James v Deputy Commissioner of Taxation
[2010] FMCA 106
•19 February 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| JAMES v DEPUTY COMMISSIONER OF TAXATION | [2010] FMCA 106 |
| BANKRUPTCY – Bankruptcy notice – overstatement of debt – what is required to comply with s. 41(5) Bankruptcy Act. BANKRUPTCY – Sequestration order – application to review Registrar’s decision – what constitutes ‘other sufficient cause’ pursuant to s.52(2)(b) Bankruptcy Act. BANKRUPTCY – Sequestration order – review of Registrar’s decision – whether applicant solvent at date sequestration order made. |
| Bankruptcy Act 1966, ss.5, 41, 52 Federal Magistrates Act1999, s.104 Federal Magistrates Court (Bankruptcy) Rules 2006, rr.2.03, 20.03 Civil Procedure Act2005 (NSW), s.101 |
| Allesch v Maunz (2000) 203 CLR 172 at 180 Re Brindle; ex parte FB & FA McMahon Pty Ltd (1992) 35 FCR 506 Nicholas v Hills (2004) 136 FCR 201 Shortall v Keily [2005] FCA 1930 Ex parte Dearle; Re Hastings (1884) 14 QBD 184 Adams v Lambert (2006) 228 CLR 409 Williams v R (1978) 140 CLR 591 Hussain v King Investment Solutions Pty Ltd [2006] FCA 905 Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 87 FCR 120 Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 Sandell v Porter (1966) 115 CLR 666 Re Lakatos; ex parte Lakatos v DCT (1996) 33 ATR 145 Re Touma; Saparas v Touma (2000) 171 ALR 275 Re Sarina; Ex parte Wollondilly Shire Council (1980) 48 FLR 372 Keenan v Deputy Commissioner of Taxation (1999) 42 ATR 101 Cain v Whyte (1933) 48 CLR 639 Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 McCallum v Commissioner of Taxation (1997) 75 FCR 458 |
| Applicant: | TREVOR ARNOLD JAMES |
| Respondent: | DEPUTY COMMISSIONER OF TAXATION |
| File Number: | BRG 111 of 2008 |
| Judgment of: | Wilson FM |
| Hearing dates: | 18, 19, 20 & 21 May 2009 |
| Date of Last Submission: | 16 June 2009 |
| Delivered at: | Brisbane |
| Delivered on: | 19 February 2010 |
REPRESENTATION
| Counsel for the Applicant: | Dr Hassall |
| Solicitors for the Applicant: | Mamdouh Elmaraazey Barrister & Solicitor |
| Counsel for the Respondent: | Mr Bickford |
| Solicitors for the Respondent: | Australian Government Solicitor |
ORDERS
The application for review of the decision of Registrar Baldwin made on 13 June 2008 is dismissed.
The applicant shall pay the respondent’s costs of and incidental to the application to be taxed, unless otherwise agreed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 111 of 2008
| TREVOR ARNOLD JAMES |
Applicant
And
| DEPUTY COMMISSIONER OF TAXATION |
Respondent
REASONS FOR JUDGMENT
On 13 June 2008 the applicant was made bankrupt on a sequestration order made by a Registrar. On 3 July 2008 the applicant sought a review of the Registrar’s decision, pursuant to s.104 Federal Magistrates Act1999, within the time prescribed by Rule 2.03(1) Federal Magistrates Court (Bankruptcy) Rules 2006.
The Further Amended Application for Review filed 8 August 2008 sets out, at great length, the grounds of review relied upon by the applicant. They can conveniently be grouped under five headings:
a)The Bankruptcy Notice relied on by the respondent was invalid;
b)In those circumstances, and with knowledge of the defects, it was improper for the respondent to present a Creditor’s Petition;
c)The applicant was able to pay his debts within the meaning of s.52(2)(a) Bankruptcy Act on 13 June 2008;
d)There was a genuine dispute as to the existence or quantum of the respondent’s debt, such as to constitute ‘other sufficient cause’ not to make a sequestration order, within the meaning of s.52(2)(b) Bankruptcy Act;
e)The court should go behind the judgment debt obtained by the respondent, and not be satisfied that the petitioning creditor’s debt was still owing: s.52(1)(c) Bankruptcy Act.
On 9 September 2008 this Court published reasons for its determination of the preliminary questions set out therein. I do not propose to repeat what was said in my earlier reasons. However, it is clear from paragraphs [47] – [51] of the earlier reasons that the fifth argument identified in the preceding paragraph is not open to the applicant.
The hearing of the application for review is conducted de novo: Federal Magistrates Court Rule 20.03. I am required to consider the matter afresh, regardless of whether or not there was error at first instance: Allesch v Maunz (2000) 203 CLR 172 at 180; Re Brindle; ex parte FB & FA McMahon Pty Ltd (1992) 35 FCR 506; Nicholas v Hills (2004) 136 FCR 201. In those circumstances, I will proceed to look at the issue of whether a sequestration order should have been made on 13 June 2008, in light of all of the evidence now before the court: Shortall v Keily [2005] FCA 1930.
I turn first to consider the arguments pertaining to the validity of the Bankruptcy Notice.
In Australian Bankruptcy Law & Practice (McQuade & Gronow) 6th ed at [44.1.05] the learned authors state that in order to maintain a bankruptcy petition there must be a good petitioning creditor’s debt, a good act of bankruptcy and a proper petitioning creditor: Ex parte Dearle; Re Hastings (1884) 14 QBD 184 at 190. In this case, the only act of bankruptcy relied on was the failure by the applicant to comply with a bankruptcy notice. The invalidity of the Bankruptcy Notice would therefore be a proper basis on which to dismiss the Creditor’s Petition.
On 11 October 2005, the respondent obtained default judgment against the applicant in the Supreme Court of New South Wales for $61,145.63, and $615.00 for costs, a total of $61,760.63. No application has been made to set that judgment aside.
The respondent claimed interest on the judgment debt pursuant to s.101 Civil Procedure Act 2005 (NSW). There was no argument that the wrong Act, or the wrong section number was stated in the Bankruptcy Notice (as in Adams v Lambert (2006) 228 CLR 409). Interest was calculated to 20 February 2007 (two days before the Bankruptcy Notice was issued) at $7,578.70. I have re-checked the calculations and they are correct. An argument initially advanced by the applicant, that the first period of interest had been incorrectly calculated using one too many days, was abandoned by the applicant’s counsel at the commencement of his oral submissions. Although the respondent’s officer Lisa Everingham accepted that there was a one cent error in the calculation of the interest on the judgment debt, I disagree. However, even if there were such an error, it would not make any difference to the conclusions that I reach so far as the validity of the Bankruptcy Notice is concerned.
If one then turns to the Schedule on the third page of the Bankruptcy Notice, the correct amounts appear in items 1, 2, 3 and 4. Unfortunately, although a credit is allowed at item 5 and the word “less” appears to the left of the number 5, the $0.02 has been added to the subtotal rather than subtracted. Therefore the amount stated to be owing is $69,339.35 whereas it should be $69,339.31; a difference of four cents.
The same, incorrect, figure is claimed on the first page of the Bankruptcy Notice.
There is, therefore, an overstatement of the amount owing so that the sum specified in the Bankruptcy Notice exceeds the amount in fact due. Counsel for the respondent submitted that an overstatement of four or five cents ought be ignored or excused, in accordance with the latin maxim de minimis non curat lex. That principle ordinarily applies to the law of contracts. It was applied, by Murphy J, in Williams v R (1978) 140 CLR 591, in the context of the amount of a drug found in the possession of the accused. The majority justices did not apply the maxim. Counsel for the respondent did not refer to any authority that the principle has been applied in bankruptcy. In the absence of there being a necessity to do so, I would prefer to decide this case on the basis that the maxim does not apply to Bankruptcy Notices, where the court has traditionally applied strict rules governing their validity.
In fact, the matter of overstatement of the debt in a bankruptcy notice has been often considered. It is now dealt with, at least in part, in the Act itself.
Section 41(5) Bankruptcy Act provides:
(5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.
Three issues arise for determination:
a)Did the applicant give notice to the respondent as required by s.41(5) of the Act;
b)If he did, what is the consequence of the giving of such notice; and
c)If he did not, is the Bankruptcy Notice otherwise susceptible to attack.
No written notice was given by the applicant to the respondent in terms of s.41(5). The applicant submits that a written notice is not required. I agree, although a prudent debtor would give a notice in writing to avoid any subsequent dispute as to what was said, as occurred in this case.
In Hussain v King Investment Solutions Pty Ltd [2006] FCA 905 at [19] – [20] Gyles J said:
“[19] Counsel for the creditor seeks to maintain the orders on other bases. The first is that a separate notice is required under s41(5). The application to set aside the bankruptcy notice was not such a notice. Counsel was not able to refer to any authority which establishes that proposition. It was suggested that assistance may be gained from a passage from the judgment in Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 87 FCR 120 as follows (at [37]):
The object of a debtor’s notice under s41(5) is to inform the creditor that the debtor disputes the bankruptcy notice and does so on the ground of a misstatement contained in that notice. The point of the notice is to draw to the creditor’s attention the misstatement, thereby giving the creditor the opportunity to consider, for example, whether the bankruptcy notice should be withdrawn and a fresh notice, correcting the misstatement, issued. If the creditor is given no hint in the notice as to the nature of the misstatement, there is a considerable risk that the debtor will be able to take unmeritorious advantage of minor errors (such as the small mistake in the present case) and that unnecessary and wasteful litigation will eventuate. It is no answer to say that the creditor can ask for particulars, since the debtor would not be obliged to given any until after litigation had been instituted. Indeed, a debtor wishing to take advantage of the technicalities of the law of bankruptcy might be well-advised to say as little as possible for as long as possible about the true nature of the alleged misstatement in the bankruptcy notice.
The notice in that case was a separate letter.
[20] Subsection 41(5) is silent as to the method of giving notice. I can see no reason why it cannot be done by service of an application to set aside a bankruptcy notice in an appropriate form. It was faintly argued that this application was not in a form to give the necessary notice. I do not agree. Furthermore, it seems to me that the passage relied upon from Seovic Civil Engineering Pty Ltd v Groeneveld is neutral as to the point which arises here. As the application was served within the time allowed for payment, the subsection is satisfied. Failure to expressly advert to s41(5) is not of any significance. It is true that ‘notice’ and ‘application’ are different words and that each is used in different parts of the Act. However, the two are not mutually exclusive. The section requires the giving of notice, not serving of a notice in any particular form.”
Admittedly, in that case there was a written document sought to be relied upon, however, his Honour’s reasoning would not preclude an oral notice, provided it otherwise complied with s.41(5) of the Act.
In Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 87 FCR 120, the Full Federal Court considered what was required for a notice to comply with s.41(5) of the Act. The Court did not consider whether an oral notice was sufficient. At [32] – [33] their Honours stated:
“32 The notice the debtor is required to five, in order to challenge the validity of the bankruptcy notice by reason of an over-statement of the amount due, must do two things:
· First, it must give notice to the creditor that the debtor disputes the validity of the notice; and
· Secondly, it must give notice to the creditor that the debtor does so on the ground of “the misstatement”.
Clearly enough, the expression “the misstatement”, as used in s41(5), is a reference to the amount claimed in the bankruptcy notice being incorrect by reason of it exceeding the amount in fact due by the debtor to the creditor.
33 It follows from the language of s41(5) of the Bankruptcy Act that a debtor does not comply with s41(5) simply by asserting in the notice to the creditors that the bankruptcy notice is invalid. The debtor’s notice must at least give notice that the validity of the bankruptcy notice is disputed “on the found of the misstatement”. What, then, is meant by the concluding words of s41(5)?”
At [36], [37] and [38] their Honours said:
“36 While it is not strictly necessary for us to decide, we think that the better view is that a notice by the debtor which simply asserts, without more, that the amount specified in the bankruptcy notice exceeds the amount actually due, does not comply with the requirements of s41(5) of the Bankruptcy Act. The expressions “the misstatement” strongly suggests that the de3btor must do more than merely assert that there is a misstatement in the bankruptcy notice. The subsection requires the debtor to provide sufficient information in the notice to enable the creditor to identify what is said to be the alleged misstatement. Only then does the debtor’s notice displace the general rule established by s41(5), that the bankruptcy notice is not invalidated only by reason that the sum specified therein as the amount due to the creditor exceeds the amount in fact due.
37 This construction of s41(5) of the Bankruptcy Act is supported by policy considerations. The object of a debtor’s notice under s41(5) is to inform the creditor that the debtor disputes the bankruptcy notice and does so on the ground of a misstatement contained in that notice. The point of the notice is to draw to the creditor’s attention the misstatement, thereby fiving the creditor the opportunity to consider, for example, whether the bankruptcy notice should be withdrawn and a fresh notice, correcting the misstatement, issued. If the creditor is given no hint in the notice as to the nature of the misstatement, there is a considerable risk that the debtor will be able to take unmeritorious advantage of minor errors (such as the small mistake in the present case) and that unnecessary and wasteful litigation will eventuate. It is no answer to say that the creditor can ask for particulars, since the debtor would not be obliged to give any until after litigation had been instituted. Indeed, a debtor wishing to take advantage of the technicalities of the law of bankruptcy might be well-advised to say as little as possible for as long as possible about the true nature of the alleged misstatement in the bankruptcy notice.
38 This view of s41(5) of the Bankruptcy Act does not mean that a debtor, who is quite likely to be unrepresented, must identify the misstatement with complete precision or specify the exact amount of the alleged excess of the claim. To borrow the language of Lockhart J in Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 at 142, the Court should adopt a “benevolent construction” of the debtor’s notice. …”
Because the effect of the giving of a complying notice is that the Bankruptcy Notice is invalid (as to which see Groeneveld at [49 – 51]; Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 at 339-40 per Gibbs CJ) in my view the misstatement relied upon by the debtor must be specified in the s.41(5) notice. The statute requires that the debtor must give notice that he disputes the validity of the notice “on the ground of the misstatement”. It is difficult to conceive of how such a notice could be given without specifying what the misstatement is alleged to be. It is not good enough to merely assert that the amount claimed is incorrect without saying why.
In this case, the applicant relies on a conversation that he had with John Crabtree, an officer of the respondent, on the day the Bankruptcy Notice was served (12 September 2007) or the day after. His account of the conversation is at paragraph 10 of his affidavit filed 12 August 2008:
“10. On or about the 12th or 13th of September 2007 1 telephoned Mr John Crabtree of the ATO Albury branch and a conversation to the following effect took place;
1 said: “Hello. John is it.”
He said: “Yes. It is John Crabtree.”
I said: “John. It is Trevor James.”
He said: “Oh. A blast from the past.”
I said: “John, I received a bankruptcy notice, why did you do that?”
He said: “Because we had to.”
I said: “I do not understand that. When firstly there is an accountant that the ATO has been in constant contact with and I dispute the amount the ATO is claiming in the bankruptcy notice because it is incorrect and totally wrong.”
He said: “Well. You have to tell the Commissioner that.”
I said: “I need to do the amendments for the 96-97 years for the business. They have never been done and the ATO has not taken that into account along with the necessary amendments that need to be done for the year that were lodged.”
I went on with words to the effect that I bitterly complained of the action the ATO has taken when negotiation could have taken place between the accountant, myself and the ATO by way of coming to the negotiating table.
He said: “perhaps you should seek some legal advice.”
In his affidavit, Mr Crabtree denies that he had a conversation with the applicant on 12 or 13 September 2007. Mr Crabtree kept contemporaneous notes of his conversations with the applicant. The applicant concedes he kept no notes of any of his conversations of officers of the respondent.
In my view, it is not necessary to resolve this contest between witnesses, because even if the applicant’s version is accepted, there was no notice given that would comply with s.41(5). The applicant disputed that he owed any money to the respondent. He did not point to any errors in the Bankruptcy Notice. In my view, the use of the words “incorrect and totally wrong” was of insufficient particularity to satisfy the applicant’s obligation under s.41(5) of the Act.
In those circumstances, I conclude that the Bankruptcy Notice in this case is not invalid by reason only of the overstatement of the amount due
The applicant argues that the Bankruptcy Notice is otherwise misleading and confusing on its face. I disagree. There is conformity between the, admittedly overstated, figures on the first and third pages of the Notice. The manner is which interest has been claimed, and calculated, is apparent from the face of the document. In my view, there is no doubt what the applicant was required to do to comply with the Notice.
I turn to the second argument advanced by the applicant. This argument depends on a finding that the Bankruptcy Notice was invalid. Because I do not accept that proposition, the second argument must fail.
Nevertheless, in the interests of completeness I shall deal with the merits of the argument.
It is accepted by the respondent’s officers who were called to give evidence that it was known to the respondent that the applicant disputed that he owed the respondent any money. In those circumstances, it is argued that it was improper for the respondent to cause a Bankruptcy Notice to be issued and served on the applicant, and subsequently relied upon to obtain a sequestration order.
It was also argued by the applicant’s counsel that it was improper for the respondent to proceed to seek a sequestration order when it was aware of the errors in the Bankruptcy Notice. Ms Everingham, an officer of the respondent, gave evidence that she was aware of the errors on the face of the Bankruptcy Notice and in fact took advice about the appropriate course of action to take. Because I have concluded that the Bankruptcy Notice was not invalid, it was not improper for the respondent to proceed to seek a sequestration order relying upon the act of bankruptcy, namely that the applicant had failed to comply with the Bankruptcy Notice.
There was nothing improper in the respondent seeking to recover unpaid tax from the applicant. Indeed, as was submitted by counsel for the respondent, there is a statutory obligation on the respondent to recover unpaid tax. The respondent commenced proceedings against the applicant in the Supreme Court of New South Wales on 9 August 2004. The Statement of Claim was served on the applicant on 24 August 2004. No defence was ever filed. On 11 October 2005 default judgment was entered against the applicant. The respondent waited almost two years before serving a Bankruptcy Notice on 12 September 2007. Further time passed until the sequestration order was sought, on 13 June 2008. The respondent was not required to wait indefinitely for the applicant to seek amendment of his taxation returns or to object to notices of assessment that had been issued. As will be pointed out in due course, the applicant now needs an indulgence to be able to object to some of the assessments that have been made. In my view nothing improper in the way that the respondent has acted has been demonstrated. Conversely, the respondent has been extremely patient with the applicant.
Although the further amended application for review could, in one respect, be read as alleging an abuse of process by the respondent and its officers against the applicant, I think that in fairness, having regard to the way in which the case was conducted, the applicant was not alleging personal animus by particular officers of the respondent against him. Reference was made to some heated conversations and to statements made by officers of the respondent to the effect that no further amendments would be allowed to the applicant’s returns. However the applicant certainly has not proved, to the requisite standard, having regard to the seriousness of the allegations made, that there was anything untoward in the conduct of the respondent’s officers.
I turn to consider the applicant’s third argument, which is that he was solvent as at 13 June 2008. It is well established that a debtor who is in a position to pay all the debts he owes within a reasonable time ought not to be the subject of a sequestration order. Further the debtor does not have to have sufficient cash at hand to pay all creditors in full immediately, if he has realizable assets: Sandell v Porter (1966) 115 CLR 666.
In Sandell v Porter, supra, at 670-1, Barwick CJ said:
“Insolvency is expressed in s.95 as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply form evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor’s assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.”
There has been an amendment to the wording of s.52(2)(a) to remove the words “as they fall due”, but in my view, the test articulated by Barwick CJ remains apposite. This is supported by the definition of ‘solvency’ in s.5(1) of the Act.
As was said in Re Lakatos; ex parte Lakatos v DCT (1996) 33 ATR 145 the onus to establish solvency and also that the discretion should be exercised in the favour of the debtor, is one placed on the debtor: See also Re Touma; Saparas v Touma (2000) 171 ALR 275 at [11]. A debtor who is able to pay, but unwilling to do so, ought not usually be made the subject of bankruptcy: Re Sarina; Ex parte Wollondilly Shire Council (1980) 48 FLR 372.
One matter that needs to be determined at the outset is whether, in considering whether a debtor has discharged the onus under s.52(2)(a) of the Act, the debtor has to accept the creditor’s debt at face value. That is, does the debtor have to satisfy the Court that he can pay all of his debts, including the creditor’s claimed debt, before discharging the onus cast upon him. The alternative argument would be that in assessing the debtor’s liabilities, the Court is required to form a judgment as to the viability of the creditor’s debt (and perhaps other debts) and include what is concluded to be the real debt in the balance to determine whether the debtor is solvent or not. That, in practical terms, brings into a consideration of the solvency issue the issue of whether there is a genuine dispute as to a debt owing, which is ordinarily considered under s.52(2)(b) of the Act.
In my view, the former construction should be accepted. The two enquiries should be kept separate. If the creditor’s debt is susceptible to a bona fide challenge, that can be considered under s.52(2)(b) of the Act. The Court may conclude that although the debtor is insolvent because the full value of the disputed debt is included in the assessment of solvency, nevertheless there is other sufficient cause not to sequestrate the debtor because of the dispute as to the petitioning creditor’s debt, which, if resolved in the debtor’s favour would tip him from insolvency into solvency.
In the present case, at the date the sequestration order was made, the respondent’s debt had increased to $177,282.09. A proof of debt, lodged by the respondent on 7 July 2008 shows that this amount was owing as at the date the sequestration order was made. Because of the conclusiveness of the respondent’s notices of assessment (s.177 Income Tax Assessment Act 1936). The debt should be taken into account at its full value.
There was some debate, in counsel’s submissions, as to whether a cash flow or balance sheet methodology should be used for assessing the applicant’s ability to pay his debts. In Keenan v Deputy Commissioner of Taxation (1999) 42 ATR 101 at [5] Kiefel J said:
“The test of solvency is that a person is able to show that they are able to meet their debts as they fall due from their own monies, but this is not limited to their own cash resources immediately available and extends to what can be procured and realised by sale: Sandell v Porter (1966) 115 CLR 666 at 670. It is not, however, sufficient in that regard simply to point to an excess of assets over liabilities.”
As Barwick CJ made clear in Sandell v Porter if assets must be realised to meet debts, those assets must be capable of being realised within a reasonable time. The words used by his Honour were that assets should be able to be realised “within a relatively short time”.
In this case there was a dispute between the expert valuers called by each party as to the value of real property owned by the applicant. It is strictly unnecessary to resolve that dispute because both valuers agreed that the market for property at Dalton, where the applicant’s property is situated, is ‘thinly traded’, which means that few sales take place, and a property can take a considerable period of time to sell. Mr Besele, the applicant’s valuer, accepted that the average selling period in the area where the applicant’s property is situated was six to eight months (T35/23). The debt owed to the respondent is due and payable immediately. The respondent has not agreed to defer repayment of the monies owed to it.
However, what is a reasonable time for the applicant to realise assets sufficient to meet debts depends upon all of the circumstances of the case. It may be that the respondent has waited so long to date to recover the outstanding tax debt that a further six to eight months could be seen, in context, to be repayment within a reasonable time. I will return to that issue after determining the applicant’s ability to repay the debt at all.
As at the date the sequestration order was made the applicant owned the property at Dalton, to which I will refer, and had $13,167.93 in a bank account. The applicant owned two motor vehicles, a 1995 Ford sedan, the mid point value of which was $2,250.00 and a 2004 Ford utility the mid point value of which was $12,500.00, although the applicant owed approximately $8,000.00 on a loan to Ford Credit relating to this vehicle. The applicant has household contents but no evidence was adduced as to their value, other than an assertion by the applicant. The applicant also was the licensee of crown land in respect of which he held a stock raising permit. There is no evidence before the court that enables the applicant’s rights under this licence to be valued.
There was also a mortgage secured against the applicant’s property to Westpac Banking Corporation. At the date of the hearing the monies owed under this loan were $396,342.41. There was no direct evidence as to the amount owed to the bank at 13 June 2008.
The applicant’s only source of income were payments of insurance benefits under a total and permanent disability policy with Tower Insurance. I accept that the applicant was able to meet his daily living expenses from his nett income. The applicant’s nett income was in the order of $41,335.04 per annum according to the Trustee’s report to creditors. Of course, the applicant could not meet the outstanding tax liability from his income from time to time. To demonstrate solvency, therefore, the applicant has to demonstrate not only a sufficient surplus of assets over liabilities, but also that such assets can be realised within a reasonable time.
As I have said, the applicant called evidence from Mr Ronil Besele, a qualified valuer. Mr Besele ascribed a value of $640,000.00 to the applicant’s property.
The applicant owns four adjoining lots. The zoning of the applicant’s land is such that the lots can be sold separately. Lot 120, upon which is constructed the applicant’s home, has an area of 8169sqm. Mr Besele valued that lot at $340,000.00.
Lot 125 has an area of 8558sqm. According to Mr Besele it has electricity connected to it. Lot 122 has an area of 8120sqm, and according to Mr Besele also has electricity connected to it. Lot 126 has an area of 7828sqm and also has electricity connected to it.
Mr Besele valued each of the three vacant allotments at $100,000.00.
The principal ground of dispute between the valuers was whether the applicant’s properties could be sold separately so as to achieve the highest value, or whether they would have to be sold together in one line.
As it happens, Mr Besele conducted a valuation for the mortgagee of the applicant’s property on the day before the sequestration order was made. Mr Besele then valued the properties on the basis that they would be sold by a mortgagee in one line, and ascribed a value to the four lots of $480,000.00.
Mr Colin Davies, the expert valuer called by the respondent opined that the value of the four lots, sold together, was $415,000.00. Mr Davies assessed the value of lot 120 at $320,000.00, which is not markedly different to the value determined by Mr Besele. However Mr Davies valued the remaining three lots at a combined value of $96,000.00.
Each valuer had difficulty in obtaining comparative sales for the subject properties. This was because, as I have said, the market for properties in the area was thinly traded. I accept Mr Besele’s evidence that properties at Gunning form part of the same market as Dalton and properties there can be used for comparative sale purposes.
Under cross examination Mr Besele accepted that a number of the comparative sales used by him were not properly comparable to the subject land. At T33/42 Mr Besele accepted that the property at 80 Offley’s Lane Dalton was very different to the subject land. At T35/8 Mr Besele accepted that the property at Cook Street Gundaroo was not comparable to the subject property.
Mr Besele agreed at T37/23 with the obvious proposition that if the applicant needed to sell his property quickly that would affect the price that he could expect to obtain. Mr Besele accepted that his valuation of $640,000.00 was given on the assumption that there was no time limit to the sale. The higher valuation was based on the premise that the properties could stay on the market for a long as necessary to achieve the desired price. Mr Besele was aware that the applicant had attempted to sell his property between 2002 and 2005, without success, and that the property had been passed in at auction.
Mr Besele also accepted that since the year 2000 only four of the twenty three sales in the Dalton area have been for vacant land. Therefore, if the applicant were to put three vacant lots of land onto the market at the same time, as he would probably be compelled to do, he would be seeking to sell almost as much as has been sold in the previous decade.
It was common ground between the valuers that, to enable a dwelling to be constructed, the three vacant allotments would require an extension of the water mains to be carried out. Each would require the installation of a septic tank. Further work would be required to extend the existing electricity line to the vacant lots. It was accepted that each of the vacant lots could have a dwelling constructed on them, but Mr Davies made the point that there were a number of cost ramifications to a person constructing a dwelling on the property. In addition to the need to pay for a connection of water and electricity, which he estimated at $17,000.00 - $20,000.00 per allotment, there was also the requirement to carry out a soil analysis to determine the most appropriate type of waste treatment equipment to use.
Mr Davies referred to the sale of a parcel of vacant land at Lot 146 The Loop Road Dalton, sold in October 2007 for $92,000.00. This land, although not of the same zoning as the subject land, is of comparable size (at 9889 sqm) and is in fact situated across a road from the subject land. It provides the most useful comparative sale.
I have some difficulty with the approach taken by Mr Davies at paragraphs 11.1 and 11.2 of his report. There is, as I have said, not a great deal of difference between Mr Davies’ composite valuation of Lot 120 and Mr Besele’s valuation. However Mr Davies values the land only at Lot 120 at $100,000.00. He values each of the remaining parcels of land at a combined total of $96,464.00. Mr Davies does not explain why the three vacant lots, which are of comparable size to lot 120 are worth so much less. The mere fact that water and electricity are not connected to the allotments would not, of itself, justify such a variation in value. It is apparent however that Mr Davies has applied a discount of 50% to the value of the three vacant lots to “reflect time to sell and a risk factor”. In my view, this is inappropriate. It would be more appropriate, in my view, to assess the value of each lot in accordance with proper principles, and then to qualify that opinion by observing that such value would most probably only be obtained after a lengthy marketing and sales period. If one removes the 50% discount, Mr Davies’ valuation of the three vacant lots is $192,928.00. This compares to Mr Besele’s valuation of a combined value of $300,000.00. A substantial part of the difference between the two values is likely because Mr Besele has not taken into account the cost to a prospective purchaser of connecting services, and obtaining the requisite council approval and the depressing effect that would have on the sale price. Mr Besele said that a person willing to buy a property in the area of the subject land would be aware that they would be expected to pay for such charges, but did not seek to quantify them.
I accept that, if time were not an issue, the greatest amount could be achieved by selling the four lots separately.
However, where the applicant is required to realise the property expeditiously, to meet debts that are due and owing, he does not have the luxury of allowing the properties to remain on the market indefinitely. There is also a further complication. It is certainly the case that if all four properties were on the market, the applicant could choose to sell some but not all of them in order to meet debts. However, the secured mortgage is over all four lots. There was no evidence from the mortgagee that it would allow one or more of the four properties to be sold separately and not retain all of the proceeds until its mortgage debt was discharged. That potential difficulty has not been considered by the applicant.
Practically, therefore, the applicant will have to sell all of the lots to pay both the outstanding mortgage debt and pay monies to the respondent. The evidence of both valuers is that the market is slow. In those circumstances if all four lots were being sold at the same time, I cannot accept that the applicant would achieve $640,000.00 for their sale. Rather, I accept that the amount properly realisable falls between Mr Besele’s valuation conducted on 12 June 2008 of $480,000.00, and Mr Davies’ valuation, without the 50% discount, of $512,928.00.
Therefore, as at the date the sequestration order was made the applicant’s assets were:
Real property
$480,000.00
$512,928.00
Cash at bank
$ 13,167.93
$ 13,167.93
1995 Ford motor vehicle
$ 2,250.00
$ 2,250.00
2004 Ford motor vehicle (nett of encumbrance)
$ 4,500.00
$ 4,500.00
TOTALS
$499,917.93
$532,845.93
The respondent’s debt is $177,282.09. If this sum is deducted from the above range the applicant is left with $322,635.84 - $355,563.84.
On sale of the real property, the applicant would have had to discharge the mortgage to the Westpac Banking Corporation. Figures were available as to the amount owing under that mortgage at the date of the Trustee’s report to creditors and at the date of final hearing, but no evidence was available as to the amount owing at the date the sequestration order was made. Counsel for the applicant in his written submissions advanced the figure of $330,000.00. For the sake of argument I am prepared to accept that figure. If the applicant was required to repay a mortgage debt of that magnitude, as well as the costs of selling his properties, it can be seen that, at best, a very small surplus would be achieved.
In those circumstances, I do not accept that the applicant has discharged the onus of demonstrating to the court that he was, at the date the sequestration order was made, able to pay his debts.
My conclusion is reinforced when the issue of the time in which it would take the applicant to realise his assets is factored in. Although the respondent has been uncharacteristically patient with the applicant in seeking to recover the monies owed to it, I do not think that a time frame of a further six to twelve months to realise assets is reasonable. That is particularly so where there have been previous unsuccessful attempts to sell the property, and no evidence that the properties were currently on the market for sale.
I conclude therefore, that the applicant’s third argument fails.
I turn then to consider the applicant’s argument that there is a genuine dispute as to his indebtedness to the respondent such that the applicant discharges the onus of showing “other sufficient cause” for not making a sequestration order.
It is accepted that those words are of wide meaning. At paragraph 29 of his written submissions counsel for the respondent has helpfully extracted a passage from Cain v Whyte (1933) 48 CLR 639 at 645-6:
“… I do not agree with the argument put forward by Mr Graham that the words “other significant cause” should be limited to the one case where the Court is satisfied that the petition is put forward solely for some collateral illegitimate end, and not for the purpose of securing the equal distribution of the available assets amongst the creditors. To my mind, the High Court of Australia did not intend to put a limit on the meaning of the words “other sufficient cause” in Dowling v Colonial Mutual Life Assurance Society (1915) 20 CLR 509 … I can well conceive that “other sufficient cause” might arise in connection with any particular case. To my mind, it is the duty of the Bankruptcy judge to examine in each case, if the question is raised, whether there is other sufficient cause then the fact that the debtor is able to pay his debts in full, for refusing to make an order.”
The fundamental difficulty confronting the applicant in this case is that there is presently no objection to the assessments made by the respondent on foot, no application for amendment of any of his taxation returns, nor any other formal process by which he disputes, in a legal sense, the debt owed by him to the respondent. It is certainly correct that the applicant has, over a long period of time, maintained to various officers of the respondent that he does not owe the tax assessed. In my view something more is required to constitute a genuine dispute as to indebtedness sufficient to amount to ‘other sufficient cause’.
In Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 the Full Federal Court considered the circumstances in which the court should adjourn the hearing of a petition so that an unresolved dispute as to the underlying debt can be finalised. At page 148 the court recognised that the fact that the tax is still payable notwithstanding a challenge to an assessment (currently s.14ZZM and 14ZZR of the Taxation Administration Act 1953) is a relevant matter to be taken into account in the exercise of the court’s discretion. The court thought that the relevant test to apply in deciding whether to adjourn the petition was whether the applicant had a “reasonably arguable case” in support of his opposition to the taxation assessments.
The applicant adduced evidence from Mr Ray King, an accountant, as to the deductibility of certain expenses incurred by the applicant, and the effect that would have on the proper assessments of his taxation liabilities over a number of years. This court cannot, as I have previously determined, decide the merits of any challenge to the notices of assessment issued by the respondent. That is appropriately done by proceeding pursuant to Part IVC Taxation Administration Act 1953. That process has not yet been commenced by the applicant.
As I understand it, the applicant did not declare as assessable income the payments received by him from his disability insurer. That led to assessments of tax, and interest charges being made thereon. So much is not controversial. What the applicant then alleges is that he was entitled to deduct expenses in respect of two businesses conducted by him. The first was a fashion business known as “Lauren Bijou”. The second was a cattle breeding business.
Each of the applicant’s tax returns has been assessed as lodged, in accordance with the self-assessment regime currently adopted by the respondent. Where the applicant has requested an amendment to his returns those amendments have been allowed. There is currently no outstanding claim by the applicant against the respondent. In those circumstances it is difficult to see how there is any “dispute” between the parties that would amount to other sufficient cause pursuant to s.52(2)(b) of the Act.
I accept the respondent’s submission that in the absence of a challenge to the assessments of tax that have been made by the respondent the applicant cannot demonstrate any genuine dispute, and therefore cannot point to any other sufficient cause within the meaning of the Act. I accept the submission made by counsel for the respondent that, on the facts of the present case, a dispute would not arise until the applicant took some step allowed under Part IVC Taxation Administration Act.
In case an alternative view is taken of that conclusion I will deal further with the ground as argued. Mr King believed that the applicant was conducting the Lauren Bijou business as a sole trader. He was not told that the applicant had sought, and obtained, amendments to his 1995 and 1996 returns. He was not told that in a letter written by his then accountant, but signed by the applicant, dated 30 September 2004 the applicant had stated to the respondent that the business was transferred to his then wife in April 1996. At T183 to T184 counsel for the respondent put to Mr King certain evidence that demonstrated that the applicant was arguably not carrying on the Lauren Bijou business in the financial years following 1996. Mr King accepted that he had not seen nor been told any of that information before. Having been appraised of the information Mr King was asked whether he would still be of the opinion that the applicant had any residual entitlement to claim losses with respect to the Lauren Bijou business, other than losses that have already been claimed. Mr King answered:
“Well, without checking the numbers here as to whether they’re accurate or not or whether there are additional things that we can claim but beyond that point, no.”
The applicant himself gave evidence that although the business was registered in his name his wife ran the business. It was necessary for the applicant to give this evidence because he was at the time claiming benefits from Tower Insurance. The applicant was the lessee of the premises from which the business was conducted. He assisted in the running of the business by purchasing items and doing the banking and the like. He provided capital for the business.
The applicant has not demonstrated a reasonable arguable case that he is entitled to any further deductions for losses incurred in respect of the business Lauren Bijou.
In his 2005/06 return the applicant claimed losses for the cattle trading business allegedly conducted by him. He claims that he is entitled to claim further losses. It is not necessary, nor is it appropriate, for me to conclude whether the applicant’s argument is a good one. I am prepared to accept, notwithstanding the persuasive evidence of Ms Redknapp called on behalf of the respondent, that there is an arguable case that further deductions should be allowed in respect of the cattle trading business.
The applicant confronts two additional problems in this regard in demonstrating that the potential reduction in his taxation liability is sufficient to amount to “other sufficient cause” within the meaning of s.52(2)(b) of the Act. First, he has not lodged any returns for the 2007 or 2008 financial years, and therefore there is no dispute as to the amount of tax payable by him for those periods. It may be that when those returns are lodged, they will be assessed in accordance with what the applicant claims.
Secondly, Mr King in his report, assuming that all of the information given to him by the applicant is accurate and correct (as to which there is considerable doubt) says that the applicant would still have an outstanding tax liability to the respondent in an amount exceeding $30,000.00. The judgment debt obtained by the respondent was in respect of the financial years ending 30 June 1998 – 2000. Even if the applicant were entitled to deduct losses incurred in the cattle trading business, that would not affect his indebtedness under the assessments for those earlier years because the losses could not be backdated see s.80 Income Tax Assessment Act. The fact that there may be deductions in the financial years 2006, 2007 and 2008 does not affect the applicant’s indebtedness for earlier years. The applicant has not demonstrated that he has any grounds to challenge the assessments that led to the default judgment, and consequently to the issue of the Bankruptcy Notice and Creditor’s Petition.
Given my findings as to solvency, if the applicant was left with a taxation debt of the magnitude assessed by Mr King he would still not be able to pay it.
I conclude therefore that the applicant’s fourth argument fails.
As the language of s.52(2) of the Act makes clear whether or not to make a sequestration order is discretionary even if the applicant demonstrates one of the two matters therein set out.
Notwithstanding the applicant’s limited education, lack of skills and disability, his conduct of his taxation affairs leaves a lot to be desired. Only so much can be blamed on the applicant’s former accountant. Court proceedings were commenced in 2004. The applicant was not made bankrupt until 13 June 2008. During the whole of that period although the applicant submitted, by his then accountant Mr Bannon, amended returns to take into account losses incurred in the Lauren Bijou business, no further steps were taken by the applicant to regularise his taxation affairs. The applicant applied for relief from his taxation debts on 4 May 2007. He offered to settle his taxation debts. The applicant has left it very late to seek the exercise of the court’s discretion in his favour.
I would be disinclined to exercise any discretion favourably to the applicant. The applicant cannot now personally request amendments to his already lodged tax returns, nor object to any assessments previously issued by the respondent. The applicant’s trustee in bankruptcy would be required to undertake such steps: McCallum v Commissioner of Taxation (1997) 75 FCR 458. The applicant has made no written request of his trustee to lodge amended returns, nor to lodge objections, and nor has he provided the trustee with all of the information that was provided to Mr King.
Further, and significantly, the applicant would now be out of time to request amendments to some of his returns and to object to some of the assessments made. Counsel for the respondent has helpfully set out in a supplementary submission the relevant provisions of the taxation legislation and the time limits that apply. I accept that the applicant would now be out of time to request amendment of the assessment issued for the years ended 30 June 1997, 1998 and 1999. Although it is open to the applicant to seek and enlargement of time, having regard to the history of this matter it must be accepted that he will encounter some difficulty in that regard.
In my view the sequestration order ought not be disturbed.
That makes it unnecessary for me to consider the interesting argument raised pertaining to s.52(4) of the Act. It will remain for another day to consider whether the review procedure of Registrar’s orders effectively suspends time running on a Creditor’s Petition as it did when there were appeals to a Federal Court judge. The fact that the hearing of an application to review a Registrar’s decision is made de novo, and the sequestration order would be set aside ab initio, provides the potential ground for distinguishing the earlier authorities as to the operation of s.52(4). Thankfully, I do not have to resolve that conundrum in the present case.
I certify that the preceding ninety (90) paragraphs are a true copy of the reasons for judgment of Wilson FM
Associate: Lynnette Chin
Date: 19 February 2010
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