Hawthorne v Carter (Trustee), in the matter of Hawthorne (Bankrupt)

[2006] FCA 1097

FEDERAL COURT OF AUSTRALIA

Hawthorne v Carter (Trustee), in the matter of Hawthorne (Bankrupt)
[2006] FCA 1097

BANKRUPTCY – application for annulment of bankruptcy – certain facts not disclosed to Court at time sequestration orders made – applicants solvent

HELD – the bankruptcies of the applicants were annulled

PETER ANTON HAWTHORNE AND MERVYN DOUGLAS HAWTHORNE v BRUCE JAMES CARTER AS TRUSTEE OF THE BANKRUPT ESTATES OF PETER ANTON HAWTHORNE AND MERVYN DOUGLAS HAWTHORNE

SAD 116 OF 2006

MANSFIELD J
26 JULY 2006
ADELAIDE

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SAD 116 OF 2006

BETWEEN:

PETER ANTON HAWTHORNE
First Applicant

MERVYN DOUGLAS HAWTHORNE
Second Applicant

AND:

BRUCE JAMES CARTER AS TRUSTEE OF THE BANKRUPT ESTATES OF PETER ANTON HAWTHORNE AND MERVYN DOUGLAS HAWTHORNE
Respondent

JUDGE:	MANSFIELD J
DATE OF ORDER:	26 JULY 2006
WHERE MADE:	ADELAIDE

THE COURT ORDERS THAT:

(1)The bankruptcy of the applicant Peter Anton Hawthorne and the bankruptcy of the applicant Mervyn Douglas Hawthorne be and are hereby annulled.

(2)The respondent be entitled to his reasonable fees, costs and disbursements of his administration of the said bankrupt estates, including the reasonable fees and disbursements of his solicitors in relation to these proceedings.

(3)Notwithstanding order (1) hereof, the respondent be entitled to retain and deal with the moneys presently held by him as trustee of the said bankrupt estates and to receive and retain the proceeds of the sale of shares which he has sold as trustee of the said bankrupt estates, and the respondent is directed to deal with the said funds in the following manner:

(i)to pay to the applicants by 4:00 pm on 31 July 2006 such amount of the said funds as the respondent reasonably determines will constitute surplus moneys after the payments in subparagraphs (ii), (iii) and (iv) hereof;

(ii)by 4 pm on 11 August 2006 to pay the following amounts to the following creditors of the applicants to the extent to which the applicants have not already paid those amounts, or some of them:

ATO   $   2,416.00

(allowing credit for fuel rebate)

Avdata Australia   $       30.00

Boarder Plasting   $  1,899.00

Payne’s Autos   $13,216.00

WorkCover   $     213.00

Petitioning Creditors   $  4,426.00

(including interest and costs)

PB and KG Gaskell Fencing              $  2,566.25

Tatiara Trucks   $     800.00

Bridgestone   $     800.00

Dr A Vealk   $     284.00

G Willoughby   $  2,850.00

SE Windrowing   $     343.20 

(iii)to pay his reasonable fees, costs and disbursements in accordance with the scale of charges agreed to by the parties;

(iv)      to pay the reasonable fees and disbursements of his solicitors;

(v)to pay to the applicants the balance of the said moneys as soon as practicable after payment of the moneys paid pursuant to subparagraphs (i), (ii), (iii) and (iv) hereof;

(4)The respondent have liberty to make an application to the Inspector-General in Bankruptcy for the remission of all or part of any realisation charges paid, or liable to be paid, pursuant to the Bankruptcy (Estate Charges) Act 1997.

(5)       Liberty to apply.

Note:   Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SAD 116 OF 2006

BETWEEN:

PETER ANTON HAWTHORNE
First Applicant

MERVYN DOUGLAS HAWTHORNE
Second Applicant

AND:

BRUCE JAMES CARTER AS TRUSTEE OF THE BANKRUPT ESTATES OF PETER ANTON HAWTHORNE AND MERVYN DOUGLAS HAWTHORNE
Respondent

JUDGE:	MANSFIELD J
DATE:	26 JULY 2006
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

1. Application for orders that the bankruptcy of the first and second applicants (the Hawthornes) be annulled pursuant to s 153B of the Bankruptcy Act 1966. Section 153B(1) provides:

   ‘If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.’

2. The applicants, son and father, are farmers.  They run a farming business in partnership, M D Hawthorne and Partners, on a rural property in Keith.  Sequestration orders were made in respect of the estate of each of the applicants on 29 May 2006.  The son, Peter Hawthorne, is the active farmer in the partnership.  He also appears to have the principal conduct of its business affairs and of this application.  Reference to Mr Hawthorne in these reasons is a reference to him.  I will refer to his father as Mr Hawthorne Senior, where necessary. 

3. Lyall Pfeiffer and Mrs J Pfeiffer are creditors of the Hawthornes.  On 29 August 2005, the Pfeiffers obtained judgment against the partnership in the Adelaide Magistrates Court for the sum of $15,751.  Mr Hawthorne paid $9,903 to the Pfeiffers by electronic funds transfer on 7 November 2005.  The Pfeiffers did not accept that part-payment.  They returned the payment by cheque on 2 March 2006, some considerable time later, but after the partnership had failed to pay the balance owed by 10 January 2006, as they had requested.  Mr Hawthorne has not however cashed the refund cheque.

4. Mr Hawthorne then paid the further sum of $6,500 to the Pfeiffers on 24 April 2006, again, by electronic funds transfer.  That payment also was not accepted by the Pfeiffers, who returned it by cheque on 27 April 2006.  Again, that cheque was not cashed by Mr Hawthorne.  In the meantime, the Pfeiffers had filed in the Federal Magistrates Court a creditor’s petition in respect of the debt.  It came on for hearing on 24 April 2006 and was adjourned to 29 May 2006, when the sequestration orders were made.  Mr Carter was then appointed trustee of the estates of the Hawthornes.

5. The applicants were not aware of these orders until 30 May 2006, when Mr Carter's office telephoned them.  Mr Hawthorne says that he had been too busy with farming work, including interstate contracting, to open his mail and realise that the bankruptcy process was progressing in that manner.

6. The Hawthornes now say that the sequestration order should not have been made because by 24 April 2006 Mr Hawthorne had paid $16,403 to the Pfeiffers, a little more than the amount of the judgment debt.  They say that the Pfeiffers should have told the Court that the returned cheques had not been cashed by their partnership.  In fact, the Federal Magistrates Court was told by the Pfeiffers that the amount of the debt was still wholly owing and unsatisfied at the time of the hearing of the creditor’s petition.  That was not fully true, as the electronic transfer of funds in two tranches had been received and the cheques in reimbursement had not been presented.  The reimbursement cheques could nevertheless have been presented at any time (within reason), and it would not have been proper to cancel them without the applicants’ agreement.  The Pfeiffers were entitled to insist upon payment of the debt in full and to reject the part payments tendered, as they had done. 

7. However, as they had received two payments by electronic funds transfer which, by the time of the hearing more or less equalled the full amount of the debt, and as their reimbursements by cheque had not been presented, the Federal Magistrates Court may well have taken a different attitude to whether to make the sequestration orders at the time on 29 May 2006 if it had known of those facts.  The reality is that, although the Pfeiffers may not have appreciated it unless they tracked the presentation of their cheques and reimbursement, they had received and then held in their account the amount of the debt, or approximately the amount of the debt, although they were of course vulnerable to the cheques being presented by Mr Hawthorne subsequently.  I infer they had not tracked the presentation of their cheques as they did not tell the Court about those circumstances, but simply that the debt had not been paid.

8. I think that had the Federal Magistrates Court known of those circumstances, it would have caused further inquiries to be made and would have adjourned the application for the sequestration orders, rather than making them as it did on 29 May 2006.  In my view, the circumstances fall within those contemplated by Gibbs J in Re Williams (1968) 13 FLR 10 at 23. I also refer to the observations of Gummow J in Re Ditfort; ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347 at 350.

9. That, of course, is not an end to the matter.  The Hawthornes acknowledge that, even if the Court is satisfied that the sequestration order should not have been made, it may decline to annul their bankruptcies.  The Hawthornes submit that the most important discretionary consideration is whether they were solvent at the time the sequestration order was made.  I accept that submission.  It reflects the views expressed in Re Gollan; ex parte Gollan (1992) 40 FCR 38; and Re MacDonald; ex parte Deputy Commissioner of Taxation (1996) 33 ATR 1. They have filed extensive affidavit material and made submissions which they say shows they were solvent at that time.

10. The Hawthornes’ creditors have each been notified directly of the application.  They have also been given the opportunity by the respondent to file proofs of debt.  With the exception of the Australian Taxation Office, none of the creditors has objected to the annulment of the sequestration orders.  That includes the Pfeiffers.  It is not presently clear what the attitude of the Australian Taxation Office is.  I will refer to that matter a little later. 

11. It is apparent in my view that the Hawthornes are, and were at all material times, solvent.  Mr Hawthorne is the lessee of the farming property at Keith under a Crown lease.  It is subject to a first mortgage to Elders Rural Bank.  The bank has supported and continues to support the applicants.  It has made additional funds available to them to ensure they can pay out their unsecured creditors, in some instances ahead of the time when those creditors would otherwise have expected to have been paid.

12. On the basis of Mr Carter's evidence, I find that the assets of the Hawthornes at all material times well exceeded that of their liabilities.  The farming land is said by them to be worth about $1.2 million.  It was valued by the bank for security purposes one year ago at $831,000.  The Registrar General's valuation is $750,000.  Mr Carter has based his assessment of their solvency on the figure of $560,000, the last sale price as at 12 March 1996.

13. The bank is owed some $260,000, secured by a first mortgage over the land as well as by a stock mortgage.  Obviously, there is still a substantial equity in the farming land.  The plant and equipment used in the farming business has an equity which well exceeds $145,000 (representing the residual equity in certain items of leased equipment).  The Hawthornes also claim to have further plant and equipment beyond the leased equipment, worth some $268,000, which Mr Carter has not valued and has not taken into account in his assessment of solvency.  The stock (sheep) on their farm is valued at about $97,000.  As noted, it also secures the lending by the bank under a stock mortgage.

14. The Hawthornes also have shares worth about $103,000, some of which have now been sold; leased vehicles with a residual ‘equity’ which the Hawthornes say is about $20,000; sundry debts said to be about $65,000 (of which Mr Carter has collected about $47,000); and a fuel rebate entitlement of about $36,000, which the Hawthornes acknowledge should be set off against their liability to the Taxation Department.

15. Using the base figures referred to above, including real estate valued at $560,000, Mr Carter says that the net assets of the partnership are about $956,000, after allowing for the liability to the bank, and that the individual assets, that is shares in separate names, are valued at about $43,000.  As I noted, Mr Carter called for proofs of debt.  Putting aside the debt to the Australian Taxation Office by the Hawthornes, the joint debts as proved are only some $15,000 to $20,000, plus the costs of the Pfeiffers in relation to the bankruptcy proceedings and interest, a further sum of about $4,200.

16. The Hawthornes’ statements of affairs disclose some further $18,000 or so of possible liabilities which Mr Carter has been in the process of confirming.

17. The costs of administration of the bankrupt estate of the Hawthorne (including the legal fees associated with the application) are estimated to be in excess of $20,000.  I must have regard to that sum also.

18. What is clear is that with assets in the order of $1 million, after the liability to the bank (apart from the liability to the Australian Taxation Office, which appears not to exceed about $60,000), and with the support of the bank, and with some readily realisable assets, including shares worth over $100,000, and debtors which have already realised some $47,000, the Hawthornes are clearly solvent and were so at the time of the sequestration orders.  If a more liberal view of the value of the farming land were taken, the position would be even more apparent. 

19. After allowing for all liabilities which he has identified and taking into account the amount which he has already collected as trustee of the bankrupt estates of the applicants, Mr Carter says a further sum of about $6,500 will be required to be paid to enable all creditors to be paid in full and all expenses of his administration to be paid.  That amount will shortly become available to him by the proceeds of realisation of certain shares.  As I noted, the bank is prepared to support the Hawthornes by allowing them to draw additional funds also as required.  It is plain the applicants, at the time of the sequestration orders, had realisable assets sufficient to pay their debts within a relatively short time:  Sandell v Porter (1966) 115 CLR 666 at 670.

20. I need to refer briefly to the position of the Australian Taxation Office.  Initially the Australian Taxation Office indicated that it objected to the application because the applicants had not lodged all income tax returns or BAS statements which they should have lodged.  All outstanding lodgments have now been filed.  The Hawthornes’ accountant has estimated that the sum owed to the Australian Taxation Office amounts to a little over $48,000.  As against that is to be offset the amount in excess of $36,000 to which they are entitled by way of diesel fuel rebate, leaving an outstanding liability in the order of about $10,000 - $12,000.  The proceeds of the sale of the shares will be ample to enable them to meet the taxation liability.  Although the Australian Taxation Office initially indicated its objection to the application, that was before the taxation returns and BAS statements had been lodged.  There is presently no reason to think that the figures provided by the Hawthornes’ accountant as to their liability to the Australian Taxation Office has been significantly understated.  I proceed on the basis that it is correct, or approximately so.

21. The Australian Taxation Office, having received those documents, has not reiterated its opposition to the applications and has not attended today to oppose them.  In those circumstances, in my view, the liability of the Hawthornes to the Australian Taxation Office is, in the scheme of things, relatively minimal and I am satisfied they will be amply able to meet their liability to the Australian Taxation Office to the extent to which Mr Carter does not meet it in the meantime from funds available to them.

22. I note, as Mr Carter acknowledged, that the Hawthornes at all times have been entirely cooperative with him in the administration of the estates.  I note further that each of the creditors, including the bank and the other secured creditors in respect of the plant and equipment (who have been given notice of this application), have not opposed the applications and that no other creditor has sought to appear, or to oppose the applications.

23. I see no reason why, in the circumstances, in the of my discretion I should not make the order sought.

24. In my view it is appropriate, however, to reflect in the orders to be made an arrangement which the parties have in place.  Mr Carter presently has significant funds held in the estates of the Hawthornes and is shortly to receive a very further significant tranche of funds from the sale of shares.  The parties have reached an arrangement whereby, notwithstanding the annulment of the sequestration orders which I propose to make, he will hold those funds and dispose of them in the following manner:

25. Firstly, to the extent to which he does not need to hold those funds to meet the liabilities to which I am about to refer, Mr Carter will repay them to the Hawthornes.  To the extent to which he anticipates that he may need funds, he is to be entitled to retain them, in essence, as agent of the Hawthornes, and to pay the funds, firstly, to meet such of their creditors as he has been satisfied are creditors of them, and to the extent to which they have not in the meantime paid those creditors by 4 August 2006.  A list of the creditors will be included in the orders.  Mr Carter is then authorised to pay his reasonable fees, costs and expenses in his capacity as trustee of their respective estates, including the reasonable fees and disbursements of his solicitors in the conduct of these proceedings.  After payment of those amounts, any balance outstanding by him is then to be repaid to the Hawthornes.

26. I note that there is an arrangement between the Hawthornes and Mr Carter - and if I may say so a sensible one – whereby Mr Carter is also to have liberty to apply to the Inspector General for remission of all or part of the realisation charges paid or liable to be paid pursuant to the Bankruptcy (Estate Charges) Act 1997 (Cth). I will reflect those arrangements in the orders which will also, of course, confirm that Mr Carter is entitled to his reasonable fees, costs and disbursements of his administration.

27. For those reasons I will make the orders which I indicated initially I would make in these matters.

I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Associate:

Dated:       15 August 2006

Counsel for the Applicant:	G Gretsas
Solicitor for the Applicant:	Gretsas & Associates
Counsel for the Respondent:	K Ryder
Solicitor for the Respondent:	O'Loughlins
Date of Hearing:	26 July 2006
Date of Judgment:	26 July 2006