Iosifidis v Hanson Construction Materials Pty Ltd
[2016] FCCA 998
•29 April 2016
FEDERAL CIRCUIT COURT OF AUSTRALIA
| IOSIFIDIS v HANSON CONSTRUCTION MATERIALS PTY LTD | [2016] FCCA 998 |
| Catchwords: BANKRUPTCY – Application for leave pursuant to s.104(2) of the Federal Circuit Court of Australia Act 1999 (Cth) to apply for review of Registrar’s decision – modest delay of one week – leave granted – question of whether to set aside sequestration order or annul bankruptcy – consideration of bankrupt’s solvency at date of sequestration order – application dismissed. |
| Legislation: Bankruptcy Act 1966, ss.52, 153B Federal Circuit Court of Australia Act 1999 (Cth), s.104(2) |
| Cases cited: Ali v Retail Decisions Pty Ltd [2012] FCA 1130 Wren v Mahoney (1972) 126 CLR 212 |
| Applicant: | ILIAS IOSIFIDIS |
| Respondent: | HANSON CONSTRUCTION MATERIALS PTY LTD ACN 009 679 734 |
| File Number: | MLG 1241 of 2015 |
| Judgment of: | Judge Wilson |
| Hearing dates: | 5 November 2015 & 11 December 2015 |
| Date of Last Submission: | 23 December 2015 |
| Delivered at: | Melbourne |
| Delivered on: | 29 April 2016 |
REPRESENTATION
| Counsel for the Applicant: | Mr B. Devanny |
| Solicitors for the Applicant: | Velos & Velos Lawyers |
| Counsel for the Respondent: | Mr M. Lapirow |
| Solicitors for the Respondent: | Davies Moloney |
ORDERS
The application for leave to apply for a review of a Registrar’s decision pursuant to s.104(2) of the Federal Circuit Court of Australia Act 1999 (Cth) is granted.
The application for review filed on 28 August 2015 is dismissed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 1241 of 2015
| ILIAS IOSIFIDIS |
Applicant
And
| HANSON CONSTRUCTION MATERIALS PTY LTD ACN 009 679 734 |
Respondent
REASONS FOR JUDGMENT
Introduction
By application for review filed on 28 August 2015, Ilias Iosifidis
(“the bankrupt”) sought orders setting aside the sequestration order made by a Registrar of the Court on 28 July 2015. The bankrupt sought leave to apply for review out of time and he also sought a stay of all proceedings under the sequestration order.
On 5 November 2015 and 11 December 2015, I heard the contested hearing of the applications brought by the bankrupt.
Hanson Construction Materials Pty Ltd (“Hanson”), the creditor that petitioned for the sequestration of the bankrupt’s estate, opposed the application for the setting aside of the Registrar’s orders.
For the reasons set out below I dismiss the applications brought by the bankrupt.
Procedural history
Before addressing the factual matters underpinning this dispute, it is necessary to say something about how this proceeding came to be heard over two days as a contested trial.
On 15 September 2014, Hanson entered judgment against the bankrupt in the sum of $29,289.96 (“the judgment debt”) for goods sold and delivered by Hanson to the bankrupt.[1] On the strength of that judgment debt, Hanson served a bankruptcy notice on the bankrupt on
7 February 2015.[2] He had by 2 March 2015 to comply with that bankruptcy notice. The bankrupt failed to do so. Upon being satisfied that the debt was proved, that all documents that needed to be served had in fact been regularly served and that Clyde Peter White
(“Mr White”) agreed to act as trustee,[3] the Registrar made a sequestration order against the bankrupt’s estate.[4]
[1] Affidavit of debt filed 27 July 2015.
[2] Affidavit verifying paragraph 4 of the petition filed 2 June 2015.
[3] Trustee Consent to Act Declaration filed 2 June 2015.
[4] Order of Registrar Caporale made 28 July 2015.
On 28 August 2015, the bankrupt applied for a review of the Registrar’s sequestration order. Given that the order was made on
28 July 2015, pursuant to r.2.02(3) of the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) (“the Bankruptcy Rules”), the bankrupt had 21 days within which to file his application to review the Registrar’s decision. He did not file the application for review within time. The bankrupt needed leave to apply out of time for that review.
In support of his application for review the bankrupt filed an affidavit sworn 27 August 2015. On 14 September 2015 the hearing of the bankrupt’s application for review came before his Honour
Judge Burchardt. Both Hanson and the bankrupt were represented by counsel on that day. His Honour Judge Burchardt adjourned the bankrupt’s application for an extension of the time within which to apply to review the Registrar’s sequestration order.
[5] Transcript of Proceedings, 5 November 2015, p.2 at line 22.
The management of this case was transferred to my docket so the return of the orders made by his Honour Judge Burchardt came before me on 5 November 2015. Immediately after announcing his appearance on that day, Mr Devanny, who appeared for the bankrupt, informed me that this case concerned what Mr Devanny said was the
“unfortunate situation”[5]in which the bankrupt’s identity had been used to establish a company called Crystal Stone Australia Pty Ltd (“CSA”). Mr Devanny said CSA’s sole shareholder was a man called Evan Dailakis (“Mr Dailakis”) and that Mr Dailakis was, on the date of the hearing before me on 5 November 2015, facing criminal charges for obtaining property by deception and that Mr Dailakis had been bailed to appear on 2 February 2016. After discussion with
Mr Devanny and with Mr Lapirow, who appeared for Hanson, it became apparent that the bankrupt’s trustee, Mr White, was not involved in the hearing. It struck me that the views of Mr White would be relevant to this application. Mr Lapirow submitted that Hanson ought to be permitted to file affidavit material addressing, among other things, the bankrupt’s solvency. After debate, I acceded to the bankrupt’s request for leave to file further evidence and I granted Hanson similar leave. It seemed to me to be sensible for me to consider the application for leave to apply out of time at the same time as I determined the merits of the review, especially having regard to the fact that only one week delay was involved in the filing of the application to review the Registrar’s sequestration order.
As a result of debate on 5 November 2015, I permitted the bankrupt and Hanson to file additional evidence and I invited Mr White to participate in the hearing on the new date.
The matter returned before me on 11 December 2015. On that date
Mr Devanny again appeared to the bankrupt, Mr Lapirow again appeared for Hanson and Mr White, the trustee in bankruptcy, also attended.
On 11 December 2015 I heard the bankrupt’s application for leave to apply out of time, his application to review the Registrar’s sequestration order and the application for orders annulling his bankruptcy.
In essence, the bankrupt relied on two matters in support of his applications –
a)
first, he contended that Hanson’s judgment debt allegedly incurred by the bankrupt was not in fact incurred by the bankrupt.
The bankrupt alleged that the judgment debt was irregular; and
b)second, the bankrupt contended that he was solvent and that he satisfied all the criteria that supported the making of orders annulling his bankruptcy.
Synopsis
For the reasons that follow, in my judgment -
a)the judgment debt was regular and the debt that gave rise to the judgment debt was in fact incurred by the bankrupt;
b)the bankrupt was not in fact solvent when this proceeding was before the Registrar and before me;
c)the Registrar correctly made the sequestration order;
d)the application for leave to apply for the review of the Registrar’s order out of time should be granted; and
e)the application for the review of the Registrar’s sequestration order and of the application for orders annulling the bankruptcy should be dismissed.
Factual setting of this proceeding
At all relevant times, the bankrupt was an occupational health and safety officer who gave his address as 14 Marianne Way, Doncaster in the State of Victoria.
CSA was incorporated on 2 May 2011. According to an historical extract derived from ASIC,[6] the bankrupt was a director of CSA from 29 July 2013 until 28 September 2015. He was the company secretary of CSA between 29 July 2013 and 28 September 2015.
[6] Exhibit 6, ASIC Current & Historical Organisation Extract dated 20 October 2015.
CSA’s registered office was 14 Marianne Way, Doncaster between
4 September 2013 and 28 September 2015. CSA’s principal place of business between 28 August 2013 and 28 September 2015 was
14 Marianne Way, Doncaster. The one ordinary share in the
capital of CSA was held by Mr Dailakis. CSA was deregistered on
28 September 2015.
At all relevant times Hanson carried on business selling material for use in the building industry.
By instrument of guarantee dated 28 January 2014, a person described as ‘Loui Iosifidis’ executed a guarantee in favour of Hanson by which the guarantor unconditionally and irrevocably agreed to duly and punctually pay to Hanson all money owing to Hanson by CSA
(“the guarantee”).[7]
[7] Exhibit 19, affidavit of Richard Kendall sworn 28 October 2015, at Annexure “RK-1”.
The bankrupt denied that he executed the guarantee. He admitted he was also known as ‘Loui Iosifidis’. In the passages below I address the bankrupt’s contentions about the guarantee.
Richard Kendall (“Mr Kendall”) who swore an affidavit on
28 October 2015[8] gave evidence about the circumstances in which the bankrupt executed the guarantee. Mr Kendall swore that he received a telephone call a couple of days prior to 28 January 2014 from a man who told Mr Kendall he was new in business and wanted to open a credit account with Hanson. Mr Kendall swore that he provided an unexecuted guarantee to the bankrupt along with Hanson’s pro-forma credit documentation. Mr Kendall swore that he offered the bankrupt the opportunity to discuss the matter if the bankrupt chose to do so.
Mr Kendall also swore that on 30 January 2014, the bankrupt entered Hanson’s office and handed Mr Kendall the executed guarantee together with several other documents. Among those other documents was the completed application for credit. Additionally, according to
Mr Kendall, the bankrupt handed Mr Kendall a copy of the bankrupt’s passport, a copy of his driver’s licence, a copy of a certificate of title to a parcel of land and a copy of a credit file search stating that the bankrupt had a good credit history. Beyond the executed guarantee and credit application form, Mr Kendall swore that Hanson did not require the documents that the bankrupt provided voluntarily. One of the documents volunteered by the bankrupt was a letter marked ‘To whom it may concern’ that read as follows –
[8] Exhibit 19, affidavit of Richard Kendall sworn 28 October 2015.
I spoke to Richard, the gentleman who handed me the credit application form and explained my position. He told me it would not be a problem with the credit as I have a property, but he told me it wouldn’t hurt if I was to explain my situation.
I have been working as a shop steward for approximately
12 years and I am currently still working. I decided to start concreting which will not interfere with my current employment.
I have been given opportunities from numerous councils and also from different building firms around the Melbourne CBD who I have associated and known over the years to start concreting.
I have been doing sewerage and Marble (sic) works for a number of years after hours and weekends so I had no need to use concrete on any of the jobs hence the reason I cannot give any supplier.
I hope this explains and helps in any way.[9]
[9] Exhibit 19, affidavit of Richard Kendall sworn 28 October 2015, at Annexure “RK-1”.
Importantly, the signature at the foot of the letter, appearing immediately above CSA’s name, bore a striking similarity to the bankrupt’s signature as it appeared on several affidavits he swore in this proceeding. As will be later apparent in these reasons, the bankrupt was at pains in this litigation to distance himself from CSA. This letter dated 28 January 2014 bore the bankrupt’s name, what appeared to be his signature as well as the connection of his name and apparent signature to CSA.
In his affidavit sworn 27 August 2015, the bankrupt asserted that he had been declared bankrupt due to debts owed by CSA of which he had been named as a director and guarantor without his knowledge or consent. He asserted that he had been declared bankrupt due to the fraudulent actions of Mr Dailakis in, what the bankrupt asserted was, “fraudulently misappropriating my identity for the purpose of obtaining financial advantage, incurring debts against my name and subsequently not honouring those same debts”. [10]
[10] Affidavit of Ilias Iosifidis sworn 27 August 2015 at [3].
The bankrupt alleged in this litigation that the judgment debt obtained by Hanson was underpinned by fraudulent transactions perpetrated by Mr Dailakis. The bankrupt contended that this Court should -
a)go behind the judgment debt obtained by Hanson;
b)investigate the circumstances giving rise to the entry of judgment; and
c)conclude that the judgment debt was irregular and thus the sequestration order that was made based on the judgment debt was irregular.
As is developed below, I disagree.
The bankrupt’s version of the alleged fraud said to have been committed by Mr Dailakis was predicated upon my acceptance of his evidence as being truthful and of my acceptance of the bankrupt as a truthful witness. I am satisfied on the balance of probabilities that the bankrupt was not in fact a truthful witness and that he did not give truthful evidence. I do not accept his contentions that he was in no way liable for CSA’s debt to Hanson. To the contrary, I am satisfied on the balance of probabilities that -
a)the bankrupt guaranteed CSA’s indebtedness to Hanson;
b)Hanson sold and delivered goods to CSA to the value of $29,289.96;
c)CSA did not pay for those goods;
d)the bankrupt therefore became liable to Hanson pursuant to the guarantee;
e)the bankrupt failed to honour the guarantee by paying Hanson;
f)Hanson’s judgment debt was regularly obtained;
g)the bankrupt failed to comply with the bankruptcy notice that Hanson served upon him; and
h)by reason of that failure, Hanson was entitled to serve a creditor’s petition.
By reason of the bankrupt’s failure to participate in any aspect of the bankruptcy proceeding subsequent to the service upon him of the creditor’s petition, and upon proof of all things required
under the Bankruptcy Rules, the Registrar properly made a sequestration order against the bankrupt estate.
That sequestration order should not be set aside. The bankrupt’s bankruptcy should not be annulled.
The bankrupt’s version
The bankrupt adduced evidence in three affidavits sworn
27 August 2015, 16 September 2015 and 26 November 2015. He also gave evidence in chief and was extensively cross-examined.
What follows is a distillation of his evidence derived from those several sources.
The bankrupt’s involvement with CSA
In his affidavit sworn 27 August 2015, the bankrupt stated that he had known Mr Dailakis for about 20 years. He said that in or about
June 2013, Mr Dailakis asked for the bankrupt’s assistance in preparing an occupational health and safety plan. The bankrupt swore that in the course of assisting Mr Dailakis, the bankrupt provided to Mr Dailakis a sample occupational health and safety plan that contained copies of the bankrupt’s certifications, his high risk licence, his bobcat licence,
a traffic management ticket, a first-aid card and his driver’s licence. The bankrupt said that on another occasion he handed Mr Dailakis a document with his name, address and a sample of the bankrupt’s signature upon it.
The bankrupt swore that on 11 April 2014, in the context of his applying for a bank loan, he ascertained that he had a default credit rating on account of debts due from CSA to Hanson and Boral Ltd (“Boral”). The bankrupt denied knowing that he, his mother or his father had any relationship or connection with CSA.
In the same affidavit, the bankrupt swore that between October 2013 and February 2014 his mother received letters addressed to CSA at
14 Marianne Way, Doncaster. He swore that the envelopes containing those letters were window-faced and when he saw the name ‘CSA’ on any of those envelopes he did not open them. The bankrupt said that upon learning of his default credit rating on 11 April 2014 and that his default status was in some way related to CSA, he went to his mother’s home at 14 Marianne Way, Doncaster and opened the letters that were inside the window-faced envelopes. He said his name was on the correspondence addressed to CSA of which he was unaware until that precise moment as he had never signed any paperwork or correspondence in relation to CSA.
The bankrupt swore that he later involved the police and provided a statement to the police. He stated in his affidavit sworn 27 August 2015 that Mr Dailakis paid the bankrupt the sum of $3,500.00 over a period of three months in mid-2014 by way of compensation for the bankrupt’s financial loss.
In his statement to the police dated 14 April 2014,[11] the bankrupt referred to his conversation on 11 April 2014 with a credit-rating person. He stated that the default related to “an account that belonged to the Boral Group Australia for the approximate amount of $23,000”.[12] The bankrupt also stated in that police statement that he had not worked for or conducted business with Boral. In his police statement the bankrupt further stated that upon being told that certain records (he did not say which) indicated he was a director of CSA,
he had never been involved or conducted any work with CSA nor did he know anyone who worked for CSA.
[11] Affidavit of Ilias Iosifidis sworn 27 August 2015, at Annexure “Il-3”.
[12] Ibid.
The bankrupt made a second statement to police, it being dated
16 October 2014.[13] In it he stated that Hanson had informed him that the bankrupt owed Hanson $27,947.00. As with the Boral debt,
the bankrupt said that at no stage had he ever opened an account with Hanson. The bankrupt stated in that second police statement that
Mr Dailakis acknowledged having opened an account in the bankrupt’s name.
[13] Ibid.
Mr Dailakis did not give evidence in this proceeding. That was hardly surprising as he had been charged with obtaining property by deception. The Registrar of the Magistrates Court of Victoria certified by certificate dated 4 November 2015 that Mr Dailakis had been so charged.[14] Even if Mr Dailakis had given evidence before me, he was likely to have relied upon his privilege against self-incrimination.
[14]
The bankrupt’s involvement with Boral
Hanson alleged that the bankrupt also gave a guarantee in favour of Boral Constructions Materials Group Limited (“BCMGL”) in respect of the debts of CSA by instrument dated 18 August 2013.[15] The bankrupt denied giving any such guarantee in favour of BCMGL.
I inspected the signature alleged to have been that of the bankrupt on the guarantee in favour of BCMGL. It was sufficiently similar to the signature on all affidavits sworn by the bankrupt in this proceeding so as to be indistinguishable. The bankrupt did not advance evidence from a handwriting expert with a view to explaining how the signatures on the guarantees allegedly given by the bankrupt in favour of Hanson and in favour of BCMGL were not those of the bankrupt.
[15] Exhibit 15, letter dated 4 March 2014 from Holman Webb Lawyers to Mr Ilios Isoifidisi (sic).
Accountancy fees for CSA
On behalf of Hanson Mr Lapirow produced a collection of documents during the bankrupt’s cross-examination with a view to disproving the bankrupt’s assertion that the bankrupt had no involvement in the affairs of CSA. In my view, the five documents from Zest Accounting Group[16] (“Zest”) demonstrated that the bankrupt did in fact have some involvement in the affairs of CSA or at least had enough to render false the bankrupt’s denial of any involvement in the affairs of CSA.
[16]By letter dated 24 September 2013,[17] Zest wrote to CSA at its
14 Marianne Way, Doncaster address and marked the letters to the attention of the bankrupt. In the letter Zest enclosed what it said was “your ASIC invoice statement for your company, Crystal Stone Australia Pty Ltd”.[18] The enclosure with the letter was a notice from the Australian Taxation Office (“ATO”) stating that CSA’s activity for the quarter July 2013 to September 2013 was overdue. The ATO notice was addressed to CSA at 14 Marianne Way, Doncaster. The bankrupt said in cross-examination he did not open that letter.
[17] Exhibit 7, letter dated 24 September 2013 from Zest Accounting Group to Mr Ilias Iosifidis.
[18] Ibid.
By letter dated 27 September 2013,[19] Zest wrote to CSA at
14 Marianne Way, Doncaster marked to the attention of the bankrupt. The bankrupt said in cross-examination that the letter was also in a window-faced envelope, inferring that he did not open that letter either.
[19] Exhibit 8, letter dated 27 September 2013 from Zest Accounting Group to Mr Ilias Iosifidis.
By letter dated 11 September 2013 from Zest to CSA at 14 Marianne Way, Doncaster and marked to the attention of the bankrupt,[20]
Zest wrote enclosing “your ASIC invoice statement for your company, Crystal Stone Australia Pty Ltd”.[21] In his evidence the bankrupt was asked the following –
HIS HONOUR: Just before you go on, Mr Lapirow.
Mr Iosifidis, can you help us with the first line of that letter which says:
We enclose for your information your ASIC invoice statement for your company Crystal Stone Australia Proprietary Limited.
[20] Exhibit 9, letter dated 11 September 2013 from Zest Accounting Group to Mr Ilias Iosifidis.
[21] Ibid.
Can you help us with the reference to “your company”
Crystal Stone Proprietary Limited having regard to your several denials this morning of your association with that company?‑‑‑
I don’t know anything about that, your Honour.
So do you say that the accountant is wrong when he writes to you in reference to “your company” Crystal Stone Australia Proprietary Limited?‑‑‑Yes, your Honour.
Did you pick him up about that incorrect reference according to what you’ve just said?‑‑‑Not them specifically, no.
Is the answer that you didn’t pick them up on that point?‑‑‑No.
In other words you agree with me? I’m having trouble understanding what no means?‑‑‑I’m sorry, your Honour. Do you mean pick them up as in contact them?
That’s right. Did you ‑ ‑ ‑?‑‑‑No. No. I did not.[22]
[22] Transcript of Proceedings, 11 December 2015, p.84 at lines 16-38.
By letter dated 16 July 2014, a little over 10 months later, Zest again wrote to CSA in largely similar terms, the letter being marked to the attention of the bankrupt.[23] The bankrupt conceded he did not respond to that letter.
[23] Exhibit 10, letter dated 16 July 2014 from Zest Accounting Group to Mr Ilias Iosifidis.
By letter dated 25 August 2014, Zest again wrote to CSA at
14 Marianne Way, Doncaster concerning an ASIC invoice, the letter being marked to the attention of the bankrupt.[24] The following exchange took place between Mr Lapirow and the bankrupt in relation to that letter –
It’s quite clear when you look at that he’s continuing to write to you at a time when you knew that Crystal Stone was in business and which you say to the court you had nothing to do with?‑‑‑That’s correct.
And you didn’t correct the accountant’s understanding; isn’t that correct?‑‑‑That’s correct.[25]
[24] Exhibit 11, letter dated 25 August 2014 from Zest Accounting Group to Mr Ilias Iosifidis.
[25] Transcript of Proceedings, 11 December 2015, p.86 at lines 4-9.
The bankrupt gave remarkable evidence about the way he dealt with correspondence that went to 14 Marianne Way, Doncaster. He swore that when the mail arrived at that address, the bankrupt’s mother placed the mail on the dining room table. In respect of correspondence addressed to CSA, the bankrupt said he thought those letters had been sent to the wrong address so he put them aside. He said that over a seven-week period about seven letters to CSA were sent to the Doncaster address. The bankrupt said that he found that to be very odd but he did not open the letters. Yet he said he did not return any, preferring instead to write “return to sender” on the envelopes. He said he then gave those letters to his mother to take to the post office. However, he said she forgot to do so, so they “piled up”.[26] The bankrupt explained why he marked the envelopes “return to sender” in the following terms –
MR LAPIROW: You have given evidence today to say that you had altered an envelope so as to give notice to a person who had sent a letter that Crystal Stone was not properly address at the – at the Marianne Way address?‑‑‑That’s correct.
Yes. And the reason why you have done that is to give the impression that you had given notice to those notice that they may have the wrong address for you or for Crystal Stone?‑‑‑Yes.[27]
[26] Transcript of Proceedings, 11 December 2015, p.52 at line 10.
[27] Transcript of Proceedings, 11 December 2015, p.53 at lines 16-22.
The bankrupt swore in cross-examination that he was never a director of any company, including CSA.
I find the bankrupt’s explanation of his non-involvement in CSA to be utterly incredible. I do not believe it. I do not believe his evidence about his writing “return to sender” on envelopes nor of his requesting his mother to post those letters nor his evidence that she forgot to do so. If the matter had the slightest forensic significance the bankrupt’s mother ought to have been called to give that evidence. She was not called. Nor was her failure to give evidence explained. In those circumstances, I drew an inference adverse to the bankrupt to the effect that the bankrupt’s mother was not called because the evidence would not have assisted the bankrupt.[28]
[28] See O’Donnell v Reichard [1975] VR 916.
I also reject the bankrupt’s evidence that he had no involvement in or association with CSA. Aside from the ASIC record[29] showing the bankrupt as a director of CSA between precise dates, the evidence revealed that at least one other creditor of CSA dealt with CSA and sent its invoices to 14 Marianne Way, Doncaster. That was Makreo Pty Ltd. It sent three invoices to CSA at the address of the bankrupt’s mother, 14 Marianne Way, Doncaster.[30] In my view, it was no mere coincidence that those invoices, addressed to CSA, were sent to that particular address. In my view, the inescapable conclusion is that Makreo Pty Ltd sent those invoices to the bankrupt’s mother’s address because Makreo Pty Ltd had been instructed to do so by the bankrupt. The three invoices identified the bankrupt by name as CSA’s contact.
[29] Exhibit 6, ASIC Current & Historical Organisation Extract dated 20 October 2015.
[30] Exhibit 12, Tax Invoices dated 14 October 2013, 15 October 2013 and 31 October 2013 from Makreo Pty Ltd to Crystal Stone Australia Pty Ltd.
As factual findings, I reject the bankrupt’s evidence that he had no association with CSA. I find that he was a director of CSA at all times relevant to the dates when Hanson sold goods to CSA. I also find that the bankrupt gave Hanson the guarantee on which Hanson’s judgment debt was founded. I reject the bankrupt’s evidence that he knew nothing about the Hanson debt or that his identity was “stolen” in order for goods to be sold and delivered by Hanson to CSA.
Even if I were willing to accept the bankrupt’s evidence that he did not open correspondence addressed to CSA and that such correspondence accumulated on the dining room table in his mother’s home, such behaviour amounts to wilful blindness and a wholesale dereliction of his duties as a director of CSA. However, it does not mean that the bankrupt was not a director of CSA nor that, relevantly here, Hanson did not sell CSA goods the payment for which the bankrupt guaranteed.
This application for review
Pursuant to r.20.03 of the Rules, the hearing of the bankrupt’s application for review proceeded by way of a hearing de novo.
The court that conducts the hearing of the case hears the matter afresh and it does not exercise the functions of an appellate court addressing errors of law. As a result, I undertook the review in this proceeding as if the matter had come before me afresh. In the process I considered not only the evidence that was before the Registrar but the additional evidence in the many affidavits sworn by the bankrupt, his viva voce evidence and the evidence for which leave was granted to adduce.
Mr Devanny of counsel for the bankrupt referred me to additional authority that stipulated that in a de novo hearing under r.20.03 of the Rules, the Court is required to decide whether the requirements of ss.52(1) and 52(2)(a) of the Bankruptcy Act1966 (Cth) (“the Act”) were established and whether, under s.52(2)(b) of the Act there was other sufficient cause why a sequestration order ought not be made.
He cited the decisions of the Federal Court of Australia in Martin v Commonwealth Bank of Australia[31] and in Totev v Sfar.[32]
[31] (2001) 217 ALR 634.
[32] (2008) 167 FCR 193 at [14], [52] and [94].
In many respects that test corresponds with the assessment the court is required to undertake when addressing the elements of s.153B of the Act, especially whether the court is “satisfied that a sequestration order ought not to have been made”.[33]
[33] Bankruptcy Act 1966 (Cth), s.153B(1).
Mr Devanny submitted that a threshold issue related to the validity of Hanson’s judgment debt. He contended that if I went beyond Hanson’s judgment debt and concluded that the debt was not owing, then I would be satisfied that Hanson had no valid basis for having filed its creditor’s petition with the result that the creditor’s petition should have been dismissed. Mr Devanny submitted that in that eventuality, the Court would not need to consider the bankrupt’s solvency.
I do not agree that I was relieved of the obligation to consider the bankrupt’s solvency. Any consideration of being satisfied that a sequestration order ought not to have been made involved a consideration of the bankrupt’s solvency. That is for the simple reason that in determining whether a sequestration order ought not to be made, the court is entitled to consider not only the case as disclosed at the time the sequestration order was made, but also as would have been disclosed had all the true facts been before the court at the time of the making of the sequestration order. That much was held by the
Full Court of the Federal Court of Australia in Stankiewicz v Plata.[34]
[34] [2000] FCA 1185.
It therefore becomes necessary to next turn to financial matters.
Solvency
One of the most important factual arenas of dispute in this litigation was the bankrupt’s solvency. Not only was the evidence conflicting on the point, but the fact of the bankrupt’s solvency bore directly on the matters about which proof was required pursuant to s.153B of the Act. The bankrupt bore the burden of proving his solvency as was held in Alfio Peter Bulic v Commonwealth Bank of Australia Ltd[35] and in Nathan v Burness (No 2).[36]
[35] [2007] FCA 307.
[36] [2011] FCA 289.
In his affidavit sworn 16 September 2015, the bankrupt addressed his solvency. He swore that prior to the sequestration order he owned real estate, that is to say an apartment in the city of Melbourne, to which he attributed the value of $550,000.00. He said he owned one car valued at $3,500.00 and that he owned personal effects valued at $10,000.00. The total of those assets came to $563,500.00.
The bankrupt swore that he owed creditors $440,664.42.
On that arithmetic, the bankrupt was solvent in the sense that his assets exceeded his liabilities to the extent of $122,835.58.
The bankrupt swore in that affidavit that he -
a)earned $100,000.00 after-tax by way of annual salary;
b)derived rental income of $450.00 per week; and
c)owed modest sums, all of which (so he asserted) he was meeting as and when his debts fell due.
Based on the value of assets attributed to each by the bankrupt,
the most significant asset owned by the bankrupt was the apartment. The bankrupt said it was worth $550,000.00 on which the mortgage stood at $401,384.71.
The bankrupt did not rely on any expert valuation evidence to substantiate the value he had attributed to the value of the apartment. For that matter he did not adduce any evidence at all from any person qualified to address valuation matters.
The trustee, Mr White, told me that he arranged for a kerbside assessment of the bankrupt’s apartment. Mr White told me that the apartment’s likely value was between $400,000.00 and $420,000.00. Mr White also told me the mortgagee of the apartment claimed to be entitled to be owed $402,572.00. That sum was to be contrasted with the amount to which the bankrupt swore of $401,384.71. While the discrepancy between the two amounts said to be owed to the mortgagee was small, nevertheless the debt to the mortgagee accounted for the overwhelming majority of the value of the bankrupt’s asset base.
In other words, the bankrupt owned very little equity in the apartment, something up to a maximum amount of $20,000.00. The bankrupt’s debts eclipsed that equity to a staggering degree.
True, no sworn valuation was before me in relation to the value of the real estate owned by the bankrupt. However, I consider that on the balance of probabilities the sum attributed by Mr White to the bankrupt’s apartment was more likely to reflect a realistic sale price than was the price attributed to the apartment by the bankrupt. I say that for several reasons. First, and most importantly, the bankrupt had a vested interest in attributing a higher sum to the apartment because in so doing, self-evidently, the enhanced value itself improved the bankrupt’s state of assets and liabilities. Conversely, the trustee carried no such a vested interest.
Next, the bankrupt was keen for me to accept that he was solvent because a finding of his solvency bore directly upon the likely fate of his application for the review of the Registrar’s sequestration order and of his application to annul his bankruptcy. Conversely, the trustee had no interest in such an outcome. The trustee was an officer of the Court owing fiduciary obligations to various parties, being wholly
non-partisan in the discharge of the functions of his office. Last, it was incumbent upon the bankrupt to put before me reliable, cogent and accurate information about the true value of his assets rather than putting before me mere assertions about the value of his assets.
He failed to discharge his evidentiary obligations.
Instead, the bankrupt adduced evidence from John Amerigo Mollica (“Mr Mollica”), a tax accountant.[37] Mr Mollica swore that he had been retained by the bankrupt to review the bankrupt’s assets, liabilities and solvency. Mr Mollica concluded that the bankrupt was solvent and that the bankrupt was able to pay his debts as and when they fell due.
[37] Exhibit 18, affidavit of John Amerigo Mollica affirmed 25 November 2015.
Mr Mollica referred to the bankrupt’s apartment, how the bankrupt purchased it for $420,000.00 in late 2011 and how its estimated value was currently $550,000.00. Mr Mollica estimated the value of two motor vehicles owned by the bankrupt to total $30,000.00. Interestingly, the bankrupt swore to the value of one motor car only valued at $3,500.00 and not $5,000.00 as had Mr Mollica. So far as creditors were concerned, Mr Mollica swore that all banks, credit card financiers or creditors generally were the subject of deferred payment arrangements. The bankrupt said no such thing in his evidence. I was very suspicious of the reliability of the evidence of Mr Mollica.
His cross-examination demonstrated how unreliable his evidence was.
Mr Lapirow extracted an array of concessions from Mr Mollica, a few of which are set out below.
Mr Mollica said -
a)he was not aware that the trustee had attributed a value to the apartment of between $400,000.00 and $420,000.00;
b)he had no qualifications in valuing real estate;
c)if the true value of the real estate was as the trustee said, there would be no surplus of assets over liabilities;
d)the information that he recorded about debts the bankrupt owed to banks and credit card financiers was based on information supplied by the bankrupt without supporting documentation;
e)that the information he expressed in certain paragraphs of his affidavit was wrong if it was supplied by the bankrupt and the bankrupt’s own information was wrong;
f)the bankrupt did not tell him that he applied for a loan from one bank in particular by reason of the bankrupt’s straightened financial circumstances;
g)he did not verify the figures that he swore were accurate;
h)he based his valuation of the two motor vehicles on information about car sales from the Internet;
i)he made no investigation into orders the Family Court of Australia may have made that were binding upon him; and
j)he made no enquiries about creditors pursuing the bankrupt in relation to debts owed to CSA.
Importantly, Mr Mollica said that he understood that his role was to put figures into an affidavit so that he could tell this Court that the bankrupt was solvent.
I do not accept Mr Mollica’s evidence. He did no more than dress up the bankrupt’s figures as his own. He was a thoroughly unimpressive witness. I reject his evidence.
Doing the best I can to apply the evidence concerning assets and liabilities, one starts with Mr White’s figure for the likely value of the apartment, namely between $400,000.00 and $420,000.00. Leaning on the side of caution in a manner that favours the bankrupt, I have used the figure of $420,000.00 as the likely proper figure representing the value of the apartment. The debt owed to the mortgagee was $402,572.00. On that arithmetic alone, ignoring all other debts, the bankrupt’s solvency was no more than an amount slightly less than $17,500.00.
If one included debts owed by the bankrupt to banks and credit card financiers, the bankrupt was hopelessly insolvent whether on a
cash-flow basis or on a balance sheet basis.
Annulment or review
In this case, the bankrupt sought relief on an alternative basis – to review the registrar’s sequestration order or to annul the bankruptcy.
So far as the bankrupt was concerned, either course was acceptable to him as each provided the means to a result by which his bankruptcy ended. However, for the trustee, the difference was important. As was pointed out by the Full Court of the Federal Court of Australia in Pattison v Hadjimouratis[38] (“Hadjimouratis”) if an order is made setting aside the sequestration order upon the bankrupt successfully reviewing the decision of the Registrar, then the trustee has no entitlement under the Act to the costs and expenses incurred in the bankruptcy administration. Yet the harshness of that approach can be ameliorated as was done by the Full Court of the Federal Court of Australia in Flint v Richard Busuttil & Co Pty Ltd[39] where the Court set aside the sequestration order making consequential orders that the appellant and respondent pay some of the trustee’s costs.
[38] [2006] FCAFC 153 at [19].
[39] [2013] FCAFC 131 at [48] – [58].
The Full Court of the Federal Court of Australia held in Hadjimouratis that it is open to the Court to consider whether annulment is the preferable course or whether the review of the Registrar’s order is the preferable course. That statement appears to leave the decision at large as to proceeding as a review application or as an annulment application. With a view to providing some guidance to the determination of which course to adopt, the Court in Begetis v Temperzone Australia Pty Ltd[40] held that an order should be made upon the application to review if the review application was commenced within the prescribed time. Here, the application for review was not brought within the prescribed time. As result, it seems to me the better course for me to adopt is to address the bankrupt’s application in this case as an application for an annulment under s.153B of the Act.
That seems to accord with the position adopted by Mr Devanny at [47] of his written submissions.[41] There, he said that upon an application for the review of the Registrar’s decision, “the court may annul the bankruptcy under s 153B but only if the preconditions are satisfied…”[42] One of those preconditions to the annulment of the bankruptcy is that the sequestration order ought not to have been made.
[40] [2007] FMCA 498 at [32].
[41] Submissions on behalf of the Applicant filed 8 December 2015.
[42] Ibid.
The bankrupt’s first application – leave for an extension of time
No dispute existed that the bankrupt required leave for the hearing of an application for review as it was made beyond the 21 days prescribed by r.2.02(3) of the Bankruptcy Rules. The bankrupt sought to invoke s.104(2) of the Federal Circuit Court of Australia Act1999 (Cth) for an order extending the 21-day time limit. Hansen opposed the grant of such an order. Mr Devanny relied on the decision of Rangiah J of the Federal Court of Australia in Di Iorio v Wagener[43] as authority for the proposition that the matters to be taken into account in exercising the discretion in favour of making an order extending the time for the filing of the application for review of a Registrar’s decision included the length of the delay, the reason for the delay and whether any purpose would be served in granting the extension.
[43] [2015] FCA 524.
Strictly speaking, Rangiah J did not pronounce upon those three things. His Honour merely repeated the way a judge of this Court had proceeded by considering those three matters. As it happens,
for my own part those three matters accord with my own view of the issues to be addressed when considering an application for leave to take a step out of time or in considering an application for the extension of time to, say, apply as is done in this case.
The delay was modest, being one week. The explanation was
given in several paragraphs of the bankrupt’s affidavit sworn
16 September 2015 and included the following -
a)he did not know who was required to file an application for review within 21 days of the sequestration order being made;
b)
eight days prior to the expiration of the 21-day time limit,
the bankrupt’s solicitors sought the trustee’s consent and the consent of Hanson to set aside the judgment debt or consent to orders annulling the bankruptcy or setting aside the bankruptcy;
c)prior to the expiration of the 21-day period, he and Hanson exchanged correspondence debating the merits of the bankrupt’s assertions about the alleged identity fraud; and
d)no response was given by the time the 21-day period elapsed.
To my mind, that explanation adequately meets the threshold of an explanation for the delay. It speaks of activity and communication between the bankrupt, the trustee and Hanson. None of the authorities to which I was taken required the explanation to be compelling, indisputable or beyond argument. To my mind, the authorities show that there must be some explanation for the delay and, inferentially, that the explanation given is in fact credible. The bankrupt’s explanation, supported by documentation from the bankrupt’s legal representative, was credible. Accordingly, I am satisfied the bankrupt addressed the length of the delay and the reason for the delay.
He needed to satisfy the third matter, namely whether any purpose would be served in granting the extension.
Naturally, the purpose for that grant of the extension is the ventilation of the bankrupt’s case for the review or the annulment of his bankruptcy. I am satisfied that there was purpose in the grant of the audit extending time and I am prepared to make an order for the extension of time.
The bankrupt’s second application – whether to set aside the sequestration order or to annul the bankruptcy
In my judgment, the application for review of the Registrar’s sequestration order should be refused. I am also of the view that the application to annul the bankrupt’s bankruptcy should be dismissed.
First and foremost, the bankrupt contended that I should go behind Hanson’s judgment debt and upon doing so, make a determination as to whether the bankrupt “in truth and reality” was indebted to Hanson.[44]
[44] Submissions on behalf of the Applicant filed 8 December 2015 at [19].
Going behind the judgment debt
The weight of authority supports the proposition that a court exercising bankruptcy jurisdiction “has undoubted jurisdiction to go behind a judgment obtained by default”.[45] The cases in support of that concept can be traced to 1813 when Lord Eldon famously said in Ex parte Bryant,[46] “[p]roof upon a Judgment will not stand merely upon that,
if there is not a Debt due in Truth and Reality, for which the Consideration must be looked to”.[47] The majority in the High Court in Corney v Brien[48] catalogued the authorities, at least to 1951.[45] Corney v Brien (1951) 84 CLR 343 at 347.
[46] (1813) 35 ER 83.
[47] (1813) 35 ER 83 at 84.
[48] (1951) 84 CLR 343.
[50] [2012] FCA 1130.
The existence of a judgment debt is prima facie evidence of the existence of that debt, according to the Full Court of the Federal Court of Australia in Wolff v Donovan.[49]. If the court exercises its discretion to look behind the judgment, the court can no longer accept the judgment as proof of the debt and the court must go on to determine whether there is in truth and reality a debt due to the
petitioning creditor. So much was observed by Bromberg J in
Ali v Retail Decisions Pty Ltd[50](“Ali”). In support, Bromberg J relied on the decision of the High Court of Australia in Wren v Mahoney[51] (“Wren”). A closer examination of the reasons for judgment of
Barwick CJ in Wren reveals that Barwick CJ spoke of there being reason shown for questioning whether behind the relevant judgment there is in truth and reality a debt due to a petitioning creditor within s.52 of the Act and if so, the court must exercise its power to look at what is behind the judgment. In Ali, Bromberg J held that a two-stage process needs to be followed. As a first step, the court must consider whether it should go behind the judgment. That was consistent with the observations of Barwick CJ in Wren where Barwick CJ spoke of there being reason shown for questioning whether (to interpolate) a valid judgment exists. In Joosse v Deputy Commissioner of Taxation,[52]
the Court held that the question is whether there is a substantial reason for questioning whether there is a debt. The bankrupt bears that burden. If the court determines that enquiry in favour of the judgment debtor, the court then moves to the second stage by fully considering the facts to determine whether a debt exists.
[51] (1972) 126 CLR 212.
[52] (2004) 137 FCR 576 at [6].
[49] (1991) 29 FCR 480 at 486.
In my judgment, the bankrupt has not shown reason for questioning whether a valid judgment debt in favour of Hanson exists.
The only ‘evidence’ of the so-called identity fraud came from the bankrupt. As appears above, I did not believe his evidence on a range of issues. I do not believe the alleged identity fraud. I found utterly incredible his evidence about his having no association with CSA, that he did not execute the guarantee in favour of Hanson, his explanation of his mother “forgetting” to return to sender envelopes containing any document to do with CSA, his denials about the correspondence from Zest, his financial information and his version of events about Mr Dailakis “stealing” his identity. I simply do not believe them. Consequently, I am not persuaded that his version of events about identity fraud is true. To my mind, the bankrupt has not shown that reason exists to question the validity of Hanson’s judgment debt. Prima facie, the judgment debt is valid. In those circumstances, I am not satisfied that the bankrupt has met the first step of the two steps mentioned by Bromberg J in Ali. It therefore is unnecessary for me to address the second step mentioned in that case.
I disagree with Mr Devanny that circumstances have been shown to prove a plausible possibility of identity theft. In my view, the bankrupt’s recital of identity theft was very far from a plausible possibility. It was outrageously nonsensical and I reject it.
Annulment
Relief pursuant to s.153B of the Act is predicated upon the court being satisfied that a sequestration order ought not to have been made. In addressing that matter, the court is entitled to consider the case on the basis that all true facts were before the court that made the sequestration order, being not only facts as they were at the date of bankruptcy but as they may now be known as at that date but excluding any facts occurring since the date of the making of the sequestration order. So much was said in Re Raymond.[53] Other cases have made observations to like effect. Had the Registrar been fully apprised of the true state of the bankrupt’s solvency, of the frailty of his version of events concerning his assertions about the so-called identity theft and about the falsity of his denials about giving the guarantee in favour of Hanson, I am satisfied the Registrar would have done precisely as he did do in making the sequestration order.
[53] (1992) 36 FCR 424.
[54] [2014] FCA 805 at [73].
A sequestration order resulting in bankruptcy is a very serious matter but likewise, an order annulling a bankruptcy is an equally serious matter as it means that the sequestration order, the bankruptcy
and the heavy financial and legal constraints placed on a bankrupt should never have occurred. So much was said by Collier J in
Mulhern v Pearce (No 2).[54]I agree with respect.
There is no merit in the bankrupt’s application for an annulment.
Conclusion
For these reasons I make the orders referred to in paragraph 13 above.
I certify that the preceding eighty-eight (88) paragraphs are a true copy of the reasons for judgment of Judge Wilson
Associate:
Date: 29 April 2016
Exhibit 2, Certificate of convictions, acquittals and other judicial proceedings signed by
Jennifer Folliot, Registrar and dated 4 November 2015.
Exhibits 7 – 11, letters dated 11 September 2013, 24 September 2013, 27 September 2013,
16 July 2014 and 25 August 2014 from Zest Accounting Group to Mr Ilias Iosifidis.
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