Deputy Commissioner of Taxation v Donnelly (No.2)
[2011] FMCA 627
•19 July 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DEPUTY COMMISSIONER OF TAXATION v DONNELLY (No.2) | [2011] FMCA 627 |
| BANKRUPTCY – Creditor’s petition – whether debtor able to pay his debts or other sufficient cause. |
| Bankruptcy Act 1966 (Cth), s.52 |
| Australia & New Zealand Banking Group Ltd v Foyster [2000] FCA 400 Cain v Whyte (1933) 48 CLR 639; [1932] HCA 6 Deputy Commissioner of Taxation v McCormick (No.2) (2005) 218 ALR 665; [2005] FMCA 729 Re Svir; Ex parte Commissioner of Taxation (1998) 83 FCR 314; [1998] FCA 503 Rotstein and Associates Pty Ltd v Slaveski (2010) 8 ABC(NS) 200; [2010] FCA 493 Sandell v Porter and Another (1966) 115 CLR 666; [1966] HCA 28 Totev v Sfar (2006) 230 ALR 236; [2006] FCA 470 |
| Applicant: | DEPUTY COMMISSIONER OF TAXATION |
| Respondent: | PAUL JOSEPH DONNELLY |
| File Number: | SYG 328 of 2011 |
| Judgment of: | Barnes FM |
| Hearing date: | 19 July 2011 |
| Delivered at: | Sydney |
| Delivered on: | 19 July 2011 |
REPRESENTATION
| Solicitors for the Applicant: | Craddock Murray Neumann |
| Respondent: | In person |
ORDERS
A sequestration order be made against the estate of Paul Joseph Donnelly.
The applicant creditor’s costs (including any reserved costs) be taxed in accordance with the Federal Court Rules and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).
THE COURT NOTES THAT:
The date of the act of bankruptcy is 4 November 2010.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 328 of 2011
| DEPUTY COMMISSIONER OF TAXATION |
Applicant
And
| PAUL JOSEPH DONNELLY |
Respondent
REASONS FOR JUDGMENT
(Revised from Transcript)
A creditor’s petition in this matter was filed and presented on 25 February 2011. The Deputy Commissioner of Taxation (the DCT) moves on the creditor’s petition. Mr Donnelly, the respondent debtor, unsuccessfully sought an adjournment of the hearing of the creditor’s petition. He now relies on a notice of opposition filed on 15 April 2011. The grounds in the notice of opposition relied on by the debtor are:
(1) I am currently owed moneys in excess of the amount claimed in the Petition.
(2) I will be able to pay the amount stated in the Petition within the next 12 months.
(3) If the petition were to be granted I would not be in the position to recover funds owed to me and this would have an adverse effect upon other creditors who will be paid out of such funds.
I take this to be intended to address not only the grounds in s.52(2) of the Bankruptcy Act 1966 (Cth) (the Act), but also to seek that, rather than making a sequestration order, the court should exercise its discretion under s.52(1) of the Act to grant a further adjournment of the hearing.
The background to these proceedings is that the creditor’s petition was based on a failure by Mr Donnelly to comply with a bankruptcy notice, which in turn was based on a judgment entered in the District Court of New South Wales on 3 October 2008 in the sum of $324,507.26. The bankruptcy notice was issued on 23 September 2010. No issue is taken in these proceedings in relation to the form, content or service of the bankruptcy notice. I am satisfied on the applicant’s evidence before me (what might be described as the usual affidavits), in particular, the affidavit of service of the bankruptcy notice of 20 October 2010, that the bankruptcy notice was personally served on the respondent on 14 October 2010.
I am also satisfied that there was a failure to comply with the bankruptcy notice and that an act of bankruptcy was committed by the respondent on 4 November 2010. The creditor’s petition was presented on 25 February 2011. I am satisfied on the basis of the affidavit of service of the creditor’s petition and the accompanying documents that the debtor was served with the creditor’s petition and supporting documentation on 21 March 2011.
The matter first came before a Registrar of the court on 6 April 2011. The respondent successfully sought an adjournment on that date and again on 10 May 2011. On the third occasion the matter was before the court it came before me as the Duty Federal Magistrate and I listed it for hearing. On each of those occasions the debtor has had the opportunity to file further affidavit evidence. He relies on three affidavits in addition to the notice of opposition.
It is apparent that no issue is taken with the formal matters specified in s.52(1) of the Bankruptcy Act. That is clear from what was said today by the debtor. In that respect I note in particular the affidavit of debt sworn on 19 July 2011 by Gregory Phillips which attests to the fact that as at the date of 19 July 2011 the amount of $433,958.67 remained due and payable by the respondent to the DCT. Mr Donnelly does not take issue with the calculation of this amount.
On the material before the court I am satisfied that the respondent committed the act of bankruptcy alleged in the petition. I am satisfied with proof of the other matters required by s.52(1) of the Bankruptcy Act.
In these circumstances the court “may” make a sequestration order against the estate of the debtor. Before proceeding to the issue of discretion, I turn to the question of s.52(2) which I take to be intended to be raised by the notice of opposition. The first issue is whether I am satisfied by the debtor that he is able to pay his debts in the sense referred to in s.52(2)(a) of the Act. As submitted for the creditor, it is well established that the respondent debtor bears the onus of proof in establishing that he is able to pay his debts as and when they fall due in accordance with s.52(2) of the Act.
The principles in relation to s.52(2)(a) and the meaning of this concept are also well-established. In Sandell v Porter and Another (1966) 115 CLR 666; [1966] HCA 28 Barwick CJ referred to the fact that:
It is the debtor’s inability, utilising 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.
In this case the respondent contends, insofar as he does contend that he is able to pay his debts as and when they fall due, that he is currently owed moneys in excess of the amount claimed in the petition. In support of this contention he relies, in essence, on copies of a number of invoices annexed to his affidavit sworn on 30 May 2011 which relate to outstanding fees in matters in which he has acted as a legal practitioner. The invoices are said to total $383,518.66. He also gave evidence today of work in progress in relation to which he had not yet had the time to issue invoices. He hoped this would result in amounts being available to him in order to meet the debt in the creditor’s petition.
However, even if the total amount referred to in the invoices was to be regarded as available to the debtor to meet his debts, that does not exceed the amount of his indebtedness. The amount now owed to the Deputy Commissioner of Taxation has increased significantly and, it is apparent, will continue to increase over time unless paid. Mr Donnelly’s present indebtedness to the DCT is in the order of $433,958.67. In addition he has disclosed a credit card debt in the order of $45,000. It is also necessary to bear in mind debts which will fall due in the reasonably immediate future pursuant to existing obligations. In that respect the affidavit of debt illustrates the potential increase in the debtor’s indebtedness to the Deputy Commissioner of Taxation. He may have other future taxation indebtedness from his activities as a sole practitioner.
The evidence before the court is not such as to satisfy me that Mr Donnelly is able to pay his debts as and when they become due. He himself indicated that he anticipated that he could pay the amount claimed in the petition within 12 months from the filing of the notice of grounds of opposition (on 3 April 2011), although today, when he sought an adjournment, he sought an adjournment of some three months. There is evidence from Mr Donnelly that he does not own any real estate or a motor vehicle. He is not the beneficiary of a trust. Due to illness, as disclosed in his most recent affidavit, his income in the years 2005 to 2010 has not been of any significance in terms of his ability to meet his indebtedness.
It is apparent that the only asset which might be available to Mr Donnelly to utilise in payment of his debts is the outstanding fees owed to him (and some unquantified work in progress). The evidence does not establish that this amount exceeds the amount that he owes. I accept that he has work in progress and that as an experienced practitioner he has some ability to estimate its value (although he did not provide the court with any estimate as to outstanding amounts that would be owed to him). However, as Hely J noted in Australia & New Zealand Banking Group Ltd v Foyster [2000] FCA 400 at [17]:
It is not sufficient for the respondent simply to establish that he has assets which exceed his liabilities in value. It must also be established that the assets are available to be realised and that they are capable of ready realisation.
The issue of realisation was not addressed in evidence.
As submitted for the applicant, there is simply insufficient evidence from the respondent as to why amounts that are said to be owing to him in the invoices in relation to finalised matters have not been forthcoming. Some of those date back to 2010. There is no evidence as to how he intends to collect any such amounts owing to him. He said from the bar table that he was in the process of instructing a debt collector. There is no evidence that he has taken any steps to collect amounts owing to him or as to whether the persons liable to make payment have the capacity to make such payment. The suggested resort to a debt collector does not support the debtor’s contentions that he will be able to recover a sufficient amount from his outstanding invoices to meet his indebtedness. Nor is there any evidence as to what additional taxation liability is likely to arise if these outstanding amounts are paid to Mr Donnelly. In these circumstances, the respondent has not established that he is able or will in the foreseeable future be able to pay his debts as and when they fall due.
While acknowledging that the debtor need not have sufficient cash at hand or immediately available to pay creditors in full, the difficulty here is that the debtor has simply not established that the evidence is such that he will be able to pay his debts in the reasonably foreseeable future (or indeed, any future debts as they become payable) as a matter of commercial reality. I note in that respect that to some extent the initial proposal that there be an adjournment for a period of 12 months might be seen as a recognition that the debtor was not presently in a position to pay his debts in the sense referred to in s.52(2)(a) of the Act.
I have borne in mind that if a debtor can establish that he or she has assets that can be realised in a relatively short time to enable him to pay his debts that is a factor that may be taken into account under s.52(2)(a). Unfortunately, in this case the evidence is simply not such as to satisfy me that the debtor is in such a position or that he will be in such a position. The debtor has not satisfied me that he is able to pay his debts in the sense referred to in s.52(2)(a) of the Act.
I have also considered whether the circumstances raised by the debtor constitute other sufficient cause. Again, it is for the respondent to satisfy the court that there is other sufficient cause and that the public interest in dealing with an insolvent debtor and the rights of individual creditors are outweighed by other considerations, as the High Court set out in Cain v Whyte (1933) 48 CLR 639; [1932] HCA 6.
In these circumstances the fact of the amounts owed to Mr Donnelly for work he has done does not amount to sufficient cause to override the rights of the creditor to have its debt paid. It is relevant to have regard to the fact that the debt that was the judgment debt has been in existence for some considerable time. I have borne in mind that, as contended for by the creditor, and as discussed in Re Svir; Ex parte Commissioner of Taxation (1998) 83 FCR 314; [1998] FCA 503 (and see the useful summary of that case by Allsop J (as he then was) in Totev v Sfar (2006) 230 ALR 236; [2006] FCA 470), this is the bankruptcy jurisdiction. The court has to keep in mind not only the interests of the parties before it in an individual case, but also the public interest which may be adversely affected by the propping up of insolvency.
While I accept Mr Donnelly’s evidence that he has suffered an illness to which he attributes the financial situation and the indebtedness in which he now finds himself, this does not in all the circumstances constitute other sufficient cause.
Having regard to the authorities which I am bound to follow in relation to the meaning of other sufficient cause, in all the circumstances it has not been established that this circumstance overrides the interests of the public in stopping unremunerative trading and the rights of creditors who are unable to have debts paid to them as they fall due, particularly where there is a long outstanding debt. The matters relied on in the notice of opposition are not such as to establish other sufficient cause within s.52(2)(b) of the Act.
The applicant raised the fact that the respondent is a legal practitioner and suggested that there may be a public interest in making a sequestration order in circumstances where a solicitor engaged in active practice is insolvent, as discussed by McInnis FM in Deputy Commissioner of Taxation v McCormick (No 2) (2005) 218 ALR 665; [2005] FMCA 729, although such legal practice is the only identified source of possible future assets. It is not for this court to determine whether a legal practitioner can continue in practice if he is bankrupt. It was not contended for Mr Donnelly that any possible restriction on his right to practice constituted other sufficient cause. What I take from McCormick as relevant to the present circumstances is that the court is required in matters of this kind to have regard to the broader public interest and the policy considerations underlying the Bankruptcy Act in circumstances where a debtor is, as in this case, insolvent.
I have also considered whether although satisfied of the matters in s.52(1) of the Act, the court should exercise its discretion not to make a sequestration order against the estate of the debtor at this stage, but rather to adjourn the proceedings. However, having regard to the history of this matter including the time the debt has been on foot; the time since the bankruptcy notice was issued (when it must have been apparent that the prospect of further proceedings may follow); the issue of the creditor's petition in February 2011; the number of times the matter has been before the court; the adjournments that have been granted in order to afford an opportunity to Mr Donnelly to, at least, begin to make payments to reduce his indebtedness; and all the circumstances, I am not satisfied that it is in the interests of the administration of justice and the parties that there be an adjournment rather than that the court proceed to make a sequestration order.
I have borne in mind the policy considerations that underlie the Bankruptcy Act and the broader public interest and that where an adjournment is sought the court should have before it all of the material that is relied on by the debtor in support of any contention that he would be in a position to meet his indebtedness. I have referred to the inadequacy of the evidence before the court in that respect in relation to the initial adjournment application. I have also borne in mind the prima facie right of the petitioning creditor to obtain a sequestration order and the need to avoid or minimise delay once bankruptcy proceedings are on foot.
Having regard to the matters considered in Rotstein and Associates Pty Ltd v Slaveski (2010) 8 ABC(NS) 200; [2010] FCA 493, I am not satisfied that an adjournment should be granted on the basis contended for by the debtor.
As indicated, I am satisfied that the respondent committed the act of bankruptcy alleged in the petition. I am satisfied with proof of the matters required by s.52(1) of the Bankruptcy Act. I am not satisfied of either of the matters provided for in s.52(2)(a) or (b) of the Act. The grounds in the notice of opposition are not made out, either in support of the grounds in s.52(2) or to satisfy me that any further adjournment should be granted.
In these circumstances, I consider it is appropriate to make the sequestration order that is sought with the usual order as to costs.
I certify that the preceding twenty-six (26) paragraphs are a true copy of the reasons for judgment of Barnes FM
Date: 15 August 2011
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