DCT v McCormick (No.2) - [2005] FMCA 729

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DCT v McCORMICK (No.2)

[2005] FMCA 729

BANKRUPTCY – Creditors petition – whether debtor solvent – sale of property of another – re-finance and new loan – whether sufficient evidence of solvency – relevance of debtor being legal practitioner.

Bankruptcy Act 1966, s.52(2)(a), s.52(2)(b)

Deputy Commissioner of Taxation v McCormick (No.1) [2005] FMCA 675
Sandell v Porter (1966) FCA 115 CLR 666
Re Sarina; Ex parte v Wollondilly Shire Council (19980) 43 FLR 163
Sarina v Wollondilly Shire Council (1980) 48 FLR 372
International Alpaca Management Pty Ltd v Ensor (1999) FCA 72 (10 February 1999)
Hardaker v Phair (2002) FCA 1176
Re Svir ex parte Deputy Commissioner of Taxation (1998) 154 ALR 710

Applicant:

DEPUTY COMMISSIONER OF TAXATION

Respondent:

BRYAN McCORMICK

File Number:

MLG 1664 of 2004

Judgment of:

McInnis FM

Hearing date:

11 May 2005

Delivered at:

Melbourne

Delivered on:

31 May 2005

REPRESENTATION

Counsel for the Applicant:

Mr. S. Gardiner

Solicitors for the Applicant:

Australian Government Solicitor

Counsel for the Respondent:

Mr. R. Broberg

Solicitors for the Respondent:

Irlicht & Broberg

ORDERS

A sequestration order be made against the estate of Bryan McCormick.
The applicant creditor's costs be taxed in accordance with the Federal Court rules and be paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (the Act).
Pursuant to section 52(3) of the Act orders 1 and 2 hereof are stayed for 7 days from the date of this order.

The Court notes that the date of the act of bankruptcy is 11 November 2004.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 1664 of 2004

DEPUTY COMMISSIONER OF TAXATION

Applicant

And

BRYAN McCORMICK

Respondent

REASONS FOR JUDGMENT

Introduction

The Deputy Commissioner of Taxation (The Creditor), by a creditor's petition filed on 21 December 2004, seeks a sequestration against Bryan McCormick (The Debtor). The creditor's petition relies upon a judgment debt obtained by the creditor in the County Court in the state of Victoria on 27 November 2003. The petition was the subject of an application for adjournment before this Court on 9 May 2005. On that date the Court refused the application for adjournment and provided reasons for that decision – see Deputy Commission of Taxation v McCormick (No.1) [2005] FMCA 675.
At that time the further consideration of the creditor's petition was adjourned for a short period of time to 11 May 2005. Upon the further hearing of the petition, it was made clear by the debtor's representative that the significant issue to be relied upon by the debtor was solvency. In the notice of intention to oppose the petition filed on 28 February 2005, the debtor seeks the exercise of the Court's discretion under s.52(2)(a) and (b) of the Bankruptcy Act 1966 (the Act) not to make a sequestration order based on the following reasons:
“(a)The respondent is able to pay out the correct balance outstanding to the applicant from the proceeds of sale of properties within his control or, alternatively, is able to raise funds against the security of this properties to pay this balance.
(b)As a practicing solicitor engaged in practice as a sole practitioner, the making of a sequestration order would be unduly prejudicial to him.”

Submissions

In support of debtor’s submissions, he has relied upon affidavit material which had previously been considered by the Court in part when dealing with the application for adjournment. Those affidavits include an affidavit of the debtor sworn on 28 February 2005, a further affidavit sworn 29 April 2005, and more recently an updated affidavit sworn 11 May 2005 and filed in Court on the day of the hearing. A further affidavit sworn by the debtor's wife on 6 May 2005 has also been relied upon in relation to this hearing.
The debtor referred the Court to the relevant principles. The debtor relies upon the evidence as supporting a conclusion that the debtor has significant net property assets, either of his own or belonging to his family available to him to satisfy his debts. It should be noted that although there was some reference to the issue of the correct balance outstanding to the petition creditor, there is no issue taken before this Court whereby the Court would be required to determine the exact amount outstanding. It is sufficient to note that it appears to be common ground that the amount outstanding is $136,000.00 with an amount of $10,000.00 apparently paid by the debtor a few days prior to this hearing.
Hence the debtor relies on his ability to pay debts and/or ‘other sufficient cause’ primarily by reason of his financial circumstances and/or the adverse impact on the debtor as a sole legal practitioner if a sequestration order is made.
Section 52(2)(a) and (b) of the Act relevantly provides:
“ (2) If the Court is not satisfied with the proof of any of those
matters, or is satisfied by the debtor:
(a) that he or she is able to pay his or her debts; or
(b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition.”
Both parties had referred the Court to relevant authorities which in brief terms include a reference to the decision of the Federal Court in the matter of Sandell v Porter (1966) FCA 115 CLR 666 and Re Sarina; Ex parte v Wollondilly Shire Council (19980) 43 FLR 163; Sarina v Wollondilly Shire Council (1980) 48 FLR 372. It is clear from the authorities to which reference has been made that if it can be established that the debtor is in a position to pay all of the debts that he owes within a reasonable time, then he ought not be subject to a sequestration order. I agree that the application of the relevant principles does not necessarily involve a simple balance sheet assessment of assets against liabilities and nor does it involve requiring a debtor to have sufficient cash on hand or available on deposit to pay all creditor’s in full immediately if the debtor has other assets.
It is noted that in Sandell v Porter, the Court in that case at page 670 states in relation to the funds being available to the debtor to pay his debts for solvency purposes are -
“15.… not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or by 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. …”. (Emphasis added)
The debtor seeks an order that the creditor's petition be dismissed. There is no doubt that the Court has a discretion which it can exercise pursuant to s.52(2) of the Act. I accept that if the debtor can prove solvency, then a Court may be reluctant to refrain from dismissing the petition. The essential requirement, well established by authority, is that the debtor must prove that he can pay debts as they fall due. The applicant creditor further relied upon other authorities, including the decision of the Federal Court in International Alpaca Management Pty Ltd v Ensor (1999) FCA 72 (10 February 1999) and in particular drew the Court's attention to the following paragraphs in that decision:
“ …
7 One thing that can be said immediately is that, since, according to the definition of "debt" in subs 5(1) of the Act, "debt" includes "liability", the debtor must satisfy the Court that he is able to pay his liabilities, to the extent to which he has liabilities which would not otherwise have been included within his debts.
8 Turning now to other aspects of the question which I posed in the next preceding paragraph of these reasons, I point out that the words of par 52(2)(a) of the Act, which words I have already set out, differ from those used in other related phrases in the Act.
…
11 In Bank of Australasia v Hall (1907) 4 CLR 1514, at 1527, Griffith CJ construed the phrase "unable to pay his debts as they become due" as it appeared in certain provisions of the Insolvency Act of 1874 (Qld). (In the context, the word "due" in that phrase seems plainly to have meant "payable".) His Honour (with whom Barton J agreed (see at 1531)) said that "the debts referred to [in the phrase] are not his debts `then' payable, but his debts `as they become due' -- a phrase which looks to the future", as well, obviously, as to the present. His Honour added that it was only the "reasonably immediate" future which was looked to in that connection. That construction was given to the phrase in repelling an argument that "only debts then actually payable and the amounts of which were then actually ascertained should be taken into consideration" in deciding whether, on a particular day, a person was unable to pay his debts as they became due. (For a case expressly applying the approach of Griffith CJ to similar words, although in a corporate, rather than an individual, insolvency context, see Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 466 (Federal Court of Australia, Sackville J).)
12 Yet other provisions of the Act (see, for example, par 124(3)(a)) speak of a person's having been unable to pay that person's debts as they became due from that person's own money. That formulation is different again from those already mentioned, because it expresses the idea of the (in) ability of a person to pay that person's debts as they become due (which, in the context, seems plainly to mean payable, as I have already pointed out in connection with the similar Queensland provisions under consideration in the Bank of Australasia Case) from that person's own money.
13 A question arises what is a person's own money in the context of provisions like those referred to in the preceding paragraph of these reasons. In Sandell v Porter (1966) 115 CLR 666, Barwick CJ (with whom McTiernan J agreed (at 672)) said (at 670-71), when dealing with s.95 of the 1924 federal bankruptcy legislation, which was a provision like those referred to in the preceding paragraph,
"[T]he 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. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due."
(See also the Bank of Australasia Case at 1528 (Griffith CJ) and 1542-43 (Isaacs J).)
14 However, although the notion of a person's own money is to be treated in the expansive way just described (subject to what I say in the next paragraph of these reasons), it does not extend, most obviously, to money borrowed without security for the purpose of paying one's debts; for a discussion of the relevance to the question of corporate insolvency of the ability to pay one's debts only with borrowed, as opposed to one's own, money, see, for example, Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267 at 276 (Federal Court of Australia, RD Nicholson J).
…
17 In spite of the legislature's failure to include, in terms, in par 52(2)(a) of the Act the language either of "when those debts become payable" or of "from the debtor's own money", the debtor nevertheless treated the paragraph before me as requiring that he prove an ability to pay, from his own money, his debts when they become payable. He did so by submitting: first, that, at the time of the hearing, he was required to and did satisfy the test of solvency set out in subs 5(2) of the Act; and, secondly, that the test of solvency set out in subs 5(2) of the Act "simply adopts the earlier test in Sandell v Porter".
18 For the purpose of determining the present petition, I propose to act upon that construction of par 52(2)(a) of the Act upon which the debtor proceeded before me. I do so, not only because of the debtor's approach, but also because two other Judges of this Court have also relied, in whole or in part, upon that construction and I have found no authority which is opposed to that construction. (The two other Judges of this Court to whom I am referring are Cooper J (see Re McVey; Ex parte Carswell and Company, unreported, 22 May 1996, at p 11; Re Eather; Ex parte Palada, unreported, 30 May 1996, at p 19) and Finn J (see Re Capel; Ex parte Caram Finance Australia Ltd, unreported, 9 April 1998, at p 8).)
19 (I add, however, that even if par 52(2)(a) of the Act were to be construed as only requiring the debtor to prove an ability to pay his debts presently payable and that from any money, whether his own or other people's, it is clear that proof of the matter set out in par 52(2)(a) of the Act does not entitle the debtor to the dismissal of the petition; it only enlivens the Court's discretion under subs 52(2) of the Act to dismiss the petition: Sarina v Wollondilly SC (1980) 48 FLR 372 at 376-77 (Bowen CJ and CA Sweeney and Lockhart JJ). On the narrower construction of par 52(2)(a) of the Act which I am hypothesising in this paragraph of my reasons, relevant considerations in the exercise of the discretion under subs 52(2) of the Act would, in my view, nevertheless be whether the debtor also has the ability to pay debts becoming payable in the reasonably immediate future and whether the debtor has the ability to pay the debtor's debts from the debtor's own money. That being so, the two matters which I have just mentioned would remain of importance in the determination of the present petition, even on a narrow construction of par 52(2)(a) of the Act. I will make further reference to the topic of this paragraph in par 31 below.)
…”
The affidavit material relied upon by the debtor in this case include detailed reference to the debtor's financial circumstances, and in particular, the claimed ability of the debtor to have made available for the purpose of paying debts assets which might properly be described as assets of family members. Specifically, it is noted that there are two significant potential sources of funds. The first is what is claimed to be the sale of a subdivided property at Stockade Street, Ballarat. In the debtor's first affidavit, sworn 28 February, he exhibits a title for that property and states that it is owned by his wife and has a "current valuation of $375,000.00 with a mortgage of $270,000.00". He further states: "the property consists of two and a half acres of land."
At the time of swearing the first affidavit, the debtor claimed to have lodged a plan of subdivision with the local municipal authority. The object of the plan of subdivision was to excise a half-acre block to be sold to the adjoining neighbour. It had been asserted in the first affidavit that the price agreed with the neighbour is $100,000.00. In the more recent affidavit relied upon by the debtor, he further refers to the sale of the subdivided half-acre from Stockade Street, Ballarat, in the following terms:
“4.I spoke to a person in the City of Ballarat Planning Department today and they provided an estimate of a further 6 to 8 weeks until the subdivision is approved by council. As the subdivision is relatively straightforward they did not anticipate any delays.
5. My neighbour, Mr Gerard Vanderkley, wishes to purchase the 1/2 acre subdivided portion and has made a formal written offer of $120,000.00 to purchase the block. ... My wife, Gaenor Lynne McCormick, who is the registered proprietor of the property has informed me that she proposes to accept this offer.
6. Notwithstanding the sale of the 1/2 acre block the remaining 2 acres with the family home on it will support the raising of finance secured by a second mortgage or caveat. State Securities have approved a loan of $55,000.00 on this basis and advised they expect settlement to take place within 2 to 3 weeks time. The funds become available on settlement and will be paid to the applicant. …”
The second source of funds referred to by the debtor appears to be an interest in a project called the Lake Federation Project. In the first affidavit, the debtor states the following:
“6.My family trust Stockade Family Trust is holder of a 9% equity in a project called The Lake Federation Project. This is a project for a development of a major health and lifestyle resort which will comprise two championship golf courses, 3000 houses an hotel and retirement village. After a lengthy bureaucratic process the resort has now received approval from the Ballarat City Council ...”
7. In accordance with the agreements between the various equity partners in the project, once approval is gazetted provisions of the development agreement are triggered which will result in a payment to the Stockade Family Trust of approximately $180,000. This arises by virtue of an option clause in the development agreement whereby one party, the holder presently of a 25% interest in the development, has the option to acquire a further 25% from the remaining partners. Given the value of the project will have once Ministerial approval is granted, that option would certainly be exercised. In accordance with the development agreement the payment of $180,000 would be expected approximately two weeks after the gazettal.
8. Both my wife and the family trust have agreed that monies available to them through respectively the sale of the ½ acre block of land and the Lake Federation Project will be immediately made available to me so that I can satisfy my debts including the required payment to the applicant. Accordingly I anticipate within three months being in a position to satisfy the applicant's claim in full.”
In the applicant's most recent affidavit, he provides further information in relation to the Lake Federation Resort. He states the following:
“7. As stated in my previous affidavit Thorney Property has an option to take up a larger share of the project. The option must be exercised within 20 business days of a final valuation being obtained. Federation Corporate Pty. Ltd. are the project managers of the Lake Federation project and have been in regular contact with the valuers, Frank Knight Valuers, seeking a final valuation. Federation Corporation have advised the valuation will be completed and available within 7 days.
7. In the event Thorney did not take up their option I would for the first time have the ability to provide the units that comprise my equity in the Lake Federation project as security to raise funds. Federation Corporate have handled all the finance related to matters of the Lake Federation project and advised me this morning there would be no shortage of funders who would provide me with sufficient funds to pay my creditors using my units as security. As those units have a value of $3.5 million, based on the interim valuation, the amount required to be raised is only a small fraction of the value of the security to be offered.”
It is noted that in the second of those paragraphs numbered "7" in the more recent affidavit, that objection is taken to that part of the paragraph which refers to what the deponent may have been advised by others without naming the others or providing affidavit material in an appropriate form. It is further noted that throughout the reference to the exercise of the option by Thorney Property has essentially rested on an assumption being made by the debtor that the option would indeed be exercised for obvious commercial reasons. There is no direct evidence from Thorney Property that the option would indeed be exercised.

It should further be noted in dealing with the material that there is evidence from the debtor's wife that the money, if it become available from the two sources, would be in turn made available to the debtor. However, there is no indication that the provision of these funds from assets not completely under the ownership and/or control of the debtor would be necessarily by way of gift. Accordingly, the creditor invites the Court to conclude, as the Court does indeed conclude, that on the material currently before the Court, the monies advanced from either the proceeds of the subdivided land at Stockade Street, Ballarat, or the proceeds from the exercise of the option from the Lake Federation Resort, would be by way of loan. Certainly if the option is not exercised in relation to the Lake Federation Resort, then finance would be raised using appropriate security and therefore further debt incurred by the debtor.
It is noted that in the first affidavit sworn 28 February 2005, the debtor sets out a list of his assets and liabilities in Exhibit BM1 which provides as follows:
“STATEMENT OF ASSETS AND LIABILITIES OF BRYAN McCORMICK
ASSETS   $
1993 Holden Jackaroo   10,000
Work in Progress   120,000
Lot 2 on proposed Plan of subdivision
of 40 Stockade Street   100,000

Payment due on planning approval
of Lake Federation   180,000

Total  410,000

LIABILITIES  $
  ATO      129,000
Bartrop Real Estate (rent)  60,000
NAB (overdraft)   15,000
Visa card   3,500
Mastercard   4,500
ARN Finance (motor vehicle)  1500
Sundry Creditors  5000
Total  218,500”
There are a number of issues which arise from that statement of assets and liabilities. The first to note is that the debtor regards an amount of $100,000.00 being an asset belonging to him as a result of the subdivision of the Stockade Street property. That is an assumption made presumably on the basis of the expressed intention of his wife to allow a benefit from that subdivision to pass to the debtor. It is clearly not a property in his name. The second issue of some concern to the Court is the reference to $60,000.00 being a liability for rent. In relation to the issue of rent, the debtor refers to the fact that rent is rental payable for the premises in which he conducts his practice. Specifically, he states in his second affidavit sworn 29 April 2005, the following:
“13. ... Included in my liabilities is an amount of $60,000 owed for rent to Bartrop Real Estate. This relates to the occupation of my business premises which are in the same building as those real estate agents. They are not pressing for payment. This liability has only built up due to the necessity for me to devote my time and attention to the Lake Federation Project which has had a temporary detrimental effect on the cash flow of my business as a solicitor. However the assets of that business, referred to at paragraph 9 of my previous affidavit, still substantially exceed the rental outstanding.”
Paragraph 9 of the earlier affidavit refers to the applicant having an established clientele, where he claims currently debtors outstanding to the firm of an approximate amount of $40,000.00 with work in progress of an amount claimed to be "approximately $120,000.00". The debtor further refers to the rental owing in his most recent affidavit, and states the following:
“8. I refer to the rent owing to Bartrop Real Estate and advise I had a meeting with the Principal of the firm, Mr. Bruce Bartrop, yesterday. The purpose of the meeting was to bring Mr. Bartrop up to date on my current circumstances. Mr Bartrop advised that he was prepared to wait for settlement of his account from the proceeds of the sale of the ½ acre block and the funds that become available from the Lake Federation project. I have continued with my monthly rental payments to Mr Bartrop since this matter was originally listed on 1 March 2005.”
In relation to the reference to the amount owing for rental for the business premises of the debtor, no specific details are given as to the duration of the outstanding debt, the amount of rental payable per month and the extent to which payments have been made recently in relation to the rent other than the mere assertion that the debtor has continued with monthly rental payments since the matter was originally listed on 1 March 2005. It may be inferred that arrears of $60,000.00 at the very least, indicates a considerable outstanding sum over a lengthy period. In the absence of further material it is difficult to reach any other conclusion than that the debtor, for a significant period of time, has been unable to pay the rent on his business premises.
In the most recent affidavit sworn 11 May 2005, the debtor also refers to other liabilities referred to in the statement of assets and liabilities, and claims as follows:
“9.With respect to the other liabilities listed in my affidavit sworn 28 February 2005 I have been making regular payments with a modest reduction in the amounts now owing. The income of my legal practice has been sufficient to fund those payments. The first mortgage over 40 Stockade Street has likewise been serviced regularly and their has been no increase in that liability.”
Arising from that assertion, it is to be observed that amongst the liabilities apparently paid, at least by regular payments resulting in a modest reduction of the amounts now owing, do not appear to be the amount owing to the petitioning creditor, say for an amount of $10,000.00 apparently advanced a few days prior to this hearing. Somewhat ironically, it would appear that income from the debtor's legal practice has been sufficient to make certain payments to other creditors and also to make payments in relation to the first mortgage over the property at Stockade Street, which the debtor does not own and presumably for which he does not have any legal liability to make payment.
The debtor has claimed that in any event, if the value of the family trust interest in the Lake Federation Project is included along with the proceeds of sale of the subdivided property at 40 Stockade Street, then based on the overall value of the Lake Federation Project of $3.5 million held by the family interest, once the option is exercised there would be sufficient funds from that process made available to the debtor for the purpose of paying debts. He claims that in a short timeframe, there is a large excess of assets over liabilities which the debtor and his family interest have and that would result in an ability to raise amounts necessary to pay the full amount claimed by the applicant.
In considering the ability of the debtor to pay his debts, it is argued for the debtor that the Court should take into account not a test of whether the debtor is able and willing or has carried out his actions to pay debts, but should apply a test as to whether or not the debtor is able to pay his debts. It is claimed the debtor “is” willing to pay his debts and it is argued that whether he could have put in place earlier the procedures to subdivide and sell the half‑acre block or to raise finance on that property, the test is whether he is able to pay his debts irrespective of whether or not he has taken all steps necessary to actually pay them.
It is further argued for the debtor that the family controlled assets should be considered in making the assessment of whether or not the debtor has available to him funds to pay the debts. Excluding the funds to be made available to the debtor as deposed to by his wife, it was submitted, would not be appropriate. Indeed it is argued that to do so would be artificial. Reliance was placed upon the decision of the High Court in Sarina and in particular a passage from the decision of Dean J where evidence of joint ownership of property by the debtor and his wife in a sale likely to yield a net return to those parties was a factor to be taken into account in assessing the ability of the debtor to pay his tests (see also Hardaker v Phair (2002) FCA 1176 5 and 12 and Re Svir ex parte Deputy Commissioner of Taxation (1998) 154 ALR 710).
In the alternative it was argued for and on behalf of the debtor that even if the Court were to consider the availability of family assets to not be a factor relevant to s.52(2)(a) and the ability of the debtor to pay his debts, that nevertheless the affidavit evidence in relation to that issue would still be relevant in a consideration of the Court's discretion under s.52(2)(b). Reliance was placed upon the decision of Burchett J in Re Svir at 712-713, where it was claimed the Court held that it was relevant to the exercise of the Court's powers under the subsection that:
a)funds could be provided by the mother of the debtor, and
b)these funds, together with the proceeds of a personal injury action would not be available in the event of a bankruptcy of the debtor that he and his mother had agreed to make them so available.
It is argued on behalf of the debtor that in the present case, the funds from the family controlled trust and the property of his wife are not assets that would made available in a bankruptcy of the respondent but both the respondent and his wife are prepared to make them available to satisfy the debts of the respondent. A further factor in the exercise of the Court's discretion under s.52(2)(b) of the Act is the practice of the debtor as a solicitor, and that that practice could not be continued if he were to be made bankrupt. Accordingly, the Court was invited to dismiss the petition and to not proceed to make a sequestration order. It was argued in summary as follows:
a)the assets available to the respondent through his family assets have a net value of over $3 million.
b)the respondent is not trading unremuneratively in his business as a solicitor and is meeting current commitments.
c)the necessary steps have now been put in place to allow all his debts to be paid off in a relatively short time frame.
d)the respondent and his wife are prepared to make available for that payment assets that would not otherwise be available in a bankruptcy so that the creditors of the respondent are positively advantaged by the respondent not being made bankrupt.
The petitioning creditor seeks a sequestration order and has submitted that the facts in the present case clearly demonstrate that the debtor at all relevant times is insolvent; that is, has not had the ability to pay his debts. It was argued that the claimed assets are assets not owned by the debtor but rather owned by and/or under the control of others. It was submitted that in the circumstances, a proper analysis of the affidavit material before the Court indicates a failure to pay rental on business premises for a significant period of time, a failure to make any or any reasonable attempt to pay the debt which is the subject of the petition - being a debt arising from a judgment entered on 27 November 2003 - and that in all the circumstances, the Court should not be satisfied that it should exercise its discretion under s.52(2)(a) of the Act.
Further, it is submitted that the mere fact that the debtor is a solicitor conducting a sole practice should not of itself be a relevant consideration in the exercise of the Court's discretion under s.52(2)(b).

Reasoning

In my view, on a proper application of the authorities, the Court is required to undertake an analysis of the evidence and to determine whether in truth and fact the debtor is able to pay his debts. On my assessment of the material, it is clear that the assets referred to by the debtor in his statement of assets liabilities appear to be misleading. It is inappropriate and inaccurate for the debtor to claim as an asset the interest in the property owned by his wife.
The reality of the proceeds of sale of the subdivision, in my view, is that the debtor will simply incur a further debt. I conclude that any funds sourced from the sale of the subdivided property could only result in a further debt for the debtor. Accordingly, there is what might be described as a transference of debt or the creation of a new debt to substitute the current debt owed to creditors, including the petitioning creditor.
I am further satisfied that the proposal in relation to seeking funds from the exercise of the option, which it is claimed will occur in relation to the Lake Federation Resort, despite the progress in relation to that project, remains speculative. Whilst it may be commercially advantageous to Thorney Property to exercise that option, the fact remains that there is a reasonably significant delay which will no doubt occur in relation to that matter. I am satisfied in any event that in the circumstances of this application, it could not properly be said that in this instance the realisation of funds from that project will occur within what might be described as a relatively short period. It is clear from a history of this matter that there has been adequate opportunity given to the applicant to undertake a conversion of available resources in order to meet the debts, including the debt claimed by the petitioning creditor. The debtor owed to the petitioning creditor, as indicated earlier, arises from a judgment entered on 27 November 2003.
Further evidence of the inability of the debtor to pay his debts as and when they fall due is illustrated by what I regard as a significant outstanding debt by way of rental due for the business premises that he occupies. The sum of $60,000.00, though not the subject of any detailed analysis which would provide the Court with an ability to determine the duration of that outstanding debt, nevertheless in the absence of that further detail represents in my view significant evidence of a long outstanding debt relating to what can only be described as a critical part of the applicant's day-to-day financial management. The inability of a solicitor to pay rent on the business premises from where he conducts practice must be regarded as a significant adverse factor in assessing his ability to pay debts when they fall due.
In relation to the issue of the Court's discretion pursuant to s.52(2)(b),

I do not regard the material before me as providing a sufficient basis upon which it could be established there is other sufficient cause not to make a sequestration order. It needs to be remembered that proceedings of this kind are not debt-recovery proceedings but involve the issue of addressing personal insolvency. The personal insolvency of a solicitor engaged in active practice is a significant public interest issue. I do not regard the fact that the consequences to a sole practitioner may be that he cannot continue in practice as necessarily requiring a Court to exercise its discretion in favour of the debtor.
There may be some instances where continuation of a practice may be regarded as advantageous to creditors. However, in the present case, having regard to the inability that I have found for this debtor to pay debts as and when they fall due, combined with the uncertainty of the ability of the debtor to access resources of others, leads the Court to conclude that this is not a case where the Court should place any or any significant weight on the consequences of bankruptcy to the debtor's ability to continue with his practice. The practice, after all, has been unable to pay one of the most fundamental expenses, namely rent on premises, for what I regard as a significant period of time.
It is clear to me in general that the debtor in this instance has not been able to identify any or any significant assets in his own name. To that extent what is sought to be argued for and on behalf of the debtor is an ability to access resources either in the control of or owned by others. I am not satisfied on the material before me that this debtor has established in the discharge of the onus which is upon him an ability to access funds available to him, and although the funds are not limited to cash resources, I am not satisfied on the material before me that he has an ability to access funds by sale or by mortgage or pledge of his assets.
Instead, there is some speculation in the material that he may have the benefit of the realisation of assets owned by others. In the circumstances of this case, I am not satisfied that it is sufficient to persuade this Court to exercise the discretion it has under s.52 of the Act. Accordingly, I am not satisfied that the debtor has discharged the onus to establish he has an ability to pay his debts. I am not satisfied that there is any other sufficient cause demonstrated which would persuade the Court that it should dismiss the petition. On the material before me, I am otherwise satisfied that the requirements of s.52 of the Act have been met, and in my view, the appropriate order is to make a sequestration order in relation to the debtor.
The Court notes that the date of the act of bankruptcy is 11 November 2004.

I certify that the preceding thirty-seven (37) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate:

Date: 31 May 2005