Deputy Commissioner of Taxation v Knazovicka
[2012] FMCA 556
•20 June 2012
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DEPUTY COMMISSIONER OF TAXATION v KNAZOVICKA | [2012] FMCA 556 |
| BANKRUPTCY – Creditor’s petition – act of bankruptcy and debt sufficiently established – insufficient evidence of ability to pay debts – sequestration order made. |
| Bankruptcy Act 1966 (Cth), ss.52(1), 52(2)(a) Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), r.4.06 |
| Eykamp v Deputy Commissioner of Taxation [2010] FCA 797 Wren v Mahony (1972) 126 CLR 212 |
| Applicant: | DEPUTY COMMISSIONER OF TAXATION |
| Respondent: | BONNA KING KNAZOVICKA |
| File Number: | SYG 790 of 2011 |
| Judgment of: | Smith FM |
| Hearing date: | 20 June 2012 |
| Delivered at: | Sydney |
| Delivered on: | 20 June 2012 |
REPRESENTATION
| Counsel for the Applicant: | Ms M Kijirah |
| Solicitors for the Applicant: | Australian Taxation Office |
| Counsel for the Respondent: | Respondent in person |
ORDERS
A sequestration order be made against the estate of Bonna King Knazovicka.
The applicant creditor’s costs, including all reserved costs, be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).
Note that the date of the act of bankruptcy is 9 February 2011.
The applicant must give a copy of this order to the Official Receiver within 2 working days.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 790 of 2011
| DEPUTY COMMISSIONER OF TAXATION |
Applicant
And
| BONNA KING KNAZOVICKA |
Respondent
REASONS FOR JUDGMENT
(revised from transcript)
This judgment explains why I have decided that the Deputy Commissioner of Taxation is entitled to the making of a sequestration order against Ms Knazovicka.
Ms Knazovicka has conducted a clothing boutique in Cremorne called La Dolce Vita Boutique for many years, during which she failed properly to account for her GST liabilities to the Australian Taxation Office. Following a series of audits and revised assessments, the Deputy Commissioner of Taxation obtained a judgment debt in the District Court on 3 September 2009 in the sum of $187,008.00, including penalties and costs. Although the Commissioner subsequently re‑visited some of the assessments upon which the judgment debt was based, and reduced the amounts owing as a result of further documents being discovered and shown to his auditors, there is nothing in the evidence before me which persuades me to go behind the judgment debt entered in the District Court. I have no reason to doubt that it was properly based upon an amount of money owing at the date that it was entered, by reason of the provisions of the relevant taxation legislation. If I had a discretion to go behind that judgment, I would not exercise it on the evidence before me today (see Wren v Mahony (1972) 126 CLR 212 and the principles discussed therein).
Based upon the judgment debt a bankruptcy notice was issued and subsequently withdrawn by the Commissioner, following proceedings in this Court which were resolved in a consent order of a Registrar on 25 May 2010 concerning Bankruptcy Notice Number NN 894 of 2010.
A second bankruptcy notice was issued at the request of the Commissioner, being Bankruptcy Notice No NN 5357 issued on 19 November 2010, also based upon the District Court judgment. The bankruptcy notice demanded payment of the sum of $202,412.09 owing under the District Court judgment, with accrued interest and less some credits. The bankruptcy notice was served personally on 19 January 2011.
I am not satisfied that the debt alleged in the bankruptcy notice was not owed at the time that the bankruptcy notice was issued and served, nor that there is any other reason for doubting the validity of the bankruptcy notice shown in the evidence before me. I am satisfied that it was duly served. I am satisfied that there was no compliance with its terms by Ms Knazovicka, and that the act of bankruptcy relied upon in the petition occurred on 9 February 2011.
Based upon that act of bankruptcy and the indebtedness arising under the District Court judgment and subject to some credits and adjustments, a petition was lodged on 21 April 2011 asserting a then indebtedness to the Deputy Commissioner of $201,558.09. I am satisfied that the existence of that debt at that time is sufficiently verified, and I am not persuaded there is any reason not to accept the affidavits of debt in relation to that indebtedness. Nor would I see any reason not to accept subsequent affidavits of debt filed in the proceedings, the most recent of which was filed today under r.4.06 of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) and deposes to a state of indebtedness in the sum of $194,435.09.
Although Ms Knazovicka has throughout the petition proceedings filed various documents disputing the calculation of this debt, it appears to me that she admitted her indebtedness in her oral submissions to me today. She has also tendered evidence of advice from professional people who endeavoured to assist her in her dealings with the taxation office, and who have advised her that this amount is indeed owed to the Australian Taxation Office. In a letter dated 5 March 2012, a solicitor who received a provisional grant of legal aid to assist Ms Knazovicka said: “she still appears indebted in the sum of $199,990.00”. A very recent advice from her accountant states: “you can see on the Client Account List that $3,141.40 is outstanding on your income tax account and $194,435.09 is outstanding on the Legal Action Account”.
I therefore accept the affidavits verifying the indebtedness asserted in the petition, and am satisfied that the Commissioner has presented evidence which meets the requirements of s.52(1) and all the other requirements of the Bankruptcy Act and Regulations and Rules which empower the Court to make a sequestration order against the estate of Ms Knazovicka.
In her various submissions and documents opposing the making of that order, Ms Knazovicka has made a number of contentions, some of which I have addressed above. In particular, as to the existence of the indebtedness.
Her remaining principal contention was, as I understood it, that the Court should not make her bankrupt today because there is a prospect of raising money to pay her current debts to the taxation office.
In this respect she submitted evidence in relation to her business, suggesting that she and a business partner, Rodney Weston, have employed the services of a business brokerage “Macquarie Commercial & Business Sales Pty Ltd”, to market the business as an ongoing enterprise, in effect, based essentially on goodwill and a current lease. The existence of a lease for the premises in which it is currently operating was established today by the tender of a lease, showing Ms Knazovicka and Mr Weston as the lessees as tenants in common in equal shares under a three year lease commencing on 10 October 2010 with an option for renewal for a further three years.
An exact description of the business is not found in the “brokerage proposal” which was tendered by Ms Knazovicka, nor is the interest of Mr Weston in the business fully explained in that document or in any other documents that Ms Knazovicka has put into evidence. However, she submits to the Court that it evidences the opinion of the brokers that a sale price of $236,170.00 could be advertised, and that they propose to charge seven per cent of the sale price plus GST when it is sold, and the proposal document also appeared to propose that she pay them $6,000.00.
The document which she tendered does not evidence a completed agreement with Macquarie Commercial & Business Sales, but rather is their offer of an agreement. Whether an agreement was eventually entered into with those brokers, and its exact terms, are not shown on the evidence before me. Nor does the document provide a valuation of the value of the business which can be relied upon.
However, assuming that an agreement to engage the brokers to sell the business has been entered into, and that the business has been on the market since around the time of the brokerage proposal, being June last year, then it has manifestly failed to attract a purchaser for about one year. During that period, the petition has been listed before the Court on numerous occasions before Registrars, before being referred to me for final hearing on 16 April 2012. On that occasion I set the matter down for hearing today, indicating to Ms Knazovicka that her further opportunities to sell the business, and to reach agreement with the ATO, would come to a head today. There remains no prospect of a sale in the foreseeable future.
I am not satisfied on any of the evidence that has been presented by Ms Knazovicka that she has an asset which she is free to dispose of by way of meeting her indebtedness to the Deputy Commissioner, and which has prospects of realising the amount of her indebtedness within a reasonable timeframe, according to the authorities on the meaning of ‘able to pay her debts’ within s.52(2)(a) of the Bankruptcy Act. As Buchanan J said in Eykamp v Deputy Commissioner of Taxation [2010] FCA 797:
7Under an earlier definition in the Act considered in Sandell v Porter (1966) 115 CLR 666 it was necessary for a debtor to be able to pay debts as they fell due out of the debtor’s own money. Such monies extended to those capable of being procured by sale, by mortgage or pledge of assets of the debtor’s within a relatively short time. A more flexible position now obtains. I note that in International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 Katz J favoured the view that the necessity to pay a debt from a person’s own money continued to be an important element in the scheme established under the Act (see e.g. s 124(3)(a) of the Act). However, with respect, so far as it concerns consideration of whether a person is, or is not, solvent, I prefer the view taken by Palmer J in Lewis v Doran (2004) 184 FLR 454 at [116] (see on appeal Lewis v Doran (2005) 219 ALR 555 at [109]–[112]) to which I subscribed, with the agreement of Marshall and Tracey JJ, in Whitton at [34]‑[38]. Accordingly it would not be impermissible to pay regard to the fact that Mrs Eykamp could raise sufficient money to pay the debt, whether or not that was the direct result of sale, mortgage or pledge of her assets. However, whatever mechanism is employed to secure the necessary funds, and satisfy the Court that it provides adequate evidence of solvency, it remains necessary that it produce results within a realistic time frame (Sandell v Porter at 670, Hall v Poolman [2007] NSWSC 1330; 65 ACSR 123 at [187]).
Ms Knazovicka raised concerns about the effect of her bankruptcy on Mr Weston’s interest in the business, but his interest is a matter which is at present obscure on the evidence before the Court, and will need investigation by her trustee in bankruptcy. She and Mr Weston should seek advice from their accounting and legal advisors about this.
Ms Knazovicka’s other submissions were, in effect, that if a sequestration order were made today there is no prospect of her debt to the Deputy Commissioner being paid. She points out that the stock of her business is held under consignment and she holds no property in it. She submits that her income is that of a pensioner with very modest income from the business. In effect, she submitted that she is so hopelessly insolvent at present, as to render bankruptcy and the expenses of bankruptcy futile.
Here again, she has not presented sufficient evidence to the Court to allow me to form any proper appreciation of her financial situation, whether in relation to her business affairs or her personal affairs. However, the fact that she may indeed prove to be insolvent with little available for distribution to creditors would not itself provide a reason for the Court to decline to make a sequestration order. Rather, in my opinion, on the evidence before me there appears to be a public interest in making a sequestration order today, since it cannot be in the general interests of Ms Knazovicka’s creditors and the public interests which the Bankruptcy Act is designed to serve, that she should be permitted to continue to trade insolvent in circumstances where a large creditor is pressing for a sequestration order.
Taking into account all the submissions that have been made to me today and all of the material that has been presented to me, in my opinion, an appropriate exercise of my discretions under the Bankruptcy Act would be to make a sequestration order today, and I shall do so in the usual terms.
I certify that the preceding nineteen (19) paragraphs are a true copy of the reasons for judgment of Smith FM
Date: 4 July 2012
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