Gardiner v Goss
[2007] FMCA 1966
•12 December 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| GARDINER v GOSS | [2007] FMCA 1966 |
| BANKRUPTCY – Petitioning creditor an undischarged bankrupt – whether she has standing to maintain the proceeding – debt for services rendered by the petitioning creditor – whether debtor able to pay her debts. |
| Bankruptcy Amendment Act 1991 Bankruptcy Act 1966, ss.52, 139ZL, Division 4B Federal Magistrates Court Act 1999, s.104 |
| Geia v Palm Island Aboriginal Council (1999) 152 FLR 135 Re Gillies; Ex parte Official Trustee in Bankruptcy (1993) 42 FCR 571 Re Sharpe; Ex parte Donnelly (1998) 80 FCR 536 Sandell v Porter (1966) 115 CLR 666 Thistlethwayte v Gender Estates Pty Ltd (1976) 8 ALR 700 |
| Applicant Debtor: | LOUISE GARDINER (NEE ALBERTS) |
| Petitioning Creditor: | VICKI GOSS (T/AS V A GOSS CLEANING) |
| File number: | MLG 739 of 2007 |
| Judgment of: | Riley FM |
| Hearing date: | 21 November 2007 |
| Date of last submission: | 5 December 2007 |
| Delivered at: | Melbourne |
| Delivered on: | 12 December 2007 |
REPRESENTATION
| Counsel for the Applicant Debtor: | Mr Brown |
| Solicitors for the Applicant Debtor: | Abetz Curtis |
| Counsel for the Petitioning Creditor: | Mr Fary |
| Solicitors for the Petitioning Creditor: | Mendelsons |
ORDERS
The decision of the Registrar made on 28 August 2007 be affirmed.
The application for review of the Registrar's decision be dismissed.
The petitioning creditor's costs of and incidental to the application for review be taxed and paid out of the bankrupt estate.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 739 of 2007
| LOUISE GARDINER (NEE ALBERTS) |
Applicant Debtor
And
| VICKI GOSS (TRADING AS VA GOSS CLEANING) |
Petitioning Creditor
REASONS FOR JUDGMENT
(As corrected)
The application
This is an application to review a sequestration order made by a Registrar. As such, the matter is to be dealt with by way of a hearing de novo.
The effect of the bankruptcy of the petitioning creditor
It was common ground that the petitioning creditor became bankrupt on her own petition on 11 August 2004. She remains a bankrupt notwithstanding that the usual three years of bankruptcy has now expired. The trustee of the petitioning creditor took no part in these proceedings although he was aware of them.
The debt which founded the bankruptcy notice in this case arose from two invoices submitted by the petitioning creditor to the debtor on
30 September 2005. The first was in respect of extra cleaning for the month of April and was in the sum of $1,540. The second was in respect of cleaning for the month of May and was in the sum of $2,887.50. The invoices referred to work done by the petitioning creditor in the months of April and May 2005.
The petitioning creditor issued proceedings in the Magistrates’ Court of Tasmania against the debtor on 4 September 2006. The debtor did not file a defence. On 31 October 2006, the debtor was ordered to pay the petitioning creditor $4,817.30 which included $389.80 for costs. On 22 January 2007, the petitioning creditor issued a bankruptcy notice which was not complied with. On 1 June 2007, the petitioning creditor issued the creditor's petition.
In these circumstances, a preliminary question arose as to whether the petitioning creditor had standing to bring either the Magistrates Court proceedings or the creditor’s petition.
As a general rule, a right to recover a debt is a chose in action which vests in the trustee in bankruptcy upon the bankruptcy of the creditor or, if the right arises during the currency of the bankruptcy, at the time when the right arises.[1] The right is property that is divisible among the creditors.[2]
[1] Sections 5 and 58 of the Bankruptcy Act 1966
[2] section 116 of the Bankruptcy Act 1966
The debtor submits that the right to recover the debt in this matter has vested in the trustee with the result that the petitioning creditor has no standing to bring the proceedings. The petitioning creditor accepts that choses in action generally vest in the trustee. However, the petitioning creditor submits that the right to recover the debt in this case has not vested in the trustee because the debt represents the income of the petitioning creditor. The debtor does not dispute that the debt, if paid, would have been income in the hands of the petitioning creditor.
In Thistlethwayte v Gender Estates Pty Ltd (1976) 8 ALR 700 at 702-3, Bowen CJ said:
… it appears to me that s 131(1) of the Bankruptcy Act 1966, as amended, is worded more strongly in favour of the bankrupt than s 101 of the Bankruptcy Act 1924. Even under that section, and the corresponding section in the United Kingdom, the view was taken by the courts that a bankrupt was entitled to receive and, if necessary, to sue for monies which, by his personal effort, he had earned unless and until the official receiver or trustee intervened …. It follows that, if I am satisfied that there is involved in the present case a claim to “ income” which is within the terms of section 131, to that extent at least the proceedings should be allowed to continue.
Section 131 of the Bankruptcy Act 1966 provided that:
(1) Subject to this section, a bankrupt who is in receipt of income is entitled to retain it for his own benefit.
(2)The court may, upon the application of the trustee, order that all, or such part as the court thinks fit, of the income of the bankrupt shall be paid to the trustee for the benefit of the bankrupt's creditors.
That section was repealed by the Bankruptcy Amendment Act 1991, which also inserted a new Division 4B. French J in Re Gillies; Ex parte Official Trustee in Bankruptcy (1993) 42 FCR 571 explained that the new Division:
…establishes a liability on the part of a person who is bankrupt to make a contribution out of the excess of his income over a threshold amount which is a function of the maximum basic rate of pension payable under the Social Security Act 1991. The Division does not impose a liability to contribute in respect of the entire excess.
His Honour went on to say:
It is true that the after-acquired property to which ss 58 and 116 apply is defined widely enough to encompass income. However, in my opinion, the legislative scheme now in place is quite inconsistent with the application of those provisions to after-acquired income. This follows from the comprehensive scheme embodied in Division 4B which approaches a code for dealing with after-acquired income of the bankrupt. There is nothing in the extrinsic material to support a change in the approach to after acquired income which would bring it within after-acquired property vesting in the trustee. In my opinion such income does not vest in the trustee.
Similarly, in Re Sharpe; Ex parte Donnelly (1998) 80 FCR 536, Lockhart J said:
In my opinion the scheme of Division 4B of the Bankruptcy Act proceeds on the assumption that after-acquired income of a bankrupt does not vest in the trustee of the bankrupt estate.
In Geia v Palm Island Aboriginal Council (1999) 152 FLR 135, Pincus JA, Thomas JA and Jones J accepted that view but said,
…it does not, of course, bear upon the question whether a cause of action for breach of a contract which would, if carried out, have produced income for the bankrupt vests in the trustee.
In that case, a bankrupt had brought proceedings for wrongful termination of his employment contract. The money claimed was referable to post-termination, prospective income but did not include any amount for services already rendered. In relation to the vesting of property upon bankruptcy, the court said at [16-17]:
… The Bankruptcy Act 1966 (Cth) has elaborate provisions on this subject, particularly in s116 and, as to income received after bankruptcy, in Division 4B. Unless there is some pressing reason to do so, such as that it is evident that the Parliament must have intended an exception to be implied, courts should be slow to hold that the statutory scheme to which we have referred has, to some uncertain extent, to be read subject to unstated exceptions, because of doctrines worked out in the older cases, under English statutes.
We have therefore concluded that it is not the law that an action of the present type may be brought by the bankrupt; it can only be brought by the trustee. The type to which we refer is an action claiming damages or other sums on the basis of wrongful dismissal, under a contract for personal service, the action not including any sum due before termination – ie not including any sum for services actually rendered.
The present case is distinguishable from Geia, in that the debt in this case was for services already rendered. The question that arises in this case appears to be free of directly applicable authority.
The debtor notes that s.139ZL of the Bankruptcy Act 1966 empowers the trustee by way of a statutory garnishee procedure to recover amounts owing to a bankrupt on account of personal services actually rendered. The debtor submits that s.139ZL supports the proposition that the trustee is the proper party to bring proceedings for the recovering of a debt for services rendered.
However, the power in s.139ZL is contingent upon the bankrupt being liable to pay to the trustee an income contribution. It is not an absolute power. It is a power that only arises if and when a liability has arisen for the bankrupt to pay the trustee an income contribution. In many cases, no such liability will arise, because the bankrupt will not have an income above the relevant threshold. In my view, s.139ZL does not illuminate the present issue.
I accept that the courts should be slow to find that the relevant statutory scheme is subject to unstated exceptions. However, the law as stated in Thistlethwayte was clear and established. It permitted a bankrupt to sue for amounts owing to him by way of income for services rendered. It is true that the law as stated in Thistlethwayte depended on the provisions of the now repealed s.131 of the Bankruptcy Act 1966 and was decided before the new Division 4B was introduced.
The new Division 4B changed the manner in which the trustee may recover for the benefit of the estate amounts of income above that required for the bankrupt’s subsistence. However, the new Division 4B did not change the basic principle that a bankrupt is entitled to keep an amount of income necessary for his subsistence. In my view, the repeal of s.131 and the introduction of Division 4B did not change the corollary of that basic principle, namely, that a bankrupt may sue for and recover amounts owing for services rendered. I am unable to detect any Parliamentary intention to alter the previous law in this regard. In the circumstances, I consider that the petitioning creditor did have standing to bring the proceedings in the Tasmanian Magistrates’ Court does have standing to proceed with her petition.
Whether the debtor is able to pay her debts
The debtor seeks review of the sequestration order made by the Registrar on one ground, namely, that the debtor is able to pay her debts. Thus, the application is brought under s.104(2) of the Federal Magistrates Court Act 1999 in reliance on s.52(2) of the Bankruptcy Act 1966. At the hearing before the Registrar, the debtor was represented by her husband. He is not a lawyer.
The debtor relied on two affidavits sworn by herself, the first on
12 October 2007and the second on 20 November 2007. She also relied on an affidavit sworn by her husband on 12 October 2007 which confirmed the contents of the debtor’s own affidavit of that date.
In her affidavit sworn on 12 October 2007, the debtor said that she operated a cleaning business. She said that Coles Myer Ltd entered into a cleaning contract with Menzies International Ltd for the cleaning of five Kmart stores. She said that Menzies subcontracted to Captive Services Pty Ltd and Captive subcontracted to the debtor. The debtor said that she further subcontracted the cleaning contract to the petitioning creditor. The petitioning creditor carried out the cleaning.
The debtor said that in May 2005, she learned that Coles had terminated the contract with Menzies on the grounds that the cleaning services were allegedly not carried out with reasonable care and skill. This resulted in the various subcontracts also being terminated.
In about August 2005, Captive sued Menzies for unpaid fees. In about May 2006, the debtor learned that Captive and Menzies had settled, with Captive receiving 43.6% of the amount owed to them by Menzies. Captive offered to pay the debtor 43.6% of the amount Captive owed the debtor. The debtor accepted that offer, and offered to pay the petitioning creditor 43.6% of the amount invoiced for the cleaning for April and May 2005.
The petitioning creditor rejected that offer and instituted proceedings. Judgment in default of defence was entered against the debtor on
31 October 2006. In November 2006, the debtor's husband contacted the solicitors for the petitioning creditor and proposed a payment plan. The solicitor said he would get instructions but the debtor heard nothing further until she was served with the bankruptcy notice on
13 March 2007.
The debtor said in her affidavit sworn on 12 October 2007 that at the time the sequestration order was made on 28 August 2007, she had the joint ownership of the following assets with her husband:
a)a 1984 Holden Gemini valued at $1,000;
b)a 16 foot half cabin boat valued at $12,000;
c)restaurant equipment not in use valued at $3,000;
d)a pizza oven not in use valued at $4,000;
e)furniture and equipment valued at $18,500 used by the restaurant business owned by the debtor and her husband;
f)home contents valued at $40,000;
g)cash at bank of approximately $2300;
h)a trailer valued at $750;
making a total of $81,250.
In her affidavit sworn on 20 November 2007, the debtor reiterated that she had the assets mentioned in her earlier affidavit and also said that she owned jointly with her husband her house in Kingston valued at $375,000 and cash in the Commonwealth Bank in the sum of about $2,000. She also indicated that she was the sole owner of about $1,000 in the Bass and Equitable Bank and a 2005 Honda Civic valued at $12,600.
The debtor said that she had the following non-current liabilities:
a)an American Express credit card debt of about $3,797.63;
b)an ANZ credit card debt of about $10,798.07;
c)a Myer/Coles credit card debt of about $6,060.97;
d)a Bass and Equitable home loan of about $136,888.43 held jointly with her husband; and
e)a Bass and equitable personal loan of about $13,264.74 held jointly with her husband and secured over the 2005 Honda Civic.
The debtor said that she was required to repay a total of $765 per month for the various liabilities on her credit cards and loans. The debtor said that she had a net income after tax of about $686 per week. She said that her weekly expenses were as follows:
a)$80 for her car insurance, registration and maintenance;
b)$175 for general living expenses such as household bills and groceries; and
c)$191.25 per week loan and credit card repayments;
making a total of $446.25. The debtor said that her weekly income exceeded her weekly expenses by $239.75. She said that consequently she could meet her expenses as and when they fell due. The debtor said that her assets exceed her liabilities.
The debtor said that the debt to the petitioning creditor was not paid when it became due because the debtor's husband offered to settle the debt by paying $2,100 plus $150 costs over a period of six months. The solicitor for the petitioning creditor replied with a written counter offer. However, he addressed his letter to the house next to the debtor's house and the debtor did not receive it.
In cross-examination, the debtor agreed that she had offered to pay the debt in instalments because she was unable to pay it in one lump sum. She also agreed that subsequently her financial position had not improved. The debtor agreed that when she was served with the bankruptcy notice in February 2007, she was not in a position where she was able to pay the debt. However, the debtor claimed that when she was served with the creditor’s petition, she could have sold assets to pay the debt. The debtor agreed that she had not taken any steps to sell any assets until after she was made bankrupt.
The debtor said that, contrary to her affidavits, the boat was her husband’s alone. She later said that they owned it together but said that it is in her husband's name alone. I find that the boat is jointly owned.
The debtor agreed that in her statement of affairs signed in September 2007 she had given her home a value of $205,000 but in the affidavit she swore on 20 November 2007 she gave her a home a value of $375,000. The debtor also agreed that she had no qualifications in valuing real estate or other assets. The debtor agreed that her house was security for a home loan of $136,888.43 as well as a business loan. The debtor could not immediately recall the amount outstanding under the business loan but said that the figure of $108,000 sounded about right. The business loan is for the purposes of a pizza restaurant business conducted by the debtor and her husband. The debtor said that it was an oversight that she had not included the business loan in the liabilities set out in her affidavits.
The debtor agreed that she could not sell the assets used in the running of the business. The debtor agreed that she had not had her home contents valued and the figure of $40,000 was an estimate based on the cost of the home contents when they were new.
The debtor said that she and her husband bought their pizza restaurant on vendor terms and the vendor is suing the debtor and her husband for about $12,000. The debtor apologised for not disclosing this liability in her affidavits.
The debtor is unable to sell the assets currently used by the business. She did not provide expert evidence of the value of her assets. I am unable to be satisfied of the value of the debtor’s assets listed in paragraph 29 above. More particularly, I am not satisfied that her home contents have a sale value of $40,000. Nor am I satisfied that the boat is worth $12,000 or the pizza oven and furniture not used in the business is worth $7,000. I consider that if the last mentioned assets had really had those values, or a value approximating the size of the debt in this case, the debtor would have sold them long ago to discharge the debt.
On her own evidence, the debtor has a negative equity in her Honda Civic of about $600. I do not accept the debtor’s assertion that her house is worth $375,000. That claim was not supported by expert evidence. I prefer her statement in her statement of affairs that her house is worth $205,000. I accept that she has a home loan secured on the house of about $137,000 and a business loan secured on the house of about $108,000. This gives the debtor a negative equity in her house of about $40,000. The debtor also has a claim against her for $12,000 in respect of the vendor terms contract. I am unable to find that that is an existing debt, as it is being disputed in another court.
Additionally, the debtor has credit card debts of about $20,000. It was suggested that the debtor’s bankruptcy would have made her credit card liabilities immediately due and payable. However, the terms of the credit card facilities were not put into evidence. I am, therefore, unable to find that the credit card debts are now due and payable.
The debtor says that she is able to meet her debts as they fall due, because she pays the required $191.25 per week for her various loans and liabilities. The debtor says that she has about $240 per week above her weekly expenses and can use this to pay her debts.
The fact is, however, that the debtor has not used that alleged surplus to pay the debt in this case. If she had paid $240 per week off the debt, she would have paid it off in about six months. That is, she could have paid off the debt in the seven months between the entry of judgment and the issuing of the creditor’s petition. The fact that the debtor did not do that, and did not set aside $240 per week to pay whatever amount might have been eventually agreed, raises grave doubts that the debtor does in fact have a spare $240 per week.
The test for the ability to pay one’s debts requires that the debtor be able to pay his or her debts from cash or realisable assets “within a relatively short period - relative to the size and amount of the debts and to the circumstances, including the nature of the business, of the debtor”: Sandell v Porter (1966) 115 CLR 666 at 670.
The debtor conceded that she was not able to pay the debt the subject of this proceeding at the time when she made the instalment offer, in November 2006, or at the time when the bankruptcy notice was served, in February 2007.
Even if the debtor does have a spare $240 per week, which I doubt, I do not consider that paying off the debt at that rate would enable the debt to be discharged “within a relatively short period”, given the size of the debt and all of the other circumstances of this case. Nor do I consider that the debtor has any assets that she could realise in a relatively short period, even if she were not bankrupt. She made no attempt to sell any assets until she was bankrupt and lost the right to sell them.
All in all, I am not satisfied that the debtor is able to pay her debts.
Formal proofs
The debtor took no issue with the formal proofs lodged by the petitioning creditor. I am satisfied that the formal requirements have been met.
Conclusion
In all the circumstances, I am satisfied that the decision of the Registrar should be affirmed, the application for review should be dismissed and the petitioning creditor’s costs of the review should be taxed and paid from the estate.
I certify that the preceding forty-six (46) paragraphs are a true copy of the reasons for judgment of Riley FM
Associate:
Date:
CORRECTION
Section 137ZL of the Bankruptcy Act 1966 has been amended to read s.139ZL throughout.
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