Deputy Commissioner of Taxation v Sedhom - [2012] FMCA 68

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DEPUTY COMMISSIONER OF TAXATION v SEDHOM

[2012] FMCA 68

BANKRUPTCY – Creditor’s petition – insufficient evidence of ability to pay debt or other sufficient cause for dismissing or adjourning petition – unproven prospects of recovering sufficient funds in pending litigation against third party – sequestration order made.

Bankruptcy Act 1966 (Cth), ss.52, 60(2)
Taxation Administration Act 1953 (Cth), Part IVC
Uniform Civil Procedure Act 2005 (NSW)

Cain v Whyte (1933) 48 CLR 639
Eykamp v Deputy Commissioner of Taxation [2010] FCA 797
Ling v Enrobook Pty Ltd (1997) 74 FCR 19
Rozenbes v Kronhill (1956) 95 CLR 407

Applicant:

DEPUTY COMMISSIONER OF TAXATION

Respondent:

NADRA F SEDHOM

File Number:

SYG 2581 of 2010

Judgment of:

Smith FM

Hearing date:

2 February 2012

Delivered at:

Sydney

Delivered on:

2 February 2012

REPRESENTATION

Counsel for the Applicant:

Mr C Wallace

Solicitors for the Applicant:

Australian Taxation Office

Representing the Respondent:

Mr N N Sedhom (with leave of the Court)

ORDERS

A sequestration order be made against the estate of Nadra Fouad Sedhom, also known as Nadra F Sedhom.
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 13 September 2010.
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 2581 of 2010

DEPUTY COMMISSIONER OF TAXATION

Applicant

And

NADRA F SEDHOM

Respondent

REASONS FOR JUDGMENT

(revised from transcript)

This is a creditor’s petition against Mrs Sedhom filed by the Deputy Commissioner on 30 November 2010. It has been adjourned several times, and its life has been extended under section 52(5) of the Bankruptcy Act 1966 (Cth). The petition relies on indebtedness of $130,604.57, based on a default judgment obtained against Mrs Sedhom in the District Court on 5 May 2009, plus interest accrued under the Uniform Civil Procedure Act 2005 (NSW). Further interest has accrued, and Mrs Sedhom’s indebtedness to the Deputy Commissioner of Taxation is now $159,980.89.
The petition alleges that Mrs Sedhom failed to meet the demands of a bankruptcy notice based on the judgment in the District Court and the accrued interest. The bankruptcy notice was served personally on Mrs Sedhom on 23 August 2010, and I am satisfied that its demands were not complied with by her in the time provided. I am therefore satisfied as to the act of bankruptcy relied upon in the petition occurring on 13 September 2010.
Notwithstanding some initial difficulties, the creditor’s petition was served personally on Mrs Sedhom on 15 May 2011.
At the next listing before a Registrar on 18 May 2011, Mrs Sedhom did not appear, but Mr Sedhom appeared and obtained leave to represent his wife. He has appeared similarly at all subsequent listings before the Registrars, and appeared today in that capacity. He assured the Court that his wife was aware of the listing, and wished to be represented by him.
From the file notes of what occurred at the previous five listings before Registrars, it is clear that Mr Sedhom sought, and obtained, adjournments upon assurances to the Registrars that he anticipated raising sufficient funds within a short period to pay the tax debt of his wife, from a settlement of proceedings on foot in the Supreme Court of New South Wales against a former solicitor and possibly other previous professional advisers. These assurances never came to fruition.
Mr Sedhom also appears to have informed the Registrars of the misfortunes, of which he has also informed the Court today. He traces his family’s financial difficulties, and those of various family companies, back to events in 2000, in which it appears one of their companies running a child care business was wound up inappropriately. Mr Sedhom believes that he was subsequently badly let down by his accountant and legal advisers who were employing to overcome their difficulties, and that the actions of these people have compounded their difficulties. The precise circumstances are very obscurely indicated in the affidavit he has filed and in his statements from the bar table.
Mr Sedhom himself appears to have faced bankruptcy proceedings, but the records of this court of which I am aware show that he successfully repelled the last creditor’s petition. There is no suggestion in the evidence before me that Mr Sedhom himself is being pursued by the Deputy Commissioner for any outstanding tax debt, but I cannot be totally confident about that.
In support of his expectations of raising enough money to pay his wife’s debt, Mr Sedhom has referred the Court to an action in the Supreme Court which was commenced in 2010 by two of his companies, himself and his wife, as plaintiffs, against a former solicitor, Mr Chaffey, and others. The pleadings are not in evidence before me, and the nature of the claims and defences is obscure to me, as is the stage at which the proceedings have reached.
There is evidence that the parties have engaged in some negotiations for a settlement. This consists of an offer made by the plaintiffs in May 2011 to accept damages of $780,500. There is also evidence that the defendants made a counter offer of $140,000 inclusive of costs, which was expressed as expiring in August 2011. However, there is no evidence before me of any subsequent negotiations, showing any prospects of an agreement for which I can give tangible content, whether in relation to quantum or timing.
The evidence as to the course of the Supreme Court proceedings consists only of two reports of listings in November and December last year. I assume that they show the matter being case-managed in the professional negligence list. At the November listing the plaintiffs were on notice of a potential application for the matter to be summarily dismissed, presumably for default. This does not seem to have eventuated at the December listing. Rather, according to a somewhat unclear narration by Mr Sedhom to me from the bar table, the judge adjourned the proceedings to another directions listing in February this year. Accord to Mr Sedhom, this is for the purposes of allowing other proceedings in which he and Mrs Sedhom are plaintiffs to be consolidated with the pending proceedings against Mr Chaffy and others. However, I can give no confidence to what I was told today. Obviously, the Deputy Commissioner was unable to assist the Court to understand the Supreme Court matter, since he is not a party to it.
Mr Sedhom has filed, on behalf of Mrs Sedhom, a notice of grounds of opposition to the petition which contains the following two grounds:
1. The respondent debtor is able to pay her debts and the petition ought to be dismissed under s.52(2) of the Bankruptcy Act 1966 (Cth).
2. The respondent will ask the taxation office to review the tax in years 2001 and 2002.
Mr Sedhom accepts that the first ground relies entirely upon the Court being satisfied that there is a prospect of sufficient money from a settlement in the above proceedings being made available to Mrs Sedhom to meet her tax debt. Implicitly, he suggests that the plaintiffs would make available to her the whole of the settlement for this purpose, without leading evidence to show that the plaintiff corporations would be in any position to do this.
However, due to the deficiencies in the evidence which I have pointed to above, I am not satisfied that there is a prospect at any time in the foreseeable future of Mrs Sedhom acquiring the means to pay the Deputy Commissioner’s debt, whether from a settlement achieved in the Supreme Court proceedings or otherwise. I am certainly not satisfied that there is a prospect of this being achieved “within a realistic time frame”, under the tests of “able to pay her debts” within s.52(2)(a) of the Bankruptcy Act which were explained recently by Buchannan J in Eykamp v Deputy Commissioner of Taxation [2010] FCA 797 at [7]:
Under 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
I am also not satisfied that Mr Sedhom has made out a sufficient possibility of her acquiring that ability within the remaining life of this petition, which might provide good reason for further adjourning the petition.
I accept the submissions from the Deputy Commissioner that the existence of the pending proceedings in the Supreme Court does not provide a reason for adjourning the petition or dismissing it, whether under paragraphs (a) or (b) of subsection 52(2).
In relation to paragraph (b), although the existence of pending litigation against a petitioning creditor may support either an adjournment or the dismissal of a petition for “other sufficient cause”, depending upon whether the court is satisfied that the pending litigation has prospects of being likely recover an amount exceeding the indebtedness, or appears to raise only “a real claim” for such an amount, that line of authority does not encompass pending litigation which is against a person who is not the petitioning creditor (see Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at pages 25.C and 26.C).
Moreover, as I have explained above, this pending litigation has not been shown to my satisfaction to have any prospect of bringing enough money into the hands of Mrs Sedhom to pay the Deputy Commissioner, even assuming that the above evidence as to past negotiations allows an inference that there is a real claim underlying the litigation.
I am therefore not satisfied that the first ground in the notice of opposition has been established by Mr Sedhom on behalf of his wife.
In relation to the second ground, although the Deputy Commissioner’s representative was unable to tell me the date of the underlying tax assessments, plainly they had been issued at least prior to May 2009. Mr Sedhom appears to suggest that they relate to the 2001 and 2002 tax years, and there is evidence that he has been employing a tax agent to deal with the Taxation Office. However, on evidence led by the Deputy Commissioner which I accept, at no time has there been an application for review of the underlying tax assessments pursuant to Part IVC of the Taxation Administration Act 1953 (Cth).
Mr Sedhom explains the absence of such an application by reference to his lack of accounting and legal qualifications, and all his misfortunes in recent years. However, the fact is that there is no evidence giving any prospect of success for Mrs Sedhom obtaining a reduction of her tax liability through the issuance of a revised or amended assessment. Moreover, as the Deputy Commissioner’s representative pointes out, under the provisions of the tax legislation Mrs Sedhom’s liability is conclusively established by the current assessment. There is, therefore, no basis upon which I could exercise a discretion to go behind the default judgment upon which the present petition is based, and I would not do that.
Mr Sedhom’s submissions today eloquently sought to draw my attention to his financial misfortunes and their affect on his businesses and on his wife. He points out, and I am prepared to assume, that his wife has been entirely blameless in her inability to meet this taxation debt. He also asserts that she is ill, although there is no medical evidence to prove that. These are matters of hardship which I can understand, but they are insufficient to overcome the creditor’s prima facie entitlement to a sequestration order (see Cain v Whyte (1933) 48 CLR 639 at 646 and Rozenbes v Kronhill (1956) 95 CLR 407 at 414).
Mr Sedhom also expressed concern that his wife’s being made bankrupt might impede his pursuit of his past advisers in the pending litigation. However, it is not apparent to me that it would have this effect. In so far as she is one of the plaintiffs, it may be necessary for a relatively brief adjournment while her trustee decides whether to elect under s.60(2) of the Bankruptcy Act. However, if he does not do so, then the other plaintiffs should be able to proceed without her, and they may benefit since the fruits of the litigation will not flow to Mrs Sedhom’s creditors. If the trustee does elect, then there may be a chance that this will assist the proceedings to be moved forward and settled in a reasonable fashion, rather than otherwise. On either situation, Mr and Mrs Sedhom may benefit, rather than otherwise, by obtaining a release from her indebtedness through her insolvency.
Taking into account all that Mr Sedhom has said to me on behalf of his wife today, I am not persuaded that he has established any proper ground for dismissing the petition.
I am not satisfied that there would be any purpose in further adjourning the petition for two or three months, as I was requested today.
In my opinion, a proper exercise of the Court’s discretion under the Bankruptcy Act would be to acknowledge the petitioning creditor’s prima facie right to a sequestration order, and to make that order today. I am satisfied that all of the requirements of the bankruptcy legislation and rules have been satisfied, to allow this order to be made.

I certify that the preceding twenty-five (25) paragraphs are a true copy of the reasons for judgment of Smith FM

Date: 2 February 2012