Johnston v Aravanis
[2013] FMCA 156
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| JOHNSTON v ARAVANIS | [2013] FMCA 156 |
| BANKRUPTCY – Application to annul bankruptcy – whether debtors petition ought to have been presented – factors in exercise of discretion. |
| Bankruptcy Act 1966 (Cth), ss.55, 58(1), 116(1), 153B, 267(2) Income Tax Assessment Act 1936 (Cth), ss.208, 222 |
| Cottrell v Wilcox [2002] FCA 1115 Drake v Jones [2009] FMCA 298 Duyker v Official Trustee in Bankruptcy Qld & Anor [2003] FMCA 463 Foreman v Vince [2006] FMCA 128 Hawthorne v Carter (Trustee), in the matter of Hawthorne (Bankrupt) [2006] FCA 1097 Insurance Manufacturers of Australia Pty Ltd v Sherriff [2000] FCA 1505 In the matter of Almassy [1999] FCA 1004 Oberlechner v Commonwealth Securities Ltd [2003] FMCA 511 Official Trustee: In the matter of the Estate of Smith [1999] FCA 1755 Ozer v Australian Liquor Marketers Pty Ltd [2001] FCA 40 Ozer v Australian Liquor Marketers Pty Ltd [2001] FCA 1197 Plant v Ken Smith Electronics Pty Ltd [2000] FMCA 7 Provan v Peake [2003] FMCA 31 Re Coyle & Anor (1993) 42 FCR 72 |
| McQuade & Gronow (Eds) McDonald, Henry and Meek Australian Bankruptcy Law & Practice (6th Edn) |
| Applicant: | JASON STUART JOHNSTON |
| Respondent: | ANDREW ARAVANIS |
| File Number: | PEG 195 of 2012 |
| Judgment of: | Lucev FM |
| Hearing date: | 22 February 2013 |
| Date of Last Submission: | 22 February 2013 |
| Delivered at: | Perth |
| Delivered on: | 8 March 2013 |
REPRESENTATION
| For the Applicant: | In person |
| Counsel for the Respondent: | Mr C Donoghue |
| Solicitors for the Respondent: | Donoghue Legal |
ORDERS
The applicant’s application filed 20 August 2012 for annulment of his bankruptcy be dismissed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
PEG 195 of 2012
| JASON STUART JOHNSTON |
Applicant
And
| ANDREW ARAVANIS |
Respondent
REASONS FOR JUDGMENT
Application
This application filed on 20 August 2012 seeks an order from the Court annulling the applicant’s bankruptcy under s.153B of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”), on the basis that the debtors petition ought not to have been presented.
Applicant’s case
The applicant relied upon various affidavits filed during the course of the proceedings. They were the applicant’s affidavit sworn on 20 August 2012, two affidavits sworn on 21 August 2012, and an affidavit sworn on 11 September 2012.
The affidavit of 20 August 2012 annexes a personal budget which purports to show an excess of income over expenditure of $2015 per month.
The first 21 August 2012 affidavit asserts that the applicant’s bankruptcy trustee is taking action regarding a property situated at 10 Mitchell Street in Kellerberrin (“Mitchell Street property”). The applicant asserts that the Mitchell Street property is fully maintained by his estranged wife and that he had had no dealings with the property since March 2010. The applicant asserts that his “monetary funds are limited” and that “the burden of court action has impacted significantly on these funds.” The first 21 August 2012 affidavit was sworn in support of an urgent application for an interim order suspending the applicant’s obligations under his bankruptcy.
The second 21 August 2012 affidavit appears to be an affidavit of service of documents in relation to the application.
The 11 September 2012 affidavit asserts that the Points of Claim, which are set out below, are true and correct. The affidavit also asserts that the contents of annexures A, B and C, which are summarised immediately below, are also true and correct.
Annexure A asserts that the applicant has a joint mortgage with his former wife on the Mitchell Street property, but that since March 2010 he has not made any contributions towards insurance, maintenance, repairs or repayments on the loan, and that his former wife has fully maintained the property by herself.
Annexure B is a single page from a document, in which the respondent trustee is responding to assertions made by the applicant to ITSA. A summary of the complete content of the document and the respondent trustee’s response are set out at paragraph 39 below.
Annexure B commences by discussing the nature of information seemingly provided to the applicant. It is noted that an email was sent (presumably to the applicant) in which it was stated that once the recipient has had an opportunity to review all the information provided the recipient should call the sender so that they may “may discuss further”. It is further noted that:
Ms Peterson provided Mr Johnston [the applicant] with information about bankruptcy as well as the procedure to become bankrupt if that was the course that he chose. At no time did she advise him that he had no choice other than to become bankrupt.
In Annexure B the applicant also complains that he was:
a)not initially told for whom Ms Peterson worked, and did not realise that she worked for Aravanis Insolvency. The response to this is that on 3 May 2012, when the applicant first spoke to Ms Peterson, she sent him an email clearly identifying that she was a consultant to Aravanis Insolvency, and that Aravanis Insolvency was a division of Fox Symes & Associates (“Fox Symes”);
b)told that his liability contributions in bankruptcy would be $7500-$8000 per annum. The response indicates that the estimated calculation of the level of contributions was based on two payslips provided by the applicant. There is an acknowledgement that an error was made initially because of the applicant’s child support payment, but it is said that this issue was subsequently rectified when the relevant amount was calculated; and
c)given misleading information, and that had he been given correct information he would not have declared himself bankrupt. The response to this is not to assert that the only matter in which an error was made was in the calculation of the estimated income contributions, but to note that the applicant was given the opportunity to correct any inaccurate information via email dated 18 June 2012. There is also an assertion that the applicant made allegations about incorrect information provided to him about his interest in a property (presumably the Mitchell Street property) jointly owned with his ex-wife. The response to this allegation does not appear as the single page of annexure B then ends.
Annexure C is a monthly personal budget signed on 11 September 2012 by the applicant which appears to again show an excess of income over expenditure of $2015 per month. It does not appear to be any different to the monthly personal budget annexed to the 20 August 2012 affidavit, save for the date on which it was completed.
The Points of Claim provide as follows:
1. The Applicant required debt consultation in relation to his financial affairs.
2. The applicant engaged the services of the Respondent in May 2012 for the debt consultation.
3. The Respondent advised bankruptcy was the only option.
4. The Respondent advised the Applicant of his rights and obligations in respect of being bankrupt.
5. The Applicant did not fully understand all requirements of being bankrupt and sought further advice from the Respondent regarding concerns in relation to the contributions required under the bankruptcy and assets not in the Applicants control.
6. The Respondent advised contributions to the bankruptcy would be approximately $7500 – $8000 per annum.
7. The Respondent advised the property of 10 Mitchell Street Kellerberrin WA 6410 would not be affected by the bankruptcy unless the property was sold.
8. The Applicant provided the Respondent a statement, in relation to the Applicant's involvement of 10 Mitchell Street Kellerberrin WA 6410, as advised by the Respondent, as per Annexure "A" of the affidavit.
9. The Respondent filled out the Debtors Petition jointly with the Applicant.
10. The Respondent made an error in the contribution amount required under the bankruptcy, as per Annexure "B" section (iii) of the affidavit.
11. The Applicant provided two pay advice slips and a statement from Child Support Agency in order for the Respondent to calculate contributions.
12. The Respondent did not advise the Applicant, prior to the Respondent filing the debtor's petition with ITSA, that the advised contribution amount was incorrect.
13. The Respondent has made demands for rental income from the co-owner of 10 Mitchell Street Kellerberrin WA 6410.
14. The Applicant was not given prior opportunity to review the correct contribution amount before the Debtors Petition was lodged with ITSA.
15. The Applicant was not advised rental income would be sought from the co-owner of 10 Mitchell Street Kellerberrin WA 6410.
16. The Applicant is solvent as per annexure "C" of the affidavit.
17. The Applicants unsecured creditors are disadvantaged by the bankruptcy WA 763/12/5.
The affidavit and annexures referred to in the Points of Claim are the 11 September 2012 affidavit and annexures.
The applicant also filed points in response, but they add nothing material save for an explanation that he did not include an unsecured creditor in this statement of affairs because he was told not to at his initial consultation with Fox Symes.
Respondent’s case
The respondent trustee does not oppose the application for annulment, acknowledging that it is a matter for the Court to decide if the debtors petition ought not to have been presented. The respondent trustee does, however, put before the Court material in relation to events both before and after bankruptcy, and in relation to a complaint to ITSA by the applicant, both to:
a)assist the Court in making its decision; and
b)defend allegations made by the applicant that the respondent trustee acted improperly in relation to the bankruptcy.
The respondent trustee relies upon the affidavit of David Bernard Isaac Gorney sworn on 9 October 2012. Mr Gorney has the care and conduct of the administration of the applicant’s bankrupt estate on a day-to-day basis on behalf of the respondent trustee. There was no objection to his affidavit which is set out below so far as it is relevant.
On 3 May 2012 Ms Peterson sent the applicant an email annexing an “indexed amounts” document from ITSA which included, amongst other things, the base threshold income amount and actual threshold income amounts used when calculating a bankrupt’s income contributions, including variations as to the number of dependents. Also attached was:
a)a detailed 28 page document prepared by ITSA entitled “Personal Insolvency Information for Debtors”;
b)information, also prepared by ITSA, in relation to the essential forms with respect to bankruptcy;
c)a blank debtors petition with prescribed information annexed; and
d)a blank statement of affairs.
The Personal Insolvency Information for Debtors document contains a detailed 10 page explanation of voluntary bankruptcy. It warns that the “consequences of bankruptcy are serious” It:
a)notes that a bankruptcy trustee may sell assets and recover property;
b)explains the requirement to pay one half of the amount by which after-tax income exceeds the prescribed threshold amount as a compulsory income contribution ;
c)sets out how compulsory income contributions are calculated and income is assessed;
d)advises the notice of assessment of compulsory income contributions will be sent by the bankruptcy trustee;
e)explains what occurs if the bankrupt’s circumstances change and explains that there are provisions for hardship variations in relation to compulsory income contributions; and
f)notes that if a bankrupt thinks that they should not have been made bankrupt or should not have lodged a debtors petition, they may apply to a court to have their bankruptcy annulled, but that this is a matter about which they should obtain their own legal advice.
Ms Peterson’s 3 May 2012 email also advises the applicant that the Aravanis Insolvency website explains all insolvency options in more detail. It is relevant to note that the 3 May 2012 email indicates that Aravanis Insolvency is a division of Fox Symes.
On 17 May 2012 Ms Peterson sent the applicant a three-page, detailed personal questionnaire, including a request for information as to all outstanding debts and balances including home loans.
Ms Peterson and the applicant met on 24 May 2012 and Ms Peterson’s notes set out anticipated realisations based on the applicant’s gross and net income, child support and the excess over the threshold amount, so that the fortnightly compulsory income contributions appear as $307.05. There are detailed notes in relation to the Mitchell Street property and a note that the applicant does not intend to protect that property, and that the home loan balance exceeds the current valuation by $54,000, but that the applicant’s ex-wife wants to hold on to the Mitchell Street property. The notes indicate that Ms Peterson “explained” to the applicant that he would not be liable for any shortfall if the property is sold in the bankruptcy, but that if it is sold at a profit the profit would vest in his bankrupt estate. The note also indicated that the applicant:
a)was told that “[h]is only requirement under bankruptcy will be income contributions”; and
b)was previously bankrupt in 1997.
On 18 June 2012 the applicant was forwarded a debtors petition for signature, together with a statement of affairs, and asked to review and advise of any changes required. The debtors petition, prior to the signature box, has an acknowledgement in the following terms:
I acknowledge that I have received and read the prescribed information overleaf.
The prescribed information attached to the debtors petition clearly indicates that:
a)assets including the debtors house can be sold by the trustee; and
b)if the applicant’s income exceeds a set limit, being an indexable amount which increases periodically, that the debtor may be required to make compulsory income contributions.
The applicant signed the debtors petition, including the acknowledgement set out above, on 18 June 2012. He also completed the statement of affairs. That statement of affairs indicates that the applicant believes the main cause of his insolvency to be unemployment or loss of income and ill health or absence of health insurance, neither of which is further explained, save for the fact that it was in February 2012 that the applicant first had difficulty in paying his debts. It is not indicated how long it is that the applicant has been in his current employment, but it is indicated that over the last 12 months he earned in excess of $109,000, and in the next 12 months expected to earn $120,000, in his current employment. The statement of affairs reveals limited assets. Cash at hand, money in bank and equity in a current year motor vehicle amount to less than $2,000. As indicated above the Mitchell Street property has a negative equity, showing that it was purchased for $100,000 in 2004, has an estimated resale value of $150,000, but $203,000 is owed to creditors who hold security over the property. The Mitchell Street property is said to be rented for a gross rent of $150 per week, and is said to be co-owned by the applicant’s former wife. The statement of affairs also indicates a liability with respect to the purchase of a caravan on which some $24,600 was owed and a motor vehicle on which $49,000 was owed. Further unsecured creditors of $44,815 are listed by way of overdrawn savings, personal loans and credit cards. Reference is also made to an excavation business, which ceased in January 2007, run by the applicant as a sole trader, but in respect of which no assets or liabilities are set out. At hearing the applicant indicated that the business had ceased all activity sometime in 2006. The applicant signed the statement of affairs immediately under a note indicating that s.267(2) of the Bankruptcy Act provides that a person must not sign a declaration that the person knows to be false upon penalty of imprisonment, and a declaration that the particulars set out in it are correct.
On 29 June 2012 an officer of Aravanis Insolvency emailed the applicant seeking further information in relation to his bankrupt affairs and advising that she was the case officer dealing with his bankruptcy.
On 2 July 2012 the respondent trustee wrote to the applicant’s ex-wife and advised that the applicant had disclosed his 50% interest in the Mitchell Street property in his statement of affairs, and further advised that the applicant’s interest in the property vested in the respondent trustee pursuant to ss.58(1) and 116(1) of the Bankruptcy Act. The respondent trustee requested confirmation of the amount of rent being collected for the property and requested that the applicant’s ex-wife deposit 50% of future rental proceeds into a nominated bank account.
On 2 July 2012 the respondent trustee wrote to the applicant advising of his compulsory income contribution assessment, and advising that it had been assessed in the sum of $12,853.93 for the period 27 June 2012 to 26 June 2013, and that the applicant was liable to pay fortnightly instalments of $535.58 commencing on 17 July 2012 and payable fortnightly thereafter for 24 fortnights. The assessment was worked out taking into account the applicant’s total taxable income of $120,000 per year, less Medicare levy paid or payable and child support or maintenance to give an assessed income of $73,400.96. The difference between the assessed income and the assessed income threshold amount of $47,693.10, divided by two (in accordance with the relevant formula) gave a compulsory income contribution liability of $12,853.93, or $535.58 fortnightly contributions over 24 payment periods. The applicant has not made any compulsory income contributions since being made bankrupt.
On 4 July 2012 the applicant emailed his case officer and asked “if it is too late to cancel this bankruptcy?”. The applicant’s case officer replied that it was too late, because the petition had been accepted by the Official Receiver and that the applicant was now bankrupt. The case officer advised that the applicant may be able to seek an annulment of the bankruptcy, but would need to seek legal advice in that respect, and that she was not able to advise him. On 5 July 2012 the applicant responded to indicate that some of the information he was given by Fox Symes was incorrect and that his “personal situation has changed … and I can afford all my debts” and that he would see how to go about an annulment. A little later the applicant emailed his case officer again asking her to let him know how he could get an annulment. The case officer responded that:
a)the applicant would have to put forward a lump sum of money to creditors to give them a certain return on their debt;
b)once the applicant knew how much he could afford to give then the respondent trustee could work out the dividend rate, approximately, and make an offer to the applicant’s major creditors;
c)the respondent trustee required a $5,000 non-refundable deposit to cover the costs of the work involved in an annulment, including writing a report and holding a meeting of creditors; and
d)an annulment of that type would require the position to be more favourable to the creditors than if the bankruptcy were to continue, that is, that the creditors would have to receive a better return,
and requested that the applicant advise if he wished to proceed with the annulment, and to let the respondent trustee know how much money was being put forward including the $5,000 deposit. Shortly thereafter the applicant advised the case officer that he could only afford to continue paying his debts as per the credit agreements and that he did not have the $5,000 deposit to give to the trustee. The applicant then said “Looks like the bankruptcy will have to go ahead unfortunately.”
The respondent trustee prepared a report to creditors on 5 July 2012. The notes to that report largely reflect the information set out above from the applicant’s statement of affairs. That report indicated that a resolution with respect to the respondent trustee’s remuneration would be put forward, and that a second detailed report to creditors would be circulated upon the completion of initial investigations.
On 10 July 2012 the applicant emailed Ms Peterson indicating that he had received information from the respondent trustee and that:
… Unfortunately it turns out the amount I have to pay in contributions is a lot more than what you worked out it to be. The amount is about $100 per month less than what the monthly amount of the bills were. My tax return has been seized, which would have been more than enough to bring the bills up to date and continue paying my bills on time. It would appear that I am actually worse off now being bankrupt.
I don’t know if there is any way this can be stopped?
Ms Peterson requested that the applicant complete a budget to allow the respondent trustee to review the matter on the grounds of hardship.
The applicant subsequently completed a personal budget dated 15 July 2012 which showed an excess of expenses over income of $611 per month.
The hardship application also disclosed an unsecured creditor owed $48,000 who was being repaid at $650 per month by the applicant, which the applicant had failed to disclose in his statement of affairs. The respondent trustee queried the non-inclusion of this unsecured creditor in the statement of affairs, and the applicant advised the respondent trustee that this unsecured creditor was someone who had taken out a loan in their own name to enable the applicant to use the money, namely the sum of $48,000, and that the applicant was having to pay the money back to that unsecured creditor. The applicant said nothing about having been told not to include the unsecured creditor by Fox Symes, or by anyone else.
On 23 July 2012 the case officer spoke to the applicant’s ex-wife about the Mitchell Street property. The case officer was advised that the property was empty and rent was not being collected. The applicant’s ex-wife was also advised that the applicant may have an interest in the property as he contributed to the deposit and half the mortgage from 2004 to 2010.
On 23 July 2012 the applicant advised his case officer that he had been off work since 3 July 2012 and it was yet to be confirmed if he would be returning to work as scheduled on 7 August 2012. On 24 July 2012 the applicant advised that he was still not sure if he was returning to work but that due to “stress” he “may be tendering … [his] resignation in the next few days.”
On 23 July 2012 the applicant also emailed his case officer saying that he had received a message from his ex-wife saying that the respondent trustee required his ex-wife to deposit half the rental income from the Mitchell Street property into an account nominated by the respondent trustee, and requested that the case officer tell him what was going on. The applicant said that he “… was advised the house would not come into this because it is way over-mortgaged.” The case officer clarified the purpose of contacting the applicant’s ex-wife, and the applicant finally responded as follows:
I was told nothing would happen with the house unless it was sold. I have had nothing to do with that house for well over 2 years.
I will be speaking with ITSA today regarding all the false information I was provided prior to going bankrupt.
On 30 July 2012 the Deputy Commissioner of Taxation wrote to the respondent trustee advising that there was presently no claim in the administration of the applicant’s bankrupt estate, but that there may be a claim when the income tax returns in a partnership, namely JS Johnston & RL Johnston, for the financial years ending 30 June 2006 to 30 June 2012 and the Activity Statements for the various quarters within those years were lodged and issued.
On 2 August 2012 the respondent trustee wrote to the applicant advising that the applicant should not deal with the Mitchell Street property in a manner which would diminish its value, but also advising that the respondent trustee would be prepared to transfer his interest in the property for $5,000 plus legal costs of $1650. A letter was also sent to the applicant’s ex-wife with respect to the Mitchell Street property, making the same offer with respect to purchasing the respondent trustee’s interest in the property, and also requesting that if any rent was to be collected in relation to the property that 50% of that rent be paid into a nominated account.
On 6 August 2012 the respondent trustee was advised of a complaint by the applicant in relation to the respondent trustee’s conduct. In essence the complaints appeared to be:
a)that the applicant was:
i)advised that he had no choice but to go bankrupt;
ii)not initially told for whom Ms Peterson worked, and did not realise she worked for Aravanis Insolvency;
iii)told that his liability contributions would be $7,500 - $8,000; and
iv)given misleading information;
b)that the case officer had not responded on some occasions in relation to the incorrect information the applicant had been given; and
c)that the respondent trustee’s declaration of independence, relevant relationships and indemnities was not accurate in this case.
For relevant purposes, it suffices to observe that:
a)Ms Peterson denied that she had advised the applicant that he had no choice other than to become bankrupt, and said that significant information was supplied to him in relation to bankruptcy and the available options, as set out above;
b)the signature block for Aravanis Insolvency showed that Ms Peterson was a consultant of Aravanis Insolvency, and that Aravanis Insolvency was a division of Fox Symes;
c)with respect to the estimated level of the compulsory income contributions these were based on two payslips provided by the bankrupt, and the contribution figure was ultimately higher because an error was made with respect to the bankrupt’s child support payment and because the tax figure was lower, and both issues were rectified when the final amount was calculated; and
d)the only matter in respect of which an error was made was the calculation of the estimated compulsory income contributions, and that no misleading information was provided in relation to the Mitchell Street property, and the respondent trustee sets out, at some length, the course of the correspondence set out above.
For present purposes the alleged failure of the case officer to respond and the alleged inaccuracies in the declaration of independence are not relevant. The applicant was advised by ITSA that it accepted that his complaint with respect to the error made in the estimate with respect to his child support payment, and, therefore, the compulsory income contributions, was justified, but indicated that:
As bankruptcy traditionally is meant to be a last resort, the fact that you were given an inaccurate estimate for income contributions, whilst irritating shouldn’t have been a deciding factor in your decision to lodge a debtors petition.
On 29 August 2012 the applicant responded to the respondent trustee’s response to his complaints. The applicant:
a)stood by his claim that he had been told he had no choice but to go bankrupt;
b)said that because of the format in which he received his email (by Iphone) the email address just showed the person’s name and not the full address, but that he did not scroll through the whole email;
c)said that the error with respect to the compulsory income contributions was important as the amount of his credit obligations is only about $200 a month different to the amount of the compulsory income contributions, and that he would not have gone bankrupt for $200 a month, and that he was not advised of the error prior to the debtors petition being submitted; and
d)said that he was advised that Mitchell Street property “would not be touched” and that that was “very important to me prior to going bankrupt” because he wanted to be assured that “going bankrupt was not going to affect my ex-wife and consequently my children.”
The applicant also asserted that given the fees to possibly be obtained by Aravanis Insolvency from the administration of the applicant’s bankrupt estate that the advice that they gave was not necessarily independent, although it was not charged for.
On 13 September 2012 ITSA advised the applicant that his original complaint was partly justified in respect of the compulsory income contributions estimate, but that that should not have been a determinative factor in his decision to lodge a debtors petition, as bankruptcy was meant to be a last resort.
The respondent trustee notes that the applicant seeks to establish that he was not insolvent at the time of presentation of the debtors petition (26 June 2012) by showing an uncommitted income surplus of $2015 per month in the form of budgets dated 20 August 2012 and 11 September 2012. The respondent trustee notes that these contrast to the budget that the applicant prepared for the respondent trustee on 15 July 2012 as part of his hardship application in regard to his contribution assessment payments, which budget showed an uncommitted income deficit of $611. Further, the respondent trustee was able to ascertain from the budget dated 15 July 2012 that the applicant was making payments of $650 per month to an unsecured creditor owed approximately $48,000, a matter which was not disclosed in the applicant’s statement of affairs. Also, the Australian Taxation Office advised the respondent trustee that there may be a claim in relation to income tax returns for the applicant as a partner in a partnership for the years ended 30 June 2006 to 30 June 2012 and activity statements for the coffers from October to December 2006 to April to June 2012, when they are lodged and issued. Income tax due and payable is a debt due to the Commonwealth, and additional tax, by way of penalty, may be imposed upon a taxpayer who has failed to furnish a return: see Income Tax Assessment Act 1936 (Cth), ss.208 and 222.
In relation to the applicant’s claim that he did not fully understand all of the requirements of becoming a bankrupt, and that he sought further advice in regard to the compulsory income contributions required and assets not in his control, the respondent trustee notes that:
a)in In the matter of Almassy [1999] FCA 1004 (“Almassy”) the debtor said she did not realise the extent of statutory and other fees imposed on bankrupt estates, however the Federal Court held it not to be a good enough reason to annul the bankruptcy;
b)the intended purpose of s.55 of the Bankruptcy Act is to permit a person who is in a difficult or hopeless financial position to obtain relief from the pressure of creditors and be given a fresh financial start by becoming a bankrupt upon a debtors petition;
c)consideration of the amount of the compulsory income contributions to be made once bankrupt, and how the bankrupt’s assets that have been vested in the respondent trustee will be dealt with by the respondent trustee, did not go directly to the financial position of a person at the time of presenting the debtors petition. In that regard, the respondent trustee argues that the applicant’s case goes generally to the conduct of the respondent trustee, but not to the ground as required at the time of bankruptcy to establish that the debtors petition ought not to have been presented.
The respondent trustee notes that in Re Coyle & Anor (1993) 42 FCR 72 at 77 per Drummond J (“Re Coyle”) the Federal Court said as follows:
It will in my view generally not be possible for a debtor to establish that his bankruptcy should be annulled on the ground that the "petition ought not to have been presented" when it is clear that at that time he was insolvent. ….Where an insolvent debtor presents his own petition, s 55 is being used for its intended purpose: it cannot be said, in such circumstances, that the petition ought not to have been presented. If a debtor is insolvent at the time he presents his own petition it cannot, in my view, be said that the petition ought nevertheless not to have been presented because the debtor then had a hope or even a reasonable expectation that his fortunes would improve either in the near future or in the long term.
See also Almassy at para.21 per Mansfield J.
Consideration
Legislation
Section 153B of the Bankruptcy Act provides, so far as is relevant, as follows:
(1) If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.
(2) In the case of a debtor's petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented.
….
It is also relevant to note that s.55 of the Bankruptcy Act provides as follows:
(1) Subject to this section, a debtor may present to the Official Receiver a petition against himself or herself.
(2) A petition presented by a debtor under this section:
(a) shall be in accordance with the approved form; and
(b) shall be accompanied by a statement of the debtor's affairs and a copy of that statement.
…
(3A) Before accepting a debtor's petition the Official Receiver must give the debtor the information prescribed by the regulations.
…
(4) The Official Receiver must accept a debtor's petition, unless the Official Receiver rejects it under this section or is directed by the Court to reject it.
(4A) Where the Official Receiver accepts a petition presented under this section:
(a) he or she shall endorse the petition accordingly; and
(b) upon the Official Receiver endorsing the petition, the debtor who presented the petition becomes a bankrupt by force of this section and by virtue of presentation of the petition.
…
(8) A person who becomes a bankrupt by force of this section continues to be a bankrupt until:
(a) he or she is discharged by force of subsection 149(1); or
(b) his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B.
Factors for consideration
Relevant factors to be considered on an application of this type are set out in McQuade & Gronow (Eds) McDonald, Henry and Meek Australian Bankruptcy Law & Practice (6th Edn) (“Australian Bankruptcy Law & Practice”) at para.153B.0.07 as follows:
1.An application for an annulment of a bankruptcy founded on the making of a sequestration order or alternatively a bankruptcy founded on the presentation of a debtor’s petition involves the court being satisfied that:
(a)the sequestration order ought not to have been made or the debtor’s petition ought not to have been presented or accepted by the Official Receiver; and
(b)in the exercise of the court’s discretion the bankruptcy ought to be annulled: Re Deriu (1970) 16 FLR 420; Heinrich v Commonwealth Bank of Australia [2003] FCAFC 315 at [20] (Carr, Finn and Sundberg JJ).
2.The discretionary consideration is an important factor and is often overlooked by applicants. Despite an applicant demonstrating that the sequestration order ought not to have been made or the debtor’s petition ought not to have been presented or accepted the discretionary factors may result in the application being refused. For example it will be difficult for a bankrupt to obtain an annulment where it is not shown that he or she is solvent. The discretionary factors may require the applicant undertaking to pay the petitioning creditor’s debt and costs and the remuneration and costs of the trustee.
3.Conditions may be imposed on the making of an order for an annulment Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589; 58 ALJR 398; 55 ALR 143 (Gibbs CJ, Murphy, Brennan, Deane and Dawson JJ).
4.Full and frank disclosure is required to be made by a bankrupt on the application. It is incumbent on the applicant to place before the court all relevant material with respect to the applicant’s financial affairs so the court may be properly informed and make a judgment that is based on all the facts and circumstances. A failure to provide proper disclosure may result in the application being refused. The failure to make appropriate disclosure may result in the court concluding that an applicant bankrupt has not satisfied the burden placed upon them under s 153B: Re Papps; Ex parte Tapp (1997) 78 FCR 524 (O’Loughlin J); Cheung v Maxims Entertainment Pty Ltd [2002] FMCA 348 (Raphael FM); Lockhart v Deputy Commissioner of Taxation (2005) 59 ATR 540; [2005] FMCA 641 at [12] (McInnis FM); Khan v Kerr [2007] FMCA 512 at [122]; Bulic v Commonwealth Bank of Australia Ltd (2007) 5 ABC(NS) 122; [2007] FCA 307 at [12] (Tracey J); Drake v Jones [2009] FMCA 298 at [100]; Nathan v Burness (No 2) [2011] FCA 289 at [10] (Tracey J).
In Official Trustee: In the matter of the Estate of Smith [1999] FCA 1755 at para.15 per Heerey J the Federal Court said that s.153B of the Bankruptcy Act did not mean that the debtors petition “ought not to have been presented” because, examined retrospectively, the debtor might have been given better advice or other options might have been pursued.
In Drake v Jones [2009] FMCA 298 at para.44 Barnes FM said as follows:
... where an insolvent debtor presents his or her own petition, a hope or reasonable expectation that his or her fortunes may or would improve in the future (as discussed in Re Coyle (1993) 42 FCR 72; 120 ALR 527) or the fact that with better advice other options might have been pursued instead of bankruptcy, including legal action (as considered in Re Official Trustee; In the matter of the Estate of Smith (1999) FCA 1755), is not such as to establish that the petition ought not to have been presented.
The conduct of the bankrupt in completing a statement of affairs is a relevant factor: Insurance Manufacturers of Australia Pty Ltd v Sherriff [2000] FCA 1505 (“Insurance Manufacturers”), including the omission of relevant matters from the bankrupt’s statement of affairs: Ozer v Australian Liquor Marketers Pty Ltd [2001] FCA 40, and on appeal Ozer v Australian Liquor Marketers Pty Ltd [2001] FCA 1197.
A debtor’s insolvency weighs heavily against the exercise of the discretion to annul: Hawthorne v Carter (Trustee), in the matter of Hawthorne (Bankrupt) [2006] FCA 1097 at para.9 per Mansfield J; Duyker v Official Trustee in Bankruptcy Qld & Anor [2003] FMCA 463 at para.16 per Baumann FM. Consideration must also be given to the effect that an annulment would have on any relation-back period where the debtor has other outstanding debts which would remain owing upon an annulment of bankruptcy: Cottrell v Wilcox [2002] FCA 1115; Plant v Ken Smith Electronics Pty Ltd [2000] FMCA 7. The time that has elapsed between the bringing of the annulment application and the making of the debtors petition is also a relevant factor to consider when considering whether or not to exercise the discretion to annul a bankruptcy: Insurance Manufacturers; Provan v Peake [2003] FMCA 31 at para.23 per Phipps FM; Foreman v Vince [2006] FMCA 128 at para.13 per Connolly FM.
The Court may also have regard to the public interest in an orderly administration of a debtor’s estate in order to meet legitimate claims of creditors, and in the exercise of the discretion, refuse the application to annul accordingly: Oberlechner v Commonwealth Securities Ltd [2003] FMCA 511 at para.16 per Driver FM.
Consideration of factors
The non-opposition of the respondent trustee is a neutral factor, given that trustees traditionally have a neutral role, and have no obligation to appear: Australian Bankruptcy Law & Practice, para.153B.0.12.
Time is not an issue which goes against the exercise of the discretion to annul in this case. The raising of the annulment was made promptly by the applicant, both with the respondent trustee, and latterly by the filing of the application itself which was made within two months of the applicant’s bankruptcy.
There were no conditions precedent not met or procedural errors in this case which would support a finding that the debtors petition ought not to have been accepted. In any event, the application is brought on the basis that the debtors petition ought not to have been presented.
As to solvency the applicant was insolvent at the time he filed the debtors petition. The purport of a debtors petition is that an applicant is insolvent, and the purpose of the debtors petition is to provide a basis for the debtor’s bankruptcy: see Bankruptcy Act, s.55; Re Coyle. To consider solvency is not to disregard s.153B(2) of the Bankruptcy Act, but rather to weigh solvency as a discretionary consideration.
In this case, the applicant’s position as a debtor was in fact worse than claimed in the debtors petition and accompanying statement of affairs. That was because he had not included in the statement of affairs, for whatever reason, a $48,000 debt to an unsecured creditor to whom he subsequently disclosed to the respondent trustee that he was paying $650 per month. Also, the applicant had asserted that rental was being paid on the Mitchell Street property, when it was not, and the respondent trustee therefore did not receive rental proceeds from the Mitchell Street property, as he might have expected to on the basis of earlier assertions by the applicant.
The fact that the applicant’s financial position might have waxed and waned, as indicated by his subsequent monthly budgets for July purporting to show a negative income flow, and for August and September purporting to show a positive income flow, is not of itself a reason to annul a bankruptcy. The assertion that the applicant’s position had improved financially is not supported by his failure to pay to the respondent trustee his fortnightly compulsory income contributions.
The applicant has not led sufficient evidence to persuade the Court that he is presently solvent, and that weighs heavily against the exercise of the discretion to grant an order for annulment of his bankruptcy.
The Court also has some difficulty in relying upon assertions made by the applicant, even if his affidavit evidence is untested. The debtors petition as filed constituted an admission of insolvency. The applicant now says he would not have filed the debtors petition if he had realised that he was to be $200 per month worse off by reason of compulsory income contributions. This is said in circumstances where, contrary to the obligation, clearly set out in the statement of affairs, to make full and frank disclosure, he has failed to disclose in the statement of affairs the $48,000 unsecured creditor to whom he later purports to be paying $650 per month. The omission to include that debt of the unsecured creditor, and the loan payments made in respect thereof, is a failure to make full and frank disclosure as required in respect of his statement of affairs. It also runs counter to the applicant’s assertion that he would not have filed the debtors petition if he had realised he would be $200 per month worse off by doing so, when in fact he had failed to disclose that he was, in fact, $650 a month worse off.
The Court further notes that no comprehensive statement, or full and frank disclosure, of the applicant’s current financial position has been made by him for the purposes of these proceedings. Filing three monthly budgets does not suffice for this purpose. For the applicant these proceedings were an opportunity to “show and tell” with respect to his solvency, which he did not take. Indeed, were it not for the affidavit of Mr Gorney submitted by the respondent trustee, there would have been such a paucity of information before the Court that it would probably have been inevitable that the application be dismissed in any event.
The fact that the advice given with respect to the compulsory income contributions was incorrect is, on the authorities, not a matter which ought necessarily concern the Court when considering whether to exercise the discretion to annul the bankruptcy. In any event, it does not alter the fact that at the time of filing the debtors petition the applicant averred that he was insolvent, and that subsequent to becoming bankrupt he has not paid the compulsory income contributions at any stage (a further indicator of insolvency) and that, in any event, the incorrect advice related to his position post-bankruptcy which could not have affected the averments he made in relation to the debtors petition and statement of affairs filed on 26 June 2012.
On the evidence, the applicant was insolvent at the time the debtors petition was made. The applicant has not adduced sufficient evidence to persuade the Court that he has become solvent at any time thereafter. In the circumstances, and having regard to the evidence as to his solvency, and the discretionary factors considered above, the Court has determined that, in the exercise of its discretion, the application to annul the bankruptcy of the applicant ought to be dismissed.
Conclusions and orders
The Court has concluded that the applicant’s application for annulment of his bankruptcy ought to be dismissed.
The Court will hear the parties as to costs.
I certify that the preceding sixty-seven (67) paragraphs are a true copy of the reasons for judgment of Lucev FM
Date: 8 March 2013
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