Big River Group Pty Ltd v Visnic
[2010] FMCA 276
•3 May 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| BIG RIVER GROUP PTY LTD v VISNIC | [2010] FMCA 276 |
| BANKRUPTCY – Creditors petition – notice of opposition – where respondent debtor claimed solvency on the basis of monies due to him from proceeds of two companies in liquidation, an unassessed costs order and property in Croatia – whether funds available within a reasonable time – where proceeds of liquidation were the subject of a freezing order issued in Family Court proceedings and distribution from one company dependant on sale of rural land – whether existence of freezing order constituted “other sufficient cause” not to issue a sequestration order – where debtor sought transfer of the matter to the Family Court. |
| Bankruptcy Act 1966 (Cth), ss.35A, 52(2)(a), 52(2)(b) Family Law Act 1975 (Cth), s.79 |
| Sandell v Porter (1966) 115 CLR 666 Pascoe v Boensch & Anor (No.9) [2009] FMCA 769 Hall v Poolman [2007] NSWSC 1330 Ling v Enrobook Pty Ltd (1997) 74 FCR 19 Clyne v Deputy Commissioner of Taxation (1985) 5 FCR 1 Cain v Whyte (1933) 48 CLR 639 |
| Applicant: | BIG RIVER GROUP PTY LTD (FORMERLY KNOWN AS BIG RIVER TIMBERS PTY LTD) |
| Respondent: | MILAN VISNIC |
| File Number: | SYG 2015 of 2009 |
| Judgment of: | Raphael FM |
| Hearing date: | 19 April 2010 |
| Date of Last Submission: | 19 April 2010 |
| Delivered at: | Sydney |
| Delivered on: | 3 May 2010 |
REPRESENTATION
| Counsel for the Applicant: | Mr D Jay |
| Solicitors for the Applicant: | Toomey Pegg Drevikovsky |
| Counsel for the Respondent: | Mr A Street SC |
| Solicitors for the Respondent: | Lander & Rogers |
ORDERS
A sequestration order be made against the estate of Milan Visnic.
The Applicant Creditor’s costs (including any reserved costs) be taxed (in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006) and paid from the estate of the Respondent Debtor in accordance with the Act.
Under the Bankruptcy Regulations a copy of this sequestration order be given to the Official Receiver in Sydney within 2 days.
THE COURT NOTES:
(i)That the date of the act of bankruptcy is 4 August 2009.
(ii)A consent to act as Trustee has been signed by Nicholas Malanos and has been lodged with the Official Receiver in Sydney.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA ATSYDNEY |
SYG 2015 of 2009
| BIG RIVER GROUP PTY LTD (FORMERLY KNOWN AS BIG RIVER TIMBERS PTY LTD) |
Applicant
And
| MILAN VISNIC |
Respondent
REASONS FOR JUDGMENT
On 20 August 2009 the applicant creditor presented a petition to this Court seeking a sequestration order against Milan Visnic, the respondent, who had committed an act of bankruptcy by failing on or before 4 August 2009 to comply with the bankruptcy notice NN86-09 served upon him pursuant to an order for substituted service made by Registrar Segal on 9 July 2009. There was annexed to the bankruptcy notice a sealed copy of a judgment entered on 3 August 2006 whereby the applicant obtained a judgment against the respondent in the sum of $144,250.00 inclusive of costs. It is not known why the applicant did not proceed to bankrupt the respondent in the three years prior to the issue of the bankruptcy notice. Mr Street SC who appears on behalf of the respondent urges the Court to infer that this was because the applicant was aware of the existence of certain Family Court proceedings between Mr Visnic and his wife that had been ongoing since 2003. Mr Chapman, a solicitor assisting the partner acting for the applicant, indicated that he first became aware of the Family Court proceedings in August 2009. Whatever may have been the state of his principal’s knowledge, I have not been advised of it and I am not prepared to draw the inference requested because there is no underlying evidence upon which I believe I can proceed in that manner.
Mr Visnic filed a notice of opposition to the creditor’s petition on 8 March 2010 and swore affidavits in support on 5 March and 23 March. He asked the Court to exercise its discretion to dismiss the petition on three bases:
(a) That he is able to pay his debts as and when they fall due
(b) There is other sufficient cause being shown
(c)The applicant’s remedy is to seek relief in the Family Court of Australia, to which this matter should be transferred.
Mr Visnic proceeds under ss.52(2)(a), 52(2)(b) and 35A of the Bankruptcy Act 1966 (Cth) (the “Act”).
In his evidence, Mr Visnic explained that on 3 July 2007 Brereton J in the Supreme Court of NSW gave judgment for him against a Mr Sywak, his former accountant and business partner. The effect of the judgment was to transfer 50 percent of the shareholding in two companies, Adellos Pty Ltd and Castlove Pty Ltd, from Mr Sywak to Mr Visnic. Both of those companies held land of considerable value. Mr Visnic also obtained an order for costs against Mr Sywak. Brereton J ordered that both companies be placed into liquidation so that their assets could be realised and the surplus paid to the shareholders. Although Mr Visnic tells this Court that he spent approximately $700,000.00 on legal costs, he appears to have taken no steps to obtain an assessment of those costs against Mr Sywak and to enforce the judgment for costs against him. In the meantime, further proceedings between Mr Visnic and Mr Sywak have occupied the Supreme Court of NSW in respect of which some costs orders have been made against Mr Visnic. During all this time, Mr Visnic has been continuing his Family Court proceedings which I am told were concluded in February 2010 and judgment reserved. During the course of those proceedings on 22 June 2009 the Family Court, Cohen J, made a freezing order restraining the liquidator of Adellos and Castlove from distributing to any person monies that it had determined were due to Mr Visnic as a creditor or shareholder in those companies. There was a further order restraining Mr Visnic from using, dealing with, directly or through any agent or otherwise disposing of any monies he or his nominees have received pursuant to the liquidation of those two companies. Although Mr Visnic became aware of the bankruptcy proceedings in relation to the applicant’s debt in July last year, he did not go back to the Court to seek a variation of that order other than for a variation which allowed the release of certain funds to him which would pay outstanding legal costs. This was so notwithstanding the fact that the liquidator entered into a contract for sale of certain rural land of which Adellos Pty Ltd was a 75 percent owner for $5,600,000.00 plus GST. I am not clear exactly when that contract was entered into but the evidence before me was that the completion date had long since passed. The Trustee would be entitled to take the deposit of some $560,000.00 but is hoping to effect completion of the sale at a reduced price. According to a report dated 18 March 2010 filed with the Mr Visnic’s affidavit of 23 March 2010 negotiations are ongoing. The liquidator is holding funds for the benefit of Mr Visnic in Castlove Pty Ltd from which Mr Visnic should receive some $230,000.00. In the report it makes reference to Mr Visnic receiving $323,210.00 but this would only be paid to him after he had repaid a loan of $90,000.00 which would reduce his net repayment. In the same report the liquidator assumes that he will complete the sale of the rural property owned by Adellos and, after accounting for all creditors including approximately $1.4 million of claims that have not yet been adjudicated upon or accepted, Mr Visnic would receive approximately $627,185.00. The sums due to Mr Visnic from the liquidator are all subject to the freezing order.
Mr Visnic says that he is solvent in that he is able to pay his debts as and when they fall due. In his affidavit of 5 March 2010 he lists his assets which include a distribution from the proceeds of the liquidation of the two companies, his estimate of the value of the Sywak costs order at $700,000.00 and some land in Croatia valued at $150,000.00. There is no evidence before the Court as to the value of the land in Croatia or any particulars of the land. I propose to disregard it for the purposes of this application. The amounts realisable from the liquidator are the subject of a freezing order and may well be required to be shared in some proportion with Mr Visnic’s wife. The costs order for $700,000.00 is not a costs order that can be enforced immediately. It is only an order for costs to be paid after assessment. If Mr Visnic’s solicitor and own client costs were $700,000.00, then it is unlikely that the assessed costs will be as much as that figure. Against these assets Mr Visnic lists creditors including the applicant company of $961,970.57 and borrowed funds of a further $474,165.00. Mr Visnic says that none of his other creditors are seeking payment and that, to the extent that they are represented by credit card companies, he is making satisfactory payments to them. He says in regard to the borrowed funds that those have been borrowed to assist him in relation to the Family Court proceedings and are not repayable until after those proceedings have been finalised. He says that he has a surplus of assets over liabilities and that, with the exception of the applicant’s debt, he is paying his debts as and when they fall due.
As a general rule if a debtor is able to pay all the debts he or she owes within a reasonable time, a sequestration order should not be made; Re Sarina; Ex parte Wollondilly Shire Council (1980) 30 ALR 266. Whether or not the debts can be repaid within a reasonable time is a question of fact for the Court to determine and what is considered a “reasonable time” will depend on the nature and amount of the debts and the circumstances, including the nature of the business of the debtor; Sandell v Porter (1966) 115 CLR 666 at [670]. The funds which may be considered available to the debtor to pay his or her debts for solvency purposes are not limited to his or her cash resources immediately available but extend to other realisable assets; Sandell v Porter (supra).
I considered the question of insolvency in Pascoe v Boensch & Anor (No.9) [2009] FMCA 769:
“There are two tests for insolvency, the balance sheet test and the cash flow test. It is now evident that attention should be principally drawn to the cash flow test, the balance sheet test only having subsidiary relevance; Keith Smith East West Transport Pty Ltd (in liq) v Australian Taxation Office [2002] NSWCA 264; (2002) 42 ACSR 501, Expile Pty Ltd v Jaab’s Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711, Lewis v Doran [2005] NSWCA 243; (2005) 219 ALR 555, Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLC 471, Sutherland v Hanson Construction Materials Pty Ltd [2009] NSWSC 232; (2009) 254 ALR 650. A decision is also required to be made as to whether the bankrupt is suffering from a temporary lack of liquidity or an endemic shortage of working capital. In Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243 Palmer J referred to this distinction and observed at [266]:
“The first is an embarrassment, the second is a disaster. It is easy enough to tell the difference in hindsight, when the company has either weathered the storm or foundered with all hands; sometimes it is not so easy when the company is still contending with the waves.”
His Honour felt that one was obliged to look at the extent of cash and other liquid assets compared with the quantum of debts due and payable and to become due and payable in the immediate future.”
In respect to whether an asset is realisable within a reasonable period, the comments of Palmer J in Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243 at [163] in relation to corporate insolvency are relevant;
“[187] An asset cannot be taken into account in assessing solvency at a particular time without reference to the time it would realistically take to effect realisation and produce cash. It is no indication of solvency – indeed, it is the opposite – to point to property as available to meet debts falling due next month when, even with the utmost expedition, that property cannot be turned into cash for 6 months. Realisable property can only be taken into account in assessing solvency “if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature…”
Mr Visnic’s debt to the applicant cannot be discounted in considering his solvency. That debt is well and truly due and payable. The question is, therefore, whether he has assets that will enable its payment within a reasonable time. I have difficulty in accepting that he has. This Court has had many cases before it in which costs assessments have featured. It is able to say that there are a number of procedures to go through before an assessment can be finalised. First, an assessable bill of costs must be prepared. Then, the appointment of an assessor must be made by the Court. The bill must be delivered to the assessor with all files and the losing party given the opportunity to make comments. An assessment involving such a complex case, which apparently ran for some weeks, might take a considerable time. After the assessment is made the unsuccessful party has the right to seek review. Given the antipathy that is acknowledged to exist between Mr Visnic and Mr Sywak, it is not unreasonable to infer that any such assessment will be hard fought and lengthy. It will certainly take some months.
The only money available from Adellos Pty Ltd would come from the sale of the land. That sale appears to have stalled and no indication was given to the Court as to when it may complete. It is rural land. It seems to me that, at best, available monies from Adellos could not exceed the $560,000.00 represented by the deposit of which Mr Visnic would only be entitled to one half of a 75 percent share. The liquidator would be unlikely to distribute any of this money until he had adjudicated upon the other claims. It is not for the Court to guess when funds may become available. It is for the applicant to show that they would become available within a reasonable time. The applicant must produce some evidence as to a date upon which the funds are likely to become available so that the Court may consider whether or not this is reasonable. In this case there is no such evidence.
The remarks which I have made above do not take into account the existence of the freezing order. A freezing order or mareva injunction cannot be used as a shield against a sequestration order; Ling v Enrobook Pty Ltd (“Ling”) (1997) 74 FCR 19. This is especially the case where Mr Visnic has not requested the Court release what, in the scheme of things, is a rather small amount of money to pay the debt evidenced in the petition. He could have asked for a release of the Castlove funds which would have been sufficient to satisfy the creditor. I do not think that Mr Visnic has established to the satisfaction of this Court that he is able to pay his debts as and when they fall due and given the unknown of the Family Court proceedings, I cannot really be satisfied that his assets succeed his liabilities. The first ground of application must therefore fail.
Mr Visnic says that there is other sufficient cause not to make the order because it is only the Family Court freezing order which prevents him from making payment of this debt from the Castlove funds which are available. Whilst it is fair to say that if he did receive this distribution the creditor’s debt could be paid, the unknown is whether the Family Court would allow the release of those funds or what Mr Visnic’s wife’s claims against his estate will be. She has not been included as one of his creditors.
The Court has a wide discretion in refusing to make a sequestration order under s.52(2)(b) of the Act. The circumstances giving rise to the exercise of the discretion are extremely variable and it is not appropriate to catalogue and circumscribe them; Clyne v Deputy Commissioner of Taxation (1985) 5 FCR 1 at [5] (citing Cain v Whyte (1933) 48 CLR 639 at [645]). The Court must consider the public interest when exercising its discretion. In Cain v Whyte (1933) 48 CLR 639 the Court said at [646]:
“[I]t is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. Something has to be put before the court to outweigh those considerations before it can be said that sufficient cause is shown against the making of the sequestration order.”
In Ling the Full Court, Davies, Wilcox and Branson JJ, considered the exercise of discretion where the debtor was involved in litigation with a third party:
“The authorities also show that satisfaction that the debtor is well advanced with litigation likely to result in the debtor being in a position to pay his or her debts may well provide a basis for a finding that there is a "sufficient cause" for a sequestration order not to be made (see, for example, Maddestra v Penfolds Wines Pty Ltd). But the authorities do not suggest that it is in the public interest to allow insolvent debtors to prosecute litigation generally. They only recognise that it is not in the public interest for a debtor to be forced into bankruptcy by reason of a state of insolvency likely to be of only short duration.” [26]
Their Honours also considered the situation where the debtor claimed solvency but for the existence of a mareva order:
“The "restraint imposed by an order of a court" relied upon by the present appellant is the effect of Lockhart J's order of 2 December 1993. Its relevant terms are set out above. They are in the nature of a Mareva injunction. In considering this matter, Lehane J referred to the decision of Heerey J in Re Ousley; Ex parte Commissioner of Taxation (1994) 48 FCR 131. In that case his Honour expressed the opinion that a Mareva injunction does not impose on execution similar restrictions to those imposed by the appointment of a receiver or a trustee to control the debtor's property. Indeed, he pointed out that one of the functions of a Mareva injunction, which creates rights in personam but not in rem, is to aid execution (Stewart Chartering Co Ltd v C & O Managements SA [1980] 1 WLR 460; [1980] 1 All ER 718 at 461, 719; Orwell Steel (Erection and Fabrication) Ltd v Asphalt and Tarmac (UK) Ltd [1984] 1 WLR 1097; [1985] 3 All ER 747).
We find the analysis of Heerey J in Re Ousley persuasive. We do not need to consider whether there is any conflict between the approach of the Full Court in the passage set out above from the Wiltshire-Smith case and the views expressed by Heerey J in Re Ousley. The passage from Wiltshire-Smith on which the appellant placed reliance speaks of a court order which has "the same practical effect" as a court order "removing his ability to make payment" of the judgment debt. It thus assumes an ability to pay the debt absent the court order; or, put another way and in the language of the Full Court, that "the practical reality" is the "the order in any way prevent(s) the debtor from paying his debt". In this case there is no evidence that the Mareva injunction removed the appellant's capacity to pay the judgment debt and the appellant's counsel conceded that it could not be assumed that it did so.”
The concerns which I have expressed earlier in these reasons about the true state of Mr Visnic’s financial affairs and my difficulty in satisfying myself that his assets do exceed his liabilities as claimed militate against the exercise of my discretion under s.52(2)(b). I would have been prepared, had I been asked, to consider sympathetically a request for an adjournment of this application whilst Mr Visnic made an urgent application to the Family Court to have the amount of the petitioner’s debt released to him. I put to Mr Street that the debtor did not appear to be making such an application and he confirmed that he was not. I think in all the circumstances it is not appropriate that the Court exercises its discretion in the debtor’s favour and the second ground of application fails.
Finally, Mr Street asks that the Court transfer these proceedings pursuant to s.35A of the Act so that the Family Court can deal with this creditor’s claim. Mr Street in his submissions to me made much of the fact that the creditor had not sought to utilise s.79 of the Family Law Act 1975 (Cth) which under s.79(10) allows a creditor of a party to itself become a party to the proceedings where the creditor may not be able to recover his or her debt if orders were made as to the division of property. It has not been explained to me what benefit a creditor may obtain from such an application. It was suggested it was the release of the funds that Mr Visnic himself did not apply for. It seems that his argument proceeded on the basis that the creditor has all along known those things that are only revealed to the Court in the report from the liquidator which is dated 18 March 2010. By that time, these bankruptcy proceedings were well advanced and Cohen J had reserved his judgment in the family law case. Mr Visnic incurred his debt to the creditor some years ago and committed an act of bankruptcy in respect of it some eight months ago. The creditor is entitled to pursue his remedy and to have the estate sequestrated; Cain (supra). It should not be made to proceed to another court at further expense, particularly when it would appear that the debtor’s situation is such that he is in all probability insolvent so that it is in the public interest that his assets be collected in by the Trustee and divided for the benefit of all of his creditors. I would not propose to transfer this case as requested.
The application has been unsuccessful. The creditor has provided me with the necessary affidavits of search and debt. I am satisfied that the respondent committed the act of bankruptcy alleged in the petition. I am satisfied with the proof of the other matters identified by s.52 of the Bankruptcy Act. I make a sequestration order against the estate of Milan Visnic. I order that the applicant’s costs including reserved costs, if any, be taxed and paid from the estate of the respondent in accordance with the Act. Under the Bankruptcy Regulations a copy of this sequestration order shall be given to the Official Receiver in Sydney in two days. The Court notes that the date of the act of bankruptcy is 4 August 2009. I note that a consent to act as Trustee has been signed by Nicholas Malanos and has been lodged with the Official Receiver in Sydney.
I certify that the preceding seventeen (17) paragraphs are a true copy of the reasons for judgment of Raphael FM
Associate:
Date: 3 May 2010
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