pay his debts

1. As Counsel for the creditors contended, on proof of the matters in s.52(1) the petitioning creditor had a prima facie right to a sequestration order. However I have had regard to whether I am satisfied by the debtor that he is able to pay his debts or that for other sufficient cause a sequestration order ought not to be made (s.52(2)).

2. Counsel for the Ferellas accepted that Angelo Ferella had no assets and that he would have to rely on his parents to comply with any obligations he may have in regard to liabilities but nonetheless submitted that I should be satisfied that he was able to pay his debts. This raises a number of issues. First there is the question of whether “being able to pay his debts” in s.52(2)(a) includes an ability to pay debts from the money of other people. Secondly there is the question of whether the evidence establishes a willingness and ability on the part of his parents to meet Angelo Ferella’s liabilities. Associated with this question is the issue of identification of the liabilities of Angelo Ferella and the assets and liabilities of his parents.

3. It is not disputed that if the debtor is in a position to pay all the debts he owes within a reasonable time he ought not to be subject to a sequestration order (Re Sarena; Ex parte Wollondilly Shire Council (1980) 43 FLR 163 and Sarena v Wollondilly Shire Council (1980) 48 FLR 372 at 376). Moreover the funds treated as being available to a debtor to pay his debts for solvency purpose:

   “… are not limited to his cash resources immediately available.  They extend to moneys which he can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short period – relative to the size and amounts of the debts and to the circumstances, including the nature of the business of the debtor” : Sandell v Porter (1966) 115 CLR 666 at 670.

4. The onus of proving that his assets are sufficient to pay his debts within the meaning of s.52(2)(a) lies on the debtor. It is necessary to take into account not only existing debts but also debts which will fall due within the reasonably immediate future pursuant to existing obligations. (Australia & New Zealand Banking Group v Foyster (2000) FCA 400 at [19] per Hely J).

5. There is authority that s.52(2)(a) of the Act requires proof by the debtor of an ability to pay, from his own money, his debts when they become payable (see International Alpaca Management Limited v Ensor (1999) FCA 72 at [18] per Katz J) despite the absence of the words “from the debtor’s own money”. However as Katz J pointed out at [19]:

   … even if para 52(2)(a) of the Act were to be construed as only requiring the debtor to prove an ability to pay his debts presently payable and that from any money, whether his own or other people’s, it is clear that proof of the matter set out in para 52(2)(a) of the Act does not entitle the debtor to the dismissal of the petition; it only enlivens the Court’s discretion under subs.52(2) of the Act to dismiss the petition: Sarena v Wollondilly SC (1980) 48 FLR 372 at 376-77 (Bowen CJ and CA Sweeney and Lockhardt JJ). On the narrower construction of par 52(2)(a) of the Act which I am hypothesising in this paragraph of my reasons, relevant considerations in the exercise of the discretion under subs.52(2) of the Act would, in my view, nevertheless be whether the debtor also has the ability to pay debts becoming payable in the reasonably immediate future and whether the debtor has the ability to pay the debtor’s debts from the debtor’s own money. That being so, the two matters which I have just mentioned would remain of importance in the determination of the present petition, even on a narrow construction of par 52(2)(a) of the Act.

6. In Lewis v Doran (2004) 184 FLR 454 at [116] Palmer J of the NSW Supreme Court suggested in the context of s.95A of the Corporations Act 2001 (which lacks the words ‘from its own money’) that it was not necessary in order to assess solvency for the purposes of the Corporations Act 2001 to ascertain whether the company is able to pay all of its debts “from its own moneys”.  Rather that provision was said to require the court to decide whether the company was able as at the alleged date of insolvency to pay all of its debts as they became payable:

   “by reference to the commercial reality.  If the Court is satisfied that as a matter of commercial reality the company has a resource available to pay all of its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party”. 

   Cf Harrison v Lewis (2001) 19 ACLC 566 at 579 per Mandie J.

7. If the narrow view is taken that a debtor must be able to pay, from his own money, his debts when they become payable, Angelo Ferella has not established that he has such ability.  He told the court that he had no income.  He did not claim to have any property divisible in bankruptcy.  This is consistent with information he provided to the Supreme Court of New South Wales on 30 September 2005 in connection with an application to pay the judgment debt of the Otvosis by instalments.  He disclosed no assets to the Court.  Counsel for Angelo Ferella conceded in oral submissions that Angelo Ferella had no assets or income and that he would rely on his parents to comply with any obligations.  On this basis he has not satisfied the Court that he is able to pay his debts from his own money.

8. However, even if one assesses the debtor’s ability to pay his debts as a matter of ‘commercial reality’ as suggested in Lewis v Doran, the evidence before the Court as to Mr Ferella’s ability to pay his debts within s.52(2)(a) is not persuasive. In a financial statement of

   
   

   30 September 2005 prepared in connection with an application to pay the creditors’ debt by instalments he stated that he was ‘supported by parent’.  Interestingly, in an application for finance from Champion Financial Mr Ferella claimed he did receive an income from rent (apparently on the basis that trust income had been applied to mortgage payments in the past.)  However he told the Court his expenses were met by his mother and father.

9. In cross-examination Angelo Ferella told the Court that money to pay a particular liability would come out of his mother’s bank account by way of gift.  However he did not have a right to draw on his mother’s account.  He also told the Court that he had not discussed this with his mother.  He told the court that the $74,656 for the cheque sent to the creditors’ solicitors was a gift to himself and his father from his mother’s sole account (being income from the Modena Unit Trust of which she was a trustee and of which he was not a beneficiary).  Yet, in re-examination he said that he had ‘not really’ discussed with his mother the basis upon which money had been given to pay some of the debts.  When asked if there was an understanding that the money was to be repaid he stated “Not at this time no, it was simply as an issue there, here’s the money, get out of this mess”.

10. There is no evidence from Angelo Ferella’s mother as to her financial situation and no evidence, other than that of Angelo Ferella, as to her willingness or ability to meet her son’s (or her husband’s) liabilities.  This evidence does not satisfy me that Angelo Ferella’s mother is willing, whether or not she is able, to meet her son’s or her husband’s debts.  Angelo Ferella’s father, Gustavo Ferella, is also bankrupt (a matter considered in Gustavo Ferella v Otvosi & Ors [2006] FMCA 334) but in any event he has not provided the Court with any affidavit evidence as to his financial position or his willingness or ability to meet his own or his son’s liabilities. It has not been established that as at 14 October 2005 Gustavo Ferella was able to pay his debts or that he is now able to do so within s.52(2)(a) of Bankruptcy Act 1966 (as to which see my judgment in Gustavo Ferella v Otvosi & Ors [2006] FMCA 334) or that as a consequence Angelo Ferella was or is solvent at such times. Indeed even if Gustavo Ferella was, contrary to my view, able to pay his debts, it would not follow that Angelo Ferella was solvent.

11. Moreover, in the course of these proceedings evidence emerged of actual and possible liabilities of Angelo Ferella (some of which are also liabilities of Gustavo Ferella) beyond those disclosed in his affidavit evidence. Neither his nor his father’s statement of affairs was in evidence, but he conceded in cross-examination that certain matters had not been disclosed to the Trustee in Bankruptcy. This is relevant not only to the exercise of the discretion to dismiss a petition but also because in determining whether the debtor is able to pay his debts under s.52(2)(a) the Court should be satisfied either that no debts of the debtor will become payable in the reasonably immediate future or that if they will the debtor will be able to pay them (International Alpaca Management Limited v Ensor at [8] – [10] and [31]). As Bennett J stated in Re Sanders; Knudson & Yates (T/A The Hargreaves Practice) v Sanders (2003) FCA 1079 at [27] s.52 requires account to be taken of debts “which will fall due in the reasonably immediate future pursuant to existing obligations”.

12. First, as discussed above the cheque provided to the petitioning creditors was not for the whole of the debt.  It did not include interest.  There is no evidence as to Mr Ferella’s ability to pay the outstanding amount.  On the evidence before me it is not appropriate to infer that as a matter of commercial reality Angelo Ferella can borrow further money from his mother (or from his father) given the absence of evidence from either parent.

1. In any event, the fact that a cheque for $74,656 was sent to the Otvosis and $9,754.79 to Woollahra Municipal Council does not establish that either or both of Gustavo Ferella or Angelo Ferella have met all of their outstanding liabilities.  For the reasons set out below  I am not satisfied that Angelo Ferella’s liabilities at the time of the sequestration order were limited to $74,656 owed to the Otvosis and $9,754.79 owed to Woollahra Municipal Council.

2. In an affidavit sworn on 28 October 2005 by Leslie Michael Steven Pozniak, the solicitor for the creditors, reference is made to correspondence from the solicitors for Woollahra Municipal Council of 27 October 2005.  That letter stated that Angelo Ferella’s debt to Woollahra Council consisted not only of the $9,754.79 discussed above but also included a liability for costs currently being assessed by the Supreme Court in the amounts of $6,328 and $20,814.  In cross-examination Mr Ferella agreed that he had not disclosed these liabilities to his trustee.  He claimed he did not know he was supposed to do so as the bills were to be ‘resolved’ an objection having been lodged in each instance.  There is apparently ongoing litigation with Woollahra Council.  Angelo and Gustavo Ferella have authorised Mrs Ferella to conduct the proceedings.

3. Bankruptcy notices were issued by Gadens Lawyers Sydney Pty Ltd against both Mr Ferellas in respect of a debt of $38,124.24 based on a judgment of the Local Court dated 9 June 2005.  In his affidavit evidence Angelo Ferella referred to a ‘dispute’ with Gadens, stated that he had filed an application to set aside the default judgment and that ‘no money is owed’ to Gadens.  In cross-examination he stated that he would not be paying this amount and did not recognise this as a debt.  Despite this there is clearly a present, albeit disputed, liability to Gadens.

4. Contrary to his current suggestion that his parents can and will meet his liabilities, in an affidavit sworn 17 October 2005 Angelo Ferella referred to the application to the Supreme Court of 30 September 2005 to pay the debt to the petitioning creditors by instalments and stated:

   “The instalment offer outlined in the application to pay by instalments is to come from income generated by a family entity which is involved in the building industry.  The company has been trading since 2002 and throughout this period the company has been trading solvent and is able to pay all debts company related or not.”

5. Annexed was a financial report for the year ended 30 June 2005 for Riva Industries Pty Ltd.  Mr Ferella attested that the profit and loss of the company and its balance sheet would be ‘better’ for the 2006 financial year.  However a search of the ASIC database annexed to an affidavit of Mr Pozniak of 28 October 2005 listed a current petitioner court action instituted by United Concrete Pty Ltd on 9 August 2005 and a notification of an application of that date to wind up the company Riva Industries Pty Ltd.  Angelo Ferella was listed as shareholder. 

   
   

   Mr Ferella’s affidavit of 17 October 2005 made no mention of such proceedings.  Subsequently, in his affidavit of 1 December 2005

   
   

   Mr Ferella stated that he had made an application to the Supreme Court to ‘set aside and terminate a wind up petition for Riva Industries Pty Ltd’.  In cross-examination Mr Ferella agreed that a winding up order was made against Riva Industries Pty Ltd on 1 November 2005 on the basis of the petition lodged in August 2005 by United Concrete Pty Ltd.  He said that the debt claimed to be due to United Concrete was ‘some 20 odd thousand’ and that he could not recall if he had given a guarantee for that debt but it was ‘possible’.  He agreed that the other creditor of Riva Industries Pty Ltd reflected in the report as to affairs of the company was Australian Boom & Scissor Lift Hire (ABSL).  He stated that he could not recall if he had given a guarantee of the company’s debt to ABSL.  He was shown a copy of a letter to ITSA dated 13 December 2005 from Matthews Folbigg, solicitor for ABSL, which was tendered in court and which stated that ABSL was a creditor of Angelo Ferella pursuant to a judgment of 1 June 2005 for $1,770.28 and that a writ of execution had issued on 17 June 2005 for $1,962.94 (which included costs).  Mr Ferella denied he was indebted to ABSL.  However, it is clear that ABSL claims to be a creditor of Mr Ferella pursuant to a judgment.  This evidence reveals limits to the disclosure made by Angelo Ferella prior to matters being put in evidence by the creditors.

6. Mr Ferella was also asked about his involvement with Ferell Industries Pty Ltd, a company which was wound up (as a result of action by the Deputy of Commissioner of Taxation) on 17 December 2004.  Angelo Ferella was the sole director and shareholder according to an extract from a company search annexed to the affidavit of Mr Pozniak of

   
   

   28 October 2005.  Mr Ferella recalled that he may have received a director’s penalty notice but could not recall the details and disputed that he had a debt to the ATO.  His recollection was that the alleged debt of the company to the ATO was some 280-odd thousand (and interest which may have increased the debt to about $400,000) but could not recall the amount in the director’s penalty notice.  He had not disclosed his directorship in Ferell Industries to his trustee in bankruptcy because he ‘forgot’.  He claimed his father ceased to be a director of this company before the period to which the penalty notice related, but no details were provided in this respect.

7. Mr Ferella was also asked if he had a debt to his former solicitors Klimt & Associates.  He agreed that he owed them money for representing himself and his father.  He stated he could not recall if he had received a bill but certainly not for recent legal work.  He also agreed that he owed another firm of solicitors, Gordon & Johnson, a couple of thousand dollars for services for himself and his father which because it was ‘on account’, had not been paid yet.  He suggested this bill would be paid by his mother but he had not discussed this with her.

8. In addition to the debt relied on in the bankruptcy notice issued by the petitioning creditors, there is evidence before the Court of a potential liability of Angelo and Gustavo Ferella for further costs in Supreme Court proceedings 2583 of 2003.  As detailed in Otvosi & Anor v Angelo Ferella (No.2) [2005] FMCA 1647 the Ferellas were unsuccessful in proceedings which resulted in a judgment of Hamilton J on 23 September 2005 in which his Honour found that the Otvosis were entitled to an injunction restraining the construction of a development by the Ferellas on land at Point Piper which they own as trustees for the Cavallino Unit Trust. His Honour stated that he would appoint a time for short minutes to be brought in and for any question as to costs to be raised. However the sequestration orders intervened. Mr Ferella claims he intends to appeal the decision of Hamilton J.

9. Further issues arise in relation to Point Piper and Kings Park properties initially said to be owned by Angelo and Gustavo Ferella (consistent with a certificate of title annexed to the affidavit sworn on 1 November 2005 by Angelo Ferella).  However in his affidavit of 6 December 2006 Angelo Ferella stated these properties were owned jointly by him with Gustavo and Nida Ferella.  It is claimed that this property is owned by the Ferellas as trustees for the Cavallino Unit Trust.  It was not suggested by Counsel for the Ferellas that their interest in the Cavallino Unit Trust affected the issue of their solvency.  However in his affidavit of 25 October 2005 Angelo Ferella stated that he could use funds from a proposed advance to be secured on this property, not only to build and construct a project, but also to pay the debt owed to the petitioning creditors.  Such proposed refinancing did not proceed.

10. The evidence is not such as to satisfy me that the debtor could meet his debts in this manner.  Mr Ferella claimed that he and his parents were the beneficiaries of the Cavallino Unit Trust (formerly the Ferella Unit Trust) which owns the Point Piper property and a property at Kings Park.  In his affidavit of 6 December 2005 Mr Ferella annexed a June 2004 valuation of the Point Piper property at $8.5million.  However since that time the Otvosis have enforced a restrictive covenant that prevents development in accordance with a development approval.  There is no evidence of the current value of this property before the court.  In any event the property was mortgaged for $4.3million to Eclipse Prudent Mortgages Ltd.  Mr Ferella disputed that they were in default under this loan and claimed that the loan facility had been extended but then terminated due to the bankruptcy proceedings.  There is no evidence before the Court, other than Mr Ferella’s assertion, that the Eclipse loan was extended beyond the due date of

    
    

    30 July 2005. A letter tendered in court from the Ferellas to Eclipse dated 28 July 2005 refers to an application for a further mortgage advance to Angelo and Gustavo Ferella ‘ATF Modena Unit Trust’ (sic). This did not proceed. However, annexed to the affidavit of Mr Pozniak of 1 December 2005 is a letter from Eclipse Prudent Mortgage Corporation Ltd dated 22 November 2005 stating that the borrowers Angelo and Gustavo Ferella were in breach of the mortgage (which was to Key Nominees Pty Ltd). A notice of demand under s.57(2)(b) of the Real Property Act 1900 (NSW) was issued by post on 30 August 2005 and served on each of Angelo and Gustavo Ferella by delivery to an occupant of a Kings Park address on 7 October 2005. This letter also confirmed that while Eclipse had previously issued an offer for a new loan over the Kings Park property, that offer had been withdrawn.

11. Mr Ferella stated that he intended to refinance the mortgage.  He sought finance from Champion Financial.  As indicated above, in cross-examination he first told the Court that he did not have an income from rental properties to draw on.  However he conceded that he had stated (in the loan application to Champion Financial for a loan of $6,300,000) that he received a monthly income from ‘rents’.  A copy of this loan application is annexed to the affidavit of Mr Pozniak of

    
    

    1 December 2005.  In it Mr Ferella was described as a self-employed builder and claimed to receive a monthly income of $13,500.  When asked about his claim to receive income he stated that the income ‘was to be received’ because that particular application was for a capitalised loan ‘which meant all the income from the trust would then be met to the trustees’.  In any event, a letter from Champion Financial to the creditors’ solicitors confirmed that the loan to the Cavallino Unit Trust was not proceeding and that the borrowers did not comply with terms and conditions attached to a letter of offer dated 28 October 2005.

12. It is also relevant that Mr Ferella indicated in his affidavit of

    
    

    1 November 2005 that half the interest under the mortgage to Eclipse was paid by the rental income generated by the Kings Park property (the other trust property) and the balance by Gustavo and by Angelo Ferella ‘relating to building and construction works undertaken by myself’. While Angelo Ferella stated in cross-examination that his father had money in a bank account from money in the trust and from income generated from other rental properties, there is insufficient evidence put before the court by the Ferellas as to the extent of such funds as well as the liabilities which have to be met from such funds to satisfy me that having regard to such claimed income either Mr Ferella is able to pay his debts within s.52(2)(a). The reference to earnings from building and construction works undertaken by Angelo Ferella has not been explained and conflicts with Angelo Ferella’s claim that he has no income.

13. Finally, on 31 January 2006 the solicitors for the petitioning creditors sought to re-open the proceedings to bring to the attention of the Court a creditor of both Ferellas in existence at the date of bankruptcy said not to have been disclosed in either the respective statements of affairs or in the affidavit evidence before me.  The matter was listed on

    
    

    6 February 2006.  Leave was granted and orders were made for the filing of further evidence.  The parties were given an opportunity for a further hearing on 17 February 2006.  On 9 February 2006 an affidavit of Mr Pozniak was sworn and filed which annexed copies of bankruptcy notices issued by AMT Engineers Pty Ltd against Angelo and Gustavo Ferella – each based on a certificate as to determination of costs issued in the Supreme Court of New South Wales proceedings no.90478 of 2005 in the sum of $139,396.78 on 26 July 2005 and an order of the District Court of New South Wales in proceedings 4349 of 2005 dated 10 October 2005 that the plaintiff recover against the defendants (Angelo and Gustavo Ferella as trustees for Cavallino Unit Trust) $139,396.78 on its claim.

14. It was submitted for the creditors, and I agree, that a real issue arose in the context of discretionary considerations on solvency and concern about disclosure of the existence of creditors which were known or ought to have been known at the date of the hearing.

15. In an affidavit of 14 February 2006 Angelo Ferella stated that these bankruptcy notices were served on the evening of 14 December 2005, that the debts arose out of costs in a District Court action completed over a year earlier, that they had ‘heard nothing’ about the matter since that time, that there was no indication that costs were going to be pursued and the matter had ‘largely been forgotten’.  It was further claimed that the first the Ferellas became aware of the requirement for payment was on receipt of the bankruptcy notices. 

16. It was submitted that the further information did not advance the matter and that if it was accepted that the assets of Gustavo Ferella were sufficient to meet all debts within a short period of time then a sequestration order should not be made simply because there was a refusal to pay, that discretionary considerations applied only to the question of annulment and that as the debts were joint and the affairs run jointly, Angelo Ferella should have the benefit of the ability of his father to pay his debts.  Alternatively, the sequestration order against Gustavo Ferella should be set aside, if not that for Angelo Ferella.

17. However it is clear that the liability for costs arose prior to the date of bankruptcy and that Mr Ferella was made aware of the application for assessment of costs.  In an affidavit sworn and filed on 16 February 2005 by Peter Ewan Kennedy, solicitor for AMT Engineers Pty Ltd, details are provided of proceedings for recovery of costs following District Court proceedings in which judgment was given on 27 April 2004.  On 13 August 2004 a costs order was made against the Ferellas (who were served with the notice of motion seeking costs and represented at the hearing of the motion).  The affidavit details the subsequent dismissal on 3 December 2004 of a stay application filed by Angelo Ferella and personal service on the Ferellas of the application for assessment of costs and other documents on 8 March 2005 and subsequent correspondence from April to July 2005 about the assessment sent or copied to Angelo and Gustavo Ferella (including a reference to a facsimile from Angelo Ferella of 11 May 2005 to the costs assessor) and the notification of the assessment dated 26 July 2005. 

18. The emergence of this undisclosed unsatisfied substantial debt reinforces my conclusion that neither Mr Ferella has made a full disclosure to the Court of his financial affairs. In all the circumstances Mr Ferella has not satisfied the Court that he could or can pay his debts within s.52(2)(a) and in any event in such circumstances I consider it inappropriate to exercise the discretion to dismiss the creditor’s petition.

Whether other sufficient cause

1. I have also considered s.52(2)(b). The fact that the debtor tendered to the petitioning creditors part of the debt (and paid an amount to Woollahra Municipal Council) is not of itself ‘sufficient cause’ within s.52(2)(b). As discussed above, the creditors would have been entitled to refuse such tender even if it had occurred before the sequestration order was made. The purported tender by the debtor was not a tender of the entire amount outstanding to the creditors in accordance with the final judgment or order as at 14 October 2005 (the date of the sequestration order) or as they may be entitled to in accordance with the statutory scheme under the Bankruptcy Act 1966, after that date.  Such tender did not take into account debts due to other creditors.  As discussed above, on the evidence before the Court I am not satisfied that Mr Ferella’s debts were limited to the two in relation to which a payment was tendered.

2. In cross-examination Mr Ferella suggested that the original sequestration order should not have been made as he did not have legal representation. I am not persuaded that this constitutes other sufficient cause within s.52(2). As the Full Court of the Federal Court stated in Love v Pattison [1998] FCA 967 at pp 5 – 6 per Branson, Sackville and Finkelstein JJ there is no right in Australia for a party to be represented in a civil proceeding.

3. Nor is this a case in which I am convinced on all the evidence before me that there cannot be any assets available for disposition so that a sequestration order would be a waste of money (cf Re Betts; Ex parte Betts [1897] 1 QBSO).  Given the lack of complete disclosure and inconsistencies that have emerged, this may well be a case where as in Radich v Bankruptcy of New Zealand (1993) 45 FCR 101 at 112 “it may only be after sequestration with a full examination by a trustee in bankruptcy … that assets come to light.”

4. The evidence of the debtor does not satisfy me that there is any other sufficient cause to exercise the discretion to set aside the sequestration order. I am satisfied that the requirements of the Act including the matters to be proved under s.52 have been established. The orders made by the Registrar should be confirmed. The application for review of the Registrar’s orders made on 14 October 2005 should be dismissed with costs.

I certify that the preceding ninety (90) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate:

Date:  10 March 2006.