D.C.T. v Salera - [2004] FMCA 714

FEDERAL MAGISTRATES COURT OF AUSTRALIA

D.C.T. v SALERA

[2004] FMCA 714

BANKRUPTCY – Creditors petition – adjournment refused – petition listed for hearing on four previous occasions.

Bankruptcy Act 1966, s.52(1)

Re Alex Lakatos; Ex parte Alex Lakatos v Deputy Commissioner of Taxation No. QB1734 of 1996 FED 543/96 Bankruptcy

Applicant:

DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent:

ALDO T SALERA

File No:

MLG 567 of 2004

Delivered on:

4 October 2004

Delivered at:

Melbourne

Hearing Date:

4 October 2004

Judgment of:

McInnis FM

REPRESENTATION

Counsel for the Applicant:

Mr T Ellis

Solicitors for the Applicant:

Australian Taxation Office

Respondent:

In person

ORDERS

A Sequestration Order be made against the estate of ALDO
T SALERA.
The Applicant Creditor’s costs (including reserved costs, if any) be taxed and paid from the estate of the Respondent Debtor in accordance with the Bankruptcy Act 1966.

The Court notes that the date of the act of bankruptcy is 21 March 2004.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 567 of 2004

DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

ALDO T SALERA

Respondent

REASONS FOR JUDGMENT

(Revised from transcript)

This is a creditor's petition by the Deputy Commissioner of Taxation of the Commonwealth of Australia (the creditor) against Aldo T. Salera, (the debtor). The creditor seeks a sequestration order this day. The debtor has sought an adjournment of the proceedings and has relied upon affidavit material including affidavits filed by him as recently as today wherein he suggests that over a period of some further time, namely ‘a week or two’, he may be in a position where funds can be raised upon security of property in order to satisfy the debt.
During the course of submissions by both parties in relation to whether or not the court should grant an adjournment, submissions were made for and on behalf of the creditor in support of a sequestration order being made this day and the debtor was permitted to rely upon additional material, both in support of the application for the adjournment and otherwise in opposition to the creditor’s petition.
It is appropriate at the outset to refer to the chronology of the events in this instance because that chronology is both relevant to the application for adjournment and the creditor's petition. In this matter the creditor's petition relies upon a bankruptcy notice which in turn has as its foundation stone an order of the County Court in default of appearance for the sum of $127,869.96 made on 14 November 2003. It is not in dispute that the bankruptcy notice issued in relation to that order was served upon the respondent on 29 February 2004 and that accordingly the date of act of bankruptcy, if there be one, would be 21 March 2004.
The petition was presented on 20 May 2004 and served on 15 June 2004. It is clear from the court file that an appearance was filed on

2 July 2004 with a first hearing of the petition occurring on 8 July 2004. It would appear that the matter on that occasion was adjourned to 29 July 2004. In all of the hearings the debtor has not been represented before this court.
The debtor had filed an affidavit sworn by him on 24 July 2004, relied upon affidavits sworn by him on 11 August 2004, 12 August 2004,

2 September 2004, 9 September 2004 and 4 October 2004. The chronology of hearings continues and it is clear again from the court file that after the second hearing on 29 July 2004 the matter was further adjourned to 12 August 2004. The matter was further adjourned to

9 September 2004 when it was again adjourned for what became the fifth hearing date this day today.
In considering the affidavit material it is clear on a proper reading of the affidavit material that there is a similarity in terms of the content of the affidavits. I simply refer to the earlier affidavits and in particular

I note the affidavit sworn on 11 August 2004 refers to the debtor obtaining finance then said to be for one half the amount owing to the creditor and obtaining finance from another institution for the other half. It refers to both the debtor and his wife who works with him in a jewellery business who both work hard to try and earn as much income and cash as possible in order to "dissolve our debt with all our creditors". It refers to certain payments being made and it otherwise refers to the attempts to borrow.
In the affidavit sworn 12 August 2004 reference again is made to attempts to borrow money and what might be described in general terms as a refinancing proposal of a kind which would be sufficient to extinguish the respondent's debts, including the debt to the applicant in this petition. The further affidavit of 2 September 2004 refers to what is described as the current situation with respect to the settlement of the debt and refers to a bank, namely ‘La Trobe’, as "settling the title of property and lending me $80,000 on my home loan" and "a second bank, Westpac, will lend me the balance, including interest and costs". It refers to there being a lot of complex work being conducted between the respondent and both banks to finally conclude the matter in settling the debt with the creditor and claims that on 9 September 2004 the creditor should "have further information regarding the settlement". In that affidavit of 12 August 2004 reference is made to the process of settling the debt as being a ‘long one’ due to the exchange and collection of documents and information.
In an affidavit sworn 9 September 2004 the debtor again refers to what he describes as "the latest information with respect to my loan in settlement of my debt with the ATO". He further states:
“The finalisation in the processing of the loans is close, $80,000 for one title and $175,000 for two other titles, which will leave excess funds to pay future tax liabilities.”
Annexed to that affidavit appear to be two documents: a Discharge/ Refinance Authority to the Commonwealth Bank, which appears to be dated 31 August 2004 and relates to discharge of a mortgage over one property being a shop 129/8 34 Gladstone Park Drive, Gladstone Park. There is a further document entitled “Letter of Instructions – Surrendering Deeds” purportedly addressed to the National Bank dated 31 August 2004 from what I take to be the debtor and his wife which I take to be provided as reliance in support of the deponent's assertion that arrangements have been made to discharge current debts.
In his most recent affidavit sworn 4 October 2004 the debtor states:
As at today, I have received approval for a loan of $171,750 from Bluestone Mortgage and have also been offered a line of credit for $220,000 from Bank West. The settlement of the two above instruments of finance between myself and the organisations (legal documentation, etc) will be effected within the next week or so.
Upon this settlement I will then be in a position to finally clear my debt (amount owing) with the ATO.
The settlement of my debt with the ATO has taken longer than expected, but as at this point the matter will shortly reach its conclusion.
In the absence of any objection, I permitted the debtor to rely upon the affidavit sworn 4 October 2004, and, perhaps more significantly, to rely upon, though not exhibited to that affidavit, a document from Bluestone Mortgages dated 17 September 2004 entitled “Conditional Approval” and addressed to the respondent and Mrs Laura Salera, who I am told is the debtor’s wife.
The author of that letter states in part:
We are pleased to advise you that your application for a loan has been conditionally approved based on the information submitted.
The principal terms of the proposed loan are enclosed. You should check these details to ensure that they correctly reflect your application and understanding. There are a number of conditions as outlined which must be met before final approval can be considered. Once these conditions are satisfied and you are happy to proceed, we may then instruct our panel lawyer to prepare loan documentation.
Further in that letter the author states:
IMPORTANT
This conditional approval is not an offer to enter into a loan, nor is it a precontractual disclosure for the purpose of the Consumer Credit Code. If you decide to borrow from us you must rely only on the information contained in the formal loan agreement which may be sent to you in due course. This sets out the final terms of your loan which overrides this approval and by signing it you agree that you have not relied on any promises that are contained in the formal loan agreement itself. In particular, you acknowledge that your decision to borrow from us is based on your own assessment of the loan product. If this is not the case you should tell us now. If your circumstances change to the extent that we feel completion of the matter would be undesirable, we have the right to cancel this conditional approval at any time.
Attached to that letter entitled ‘Conditional Approval’ is a further document under the heading ‘Proposed Loan’ where the borrowers include the respondent and his wife. Security is said to be a registered first mortgage over a property at 40 Morefield Court, Diggers Rest. The total loan amount is said to be $468,750. The purpose of the loan is referred to as ‘debt consolidation’. The debts referred to as being refinanced include a mortgage to the National Australia Bank of $297,000 and judgment of the Deputy Commissioner of Taxation of $129,144. There is a further reference to rates to Hume City Council and what is described as “Other” being "Business Purpose Balance” of funds". The loan is for a period of 30 years at an annual percentage interest rate of 10.7 per cent with repayments of $4179.69 being interest only for the first three years of the 30-year loan period with the remainder reverting to principal and interest.
It is clear to me on a proper analysis of the document to which I have just referred that it could not be described as approval for a loan of $171,750 as described by the deponent. It is at best a conditional approval and specifically is said to be not an offer to enter into a loan. What appears to be absent from the material is the additional information sought indeed by the prospective lender. Under the heading “Conditions To Be Satisfied” the prospective lender claims that the debtor should provide the following information:
·Signed and dated Bluestone's Consent to Obtain Personal Information and Credit Reports,
·Correctly completed Bluestone's Self-Certified Income Declaration (to be individually completed for each applicant with their respective business details, ie business name & ABN) legible copy of both applicants' driver's licence.
The creditor in opposing the application for adjournment and in support of the petition and sequestration order has submitted that the affidavit material does not demonstrate sufficient detail which would satisfy the court that the debtor is solvent, nor sufficient detail concerning the income and expenses of the debtor or other details which would satisfy the court that the adjournment should be granted or that there is indeed any realistic immediate prospect of liquidation of assets of a kind which would satisfy the debt.
In my view, the current state of the evidence of the debtor is unsatisfactory. Whilst I can understand, having regard to the chronology of events and the affidavits to which I have referred, that the debtor has continued to be hopeful of refinancing, it is clear that the refinancing process has been slow and unsatisfactory. It has not been confined to one potential borrower, has not culminated in what I would describe as any definite prospect of an advance of money based upon the securities relied upon by the respondent.
Having regard to the chronology of events and the number of times the matter has previously been listed, together with affidavit material seeking to assure the court and indeed the creditor that the prospect of an advance and refinancing was imminent, it is my view that this being the fifth court hearing date, and having regard to the state of the evidence, it would not be appropriate for me to exercise the discretion to grant an adjournment of this application.
It remains for me then to consider the issues that are relevant in relation to the creditor's petition and whether or not the court should on the material before it proceed to make a sequestration order. In addition to the usual documents which were filed in support of the petition, the creditor has this day relied upon an affidavit of search of Rita Lowe sworn 1 October 2004 and an affidavit of liability of Melina Secuti sworn 4 October 2004. In support of the application I have otherwise been referred to the unreported decision of Cooper J in the matter of Re Alex Lakatos; Ex parte Alex Lakatos v Deputy Commissioner of Taxation No. QB1734 of 1996 FED 543/96 Bankruptcy.
In that decision the court had to consider what the applicant submitted was similar circumstances to the circumstances presented to this court in this application. I accept that there are certain similarities, at least to the extent in giving this debtor the benefit of the doubt that there may well be property and assets of a kind which in total may be seen to exceed the debt due to the creditor. It is difficult to be more precise in analysing the material, but I am prepared in the circumstances to draw that conclusion in this case. Part of the difficulty in this case has been the lack of relevant information, that is, detailed information as to the true financial circumstances of the debtor.
Whilst in a statement of assets and liabilities as at 30 June 2004 annexed to the affidavit of the respondent sworn 24 July 2004 he has listed total assets of $2,037,5000, including two properties, one at High Street, Preston and a shop at Gladstone Park Shopping Centre, he has otherwise referred to liabilities in brief terms including bank loans on property without distinguishing over which property the loans have been obtained of $235,000 and creditors of $8600 with a total of liabilities of $243,600. There is no specific reference to the creditor's debt, nor other debts in that material. It is also clear in the material annexed that there is no detailed analysis of a kind that might otherwise be provided in relation to the total financial circumstances of both the respondent and his wife in the business. Nevertheless, at least prima facie, there may appear to be property of a kind which may, at least potentially, have a value exceeding the liabilities.
In referring to the decision of Cooper J in the matter of Lakatos where, as I indicate, I am satisfied a similar position in relation to assets and liabilities presented itself to the court, I was taken specifically to the judgment of His Honour Cooper J where His Honour sets out in paragraph 5 some detail of the affidavit material then before him.
I was then taken to paragraphs 7, 8, 9, 10 and 11 of His Honour's reasoning as follows:-
“7. If a debtor is able to pay his debts within the meaning of s 52(2)(a) of the Act the court in bankruptcy will ordinarily dismiss a petition brought against him although s 52(2)(a) is a permissive rather than a mandatory provision (see Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372(FC); Re Stirling; Ex parte Webb Ross and Co (1990) 1 NZLR 569).
8. Mr Lakatos bears the onus of establishing an ability to pay his debts (Re Poulson; Ex parte Hempenstall Bros Ltd (No 2) (1929) 1 ABC 54 at 59 - 60). It is not sufficient for him to show that his assets exceed his liabilities (Re Jones; Ex parte Clutterbuck Bros (Adelaide) Ltd (1930) 2 ABC 89; Re Noye; Ex parte Deputy Federal Commissioner of Taxation (1956) 18 ABC 77). The test of ability to pay debts is that stated by Barwick CJ (with whom McTiernan and Windeyer JJ agreed) in Sandell v Porter (1966) 115 CLR 666 (at 670):-
"... Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency."
9. It is not disputed that Mr Lakatos' assets far exceed his liabilities. However, the material does not disclose an ability on his part to pay his debts as they fall due. Mr Lakatos has not deposed to the level of his recurrent expenses, which include repayments of a substantial mortgage debt, nor to any ability to meet them out of recurrent earnings or otherwise. Mr Lakatos does not depose to the trading performance of the business owned by he and his wife, except to say that it "trades profitably". There is no evidence as to the speed with which any of his assets could be realised to meet the debt which founded the petition or any other debt. Similarly, there is no evidence that Mr Lakatos would be able to borrow against his assets or any of them in order to pay his debts.
10. The document signed by Mr Lakatos and his wife on 11 June 1996 shows that, more than one year after the Deputy Commissioner obtained judgment in the Magistrates' Court, Mr Lakatos still required three months to pay the debts owing by him. Further, the document is not expressed in terms which would suggest any confidence that the debt would be paid after that time. Indeed, it raises the prospect that upon sale of his divisible assets Mr Lakatos may still need the assistance of a loan from his wife in order to pay all the debts owing by him.
11. Such evidence as is before me does not establish that Mr Lakatos is solvent. He is not experiencing any temporary lack of liquidity but is unable to pay his debts as they fall due out of his cash resources or out of funds he can procure within a relatively short time by sale or pledge of his assets. I am satisfied that Mr Lakatos is not able to pay his debts within the meaning of s 52(2)(a) of the Act.”
It is clear to me that in this case, as in the Lakatos case, the respondent does bear the onus of establishing an ability to pay his debts.
On the history before me I am satisfied in applying the principles of law to which His Honour Cooper J referred, including application appropriately of the High Court decision in Sandler v Porter included in paragraph 8 of Cooper J's decision, that in the present case the mere appearance of an excess of assets over liabilities is insufficient to discharge the onus placed upon the debtor to establish an ability to pay his debts. I am not satisfied on the material before me that the respondent has satisfied this court that he is solvent. I am otherwise satisfied on the material that in fact it is reasonable to conclude that he is insolvent within the meaning of the law referred to by Cooper J in the decision to which I have referred of Lakatos.
It remains for me to consider then whether or not I am otherwise satisfied that the matters required to be proved in s.52(1) of the Bankruptcy Act have been satisfied. Having regard to the affidavit material, I am so satisfied in the present case. In my view, it would follow therefore that the appropriate order of the court is that a sequestration order should be made in this application.

I certify that the preceding twenty-six (26) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate:

Date: 4 October 2004