Ilhan v Seri

[2012] FMCA 148

FEDERAL MAGISTRATES COURT OF AUSTRALIA

ILHAN v SERI [2012] FMCA 148

BANKRUPTCY – Creditor’s petition – obligation to disclose security – whether security over property owned by debtor as trustee is security over debtor’s property.

Bankruptcy Act 1966, ss.5, 44, 58, 116

Adsettv Berlouis [1992] FCA 368; (1992) 37 FCR 201; 109 ALR 100
Collie v Merlaw Nominees Pty Ltd [2001] VSC 39
Octavo Investments Pty Ltd v Knight [1979] HCA 61;  (1979) 144 CLR 360
Re Morris; Ex parte ANZ Banking Group Pty Ltd (1991) 29 FCR 1
Savage v Union Bank of Australia Ltd [1906] HCA 37; (1906) 3 CLR 1170
13Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) [1999] FCA 144; 17 ACLC 500; (1999) 30 ACSR 377

Applicant: PATRICIA JOSEPHINE ILHAN

Respondent: BILLY SERI

File Number: MLG 1047 of 2011

Judgment of: Riethmuller FM

Hearing date: 1 February 2012

Date of Last Submission: 1 February 2012

Delivered at: Melbourne

Delivered on: 1 February 2012

REPRESENTATION

Counsel for the Applicant: Mr Galvin of Counsel

Solicitors for the Applicant: Madgwicks

Counsel for the Respondent: There being no appearance by or on behalf of the Respondent

Solicitors for the Respondent: Russell Kennedy

Counsel for the Supporting Creditors: Mr Drenen

Counsel for the Supporting Creditors: bdlegal

ORDERS

1. The Applicant has leave to file an amended petition in the form marked and filed in Court today.

2. Re-verification and re-service of the petition as amended is dispensed with.

3. A sequestration order is made against the Estate of Billy Seri (also known as Bulent Seri).

4. The Applicant’s costs, and the costs of the supporting creditor including reserved costs, are to be taxed in accordance with the Federal Court Rules and paid in accordance with the Bankruptcy Act 1966.

AND THE COURT NOTES THAT:

A.The date of the relevant bankruptcy is 25 July 2011.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT MELBOURNE

MLG 1047 of 2011

PATRICIA JOSEPHINE ILHAN

Applicant

And

BILLY SERI

Respondent

REASONS FOR JUDGMENT

(as revised from transcript)

1. The applicant in this matter, Ms Ilhan, has a judgment against the debtor in the sum of $708,775.20 entered in the Supreme Court of Victoria on 10 May 2011 before the Honourable Mukhtar AJ. The matter was referred for hearing before this Court as a result of an argument raised in relation to the operation of s.44 of the Bankruptcy Act and the form of the petition that is currently before the Court.

2. In the petition before the Court the creditor set out that the creditor held security over property of the respondent debtor to the value of $100 consisting of 100 fully paid ordinary one-dollar shares in the name of the respondent debtor in the company, Coffee Pls Pty Ltd ACN 119 345 336.  It transpires that the applicant also holds a security over the units held by the debtor in a unit trust.  Those units have the same nominal value of $1.00 each and there are 100 units involved.  The applicant had not set out this security in the petition.

3. Section 44 of the Bankruptcy Act relevantly provides:

   44     [Conditions on which creditor may petition]

   (1) …

   (2)  Subject to subsection (3), a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him or her exceeds the value of his or her security.

   (3)  A secured creditor may present, or join in presenting, a creditor’s petition as if he or she were an unsecured creditor if he or she includes in the petition a statement that he or she is willing to surrender his or her security for the benefit of creditors generally in the event of a sequestration order being made against the debtor.

   (4)  Where a petitioning creditor is a secured creditor, he or she shall set out in the petition particulars of his or her security.

4. The question that arises with respect to these provisions is whether or not the petition is sufficient if it does not set out the security held by the applicant over the units held by the debtor in the unit trust.  The argument raised by the debtor is that he holds the units in the unit trust as a personal trustee of the Kiran Family Trust.  Thus, on the argument as it appears from the material, the creditor says that this is not a security over property of the debtor as the Kiran Family Trust has a beneficial interest in the units held by the debtor.

5. Before turning to the question of the definition of “property” and the nature of the equitable interests concerned, it is appropriate to first note other provisions of the Bankruptcy Act that are relevant.  The term “property” is defined in the Bankruptcy Act in s.5 in the following terms: 

   Property means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.

   It is apparent from the terms of this section that the definition of “property” as utilised in the Bankruptcy Act is a statutory definition which is broader than one would understand of the definition of the term “property” at common law or indeed in equity.

6. No restrictions are placed upon the definition of “property” as it appears in s.44 of the Bankruptcy Act. The restriction on the ability of creditors is effected by allowing access to “divisible property”, the definition of which is restricted by s.116 of the Bankruptcy Act which relevantly states:

   116 [Property divisible among creditors [see Table B]]

   (1)  Subject to this Act:

   (a)  all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and

   (b)  the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge; and

   (c)  property that is vested in the trustee of the bankrupt's estate by or under an order under section 139D or 139DA; and

   (d)  money that is paid to the trustee of the bankrupt's estate under an order under section 139E or 139EA; and

   (e)  money that is paid to the trustee of the bankrupt's estate under an order under paragraph 128K(1)(b); and

   (f)  money that is paid to the trustee of the bankrupt's estate under a section 139ZQ notice that relates to a transaction that is void against the trustee under section 128C; and

   (g)  money that is paid to the trustee of the bankrupt's estate under an order under section 139ZU;

   is property divisible amongst the creditors of the bankrupt.

   (2)  Subsection (1) does not extend to the following property:

   (a)  property held by the bankrupt in trust for another person;

   …

   116(2)   [Limitations on divisible property] Subsection (1) does not extend to the following property:

   (a)     property held by the bankrupt in trust for another person...

7. There are a number of other exceptions to divisible property within the meaning of the Bankruptcy Act listed in s.116(2), many of which clearly have a policy foundation rather than reflecting any specific common law or equitable principles, for example, amounts paid to a bankrupt under a rural support scheme prescribed for the purposes of the Act (see s.116(2)(k) of the Act).

8. Section 58 of the Bankruptcy Act provides that where a debtor becomes a bankrupt “the property of the bankrupt ... vests forthwith in the official trustee ... and

   (b)     after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt...

   Section 58(2) recognises that where the transmission of property must be registered, that the equitable interest vests until such time as the requirements for the legal transfer have been complied with.

9. Conceptually, the argument put by the applicant is that one must consider that the rights by way of security over the units of the unit trust are rights with respect to property held by a “person” other than the debtor, and thus can not be security over “property” of the bankrupt under s.44. It is argued by the applicant that this is effectively the conceptual consequence of the right of a beneficiary with respect to the property held in trust.

10. The applicant sought to distinguish Adsettv Berlouis [1992] FCA 368; (1992) 37 FCR 201; 109 ALR 100. Mr Galvin pointed to the terms of the decision arguing that the trustee had a “right to an indemnity” with respect to liabilities incurred when acting in the capacity as trustee in that case, see at 209 to 210:

    A trustee in bankruptcy is governed by the general law relating to trustees save where the position of the trustee is modified by the Bankruptcy Act or Rules: see Re Ladyman (1981) 55 FLR 383 at 394-396. The Act confers no right on a trustee to be reimbursed in respect of the costs, charges or expenses incurred in the administration of the estate. The trustee's right to an indemnity is provided under the general law. Under that law a trustee is entitled as of right to a full indemnity out of the trust estate against all costs, charges and expenses properly incurred by the trustee: see Turner v Hancock (1882) 20 Ch D 303 at 305; Re Love,· Hill v Spurgeon (1885) 29 Ch D 348 at 350; Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 558. (emphasis added)

11. The rights of a trustee to apply the assets or corpus of the trust to meet debts incurred by the trustee with respect to administering the trust is also referred to by Warren CJ in Collie v Merlaw Nominees Pty Ltd [2001] VSC 39 where Warren J (as her Honour then was) considered the question of a trustee’s rights of indemnity from trust assets, with respect to a trading trust. In that case her Honour said:

    [53]  It is well established that a trustee is entitled to be reimbursed out of the trust property in respect of all charges and expenses properly incurred in the execution of the trust: Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319, 335; Custom Credit Corp Limited v Ravi Nominees (1992) 8 WAR 42, 52-53. The right of reimbursement and indemnity is a first charge or lien on the trust property: Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360, 367, 369-370; Custom Credit, supra, 53; Re Pumfrey (1887) 22 Ch D 255, 262; Rothmore Farms Pty Ltd v Belgravia Pty Ltd (1999) FCA 745 at paragraphs 33-35; Jennings v Mather [1902] 1 KB 1, 6-7.

12. Her Honour goes on at paragraph [54] to consider the impact of a change of trustee and stating: 

    [54]  On the basis of the principles, therefore, Merlaw enjoyed a right of indemnity from the property of the Prudent Trust. The next question to be determined is whether the change of trustee on 11 October 1993 affected that indemnity in any way. The plaintiff contended that it did not and that the right of Merlaw to indemnity, exoneration and lien continued despite the change of trustee to Mr Nolan. If a trustee is removed and relinquishes possession of trust assets the lien or charge still subsists against the trust assets: see Chief Commissioner of Stamp Duties v ISPT Pty Ltd (1998) 45 NSWLR 639, 653; also Rothmore Farms, supra, at paragraphs 36-42. On the basis of this principle, therefore, a former trustee such as Merlaw remains liable but the new trustee takes the trust property subject to the right of indemnity of the predecessor of the new trustee. Hence, where the former trustee has created a lien over the trust assets it will be enforceable in equity proceedings against the successor trustee: see Williams v Hathaway (1877) 6 Ch D 544, 551; also Cummins v Perkins [1899] 1 Ch 16, 19-20.

13. The description of the trust assets as though they are a separate, almost hermetically sealed, pool of assets into which one may dip in certain circumstances is a reading open from the phrases used in these judgments.  Similar phrasing occurs in paragraph [58] of her Honour’s judgment where her Honour says: 

    [58]  Thus, as a matter of general principle a creditor of a trustee is entitled to be subrogated to the trustee's right of indemnity out of trust assets: see also In re Blundell, Blundell v Blundell (1890) 44 Ch D, 9-10; Vacuum Oil, supra, 325; Re Evans (1887) 34 Ch D 597; Custom Credit, supra. In the present matter, the situation is complicated by the fact that Merlaw is in liquidation.

14. Similar descriptions appear in 13Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) [1999] FCA 144; 17 ACLC 500; (1999) 30 ACSR 377 when Finkelstein J stated:

    [30]  …All of the steps taken by the liquidator were to procure the performance by the trustee of its duties and it is no novel proposition that, in those circumstances, a trustee has a charge on trust property for the costs and expenses properly incurred in dealing with trust assets: Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360; Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319.

    [31]  In one respect Suco Gold, and other cases that have applied the principle there stated, may be said to have overlooked the distinction between the trustee (the company in liquidation) and its liquidator. The liquidator is not, of course, the trustee but the person who has replaced the directors who formerly controlled the trustee. The distinction was noted by Mr Nugee QC sitting as a deputy High Court Judge in In re Berkeley Applegate Ltd (No 2) [1989] 1 Ch 32 where, in somewhat similar circumstances to the present case, it was held that the liquidator could look to the trust assets for his remuneration not for reasons akin to those expressed by King CJ but on "a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property.": see Berkeley Applegate at 50.  (emphasis added)

15. This flows from the phrasing used by the High Court in Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 at 367 where in the joint judgment of Stephen, Mason, Aickin and Wilson JJ it is said:

    It is common ground that a trustee who in discharging its trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions;  Vacuum Oil Co Pty Ltd v Wiltshire.  However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets;  Vacuum Oil Co Pty Ltd v Wiltshire.  The charge is not capable of differential application to certain only of such assets.  It applies to the whole range of trust assets in the trustee’s possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorised to use for the purpose of carrying on the business:  Dowse  v Gorton.

16. However, the High Court go on to explain that:

    In such a case there are then two classes of person having a beneficial interest in the trust assets:  first, cestuis que trust, those for whose benefit the business was being carried on;  and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust.  The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied:  Vacuum Oil Co Pty Ltd v Wiltshire.  (emphasis added)

17. It therefore follows, as the High Court explained, that:

    The creditors of a trustee have limited rights with respect to the trust assets.  The assets may not be taken in execution (Savage v Union Bank of Australia Ltd).  In re Morgan; Pillgrem v Pillgrem.  But in the event of the trustee’s bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee:  Vacuum Oil Co Pty Ltd v Wiltshire; Ex parte Garland. 

    These principles lead naturally to the conclusion that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets held by a bankrupt trustee form part of the property of the bankrupt divisible among his creditors:  Savage v Union.

18. Their Honours in Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 go on to state:

    [29] Property which is an asset of a trading estate carried on by a trustee is properly described as trust property: Dowse v. Gorton [1891] AC 190; Jennings v. Mather (1901) 1 QB, at p 111 . However, as we have already indicated, that does not mean that the cestuis que trust are necessarily entitled to call for the delivery of the property. If the trustee has incurred liabilities in the performance of the trust then he is entitled to be indemnified against those liabilities out of the trust property and for that purpose he is entitled to retain possession of the property as against the beneficiaries. The trustee's interest in the trust property amounts to a proprietary interest, and is sufficient to render the bald description of the property as "trust property" inadequate. It is no longer property held solely in the interests of the beneficiaries of the trust and the trustee's interest in that property will pass to the trustee in bankruptcy for the benefit of the creditors of the trust trading operation should the trustee become bankrupt. (at p370)  

    [30] The fact that the trust property itself cannot be taken in execution by the creditors of the trustee is not to the point. Those creditors are nevertheless subrogated to the rights of the trustee in relation to that property, and in the event of the trustee becoming bankrupt, it is those rights which are to be realized in their favour. (at p370)  (emphasis added)

19. The analysis described in these cases is in a form of words that is useful for the types of decisions then being made in order to ascertain the various rights of the persons concerned.  However, read in the abstract, could lead one to conclude that a property interest at law, as held by the debtor in this case, has ceased to be a property interest held by the debtor as a result of the trust.  That is, to in some way conceptually divide up the property into separate parcels depending upon whether it is owned as trust property or not owned as trust property, is apt to lead to the misconception that the person who is the trustee has two legal identities rather than one.  One must remember that the trustee as legal title owner has superior title to all the world subject only to the obligation to the beneficiary.

20. It is in this context that the applicants move forward to attempt to explain away the decision of Beaumont J in Re Morris; Ex parte ANZ Banking Group Pty Ltd (1991) 29 FCR 1, a decision which is against them on the points relevant in this case. In Re Morris, Beaumont J considered a situation where a creditor, the ANZ Bank, held security over trust assets obtained when granting a mortgage or obtaining a mortgage to secure funds lent to the debtor when he was acting as executor and trustee of an estate.  At page 3 his Honour said:

    It was submitted that the [Bankruptcy] Act is concerned only with the debtor’s beneficial interests in property and does not bring into the estate of a bankrupt, as property divisible among his creditors, property held by the bankrupt upon trust:  See section 116(2)(a).

    In my opinion, the ANZ Bank was a secured creditor for the purposes of section 44.  It is true that the lands were vested in the debtor, Mr Pound and Mr Johanson as executors and trustees.  But it is not said that their mortgage of the lands to the  ANZ Bank was beyond their powers or otherwise bad.  In these circumstances, it must, I think, be assumed that the mortgage was validly granted.  It was granted over property of which the debtor was one of the registered proprietors.  It must follow, in my opinion, that the ANZ Bank should be regarded as a secured creditor for present purposes.

1. The point of distinction that was argued before me was that the security here was not granted by the trustee as part of the trading of the trust and that therefore in this case the trust assets ought not to be considered property of the debtor for the purposes of the bankruptcy petition.  It was argued that in Morris’ case as the debtor had incurred the debt as the trustee of the estate, then the assets of the estate over which the creditor had security were properly considered to be “property” of the debtor.

2. It appears to me that the cases referred to all stand as appropriate and correct explanations of the law, but that the true nature of a trust must be carefully considered in order to understand the outcomes in the cases and to understand that the descriptive language used to explain the outcomes can at times mislead if applied to different factual situations without reference to the underlying concept of the trust.

3. A trustee holds legal title to the trust property.  The trustee in the simplest form of trust owns the legal title (for example, with respect to land).  The beneficial interests of the beneficiaries of a trust are the result of obligations owed by the trustee to the beneficiaries.  As the academic authors describe it, “the genius of equity” is to convert what is in essence an obligation by the trustee to the beneficiaries into a form of “property”, described as equitable property or an equitable interest.  (I do not digress here to discuss the nuances with respect to equitable property, equitable interests, mere equities and the like).

4. Once one views equitable property as equity’s conversion of an obligation by a trustee to the beneficiary into a legal concept (or legal thing) that can be dealt with in the same way in which common law property can be dealt with (or at least in a significantly similar way), it is easier to understand how s.44 must operate.

5. The property the subject of the charge in this case is in fact property of the debtor.  The debtor has the legal title.  The debtor (and on some academic explanations the property itself) is impressed with an obligation owing to the beneficiaries.  The extent of that obligation can only be ascertained by reference to the terms of the trust.  That obligation carves out some part of the benefits of the property (the legal title) held by the trustee for the benefit of the beneficiaries.  In the most simple trust all of the benefits of the property are available for the beneficiaries, in more complex trusts only part of the benefits of ownership of the property are available to them. 

6. In a case where the trustee has, in the course of administering the trust (or otherwise within their powers as trustee), incurred a debt there is clear law that they are entitled to be indemnified from the trust assets.  In truth, the trustee is the owner of the assets and in incurring a debt of this type, from which they are able to access the trust assets, they have a stronger claim at equity over the assets than the beneficiaries of the trust.  Thus, when one looks at the competing rights of legal title holder and the beneficiary’s interest in the property, the trustee has a greater right, not merely because of legal ownership, but as a result of the law relating to the priorities of the beneficial interests in trust assets to meet expenses incurred in administering the trust before those owed to the beneficiary. 

7. That is, all of the interests in the secured property both legal title and beneficial interest are in these circumstances still available to the legal title holder subject to the obligations to the beneficiary.  The beneficiaries of the trust, whilst they have residual interests in the property do not have an interest sufficient to impede the current interest of the debtor in the property as legal title holder where there is a legal charge over the property.  Any action to enforce the charge lies against the legal title holder, not the beneficiary.  Any action to recover the units or enforce the rights they create would be at the suit of the legal title holder, not the beneficiaries.  When viewing the matter through the lens of the trust as obligation, in order to focus with precision upon the nature of the interests of the beneficiaries of the trust in comparison to the interests of the trustee legal title holder and secured creditor, it is apparent that the property must be considered to be property of the trustee debtor.

8. Further, it is apparent that the definition of “property” in the Bankruptcy Act is so broad that even a “dry legal title” to property is “property” within the meaning of s.5, and s.44 does nothing to restrict that broad statutory definition of “property” when it uses the term “property”.

9. The restrictions which mirror equity’s traditional protection of equitable interests come about through the operation of s.116 which limits the property that is divisible among the creditors by providing a definition of “divisible property” which excludes “property held by the bankrupt in trust for another person”. That phrase must necessarily be read as meaning that the property is held by the bankrupt in circumstances where another person has an equitable interest in property so as to protect the interests of beneficiaries to the extent that they are of higher priority to that of the bankrupt in the particular asset.

10. For these reasons I find that there is no reason to question the decision and reasons given by Beaumont J in Re Morris, and that I was not persuaded that the decisions in Adsett v Berlouis, Collie v Merlaw Nominees Pty Ltd nor indeed the High Court’s decision in Octavo Investments Pty Ltd v Knight are in any relevant sense inconsistent with or cast any doubt upon the decision of Beaumont J.

11. In these circumstances, s.44(4) requires the relevant security to be referred to in the creditor’s petition and the applicant must therefore seek amendment in order to proceed.

Amendment of the Creditor’s Petition

1. At the hearing of the matter the applicant did seek an amendment by way of alternative argument.  The amendment sought was set out in the submissions which were served upon the respondent yesterday morning.  The respondent did not attend today nor answer when called.  The submissions say: 

   8. If, on the other hand, the applicant is properly to be regarded as a “secured creditor” within the meaning of s.44(2) of the Act, notwithstanding that the Shares and the Units are held by the debtor on trust, leave will be sought to amend the petition to include reference to the security over the Units. The petition already includes reference to the charge over the Shares. An order dispensing with re-verification and re-service will also be sought.

2. In this case it appears that on the material there is no prejudice to the debtor to allow the amendment.  The issue was raised by the debtor before a registrar of this Court which resulted in the case being listed before a federal magistrate for hearing.  The authority of Re Morris was drawn to the attention of the Court and the parties on that occasion.  It is apparent that a creditor’s petition can, in appropriate circumstances, be amended and the re-verification and re-service dispensed with.  In circumstances of this case the debtor is well aware of all of the facts and circumstances relied upon, the difficulty faced by the applicant is a purely technical one.  The debtor has notice of the request for an amendment.  It appears to me that it is appropriate to allow the creditor’s petition to be amended, and dispense with the re-verification and re-service as they would serve no purpose in a case such as this.

Sequestration Order

1. I turn then to consider whether or not a sequestration order ought to be made in the circumstances of this case.  The debtor has not appeared to give evidence or be cross‑examined.  This leads to real difficulties in accepting the evidence that he puts forward in the affidavit filed by him as prepared by his then legal practitioners.  However, even on the face of that affidavit it appears that he is insolvent.  In paragraph [18] he sets out his assets and liabilities which purport to demonstrate that he has some degree of solvency represented by the difference between the value of a property at Port Melbourne and a debt to the Commonwealth Bank ($960,000 less $752,435.63), a half share in a BMW 2002 model 745i sedan less a debt owing to BMW Finance of $31,500 and director’s or shareholder’s loans of approximately $320,000 owing to Coffee Pls as the trustee for Coffee Pls Unit Trust.  He owes the creditor over $700,000.

2. On these figures alone, the debtor on his own material is insolvent.  In addition, however, he has legal fees owing to a law firm of over $20,000, debt on a credit card of over $7000 and a private loan which he swears is due and payable in 2012 of $500,000. 

3. In addition, the profit and loss statement for 2010 with respect to the unit trust and Coffee Pls, which appears to be the entity operating the business, shows that the business itself, on the balance sheet, had no net assets but net liabilities of $70,324.  On this material it is difficult to see how it could be said that he is solvent even if the shareholder’s loan is intended to be money owing to him.

4. The debtor also raises in his material the question of whether or not the value of the security is greater than the value of the debt.  The debt in this case is in excess of $700,000.  The securities relate to entities that are effectively the controllers or owners of Coffee Pls Unit Trust, which has no net assets but liabilities of over $70,000.  In these circumstances, it does not appear to me that the claims in the affidavit that the equipment of the business has a market value of $1.2 million can be seen as in any sense realistic.  Therefore, I am not persuaded on the face of the affidavit that it could satisfy the Court that the securities held by the applicant are of greater value than the debt.

5. I also note with respect to the question of solvency that at paragraphs [25] to [27] the applicant says that he had a loan of $1.85 million approved on 14 October 2011 in order to refinance his Commonwealth Bank loan and to pay out the debt owed to the applicant and other smaller debts.  He said in his affidavit that he believed that the funds would be available in about mid-December.  He stated in the affidavit that as soon as he received the funds he intended to pay the applicant the amount claimed plus any further interest which has accrued on the debt since the petition was issued.  There was nothing before the Court to indicate that any attempt had been made to make the payment nor that any offer of payment had been made to the applicant.  The claims made in this part of his affidavit, together with the fact that no payment has been made to date nor any offer put in evidence adds significantly to the earlier evidence to leave me in no doubt that the debtor is insolvent.

Conclusion

1. For these reasons I therefore give the applicant leave to file an amended petition in the form marked and filed in Court today and that re-verification and re-service of the petition as amended is dispensed with.  I therefore make a sequestration order against the Estate of Billy Seri (also known as Bulent Seri) and that the date of the relevant bankruptcy is 25 July 2011.

2. The Applicant’s costs, and the costs of the supporting creditor including reserved costs, should be taxed in accordance with the Federal Court Rules and paid in accordance with the Bankruptcy Act 1966.

I certify that the preceding forty (40) paragraphs are a true copy of the reasons for judgment of Riethmuller FM

Date:  20 March 2012