Howell, R.S. v The Official Trustee in Bankruptcy

[1990] FCA 254

Re: ROGER SANDFORD HOWELL
Ex parte: ROGER SANDFORD HOWELL
And: THE OFFICIAL TRUSTEE IN BANKRUPTCY
No. 45 of 1989
FED No. 254
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
French J.(1)

CATCHWORDS

Bankruptcy - discharge - failed property developments - substantial liabilities - no prospect of recovery - execution of guarantees which could not be met - mitigating circumstances - no misconduct - stress requiring psychiatric counselling - opportunity for financial rehabilitation - effect on family - no adverse considerations of public interest, commercial morality or creditors' interests - discharge ordered but suspended for 7 months.

Bankruptcy Act 1966 s.150

Defence Services Homes Act 1918 s.33

Re Benda (1985) 6 FCR 346

HEARING

PERTH

#DATE 31:5:1990

Counsel for the Applicant: Mr R.G.S. Harrison

Solicitors for the Applicant: Warren Harrison

Counsel for the Respondent: Mr M. Cole

Solicitors for the Respondent: Australian Government Solicitor

ORDER

The bankrupt is discharged from bankruptcy.

The operation of the order is suspended until 1 January 1991.

Note: Settlement and entry of orders is dealt with in Order 124 of the Bankruptcy Rules.

JUDGE1

This is an application under s.150 of the Bankruptcy Act 1966 for early discharge from bankruptcy. Roger Sandford Howell became a bankrupt on his own petition on 24 January 1989. His statement of affairs disclosed liabilities amounting to $18,284,719 against assets of $85,263. The Official Trustee reports that notwithstanding the large debt set out in the statement of affairs, proofs have only been lodged for $9,903. None have been admitted to rank for dividend as the trustee is of opinion that no dividend will be paid. The claimed assets are said to have been overvalued and realisations to date have totalled $344. The principal component of the claimed assets comprises an equity of some $77,000 in a home mortgaged to the Defence Services Corporation, but s.33 of the Defence Services Homes Act 1918 provides that:

"The estate or interest of any purchaser or borrower in any land or land and dwelling-house included in a contract of sale, mortgage or other security under this Act shall not be divested from the purchaser or borrower under any law relating to bankruptcy or insolvency but if the purchaser or borrower becomes bankrupt or insolvent, or if the land or land and dwelling-house is seized in execution the Corporation may

(a) in the case of a purchaser, cancel the contract of sale, and, in its discretion forfeit the instalments previously paid by the purchaser; and

(b) in the case of a borrower, sell the estate and interest of the borrower in the land, or land and dwelling-house."

The corporation does not propose to exercise its powers under the Act to sell the house which is registered jointly in the names of Howell and his wife.

1. The background to the bankruptcy appears from affidavits sworn by Howell on 8 September and 19 December 1989 as well as from the trustee's report. They disclose that he entered the real estate business in 1973 and after some initial involvement in sales, moved to real estate development. He formed various companies in conjunction with John Maunder-Hartigan as vehicles for the development of holiday and resort projects. The companies included Resorts Corporation Australia Pty Ltd ("Resorts Corporation"), Canylon Pty Ltd ("Canylon") and Kalbarri Timeshare Pty Ltd ("Kalbarri Timeshare"), each of which is now in liquidation. In each case he was a director of the company and Maunder-Hartigan, also now a bankrupt, was a co-director.

2. Resorts Corporation was formed in 1982 to acquire several parcels of land at Kalbarri for the purpose of constructing 73 holiday units. The project was financed by BFC Finance Limited and the finance was secured by a first charge over the company's assets. BFC advanced $4.6 million. A valuation from Justin Seward and Co. at the time, placed the value of assets under the charge at $7.4 million. Howell gave a personal guarantee but says, and I accept, that he believed the company would be able to repay the loan.

3. In February 1984, Canylon acquired land in Mandurah for the construction of a 64 unit development known as Lakeside Villas Mandurah. The development was financed by Rothwells Merchant Bank to the extent of an initial advance of $4.1 million, secured by a first charge over the company's assets and personal guarantees from the directors. At about this time, Rothwells also paid out BFC Finance. Subsequently Rothwells claimed that the total indebtedness of the companies exceeded $17 million. This is a claim which although disclosed as a debt on the statement of affairs, is not conceded by Howell who says that a figure of $9 million or thereabouts is likely to be the true extent of the indebtedness.

4. Howell conceded the obvious, that when he signed the guarantees he had no prospect of being able to repay them if called upon. He said however that he believed the companies would be able to repay the debts out of the development projects. His personal inability to repay the debts was, he says, known to Rothwells, and I accept that the probability is that the guarantees were extracted as a commercial safeguard and not in the belief that they added a monetary security of any significance to the charges already held.

5. In the event, under the influence of high interest rates, some industrial disputation and other factors, including the notorious collapse of Rothwells in 1987, the companies failed. The Rothwells debt had been assigned to a company called Amazone Pty Ltd which made demand for repayment. Demand was also made under the guarantees. Ultimately Howell decided to petition for bankruptcy having been forced to claim unemployment benefits in the second half of 1988. After many unsuccessful job applications, he obtained employment with the AMP Society as a probationary sales agent. His prospects for advancement within that organisation are significantly impeded by the fact of his bankruptcy and he explains the reason for that at paras. 15 and 16 of his affidavit of 8 September 1989. In particular, he is unable to sell units in Unit Trusts through authorised prospectuses without being the holder of a security dealer's representatives licence, which would be limited in operation to dealing in AMP units. He says it is part of a representatives task to sell such units and while an undischarged bankrupt he cannot hold the relevant licence. Further, he says, he has been informed by the manager of the branch of the Society to which he is attached, that the fact of his bankruptcy prevents him from being considered for promotion to an assistant branch manager or for any other managerial post. Although he has only been an agent of the Society for a short time, he believes that he would otherwise be considered for promotion. At the moment he acts as an unofficial assistant to the manager in training and sales matters for new appointees. There is also a risk that he may be dismissed from the Society if his bankruptcy became known to more senior executives in its Head Office.

6. Not unexpectedly, Howell finds that the financial stress he has suffered has caused considerable anxiety and has effected personal and family relationships. He consulted a psychiatrist. In affidavit evidence, Dr. Timothy Clarke said he was first consulted by Howell on reference from his general practitioner in 1987. He found him to be suffering from anxiety and panic attacks. He was tearful and tense and appeared to be experiencing great difficulty in controlling emotions. He expressed anger and bitterness and appeared to blame himself entirely for the misfortunes which had befallen the companies formerly directed by him. The effect of these symptoms rendered him tense and unstable in relationships with others. Some medication was prescribed and a course of counselling on stress management undertaken which required approximately 20 visits over the last two years. Following the failure of the companies and his subsequent unemployment, Clarke noticed a marked deterioration in his condition. In January 1989, following his appointment as a probationary sales agent with the AMP his general attitude seemed to have improved, but again the fact of bankruptcy was, in the doctor's view, a setback and the debt recovery procedures that precipitated it were a source of additional stress. Clarke went on:
   

"From the period of bankruptcy to date I have noticed a perceptible improvement in his condition. Roger Howell informs me and I verily believe that his career with the AMP is successful. In recent weeks he has informed me that he believes that his bankrupty is an impediment to his promotion and advancement in the Society and possibly could lead to him being dismissed. During the consultation when this information was given to me I noticed that he was stressed and tearful and that some of his early symptoms were returning."

Clarke believes that for Howell to be discharged from bankruptcy would have a significantly beneficial effect on his present mental condition and also on the relationship with his wife and three children.

1. While I accept that the events of recent years will have taken a significant toll on Mr Howell and his family in terms of stress and financial anxieties, those matters are not sufficient to relieve against a continuation of the bankruptcy. The symptoms and reactions described are no doubt common among those who suffer the sort of stresses that accompany failure of a business and personal financial disaster. There is really nothing in the evidence provided by Dr. Clarke to indicate that in any qualitative sense Howell's reactions are significantly different from those of any ordinary person placed in a similar position.

2. In determining whether or not a bankruptcy should be discharged prior to the time limited by s.149 of the Act, that is in the ordinary course three years from the date of bankruptcy, the Court must take into account the public interest, the interest of creditors and considerations of commercial morality, as well as the legitimate interests and concerns of the bankrupt. In this case, there is no suggestion of personal misconduct on the part of Howell and although the failure of his business has led to substantial indebtedness which will obviously never be recovered, there is no evidence advanced and nothing from which I can infer on the materials before me that he acted in a way that could be described as reckless or in disregard of his obligations. That is subject to the one qualification that in signing guarantees of the advances made by Rothwells and before that BFC Finance, he did so in the knowledge that he would be unable to pay them personally if they were called upon. The seriousness of that position is mitigated by the fact that the nature of the transactions and the magnitude of the sums being advanced suggest that his personal capacity to meet the obligation must have been known to those that he was dealing with. However, to enter into a guarantee under such circumstances does bring him within the scope of sub-s.150(6) of the Act and in particular para.(c) which deals with the case where a bankrupt has contracted a debt provable in the bankruptcy without having at the time of contracting it any reasonable or probable grounds of expectation, proof of which lies on him of being able to pay it after taking into consideration his other liabilities at that time. In Re Benda (1985) 6 FCR 346 at p 348, Toohey J. said of a similar case:
   

"When he entered into each guarantee the bankrupt may not have contracted a debt in the sense in which that word is ordinarily understood but I think that he contracted a debt provable in the bankruptcy, uncertain and contingent though the debt may have been. See Rowlatt on the Law of Principal and Surety (4th ed), p 202. Section 150(6)(c) places on the bankrupt proof that at the time of contracting the debt he had reasonable or probable grounds of expectation of being able to pay it. In this regard the position of the bankrupt was not that when he entered into each guarantee he had an expectation of being able to pay if called upon to do so. Rather the tenor of his evidence was that each venture was viable so that he did not expect to be called upon to meet any obligation under the guarantee. I am not persuaded that the bankrupt did have reasonable or probable grounds of expectation of being able to pay any debt under the guarantees if required to do so. Thus s.150(6) operates to preclude the court from making an order of discharge, except suspended, either unconditionally or subject to conditions. At the same time, while in my view the bankrupt's conduct fell literally within s.150(6)(c), it was different from and less blameworthy than the type of conduct that usually attracts the operation of this section."

And I think that that last observation applies to the bankrupt's conduct in this case. I note further, that the Official Trustee's report indicates that he is not aware that the conduct of the bankrupt either prior to or subsequent to the date of bankruptcy has been other than satisfactory and that there is no suggestion that any offences have been proved to have been committed by the bankrupt.

1. The approach to be taken in a case like this, having regard to the public interest, commercial morality and, of course, the interests of the creditors, is one which also allows me to take into account the bankrupt's interests and his prospects of financial rehabilitation. In Re Benda Toohey J. granted a suspended discharge, making the observation that notwithstanding that the bankrupt contracted substantial liabilities, the evidence did not suggest that he enterted into ventures that were doomed to failure or that he acted rashly in respect of his financial affairs.

2. It is apparent in this case that there is no benefit to the creditors by requiring the bankruptcy to continue its full term, there is obvious disadvantage to the bankrupt and a burden placed on his attempts to rehabilitate himself and his family financially. The liabilities he has incurred however are substantial and serious and they have been incurred in circumstances in which he undertook personal liabilities through the guarantees when he knew he did not have any prospect of being able to meet them. Allowing for the mitigating factors to which I have already referred, I propose to make an order of discharge under sub-s.150(5) but to suspend that order until 1 January 1991.