D.C.T. v Sumner-Potts - [2006] FMCA 877

FEDERAL MAGISTRATES COURT OF AUSTRALIA

D.C.T. v SUMNER-POTTS

[2006] FMCA 877

BANKRUPTCY – Creditors petition – proof of solvency.

Bankruptcy Act 1966, ss.5(2), 52(2)
Corporations Act 2001, ss.601AB, 601AD, 601AH

ReSarina ex parte Wollondilly Shire Council (1980) 32 ALR 596

Applicant:

DEPUTY COMMISSIONER OF TAXATION

Respondent:

MICHAEL PHILIP SUMNER-POTTS

File number:

BRG796 of 2005

Judgment of:

Jarrett FM

Hearing date:

24 February, 2006

Date of last submission:

24 February, 2006

Delivered at:

Brisbane

Delivered on:

24 February, 2006

REPRESENTATION

Counsel for the Applicant:

Ms Chattaway

Solicitors for the Applicant:

Australian Taxation Office

Solicitor for the Respondent:

Mr Thompson

Solicitors for the Respondent:

Myles Thompson Lawyers

ORDERS

That a sequestration order be made against the Estate of Michael Philip Sumner-Potts.
That the Petitioning Creditor’s costs of and incidental to the Creditor’s Petition be fixed in the sum of NINE HUNDRED AND SEVEN DOLLARS AND SIXTY CENTS ($907.60) and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act1966.

I note that the act of bankruptcy is 19 October 2005.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
BRISBANE

BRG796 OF 2005

DEPUTY COMMISSIONER OF TAXATION

Applicant

And

MICHAEL PHILIP SUMNER-POTTS

Respondent

REASONS FOR JUDGMENT

Ex Tempore

This is a hearing of a creditor's petition that was presented on 14 December, 2005 by the Deputy Commission of Taxation for the sequestration of the estate of Michael Philip Sumner-Potts. The creditor's petition relies upon an act of bankruptcy committed by the debtor on 19 October, 2005.
The act of bankruptcy relied upon is the debtor's failure to comply with a bankruptcy notice issued on 11 August, 2005. That bankruptcy notice, in turn, is founded upon a judgment of the District Court of Queensland given on 28 July, 2005 following an application for summary judgment. By that judgment, the debtor was ordered to pay to the petitioning creditor the sum of $175,763.93 inclusive of interest and costs.
The bankruptcy notice is in the prescribed form. It seeks payment of the judgment debt from the debtor and has been regularly and validly served on him. No issue is taken with the bankruptcy notice, service of it or the assertion that an act of bankruptcy has been committed by reason of the debtor's failure to comply with it.
On 16 February this year, the debtor filed a notice stating his grounds of opposition to the creditor's petition. According to that document he opposed the petition on the following grounds:
a)That he is solvent in accordance with the definition in Bankruptcy Act s.5(2) because at all material times he is or will be able to pay his debts as they become due and payable;
b)The petition should not proceed on 17 February, 2006 (the date fixed for the hearing of the petition), or proceed at all because the respondent has obtained loan funds to pay the alleged debt, the quantum of which was not admitted but would be paid under protest because of the unfairness of the petitioner more further particularised in the affidavit of the respondent filed with the Notice;
c)In all the circumstances it is unfair and "repressive" that the petition should proceed at all or proceed on 17 February, 2006.
In support of the notice stating the grounds of opposition to the petition the debtor also filed a number of affidavits. One was sworn by the debtor's solicitor, Myles Thompson, and filed on 16 February, 2006. There are two affidavits by the debtor filed on 16 February, 2006. On 17 February, 2006 it appears that the matter was unable to be reached and it was adjourned for hearing before me on 20 February, 2006.
When the matter came before me on Monday of this week I adjourned the matter to today and made some directions for the filing of any further affidavit evidence upon which the debtor wished to rely. In consequence of those directions but not in compliance with them, two affidavits were filed. The first an affidavit of the debtor filed 23 February, 2006 (within the time provided for in the directions). The second, an affidavit of Myles Thompson sworn today, was not filed in accordance with the directions because the material deposed to in it only came to hand late on 23 February, 2006.
That seems to be the material relied upon by the debtor in these proceedings. There was also an outline of submissions on behalf of the debtor filed on 17 February, 2006.
In addition to the usual material, the petitioning creditor also relies upon an affidavit of Kylie Anne Chattaway sworn today and filed today by leave.
The making of a sequestration order pursuant to s.52 of the Bankruptcy Act is discretionary. I can refuse to exercise the discretion and dismiss the petition if, according to s.52(2), I am satisfied by the debtor that he or she is able to pay his or her debts, or that for another sufficient cause a sequestration order ought not be made. The ground provided in s.52(2)(a) of the Act is commonly referred to as proof of solvency by the debtor.
In this case the debtor says he is solvent. Primarily, but not only because he has secured the means by which he says he can now pay the petitioning creditor's debt. There is no doubt that a petitioning creditor is not obliged to accept tender of payment of a debt which founds a creditor's petition. The hearing and determination of a creditor's petition and the exercise of the relevant discretion is not something that simply takes place as between the parties to the petition, but is exercised bearing in mind the public policy to which the insolvency laws and in particular the Bankruptcy Act are directed.
The evidence for the debtor is that he has been in discussions, if I can use that neutral term, with the petitioning creditor about his taxation affairs for some time. Despite those discussions and despite the debtor's position with respect to what is owed by him to the tax office, or perhaps more to the point what is not owed by him, the fact of the matter is that there has been a judgment entered against him in the District Court of Queensland for the debt the subject of the Bankruptcy Notice.
This Court, of course, has the opportunity to go behind a judgment debt, particularly one entered by default on the hearing of a creditor's petition, but this was not a judgment debt entered by default. Rather, it was a judgment entered after the hearing of a summary judgment application. Moreover, it seems to me that there is absolutely nothing in the debtor's material that mandates me to go behind the judgment debt the petitioning creditor has obtained against him.
The debtor seeks to explain his delay in dealing with this matter in his larger affidavit filed on 16 February, 2006. It seems that at some stage last year, although the time is not precisely stated, he made inquiries of his usual bankers for financial accommodation to assist in dealing with the debt owed to the petitioning creditor. Those inquiries were unsuccessful. In November 2005, he engaged another finance broker or mortgage broker perhaps to assist him. He was advised that with his taxation returns up to date he would be more likely and it would be cheaper for him to find financial assistance.
The debtor owes a large sum; they are his words in paragraph 7 of his affidavit, to his accountant for outstanding fees. No precision is put on the term "large sum". Nonetheless, his accountant it seems was prepared to help him bring his taxation returns up to date. That accountant was provided with information but then went on annual leave in mid-December to return in the first half of January, 2006. There were difficulties in providing some information to the accountant because of the debtor's computer facilities. His computers, it seems, both at work and at home had failed or were in the process of failing and rather than attempt an immediate rectification of them the debtor appears to have sought to address the matter in a less than useful fashion. He says in paragraph 8 of his affidavit filed on 16 February, 2006:
I wasted several weekends trying to fix the computer and get my data off. I gave up last weekend and engaged a nearby computer technician to build a new one for me. He advised me this morning that he is unable to copy any files from my old hard drive. I hope to have the information to my accountant next week, but this will entail rebuilding some files.
That affidavit, I remind myself, was sworn on 16 February, 2006 and filed on that same day.
In paragraph 12 of his affidavit of 16 February, 2006 the debtor says this:
As a result of the unreasonable lack of cooperation [from the petitioning creditor] as detailed above I have had to ask my finance broker to pursue the option of a "low doc" loan which is one where supporting documents in particular taxation records are not available. I have been advised today that a letter of offer will be received today. I intend to accept that offer and upon the loan being completed will have funds with which to resolve taxation issues.
In a shorter affidavit filed on 16 February, 2006, the debtor swears that:
I have now received a finance approval letter for a sum sufficient to satisfy the amount claimed in the petition. I have accepted that offer.
A copy of the letter of offer is not exhibited to the affidavit, nor are its terms set out in the affidavit in any meaningful way.
On 16 February, 2006 Mr Thompson swore an affidavit wherein he exhibited a letter received by him from an organisation described as Premier Mortgage Solutions. The letter is dated 16 February, 2006. It is in these terms:
Please be advised that Mr Sumner-Potts has applied for finance to pay an outstanding Australian Taxation Office liability. The lender has verbally indicated that the finance will be approved and we are awaiting this in writing.
In his affidavit sworn and filed 23 February, 2006 the debtor swears that he received the letter of offer of loan funds in a sum considerably in excess of the amount claimed by the petitioner and that he has accepted that offer. For that offer to become unconditional, certain lenders requirements needed to be satisfied. Mr Sumner-Potts swears that those requirements are not onerous and he had no doubt that they would be satisfied.
A copy of the relevant correspondence is exhibited to his affidavit. Again, it is a letter from an organisation described as Premier Mortgage Solutions. The letter is dated 23 February, 2006. It is addressed to Mr Thompson. It is in the following terms:
I confirm all of the preconditions for granting the loan have been satisfied. I confirm that there is nothing preventing an unconditional loan offer and I am expecting to receive it forthwith. If the unconditional loan offer is received tomorrow, 24 February 2006, settlement of the loan can occur within two weeks. There is sufficient funds available to pay out the ATO and Mr Sumner Potts's accountant in full.
Thus at that stage the evidence was that there had not, as of the swearing of that affidavit, been an offer of an unconditional loan to the debtor despite what he has sworn in two affidavits. The letter exhibited to his affidavit of 23 February 2006 makes it absolutely plain, in my view, that an unconditional loan offer had not been made by any person or organisation to the debtor. Rather, one was expected to be made.
Later on the afternoon of 23 February, 2006 an organisation called Queenslanders Credit Union Limited sent a letter to the Director, Sumner Villa Pty Ltd. The letter is in these terms:
Dear Michael,
LOAN APPLICATION $500,000 - APPROVAL
I refer to our previous letters dated 15 February 2006. I am pleased to confirm the following -
· The valuation of your security property has been accepted.
· Satisfactory searches and stamped documentation requirements must be completed prior to the loan being settled. Please have your conveyancer provide these to our solicitor as soon as possible to ensure nothing adverse is apparent which would deem the security property unacceptable.
We will instruct solicitors to proceed with the preparation of documentation …
A number of matters are apparent from that correspondence. The first is that the letter is presumably directed to the debtor in his capacity as director of a company called Sumner Villa Pty Ltd although there is no direct evidence of that. The second matter that is apparent is that whilst approval has been given on the loan application one of the conditions of the approval is that:
Satisfactory searches and standard documentation requirements must be completed prior to the loan being settled.
The affidavit of Kylie Chattaway filed this morning by leave demonstrates that there was such a company known as Sumner Villa Pty Ltd but the incorporation of that company was deregistered by ASIC on 15 January, 2006 pursuant to the provisions of s.601AB of the Corporations Act 2001.
Section 601AB of the Corporations Act 2001 provides for the circumstances in which ASIC might initiate deregistration of a company. There are a number of bases set out in the sub-sections of that section upon which ASIC might fix to determine to deregister a company. There is nothing in the material before me to demonstrate why it is that the company has been deregistered. I observe, but place no particular weight on the fact that under s.601AB(1)A, ASIC may decide to deregister a company if the company's review fee in respect of a review date has not been paid in full at least 12 months after the due date for payment.
The effect of deregistration of a company is set out in s.601AD of the Corporations Act 2001. Essentially and without attempting to be exhaustive, the effect of that section is that the property owned by the company at the date of deregistration is vested in ASIC and it is only ASIC that has power to deal with it.
Section 601AH of the Act provides for the reinstatement of corporations. Corporations that have been deregistered can be reinstated either by ASIC or by order of a Court. Reinstatement by ASIC can take place where the corporation should not have been deregistered. No submissions have been addressed to me on that aspect of the matter, but on its face that tends to suggest to me that ASIC may reinstate the registration of a corporation where ASIC has erroneously deregistered a corporation in circumstances where it was not entitled to do so.
Section 601AH(2) provides for reinstatement by a court. Again, without attempting to be exhaustive it seems to me that that reference is either to the Supreme Court of a state or to the Federal Court of Australia. An application is required but once a corporation is reinstated it is revested with all of the property of which it stood vested at the time of deregistration.
For present purposes, however, the position is that Sumner Villa Pty Ltd stands deregistered. It has no property. It has no existence and on that basis it is difficult to see how the conditions attached to the loan approval set out in the letter of 23 February, 2006 can be met given that the property of the company vests in ASIC and neither in the deregistered company or the debtor.
As Mr Thompson argues for the debtor, that position might be reversed by reinstatement of the company but I do not accept his assertions from the Bar table that that is a simple process that could be accomplished in the next two weeks. As I have attempted to set out, it is more likely than not that it will require an application to either the Supreme Court or the Federal Court.
What flows from all of that is that there are real concerns in this matter about the solvency of the debtor. Apart from the matters I have already referred to, nowhere in his affidavit material does the debtor depose to his assets and liabilities or his income and expenses with any particularity. The documents upon which he relies to show a capacity to pay this debt make it plain that the assets upon which he is relying to raise finance do not belong to him. Moreover, even if it was the case that the company Sumner Villa Pty Ltd was not deregistered, the property owned by it does not belong to him. It belongs to the company.
There is no deposition in the debtor's material as to his debts. All he deposes is that he owes the petitioning creditor the judgment debt in this case and a "significant sum" to his accountant, but there is no precision whatsoever put on that sum or any precision put to the terms used by him in his affidavit to describe that debt. Moreover, there is evidence in his affidavit that tends to suggest that there are other debts which he does not view as significant and which have not been disclosed.
In those circumstances, it is entirely impossible for me to come to the conclusion that the debtor is able to pay his debts. There is no evidence of what those debts are nor how the debtor might pay them.
The consequences of a sequestration order are significant. In the written submissions filed by the debtor on 17 February, 2006 he sets out a passage from a decision of the Full Court of the Federal Court of Australia in ReSarina ex parte Wollondilly Shire Council (1980)

32 ALR 596.
Lest it be said that I am not sufficiently aware of the consequences of bankruptcy it is worth repeating that passage. It is as follows:
In bankruptcy rights of creditors to sue the bankrupt are converted into rights of proof against his estate and he is protected from suit. The avoidance of preferences, voluntary settlements and fraudulent dispositions of property by the bankrupt is intended to restore the property or money of the bankrupt to his estate to achieve a fair and rateable division of the bankrupt's property among his creditors. The bankrupt is disqualified from holding certain offices. Bankruptcy involves a change of status and quasi penal consequences. Upon discharge from bankruptcy the bankrupt is released from his debt subject to certain exceptions.
The debtor in this case is a practising barrister. He points out in his material that apart from the ordinary consequences that might flow from a sequestration order against his estate there might be in this case professional ramifications for him as well. If that is the case, then that is simply one of the consequences, it seems to me, from the making of a sequestration order.
I am not satisfied in the circumstances of this case that the debtor is able to pay his debts as and when they fall due. I am not satisfied that the making of a sequestration order in this case is "repressive". In my view the circumstances warranting the making of a sequestration order as set out in s.52 of the Bankruptcy Act have been proved.

ORDERS DELIVERED:

I certify that the preceding thirty-eight (38) paragraphs are a true copy of the reasons for judgment of Jarrett FM

Associate: S. Haysom

Date: 19 June 2006