Ketch Nominees Pty Ltd v Hadden
[2007] FMCA 8
•10 January 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| KETCH NOMINEES PTY LTD v HADDEN | [2007] FMCA 8 |
| BANKRUPTCY – Application for sequestration order – whether Respondent Debtor solvent – cash flow – assets and liabilities – alleged outstanding tax liabilities – Supreme Court proceedings – Respondent Debtor solvent. EVIDENCE – Admissibility – hearsay – notice. COSTS – Discretionary – no special circumstances – follow the event. |
| Bankruptcy Act 1966 (Cth), ss.5(1); 32; 40(1)(g); 41(7); 43, 52(2) Evidence Act 1995 (Cth), ss.48, 67(1) |
| Allied Pastoral Holdings Pty Ltd v FCT [1983] 1 NSWLR 1 Bank of Australasia v Hill (1907) 4 CLR 1513 G.. Ferella v Otvosi & Ors [2006] FMCA 334 Hadden v Ketch Nominees Pty Ltd [2005] FMCA 794 International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 McIntosh v Shashoua (1931) 46 CLR 494 Re Noye; ex parte Deputy Federal Commissioner of Taxation (1956) 18 ABC 77 Re Sanders; Knudsen and Yates (trading as The Hargreaves Practice) v Sanders (2003) 1 ABC(NS) 408; [2003] FCA 1079 Re Sarina, Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163 Re Skase; ex parte Donnelly (1992) 37 FCR 509 Sandell v Porter (1966) 115 CLR 666 Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372 |
| Applicant: | KETCH NOMINEES PTY LTD |
| Respondent: | HEIDI HADDEN |
| File Number: | PEG12 of 2006 |
| Judgment of: | Lucev FM |
| Hearing date: | 5 September 2006 |
| Date of Last Submission: | 5 September 2006 |
| Delivered at: | Perth |
| Delivered on: | 10 January 2007 |
REPRESENTATION
| Counsel for the Applicant: | Mr D. Skender |
| Solicitors for the Applicant: | Gadens, and later Phillips Fox |
| Counsel for the Respondent: | Mr I. Tait |
| Solicitors for the Respondent: | Tait & Co. |
ORDERS
The Court orders that:
(a)The Applicant Creditor’s petition be dismissed;
(b)The Applicant Creditor pay the Respondent Debtor’s costs to be agreed, or if not agreed, taxed in accordance with O.62 of the Federal Court Rules; and
(c)The sum of $13,000.00 paid into Court by the Respondent Debtor pursuant to order 3 of Registrar Jan’s order of 19 June 2006 be released to her forthwith.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
PEG12 of 2006
| KETCH NOMINEES PTY LTD |
Applicant
And
| HEIDI HADDEN |
Respondent
REASONS FOR JUDGMENT
Application
On 12 January 2006 Ketch Nominees Pty Ltd (“the Applicant Creditor”) applied to the Court for a sequestration order under s.43 of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”) against the estate of Heidi Hadden (“the Respondent Debtor”).
Background
On 19 February 2003 the Applicant Creditor obtained judgment in the Local Court of Western Australia (“Local Court”) at Narrogin in respect of Plaint 121/02, in the sum of $2970 plus interest and costs.
On 11 February 2005 the Applicant Creditor obtained Bankruptcy Notice No 53 of 2005 (“Bankruptcy Notice”) requiring the Respondent Debtor to pay the amount of $3,280.50 (“Judgement Debt”).[1]
[1] Esposito Affidavit, 28 July 2005, annexure DE1.
The Bankruptcy Notice was served on the Respondent Debtor on
23 February 2005.[2][2] Esposito Affidavit, 28 July 2005, paras 1 and 2.
The Respondent Debtor made application on 10 March 2005 to set aside the Bankruptcy Notice. That application was dismissed by Federal Magistrate McInnis on 3 August 2005.[3]
[3] Hadden v Ketch Nominees Pty Ltd [2005] FMCA 794.
The Applicant Creditor asserts that the Respondent Debtor failed to comply with the requirements of the Bankruptcy Notice on or before
3 August 2005, and that that constituted an act of bankruptcy: see Bankruptcy Act s.40(1)(g) and s.41(7).
Further background – the Supreme Court proceedings
By way of further background it is necessary to understand that the Respondent Debtor (as Plaintiff) has brought proceedings in the Supreme Court of Western Australia (“the Supreme Court Proceedings”). Those proceedings, commenced in 2002, claim damages against the Applicant Creditor (as Defendant) in relation to:
a)alleged misrepresentations made concerning the lease (“Business Lease”) of premises (“Business Premises”) from which the Respondent Debtor ran a business known as the Exchange Tavern (“Business”);
b)alleged wrongful termination of the Business Lease; and
c)conversion of goods (used in the Business).
In essence, and primarily, the Respondent Debtor says that the Business Premises were not fit for the use for which they were leased. Consequently, rental disputes arose, and it is out of those disputes that these bankruptcy proceedings arise.
The Respondent Debtor’s claim is for damages of more than $400,000.00
The Supreme Court Proceedings are defended.
The applicant creditor’s evidence
The Applicant Creditor sought to rely on the following evidence:
a)Esposito’s Affidavit, 28 July 2005;
b)Oliver’s Affidavit, 12 January 2006;
c)Pearson’s Affidavit, 12 January 2006;
d)McNelly’s Affidavit, 14 February 2006;
e)Oliver’s Affidavit, 17 February 2006;
f)Williams’ Affidavit, 20 February 2006;
g)Esposito’s Affidavit, 23 February 2006;
h)Carstairs’ Affidavit, 7 March 2006;
i)Oliver’s Affidavit, 26 April 2006;
j)Carstairs’ Affidavit, 19 June 2006;
k)Hicks’ Affidavit, 4 September 2006; and
l)Carstairs’ Affidavit, 4 September 2006.
Objections to applicant creditor’s evidence
The Respondent Debtor objects to the following evidence sought to be relied upon by the Applicant Creditor:
a)Carstairs’ Affidavit, 7 March 2006
The second sentence of paragraph 2 is objected to on the basis that it is hearsay and that the relevant notice has not been given under section 67(1) of the Evidence Act, 1995 (Cth) (“Evidence Act”) (“the Hearsay Notice Objection”).[4] The sentence objected to is a hearsay representation made by Babin to Carstairs to the effect that the former was the property settlement agent of the Respondent Debtor.
[4] Transcript, p.5.
It is unnecessary to deal with this objection. The Respondent Debtor was cross-examined and gave evidence that Babin was the person with whom she dealt at the property settlement agent.[5]
[5] Transcript. p.37.
b)Carstairs’ Affidavit, 19 June 2006
i)A Hearsay Notice Objection is taken to the second sentence of paragraph 6.
The sentence objected to relates to the Applicant Creditor’s solicitor (“the Applicant Creditor’s Supreme Court solicitor”) in the Supreme Court Proceedings being asked (it is not clear by whom) in a telephone conference on 13 June 2006 whether the Applicant Creditor had refused to produce to the Respondent Debtor a Sale Agreement.[6]
[6] Transcript, p.8.
ii)A Hearsay Notice Objection is taken to paragraph 9.
That paragraph relates to statements allegedly made by the Applicant Creditor’s Supreme Court solicitor in the telephone conference on 13 June 2006 concerning statements in telephone discussions earlier in June 2006 and actions during inspections of documents of the Respondent Debtor in relation to discoverable documents in the Supreme Court Proceedings.[7]
[7] Transcript, p.8.
iii)A Hearsay Notice Objection is taken to paragraph 11.
The objection relates to the same type of statements as in (ii) above, same that the statements actual concern the conduct of the Supreme Court Proceedings.[8]
[8] Transcript, p.9.
In each case the objection is upheld. Further, in each case the evidence is irrelevant, given that the application has been determined on the basis of the Respondent Debtor’s present solvency, and in relation to which the Court has formed the view that the Supreme Court Proceedings do not assist with the assessment of present solvency.
c)Oliver’s Affidavit, 26 April 2006
i)A Hearsay Notice Objection is taken to the second sentence of paragraph 11.
That objection relates to information allegedly provided to Oliver (a director of the Applicant Creditor) by the Applicant Creditor’s Bunbury solicitors concerning the alleged necessity to commence further proceedings (in the Local Court) each time a further instalment of the Respondent Debtor’s rent became overdue.[9] Counsel for the Applicant Creditor concedes, not directly, but that it is:
[9] Transcript, p 9.
A) not relied upon as a statement of truth; and
B) a proposition of law.[10]
[10] Transcript, p.10.
ii)A Hearsay Notice Objection is taken to paragraphs 22, 27 and 32.
Each of these objections is similar in form to the objection in (i) above, and relates to similar subject matter, namely Local Court proceedings against the Respondent Debtor for rent arrears.[11]
[11] Transcript, p.10.
iii)A Hearsay Notice Objection is taken to paragraph 41.[12]
[12] Transcript, p.10.
This objection is similar in form to those in (i) and (ii) above, but the subject matter relates to the duration and renewal of Warrants of Execution, and their replacement with Property (Seizure and Sale) Orders, arising from the attempted enforcement of various Local Court orders.
iv)A Hearsay Notice Objection is taken to the first two sentences of paragraph 51.[13]
[13] Transcript, p.10.
This objection relates to the same type of statements as in (b)(i) and (ii) above, save that the statements concern the conduct of proceedings before a Registrar of this Court.[14]
[14] Transcript, p.10.
v)A Hearsay Notice Objection is taken to the first sentence of paragraph 58.[15]
[15] Transcript, p.10.
This objection relates to the same type of statements as in (b)(i) and (ii) above, save that the statement concerns the conduct of earlier proceedings in this matter before Federal Magistrate McInnis.
vi)A Hearsay Notice Objection is taken to the first sentence of paragraph 65.[16]
[16] Transcript, p.10.
This objection relates to the same type of statement as in (b)(i) and (ii) above, save that the statement concerns the Respondent Debtor’s alleged conduct in relation to the provision of particulars in the Supreme Court Proceedings.
vii)A Hearsay Notice Objection is taken to paragraph 77, save for the annexures referred to in that paragraph.[17]
This objection relates to the same type of statement as in (b)(i) and (ii) above, save that the statements made relate to hearsay allegations that the Respondent Debtor’s conduct has “hampered” the “progress” of the Supreme Court Proceedings.
viii)A Hearsay Notice Objection is taken to the second sentence of paragraph 80 and the whole of paragraph 81.[18]
These objections relate to the same type of statements as in (b)(i) and (ii) above, save that the statements relate to hearing dates for interlocutory matters in the Supreme Court Proceedings.
ix)A Hearsay Notice Objection is taken to the second sentence of paragraph 90.[19]
This objection relates to the same type of statements as in (b)(i) and (ii) above, save that the statement concerns a controversy concerning whether an injunction was granted by this Court.
x)A Hearing Notice Objection is taken to the first sentence of paragraph 96.[20]
This objection relates to the same type of statement as in (b)(i) and (ii) above, except that the statement concerns matters arising from alleged comments made by the Respondent Debtor (to the effect that “she has no home and is itinerant”) of a Registrar in the Supreme Court Proceedings.
In each case the objection is upheld. Further, in each case the evidence is irrelevant to an assessment of present solvency.
xi)A Hearing Notice Objection was taken to the whole of paragraph 98. In the course of argument it was agreed that paragraph 98 could be struck out.[21]
[17] Transcript, p.12.
[18] Transcript, p.12.
[19] Transcript, p.12.
[20] Transcript, p.12.
[21] Transcript, p.13.
Respondent Debtor’s Affidavit Evidence
The Respondent Debtor sought to rely on four affidavits, as follows:
a)Respondent Debtor’s Affidavit, 27 March 2006;
b)Respondent Debtor’s Affidavit, 10 April 2006;
c)Respondent Debtor’s Affidavit, 2 June 2006; and
d)Respondent Debtor’s Affidavit, 15 June 2006.
Objections to Respondent Debtor’s Affidavit Evidence
The Applicant Creditor objects to the following evidence sought to be relied upon by the Respondent Debtor:
a)Respondent Debtor’s Affidavit, 2 June 2006
i)Annexure E, being “Notes of Referees hearing relating to a Dangerous Building at Town Lot 149 and Pingelly Lot 479 Corner Pasture Street and Quadrant Street Pingelly (Exchange Tavern)” of 12 April 2002 (“Referees’ Notes”)[22], is objected to on the basis that:
[22] There were two referees.
A) Referees’ Notes are not an original document (and, the Court notes, is not said or certified to be a copy of the original);
B) the Respondent Debtor is not the author of the document;
C) the Respondent Debtor was not present when the Referees’ Notes were produced;
D) the Respondent Debtor is not able to authenticate the Referees’ Notes; and
E) it is not clear what part of section 48 of the Evidence Act is relied upon to prove the contents of the Referees’ Notes.[23]
[23] Transcript, p.14.
This objection is upheld. Ultimately, the evidence is irrelevant to an assessment of present solvency.
ii)Annexure F, being a copy of a remittance advice to the Respondent Debtor, was objected to on the basis that the author of the document was not called, and certain details had been deleted.[24] Ultimately, it is not necessary to deal with this objection because the Respondent Debtor was cross-examined and gave evidence to the effect that she had received the monies referred to in the remittance advice[25] and the Applicant Creditor’s counsel conceded that the objection was no longer in issue[26]. Finally, a copy of an unexpurgated original was admitted into evidence without objection in the Respondent Debtor’s re-examination[27], and corroborated, without objection, by an entry in an Elders Rural Bank statement[28]
iii)Annexure G, being a Certificate of Insurance, for home contents insurance to the insured value of $60,000, was objected to on the basis that:
A) the author of the document was not called; and
B) it was irrelevant, because it did not show that the assets insured were of that value.[29]
The objection is dismissed. There was direct unchallenged evidence given by the Respondent Debtor as to the value of the contents.[30] The Certificate of Insurance merely corroborates that unchallenged evidence.
iv)Objections to annexures H and I were not pressed.[31]
[24] Transcript, p.15.
[25] Transcript, p.23.
[26] Transcript, p.51.
[27] Exhibit C, and see Transcript, pp.51-52.
[28] Exhibit A, and see Transcript, pp.42-43 and 51-52.
[29] Transcript, p.16.
[30] See para.48 below.
[31] Transcript, p.16.
Statutory Framework
Section 40 of the Bankruptcy Act provides that a debtor commits an act of bankruptcy in certain cases. Section 40(1)(g) of the Bankruptcy Act prescribes one of those cases:
If a creditor who has obtained against the debtor a final judgment or final order, not stayed, and is served on the debtor in Australia a bankruptcy notice, and the debtor does not within the time specified in the bankruptcy notice, comply with the requirements of the bankruptcy notice or satisfy the Court of a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt, be one that could not have been set up in the action in which judgment was obtained.
Section 41(7) of the Bankruptcy Act provides that:
Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor applies to the Court for an order setting aside the bankruptcy notice on the ground that the debtor has a counter-claim, set-off or cross demand as referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter-claim, set-off or cross demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied.
Section 43(1) of the Bankruptcy Act provides that, subject to that Act:
Where a debtor has committed an act of bankruptcy (s. 43(1)(a)), and at the time when the act of bankruptcy was committed the debtor was personally present or ordinarily resident in Australia (s. 43(1)(b)(i)), that the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.
The Respondent Debtor committed an act of bankruptcy (a matter not seriously disputed in this case) under s.40(1)(g) of the Bankruptcy Act when she failed to comply with the requirements of a Bankruptcy Notice on or before 3 August 2005, that being the relevant date by reason of s.41(7) of the Bankruptcy Act. Thus s.43(1)(a) of the Bankruptcy Act is satisfied. There is no dispute that the Respondent Debtor was personally present and ordinarily resident in Australia, and that she remains so. Thus, s.43(1)(b) of the Bankruptcy Act is satisfied. Jurisdiction exists for the Court to make a sequestration order against the estate of the Respondent Debtor.
Notice of opposition to creditor’s petition
The Court may decline to make a sequestration order if the Respondent Debtor proves that:
a)she is able to pay her debts (that is, she is solvent); or
b)there is other sufficient cause why a sequestration order ought not be made.[32]
[32] Bankruptcy Act, s.52(2).
The Respondent Debtor argued that the Court ought to decline to make a sequestration order for one or both of the above two reasons, and the matter was argued on that basis.
A Notice of Opposition to the Creditor’s petition was filed on
28 March 2006 (“Notice of Opposition”).The grounds of opposition are:
“a)The Respondent has a pending claim against the Applicant in the Supreme Court of Western Australia in CIV 2227/2002 for, amongst other things, damages exceeding the total sum of $400,000.00.
b)The Applicant has exercised its option to purchase the Respondent’s plant, equipment and stock pursuant to the Lease of the premises known as 1 Pasture Street, Pingelly in the State of Western Australia amounting to the total sum of $25,072.00 which said sum or any part thereof has not been paid to the Respondent.
c)The Respondent at all material times has been solvent.”
Ground (a) raises the issue of other sufficient cause.
Ground (b) appears to raise a mixed issue of solvency and other sufficient cause.
Ground (c) clearly raises the issue of solvency.
Is the respondent debtor solvent?
It is convenient to deal with ground (c) of the Notice of Opposition first.
Solvency
Solvency is relevantly expressed in terms of the Respondent Debtor being “able to pay his or her debts”[33].
[33] Bankruptcy Act, s.52(2)(a).
If the Respondent Debtor can prove to the Court that she is solvent the Court may dismiss the Applicant Creditor’s petition.[34]
[34] Re Sanders; Knudsen and Yates (trading as The Hargreaves Practice) v Sanders (2003) 1 ABC(NS) 408 at 413 per Bennet J; [2003] FCA 1079 at para.22 per Bennet J (“Re Sanders”).
Solvency requires that the Respondent Debtor be able to pay debts as they fall due out of her own money. This includes both cash on hand and money reasonably quickly realisable by asset realisation. Temporary lack of liquidity will not generally constitute insolvency.[35]
[35] Sandell v Porter (1966) 115 CLR 666 at 670 per Barwick CJ.
Solvency means being “able to pay all … debts, as and when they become due and payable”[36]. Account must be taken of debts “which will fall due in the reasonably immediate future pursuant to existing obligations”[37], and whether the Respondent Debtor will be able to pay them.[38]
[36] Bankruptcy Act, s.5(2).
[37] Re Sanders ABC(NS) at 414 per Bennet J; FCA at para.27 per Bennet J.
[38] Re Sanders ABC(NS) at 414 per Bennet J; FCA at para.26 per Bennet J; International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 at paras.8-10 per Katz J (“International Alpaca”); Bank of Australasia v Hill (1907) 4 CLR 1513 at 1527 per Griffith CJ.
In assessing solvency the Court ought not take account of realisable assets required for the Respondent Debtor to live a reasonably comfortable and dignified existence.[39]
[39] International Alpaca at paras.15-16 per Katz J.
If the Respondent Debtor is in a position to pay debts owed within a reasonable time, no sequestration ought be made.[40]
Evidence of solvency
[40] Re Sarina, Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163 at 165 per Deane J (“Sarina”); Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372 at 376 per Bowen CJ, CA Sweeney and Lockhart JJ (“Shire of Wollondilly”).
Evidence of solvency – cash flow
The Respondent Debtor’s affidavit evidence was that as at 2 June 2006 she was receiving an income of $5,175.00 a month. That was an average figure based on income from her contract cleaning business over the preceding three months – March, April and May 2006.[41]
[41] Respondent Debtor’s Affidavit, 2 June 2006, para.15 and annexure F; Exhibits A and C; Transcript pp.23, 42-43 and 51-52.
By 5 September 2006 when the Respondent Debtor gave oral evidence her monthly income had increased significantly. The Respondent Debtor’s oral evidence was that her average income was $7,500.00 - $8,000.00 a month over the preceding three months – June, July and August 2006.[42] Documentary evidence, in the form of a remittance advice from the company which engages the Respondent Debtor as a contract cleaner, indicates income of $7,461.86 for August 2006.[43]
[42] Transcript, pp.48, 52-53.
[43] Exhibit D.
Having regard to the evidence, and adopting a slightly cautious approach, the Court is satisfied that the Respondent Debtor’s income is not less than $7,450.00 a month.
The Respondent Debtor’s affidavit evidence was that as at 2 June 2006 her outgoings were $3,932.00 a month (“June Outgoings”), and that she therefore had an excess of income over outgoings of about $1,200.00 a month.[44] On an income of not less than $7,450.00 a month the excess of income over outgoings, on that basis, would exceed $3,500.00 a month.
[44] Respondent Debtor’s Affidavit, 2 June 2006, para.16.
The Respondent Debtor’s outgoings are however greater than June Outgoings. Arising from her contract cleaning the Respondent Debtor registered for GST purposes on 17 May 2006.[45] The Respondent Debtor’s evidence was that following the submission of her first quarterly Business Activity Statement on 28 July 2006 she had to pay the Australian Tax Office $480.00 in taxation for the last half of the previous quarter (that is, from 17 May 2006, in the April, May and June 2006 quarter).[46] That was a quarter in which the Respondent Debtor’s income would have been approximately $17,800.00.[47]
[45] Exhibit B; Transcript pp.47-48.
[46] Transcript, p.54.
[47] (2 x $5,175.00) + $7,450.00 = $17,800.00.
It is difficult to determine exactly how much taxation might be payable on the subsequent quarters income, assuming it to be approximately $22,350.00,[48] because that quarter was not complete at the time the evidence was given. Further, it is difficult to know the precise particulars of income, expenditure and deductions. But assuming $960.00 would have been payable for the full previous quarter (had the Respondent Debtor been registered for GST purposes for the entire quarter), at least $1,200.00 might be payable for the subsequent quarter as the Respondent Debtor’s income had increased by slightly in excess of twenty five percent.
[48] 3 x $7,450.00 = $22,350.
Therefore, a further outgoing of at least $400.00 a month has to be added for taxation.
The Respondent Debtor’s June Outgoings also do not include:
a)lawyers fees of approximately $1,200.00 a month;[49]
b)monthly airfares from Kalgoorlie to Perth and return (for Court hearings) costing approximately $400.00 a month;[50]
c)an increase in credit card payments of $628.00 a month ( up from $372.00 a month[51] to at least $1,000.00 a month[52]);
d)an increase in rent of $254.00 a month (up from $866.00 to $1,120.00 a month[53]).
Various other possible outgoings were put to the Respondent Debtor in cross-examination: water, medication and casual relief for her cleaning business being examples. In the case of the former no account had been rendered for the Respondent Debtor’s new rental premises. In the latter two cases the Respondent Debtor gave evidence that her medication and casual cleaning relief expenses came out of “my money”.[54] This was the $900.00 set aside as an outgoing for “Food”, and in relation to which the Respondent Debtor said:
… it [casual cleaning relief payment] comes out of my money. I’ve got $900.00 down for food which – I regard food as chemist, miscellaneous expenses, if I go out for the night… I don’t eat much, there’s only me and two cats.[55]
and
I’m referring to the food money, the $900.00 a month. It’s part of what I regard as my money, my expenditure. It’s not spoken for until I spend it on – if I’ve got someone to do a cleaning job for me.[56]
[49] Transcript pp.24-25.
[50] Transcript p.25.
[51] Respondent Debtor’s Affidavit, 2 June 2006, para.16.
[52] Transcript, p.29.
[53] Transcript, p.28.
[54] Transcript, p.30.
[55] Transcript, p.30.
[56] Transcript, p.30.
The Respondent Debtor further explained it thus to the Court:
His Honour…Can you explain to me why it is that you would put, as I understand your evidence, casual cleaning services performed by whoever that you pay for when you are absent under food outgoings?
Because it comes out of my pocket, I’m not absent very often.
Well, in terms of your affidavit is there any reason why it did not go into miscellaneous or did not go under a separate category? I mean, the evidence is that you are away once a month.
Yes, but not – I don’t – quite often I don’t have to have anybody cover me. It’s just that when I do, I use my girlfriend and I just give her a bit of cash….
Well, you say for the purposes of the affidavits you have sworn, you have counted that as food expenses?
It probably looks bad but I regard – when I - like food expenses is cigarettes, is – you know, shampoo and things like that. Sort of to me it’s all part of just living expenses.
I do not know that it looks bad Ms Hadden, it looks odd. I have to say to me?
It’s probably the way I sort mentally decipher it. [57]
[57] Transcript, p.58.
Whilst the Respondent Debtor’s explanation does look “odd”, the Court is inclined, on a consideration of all the evidence and the Respondent Debtor’s demeanour as a witness, to believe the explanation she gave. Whilst not always across all of the detail, the Respondent Debtor generally appeared to speak with a sardonic honestly, perhaps born of some of the harsher experiences of life.
On the evidence, the Court will not therefore add any further amount to the Respondent Debtor’s monthly outgoings for medication and casual relief for the cleaning business.
Given that no account has been rendered for water for the Respondent Debtor’s new rental premises it is not possible for her to prove (or disprove) any amount to be incurred in this respect, and it is not appropriate for the Court to speculate about the sum concerned.
Based on the foregoing the Respondent Debtor’s monthly outgoings appear to total $6,814.00[58], calculated as follows:
[58] The Court notes that this figure is slightly higher than the $6,794.00 put in submissions by the Applicant Creditor’s counsel: Transcript, p.77.
Tax $400.00
Lawyers Fees $1,200.00
Airfares $400.00
Credit Cards $1,000.00
Rent $1,120.00
Phone Costs $427.00
Vehicle Operating Costs $600.00
Insurance $470.00
Electricity and Gas $97.00
Food $900.00
Miscellaneous $200.00
The Respondent Debtor’s monthly income therefore exceeds outgoings by about $636.00 a month.
Based on the Respondent Debtor’s cash flow (and subject to what follows below concerning her tax liability) there is an excess of income over outgoings, and if this were the only relevant test the Court would consider the Respondent Debtor to be solvent.
Evidence of solvency – assets and liabilities
The Respondent Debtor’s Affidavit of 2 June 2006 claims assets of $87,000.00 and liabilities of $11,000.00.[59]
The assets claimed are:
a)household contents $60,000.00
b)1989 Mitsubishi Express and 1992 Pajero
motor vehicles $12,500.00
c)available cash $15,000.00
[59] Para.17.
Although the admissibility of a document showing insurance for contents said to be valued at $60,000.00 was objected to[60], the Respondent Debtor was not challenged as to the fact of her owning household contents valued at $60,000.00 to which her Affidavit of
2 June 2006 attested. The Respondent Debtor was asked as to whether she had:
a)provided documentary evidence of the household contents; and
b)a sworn valuation as to the value of the household contents.
[60] See para.13(a)(iii) above.
It was not put to the Respondent Debtor that the contents were not worth $60,000.00, nor was there any cross-examination as to specific contents and their value. Merely because the Respondent Debtor has not provided a list or photographs or receipts for purchase of household contents does not mean that her evidence as to value ought not be believed, especially when it has not been properly or specifically challenged, and when the Respondent Debtor has otherwise been found to be a witness who might generally be believed[61].
[61] See para.41 above.
The Court therefore finds that the Respondent Debtor does have household contents valued at $60,000.00 or thereabouts.
The Court cannot take into account household contents necessary to enable the Respondent Debtor to live in an appropriate manner.[62] However, the Court notes that the Respondent Debtor lives alone, with two cats.[63] In those circumstances, the Court can infer that some portion of the household contents, albeit small and not presently calculable on the evidence available, might be realisable to repay any debts which become due and payable.
[62] See para.30 above.
[63] See para.39 above.
The Respondent Debtor also gave evidence concerning the value of the motor vehicles. She bought the Mitsubishi Pajero for $9,500.00 in 2006.[64] Therefore, on the evidence, the other vehicle, a 1989 Mitsubishi Express, is valued at $3,000.00. The values for the vehicles were not disputed or challenged in any way.
[64] Transcript, pp.38-39 and 56.
Again, the Court cannot take account of a motor vehicle required to live in an appropriate manner. However, the Respondent Debtor has two motor vehicles, and one could be realisable to repay any debts which become due and payable. On this basis, the Respondent Debtor has realisable assets, valued at either $3,000.00 or $9,500.00, depending on which is realised.
The evidence established that the Respondent Debtor has $2,000.00 cash in hand immediately available.[65]
[65] Transcript, p.56.
The Respondent Debtor’s liabilities have increased from $11,000.00 to $12,000.00 in the period from June 2006 to hearing. That liability is a credit card liability on which the Respondent Debtor presently pays back $1,000.00 a month as payment become due.[66]
[66] Transcript, p.29.
The Court therefore considers that the Respondent Debtor has:
a)a small, but not presently calculable, portion of her $60,000.00 of household contents;
b)a motor vehicle, valued at $3,000.00 or $9,500.00, depending on which vehicle is realised; and
c)cash of $2,000.00,
as assets available to meet debts due and payable.
Evidence of solvency – alleged outstanding tax liability
The Applicant Creditor alleged that the Respondent Debtor had outstanding tax liabilities for personal income tax, GST and capital gains tax.
In relation to personal income tax and GST the Applicant Creditor’s case was that the Respondent Debtor had a substantial uncrystallised liability for income tax by reason of her failure to lodge tax returns.[67] The Respondent Debtor denied that there was a substantial uncrystallised liability.[68]
[67] Transcript, p.37.
[68] Transcript, p.37. See too Respondent Debtor’s Affidavit, 15 June 2006, para.3; “I have no outstanding amounts owing to the Australian Taxation Office.”
The Respondent Debtor admitted that she had not submitted a personal tax return since 1999 or 2000,[69] although she had earned income[70] and “paid” tax during the period when selling real estate.[71] The nature of this tax is not apparent from the evidence, although it was “paid” (presumably by deduction and remittance from income earned) at the rate of twenty five per cent. However, during the same period from 1999-2000, but 12 months prior to her selling real estate (itself 12 months ago) the Respondent Debtor had been unable to work and been on a disability pension, and at one point “had no roof … no job … nothing”.[72]
[69] Transcript, p.32.
[70] From selling real estate and in her current cleaning business: Transcript, p.36.
[71] Transcript, p.36.
[72] Transcript, p.32.
The Respondent Debtor gave evidence that she had discussed the matter of her personal tax returns with the Australian Taxation Office (“ATO”) and that the ATO had no issue with the personal tax returns not yet having been submitted.[73] It would appear that the issue of the submission of the Respondent Debtor’s personal tax returns, and hence her personal tax liability, overlaps with that of possible tax liability (both personal and business, especially as to GST) arising from the conduct of the Business. The Respondent Debtor had again discussed this issue with the ATO. In substance, until the issues arising from the Supreme Court Proceedings have been resolved, it appears that it is not possible for the ATO to determine whether the Business made a profit or a loss, and hence what liability the Respondent Debtor or the Business had to pay tax.[74]
[73] Transcript, pp.32-33.
[74] Transcript, pp.32, 33 and 55.
In cross-examination the Respondent Debtor denied that the Business traded profitability.[75] She conceded that at a point prior to the alleged repudiation of the Business Lease it was taking approximately $1,900.00 a week, but disputed (probably incorrectly) that this was a net figure.[76] The Respondent Debtor also denied that she made income or profit of approximately $100,000.00 a year from the Business.[77]
[75] Transcript, p.33.
[76] Transcript, pp.33 and 35.
[77] Transcript, pp.33-35.
The cross-examination in this respect was based on the Amended Statement of Claim filed in the Supreme Court Proceedings by the Respondent Debtor on 3 November 2003,[78] and in particular paragraph 47 of the Amended Statement of Claim. It is important to read paragraph 47 of the Amended Statement of Claim in its entirety and in context. Paragraph 47 claims that prior to the alleged repudiation of the Business Lease by the Applicant Creditor, the Business, “was netting an average of $1,910.65 per week”, and but for the breach “would have netted an additional amount of an average of $1,510.65, making a total of $3,421.30” a week, during the remaining 18 months of the term of the lease.[79] The Respondent Debtor operated the Business until 21 August 2002 when the Applicant Creditor took possession of the Business Premises (whether wrongfully or otherwise is immaterial for present purposed).[80]
[78] Exhibit A to Respondent Debtor’s Affidavit, 27 March 2006.
[79] Para.47, Exhibit A to Respondent Debtor’s Affidavit, 27 March 2006. The Business Lease was seemingly for a period of seven years commencing 19 February 1997: para.5, Exhibit A to Respondent Debtor’s Affidavit, 27 March 2006.
[80] Paras.1 and 38, Exhibit A to Respondent Debtor’s Affidavit, 27 March 2006.
The purpose of the cross-examination on the income earned and net profits made by the Business, or by the Respondent Debtor as sole proprietor of the Business, was seemingly to establish that the Respondent Debtor, had a significant liability for unpaid taxation.
Ultimately, the Respondent Debtor said (in response to a question from the Court):
I have got a liability …[81]
[81] Transcript, p.59.
The evidence as to the quantum of any alleged tax liability for the Respondent Debtor is however inconclusive. The Respondent Debtor’s evidence also disclosed that:
a)within six months of the alleged lease repudiation her “income dropped drastically”;[82]
b)overall, she did not make money, but lost money, from running the Business; and[83]
c)as a consequence of discussions with the ATO concerning the submission of tax returns for the years from 1999-2000, the Respondent Debtor does not have to submit tax returns for the years during which she ran the Business, until such time as the Supreme Court Proceedings are determined because those proceedings will determine, or assist in determining, issues relevant to her taxable income, such as whether she:
i)earned income;
ii)incurred losses; and
iii)might claim alleged losses of stock and other items (allegedly valued at $112,074.75).[84]
[82] Transcript, p.33.
[83] Transcript, p.33.
[84] Transcript, pp.32, 33, 55 and 59; para.39, Exhibit A to Respondent Debtor’s Affidavit, 27 March 2006.
The Respondent Debtor’s tax liability is therefore dependent upon:
a)the outcome of the Supreme Court Proceedings;
b)the subsequent submission of tax returns for the relevant years by the Respondent Debtor; and
c)assessment of the returns by the ATO.
The Respondent Debtor is the plaintiff in the Supreme Court Proceedings. Those proceedings commenced in 2002. Master Sanderson in a judgment delivered on transcript on 9 August 2006 has described the proceedings as having “meandered to this point”, [85] and referred to “the rather dilatory nature of the proceedings.”[86]
[85] Annexure SDH 1 to Hicks’ Affidavit, 4 September 2006, p.1.
[86] Annexure SDH 1 to Hicks’ Affidavit, 4 September 2006, p.2.
The Applicant Creditor’s counsel conceded in argument that on “an optimistic view” the Supreme Court Proceedings were unlikely to be completed before “the latter half of 2007.”[87] Assessment of any liability based on submitted tax returns is therefore unlikely to occur before some time in the first half of 2008, based on this “optimistic view”. The Applicant Creditor’s counsel also conceded that that “represent[ed] a significant problem for the Applicant’s case”.[88]
[87] Transcript, p.72.
[88] Transcript, p.72.
The Applicant Creditor’s counsel also conceded that it was “correct” that the “quantum of potential [tax] liability … might be $10.00, it might be $10,000.00, it might be $100,000.00”, and that “no taxation liability is able to be quantified”.[89]
[89] Transcript, pp.72.73.
The Applicant Creditor’s counsel’s concessions are not to be criticised: they were properly made, and their effect sought to be mitigated by counter-argument.
Essentially, that counter-argument was that the Respondent Debtor had to discharge the onus of proving that her assets were sufficient to pay her debts,[90] with debts including liabilities.[91]
[90] International Alpaca at para.31 per Katz J.
[91] Bankruptcy Act, s.5(1), definition of “debt”.
In relation to the tax liability the Court considers that the Respondent Debtor has discharged the onus. On the basis of the evidence the Court is satisfied that any tax liability is not a debt which will become payable “in the immediate future”.[92] Rather, it is an indeterminate liability as to quantum, payable at an indeterminate future point in time.
[92] International Alpaca at para.31 per Katz J.
Evidence of solvency – alleged outstanding Capital Gains Tax liability
The Applicant Creditor asserted that the Respondent Debtor had a liability to pay Capital Gains Tax on the sale of property.
The evidence is that the Respondent Debtor bought property in fee simple in Brookton in July 1995 for the sum of $55,000.00.[93] In cross-examination the Respondent Debtor said the property was sold for $135,000.00, in March or April, 2006 (“Brookton property sale”).[94]
[93] Carstairs’ Affidavit, 4 September 2006, Annexure LMC 2.
[94] Transcript, p.37.
In cross-examination on this point the Respondent Debtor was asked whether she knew (“do you know if”)[95] or was aware (“are you aware of any liability”)[96] of a requirement or liability to pay Capital Gains Tax, on the Brookton property sale. To the former question she responded “No, I don’t”,[97] and to the latter “No”[98]. When asked whether she had “disclosed a liability to pay Capital Gains Tax” in her affidavit the Respondent Debtor said “No”.[99]
[95] Transcript, p.37.
[96] Transcript, p.38.
[97] Transcript, p.37.
[98] Transcript, p.38.
[99] Transcript, p.38.
The Respondent Debtor’s answers read somewhat equivocally, attributable in part to the form of the questions, which did not put directly to the Respondent Debtor that:
a)she had an actual Capital Gains Tax liability; or
b)the quantum of any Capital Gains Tax liability.
It was however apparent from the tenor of the Respondent Debtor’s responses, and her demeanour, in responding to the questions that were put to her, that the Respondent Debtor meant to convey that she did not consider that she had a Capital Gains Tax liability.[100] She was not pressed as to why that was her view, and not re-examined by her own counsel (and correctly so, given that the manner in which the answers were given was not, for reasons set out above, unclear).[101]
[100] See also Respondent Debtor’s Affidavit, 15 June 2006, para.3 where she says she has no outstanding amounts owing to the Australian Taxation Office.
[101] Transcript, p.81, where the Respondent Debtor’s counsel made the point of his client’s denial of a Capital Gains Tax liability, and the failure to put the issue squarely to her.
Because those matters were not matters put in issue by notice[102], and which were not put directly to the Respondent Debtor the Court is not prepared to draw an inference, adverse to the Respondent Debtor, that she has an actual Capital Gains Tax liability.[103]
[102] The evidence relied on to establish the purchase price of the Brookton property was in Carstairs’ Affidavit, 4 September 2006, filed that day, which was one day before the hearing.
[103] Allied Pastoral Holdings Pty Ltd v FCT [1983] 1 NSWLR 1 at 16 and 22-24 per Hunt J.
Therefore, the Court considers that the Respondent Debtor has discharged the onus by her direct evidence that there is no Capital Gains Tax liability. Why that might be so is not for the Court to speculate upon, suffice to say that the Respondent Debtor’s direct evidence in cross-examination was not challenged in a manner which permits the drawing of inferences adverse to the Respondent Debtor on this issue.
If, in any event, the Respondent Debtor does have a Capital Gains Tax liability Counsel agreed that it might be $12,000.00 or $13,000.00 at most. The Respondent Debtor has, given the excess of income over outgoings, of assets over liabilities, and the $2,000.00 cash she has at home, the capacity to borrow to pay this debt.
In all the circumstances, the Court concludes that:
a)the Respondent Debtor, on the evidence available, does not have a Capital Gains Tax liability; and
b)alternatively, if the Respondent Debtor does have a Capital Gains Tax liability, she has the capacity to pay, or to borrow to facilitate payment,
and is therefore not insolvent on account of any Capital Gains Tax liability, because she would be able to pay the debt, or pay it within a reasonable time.[104]
[104] Sarina at 165 per Deane J; Shire of Wollondilly at 376 per Bowen CJ, CA Sweeney and Lockhart JJ.
Evidence of solvency – Judgment Debt
An act of bankruptcy occurred on 3 August 2002, when having failed to comply with the Bankruptcy Notice served on 23 February 2005, the Respondent Creditor’s application to set aside the Bankruptcy Notice was dismissed.[105]
[105] See para.6 above.
The Respondent Debtor states that she is “ready, willing and able to pay” the Judgment Debt.[106] However, she states that the Applicant Creditor “is not prepared to accept any tender” of the Judgment Debt amount.[107]
[106] Respondent Debtor’s Affidavit, 2 June 2006, para.22.
[107] Respondent Debtor’s Affidavit, 2 June 2006, para.23 and Annexure H (final para.)
The Applicant Creditor, knowing the act of bankruptcy has been committed is entitled to refuse payment proffered by the Respondent Debtor.[108] In any event, the debt, being one due prior to the commission of the act of bankruptcy, converted to a right in the Applicant Creditor to prove for the debt in the bankruptcy, and thus it was probably not open to the Applicant Creditor to accept the offer of payment.[109]
[108] McIntosh v Shashoua (1931) 46 CLR 494 at 505 per Gavan Duffy CJ and Dixon J; G. Ferella v Otvosi & Ors [2006] FMCA 334 at para.18 per Barnes FM (“G. Ferella”).
[109] Bankruptcy Act, s.82; G. Ferella at paras.19 and 20 per Barnes FM.
The question for present consideration is however whether the Respondent Debtor can satisfy the Court that she can pay the debt.
Given the comparatively small quantum of the Judgment Debt the Court is satisfied that the Respondent Debtor has capacity to pay it having regard to her:
a)excess of income over outgoings; and
b)excess of assets over liabilities, including cash on hand and saleable assets.
Evidence of solvency – other debts – rent still owing
The Applicant Creditor also asserts that there is unpaid rent under the Business Lease in the sum of $8,910.00 for the January, February and March 2002 (“Unpaid Rent”). Assuming (without deciding) that this is correct the Court is satisfied that the Respondent Debtor has the capacity to pay that sum, having regard to her:
a)excess of income over outgoings;
b)excess of assets over liabilities, including cash on hand and saleable assets; and
c)capacity to borrow arising from her level of income, and from (a) and (b) above.
Evidence of solvency – all debts
The Court has also considered the position of the Respondent Debtor in relation to all of the above debts (the Judgment Debt and other alleged debts and liabilities) and repayment of them in their totality. The total sum of those alleged debts is no more than $25,190.50 (this assumes the Unpaid Rent and Capital Gains Tax liabilities are debts immediately repayable). It may be a very tight squeeze, but, on balance, the Court is satisfied, having regard to the factors set out in para.87(a)-(c) above, that the Respondent Debtor has the capacity to repay the debts, both the Judgment Debt and the other alleged debts, including liabilities (if the latter are in fact payable).
Evidence of cash flow – Supreme Court Proceedings
The Applicant Creditor invited the Court to assess the Respondent Debtor’s solvency having regard to the Supreme Court Proceedings, the claims and counter-claims made, and to apply appropriate discounts to the Respondent Debtor’s claims.[110] The Court does not intend to have regard to the Supreme Court Proceedings in assessing the Respondent Debtor’s solvency. The reason is simple: those proceedings have progressed languorously, and at this stage:
a)it is not evident that interlocutory processes are complete;
b)the matter has not been entered for trial;
c)other than the pleadings and affidavits in connection with interlocutory processes there is a lack of evidence to be relied on at hearing in relation to the substantive issues; and
d)on an optimistic view the proceedings are unlikely to be completed before the latter half of 2007.[111] In all those circumstances it is not appropriate for this Court to anticipate the judgment of the Supreme Court, and in terms of solvency assessment, those proceedings are unlikely to give rise to a debt due and payable (assuming – but without any hint of judgment – the Respondent Debtor is unsuccessful) by the Respondent Debtor until early in 2008, at the earliest. In all of the circumstances, the Court does not consider that there is likely to be a debt due and payable within the reasonable immediate future, such as to require solvency assessment on the basis of the Supreme Court Proceedings.
[110] Transcript, pp.82-85.
[111] Transcript, pp.72-73.
Conclusion – evidence of solvency
The Court considers, for the reasons set out above, that the Respondent Debtor is solvent.
Other sufficient cause
Having regard to the Court’s conclusion that the Respondent Debtor is solvent, it is unnecessary to consider whether there is other sufficient cause not to make a sequestration order.
Costs
Under s.32 of the Bankruptcy Act the award of costs is vested in the discretion of the Court. Ordinarily, and absent special circumstances, costs follow the event, but the Court is entitled to examine the conduct of the parties in the case and the circumstances out of which the case arose.[112] Thus, as submitted by the Applicant Creditor’s counsel it is possible that an order for costs might be made against a Respondent Debtor where no sequestration order issues.[113]
[112] Re Skase; ex parte Donnelly (1992) 37 FCR 509 at 522 per Drummond J (“Skase”).
[113] Relying on Re Noye; ex parte Deputy Federal Commissioner of Taxation (1956) 18 ABC 77 at 78 per Clyne J, where that principle is stated succinctly. Skase appears to the Court to be a better expression of the law as to costs as it presently stands.
Having considered the circumstances out of which these proceedings arose, the Supreme Court Proceedings, and the conduct of these proceedings, there is nothing which takes the matter outside the ordinary conduct and running of bankruptcy and antecedent proceedings, and no special circumstances warranting a departure from the ordinary rule whereby costs follow the event. Hence, the Respondent Debtor will be entitled to costs.
Orders
The Court orders that:
a)The Applicant Creditor’s petition be dismissed;
b)The Applicant Creditor pay the Respondent Debtor’s costs to be agreed, or if not agreed, taxed in accordance with O.62 of the Federal Court Rules; and
c)The sum of $13,000.00 paid into Court by the Respondent Debtor pursuant to order 3 of Registrar Jan’s order of 19 June 2006 be released to her forthwith.
I certify that the preceding ninety-four (94) paragraphs are a true copy of the reasons for judgment of Lucev FM
Associate:
Date:
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