Della Bruna v Glowsoar Pty Ltd

[2006] FMCA 1815

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DELLA BRUNA v GLOWSOAR PTY LTD [2006] FMCA 1815

BANKRUPTCY – Annulment – whether sequestration order should not have been made – whether bankrupt was personally served with creditor’s petition – whether creditor validly proved debt – whether court should exercise its discretion not to annul notwithstanding a finding of no service – whether proposals for compromise should be accepted.

Bankruptcy Act 1966, ss.5, 52, 73, 153B

Heinrich v Commonwealth Bank of Australia [2003] FCA 539
Re Frank; Ex parte Piliszky (1987) 77 ALR 511
Rafaraci v Pearce & Heers [2003] FCA 1307
Udowenko v Rasevi Pty Limited  [2006] FCA 1217
Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137
Needlework Warehouse Pty Ltd (ACN 101 863 709) v Chansonette Pty Ltd (ACN 092 507 938) and Anor [2005] FCA 1525

Applicant: ALBINA DELLA BRUNA

Respondent: GLOWSOAR PTY LIMITED
ACN 054 924 533

File Number: SYG2584 of 2006

Judgment of: Raphael FM

Hearing date: 15 November 2006

Date of Last Submission: 1 December 2006

Delivered at: Sydney

Delivered on: 8 December 2006

REPRESENTATION

Counsel for the Applicant: Mr T Rickard

Solicitors for the Applicant: Simmons & McCartney

Counsel for the Respondent: Mr S Docker

Solicitors for the Respondent: Kemp Strang

ORDERS

1. Application dismissed.

2. Respondent’s costs to be paid out of the estate of the bankrupt.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG2584 of 2006

ALBINA DELLA BRUNA

Applicant

And

GLOWSOAR PTY LIMITED (ACN 054 924 533)

Respondent

REASONS FOR JUDGMENT

1. On 15 November 2006 I heard an application for the annulment of a bankruptcy which had come into effect by way of a sequestration order made on 31 August 2006. The application was brought pursuant to s.153B of the Bankruptcy Act 1966 (the “Act”) which is in the following form:

   “Annulment by Court

   (1)  If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor’s petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Courthttp:// - the_court may make an order annulling the bankruptcy..

   (2)  In the case of a debtor’s petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented.”

2. The bankrupt, Dr Albina Della Bruna submitted that there were two grounds upon which the court should find that the sequestration order ought not to have been made. The first was that she was not served personally with the creditor’s petition and supporting documents prior to 31 August 2006 as required by s.52(1)((b) of the Act. The second ground was that the court should not have been satisfied by the proof placed before it by the petitioning creditor that the debt was still owing as required by s.52(1)(c). I heard the evidence of the parties on
   15 November 2006 and made orders that the parties provide me with written submissions.  Both parties have complied with those orders and I am grateful to counsel for their assistance.  The court has proceeded on the basis that it is entitled to consider both the case disclosed at the time and the facts now known to have existed Heinrich v Commonwealth Bank of Australia [2003] FCA 539. The written submissions provided by counsel addressed both the evidentiary matters and the important matter of my discretion. In Re Frank; Ex parte Piliszky (1987) 77 ALR 511 at [518] Fisher J opined:

   “It is trite to say, as the above excerpts acknowledge, that the appropriate meaning is determined by the context.  In my opinion “ought” in s 154(1)(a) is of imperative significance and an order should not be annulled unless the judge was in the circumstances bound not to make it and even then there is a residual discretion not to annul.”

   In Stankiewicz v Plata [2000] FCA 1185 the Full Bench reminded the parties:

   “[19]  In Re Williams (1968) 13 FLR 10, Gibbs J explained the approach to be taken to the then equivalent of s153B of the Bankruptcy Act (at 23):

   “In determining the question whether the sequestration order ought not to have been made, the court is entitled to consider not only the case as disclosed at the time the order was made, but as it would have been disclosed had all the true facts been before the court on the making of the order.  If the Court is satisfied that the order ought not to have been made, it is not bound as a matter of course to annul the order, but must consider in the light of all the circumstances of the case whether the order ought to be annulled.”

3. In this case the major factors that might lead me to exercise my discretion against annulling Dr Della Bruna’s bankruptcy related to her financial position and her conduct vis a vis the trustee.  The respondent in its written submissions seeks to persuade me that I could decide the matter on discretionary grounds and thus not be required to address the vexed question of whether or not Dr Della Bruna was served with the bankruptcy petition.  This is a tempting submission but it is not one that I think the court should take up because a discretion must be exercised against the background of all the facts and not on the basis of assumptions.  I will therefore deal first with the two arguments by the bankrupt.

Was the bankrupt served personally?

1. Dr Della Bruna swore two affidavits, the first dated 11 September 2006 and the second dated 16 October 2006.  She denies being served personally with the creditor’s petition.  In the first of those affidavits she merely denies service of the petition. She accepts that she was served with the bankruptcy notice.  The bankruptcy notice was served by the same process server, Mark Smith, who had deposed to having served the bankruptcy petition.  In the second affidavit Dr Della Bruna goes into more detail.  She says that she knew that the petition was to be served upon her and had advised her administrative staff of this possibility.  She tells how she only worked half a day on 9 August 2006, the day of the alleged service, because she had an appointment in the city at 1.15.  She told how she saw a patient at 11.30a.m. who spent 30 minutes with her.  Between 11.30 and 12 noon she did not leave the room and no one came in.  Dr Della Bruna’s evidence was corroborated by that of a member of her staff, Kala Jackson, and the practice manager Suzana Bakin.  Evidence was also given by the patient who was with her at the relevant time, Mr Williams.

2. On 8 November 2006 the process server Mr Smith swore an affidavit.  He told how he had served the bankruptcy notice on Dr Della Bruna at 129 Edgecliff Road Woollahara and that he had a conversation with her at the time.  He also made reference to picking up a book entitled “The Runes” and having a conversation with Dr Della Bruna about it after service.  He told how on 9 August 2006 he went again to 129 Edgecliff Road but after waiting around there for some time realised that the business that Dr Della Bruna operated from those premises may have moved.  He made enquiries and then walked down the road to 189 Edgecliff Road, the site of the new consulting rooms.  He described the house from the front and then from the inside.  He said that the reception area was about 4 metres by 4 metres with one reception desk and about six chairs for people to wait in.  He referred to posters in the reception area.  Mr Smith announced himself and was told he would have to wait. 

   “I waited in the reception area for ten or fifteen minutes.  After that time Ms Bruna came into the reception area from the corridor with a female person who was not very tall and had blonde hair.  They were talking to each other as they entered the room.  I assumed that the short blond woman was one of Ms Bruna’s patients.  Upon entering the reception she sat down in one of the chairs in the reception room and appeared to be going through her diary.  Ms Bruna approached me and we had a conversation to the following effect:

   She said:   Hello Mark

   I said:     I’ve got some personal documents for you.

   I then handed her an unsealed A4 sized envelope which contained a copy of the creditors’ petition and affidavit verifying paragraphs 1, 2 and 3 of the creditors’ petition. …

   She opened it and pulled the documents half wait out of the envelope and looked at then.  She then said words to the effect of:

   Thanks Mark.”

3. Later in the affidavit Mr Smith accepts that the conversation which he deposed to in his original affidavit of service was incorrect.  Annexed to the affidavit is a worksheet noting that the time of service was 11.45a.m.  The invoice which he sent to his instructing agents indicated that he had gone to 129 Edgecliff Road and then to 189 Edgecliff Road.

4. There were a number of problems with Mr Smith’s evidence.  If I accepted the evidence of Dr Della Bruna and her employees there were not six chairs in the waiting room at all.  There were lounges and armchairs.  There was a window in the room, there were paintings on the walls and the receptionist had brown, not blond hair.  The applicant also argued that Mr Smith had taken a somewhat cavalier approach to his original affidavit of service.  He used the standard form which did not accurately reflect what occurred.  Then when his evidence was challenged instead of going to the solicitors for the petitioning creditor he goes to Mr Rappolo who runs the agency for whom he is a sub agent and allows Mr Rappolo to draw up a new affidavit which he then swore.  Under cross examination his testimony regarding the second affidavit began to lose much of its credibility because of the manner in which the document was created.  Mr Smith had difficulty in answering the questions possibly because he did not clearly understand them although they appeared to me to be perfectly clear.  He had difficulty in remembering when he first discussed the affidavit with Mr Rappolo saying first 27 October 2006, the date of the first draft document and then 8 November, the date that the document was actually signed.  He said that he had sat down with Mr Rappolo for approximately two hours but he couldn’t remember where, nor when.  It is to be remembered that these events only took place a few days before the hearing and it is difficult to accept a loss of memory in relation to those matters and yet so clear a memory in relation to the matters relating to service. 

5. In weighing up Mr Smith’s evidence against the evidence of the corroborating witnesses called by Dr Della Bruna, none of whom admitted to having seen him on the day in question, I am unable to be satisfied that service did occur.  Mr Smith is firm in his timing of when service took place, namely between 11.30 and 12 noon.  Mr Williams, who appears to be entirely independent of any party in these proceedings, deposed to being with Dr Della Bruna throughout that time.  He was not shifted in his cross examination and I would prefer his evidence to that of Mr Smith.

Was there adequate proof of the debt owing?

1. The affidavit of debt was not sworn by a director of Glowsoar Pty Limited, one of whose directors, Mr Darcy, gave evidence.  The affidavit was sworn by Mr Beggs.  Mr Darcy told the court that Mr Beggs was not an employee, director or shareholder of Glowsoar but that his company Cayle Pty Limited had put up money towards other loans that Glowsoar had made from time to time.  He did not put up any money towards this particular loan.  Mr Darcy said that Mr Begg was present when Dr Della Bruna signed the loan agreement and knew about the loan.  Mr Darcy was going away around the time that the affidavit was required to be sworn.  He says that he and his wife, the two directors of Glowsoar, agreed that Mr Begg would be authorised to do everything necessary to deal with this aspect of the matter.  They prepared an authorisation which was sent to Glowsoar’s solicitors.  This letter of authorisation was not voluntarily produced to the court but neither was it called upon by the applicant.  I am satisfied from Mr Darcy’s evidence that Mr Begg was fully advised about the debt owed by Dr Della Bruna to Glowsoar.  I am satisfied that the arrangements made between Glowsoar and Mr Begg gave him sufficient authorisation to swear the affidavit on the company’s behalf.  I would not make a finding that the sequestration order ought not to have been made on these grounds. 

Discretionary matters

1. The applicant in her submissions made much of two recent Federal Court authorities: Rafaraci v Pearce & Heers [2003] FCA 1307 and Udowenko v Rasevi Pty Limited [2006] FCA 1217.Both these cases involved the impugning of evidence of process servers but the difference between both those cases and this one is that the result of the disbelief of the evidence of the process servers was that no act of bankruptcy had been committed.  In Rafaraci Tamberlin J found that the evidence of the process server in respect of the originating statement of claim as well as the bankruptcy notice and creditor’s petition were unreliable so that there might not even be any valid judgment against the applicant let alone an act of bankruptcy.  In Udowenko where His Honour made findings that the process server had lied his findings were directed to the service of the bankruptcy notice. In the case before me there is no denying the bankruptcy notice was served and that an act of bankruptcy had been committed. Whilst I can understand the views expressed by Madgwick J at [9] in Udowenko that the courts should do what they can to deter a process server who might be tempted to cut corners I do not believe that His Honour was of the view that this should always and automatically mean that where the evidence of a process server is not accepted the sequestration order should be set aside as was done in that case.  As the Full Court said in Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 at [148]:

   “Bankruptcy is not mere inter partes litigation.”

2. In this case the court has had the benefit of a detailed report from Dr Della Bruna’s trustee. Accepting s.52(1)(b) of the Act has not been complied with I must look to this document and to the evidence given before me, particularly by Dr Della Bruna, to determine whether or not I should exercise my discretion against granting the annulment that would normally follow from the breach. Dr Della Bruna gave evidence that she was a highly paid medical practitioner who appears to have engaged in property speculation to her disadvantage. She was clearly in desperate need of money at the time she borrowed from Glowsoar. She borrowed $186,584.50 which included payment of the first month’s interest at the rate of 9% per month and received in her hand $170,000.00. She used $120,000.00 of this money to repay another loan and $50,000.00 went into her St George Bank account. She only made one repayment of interest. Dr Della Bruna has made complaints about this loan. She said that if the annulment is granted she will take up with her solicitor her rights under the various state and federal acts dealing with credit or misleading and deceptive conduct to set the agreement aside. But even if she succeeds in this Glowsoar will have a restitutionary claim for the amount advanced and not repaid Needlework Warehouse Pty Ltd (ACN 101 863 709) v Chansonette Pty Ltd (ACN 092 507 938) and Anor [2005] FCA 1525

3. In her statement of affairs Dr Della Bruna revealed assets to the value of $242,687.00 which the trustee estimated as having a realisable value of $73,527.00.  She told the trustee she proposed to reduce her work commitments so that her earnings would be reduced from $208,000.00 per annum to $50,000.00 per annum.  Dr Della Bruna estimated her unsecured liabilities in the statement of affairs at $3,116,140.00.  The trustee estimated them at $4,435,938.00.  Dr Della Bruna did not admit all of her obligations in her statement of affairs.  There were liabilities to her father and the ANZ Bank which had not been included.  Most of Dr Bruna’s debts related to liquidation of a company known as BMS Property Consulting Pty Limited (In Liquidation) of which she was a shareholder and director.  She says she will challenge these debts but it is not clear whether she does so because she says the guarantees are invalid or the loans themselves were invalid. There is no indication of the views of the liquidator of the company.  As the respondents say in their written submissions:

   “Ms Bruna was the only director and shareholder of BMS and she is a medical practitioner under no apparent or claimed disability.  See Garcia v National Australia Bank Ltd (1998) 194 CLR 395.”

4. On the evidence before me I can see little prospect of the guarantees being set aside.

5. About $1,500,000.00 of Dr Della Bruna’s debts are not based on guarantees and she has provided the court with no evidence of her capacity to meet them in the foreseeable future. 

6. I was also concerned at evidence given by Dr Della Bruna that she had sold shares in a company known as Samarina Investments Pty Limited to her mother for $2.00.  Samarina owns a Mercedes car, a hair removal machine estimated to be worth $30,000.00 and two properties in Queensland.  Dr Della Bruna gave evidence that all these assets were encumbered but I cannot be satisfied that they would effectively have a nil valuation.  I was not impressed by Dr Della Bruna as a witness and would not accept her evidence on the value of the Samarina shares.  The transfer took place around the time of the bankruptcy and one would have to ask why Dr Della Bruna’s mother would accept responsibility for a company that was totally worthless.  The action has all the hallmarks of a bankrupt attempting to divest herself of her assets in fraud of her creditors.

7. Dr Della Bruna did produce two letters from banks indicating that they would not call up their secured loans if her bankruptcy was annulled.  But given the amount of her indebtedness to all of her creditors, both secured and unsecured, there must be suspicion that Dr Della Bruna can only keep those loans in order by neglecting to pay other obligations.

8. I am of the view that I could not be satisfied that Dr Della Bruna is a person who is able to pay her debts as and when they become due and payable (s.5(2) of the Act). I also note that Dr Della Bruna has made no suggested arrangements for payment of any of her outstanding debts or the trustee’s fees and charges. There appears to be a realisation of Dr Della Bruna’s precarious financial position in the written submissions of her counsel who says at [44] and [45] of those submissions:

   “[44]    The court has the power to impose conditions on the making of an order for annulment (Clyne v Deputy Commissioner of Taxation (1984) 154 CLRE 589).

   “[45]    To this extent, the applicant believes that she can draw upon the resources of family and friends to pay out these creditors and therefore proposes that the Court:

   a.   Grant the annulment sought, but conditional on her reaching a compromise with a named list of creditors.

   b.   The applicant to file in this court a list of personal creditors accepted by her by say, 31 January 2007.

   c.   In the event that no compromise is reached by, say 15 February 2007, the Applicant’s application for annulment be dismissed.

   d.   Order that the Applicant pay the Trustee’s reasonable costs on or before 15 February 2007.”

9. The effect of this proposal is to allow Dr Della Bruna to choose those creditors with whom she wishes to compromise. That is not what bankruptcy is intended to effect. I would not be disposed to make orders of that type. I am of the view that I should exercise my discretion against granting the annulment. If Dr Della Bruna is able to collect sufficient funds to make an acceptable proposal to her creditors she is entitled to do this under s.73 of the Act. The application shall be dismissed and the costs of the respondent should be paid from the estate of the bankrupt with the same priority as it had as petitioning creditor.

I certify that the preceding eighteen (18) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate: 

Date: