Lawry v Mitrou - [2009] FMCA 258

FEDERAL MAGISTRATES COURT OF AUSTRALIA

LAWRY v MITROU

[2009] FMCA 258

BANKRUPTCY – Application for sequestration order – act of bankruptcy – notice of suspension of payment of debts.

Bankruptcy Act 1966, s.40(1)(h)

Re Scott; Ex parte Scott [1896] 1 QB 619
Cropley’s Ltd v Vickery (1920) 27 CLR 321
Re Hewson; Ex parte Sydney Stock Exchange (1967) 10 FLR 479
Moy v Briscoe & Co Pty Ltd (1907) 5 CLR 56
In re Lamb; Ex parte Gibson 4 Morr 25
Clough v Samuel (1905) AC 442
Re Carney & Carney; Ex parte Ampol Petroleum (Queensland) Pty Ltd (1983) 76 FLR 97
Conn v Hanks [2001] FMCA 62

Applicant:

BRIAN KEITH LAWRY

Respondent:

ARTHUR MITROU

File Number:

MLG 1056 of 2008

Judgment of:

Riley FM

Hearing dates:

15 December 2008 and 13 February 2009

Date of Last Submission:

13 February 2009

Delivered at:

Melbourne

Delivered on:

30 March 2009

REPRESENTATION

Counsel for the Applicant:

Stewart Maiden

Solicitors for the Applicant:

Maurice Blackburn Commercial

Counsel for the Respondent:

No appearance

Solicitors for the Respondent:

No appearance

ORDERS

The application to amend the creditor’s petition filed on 27 August 2008 is refused.
The creditor’s petition filed on 27 August 2008 is dismissed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 1056 of 2008

BRIAN KEITH LAWRY

Applicant

And

ARTHUR MITROU

Respondent

REASONS FOR JUDGMENT

Introduction

This is a petition for a sequestration order. A creditor’s petition was filed on 27 August 2008. A registrar made an order for substituted service. The respondent appeared in person on 9 October 2008. The matter was then adjourned until 10 November 2008 when the respondent again appeared in person. The matter was then adjourned to 15 December 2008. On that occasion, the respondent did not attend court personally, although the applicant had given a notice requiring the respondent to attend for cross-examination. However, the respondent was represented by a solicitor who sought a further adjournment. The adjournment was refused for reasons which were given at the time. The respondent’s solicitor was then given leave to withdraw. The hearing proceeded on 15 December 2008 in the respondent’s absence but was adjourned part heard until

13 February 2009
, when it continued in the respondent's absence. The decision was reserved on that date.

The nominated act of bankruptcy

The act of bankruptcy nominated in the creditor's petition was that, within six months before the presentation of the petition:
The debtor gave notice that he has suspended payment of his debt.
The creditor’s petition referred to s.40(1)(h) of the Bankruptcy Act 1966 (“the Act”). That paragraph provides that:
A debtor commits an act of bankruptcy in each of the following cases:
…
(h)if he or she gives notice to any of his or her creditors that he or she has suspended, or that he or she is about to suspend, payment of his or her debts ….
At the hearing, the applicant sought leave to amend the creditor's petition to allege two alternative debts and, additionally, so that the act of bankruptcy alleged was that:
The debtor gave notice that he has suspended payment of his debts.

The authorities

The amendment to the description of the act of bankruptcy, to include the plural of “debt”, was necessary because it is well established that the nominated act of bankruptcy only occurs where the notice of suspension of payments of debts concerns the whole body of creditors and not just the recipient of the notice: Re Scott; Ex parte Scott [1896] 1 QB 619. In that case, the debtor said to a creditor’s agent, when asked to pay that creditor, “I won't pay anybody now. … I am acting under advice.” In these circumstances, Vaughan Williams J said at 623 to 625:
If we were to hold that every refusal to pay a debt when demanded was a notice of suspension of payment, merely because it was based on the excuse of inability to pay the debt at the moment, we should be giving far too wide an application to s. 4, sub-s. 1 (h). To operate as such a notice, the statement must be a notice of intention to suspend payment of debts in the ordinary course. With regard to a trader it means a notice of suspension of payment of all commercial debts when they are due and payable. If a refusal to pay such debts is based on an inability to pay them at the usual time, I can understand that such a refusal may amount to a notice of suspension of payment. In the case of a trader it would be a notice of intention to suspend payment of debts when they became payable in the ordinary way; but in the case of a private person the ordinary course of payment is not the same, for in such a case a creditor cannot expect that the debtor will always have the money ready. If the creditors of a trader are not paid at certain times, that is a departure from the ordinary course of business; but in the case of a non-trader it is impossible to say that the mere fact that a debtor says “I cannot pay you now; I cannot pay you until I receive my rents,” or, “until I receive my next dividends,” amounts to a notice of suspension of payment. If we look at this case as if there had only been an application for payment, and the creditor had been told to call again, and receive payment for himself and for Mr Lewis, and when he had called the next day the debtor had said, “I cannot pay now, but I hope to pay every one soon,” that in itself would not amount to a notice of suspension of payment. I am convinced that s. 4, sub-s. 1 (h), is meant to apply to the case of a debtor dealing with his creditors as a body. If a debtor gives notice to one of his creditors that he cannot pay, and that he will deal with all his creditors as a body, that will amount to a notice of suspension of payment; but the notice will not come within the section unless the debtor is dealing with his creditors as a body. In the present case the only notice given was that given by the debtor to Mr Sear, that at the moment she could not pay him and Mr Lewis, or any of her creditors. That by itself might not come within the section; but she went on to add that she had taken advice, and that she would not pay anyone. That is not an answer to these two people only; what she was really saying was, ‘I cannot pay you or anyone else; I have taken advice and I am advised that I must deal with my creditors collectively.” For that reason I have come to the conclusion that this announcement did amount to a notice of suspension of payment, or of intention to suspend payment, within the meaning of s. 4, sub-s. 1 (h). I do not hold that this notice comes within the section, on the ground that it is based on inability to pay; if that were all, it would not be sufficient; but it amounted to a notice that she had taken advice, and intended to deal with her creditors collectively and therefore it comes within s. 4, sub-s. 1 (h), and on that ground this motion must be dismissed.
It was made clear in Cropley’s Ltd v Vickery (1920) 27 CLR 321 at 325 per Knox CJ that to constitute the nominated act of bankruptcy, two elements must be satisfied:
first, an intention residing in the mind of the debtor that he will, in a sense voluntarily, that is, as his own act, refuse to pay his debts as they become due, and, secondly, a communication of that intention to one of his creditors.
In Cropley’s Ltd v Vickery, the court at first instance found that the debtor had told a creditor that if the debtor was compelled to pay that creditor, he would be unable to pay his other creditors, and his position would be hopeless. The court held on these facts that the creditor had given notice of his intention to suspend payment of his debts.
On appeal, it was argued by the debtor that there was no statement by him the natural inference from which was that he intended to suspend payment to his creditors generally. On the contrary, he had stated that he intended to carry on his business. The creditor argued that the debtor’s intention not to pay his creditors was the natural inference from the debtor’s statement that if he paid a particular creditor his position would be hopeless.
Knox CJ allowed the appeal. His Honour held that, not only did the debtor not communicate an intention to suspend payment of his debts, he did not have such an intention. His Honour considered that:
on the evidence the proper inference to draw … is that [the debtor] realized that the settlement he had come to with Cropley’s Ltd under compulsion rendered it extremely probable that he would be unable to carry on his business or to pay his other creditors, but that he meant to attempt to do so. (emphasis added)
Communication of a mere inability to pay is not sufficient to constitute the act of bankruptcy. In Re Hewson; Ex parte Sydney Stock Exchange (1967) 10 FLR 479 at 484, Gibbs J (as his Honour then was), said, when sitting in the Federal Court of Bankruptcy:
The debtor commits this act of bankruptcy when he decides not to meet his engagements as they fall due, and gives notice of that decision to his creditors, although the reason for his decision is that any other course would be futile. As Lord Robertson pointed out in Clough v Samuel [1905] AC at 448, a man who is insolvent has a number of choices open to him. He “may try to arrange with his more pressing creditors, or he may put off the evil day and stagger on, leaving the stoppage of his career to be brought about by the action of others”. If he chooses either of those courses he does not intend to suspend payment of his debts. Another course open however is to give up the struggle and make no attempt to pay his debts, and if he chooses that course, even if it is the only sensible course, he does not intend to pay his creditors in the course of his trade … and does intend to suspend payment. If a debtor says that he is unable to pay, and means no more than that, it is not enough, but if in the circumstances his words mean that he has not the intention of paying his debts as they become due, that will be notice that he is about to suspend payment ….
As I have indicated, in the circumstances of the present case Hewson's statements went beyond a mere declaration of his inability to pay his debts. They made it clear that of necessity he had given up the struggle and intended to do nothing towards paying his debts as they became due in the ordinary course of his trade as a stockbroker.
In Hewson, the debtor was a stockbroker who had incurred extremely heavy losses in the course of trading in stocks. He admitted to a committee of the Sydney Stock Exchange Ltd, which included a number of his creditors, that he was insolvent and that he did not know how he could meet his obligations. He said that if the committee suspended him from the stock exchange he would be finished because he could not do anything further from that point. The committee did suspend him. In these circumstances, the court concluded that the debtor had given notice of his intention to suspend payment of his debts.
In Moy v Briscoe & Company Ltd (1907) 5 CLR 56 at 62, Griffith CJ addressed the question of whether the communication of the debtor’s intention was to be construed objectively or subjectively. His Honour cited two authorities, both with approval, the first suggesting that the test was objective and the second suggesting that it was subjective.
The first case was In re Lamb; Ex parte Gibson 4 Morr 25 at p.32, where Bowen LJ said:
We have in each case to ask ourselves, and in each case to answer the question, what is the reasonable construction which those who receive this statement of the debtor would have a right, under the circumstances of the debtor's case, to assume, and would assume, to be his meaning as to what he intends to do with respect to paying, or suspending payment of, his debts.
The second case was Clough v Samuel (1905) AC 442 at 446 where Macnaghten LJ said, in dissent, that:
The question is what effect would the communication have on the minds of the persons to whom it is addressed. … All that is required is that a communication proceeding from the debtor, made seriously, should give the creditors or any of the creditors to understand from the state of circumstances as disclosed at the time that the debtor has suspended or that he is about to suspend payment.
In considering the circumstances in Moy v Briscoe, Griffith CJ referred at page 63 to the intent that the communication would convey to “any ordinary person”. All in all, it seems to me that the authorities require that the communication would reasonably convey to a creditor, in the circumstances of the case, that the debtor intended to suspend payment of all of his debts. It is not enough that the creditor to whom notice was given in fact understood that the debtor intended to suspend payment of all of his debts.
In Moy v Briscoe, the debtor told a creditor that he had put his affairs in the hands of accountants to prepare a statement of his accounts and that in the meantime the debtor had been advised not to pay any accounts. That statement in the circumstances was held to constitute notice of suspension of payment of debts.
In Re Carney & Carney; Ex parte Ampol Petroleum (Queensland) Pty Ltd (1983) 76 FLR 97, Fitzgerald J dismissed a creditor’s petition based on an alleged act of bankruptcy consisting of notice to suspend payment of debts. Ampol had judgment against the debtors in the sum of almost $100,000 and it was alleged that they owed Caltex $200,000. The debtors said that they were unable to presently pay either Ampol or Caltex, but said that they had paid and were continuing to pay various smaller trade creditors, including their small suppliers, their staff and their landlord. In these circumstances, Fitzgerald J did not accept that the debtors had indicated an intention to suspend payment to their creditors generally.
In Conn v Hanks [2001] FMCA 62, Phipps FM accepted that the debtor had given notice of an intention to suspend payment of debts to his creditors generally. In that case, the debtor said to a creditor:
Look mate, you know my wife and I have lost a bundle on this business. We have no money to pay anyone, not you or anyone else, and we can't see when we'll have it in the future. We owe money all over the place and if anyone pushes us, they'll get nothing.

The circumstances of this case

In the present case, the applicant relied on the following matters to constitute notice by the respondent that he had suspended payment of his debts. Firstly, the applicant said at paragraph 12 of his affidavit sworn on 26 August 2008 that:
On numerous occasions between February 2007 and the time of swearing this my affidavit, I contacted Mr Mitrou to request payment of the amount he owed me. His usual response was words to the following effect:
I am concentrating on my rehabilitation and I cannot work or pay. I am on a disability pension and am living off money from family and friends.
Secondly, the applicant said at paragraph 13 of his affidavit sworn on 26 August 2008 that, on 6 May 2008, he had sent a letter to Mr Mitrou by email. The letter said:
Dear Arthur,
I refer to our agreement dated 15 February 2007.
The debt which you agreed to pay was $198,765 plus interest. You have not paid any of it.
I agreed to refrain from pursuing the debt so long as you demonstrated good faith. You have not done so. You have:
1.not updated me on your financial position or your ability to pay;
2.not offered to repay any part of the debt;
3.threatened to take out a restraining order against my wife, because she arranged to send you a letter concerning your obligation to repay;
4.been contemptuous about your intention to repay.
I require you to clearly demonstrate that you are acting in good faith. To do so, I require you to repay the principal outstanding on the debt by 4 pm on Wednesday, 3 June 2008.
If that is not possible, I require a written statement from you by that time:
1.stating that you are unable to pay;
2.describing your current assets and liabilities;
3.attaching copies of financial records (such as bank statements) since 15 February 2007; and
4.providing me with your current residential address.
I reserve the right to further investigate your financial affairs.
If I don’t hear from you as required by 3 June 2008, I will proceed on the assumption that you do not intend to honour our agreement, and will consider my legal rights and remedies.
Further, I have been contacted by the Australian Tax Office about unpaid tax of approximately $80,000 in relation to our business. As directors, we are jointly liable to pay. Please indicate by
3 June 2008, whether you are able to pay your half share of that tax liability.
Regards,
Brian Lawry
The applicant exhibited to his affidavit sworn on 26 August 2008 a letter dated 18 September 2007 from the Australian Taxation Office to the trustee for the ABG Unit Trust. The letter demanded payment of $71,646.22. At the hearing before this court, counsel for the applicant conceded that the applicant had been mistaken in telling the respondent that they were jointly liable to pay the tax debt. Accordingly, I proceed on the basis that the $71,646.22 was not a debt owing by the respondent.
The applicant said at paragraph 14 of his affidavit sworn on

26 August 2008
that on 12 May 2008 he received an email from Mr Mitrou in which he said:
Dear Brian,
I needed the weekend to cool off, otherwise a 2 word response was all you were going to get.
Now, I think that to respond in kind would mean I threaten and give you ultimatums in response.
I will not do so, as that would be too easy to do.
So what I will do is give you the facts. (You then will start your legal action, as you have constantly threatened to do so).
We spoke two weeks ago, and I told you I was still not working be course I am still under rehab.
My only income is the DSP @ $14k PA, (DSP, Disability Support Pension)
I have no fixed address, as my health requires I move to warm climate during the cold months, I only board, here and there.
I have no assets, maybe $5000 of personal belongings.
I have many liability’s, in the range of $45K.
I do not know when I will return to work, course I do not know how long recovery and rehab will take.
Therefore your answer is in that, ““unknown”””
I do not have crystal ball, neither does my surgeon and my rehab doctors.
Ok, now the conditions for me to comply to your threats.
If you want all this in legal proof, I shall require form you a written letter stating you will “never” pursue legal action, (now or in the future).
If you go anywhere near my children’s and their mothers home direct or otherwise, all agreements are null and void, prior, current or future.
I will, block you from my phone, cancel this email address, and you will not have any direct contact with me again.
So please state in writing what your intentions are and I will respond as to my terms above.
You must declare as to your intention to take legal action as a first point. (Answer to this is mandatory before moving foreword)
Kind regards
Thirdly, the applicant referred to an email from him to the respondent dated 14 May 2008 and the respondent’s reply dated 15 May 2008. The applicant’s email is as follows:
Arthur,
My only response is to reinforce what is said in the letter.
If your financial condition is so bad then you should have no concern with proving it without condition.
Please send me your list of contact details. I need your contact details (address, phone, email) to keep in touch. If not, I will have to use the only residential address I have and that is Danielle’s. She may be your ex wife but she knows how to contact you.
To date I have not threatened anything but every conversation has been the same. You will not be open and honest and just keep saying “are you taking legal action” rather than answering questions regarding payments. This was the same on the phone two weeks ago.
The date on the letter has not changed.
Brian

The respondent’s email dated 15 May 2008 is as follows:
Email is suffice 4 u 2 contact me.
As far as Danielle is concerned, she is informed to put in bin any mail marked 4 me. So you might as well stop that, it is just pissing me off. I mean it Brian, keep sending stuff there and I will break all communication with you. (last time I am saying this)
If you really want to send me letters I can give you a PO BOX, as I have told you, “NO FIXED ADDRESS”
I have answered your letter and have stated my terms. If you want my documents, meet the terms or take action, your call.
I do not care if you believe me or not, you want to find out in court, be my guest, I will not contest it.
I have told you once before, declare your intentions in advance and we move forward, you cant have your cake and eat it.
Awaiting your response Brian
PS: you don’t have long, I will be going north soon as I have told Brian, cold equals chronic pain for me, you know that it has been the same for last 2 years.
The applicant relied particularly on the passages in the emails of

12 and 15 May 2008 which are set out not in italics in the quotations set out above.
The applicant said at paragraphs 15 and 16 of his affidavit sworn on

26 August 2008
that:
15. I understood Mr Mitrou’s statements, and in particular, those in his e-mail of 12 May 2008, to mean that:
a. he could not pay any of his debts until some date in the future, when and if he returned to work; and
b. he had decided not to pay his debts, including his debt to me and his taxation debt, as and when they fell due.
16.At the time of swearing this my affidavit I have not received payment of any of the debt described in paragraph 11 above from Mr Mitrou. By reason of his failure to pay and the matters set out above, I believe that Mr Mitrou has suspended payment of his debts, and cannot and will not pay what he owes me.

Conclusion

I accept the applicant's unchallenged evidence that, by virtue of the statements made by the respondent and by virtue of his failure to pay the amounts claimed by the applicant, the applicant believes that the respondent had suspended payment of his debts. However, the question is whether a creditor would have reasonably formed the view, in the circumstances of this case, that the respondent had given notice that he had, or was about to, suspend payment of all of his debts.
In my view, a fair reading of the respondent’s email of 12 May 2008 is that the respondent said that, in view of his health, his income and his other debts, he was not presently able to pay the applicant. The respondent did not state in express terms his intentions regarding his other debts. The respondent’s email of 12 May 2008 indicates that he had liabilities totalling about $45,000. The applicant did not dispute that claim. The hearing proceeded on the basis that the respondent did have the other debts he mentioned in his email dated 12 May 2008.
Accordingly, this case is distinguishable from Scott, where the debtor told a creditor’s agent, “I won't pay anybody now. … I am acting under advice.” (emphasis added) The present case is also distinguishable from Moy v Briscoe, where the debtor told a creditor that he had put his affairs in the hands of accountants to prepare a statement of his accounts and that in the meantime the debtor had been advised not to pay any accounts. Similarly, the present case is distinguishable from Conn v Hanks where the debtor said to a creditor:
We have no money to pay anyone, not you or anyone else, and we can't see when we'll have it in the future. We owe money all over the place and if anyone pushes us, they'll get nothing. (emphasis added)
In each of the three cases mentioned, it is clear that the debtor indicated very clearly that none of his or her creditors would be paid anything for the time being. The present case is different. The respondent was silent about his other creditors. He simply said that he had liabilities, without saying whether he intended to meet them or not.
The applicant argued that it was implicit in the respondent’s communications that he was unable to pay any debts and that he had communicated that he had suspended or would suspend payment of all of his debts. The applicant relied particularly on Hewson. In that case, the debtor did not expressly say that he would not pay any of his creditors. However, it seems clear from the report that the debtor regarded all of his debts collectively and that his statements to the creditors were to the effect that he would not be paying any of them.
The present case is different. The respondent does not appear to be treating all of his debts collectively. He seems to be distinguishing between his liabilities, which he limits to about $45,000, and the claim made by the applicant, which amounts to almost $200,000. The respondent clearly stated that he was not able to, and would not, pay the applicant in the short term. However, he did not state his position in relation to his other debts.
I note that it was said in Scott that:
If we were to hold that every refusal to pay a debt when demanded was a notice of suspension of payment, merely because it was based on the excuse of inability to pay the debt at the moment, we should be giving far too wide an application to s. 4, sub-s. 1 (h). … If a debtor gives notice to one of his creditors that he cannot pay, and that he will deal with all his creditors as a body, that will amount to a notice of suspension of payment.
I also note that in Hewson, Gibbs J said:
As Lord Robertson pointed out in Clough v Samuel [1905] AC at 448, a man who is insolvent has a number of choices open to him. He “may try to arrange with his more pressing creditors, or he may put off the evil day and stagger on, leaving the stoppage of his career to be brought about by the action of others”. If he chooses either of those courses he does not intend to suspend payment of his debts.
I accept that the notice required by s 40(1)(h) of the Act does not need to be entirely express and that the debtor’s communications are to be interpreted in the light of the circumstances of the case. However, there is a difference between matters that can be fairly implied and matters that are mere conjecture or speculation.
It seems to me that the present case is similar to Cropley’s Ltd v Vickery, where the debtor did not actually form the intention to suspend payment of his debts, even though his position was apparently hopeless. It seems to me that the respondent in the present case was “just staggering on”, in the words of Clough v Samuel, without actually forming an intention to suspend payment of all of his debts.
I consider that, on a fair reading of the respondent’s communications to the applicant, in all of the circumstances of this case, the respondent did not form the intention to suspend payment of all of his debts and did not communicate that intention. To hold otherwise would be to give too wide an interpretation to s 40(1)(h) of the Act, as cautioned against in Scott.
Accordingly, the act of bankruptcy relied upon is not made out and the petition must be dismissed. It is therefore unnecessary for me to consider whether the debt claimed by the applicant, or either of the alternative debts mentioned in the proposed amended petition, are sustainable. I will not grant leave to amend the petition because amendment would be futile.

I certify that the preceding thirty-eight (38) paragraphs are a true copy of the reasons for judgment of Riley FM

Associate: Ashika Kanhai

Date: 30 March 2009