Lion Finance Pty Ltd v Kelly

[2011] FMCA 763

FEDERAL MAGISTRATES COURT OF AUSTRALIA

LION FINANCE PTY LTD v KELLY [2011] FMCA 763

BANKRUPTCY – Creditor’s petition – no evidence of ability to pay debt – no other grounds for refusing to make sequestration order – adjournment refused – order made.

Bankruptcy Act 1966 (Cth), ss.52, 52(1)(a), 52(2)(a), 52(2)(b), 52(3), 153A
Bankruptcy Regulations 1996 (Cth), reg.16.01(c)

Cain v Whyte (1933) 48 CLR 639
Eykamp v Deputy Commissioner of Taxation [2010] FCA 797
Rozenbes v Kronhill (1956) 95 CLR 407
Seller v Deputy Commissioner of Taxation [2011] FCA 865
Wren v Mahony (1972) 126 CLR 212

Applicant:

LION FINANCE PTY LTD

ACN 095 926 766

Respondent: TIMOTHY JOHN KELLY

File Number: SYG 2273 of 2010

Judgment of: Smith FM

Hearing date: 28 September 2011

Delivered at: Sydney

Delivered on: 28 September 2011

REPRESENTATION

Counsel for the Applicant: Mr R Chia

Solicitors for the Applicant: Jones King Lawyers

Counsel for the Respondent: Respondent in person

Counsel for Baycorp Collections PDL (Australia) Pty Ltd
ACN 119 478 778,
Supporting Creditor: Ms S Kain

Solicitors for the
Supporting Creditor: ClarkeKann Lawyers

ORDERS

1. A sequestration order be made against the estate of Timothy John Kelly. 

2. All proceedings under the sequestration order are stayed under s.52(3) of the Bankruptcy Act 1966 (Cth) for 21 days.

3. The applicant creditor’s costs, including all reserved costs, be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).

4. Note that the date of the act of bankruptcy is 27 September 2010. 

5. Note that a consent to act as trustee has been signed by Katherine Elizabeth Barnet. 

6. The applicant must give a copy of this order to the Official Receiver within 2 working days. 

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 2273 of 2010

LION FINANCE PTY LTD

ACN 095 926 766

Applicant

And

TIMOTHY JOHN KELLY

Respondent

REASONS FOR JUDGMENT

(revised from transcript)

1. Lion Finance Pty Ltd (“Lion Finance”) obtained a default judgment in the Local Court of New South Wales against Mr Kelly on 15 December 2009, in the sum of $34,895.13 inclusive of costs.  Lion Finance then obtained a bankruptcy notice based on that judgment debt and additional interest, and this was, on the evidence before me, served on Mr Kelly at his home on 6 September 2010.  Mr Kelly failed to pay the amount demanded, being $36,851.17, before the date provided in the bankruptcy notice or to reach any arrangement with Lion Finance, and he therefore committed an act of bankruptcy on 27 September 2010. 

2. I now have before me a petition by Lion Finance for a sequestration order against Mr Kelly based upon non‑payment of the amount demanded in the bankruptcy notice.  Non‑payment is conceded.  The petition was lodged on 20 October 2010, and is due to expire within the next month.  It was adjourned on numerous occasions between 3 February 2011 and the referral of the petition to me on 16 August 2011.  On all of those occasions, Mr Kelly appeared in Court, and most of them involved unsuccessfully contested adjournments. 

3. Mr Kelly presented a number of reasons, which were accepted by Registrars, for seeking more time to raise money to meet the payment owed to Lion Finance under the default judgment.  These included proposals to drawing on equity in his family home owned with his wife, the possibility of raising money from supporting family members, and obtaining permission to draw from his superannuation fund prior to reaching retirement age.  He has also recently suggested that he might apply to the Local Court to set aside the default judgment.  However, none of these proposals has come to any fruition, on the evidence filed by Mr Kelly and given to me today. 

4. When the petition was referred to me on 16 August 2011, I gave a timetable for the filing of additional evidence, and explained to Mr Kelly that this provided him with the last opportunity for him to present evidence in support of his grounds of opposition.  The case was fixed for hearing today. 

5. Mr Kelly has attended today.  He has filed no additional evidence subsequent to the setting down of the matter on 16 August 2011. 

   
   

   In particular, he has filed no additional evidence before the time specified, being 30 August 2011.  He sought a further adjournment of the petition. 

6. He has presented evidence today, being medical certificates and oral evidence of suffering a back incapacity, which has prevented him from attending work and interfered with his life between 15 September 2011 and his return to work yesterday.  Although the medical evidence is not compelling as to how his back incapacity could have affected his preparation of his case, I am ready to accept that it may have impeded his preparation during the period of the incapacity.  However, his evidence about the incapacity does not explain his failure to meet the previous Court timetables in relation to the filing of additional evidence.  More importantly, it does not explain his failure to have applied to the Local Court of New South Wales either to set aside the petition or, as he also suggested he might wish to, to seek payment of the judgment debt by instalments.  The net result is that, in my opinion, he has not presented to the Court a sufficient basis for further adjourning the petition, and I declined to do that. 

7. I then heard Mr Kelly in relation to the substance of his notice of opposition as amended and filed on 22 July 2011.  It said: 

   1.I am not insolvent.  I am permanently employed and sufficient income to repay a debt ordered by the court.  I also have solid future prospects of continued income. 

   2.I have sufficient funds in a superannuation scheme that I am in the process of seeking access to repay a debt ordered by the court. 

   3.I am seeking sufficient time, 30 days to facilitate the release of funds from the Superannuation scheme to repay any debt ordered by the court. 

   4.I have lodged an application to review the decision by APRA in declining my application for early release.  I will receive an answer to that application in about 19 business days.  On the basis of procedural fairness and due process, I seek that time for application to be considered. 

   5.I am also seeking that this matter be referred to a Federal Magistrate for hearing and seek that the matter be placed in the list either on Tuesday 16 August 2011 or a date after that date as I will be interstate and return to the state and work on Monday 15 August 2011. 

   6.I do not agree that I owe the amount of debt claimed by Lion Finance. 

   7.I have had no agreement or loan with Lion Finance. 

   8.It is my submission that Lion Finance purchased the debt from Westpac at a rate that could be anywhere between 1 cent and 10 cents in the dollar.  I am seeking through the court to receive information from Lion Finance all details in respect of the amount paid to Westpac for that debt. 

   9.Subject to that information, it is my submission that the only amount I may owe to Lion Finance is the amount paid to Westpac although I do not concede that I owe any money to Lion Finance.  

   10.Since the last court date, my circumstances have improved.  I have received notification that I had made the last repayment owed on the family vehicle.  Copy of letter received from GE Financial Services 14 July 2010.  This demonstrates a capacity to repay.  It also demonstrates that I could, if ordered by the court, repay an amount of up to $500 per fortnight against any debt ordered by the court. 

   11.I am also challenging that I was served with the required documents and that may affect the validity of the bankruptcy order.  In an affidavit of service tendered by the Creditor, the licensed commercial agent states he served the notice at [Camden] and had a conversation with a female via intercom, “Does Timothy John Kelly live here?”  The female replied, “Yes.”  This could not have occurred as stated by the commercial agent as there is no intercom at my residence.  It would appear that the affidavit of commercial agent contains a false or misleading statement and that the bankruptcy notice was not served as stated in the affidavit. 

   12.It is my submission that the bankruptcy order sought by Lion Finance is a punitive, malicious and unnecessary measure.  It is also self defeating and will not result in the outcome sought by Lion Finance for the following reasons 

   a)The effect of a bankruptcy judgment would be my share my house sold and all available proceeds would go to the bank and there would be no funds available for the creditor to receive any funds. 

   b)Due to my profession, a bankruptcy order is likely to result in my losing my current employment and any future role in my profession which I have practised with distinction for 27 years. 

   c)This would result in me having minimal opportunity to repay [any] court ordered debt through income. 

   13.As stated above, once the amount of quantum is properly heard and determined by the court, it is my submission that a suitable arrangement could be sanctioned by the court to repay the finalised debt amount in a reasonable time. 

   14.I am also seeking time if necessary or required to appeal against the original judgment debt in the Local Court as I did not have an opportunity to be heard on that matter and will lodge an appeal in the Local or District Court as required. 

   These were elaborated to some extent in Mr Kelly’s affidavits. 

8. In relation to the assertion in Ground 1 that he is “not insolvent”, this is to be understood as raising a ground of opposition invoking s.52(2)(a) of the Bankruptcy Act 1966 (Cth) “that he or she is able to pay his or her debts”.  This provision is explained in jurisprudence which was recently examined by Buchanan J in Eykamp v Deputy Commissioner of Taxation [2010] FCA 797:

   7Under an earlier definition in the Act considered in Sandell v Porter (1966) 115 CLR 666 it was necessary for a debtor to be able to pay debts as they fell due out of the debtor’s own money. Such monies extended to those capable of being procured by sale, by mortgage or pledge of assets of the debtor’s within a relatively short time. A more flexible position now obtains. I note that in International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 Katz J favoured the view that the necessity to pay a debt from a person’s own money continued to be an important element in the scheme established under the Act (see e.g. s 124(3)(a) of the Act). However, with respect, so far as it concerns consideration of whether a person is, or is not, solvent, I prefer the view taken by Palmer J in Lewis v Doran (2004) 184 FLR 454 at [116] (see on appeal Lewis v Doran (2005) 219 ALR 555 at [109]–[112]) to which I subscribed, with the agreement of Marshall and Tracey JJ, in Whitton at [34]‑[38].  Accordingly it would not be impermissible to pay regard to the fact that Mrs Eykamp could raise sufficient money to pay the debt, whether or not that was the direct result of sale, mortgage or pledge of her assets.  However, whatever mechanism is employed to secure the necessary funds, and satisfy the Court that it provides adequate evidence of solvency, it remains necessary that it produce results within a realistic time frame (Sandell v Porter at 670, Hall v Poolman [2007] NSWSC 1330; 65 ACSR 123 at [187]).

9. Mr Kelly’s evidence as to his financial affairs is far from adequate in setting out in a comprehensive fashion his assets, liabilities, income and outgoings.  He points to the ownership of a house with his wife, without explaining the title, nor presenting evidence as to his wife’s attitude towards making available her equity towards payment of Mr Kelly’s creditors.  He presents evidence of two bank loans apparently secured on his equity and his wife’s equity of the house.  Those loans appearing to be fully drawn, and he has frankly given evidence that the bank would not advance more money on security of that property.  There is no adequate evidence of valuation, to allow me to make any findings of fact with any confidence as to the unencumbered equity of Mr Kelly and his wife in the property. 

10. In short, there is no evidence that allows me to form a conclusion that his home asset would allow him to raise money to pay this creditor or other creditors “within a realistic timeframe”.  Otherwise, Mr Kelly has not pointed to any other assets available to enable him to pay all his outstanding debts. 

11. He has pointed to his employment as providing a regular source of income.  His wife also, it seems, may have income from which their joint debts have been paid.  However, Mr Kelly’s evidence appears frankly to concede that, although he could hope to pay the money owing to Lion Finance by instalments over a substantial time, his income and savings would not allow him to pay the debt which has been demanded by Lion Finance under the bankruptcy notice and now in the petition in the foreseeable future, and I can see no prospect of this happening in the foreseeable future nor in “a realistic time frame”. 

12. On all the evidence before me, I am far from satisfied that Mr Kelly satisfies s.52(2)(a) of the Bankruptcy Act.

13. Grounds 2, 3, 4 and 5, in effect, address Mr Kelly’s evidence which had been presented to Registrars showing efforts to raise the necessary funds by exercise of an APRA discretion to allow early release of superannuation funds.  However, over the life of the petition, as Mr Kelly now concedes, adverse decisions have been made on his application to APRA, both initially and on reconsideration.  Mr Kelly now concedes that he has no immediate prospects of obtaining such a release. 

14. Grounds 6, 7, 8 and 9 of the notice of opposition present an argument asserting, it seems to me, that Mr Kelly has a defence to Lion Finance’s claims in the Local Court giving rise to the default judgment debt, based on a suspected discounting of the indebtedness acquired by Lion Finance from Westpac Bank under a debt‑factoring arrangement.  Whether in fact there were such arrangements, whether there was a discount, and whether it was substantial or not, is not shown in any evidence.  Moreover, in my opinion, uninstructed by any authority cited to me, these grounds reflect a misunderstanding of the effect of an assignment of debt.  It is the assigned indebtedness, and not the consideration for the assignment, which remains owing by the debtor. 

15. Mr Kelly has had the opportunity to investigate the matter by way of subpoena, and concedes that he has not obtained evidence pointing to any defect in the acquisition of Lion Finance of the liability upon which the default judgment was based.  Mr Kelly has not presented to me any formulated grounds of defence which he could present to the Local Court in support of a setting aside application, and he has in my opinion had more than ample time to discover and present such an arguable defence. 

16. On all the evidence before me, and taking into account all that he has said, I am not persuaded that he has raised any reason for the Court to exercise its “discretion” to go behind a default judgment to consider whether “in truth and reality a debt [is] due to the petitioner” (see Wren v Mahony (1972) 126 CLR 212 at 225).

17. I am not persuaded that I should not allow the petitioner to rely upon the judgment debt, and in my opinion it is appropriate to exercise my discretion to rely upon the affidavit verifying the petition as sufficient to establish the debt upon which both the bankruptcy notice and the petition is based (see s.52(1)(a)).

18. The suggestion of improved circumstances in Ground 10 of the notice of opposition goes to questions of insolvency and inability to pay, which I have addressed above.  I accept that Mr Kelly has demonstrated a desire and ability to pay some of his creditors by way of instalments in the past, and has a basis perhaps for being able to do that in relation to the present debt, if Lion Finance agreed to accept payment by way of instalments.  However, the fact is that Lion Finance has not agreed to this, and is insisting on payment of the total debt by way of a bankruptcy proceedings.  In my opinion, it has a prima facie right to a sequestration order upon establishment of the indebtedness (see Rozenbes v Kronhill (1956) 95 CLR 407 at 414, citing Cain v Whyte (1933) 48 CLR 639 at 645‑646).

19. Ground 11 challenges the service of the bankruptcy notice, only in so far as the affidavit of service of the process server which was initially filed swore to having verified that Mr Kelly’s address at Camden was where he was living by way of a conversation “with a female person via intercom” at that address before he “placed the document in an envelope, marked private and confidential, addressed to Timothy John Kelly and left the same in the letter box of the premises at [Camden]” in accordance with reg.16.01(c) of the Bankruptcy Regulations 1996 (Cth). Mr Kelly denied that, in fact, there was an intercom at his home address, but did not deny that, in fact, an envelope had been left on that occasion marked as deposed by the process server.

20. The process server swore a further affidavit conceding that he had made a mistake when swearing his first affidavit, and that, in fact, “the conversation referred to in paragraph 2 of my Affidavit relates to a conversation I had with a female neighbour and not an occupant” at the Camden address. The incorrect affidavit is most regrettable, however, in my opinion this circumstances does not cause me not to accept that there was service in accordance with reg.16.01(c). Mr Kelly has not presented any evidence which causes me not to accept that part of the affidavit. I am therefore satisfied that the act of bankruptcy occurred. I note that no challenge is made to the formal validity of the bankruptcy notice.

21. Paragraphs 12 and 13 do not, in my opinion, give rise to a ground of opposition to the petition which I can accept as providing “other sufficient cause” for a sequestration order not to be made within s.52(2)(b). In effect, it is a complaint by a debtor as to the wisdom, fairness or morality of a creditor pursuing the debtor into bankruptcy. He may well be right, that from his perspective the creditor’s action is “self defeating” due to a possible lack of dividend to creditors in the insolvency.  However, these are not arguments which the Court can give way to in answer to a petition, where the petitioner has, under the authority cited above, a prima facie right to force an insolvent debtor into bankruptcy administration. 

22. I am unable to find in Mr Kelly’s evidence or submissions any circumstance which could come within principles of abuse of process which may give rise to a good ground of opposition (see the authorities recently referred to by Flick J in Seller v Deputy Commissioner of Taxation [2011] FCA 865 at [14] and subsequent).

23. I have above addressed Mr Kelly’s contention in Ground 13 of the notice of opposition, in which he hoped that arrangements could be made with Lion Finance for payment of the debt by instalments. 

24. I have also answered the request in Ground 14 in so far as it was repeated in the adjournment application made today. 

25. In his affidavit, Mr Kelly raised concerns about the effects of bankruptcy on his employment and profession.  However, he has not in his affidavit or in his oral submissions today shown any real substance to his concern that either of these would be threatened by bankruptcy.  Indeed, on the evidence before me today, it does not appear to me that his employer would be bound or likely to terminate or restrict his employment in any manner affecting his capacity to continue in employment.  Whether his bankruptcy might impact upon the particular duties he is performing might be a different matter, on which I am unable to express any opinions on the evidence before me. 

1. Taking into account all that Mr Kelly has said in his affidavit and to me today, I can understand his concerns at being forced into bankruptcy, but in my opinion those concerns and the possible hardships he will face should not be weighed by me as providing sufficient grounds for declining to make a sequestration order today. 

2. For all of the above reasons, I am satisfied that an act of bankruptcy has been committed, and the requirements of s.52 and other provisions of the Bankruptcy Act and Regulations are satisfied, and that it is appropriate for the Court to exercise its discretion today to make a sequestration order.

3. I am prepared to order a suspension of the operation of the sequestration order under s.52(3) for the maximum 21 days. Mr Kelly is still expressing hopes that he may be able to raise funds to pay out or reach agreement with his creditors from resources available to him or his family or friends. He has not presented evidence before me showing any real prospect of that occurring, but I am prepared in the circumstances to allow him that opportunity. The suspension will not affect his status in bankruptcy, nor the appointment of the trustee, nor the vesting effects of the sequestration order. However, it will delay the trustee in taking steps in the course of administering the estate, and this might reduce the costs of the bankruptcy which would have to be paid by Mr Kelly if he is to emerge from bankruptcy under s.153A or some other method of early discharge from bankruptcy. Mr Kelly should immediately consider those options by taking relevant advice from insolvency experts and/or his trustee in bankruptcy.

I certify that the preceding twenty‑eight (28) paragraphs are a true copy of the reasons for judgment of Smith FM

Associate: 

Date:  6 October 2011