DUNCAN v McVeigh - [2004] FMCA 759

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DUNCAN v McVEIGH & ANOR

[2004] FMCA 759

BANKRUPTCY – Annulment.

Bankruptcy Act 1966, s.153B
Local Government Act 1919 (NSW)

Corney v Brien (1951) 84 CLR 343
Delph Sing v Wood (1918) 25 CLR 497
Hopkins v Seymour Softwoods Ltd and Ors [1998] FCA 1419
Layton v Westpac Banking Corp (2000) 181 ALR 603
Pollock v Deputy Commissioner of Taxation (1994) 94 ATC 4148
Re Frank; Ex parte Piliszky (1987) 16 FCR 396
Re Gollan (1992) 40 FCR 38
Re Raymond (1992) 36 FCR 425 Re Frank; Ex parte Piliszky (1987) 16 FCR
Stankiewicz v Plata (2000) FCA 1185
Wren v Mahony (1972) 126 CLR 212

Applicant:

TOM DUNCAN

First Respondent:

DEAN ROYSTON McVEIGH

Second Respondent:

EQUUSCORP PTY LTD

File No:

MLG 906 of 2004

Delivered on:

18 October 2004

Delivered at:

Melbourne

Hearing Date:

18 October 2004

Judgment of:

Riethmuller FM

REPRESENTATION

Counsel for the Applicant:

Mr P. Fary

Solicitors for the Applicant:

Russell Kennedy

Counsel for the First Respondent:

Excused from attending

Solicitors for the First Respondent:

G R Campbell

Counsel for the Second Respondent:

Mr M.R. Scott

Solicitors for the Second Respondent:

Phillip Allen Clark

ORDERS

The Applicant’s bankruptcy (number 1669 of 2003) be annulled.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 906 of 2004

TOM DUNCAN

Applicant

and

DEAN ROYSTON McVEIGH

First Respondent

and

EQUUSCORP PTY LTD

Second Respondent

REASONS FOR JUDGMENT

This is an ex tempore judgment on an application by the applicant for an annulment of his bankruptcy pursuant to section 153B of the Bankruptcy Act 1966.
The applicant became a bankrupt by order of Deputy Registrar Mussett made on 8 May 2003 on the application of Equuscorp Pty Ltd who is the second respondent in these proceedings. The trustee, who is the first respondent in these proceedings, is Dean McVeigh.
The background to the proceedings is well set out in the contentions of fact and law by the applicant however it is appropriate that I recount a number of the contentions set out therein. The matter initially arose out of a pine plantation investment in 1989. The applicant received a prospectus from his accountant concerning the investment proposal. The pine plantation investment (described by some as tax effective and others as a tax shelter) was an investment wherein a person entered into arrangements to effectively lease a section of a pine plantation and have another company plant it and manage it until the pine trees were of sufficient size and quality to be harvested. There is considerable dispute as to the precise nature of the legal arrangements between the various entities involved in the plantation proposals and arrangements and the profitability of such an investment scheme. Those matters are not necessary to decide in these proceedings.
In June 1990 the applicant entered into a series of lease agreements with the company Sintoff Pty Ltd which is now in receivership and/or liquidation. In June 1995 Equuscorp appointed Mr Kelly as receiver of Sintoff pursuant to a charge that it had over the assets of Sintoff. In November 2000 Equuscorp commenced proceedings in the Supreme Court of Victoria by writ and statement of claim against 243 people including the applicant, all of whom it appears were investors in the pine plantation arrangement. Those proceedings sought moneys said to be owed pursuant to various lease agreements between the investors and Sintoff, which Equuscorp had obtained by way of a deed of assignment.
There is a dispute between the parties as to whether or not the applicant was personally served with the writ and statement of claim. It seems that some time after the alleged service of the writ and statement of claim the second respondent entered a default judgment in the Supreme Court of Victoria. On 9 April 2002 Equuscorp obtained judgment against the applicant for $46,829.66 as a result of his default of entering an appearance in the Supreme Court proceedings. There is some dispute between the parties as to whether or not a lapse of one year between the date of alleged service and the date of entry of default judgment meant that the default judgment was irregularly entered under the rules of the Supreme Court of Victoria due to the nature of the management of the case then in court. That issue does not need to be determined by me in these proceedings.
On 13 June 2002 a bankruptcy notice was issued addressed to the applicant on the application of the second respondent, Equuscorp, claiming $47,843.86 pursuant to the default judgment. It seems that the applicant also received a notice of demand from Equuscorp claiming $73,084.58 on or about 12 September 2002. It is admitted by the applicant that he was personally served with the bankruptcy notice on 30 November 2002. On 31 January 2003 the second respondent presented a creditor's petition to the Federal Magistrates Court seeking a sequestration order against the applicant's estate.
Orders were made for substituted service of the creditors petition on

11 April 2003. There is some dispute as to whether or not the applicant actually became aware of the creditor's petition that was then pending. However, on 8 May 2003 a sequestration order was made and the first respondent, McVeigh, became trustee of the applicant's estate. It is clear that by 5 June 2003 the applicant must have been aware of the sequestration order as he retained a solicitor, Lynch Meyer, and then another lawyer, Mr Barodoel, to assist him in relation to the bankruptcy.
On 6 August 2003 he filed a statement of affairs with the official receiver. Later on 28 April 2004 he retained his current solicitors, Russell Kennedy, to act on his behalf as his previous lawyer did not appear to be progressing the matter. On 12 July 2004 proceedings were commenced in this court seeking the annulment of the bankruptcy and were listed on an urgent basis before me to be heard today.
The applicant contends that the court ought not to have made a sequestration order on two grounds. First, that he is solvent, and second, there is not in truth or reality a debt owing. In respect to solvency, I have regard to the comments of the Full Court in Stankiewicz v Plata (2000) FCA 1185:
There are authorities which suggest that a bankrupt whose assets exceed his or her debts at the date of the sequestration order ordinarily will be entitled to an annulment of the bankruptcy, at least if the bankrupt gives undertakings to pay the costs of the petitioning creditor and the trustee's costs of administration: Re Gollan, at 41-42, per Spender J; Re McDonald; ex parte Deputy Commissioner of Taxation (1996) 33 ATR 1 (Spender J). This principle is said to follow from s 52(2)(a) of the Bankruptcy Act, which provides that if the Court is satisfied that the debtor "is able to pay his or her debts", it may dismiss the creditor's petition. In general, a debtor who so satisfies the Court will succeed in having the creditor's petition dismissed: Sarina v Wollondilly Shire Council (1980) 48 FLR 372 (FC), at 376; Re Stubberfield; ex parte Paradise Grove Pty Ltd (1995) 134 ALR 169; cf Trojan v Corporation of Hindmarsh (1987) 16 FCR 37 (FC), at 47. We are content to assume, without deciding, that the authorities to which we have referred correctly state the position.
In order to satisfy the Court that he or she is "able to pay his or her debts", it is not necessary for the debtor to show that he or she has cash resources immediately available for this purpose. But the debtor must be able to realise assets, sufficient to pay the debt, within a relatively short time. As Barwick CJ said in Sandell v Porter (1966) 115 CLR 666, at 670, the resources to be considered
"extend to moneys which [the debtor] can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing 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."
It is conceded by the respondent that the applicant appears to be solvent, given that he is on an income of around $105,000.00 per annum and has a surplus of assets over liabilities of around $170,000.00 (being the value of his home less the mortgage, a small credit card debt and the debt that is the subject of these proceedings). I am satisfied on the material presented to me today that it appears that the applicant is in fact solvent.
The second issue concerns whether or not the court should go behind the default judgment. It is clear that the court in its bankruptcy jurisdiction does have the power to look behind a judgment in order to determine whether or not to either make a sequestration order or to make an order annulling a bankruptcy. A number of cases have been cited in this regard such as Pollock v Deputy Commissioner of Taxation (1994) 94 ATC 4148, Corney v Brien (1951) 84 CLR 343 and Wren v Mahony (1972) 126 CLR 212.
The basis for disputing the debt is set out in some detail in the affidavit material. In part it relies upon a contention that the lease agreements involved in the investment constituted a subdivision within the meaning of the Local Government Act 1919 (NSW) and were therefore void. The issues that are likely to arise in this case are discussed in some detail in a case involving the same scheme and promoters but a different investor: Hopkins v Seymour Softwoods Ltd and Ors [1998] FCA 1419. The facts and circumstances as they applied to Hopkins were discussed in some detail by Foster J in that case. Many of the issues in that case will necessarily be the same in this case. It appears clear that there is no doubt that there is a genuine dispute as whether or not a debt is owing and that certainly on the applicant's best case a debt would not be owing.
Quite properly, counsel for Equuscorp conceded this morning that based upon the defences articulated in the applicant's affidavit sworn 8 July 2004 a genuine dispute exists in the sense required to give the court a basis for exercising the discretion to annul the bankruptcy.
An issue then arises as to whether or not I ought to exercise the discretion to annul the bankruptcy in the circumstances of this case. The second respondent contended that there were a number of discretionary factors which militate against the exercise of the discretion. There has been a substantial delay since the making of the sequestration order on 8 May 2003. There certainly seems to be no question that at the relevant time an act of bankruptcy had been committed in the sense described in Layton v Westpac Banking Corp (2000) 181 ALR 603. It is said by the second respondent that the applicant has not proffered an undertaking to pay their or the trustee's costs in obtaining the sequestration order and administering the bankruptcy. It is also argued that the outcome of the Supreme Court proceedings may result in everybody ultimately being back here in the same position but with considerable cost and delay in the meantime.
The parties referred to a number of cases as to the exercise of discretion including: Re Frank; Ex parte Piliszky (1987) 16 FCR 396, Delph Sing v Wood (1918) 25 CLR 497; Re Gollan (1992) 40 FCR 38; Re Raymond (1992) 36 FCR 425.
It appears to me that what really must be weighed up is the potential prejudice to the creditors, and in this case effectively only one creditor, as against the position of the bankrupt.
There is no doubt that the bankrupt has delayed significantly before doing anything about his case. Even on his best case, he was certainly served with a bankruptcy notice on 30 November 2002 and must have been aware of the sequestration order by 5 June 2003. The delay is certainly inordinate. Some explanation is given, which in part relies upon a lack of action by solicitors, however, it does not wholly explain that delay.
If the bankruptcy is annulled it is difficult to see any real prejudice to the second respondent as the creditor, which could not be ameliorated by an appropriate order for costs. Effectively, the bankrupt would be returned to the same position as around 240 other defendants in the primary Supreme Court proceedings pending in Victoria. He would, of course, have to apply to have the default judgment set aside but there appears to be little doubt that that application would be successful. The Supreme Court proceedings in Victoria have a small number of defendants, between one and three, who are proceeding in the form of a de facto test case. That was initially listed for trial next month, but I am told those dates have now been vacated as the parties are not yet ready for trial. Effectively, therefore, the second respondent will really be in no different position to what it is in with respect to around 240 other defendants who were all investors in the scheme, save, as I indicated before, with respect to the costs involved in these proceedings.
It appears to me that it would be a rare case where a court would decline to annul a bankruptcy where the bankrupt has an apparently good defence on the merits (that is, operating on the assumption that the material put forward by the bankrupt can be proved in the Supreme Court) and where there doesn't appear to be any prejudice to the creditor which could not be remedied by a costs order. It would, of course, be very different if time limits had expired or the other proceedings had been wholly disposed of some time ago. In this case, however, the bankrupt returns to the same position as a very large number of other defendant investors in the scheme.
Whilst it is said that the applicant has not offered an undertaking with respect to costs and expenses, it appears clear to me, from the way in which his case has been conducted, that he accepts that he will be ordered to pay such costs and expenses as the court considers is reasonable, and that to preclude him from having an annulment order simply because he does not concede to whatever demands are made in that regard would be inappropriate. It is appropriate to allow him to agitate before the court and have the court determine what is a reasonable part of those expenses and costs that he should meet as a result of his conduct, the conduct of the other parties, and the effect of the annulment order.
In the circumstances I therefore order that the bankruptcy in this matter be annulled. I will now hear the parties as to what evidence may be required or other submissions are necessary with respect to the question of costs in order to determine what would be an appropriate order or orders with respect to the costs incurred by the parties and the trustee with respect to the bankruptcy which has been annulled.

I certify that the preceding twenty-one (21) paragraphs are a true copy of the reasons for judgment of Riethmuller FM

Associate:

Date: