Deputy Commissioner of Taxation v Khorram
[2010] FMCA 554
•28 July 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DEPUTY COMMISSIONER OF TAXATION v KHORRAM | [2010] FMCA 554 |
| BANKRUPTCY – Creditors petition – Notice Stating Grounds of Opposition to Petition claiming solvency subject to sale of residential home – whether an adjournment should be granted pending sale of property to pay tax liability. |
| Bankruptcy Act 1966 (Cth), ss.30, 43,52, 58 Conveyancing Act (NSW), s.66G |
| Lynn v Whyte (Trustee), in the matter of Lynn [2000] FCA 429 Park v Barclay [2010] FMCA 397 Re Sarina, Ex Parte Council of the Shire of Wollondilly (1980) 43 FLR 163 Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 |
| Applicant: | DEPUTY COMMISSIONER OF TAXATION |
| Respondent: | ZARGHOONA KHORRAM |
| File Number: | SYG 2685 of 2009 |
| Judgment of: | Lloyd-Jones FM |
| Hearing date: | 8 June 2010 |
| Delivered at: | Sydney |
| Delivered on: | 28 July 2010 |
REPRESENTATION
| Solicitors for the Applicant: | Ms K Prestidge of ATO Legal Services |
| Counsel for the Respondent: | Mr B Morris |
| Solicitors for the Respondent: | Mr D Clarke Clamenz Corporate Lawyers |
ORDERS
The application for an adjournment is granted.
Costs reserved.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 2685 of 2009
| DEPUTY COMMISSIONER OF TAXATION |
Applicant
And
| ZARGHOONA KHORRAM |
Respondent
REASONS FOR JUDGMENT
Background
A Creditor’s Petition was filed in the Federal Magistrate’s Court on 4 November 2009. A Deputy Commissioner of Taxation applies to the Court for a Sequestration Order under s.43 of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”) against the estate of Zarghoona Khorram of Cherrybrook in the state of New South Wales. The Respondent Debtor owes the Applicant Creditor the amount of $140,986.76, being an amount of $134,018.99 due under a final judgment obtained in the District Court of New South Wales at Sydney on 24 September 2008, and is inclusive of $538.00 costs plus $6,967.77 being interest on the judgment up to 6 April 2009.
The Respondent Debtor failed to comply on or before the 11 May 2009 with the requirements of a Bankruptcy Notice NN1339/2009, served on her on 19 April 2009, or to satisfy the Court that she had a counter claim, set-off or cross demand equal to or more than the sum claimed in the Bankruptcy Notice.
On 21 April 2010 the Respondent Debtor Ms Khorram filed a ‘Notice Stating Grounds of Opposition to Petition’ indicting that she intended to oppose the Petition on the following ground:
At all material times, the Respondent has been able to pay her debts and is solvent within the meaning of s.52 (2)(a) of the Bankruptcy Act 1966 (Cth).
The matter was first before a Registrar of this Court on 16 December 2009 and has been adjourned on a number of occasions, some adjournments being by consent and some being by order of the Court.
On 8 June 2010 the duty Registrar, Registrar Hedge, referred the matter to this Court for hearing. Ms Prestidge informed the Court that it was the Applicant’s position that the matter should be heard at that time and was seeking that a Sequestration Order be made against the Respondent’s estate. Mr Morris, appearing for the Respondent, informed the Court that the Respondent was seeking for the Creditor’s Petition be dismissed on the grounds that the Respondent was solvent, or in the alternative, that the proceedings be adjourned pending the sale of a family home that was currently on the market.
Evidence
The Deputy Commissioner of Taxation relies upon the following material that has been filed in the proceedings:
a)Creditor’s Petition filed 4 November 2009;
b)Affidavit of Search affirmed by Jason Green affirmed 4 November 2009;
c)Affidavit of Service of Bankruptcy Notice sworn by Greg Hughes, licensed process server sworn 24 April 2009; and
d)Affidavit of Mark T Simpson affirmed 1 June 2010.
The Respondent Debtor Ms Khorram, relies on the following affidavit material:
a)Affidavit of Zarghoona Khorram affirmed 7 April 2010 (first Affidavit of Ms Khorram);
b)Affidavit of Zarghoona Khorram affirmed 21 April 2010 (second Affidavit of Ms Khorram);
c)Affidavit of Zarghoona Khorram affirmed 7 May 2010 (third Affidavit of Ms Khorram); and
d)Affidavit of Zarghoona Khorram affirmed 25 May 2010 (fourth Affidavit of Ms Khorram).
Respondent’s submissions
Mr Morris informed the Court of the circumstances of this matter, being that the Respondent Debtor’s husband, Zarif Khorram, was declared bankrupt on 2 December 2009 and has a trustee appointed to his estate. It is his wife, the Respondent Debtor, who has the debt outstanding to the Australian Taxation Office for which judgment has been obtained. The husband and wife are joint owners of the family home at 8 Bernard Place, Cherrybrook New South Wales. The initial estimate of the potential value of that property was $810,000.00 - $850,000.00 (second affidavit of Ms Khorram para. 12). Subject to that affidavit, the family home has now been placed on the market and a contract for sale of the property is annexed to the fourth affidavit of Ms Khorram (Annexure A). The agent for the sale of the property, Mr Joseph Tan of Century 21 Joseph Tan Real Estate, estimates that the market value for the property is more likely in the vicinity of $740,000.00 - $760,000.00 (Annexure C).
Mr Morris informed the Court that there had been discussions with PPB, the Trustees in Bankruptcy of the husband’s estate, concerning the sale of the house. It was anticipated that an application was to be lodged in the Supreme Court of New South Wales pursuant to s.66G of the Conveyancing Act 1919 (NSW) for a notice to be issued for the Trustee in Bankruptcy to consent to that sale. Further, a letter from Joseph Tan Real Estate to Clamenz Corporate Lawyers dated 17 May 2010 advises that an agency agreement has been signed for the sale of the property.
As at 14 March 2010, Mr and Mrs Khorram had an outstanding mortgage in the amount of $488,020.09 with the Commonwealth Bank of Australia (second affidavit of Ms Khorram at para. 14). The Respondent Debtor has personal assets comprising jewellery and other effects which can be sold for approximately $80,000.00 (second affidavit of Ms Khorram para. 22). There are two automobiles which are valued at $8,000 and $22,000. The latter is subject to a loan (second affidavit of Ms Khorram para. 23).
The second affidavit of Ms Khorram at para. 24 indicates that her close and immediate family, including her daughter and sister have indicated a willingness to provide Ms Khorram with financial assistance in circumstances of financial hardship and were willing to assist in a pool of funds amounting to $70,000.00 in such circumstances. Ms Khorram indicates that she has no other personal liabilities other than the residential and personal loans to the Commonwealth Bank of Australia.
Mr Morris indicated that the complexity in this matter is that the Trustee in Bankruptcy of her husband’s estate has an interest in part of the residential property. A large portion of the debt owed by Ms Khorram to the Department of Taxation relates to a partnership debt that Ms Khorram and her husband incurred when they were in a cleaning business together. This is effectively summarised in the second affidavit of Ms Khorram as follows:
19. In partnership with my husband, Zarif Khorram, I operated a cleaning services business trading under the name Dynamic Cleaning, ABN 82151502032.
20. The business has prepared partnership tax returns with a taxable income for the 2008 and 2009 financial year periods in the amount of $56,301.00 and $82,514.00 respectively. My personal household expenses (between me and my husband) are about $50,000.00 per year, which leaves me in a cash flow positive position.
21. The business has a transaction account with the Commonwealth Bank of Australia which, as at 1 April 2010, has a positive closing balance of $19,382.07.
Mr Morris advised the Court that the house is currently on the market to sell in the next six to eight weeks. If sold, the Commonwealth Bank of Australia will receive approximately $490,000.00 in respect of their first mortgage over the house. That leaves a balance of approximately $260,000.00. Mr Morris submits that from the residue of the sale, an amount of $230,000.00 owing to the Taxation Office would be deducted (affidavit of Mr Simpson, para. 26) leaving a balance of $30,000.00. To that amount, Ms Khorram would have additional assets, being the jewellery, cars and other items specified in her second affidavit, which totals approximately $110,000.00. It is submitted that this provides Ms Khorram with a surplus of assets over liabilities of at least $140,000.00.
Mr Morris submits that in respect to the Trustee’s position of Mr Zarif Khorram, the present Taxation Office debt is a joint and severable liability to the Taxation Office. The payment to the Australian Taxation Office from the proceeds of the sale would eliminate much of the debt owed by the husband’s estate, leaving a small balance of the estate which Ms Khorram intends to satisfy from the surplus of assets in her own name, resulting in his bankruptcy being annulled.
Applicant’s submissions
Ms Prestidge informed the Court that she relied on the affidavit of Mark T. Simpson affirmed on 1 June 2010. That document states that the liability owed by Ms Khorram is $230,427.72 and this remains due and payable (affidavit of Mr Simpson, Annexure G). Ms Prestidge advised the Court that representations had been made by Ms Khorram since May 2009 that attempts were being made to obtain a loan to pay out the debt. In December 2009, Ms Khorram advised that she was in the process of selling a residential home, but six months later the property has not exchanged and there was no application for a loan on foot. Ms Prestidge indicated that it was the Commissioner’s position that there are no prospects of any monies being secured within a relatively short period of time.
Paragraph 30 of Mr Simpson’s affidavit indicates that no payments have been made by Ms Khorram to extinguish the taxation liabilities, with the last payments being made on the 8 May 2006 in the amount of $548.52, which was applied to the partnership account of Ms Khorram.
Ms Presdige submitted that given the long standing nature of these proceedings, the assets nominated by Ms Khorram are not ready for realisation. The significant asset that Ms Khorram relies upon is her family home which she owns in joint tenancy with her husband and who is an undischarged bankrupt. The Trustee of Mr Zarif Khorram’s estate was not aware of the property being on the market for sale until Friday 4 June 2010. Under s.58 of the Bankruptcy Act the property is vested with the Trustee in Bankruptcy and thereby needs a Trustee’s approval to be on the market for sale. There is no evidence before the Court that this approval has been given. Accordingly, it is incorrect for Ms Khorram to say that she enjoys half the benefit of the total equity in the property. Nor has an agency agreement been annexed to the affidavit of Ms Khorram. An agency agreement would show the agent’s fees and what is expected to be realised from a sale, and how the property is intended to be sold. As of 31 December 2009, the mortgage balance was in the amount of $483,643.16. For the period of 1 January 2010 – 14 March 2010, the mortgage has increased to a total amount of $488,020.00. Over this two and a half month period, the secured debt owed to the Commonwealth Bank of Australia has increased by $4,376.00. According to the mortgage statement, Ms Khorram is required to make monthly repayments of $3,507.00 however, she has only paid $3615.00 over a period of 1 January 2010 – 14 March 2010. This is less than half of the required repayments. Ms Prestidge contends that Ms Khorram does not have the financial capacity to meet the interest components of the mortgage repayments. In the absence of a current mortgage statement it is most likely that the mortgage has escalated further.
In respect of the other assets available, being the value of the house contents, partnership bank account, jewellery and automobiles should be given little or no probative value as there is no documentary evidence to support the ownership or value of these assets. The taxation liabilities owed by Ms Khorram to the Deputy Commissioner of Taxation are made up of income tax, running balance account on her individual account and a running balance account on her partnership with her husband. Ms Khorram’s asset and liability breakdown claims a net positive position of $32,950.00, but fails to disclose her liability to the Taxation Office. The following documents are relied upon in support of that submission:
a)Second affidavit of Ms Khorram, Annexure B – letter from Clamenz Corporate lawyers which summarises the debt to the Australian Taxation Office as $226,806.00;
b)The third affidavit of Ms Khorram, Annexure D – states that the outstanding amount to the Australian Taxation Office is $174,429.00 and the total debt is subject to a PPD caveat in the amount of $239,050.00; and
c)The second affidavit of Ms Khorram, Annexure A – letter from PPD, joint trustee of the bankrupt estate of Zarif Khorram indicates the total amount to annul this bankruptcy is $239,050.00.
Significantly, the statement of assets and liabilities annexed to the second affidavit of Ms Khorram at Annexure D ((b) - above), is that of her husband and not hers. This net asset position of $32,950.00 does not include Ms Khorram’s taxation liability of $230,000.00. Only part of the taxation liability included in Mr Zarif Khorram’s proof of debt is a parallel debt to that of his wife Zarghoona Khorram. In the proof of debt filed by Zarif Khorram, it identifies Zarghoona Khorram’s indebtedness to the Taxation Office in respect to the partnership, being an amount of $70,896.18 (second affidavit of Ms Khorram - Annexure A). The remaining balance is made up of Ms Khorram’s husband’s individual account.
The Taxation Office records shows as at 1 June 2010, the partnership account of Zarif and Zarghoona Khorram to have a running balance of $20,121.80 and a reserve Bank of Australia debt of $192,614.77. Since then, Zarif Khorram’s bankruptcy partnership account has increased by $38,840.42 (affidavit of Mark Simpson para 22 – 23 & Annexure D & E).
Ms Prestidge refers the Court to a letter from Ms Khorram’s solicitors, Clamenz Corporate Lawyers, addressed to the Australian Taxation Office that requests the remission of general interest charges on the basis of serious hardship (second affidavit of Ms Khorram - Annexure B). Ms Prestidge submits that from Ms Khorram’s own admission she is in serious hardship, and this supports the Taxation Office’s submission that Ms Khorram is insolvent. On this basis, it is submitted that Ms Khorram has not rebutted the question of solvency and that a Sequestration Order should promptly be made against her estate. By Ms Khorram’s own admission she has assets of approximately $30,000.00, not including the total outstanding amount owed to the Taxation Office, which is an amount of $230,000.00. Of this, only $70,000.00 is a shared partnership account which leaves approximately $160,000.00 to be repaid from Ms Khorram’s net assets of $30,000.00, clearly indicating that Ms Khorram is insolvent.
Consideration
Solvency requires that the Respondent Debtor be able to pay debts as they fall due and payable, out of her own money. This includes both cash on hand and money attainable in a reasonably quick manner through asset realisation. Temporary lack of liquidity will not generally constitute insolvency: Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 per Barwick CJ at 670. If the Respondent Debtor is in a position to pay debts owed within a reasonable time, no sequestration order ought be made: Re Sarina, Ex Parte Council of the Shire of Wollondilly (1980) 43 FLR 163 per Deane J at 165.
The submissions made by both sides in these proceedings indicate that there is some difficulty determining the true financial position of Ms Khorram due to differences in the valuation of the residential property, being the main asset, and the overlapping taxation responsibility of both herself and her husband. In the second affidavit of Ms Khorram – Annexure B – which is a letter from Clamenz Corporate Lawyers dated 6 May 2010 to the Australian Taxation Office, the amount of the debt to that organisation is set out as $226,806.00 and the financial position of Ms Khorram is said to be $82,950.00, taking into account the proceeds of the sale of the residential property and the payment of the outstanding taxation liability.
However, submissions indicate that the $810,000.00 recorded in that letter as the value of the residential property should be reduced to a figure somewhere in the vicinity of $740,000.00 - $760,000.00. Consequently, Ms Khorram appears to be in the position to pay the debts owing within a reasonable time, based on the proposition that the residential property has been placed on the market.
This Court does not have the power to make an order to make a sale under s.30(1) of the Bankruptcy Act against a co-owner of real property who is not the relevant bankrupt. In Lynn v Whyte (Trustee), in the matter of Lynn [2000] FCA 429 it was held that the power to make an order that real property the subject of co-ownership be sold where the co-owner is not otherwise a party to the bankruptcy must be found in state law and in the case of New South Wales, the Real Property Act 1900 (NSW). An examination of the applicable jurisdiction was addressed in the decision of His Honour Federal Magistrate Jarrett in Park v Barclay [2010] FMCA 397.
Consequently, in the application before this Court, a short adjournment should be granted to allow the sale of the residential property so that Ms Khorram can obtain the benefit of her share of that property to meet her creditors’ demands.
I certify that the preceding twenty-six (26) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM
Associate:
Date: 28 July 2010
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