Deputy Commissioner of Taxation v Somerton

[2011] FMCA 252

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DEPUTY COMMISSIONER OF TAXATION v SOMERTON [2011] FMCA 252

BANKRUPTCY – Application for review of a decision by a Registrar of this Court refusing to grant a further adjournment of the hearing of a Creditors Petition – hearing de novo – adjournment granted.

Bankruptcy Act 1966, ss.33(1)(a), 116(2)

Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589
Deputy Commissioner of Taxation v Selera [2004] FMCA 714
Re Bond Corporation Holdings Ltd (1990) 8 ACLC 153
Re a Debtor (1930) 2 ABC 164
Rotstein & Associates v Slaveski [2010] FCA 493

Applicant: DEPUTY COMMISSIONER OF TAXATION

Respondent: RICHARD MARK SOMERTON

File Number: SYG 2319 of 2010

Judgment of: Lloyd-Jones FM

Hearing date: 6 April 2011

Delivered at: Sydney

Delivered on: 12 April 2011

REPRESENTATION

Solicitor for the Applicant: Mr Bavin (solicitor) Hunt & Hunt Lawyers

Counsel for the Respondent: Mr Tregenza

Solicitors for the Respondent: David Begg & Associates

ORDERS

1. The hearing of the Creditors Petition is adjourned to Thursday 30 June 2011 at 10:15 before her Honour Barnes FM.

2. Costs be reserved.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 2319 of 2010

DEPUTY COMMISSIONER OF TAXATION

Applicant

And

RICHARD MARK SOMERTON

Respondent

REASONS FOR JUDGMENT

The proceedings

1. This is an application for review of a Registrar’s decision not to adjourn the Creditor’s Petition of Richard Mark Somerton and is before me as a hearing de novo.

2. The matter has come before me as a referral from the Registrar’s list.  The Respondent in the substantive proceedings has challenged the decision of the Registrar not to adjourn the Creditors Petition on the basis that there was insufficient evidence to support the Respondent’s claims that additional time would allow him to satisfy the debt owed. The matter has been adjourned four times before Registrars of this Court prior to it being referred to Federal Magistrate Barnes on 15 March 2011. Her Honour was unable to hear the matter on the referral day and adjourned the Petition to 13 April 2011.  On 5 April 2011, the Respondent Debtor challenged the Registrar’s decision not to grant a further adjournment and the proceedings were referred to me for review of this matter alone. 

3. The Respondent was served with a Bankruptcy Notice on 14 July 2010. By 4 August 2010, the Respondent failed to comply with the requirements of Bankruptcy Notice NN2300 of 2010. A Creditor’s Petition was then filed on 27 October 2010 by the Deputy Commissioner of Taxation, stipulating that Respondent owed the Applicant Creditor the sum of $843,942.13 which comprised a judgment debt obtained in the Supreme Court of New South Wales together with interest charges from 22 May 2010 to 2 June 2010. 

4. From early 2004 to May 2007, the Respondent Debtor ran his own business in the corporate travel and event management industry.  In 2007, the business suffered as a result in the decline of the corporate travel market and went into liquidation.  The Deputy Commissioner of Taxation is the only secured creditor of the Respondent however his debts extend beyond what is owed to the ATO.

5. The Respondent Debtor, Mr Somerton, is a director of a company known as Energie Future Pty Limited.  The Respondent claims that Energie Future Pty Limited has received an offer to merge with another company known as Jade Commodities Limited in an all scrip offer (merger). Jade Commodities Limited is a developer of Underground Coal Gasification (“UCG”) projects in China and India.  Energie Future has taken control of a UCG project in the USA and has already completed a series of pilot tests and intends to commence developing a commercial scale UCG project during 2011.  Energie Future is seeking an Initial Public Offering (“IPO”) to raise the first stage of the development funding.   The proposal is that the merged entity be floated on the London Stock Exchange, with the most recent timeframe indicating that the float is expected to occur in June 2011.  It had originally been thought that the float would take place by April 2011 and this had been the basis for previous adjournments of the matter.  

6. Mr Somerton reads and relies on the following affidavit evidence:

   a)Affidavit of Richard Mark Somerton sworn 26 November 2010;

   b)Affidavit of Richard Mark Somerton sworn 10 December 2010;

   c)Affidavit of Richard Mark Somerton sworn 3 February 2011;

   d)Affidavit of Richard Mark Somerton sworn 7 February 2011;

   e)Affidavit of Richard Mark Somerton sworn 11 March 2011;

   f)Affidavit of Richard Mark Somerton sworn 28 March 2011; and

   g)Affidavit of Mitchell Frederick Hillier sworn 5 April 2011(paragraph 20 not read).

7. Mr Somerton is a discretionary beneficiary of the Artskyd Family Trust.  The Trustee is Vanstra Pty Ltd. In his affidavit of 29 November 2010, Mr Somerton provides a convenient background to his claim at [7] – [9]:

   [7] I am a beneficiary of the Artskyd Family Trust (Trust).  Based on the IPO valuation given by the brokers, the Trust’s interest in Energie upon the Merger, will be valued at approximately A$15 million. 

   [8] Vanstra Pty Limited as trustee for the Trust (Vanstra) has an agreement with Sinom Holdings Co Limited (Sinom) to purchase US$2.5million in stock from the Trust upon the listing of the new company following the Merger.  Annexed and marked “B” is a copy of Vanstra’s letter to Sinom sent on 20 November 2010.

   [9] Upon completion of the sale between Sinom and the Trust, the trustee of the Trust has agreed to transfer sufficient funds to me to pay all outstanding creditors, upon the proviso that I am not a bankrupt at that time.  Annexed and marked “C” is a copy of the resolution of the trustee dated 19 November 2010 to this effect.

8. In his most recent affidavit, sworn 28 March 2011, Mr Somerton attests to the following at [2] – [5]:

   [2] Since 11 March 2011, negotiations regarding the merger of Energie Future Limited NL (Energie Fugure) and Jade Commodities BVI Limited (Jade) have steadily progressed.  In a letter dated 22 March 2011, I was informed by the Chief Executive Officer of Jade, Mr Richard Bennett, that the Sale and Purchase Agreement sent to Jade on 7 March 2011 is currently being reviewed by their legal representatives.  Further to this, Mr Bennett confirmed that the public listing of the proposed company resulting from the merger of Energie Future and Jade is still scheduled for June 2011.  Annexed hereto and marked “A” is a true copy of the letter from Jade dated 22 March 2011. 

   [3]  Previous negotiations that I have been involved in between Vanstra (as Trustee of the Trust) and Sinom Holdings (the Sinom Holdings Negotiation), referred to in my first February Affidavit and my March Affidavit, were due to result in an agreement for Sinom Holdings to purchase $2 million worth of stock from Vanstra upon the formation of the Merged Company. The Sinom Holdings Negotiations have been superseded by negotiation with Asian Aim Incubator Company Limited (Asian Aim).  It has been agreed with Asian Aim that they are to purchase the equivalent of 6 million shares in the Merged Company.  To this effect, a Share Sale Purchase Agreement (the Agreement) has been executed between Asian Aim and Vanstra.  Annexed hereto and marked “B” is a true copy of the Share Sale and Purchase Agreement.

   [4] As stated in the Agreement at clause 3, Vanstra will receive $2million for the sale of the shares.  On the basis of the previous resolution of the Directors of Vanstra in respect of the Sinom Holdings Negotiations referred to in my November Affidavit at Annexure C, it is envisaged that the Directors of Vanstra will resolve at the Directors’ meeting that following the completion of the transaction between Asian Aim and the Trust, monies will be applied to my benefit to pay all of my outstanding creditors, providing I am not bankrupt.

   [5] I request that this Honourable Court stand the Petition over to late June 2011.

Respondent Debtor’s submissions

1. Mr Tregenza, appearing for Mr Somerton, submits that it is in the public interest and the interest of creditors as a whole that a sufficient adjournment be allowed to permit the float to take place. He submits that this would result, if all goes to plan, in all creditors being discharged, including the petitioning creditor. It is submitted that if it does not go ahead, and there is no distribution of the estate, it would mean that there is no money for creditors at all. Mr Tregenza submits that the principles in granting an adjournment are those principles founding the Bankruptcy Act, being primarily, what is in the public interest and whether bankruptcy would assist unpaid creditors recover their debts. Mr Tragenza submits that there is a wide discretion in relation to adjournments in bankruptcy proceedings. He refers the Court to the decision of Bromberg J in Rotstein & Associates v Slaveski [2010] FCA 493. In paras.17 and 18 of that judgment, his Honour sets out the principles indicating a wide discretion in relation to adjournments. Being, that they are:

   …what is necessary to achieve the objects of the Bankruptcy Act.

2. In para.17, his Honour indicates:

   Relevantly to the issues before me, those objectives include the public interest in stopping individuals who are unable to meet their debts from continued insolvent trading, and assisting creditors who are unable to recover debts owed to them.

3. His Honour looked, in para.18:

   …in those circumstances, as to the need to protect the public from insolvent trading.

4. In para.21 his Honour deals with the argument that there is a public interest that debts be enforced efficiently and expeditiously. 

   Bankruptcy proceedings are … it is not the case that bankruptcy proceedings are a mere debt collection tool at the disposal of creditors.

Applicant Creditor’s submissions

1. Mr Bavin, appearing for the Deputy Commissioner of Taxation, submits that the Respondent Debtor has not been able to provide the Court with any documents that are not merely in the ‘draft’ stage in support of the proposed merger agreement.  He submits that the debtor has been given every opportunity for this proposed deal to go ahead and it still remains at the draft stage, some five months after the agreement was put to the Court.

2. Mr Bavin further submits that the proposal for deferred consideration for the purchase of shares to occur some 90 days post the IPO indicates that even if the IPO does happen to occur in June, payment of the full amount will not occur for a period of three months after that.  Mr Bavin submits that it will be another four months, if at all, before the funds are realised under the proposed agreement.  Mr Bavin contends that there is still a large degree of uncertainty as to whether any such agreement will eventuate, particularly considering the status of the agreement documents still remain in their draft form.  Mr Bavin refers the Court to the decision of McInnis FM in Deputy Commissioner of Taxation v Selera [2004] FMCA 714 where his Honour considers the nature of evidence as to the Respondent Debtors capacity to refinance. His Honour states at para[17]:

   In my view, the current state of the evidence of the debtor is unsatisfactory.  Whilst I can understand, having regard to the chronology of events and the affidavits to which I have referred, that the debtor has continued to be hopeful of refinancing, it is clear that the refinancing process has been slow and unsatisfactory.  It has not been confined to one potential borrower, has not culminated in what I would describe as any definite prospect of an advance of money based upon the securities relied upon by the respondent. 

3. Mr Bavin submits that the case is analogous to the present set of facts. Here, there has been a suggestion of the float that has been delayed, at least once, with no definite proposal that it is going to occur.  Mr Bavin submits that even if it does occur, someone still has to purchase the shares from the trust.  Mr Bavin submits that Sinom Holdings, who previously had an agreement in place, recently refuted that agreement and has been replaced by a new party who has stipulated some deferred consideration plan involving Swiss-based companies in the Channel Islands.  It is the submitted that there is no certainty that any of these processes are going to occur.

Consideration

1. The Court has been requested to exercise its discretion in granting an adjournment of the hearing of the Creditor’s Petition in order to allow the completion of a merger between Energie Future Pty Ltd and Jade Commodities Limited in order to facilitate the float on the London Stock Exchange which is anticipated will yield funds in the vicinity of $2 million which will become available for Mr Somerton to pay the Petitioning Creditor and his other creditors.  The Court has been requested to exercise its discretion to allow sufficient time for these arrangements to be placed in a contractual arrangement to facilitate this to occur.  The submission made to the Court is that the extension of time is required to 15 June 2011. 

2. The Court has been referred to the decision in Rotstein & Associates v Slaveski [2010] FCA 493 per Bromberg J where the principles involved in the exercise of the discretion are summarised by His Honour. At [16] – [18] his Honour states:

   16] Section 33(1)(a) of the Bankruptcy Act provides as follows:

   (1)  The Court may:

   (a)  upon such terms as it thinks fit, at any time adjourn any proceeding before it, either to a fixed date or generally

   [17] It is evident that s 33(1)(a) gives the court a wide discretion in relation to the grant of an adjournment. As Sweeney J (with whom Franki J agreed) stated in Field v Commercial Banking Co of Sydney Ltd (1978) 37 FLR 341 at 349, it would be unwise to attempt to draw up an exhaustive catalogue of the circumstances to which the court should pay regard in considering an application for an adjournment of a creditor’s petition. However, the court’s discretion should be exercised with a mind to the policy objectives of the Bankruptcy Act. Relevantly to the issues before me, those objectives include the public interest in stopping individuals who are unable to meet their debts from continued insolvent trading and assisting creditors who are unable to recover debts owed to them: See Rozenbes v Kronhill (1956) 95 CLR 407 at 414.

   [18] In this case, Rotstein is the sole petitioning creditor. There is no evidence before me that Slaveski has other creditors. There is no evidence that Slaveski is involved in trade or commerce. There is evidence before me that a substantial part of the judgment debt has been paid and that if the instalment order continues to be adhered to the debt will be extinguished by 25 January 2011. There is nothing before me to suggest that the need to protect the public from insolvent trading would be put in jeopardy by an adjournment of the hearing of the creditor’s petition to a date sufficient to allow the obligations under the instalment order to be satisfied before the creditor’s petition is dealt with.

3. The aims of insolvency law must involve the consideration of the position and concerns of the debtor, their creditors and the general community: Re a Debtor (1930) 2ABC 164 at 166- 167; Re Bond Corporation Holdings Ltd (1990) 8 ACLC 153 at 156, and it must seek to balance the interest of these parties. The principle aim is to provide equal, fair and orderly procedures in handling the affairs of insolvents, ensuring that creditors receive an equal and equitable distribution of the assets of the debtor. This is the pari passu principle which is generally regarded as being the foremost principle of insolvency law.  However, it is widely accepted that this principle is subject to many exceptions.  Upon the bankruptcy of a debtor, the rights of creditors are converted into rights to prove their debt in the administration of the bankrupt’s estate, and they lose their rights to pursue other remedies to pursue unsatisfied debts; Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 594-5.

4. When a debtor becomes a bankrupt their real and personal property at the date of the commencement of the bankruptcy, vests in the trustee of the bankrupt estate. The property of the bankrupt which vests in the trustee is that which is divisible among the creditors of the bankrupt estate, including after acquired property (which vests as soon as it is acquired). Section 116(2) of the Bankruptcy Act excludes certain classes of property, including necessary household furniture and effects, a car and tools of trade up to certain values, superannuation and some life insurance policies.  Other consequences of bankruptcy to the debtor are that they may be prohibited from being a director, promoter or concerned in the management of a company without leave of a court.  The debtor, once bankrupt, may be prevented from travelling overseas without the written consent of his or her trustee or an order of the court.  They must hand their passport to their trustee. 

5. In this matter, we have a debtor subject to a Creditor’s Petition based on a debt to the Deputy Commissioner of Taxation in the sum of $843,942.13.  In addition, there are unsecured creditors that are owed in the vicinity of $200,000.00.  The Debtor claims that his personal effects are valued at approximately $5,000.00.  If sequestration occurred at this point, none of the creditors would be paid. 

6. However, as set out above, Mr Somerton has a proposal for a commercial transaction utilising the entire issued share capital of Energie Future Pty Ltd that has control of an Underground Coal Gasification project in America which has already completed a series of pilot tests and intends to commence developing a commercial scale Underground Coal Gasification project.  This process requires the raising of capital to proceed to the next stage of development and it is proposed that these funds would be sourced by an Initial Public Offering.  Mr Somerton is attempting to facilitate a commercial transaction between Energie Future Pty Ltd, Jade Commodities Limited and Sinom Holdings Co. Limited.

7. I note Mr Bavin’s concerns and the similarity to the matter of Deputy Commissioner of Taxation v Salera (supra) set out above, which concerned a draft loan agreement, documents which were conditional and whether or not there should be an adjournment to allow the further progress of these matters in order to realise the assets.   I acknowledge the similarities to the matter before this Court where a draft confidential share agreement has been placed in evidence which is subject to sign off by Jade Commodities’ legal advisors.  When this is complete, there has to be a float and this has been delayed on more than one occasion.  Consequently, Mr Bavin is correct in his submissions that there is no definite proposal that this commercial agreement is going to occur and even if it does, an independent third party has to purchase the shares from the trust.  Earlier in the proposal, Sinom was a party that was identified as a possible purchaser but apparently this agreement was refuted and had to be replaced by a new party, Asian Aim Incubator Company Limited.  Asian Aim Incubator Company Limited has come up with some deferred consideration plans involving a Swiss based company in the Channel Islands. 

8. A further complication is that if the initial public offer occurs in June, part of the consideration is going to be received for a period anticipated to be 90 days post that event.  The effect of this is that a period between the date that this matter first came to Court and the possible settlement is in the vicinity of 9 months.  I am satisfied that the general public are protected in respect of the aspect that Mr Somerton is not trading while insolvent, as he has indicated in his affidavits filed in Court that he is undertaking employment as a consultant and using the funds received to maintain his family.  The other very significant issue is that if the steps leading to the Initial Public Offer are successful, the secured and unsecured creditors will be paid.  I recognise that the undertaking to arrange an Initial Public Offer involves a detailed process of due diligence and investigation by all of the parties involved and in broad terms is far more difficult venture to achieve than that of arranging a normal refinancing.  In these circumstances, I believe it is appropriate to grant an adjournment to Thursday 30 June 2011. 

I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM

Date:  12 April 2011