Banks-Walker v Vince
[2016] FCCA 2750
•28 October 2016
FEDERAL CIRCUIT COURT OF AUSTRALIA
| BANKS-WALKER v VINCE & ORS | [2016] FCCA 2750 |
| Catchwords: BANKRUPTCY – Application for annulment of debtor’s petition on the grounds that it ought not to have been presented – credibility of bankrupt – bankrupt admitting extended involvement in fraud and forgery – whether bankrupt solvent at time debtor’s petition filed. |
| Legislation: Bankruptcy Act 1966 ss.58(3), 153A and 153B Corporations Act 2001 ss.588H(2), (3) and (4) |
| Cases cited: Bulic v Commonwealth Bank of Australia Ltd [2007] FCA 307 Coyle, Re (1993) 42 FCR 72; (1993) 120 ALR 527 Drake v Jones [2009] FMCA 298 Estate of Smith, Re [1999] FCA 1755 Papps v Tapp(1997) 78 FCR 524 |
| Applicant: | MATTHEW BANKS-WALKER |
| First Respondent: | PETER ROBERT VINCE |
| Second Respondent: | DANIELLE JANINE ROCHE |
| Supporting Creditor: | STEPHEN JOHN MICHELL |
| File number: | MLG 1108 of 2016 |
| Judgment of: | Judge Riley |
| Hearing date: | 16 September 2016 |
| Date of last submission: | 16 September 2016 |
| Delivered at: | Melbourne |
| Delivered on: | 28 October 2016 |
REPRESENTATION
| Counsel for the applicant: | John K. Arthur |
| Solicitors for the applicant: | Mackinnon Jacobs Lawyers |
| Counsel for the respondents: | Daniel C. Harrison |
| Solicitors for the respondents: | Lewis Holdway Lawyers |
| Advocate for the supporting creditor: | Ivan Hristovski |
| Solicitors for the supporting creditor: | Gadens Lawyers |
ORDERS
The application filed on 26 May 2016 and amended on 16 September 2016 be dismissed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 1108 of 2016
| MATTHEW BANKS-WALKER |
Applicant
And
| PETER ROBERT VINCE |
First Respondent
And
| DANIELLE JANINE ROCHE |
Second Respondent
And
| STEPHEN JOHN MICHELL |
Supporting Creditor
REASONS FOR JUDGMENT
Introduction
This is an application for annulment of a bankruptcy pursuant to s.153B of the Bankruptcy Act 1966 (“the Act”). The application was brought by the bankrupt. He became bankrupt upon the presentation of a debtor’s petition on 2 December 2015. The respondents were appointed as trustees of the bankrupt estate of the bankrupt.
Section 153B of the Act relevantly provides as follows:
(1)If the Court is satisfied that…, in the case of a debtor's petition, that the petition ought not to have been presented … the Court may make an order annulling the bankruptcy.
(2)In the case of a debtor's petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented.
The applicant’s grounds, as set out in his application filed on 26 May 2016 and amended by leave granted on 16 September 2016, are as follows:
1.An order annulling the Applicant’s bankruptcy pursuant to s. 153B Bankruptcy Act 1966 (Cth.) on the grounds that the debtor’s petition ought not to have been presented to the Official Receiver by reason that:
(a)the debtor’s petition amounted to an abuse of process as, properly advised, the applicant would not have presented it and he was solvent;
(b) the Applicant was not insolvent; and
(c)in the Court’s discretion the bankruptcy ought to be annulled.
Essentially, the bankrupt argued that:
a)he was poorly advised by the first respondent to file a debtor’s petition when he could have defended the claims of his creditors;
b)he had a good defence to the call on the guarantee from Macquarie Leasing (CB122) because he did not actually sign the guarantee or the loan contract that appear to bear his signature; and
c)the first respondent had a conflict of interest because he advised the bankrupt to file a debtor’s petition on the basis that he would become the trustee in bankruptcy and thereby earn fees.
Statement of affairs
The bankrupt filed a statement of affairs in which he indicated that, on the positive side:
a)he had an annual income of $90,000;
b)he had about $176 in bank accounts;
c)he was owed a tax refund of $8,000;
d)he had superannuation of $60,000; and
e)he had a car worth $6,000.
On the negative side, the bankrupt’s statement of affairs indicated that:
a)he had a secured debt of $29,000 owed to People’s Choice Credit Union in respect of a car driven by his wife; and
b)he had unsecured debts as follows:
i)$120,000 (estimated) owed to Macquarie Leasing in respect of a contingent liability for a chattel mortgage;
ii)$1 (actual amount unknown) owed to Blackwood Financial Services in respect of a personal loan;
iii)$1 (actual amount unknown) owed to Escape Travel (Aus) Pty Ltd (“Escape Travel”); and
iv)$151,000 owed to NFA Investment Group Pty Ltd (in liq) (“NFA”) in relation to an insolvent trading claim.
The bankrupt’s first affidavit
The bankrupt said in his affidavit sworn on 25 May 2016 that:
a)his unsecured debts arose as a result of him being embroiled in the activities of Robert Zaia (“Zaia”), Scott Arthur, Bill Jordanou (“Jordanou”) and the accountancy and financial services firm, Zaia Arthur and Associates;
b)Zaia and Jordanou are currently facing criminal charges;
c)it is alleged by the prosecution that Zaia and Jordanou used false documents to obtain loans from financial institutions and submitted false Business Activity Statements to the Australian Taxation Office (“ATO”) to obtain GST refunds;
d)Zaia appointed the bankrupt without his knowledge or consent as a director and secretary of NFA;
e)the insolvent trading claim, being the $151,000 claimed from the bankrupt by the liquidator of NFA, arose from Zaia, Jordanou and Zaia Arthur and Associates engaging in a fraudulent scheme utilising NFA;
f)in 2001, the bankrupt was working in the automotive sales industry and began a home theatre installation business which he operated out of normal business hours;
g)the bankrupt met Zaia through family members;
h)in 2006, left his job in the automotive sales industry and had difficulty finding new employment;
i)Zaia offered the bankrupt employment at Zaia Arthur and Associates;
j)the bankrupt began working with Zaia Arthur and Associates in August 2006 doing general office work;
k)he left in April 2008 to work in an online home theatre business;
l)in 2010, he decided to set up a business importing audio-visual cabling and sought Zaia’s advice;
m)Zaia asked to be involved and the bankrupt agreed;
n)a company called The Cable Connection Co Pty Ltd (“Cable Connection”) was established with the bankrupt as the director, secretary and 50% shareholder and Zaia and Jordanou holding the other 50% of the shares through a company;
o)Zaia and Jordanou contributed $50,000 as capital and provided Cable Connection with space in the offices of Zaia Arthur and Associates, rent free;
p)Cable Connection began operating in January 2011;
q)in February or March 2011, Zaia told the bankrupt that:
i)to assist with a property development that he was undertaking, he wanted to buy a Porsche for a person called Daniel Emery (“Emery”);
ii)Zaia wanted to buy the Porsche through a company, which was eventually called NFA Investments Pty Ltd;
iii)Zaia wanted the bankrupt to be the “go to guy” for NFA and the finance application for the Porsche;
iv)in exchange for his help, Zaia would give the bankrupt a block of land in the property development;
v)there would be some documents to sign but the bankrupt would have no personal liability;
vi)the finance application for the Porsche was made but it was unsuccessful;
r)Zaia and Jordanou then made a finance application to Macquarie Leasing through NFA for a Mercedes Benz;
s)they used the bankrupt’s financial details which had been falsified;
t)the bankrupt did not consent to his financial details being used or being falsified;
u)the Macquarie Leasing documents purportedly show that:
i)the bankrupt was a guarantor of a loan to NFA;
ii)the bankrupt executed the documents on behalf of NFA as its director; and
iii)the bankrupt executed the documents in his personal capacity as a guarantor;
v)the bankrupt did not sign the Macquarie Leasing documents and the signatures purporting to be his were not written by him or with his authority;
w)the bankrupt did not consent to being a director or shareholder of NFA and, as far as he was aware, did not sign any documents for those purposes;
x)at Zaia’s direction, the bankrupt opened a bank account in the name of NFA, but did not undertake any transactions on behalf of NFA, as they were all done by Zaia;
y)in October 2011, about four months after the Mercedes was bought, Macquarie Leasing rang the bankrupt to say that the loan was in arrears;
z)the bankrupt raised this with Zaia and the loan was brought up to date;
aa)other than checking that there were sufficient funds to meet the loan repayments, the bankrupt had nothing to do with the finances of NFA;
bb)the bankrupt had no knowledge of the fraudulent scheme by which Zaia, Arthur and Jordanou obtained GST refunds through NFA;
cc)the first the bankrupt knew about him being a director of NFA was in May or June 2012 when a finance broker named David Cowen (“Cowen”) told him he was a director of NFA in the context of NFA’s loan application for $3.5 million to buy land for the purposes of a property development;
dd)the bankrupt did not, at the time, check whether what Cowen had told him was correct;
ee)Cowen told the bankrupt he was about to sign a personal guarantee for a $3.5 million loan to NFA for a property development;
ff)the bankrupt told Cowen he would not sign the guarantee;
gg)consequently, the loan was not approved;
hh)Emery blamed the bankrupt for the loan not being approved and threatened to “smash up” the Mercedes;
ii)the Mercedes was written off shortly afterwards;
jj)on 9 June 2012, Macquarie Leasing sent the bankrupt a letter of demand in respect of the outstanding loan repayments due on the Mercedes, which then amounted to $25,005;
kk)the bankrupt has not been served with any documents in respect of the Macquarie Leasing claim other than the letter of demand dated 9 June 2012;
ll)NFA was placed into liquidation on 26 July 2013 and Stephen John Michell (“Michell”) of PCI Partners was appointed as the liquidator;
mm)on 30 July 2013, the bankrupt received a letter from Michell asking him to deliver up any property of NFA and attend an interview;
nn)the bankrupt’s solicitor replied by letter dated 5 August 2013 saying that the bankrupt had no property of NFA, had never acted as a director and he had only consented to the appointment as Zaia requested his co-operation;
oo)the statement that the bankrupt had consented to being appointed was a mistake made by the bankrupt’s then solicitor, Mr O’Neill;
pp)on 29 May 2014, after he had been pursued for traffic infringements relating to a car registered in the name of NFA, the bankrupt filed a form 377 with ASIC saying that he had never consented to being a director, the secretary or a shareholder of NFA;
qq)the bankrupt filed the same form in respect of Escape Travel after discovering that he had been appointed as a director and secretary of that company without his knowledge or consent;
rr)on 5 November 2015, PCI Partners demanded $151,779.58 from the bankrupt on the basis that he was the director of NFA and it had engaged in insolvent trading;
ss)the bankrupt’s solicitor advised him to obtain advice from an insolvency expert;
tt)on 25 November 2015, the bankrupt and his wife met with the first respondent in his office and told him:
i)he had been an employee of Zaia Arthur and Associates for about two years, between 2005 and 2008;
ii)Zaia, Jordanou and others were facing fraud charges;
iii)the bankrupt was to be a witness for the prosecution;
iv)the Macquarie Leasing documents were forgeries and the bankrupt did not sign them;
v)the bankrupt had no active role in the operation of NFA;
uu)the bankrupt gave the first respondent copies of the letter from Michell, the Macquarie Leasing demand, the bankrupt’s statement to the police and a joint statement of his and his wife’s assets and liabilities;
vv)the first respondent told the bankrupt and his wife that:
i)the first respondent needed a week to consider the position and formulate his advice;
ii)the bankrupt’s wife would need to seek independent legal advice about the “associated entity” claim made by Michell, and the first respondent would provide contact details of a friend who could provide that advice; and
iii)the amount that could be demanded of the wife as an “associated entity” was about $150,000;
ww)the first respondent did not advise the bankrupt to get legal advice;
xx)on 2 December 2015, the first respondent advised the bankrupt and his wife that:
i)the bankrupt had no alternative but to declare bankruptcy;
ii)the first respondent would be the trustee in bankruptcy;
iii)the bankrupt was not in a position to defend the insolvent trading claim;
iv)the bankrupt’s wife was an associate and could be liable for $100,000 to $125,000; and
v)the bankrupt would be able to get an annulment in about six months;
yy)the bankrupt then completed a debtor’s petition with assistance from an employee of the respondents;
zz)the employee advised the bankrupt to include every company to whom he might owe money and put the debt as $1 if he did not know the amount of the claim;
aaa)the bankrupt is, and was at the time of the debtor’s petition, solvent;
bbb)the bankrupt is employed and earns $90,000 a year;
ccc)the bankrupt is up to date with the People’s Choice Credit Union loan;
ddd)if the current balance of about the People’s Choice Credit Union loan of $26,000 was required to be paid immediately, the bankrupt’s wife has sufficient funds to pay it out and has agreed to do so;
eee)the bankrupt has not received any demand in relation to Escape Travel or Blackwood Financial Services and does not believe he has any liability to them;
fff)the bankrupt did not sign the Macquarie Leasing documents and therefore has a good defence to any claim that might be brought by them;
ggg)the bankrupt has a good defence to the NFA insolvent trading claim under s.588H(2), (3) and (4) of the Corporations Act 2001.[1]
[1] Those provisions involved the person concerned having reasonable grounds to expect that the company was solvent and a director not taking part in the management of the company because of illness or for some other good reason.
ASIC search of NFA
ASIC searches in respect of NFA indicate that:
a)it was registered on 1 August 2008;
b)it was placed into liquidation on 26 July 2013; and
c)the bankrupt was a director, the secretary and a shareholder of NFA from 1 January 2011 until at least 31 July 2013.
Assets and liabilities
The assets and liabilities statement that the bankrupt provided to the first respondent on 25 November 2015 was as follows:
Description
Details
Purchased
Value
Debt owing
Family home
21 Adam Close Rowville
Jun-10
$700,000.00
$359,561.04
Investment 1
Townhouse- Stamford Crescent – Land
Aug-14
$191,925.00
$153,393.53
Investment 1
Townhouse Stamford Crescent – Building
Aug-14
$183,430.00
Investment 2
Graham Street Wonthaggi
Sep-15
$240,000.00
$223,156.59
Family Car
Commodore
Nov-15
$38,000.00
Car 2
2010 Mazda CX7
Jun-10
$20,000.00
Car 3
Holden Monaro
Aug-13
$20,000.00
Car 4
Holden Monaro -1971
Dec-14
$27,000.00
$1,420,355.00
$736,111.16
52%
Notes
All assets purchased in sole name of K L Banks-Walker [the bankrupt’s wife]
Prior to June 2010 family home was in joint names. When sold funds used to purchase Adam Close in K. L Banks-Walker name solely
Investment 1 is a off the plan purchase of townhouse development. Completion expected in Feb 16. Further $20k outstanding payments owing.
Investment 1 – total cost of investment 1 is $375K. Estimated value when complete $425K - $450K
Mazda CX7 currently up for sale to fund purchase of Commodore
Commodore is used as security against $30K personal loan in name of M. A. Banks-Walker [the bankrupt]
Police statement
In his police statement, which the bankrupt did not exhibit to his affidavit, the bankrupt said, among other things, that:
a)when working for Zaia Arthur and Associates, he witnessed documents that he did not see people sign;
b)he probably knew at the time he should not have done that;
c)he also photocopied signatures on to documents, by cutting out a signature from a document and then photocopying it onto another document; this was called a “signature transfer”;
d)he created letterheads for companies that he now thinks were not legitimate companies;
e)he created employment letters to say that a particular person had worked at a particular place for a particular amount of time;
f)he attended the Building Commission and pretended to be another person; and
g)he knew that “some of what was going on was wrong”.
The first respondent’s affidavit
The first respondent swore an affidavit on 15 July 2016 in which he said:
a)he is a fellow of the Institute of Chartered Accountants, an Official Liquidator, a Registered Trustee in Bankruptcy and has worked in corporate and personal insolvency for over thirty years;
b)he neither supported nor opposed the bankrupt’s annulment application, but provided evidence to assist the court;
c)the bankrupt telephoned him on 24 November 2015 and said, among other things:
i)he had been involved in a fraud of over $110 million with Zaia Arthur and Associates;
ii)he had been given immunity from prosecution;
iii)he was a lead witness in the case;
iv)PCI was chasing him for $150,000 for fraudulent claims made to the ATO by a company of which he was a director;
v)he had other creditors; and
vi)he was considering bankruptcy;
d)the bankrupt and his wife met with the first respondent on 25 November 2015 and they provided to the first respondent:
i)a statement of assets (which differs by a couple of thousand dollars from the statement of assets set out above);
ii)correspondence from the bankrupt’s solicitors and PCI; and
iii)the bankrupt’s statement to the police and other police documents;
e)the bankrupt and/or his wife said to the first respondent:
i)the bankrupt had participated in fraudulent GST claims;
ii)the bankrupt had forged signatures;
iii)the bankrupt had scammed banks for several years;
iv)the bankrupt had participated in a Ponzi scheme;
v)the bankrupt’s wife worked in finance at a very senior level;
vi)the bankrupt and his wife both wanted the matters to be resolved as promptly as possible;
vii)they both expected that the bankrupt would need to become bankrupt;
viii)all significant assets were in the name of the bankrupt’s wife and his income was paid into an account in her name;
ix)the former family home had been in joint names but it was sold and the proceeds were used to buy a new house in the sole name of the bankrupt’s wife;
x)the bankrupt’s only realisable asset was income of $90,000 a year;
xi)the bankrupt’s wife wanted her family “left alone”;
xii)as well as the insolvent trading claim of $150,000, he had a loan from Blackwood Partners for $460,000, and a debt to Macquarie Leasing of $120,000 and a further guarantee for $220,000 for a Mercedes Benz; and
xiii)the bankrupt’s wife was not prepared to meet his debts;
f)the first respondent understood the bankrupt to continue to be represented by the solicitors whose correspondence had been provided to the first respondent;
g)the first respondent advised the bankrupt’s wife to obtain independent legal advice, because, if the first respondent was appointed as the trustee in bankruptcy, he would probably make a claim against the family home of $100,000 to $125,000, and perhaps other claims against the bank account into which the bankrupt’s salary was paid;
h)the first respondent said that he could provide a referral for a lawyer, but did not suggest he would refer a friend, and the bankrupt’s wife did not say she wanted a referral;
i)the first respondent said that he needed a week to think about the information that had been provided and arranged a further meeting on 2 December 2015;
j)the first respondent understood from the telephone call on 24 November 2015 and the meeting on 25 November 2015 that the bankrupt had settled on filing a debtor’s petition and his wife supported him in that course;
k)the first respondent reviewed the documents provided by the bankrupt and was satisfied that he was insolvent and that it was appropriate for him to become bankrupt;
l)the bankrupt and his wife attended on the first respondent on 2 December 2015 and the bankrupt told the first respondent that he wished to present a debtor’s petition and wanted the first respondent to be his trustee;
m)the first respondent referred the bankrupt and his wife to Aaron Sonnberger, an employee of the firm, who assisted the bankrupt to complete the debtor’s petition and statement of affairs;
n)the first respondent did not provide or purport to provide any legal advice to the bankrupt about the insolvent trading claim or any other matter;
o)the bankrupt did not advise the first respondent that he was not a director of NFA or did not know he was a director of NFA; and
p)the first respondent did not advise the bankrupt that he would be able to obtain a quick annulment, and, in fact, there was no significant prospect of being able to arrange an annulment.
The bankrupt’s second affidavit
The bankrupt swore a second affidavit on 5 August 2016. He disputed much of evidence given by the first respondent in his affidavit. He said that he told the first respondent that he had been advised by his lawyers to seek advice from an insolvency professional about the claims made against him, and he was seeking professional advice about whether he should consider bankruptcy.
The bankrupt also confirmed that he provided to the first respondent at their meeting on 25 November 2015 copies of correspondence to and from his solicitors concerning his debts. The bankrupt said that he told the first respondent that his solicitor had retired and he had been advised to obtain advice from an insolvency expert.
The bankrupt denied that his wife told the first respondent that she wanted her family left alone, and said that his wife actually said that she wanted her family home left alone.
The bankrupt denied that he had told the first respondent that he had forged signatures, scammed banks or been involved in a Ponzi scheme and denied that he told the first respondent that he had a debt to Blackwood Finance of $460,000.
The bankrupt said that he told the first respondent that he had been installed as a director of NFA without his consent and he had only recently learned that he had been appointed as a director of Escape Travel, without his knowledge.
The bankrupt also said that his wife did not say anything to the first respondent about her financial position or her willingness or otherwise to meet the expense of defending the claims against him.
The bankrupt denied that the first respondent mentioned on 25 November 2015 that he might be appointed as trustee of the bankrupt’s estate and denied that the first respondent said at that meeting that he would probably make a significant claim against the bankrupt’s wife in relation to the bankrupt’s interest in the family home.
The bankrupt said that, at the meeting on 2 December 2015, the first respondent advised him that he had “no option” but to go bankrupt and he and his wife then decided to proceed with the bankruptcy. He completed the statement of affairs under the instructions of Aaron Sonnberger.
The bankrupt said that the first respondent advised him that he would not be able to defend the NFA insolvent trading claim.
The bankrupt’s third affidavit
The bankrupt swore a third affidavit on 8 September 2016 in which he said that:
a)he was employed at a salary of about $90,000 per year; and
b)his repayments on the loan from People’s Choice Credit Union were up to date.
The bankrupt’s wife’s first affidavit
The bankrupt’s wife swore an affidavit on 5 August 2016. She confirmed various aspects of her husband’s two affidavits.
The bankrupt’s wife also said that, at the meeting on 25 November 2015, the first respondent told her that there would be a claim against her for between $100,000 and $125,000, that she would need to seek independent legal advice about that issue and that he could refer her to someone he knew. She said that the first respondent did not provide her with the referral.
The bankrupt’s wife also said that she was prepared to assist her husband to meet repayment of the loan from the People’s Choice Credit Union.
The bankrupt’s wife’s second affidavit
The bankrupt’s wife swore a second affidavit on 8 September 2016, in which she said that:
a)the payments towards the People’s Choice Credit Union loan were made by her by direct transfer from her bank account and were up to date;
b)she remained willing to assist her husband in meeting his payment obligations under that loan, or paying it out in full if he was required to do so;
c)she was willing to provide financial assistance to her husband to meet:
i)the costs of defending any claims by Macquarie Leasing and/or NFA;
ii)the payment of any judgment obtained by either of those parties or any agreed settlement sum; and
iii)the costs and expenses of the respondents that the bankrupt might be ordered to pay in this proceeding;
d)she is employed at a salary of about $118,000 a year, which would go up to about $127,000 a year starting on 1 October 2016;
e)she is the sole registered proprietor of the family home, which, according to the latest council rates notice, has a capital improved value of $655,000 and mortgages totalling about $274,000, leaving a net equity of $381,000, and one of the mortgages has a redraw facility of $130,000;
f)she is the sole registered proprietor of a unit, which earns rent of $1,852 per month, and which she estimates to be worth $400,000 with a mortgage of about $300,000, leaving a net equity of about $100,000;
g)she is the sole registered proprietor of a property in Wonthaggi, which earns rent of $1,682.86 per month, and which, according to the latest council rates notice, has a capital improved value of $250,000 and a mortgage of about $233,000, leaving a net equity of about $17,000; and
h)she owns a Holden Commodore which she estimates to be worth $25,000 but which is subject to the People’s Choice Credit Union loan in her husband’s name, on which about $22,000 is owing.
The affidavit of David Cowen
An affidavit sworn by David Cowen on 8 September 2016 was filed by a supporting creditor, Michell, who is the liquidator of NFA. Michell opposed the annulment application. Cowen said:
a)he is a financial consultant and director of Finstra Pty Ltd, which is a finance broker;
b)since 2008, he assisted clients referred by Zaia Arthur and Associates to obtain finance;
c)he met the bankrupt through Zaia Arthur and Associates;
d)in about May 2011, Zaia approached Cowen to obtain finance for NFA to acquire a motor vehicle;
e)Zaia provided Cowen with the relevant information and he prepared loan contracts;
f)Cowen met the bankrupt at the offices of Zaia Arthur and Associates on 25 May 2011 and explained to him:
i)Macquarie Leasing was to be the mortgagee under the chattel mortgage;
ii)NFA was to be the borrower;
iii)the bankrupt was to be the guarantor;
iv)the goods to which the chattel mortgage applied was a Mercedes Benz; and
v)the amount of the loan was $190,780;
g)Cowen explained to the bankrupt that he was the guarantor;
h)the bankrupt did not raise any concerns about proceeding with the arrangement;
i)the bankrupt signed the loan contracts on behalf of NFA as borrower and in his own capacity as guarantor in the presence of Cowen; and
j)Cowen submitted the loan contracts and understands that the funds were advanced and the vehicle was acquired.
Where the bankrupt’s signature appears on the loan contracts as the borrower, there is a line for his signature, under which are the words:
Director/Company Secretary/Sole Director and Sole Company Secretary.
The affidavit of Stephen Michell
Michell swore an affidavit on 8 September 2016. He said that:
a)he was appointed as the official liquidator of NFA on 26 July 2013;
b)he opposes the annulment of the bankrupt’s bankruptcy;
c)his investigations showed that the bankrupt completed and signed two applications for business bank accounts as director of NFA;
d)the bankrupt was the sole signatory of those accounts;
e)the accounts were used for Macquarie Leasing repayments, as well as personal items and netbank transfers;
f)NFA did not maintain any books and records from inception until the date of liquidation;
g)NFA was insolvent from at least 1 January 2011;
h)NFA traded and had GST liabilities to the ATO of $151,779.58;
i)NFA’s only asset was a Mercedes Benz that was written off prior to December 2012; and
j)Mr Michell demanded payment of the ATO debt from the bankrupt on 5 November 2015.
Cross examination of Mr Cowen
Cowen was strenuously cross examined by the bankrupt. Cowen said that he was a witness for the prosecution in the case against Zaia and Jordanou. He maintained that he had personally been present and witnessed the bankrupt signing the NFA loan contracts with Macquarie Leasing for the Mercedes Benz.
When it was put to him that it was not the bankrupt’s signature on the loan contract, Cowen said:
I would vehemently protest that, because I have a very strong memory of signing it with him. … I have a very clear memory of signing. I’m extremely confident that I witnessed his signature.
In the cross examination of Cowen, the bankrupt conceded that the loan documents bore his handwriting at CB87 (Tr. p.29), but maintained that they did not bear his signature.
Cowen was pressed again, after being reminded that he witnessed a large number of loan documents, and after it was put to him that his reputation would be damaged if he had in fact purported to witness the bankrupt’s signature when he had not been present. Cowen then said:
I am 100 percent certain that that is both his signature and his handwriting of when he signed this document in front of me on that date.
Cowen confirmed that he suggested to the bankrupt in about May or early June 2012 that he carefully consider his position into in relation to the proposed guarantee for a $3.5 million loan for a property development to be undertaken by NFA.
Cowen conceded that he had no notes of his meeting with the bankrupt at which he signed the Macquarie Leasing documents in relation to the Mercedes Benz, saying that the loan contracts themselves constituted the notes of the meeting.
Cross examination of the bankrupt
The bankrupt conceded in cross examination that the first respondent did not say during the meeting on 25 November 2015 that he would be giving the bankrupt legal advice about the insolvent trading claim. However, the bankrupt maintained that he understood that the first respondent would give him such advice because he portrayed himself as an insolvency expert.
The bankrupt, when asked whether he had lawyers acting for him in November 2015 said he did not (Tr. p.36 l.17). However, the bankrupt was then shown an email dated 17 November 2015 from O’Neill Behan and Associates to him (CB298) which was exhibit MBW-22 to his second affidavit. The email said:
We refer to our discussion on 16 November 2015 and confirm you intend to consult a lawyer who is an Accredited Specialist in Business/Insolvency Law.
When asked again whether he had lawyers acting for him in November 2015, the bankrupt said:
… on the 25th I did not have legal representation. Over the course of the month, at the start of the month, I had no representation in regards to the matter, because I didn’t contact them till the 16th.
The bankrupt conceded in cross examination that none of his affidavits included a claim that he told the first respondent that his lawyer, Mr O’Neill, had retired. However, he maintained that he did tell the first respondent that.
The bankrupt was initially evasive in response to a question to the effect that he never thought the first respondent was a lawyer. However, he eventually conceded that he had never thought that the first respondent was a lawyer or was giving him legal advice.
The bankrupt said in his statement of affairs in answer to question 18C, which asks, “When did you first have difficulty paying your debts? (month/year)”, that he first had difficulty paying his debts in 2010-2012 (CB52). However, in cross examination, he said he had never had difficulty paying his debts. He said that his answer to question 18C was in accordance with instructions from Aaron Sonnberger. In his affidavit, the bankrupt said that Aaron Sonnberger told him how to fill in the statement of affairs, and what to write in relation to the debts relating to Escape Travel and Blackwood Finance. However, in cross examination, the bankrupt said that Aaron Sonnberger told him what to write throughout the statement of affairs.
The bankrupt acknowledged that he had signed a declaration at the end of his statement of affairs that it was true and correct. However, he maintained that his answer to question 18C, that he first had difficulty paying his debts in 2010-2012, was incorrect. He said that he did not know the answer was wrong when he filled out the statement of affairs. He said he thought the answer “2010-2012” to question 18C was a continuation of the answer to question 18B. That question was, “What do you think was the main cause of your Insolvency?” The bankrupt’s answer was “Fraudulent activity by previous employer/accountant”.
The bankrupt said in cross examination that he forged signatures from 2005 or 2006 through to 2008 when he worked at Zaia Arthur and Associates. When asked whether he told the first respondent that, he said “Yes, absolutely, yes.” (Tr. p.45) However, in his second affidavit, at paragraph 19(f), he said that he did not tell the first respondent that he had forged signatures. The bankrupt, in cross examination, said that he was unable to explain the discrepancy between his oral evidence and his affidavit evidence.
The bankrupt confirmed that, in his police statement, he said that Cowen is “not on the take” and is “one of the good guys”. He confirmed that was still his view.
The bankrupt confirmed that he had access on Net Bank to the NFA bank accounts and they were linked to his personal bank accounts.
Re-examination of the bankrupt
The bankrupt said in re-examination that his handwriting was in the Macquarie Leasing documents at CB87. He said that someone in the office of Zaia Arthur and Associates must have photocopied his handwriting onto the document.
Cross examination of the first respondent
The first respondent acknowledged that he was given a statement of assets which showed that the bankrupt’s wife had assets in her name worth about $700,000. The first respondent said that he thought the bankrupt estate would have a claim against the family home because the bankrupt probably contributed to its acquisition. He said that he made a rough estimate of $100,000 to $125,000.
The first respondent denied in cross examination that he told the bankrupt that he had no option but to declare bankruptcy. He said he told the bankrupt that his best option was to declare bankruptcy. The first respondent said the bankrupt’s other option was to do nothing, but the first respondent did not advise the bankrupt to take that option.
The first respondent conceded that Michell, the liquidator of NFA, had not commenced proceedings against the bankrupt after sending a letter of demand on 5 August 2013, and said it was irrelevant to the issue of the bankrupt’s solvency. (However, Michell did send the bankrupt a further letter of demand on 5 November 2015, requiring payment of $151,779.58 arising from the unpaid GST liabilities of NFA.)
The first respondent conceded that he did not inquire whether the bankrupt might have had a defence to the claim from the liquidator of NFA.
The first respondent conceded that he had billed $15,800 plus GST to the bankrupt’s estate, but said he has not yet received any payment from the estate.
Other witnesses
The bankrupt’s wife and Michell, the liquidator of NFA, were not required for cross examination.
Findings
I accept all of the evidence of all of the witnesses except that, to the extent that the bankrupt’s evidence differs from that of the other witnesses, I prefer the evidence of the other witnesses. That is for the following reasons:
a)on his own admission, the bankrupt, over a period of years, engaged in grossly dishonest and fraudulent conduct for his own financial advantage;
b)the bankrupt’s fraud and dishonesty may well have warranted criminal sanctions;
c)the fact that the bankrupt has been given immunity from prosecution does not detract from his gross dishonesty;
d)the bankrupt swore in his affidavit that he had not told the first respondent that he had forged documents but frankly admitted in cross examination that he had told the first respondent that he had forged documents;
e)this suggests that the bankrupt was either confused about what he had told the first respondent, and was thus not a reliable witness, or he was dishonest, and was thus not a reliable witness;
f)the bankrupt’s claim that his answer to question 18C, “2010-2012”, was a continuation of the answer to question 18B in the statement of affairs was completely implausible (there are separate boxes for the answers to each question); his answer in cross-examination appeared to be fabricated on the run;
g)the bankrupt claimed that he expected to receive legal advice from the first respondent but admitted in cross examination that the first respondent had never held himself out to be a lawyer or said that he would provide legal advice;
h)Cowen presented in the witness box as very credible; he was unshaken in any aspect of his evidence; he was particularly solid in relation to his evidence that he saw the bankrupt sign the Macquarie Leasing documents;
i)the bankrupt said in his police statement that Cowen was “not on the take” and was “one of the good guys”, and the bankrupt continued to be of that view;
j)it is inconsistent with the bankrupt’s own view of Cowen that he could have been as mistaken as the bankrupt maintained about witnessing the bankrupt’s signature on the Macquarie Leasing documents;
k)the bankrupt denied that he had lawyers acting for him in November 2015; the bankrupt conceded that O’Neill Behan and Associates acted for him in relation to the matters the subject of this proceeding on 16 and 17 November 2015; he said that the last time they had acted for him was in 2013; they wrote a letter for him on 5 August 2013 in relation to the insolvent trading claim; they received a letter dated 5 November 2015 on that topic from NFA’s liquidator; it was presumably that letter that led to the meeting on 16 November 2015; in these circumstances, it was disingenuous for the bankrupt to say that he did not have lawyers acting for him in November 2015;
l)the bankrupt appears to have been under certain misapprehensions about the advice that he was given; he said that the liquidator of NFA had indicated that the bankrupt’s wife might have a liability as an associated entity; however, the reality was that the trustee in bankruptcy would have a claim against her on the basis that the bankrupt had contributed to assets registered in her sole name; and
m)the evidence of the first respondent was cogent and made sense, and for that reason was likely to be accurate.
Consequently, on the evidence before me, I am satisfied that the bankrupt was aware at the relevant times that he was the director of NFA. The bankrupt, on his own evidence, was to be rewarded with a block of land for his involvement with NFA. I consider that his solicitor’s letter to the liquidator of NFA, to the effect that the bankrupt consented to being a director of NFA because Zaia asked him to, was accurate. The bankrupt signed the Macquarie Leasing documents on behalf of NFA in May 2011, and, in May and August 2011, he also applied for bank accounts for NFA that were linked to his personal bank accounts. The applicant did not lodge documents with ASIC claiming that he did not consent to be a director of NFA until May 2014.
I am satisfied that the bankrupt did sign the Macquarie Leasing documents in the presence of Cowen. I do not accept, on the evidence before me, that the bankrupt has a reasonable prospect of being able to avoid liability for the Macquarie Leasing debt on the grounds that he did not sign the documents on behalf of NFA as director or in his personal capacity as guarantor.
I do not accept that the bankrupt has good prospects of being able to resist the trading while insolvent claim from the liquidator of NFA. The failure to keep books and records means that NFA was presumed to be insolvent. I consider, on the evidence before me, that it is unlikely that the bankrupt would be able to establish that he did not know, at the relevant times, that he was a director of that company and that he did not act as a director for a good reason. If nothing else, his deep involvement in frauds perpetrated through NFA would probably preclude him from having a viable defence.
However, the more important point is perhaps that the bankrupt apparently believed the insolvent trading claim and the Macquarie Leasing claim would succeed against him. His solicitors advised him to get legal advice from a lawyer who was an accredited specialist in insolvency law but the bankrupt chose instead to go directly to an accountant who could assist him to file a debtor’s petition.
The annulment application
The general principles applicable to applications for annulment under s.153B of the Act were summarised by Tracey J in Bulic v Commonwealth Bank of Australia Ltd [2007] FCA 307 at [12] as follows:
Section 153B(1) and its predecessors have been considered in many decisions of this and other Courts. These authorities establish a number of relevant propositions. They are:
(1)An order can be made under s 153B(1) of the Act notwithstanding that the applicant has been discharged from bankruptcy; Re Oates; ex parte Deputy Commissioner of Taxation (1987) 17 FCR 402.
(2)An applicant who seeks an annulment of his or her bankruptcy “carries a heavy burden.” It is incumbent on an applicant “to place before the Court all relevant material with respect to his or her financial affairs so that the Court may be properly informed and may make a judgment that is based on the actual circumstances of the applicant.” Re Papps; Ex parte Tapp (1997) 78 FCR 524 at 531.
(3)In determining whether or not a sequestration order “ought not to have been made” the Court is not confined to a consideration of whether the order should have been made on the facts known to the Court at the time at which it was made. The Court must take account of facts, known at the time at which the sequestration order was made and at which it determines an annulment application, even if those facts were not before the Court at the time at which the sequestration order was made: Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239 at 243; Re Raymond; ex parte Raymond (1992) 36 FCR 424 at 426.
(4)A sequestration order “ought not to have been made” if, on the facts known at the time of the annulment application, the Court would have been bound not to make the sequestration order: Re Frank; ex parte Piliszky (1987) 16 FCR 396.
(5)The Court will be so satisfied if it is established that the debtor was not, at the time the sequestration order was made, indebted to the petitioning creditor: Re Deriu (1970) 16 FLR 420 at 422.
(6)If the Court is so satisfied, it is not precluded from annulling the bankruptcy because the bankrupt had not sought to have the default judgment set aside or failed to oppose the creditor’s petition or failed to seek a review of the sequestration order: Re Raymond; ex parte Raymond (1992) 36 FCR 424 at 426.
(7)The power conferred on the Court by s 153B(1) is discretionary in nature. Even if persuaded that the sequestration order ought not to have been made, the Court can, in appropriate circumstances, decline to annul the bankruptcy: Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239 at 243.
(8)Considerations which may have a bearing on the exercise of discretion include unexplained delay in the making of the application, whether or not the applicant is solvent, whether or not the applicant has made full disclosure of his or her financial affairs and a failure by the bankrupt to oppose the creditor’s petition and attend the hearing at which the sequestration order was made: Re Williams (1968) 13 FLR 10 at 24-5; Boles at 247; Re Papps; ex parte Tapp (1997) 78 FCR 524 at 531; Rigg v Baker [2006] FCAFC 179 at [79]; Cottrell v Wilcox [2002] FCA 1115 at [7]. Additional considerations are collected in D. A. Hassall, “Annulment of Bankruptcy and Review of Sequestration Orders” (1993) 67 ALJ 761 at 766.
In relation specifically to debtor’s petitions, Drummond J said in Re Coyle (1993) 42 FCR 72; (1993) 120 ALR 527:
19.It will in my view generally not be possible for a debtor to establish that his bankruptcy should be annulled on the ground that the “petition ought not to have been presented” when it is clear that at that time he was insolvent. Although in contrast to earlier legislation, the provisions of the Bankruptcy Act 1966 (Cth) that now govern presentation of a debtor's petition do not require the debtor to admit his insolvency, the procedure available to a debtor to procure his own bankruptcy is only intended to be available to debtors who are insolvent: see Re Mottee; Ex parte Mottee v The Official Receiver (1977) 29 FLR 406 at 412. Where an insolvent debtor presents his own petition, s. 55 is being used for its intended purpose: it cannot be said, in such circumstances, that the petition ought not to have been presented. If a debtor is insolvent at the time he presents his own petition it cannot, in my view, be said that the petition ought nevertheless not to have been presented because the debtor then had a hope or even a reasonable expectation that his fortunes would improve either in the near future or in the long term. If, after becoming bankrupt on his own petition, the debtor is able for any reason to pay all his debts, then he will be entitled to an annulment of his bankruptcy under s. 153A upon complying with the requirements of the section. But that such a situation arises, or may arise, after bankruptcy, in circumstances in which it was anticipated that it would arise at the time the debtor presented his own petition, provides no ground for saying that the petition ought not to have been presented, the debtor then being insolvent in the sense in which the term is used in Sandell v Porter (1966) 115 CLR 666 at 670, at that time.
It is well established that, in an application for an annulment of a bankruptcy, the bankrupt is obliged to make full and frank disclosure to the court about his financial affairs. Failure to do so is a discretionary factor weighing heavily against an annulment. In Papps v Tapp(1997) 78 FCR 524, O’Loughlin J said at 541:
… the failure on the part of the debtor to present an accurate statement of his financial affairs at the time when he applied for an annulment of the sequestration order should justify the Court in making an order rescinding the [annulment] …
The bankrupt’s counsel said to the court that the bankrupt was in a “cleft stick” (Tr. p.80), because if he made full disclosure to the court about his contributions to the assets held in his wife’s sole name, to show his solvency, but the case was determined against him, then the trustee would be in a position to recover the amount of the bankrupt’s contributions from his wife’s assets.
There was, accordingly, in this case, a blatant failure to make full disclosure. It seems clear, on normal principles, that the bankrupt would have had some claim against the assets held in his wife’s sole name, not least because the proceeds of sale of a former family home that was jointly owned were put into a property held in the wife’s sole name. The bankrupt clearly has some assets that his trustee would be entitled to recover for the benefit of the bankrupt estate, namely, his interest in assets held by his wife. In my view, in all the circumstances of this case, the bankrupt’s failure to give the court details of his contributions to the assets in his wife’s name, to enable the trustee to recover them, is in itself sufficient to deny the application.
Moreover, the bankrupt has put the proceeds of his jointly held former family home into a new family home in his wife’s sole name. He currently puts his income into an account in his wife’s name. There are two investment properties that have been placed in the wife’s sole name. There must be at least a question as to whether these steps were taken to defeat the interests of the bankrupt’s creditors. In the absence of an adequate explanation, these steps suggest that the applicant is not bona fide in relation to his past, present and future creditors.
Turning to the other issues in the case, I accept the first respondent’s argument that he did not have a conflict of interest by advising the bankrupt to file a debtor’s petition and then becoming his trustee in bankruptcy. I accept that this is a common occurrence and no different in principle to a solicitor advising that a person has a good claim and then acting for the person in the pursuit of that claim.
I am not persuaded that the advice given by the first respondent that the bankrupt’s best option was to file a debtor’s petition was poor advice. There was no expert evidence to that effect. This is not a case in which the advice given by the first respondent was so patently bad that the court could conclude that the bankrupt was poorly advised, in the absence of expert evidence.
Moreover, in Estate of Smith [1999] FCA 1755 Heerey J said:
15 … if the debtor is insolvent there is no discretion to grant annulment. I respectfully agree. I think “ought not to have been presented” means that the legal precondition for bankruptcy on a debtor's petition, namely insolvency, was not in fact present. The section does not mean that the petition “ought not to have been presented” because in retrospect, and given better advice, other options might have been pursued. …
That case was followed by Barnes FM, as her Honour then was, in this court in Drake v Jones [2009] FMCA 298, where her Honour said at [44]:
I am of the view that, consistent with the approach taken in these cases and the purpose of s.55, where an insolvent debtor presents his or her own petition, … the fact that with better advice other options might have been pursued instead of bankruptcy, including legal action (as considered in Smith), is not such as to establish that the petition ought not to have been presented.
That is, to obtain an annulment under s.153B of the Act, it is not sufficient that the bankrupt might have received better advice if he had gone elsewhere. In particular, it is not sufficient that the bankrupt may have been able to take legal action to fight the claims against him.
Contrary to the bankrupt’s submissions, it is immaterial that Macquarie Leasing did not attend court to oppose the annulment application. From their point of view, either the bankruptcy would continue, and they would recover X cents in the dollar, or it would not, and they could proceed to recover their debt through the courts.
It is also immaterial that the liquidator of NFA has not filed proceedings against the bankrupt. Clearly, the bankrupt filed his debtor’s petition soon after the liquidator’s letter of demand dated 5 November 2015. Upon the acceptance of the debtor’s petition, the liquidator was unable to commence proceedings against the bankrupt, without leave of the court: s.58(3) of the Act.
In relation to whether or not the bankrupt was insolvent at the time he presented his debtor’s petition, the question is not whether he had an excess of assets over liabilities but whether he was able to pay his debts as they fell due on a cash flow basis.
The Macquarie Leasing debt was clearly due when the debtor’s petition was filed because a call had been made on the guarantee on about 9 June 2012. Similarly, the NFA insolvent trading debt was due because the liquidator had demanded payment within 14 days of 5 November 2015. Those debts amounted to $271,000.
As at 2 December 2015, according to his statement of affairs, the bankrupt had $60,000 in superannuation (which he may have been able to access on hardship grounds), an expected tax refund of $8,000, a car worth $6,000 (which may have been in his wife’s name) and a salary of $90,000 that was paid into his wife’s bank account. It is clear that, without recourse to his wife’s assets, the bankrupt did not have sufficient money to pay the Macquarie Leasing debt and the NFA insolvent trading debt in a reasonable time frame.
There was no suggestion, as at 2 December 2015, that the bankrupt’s wife was willing to provide funds to pay out the bankrupt’s debts. On the contrary, for the reasons expressed above, I accept the first respondent’s evidence that the bankrupt’s wife was not willing, as at 2 December 2015, to pay out the bankrupt’s debts.
The bankrupt’s wife says that she is now willing to pay the legal costs to defend the claims against the bankrupt and pay the debts if it comes to it. However, her present intention is not to the point. The question is whether the debtor’s petition ought not to have been presented because the bankrupt was solvent as at 2 December 2015. It is clear that he was not.
To the extent that it might be relevant, the bankrupt argued that he is presently solvent because his wife has said in her affidavits filed in this proceeding that she will fund challenges to the bankrupt’s existing debts and, if it comes to it, pay out those debts. That may be her present intention. However, she could have a completely different intention tomorrow. The bankrupt’s wife’s present intention is not binding or enforceable in any way.
When this point was discussed in court, the bankrupt did not propose that his wife give an undertaking to the court, or suggest any other mechanism by which her present intention could become enforceable. Given the bankrupt’s history of gross financial dishonesty, and his less than frank and honest evidence in the current proceeding, I am not at all confident that the bankrupt’s wife would follow through with her presently stated intention. Consequently, I am not at all confident that the bankrupt is presently solvent, or that he would be tomorrow if his bankruptcy were annulled.
If the wife is genuine about her willingness to pay out the bankrupt’s debts, she can do so and the bankrupt can seek an annulment under s.153A of the Act.
All in all, I am not satisfied that the debtor’s petition ought not to have been presented. The application will be dismissed.
I certify that the preceding seventy-eight (78) paragraphs are a true copy of the reasons for judgment of Judge Riley
Date: 28 October 2016
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