Little Creatures Brewing Pty Ltd v Bordin - [2006] FMCA 302

FEDERAL MAGISTRATES COURT OF AUSTRALIA

LITTLE CREATURES BREWING PTY LTD v BORDIN

[2006] FMCA 302

BANKRUPTCY – Sequestration Order – solvency – whether refinancing through family relevant – oral loan agreement – whether sufficient evidence of solvency – whether Corporations Act provisions similar to Bankruptcy Act – ability to pay not required “from his own moneys”.

Bankruptcy Act 1966, s.5, 52(2)(a), 95A
Corporations Act 2001, s.95A

Lewis & Anor v Doran (2004) 208 ALR 385
Sandell v Porter (1966) 115 CLR 666
Harrison v Lewis (2001) 19 ACLC 566
Re Sarina; Ex parte Wollondilly Shire Council (1980) 43 FLR 163
Re Capel Ex parte Caram Finance Australia Ltd (unreported) FCA per Finn J 9 April 1998
International Alpaca Management Ltd v Ensor (1999) FCA 72

Applicant:

LITTLE CREATURES BREWING PTY LTD (ACN 083 392 303)

Respondent:

DOMENIC BORDIN

File Number:

MLG 1165 of 2005

Judgment of:

McInnis FM

Hearing date:

22 February 2006

Delivered at:

Melbourne

Delivered on:

3 March 2006

REPRESENTATION

Counsel for the Applicant:

Mr S.J. Waldron

Solicitors for the Applicant:

Mallesons Stephen Jacques

Counsel for the Respondent:

Mr M.J. Galvin

Solicitors for the Respondent:

Madgwicks

Solicitor for the Supporting Creditor – Australian Taxation Office:

Ms R Hannan

Solicitors for the Supporting Creditor – Australian Taxation Office:

ATO Legal Services

Solicitor for the Supporting Creditor – Tasman Liquor Traders:

Mr L Blake

Solicitors for the Supporting Creditor – Tasman Liquor Traders:

Hunt & Hunt

ORDERS

A Sequestration Order be made against the estate of Domenic Bordin.
The Applicant Creditor’s costs be taxed in accordance with the Federal Court Rules and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 1165 of 2005

LITTLE CREATURES BREWING PTY LTD (ACN 083 392 303)

Applicant

And

DOMENIC BORDIN

Respondent

REASONS FOR JUDGMENT

This is a creditors petition filed by Little Creatures Brewing Pty Ltd ("the creditor") seeking a sequestration order against Domenic Bordin ("the debtor"). The petition has been the subject of notices of appearance filed by two supporting creditors, namely the Deputy Commissioner of Taxation of the Commonwealth of Australia and Tasman Liquor Traders Pty Ltd (in Liquidation) ("the supporting creditors").
The creditors petition relies upon a bankruptcy notice issued on 18 May 2005. The bankruptcy notice claims that the debtor owes the creditor the amount of $29,895.14, being moneys owed to the creditor arising from a default judgment obtained in the Supreme Court of Tasmania at Hobart in proceedings number 516 of 2004 on 22 December 2004.
There is no issue taken in relation to the service of the bankruptcy notice and at the date of hearing updated affidavits as required were filed deposing to proof of debt and that the appropriate searches having been undertaken.
The debtor has relied upon a notice of intention to oppose the petition filed 28 November 2005. In that notice the debtor refers to the following grounds:-
“1. Applications for a refinancing of two large assets, being a farm at 1179 Illawarra Road, Longford, and the freehold of a hotel known as the Rocherlea Tavern, both located in Tasmania, have been lodged and are likely to be approved within approximately 2 weeks.
2. The funds made available from that refinancing would be more than sufficient to pay all of the respondent's debts.
3. Alternatively to the refinancing, the respondent's parents have listed the freehold of the Rocherlea Tavern for sale with various agents in Tasmania. Several expressions of interest have been received.
4. The funds available from a sale of the freehold of the Rocherlea Tavern would be more than sufficient to pay all of the respondent's debts.
5. By reason of the matters referred to in paragraphs 1-4, the respondent is solvent for the purposes of the applicant creditor’s petition and accordingly, sequestration orders should not be made against the respondent in pursuance of that petition.”
The debtor filed an affidavit in support of the notice of intention to oppose the petition on 1 December 2005. In that affidavit, which had been sworn on 30 November 2005, the debtor refers to the orders which had been made by a Registrar on 9 November 2005 requiring the debtor to swear an affidavit "deposing to my attempts to satisfy the debt claimed by the applicant creditor".
In his affidavit the debtor further deposes as follows:-
“2. On behalf of the Bordin Family Trust, my parents’ trust, of which Bordin Management Pty Ltd is trustee, I caused to be lodged applications for finance based on the value of the farm at 1179 Illawarra Road, Longford, owned by the Bordin Agricultural Unit Trust, and the hotel known as Rocherlea Tavern, owned by Rocherlea Tavern Pty Ltd.”
Annexed to that affidavit was a document described as an email "from Bill Bissett of Mortgage Central confirming a lodgment of applications for finance".
The debtor then further deposed that he had been informed by Mr Bissett and believed that the Bordin Management Trust would be offered approximately $2,400,000 by way of finance "to these applications". He further deposes, "That money will be used to discharge my personal debts as well as for other purposes relating to the Rocherlea Tavern."
In the same affidavit the deponent refers to the Rocherlea Tavern apparently listed with various real estate agents for sale in order to provide an alternative, though not additional, source of funding. The deponent states he had a belief that the sale of the tavern either by auction or by private treaty would yield approximately $2,500,000 to $3,000.000.
In his affidavit the deponent claims that the funds realised "from either the refinancing of the farm and the Rocherlea Tavern or from the sale of the Rocherlea Tavern will be used (among other things) to discharge my personal debts, including the debt owed to the applicant creditor which is claimed in these proceedings". He further states, "I expect these funds to be available to me in two-four weeks."
The immediate observation that could be made at this point of the proceedings is that there appears to be a discrepancy between the period of "two weeks" referred to in the notice of intention to oppose the petition and the period of "two‑four weeks" referred to in the affidavit in support.
After the notice of intention to oppose the petition was filed then further material was provided by the debtor and others in support of the essential argument in this application, namely that he is solvent. Specifically, the debtor filed and served a further affidavit sworn by him on 5 December 2005.
In that affidavit he provides a statement of assets and liabilities as at the date of swearing the affidavit. The liabilities in that statement are claimed to be $3,684,400. The assets total $1650, comprising $150 in the bank and an amount of $1500 for "clothing". In that document reference is made to a credit card balance and other liabilities under the heading "Personal Guarantees" which include the following:-
Bordin Management Pty Ltd           $2,429,000
Little Creatures Brewery   $40,000
Vok Beverages   $125,000
Esanda Finance       $27,000
CBFC Finance   $11,400
Tooheys Brewing   $38,000
Bennetto Finance   $12,000
Tasmanian Government   $65,000
In the same document under the heading "Contingent Liabilities" reference is made to a liability to Tasman Liquor Traders (in Liquidation) one of the supporting creditors in the amount of $816,000, though reference is made to what is described as a set‑off (in dispute) of $765,000. The net liabilities appear to be $3,646,750.
The debtor also sought to rely upon a further affidavit, this time sworn by the debtor's mother, Maria Grazia Bordin. The affidavit, apparently sworn 30 November 2005, refers to the debtor's affidavit wherein he deposed to liabilities in the amount of $3,646,750 and then goes on to state the following:-
“3. Together with my husband, Ermengildo Bordin, I own the following assets beneficially:
(a) a public hotel known as Rocherlea Tavern, through Rocherlea Tavern Pty Ltd, of which my husband and I are directors and shareholders; and
(b) a farm at 1179 Illawarra Road, Longford, Tasmania, through the Bordin Agricultural Unit Trust, of which my husband and I are unit holders. Bordin Management Pty Ltd is the corporate trustee of that unit trust.”
Exhibited to that affidavit of the debtor's mother are company searches dated 1 December 2005 in respect of Rocherlea Tavern Pty Ltd and Bordin Management Pty Ltd.
In the affidavit of the mother of the debtor, reference is made to the tavern having been listed for sale, and annexed to the affidavit is a report from a real estate agent suggesting that the sale is expected to realise $2,800,000. Further reference was made to the debtor's affidavit of 30 November 2005 deposing that applications for finance had been lodged on the basis of 50 per cent of the value of the Longford farm and 60 per cent of the value of the tavern.
Significantly, at the time of the swearing of the affidavit of the debtor's mother, that is 5 December 2005, the deponent states:-
“7. My husband and I will apply funds received from either the refinancing or the sale of Rocherlea Tavern to assist Domenic to pay his liabilities. We will not treat these funds as a loan to Domenic.”
The debtor then further relies upon an affidavit sworn by him on 22 December 2005. In that affidavit he seeks to analyse the personal liabilities that have been referred to earlier in this judgment. After analysing those debts in further detail, the debtor then states, in relation to what is claimed to be the total amount of personal liabilities, the following:
“14. The sum of my personal liabilities, excluding the debt to Bordin Management Pty Ltd, and the debt owed to the petitioning creditor in this proceeding which is approximately $220,107.12. I expect to discharge the debts on the full funding of either new mortgage to Bordin Management Pty Ltd or Rocherlea Tavern Pty Ltd. The debt to the petitioning creditor will be paid as soon as funds become available on the part funding of the new mortgage to Rocherlea Tavern Pty Ltd.”
Further in the affidavit sworn 22 December 2005 the debtor states the following:-
“18. The funds which will be made available from the refinancing of the Rocherlea Tavern and the Longford farm (approximately $1,400,000) will be sufficient to discharge my personal liabilities, given that my parents have agreed to use those funds to assist me with the repayment of those liabilities.”
When the matter came before the court on 20 February 2006 a short adjournment was granted on the basis that some further discussions were taking place amongst the parties. Ultimately the matter then proceeded on 23 February 2006 with the applicant filing in court up‑to‑date affidavits of proof of debt and search. The debtor also sought to rely upon further affidavit material, including an affidavit sworn by him on 22 February 2006 and an affidavit sworn by the debtor's father, Ermengildo Bordin also on 22 February 2006.
In the affidavit of the debtor's father sworn 22 February 2006 the following relevantly appears under the heading "Bordin Management Pty Ltd":-
“3 My son's affidavit sworn 22 December 2005 deposes to a debt owed by him to Bordin Management Pty Ltd of approximately $2,429,000.00. I confirm that this amount is owed to Bordin Management Pty Ltd by my son.
4. Historical extracts in respect of Bordin Management Pty Ltd and Rocherlea Tavern Pty Ltd comprise exhibit ‘MGB-1’ to the affidavit of my wife sworn 5 December 2005.
5. In our capacities as directors of Bordin Management Pty Ltd, my wife and I have resolved we will not cause Bordin Management Ltd to call for repayment of the debt owed by Domenic to Bordin Management Pty Ltd before the expiration of six months. Further, there is no present intention to call for repayment of the money at any particular time in the future.”
In the same affidavit the debtor's father deposes under the heading "Borrowing by Bordin Management Pty Ltd on the Security of the Rocherlea Tavern" the following:-
“6. On 17 February 2006, the amount of $500,000.00 borrowed by Bordin Management Pty Ltd was deposited at the direction of my wife and me into an account held in our joint names. These funds were loaned to Bordin Management Pty Ltd on the security of, inter alia, the mortgage over the Rocherlea Tavern at 214 to 218 George Town Road, Rocherlea. Exhibit DB-8 to the affidavit of Domenic sworn 22 December 2005 is a copy of a letter from AuSec on behalf of my wife and I as directors of Rocherlea Tavern Pty Ltd regarding the refinancing of the Rocherlea Tavern property.
7. Notwithstanding that my wife and I previously agreed not to treat these funds as a loan to Domenic, my wife and I have in our capacities as directors of Bordin Management Pty Ltd have now agreed with Domenic to treat these funds as a loan to him. The terms of this loan are as follows:
(a) the loan funds will be used to pay Domenic's personal creditors;
(b) the loan funds will be repayable by Domenic to Bordin Management Pty Ltd on demand in the future, but in any event not before the expiration of six months.”
Exhibit DB-9 to the affidavit of the debtor sworn 22 December 2005 appears to be a letter to the debtor's parents and is dated 1 December 2005. The letter from Latrobe Home Loans of Australia Pty Ltd states the following:-
“We are pleased to advise that La Trobe is prepared to proceed generally with your Application for Finance, subject to various conditions to be confirmed in any formal subsequent Letter of Offer should you proceed with your application.”
The letter then sets out what are described as "details of proposed loan". It refers to a loan amount of $1,000,000 "or 50%t of valuation, whichever is the lesser". It refers to a two‑year period of loan and otherwise sets out the interest and refers to the security as being the property at 1179 Illawarra Road, Longford.
Also in the letter appears to be a list of items required from the borrower before further considering approval of the application. That list includes acceptable valuations, accountants correspondence in the standard form, six months satisfactory conduct on debt to be refinanced and payment of an application and valuation fee.
In his affidavit sworn 22 February 2006 the debtor refers to his earlier affidavits and affidavits filed and served by the respondent. In relation to personal assets the debtor deposes:-
“4. My personal assets comprise loan funds in the amount of $500,000.00 which has been advanced to me by way of loan from Bordin Management Pty Ltd, which is further discussed in paragraphs 22 to 24 of this affidavit. I have no other assets.”
Paragraphs 22 to 24 of the debtor's most recent affidavit provide:-
“22. Exhibit DB-8 to my earlier affidavit is a letter from AuSec (Australian Secured Investments Limited) dated 16 December 2005 to Tasmanian Perpetual Trustees Ltd relating to the refinancing of the first mortgage held by Tasmanian Perpetual Trustees Ltd over the Rocherlea Tavern. A title search in respect of the Rocherlea Tavern, which confirms that it is owned by Rocherlea Tavern Pty Ltd, forms part of exhibit "’CMP-4’ to the affidavit of Catherine Maisie Pierce affirmed 20 February 2006.
Now produced and shown to me and marked ‘DB-2’ is a letter from AuSec to Bordin Management Pty Ltd dated 16 December 2005. Now produced and shown to me and marked ‘DB-3’ is a true copy of an Acknowledge of Further Advance dated 16 February 2006.
23. In pursuance of the refinancing of the Rocherlea Tavern, $500,000.00 was deposited into a Commonwealth Bank of Australia account in the joint names of my parents on Friday 17 February 2006 by AuSec. The money was paid into a bank account in the joint names of my parents at their direction, although the moneys were borrowed by Bordin Management Pty Ltd.
Now produced and shown to me and marked ‘DB-4’ is a true copy of a bank statement showing the deposit of $500,000.00 from AuSec into my parents' bank account.
24. My parents in their capacity as directors of Bordin Management Pty Ltd have agreed with me that they will loan the $500,000.00 referred to in paragraph 23 of this affidavit as a loan and that my parents have no present intention to call on the loan after that time. My parents' loan to me has been made on the following terms:
(a) the loan funds are to be used to repay my personal creditors; and
(b) the loan funds will be repayable by me to Bordin Management Pty Ltd on demand but in any event not before the expiration of at least 6 months from the date of this affidavit, and that my parents have no present intention to call on the loan after that time.”
Further reference in that recent affidavit is made to the refinancing of what is described as the Longford farm. The deponent further states:-
“25. The valuation of the farm at Illawarra Road, Longford has been assigned to a new financier for the purposes of a further advance of funds to Bordin Management Pty Ltd on the security of the farm.”
A number of observations may be made in relation to the affidavit material of the debtor, and in particular the more recent affidavit material of the debtor's father. There appears to have been a significant change from the earlier affidavit material relied upon by the debtor and specifically reference is made to the affidavit of his mother. In her affidavit referred to earlier in this judgment, the applicant's mother had indicated that both she and her husband upon refinancing would obtain funds which would then be applied to assist the debtor to pay his liabilities. At that time the debtor's mother claimed that she would not "treat these funds as a loan to Domenic". In the later affidavit of the applicant's father, and indeed the debtor’s own affidavit, it is now clear that the funds which apparently have been obtained by the debtor's parents are to be advanced to the debtor by way of a loan.
No loan agreement has been exhibited to the affidavits, nor is there any specific date provided in relation to the loan, save that it is suggested that the amount of $500,000 borrowed by Bordin Management Pty Ltd was deposited at the direction of the debtor's father and mother into an account held in their joint names.
Whilst reference is made to the funds being loaned to Bordin Management Pty Ltd on the security of a mortgage over the tavern, there is no further material before the court in relation to the precise arrangements concerning that borrowing nor have any minutes being produced from the company to suggest that the borrowing and/or the advance of the amount of $500,000 as a result of the borrowing by Bordin Management Pty Ltd has been authorised at any meeting of directors of the company. Perhaps not a great deal turns on that point, though the evidence is somewhat vague.
A further observation which may be made is that, although the affidavit evidence reveals that the amount of $500,000 has been deposited into an account held in the joint names of the debtor's mother and father, there is no evidence before the court that that amount has been advanced to the debtor.
Counsel for the debtor provided two bank cheques, the details of which are as follows:
·Bank cheque payable to the Applicant Creditor’s solicitors in the sum of $49,800.00.
·Bank cheque payable to the Australian Taxation Office in the sum of $75,000.00.
The production of those cheques occurred by way of tender in open court of those amounts claimed to satisfy the indebtedness of the debtor to the applicant and one of the supporting creditors.
The debtor submitted that on the basis of the material now before the court it should be satisfied that in the circumstances the debtor is solvent and accordingly the court should not proceed to make a sequestration order. The debtor submitted that the court should consider carefully the definition which now applies in relation to solvency pursuant to s.5 of the Bankruptcy Act 1966. In that section the following appears:
“A person is "solvent" if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.”

It was argued that the current definition does not require the debtor in discharging any onus concerning solvency to prove a capacity to pay debts as and when they become payable from the debtor's own funds. It was noted that amendments to the Bankruptcy Act have removed the requirement of debtors to establish a capacity to pay debts when they become due and payable from their own funds and that requirement no longer applies.
Reliance was placed upon a decision of Palmer J in the Supreme Court of New South Wales in the matter of Lewis & Anor v Doran (2004) 208 ALR 385. That case concerned the Corporations Act 2001 relating to the significance of the omission from the statutory definition in solvency in s.95A of the words "from his own money", which likewise does not occur in the present version of s.52(2)(a) of the Bankruptcy Act; which were present in the provision considered in the often‑cited decision of Sandell v Porter (1966) 115 CLR 666.
In Lewis v Doran it is noted that Palmer J states the following in relation to the omission of the words "from its own moneys" as follows:-
“[111] In my opinion, the omission of the words “from its own monies” from the definition of insolvency in s 95A now leaves the court free to determine the question of retrospective insolvency free of a qualification which might well be appropriate to determine only prospective insolvency. The omission leaves the court free to determine insolvency, whether retrospective or prospective, as a question of commercial reality having regard to the particular facts of the case.
[112] So, where retrospective insolvency is in issue, the court can take into account that as at and after the alleged date of insolvency the company actually paid all its debts as they fell due because a third party made funds available to it without security. The court can look at the arrangements which were actually made rather than artificially excluding them from consideration because the arrangements did not fall within the definition of payments from the debtor’s “own monies”. To look at what actually happened avoids the possibility that the court is forced to conclude that, as a matter of law, a company could not pay all its relevant debts when, as a matter of fact, the company clearly did pay those debts.
[113] On the other hand, where prospective insolvency is in issue the court, as a general rule, would be sceptical of an assertion that a third party is willing to advance funds unsecured on such terms as would not, in any event, bring about insolvency. Such willingness on the part of a third party would have to be cogently demonstrated, if not as a matter of legal obligation, then as a matter of commercial reality.”
It is not necessary for the court to consider in detail the facts in Lewis v Doran, save to note that in that case the company made various claims against directors of the company and another company with the same directors. Those claims involved establishing that the company was insolvent at a particular point in time under the definition of "insolvency" in the Corporations Act. That then raised the issue of whether it was permissible to take into account money that the company had obtained through certain loans made to it.
In dismissing the claims, the court in Lewis v Doran held that s.95A of the Corporations Act does not require the ability of a person to pay all their debts to be ascertained simply by reference to their own money; rather it was held it requires that ability to be assessed as a matter of commercial reality which may permit consideration of money obtained from an unsecured borrowing or a voluntary extension of credit by another person. So much is clear from the following passage from the judgment of Palmer J where his Honour states:-
“[116] For those reasons I conclude that s 95A of the CA has changed the pre-existing law as to the definition of insolvency as stated in cases such as Sandell v Porter, and that it is no longer necessary in order to assess solvency to ascertain whether the company is able to pay all of its debts “from its own monies”, in the sense discussed in those cases. In my opinion, s 95A requires the court to decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable by reference to the commercial realities. If the court is satisfied that as a matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party.”
It was submitted for the debtor that in the present case the court should interpret the current requirements of s.52 of the Bankruptcy Act as being similar to the requirements of the provision referred to in the Corporations Act which had been considered by the court in Lewis v Doran. It was argued specifically that this court should take into account the affidavit material and the refinancing and the agreement in relation to the loan referred to by the debtor's father.
The views expressed by the court in Lewis v Doran are confined to the context of the Corporations Act. I also noted that there appears to be some divergence of view as to whether or not the alteration to that provision in the Corporations Act changed the law. A different view was expressed by Mandie J in the Supreme Court of Victoria in Harrison v Lewis (2001) 19 ACLC 566 at [pp.578-579] where the court states the following:-
“48. In Re RHD Power Services Pty Ltd (in liq) (1991) 9 ACLC 27, 28; (1990) 3 ACSR 261, 263-4; McPherson SPJ said on the question of insolvency of a company:
‘Its principal current assets consisted of cash at bank and trade debtors. At 30 June 1987 the former stood at $94,494 and the latter, after making allowance for the doubtful debts, at $217,605. Those were not inconsiderable sums; but the company had entered into a factoring agreement with Heller Financial Services Ltd with respect to its trade debtors. Heller was secured by a registered mortgage debenture given by the company in 1985, and on 15 October 1987, it appointed a receiver in respect of all money due to the company. Subsequently the plant and equipment was sold to satisfy this secured debt.
Against this it was said that the company remained solvent as long as its holding company was prepared to continue lending it funds for its operations. As to that, s 122(1) of the Bankruptcy Act speaks of a person who is unable to pay his debts as they become due ‘from his own moneys’. To the extent, if at all, that the company was paying its way before 15 October 1987, it was succeeding in doing so by means of money provided by the holding company. Even if, upon receipt of such a loan, the money lent became on each occasion its ‘own moneys’ it remains true to say that each such loan increased the company’s indebtedness, so making it correspondingly less able to pay its debts as they fell due from its own moneys. But, in any event, the test of insolvency for the purpose of s 122(1) means the inability of the debtor ‘utilizing such case resources as he has or can command, through the use of his asserts, to meet his debts as they fall due’: see Sandell v Porter (1966) 115 CLR 666, at 670 per Barwick CJ. To pay its debts the company here was using not its own assets but those of its holding company or of other members of the group. It has been said that under s 122(1)’money obtainable by unsecured borrowing is not treated as the debtor’s own money’: see Taylor v Australian & New Zealand Banking Group Ltd (1988) 6 ACLC 808 at 812; (1988) 13 ACLC 780, at 784 per McGarvie J. That may not always or necessarily be so because a person’s inability to borrow without security may in some circumstances provide compelling evidence of his strong financial standing, but it is certainly true of a case like this, where the company has been able to trade only by receiving continuing financial assistance from its parent company.
49. I do not think that the absence of s 95A of the words ‘from its own money’ alters the proper approach to this question as referred to in the passages quoted above. Wine Bank was unable to pay its debts, in particular the debt to McGuigan which was then incurred and soon to fall due, from its own cash resources. I am satisfied that it had no expectation of significant income and no assets which could readily be sold or hypothecated. No sale of the nearly defunct business was reasonably imminent. The Citibank credit facility was the source of a potential loan, but a loan secured on the defendant’s assets and not on the assets of Wine Bank. One debt would simply have been replaced with another debt which could not be repaid. Looking at the total picture, I would have concluded that Wine Bank was insolvent as at 6-12 February 1998.”
It is common ground that there is no authority in a bankruptcy context on this issue. It clearly follows that if the views expressed by the court in Lewis v Doran are correct then it may well be that some of the authorities previously relied upon concerning the issue may no longer be applicable without qualification.
In the past reliance has been placed upon authorities for the proposition that when dealing with availability of money and assets and the ability to pay clearly if a debtor is in a position to pay all the debts he or she owes within a reasonable time that a sequestration order should not be made (see Re Sarina; Ex parte Wollondilly Shire Council (1980) 43 FLR 163) (Re Sarina).
Further it is noted that availability of money and assets does not necessarily require the debtor to have sufficient cash at hand or available on deposit to pay all creditors in full immediately if the debtor has other realisable assets (see again Re Sarina).
The High Court authority in Sandell v Porter (at p.670) provides that in relation to the funds being available to the debtor to pay his debts for solvency purposes that those funds:
“... are not limited to his cash resources immediately available. , They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business of the debtor.”
Also in Sandell v Porter it is noted that where a debtor seeks to rely on the capacity to borrow money or pay his or her debts then the debtor must show that he has assets capable of sourcing or raising the moneys sought to be borrowed "by sale or by mortgage or pledge ... within a relatively short time" (see Sandell v Porter at p.670).
The debtor should also show "a capacity to pay for, to secure or otherwise satisfy the new debt" in order to "discharge the onus that the debtor is a able to pay his debts" (Re Capel Ex parte Caram Finance Australia Ltd (unreported) FCA per Finn J 9 April 1998).
In dealing with the question of ability to pay debts, it is noted that in the past it does not include an ability to pay debts from the money of other people. It is noted that in International Alpaca Management Ltd v Ensor [1999] FCA 72 Katz J stated the following:-
“4 The debtor submits that he has satisfied me either of his ability to pay his debts or of the existence of other sufficient cause why a sequestration order ought not to be made against his estate or of both and that I should therefore dismiss the creditors' petition.
…
9 For instance, the Act provides in subs 5(2) that a "person is `solvent' if, and only if, the person is able to pay all the person's debts, as and when they become due and payable". Many operative provisions of the Act then use the word "solvent". Thus many operative provisions of the Act, instead of simply using the language of a person's ability to pay that person's debts, in effect use the language of a person's ability to pay all that person's debts, as and when they become due and payable.”
There is no issue in the present case taken that the onus of proving the debts within the meaning of s.52A of the Bankruptcy Act lies upon the debtor. However, as indicated, applying the authority of the Supreme Court of New South Wales in Lewis v Doran and by analogy referring to the current definition of "solvency" in the Bankruptcy Act, it is sought to be argued that the affidavit material provides ample evidence upon which this court can be satisfied the debtor is solvent.
The applicant submits that the court relying upon the debtor's own evidence of his assets and liabilities should note the deficiency admitted as $2,830,750. It is further submitted that the debtor appears to have been unable to pay liabilities for at least a period of 18 months. Those liabilities include the debts listed earlier in this decision and significantly the judgment debt of $40,000 owed to the petitioning creditor which was subject to a judgment obtained on 22 December 2004 and the bankruptcy notice not complied with on 13 July 2005.

It should be further noted that certain objections were taken to the admissibility of affidavit material sought to be relied upon by the debtor.
For present purposes it is not necessary for me to formally rule upon the admissibility of that material as I am satisfied that even admitting the material now sought to be relied upon by the debtor that the current loan arrangement between the debtor and his father and mother in the absence of evidence that the amount of $500,000 has been advanced to the debtor, albeit that perhaps some amount was advanced to enable bank cheques to be tendered at the hearing, totalling a sum of $124,800.00, does not persuade me having regard to the history of indebtedness, the extent of indebtedness and the lack of payment of debts to creditors that the debtor has discharged the onus upon him of establishing pursuant to s.52(2)(a) of the Bankruptcy Act that he is able to pay his debts.
In my view the decision of the Court in Lewis v Doran whilst it is apparent that there may be an analogy between the provisions in the Corporations Act and the Bankruptcy Act it does not necessarily follow that the authorities referred to alter the approach to the question for the Court to consider simply by deletion of the words “from his own money” or as in the Corporations legislation “from its own money”. In my view the task for the Court remains consideration of whether the debtor is able to pay his debts as and when they become due and payable. Authorities already make due allowance for the capacity of the debtor to pay debts based upon not simply cash resources immediately available but moneys he can procure. Although due allowance is made for that approach, it is my view that the decision of Mandie J in Harrison v Lewis applies to bankruptcy cases as the Court still needs to consider whether upon obtaining finances from other sources the debtor is capable of servicing any debt raised and/or whether he has assets capable of raising moneys. To ignore those relevant factors would be to a large extent to embark upon a somewhat artificial process where debtors would only need to provide as in this case vague details of a loan which may or may not lead to an advance from the family, friend or friendly creditor without then considering whether that debt substituting for existing debts has any real impact upon the debtor’s solvency. Whilst removal of the words “from his own moneys” may provide at least the opportunity to adduce broader evidence in support of the claim of solvency, it does not relieve the Court from its obligations to properly analyse the nature of the source of funds and the capacity of the debtor to either source and/or finance repayment of any new loan. The task remains in the same manner as the Court’s assessment of the ability of a debtor to liquidate assets which may be claimed to be under his control or power. To the extent that there may be any inconsistency between the views expressed by the Court in Lewis v Palmer and those expressed by Mandie J in Harrison v Lewis, I prefer the reasoning of Mandie J for the reasons stated in applying the principles to bankruptcy law.
The issue of solvency, even if not confined to the ability of the debtor to pay debts out of his own funds, does not in my view assist the debtor in this instance as his capacity to pay his debts from moneys subject to an apparent oral loan agreement with his parents. The moneys have not been advanced. I am not satisfied on the material that that is anything other than a loan that would be payable on demand at the very least after the expiration of a period of six months.
Hence I conclude that, albeit the parents of the debtor may be regarded as friendly creditors prepared to make significant allowances to the debtor, it does not in my view lead to a conclusion that the refinancing arrangements both of the parents and respectively for the debtor could be described as anything other than raising one debt in order to seek to pay existing debts.
The mere fact that there is an absence of evidence as to the demands of other creditors does not of itself mean that those debts are not still current debts. There is no evidence of forgiveness of debts or any suggestion that those debts have been abandoned by the creditors referred to in the debtor's own affidavit material where he sets out in detail his assets and liabilities.
It is my conclusion on the evidence before me that the debtor has failed to discharge the onus that he is able to pay his or her debts and has significantly, in my view, on the material before me for the reasons given failed to establish solvency as I am not satisfied that the debtor is able to pay all his debts as and when they become due and payable. The words "as and when they become due and payable" are particularly significant in the present case given the significant number and substantial amount of the debts set out in the affidavit material.
Further, I am satisfied that the discrepancies in the affidavit material and the manner in which the claimed refinancing and/or advance to the debtor was described initially in the earlier affidavits and the later reference to the loan does not provide what I would describe as material upon which this court could be satisfied that there is indeed in any event an appropriate arrangement in place between the debtor and his parents.
There are a number of outstanding issues, none the least of which concern other parties which may be involved, either as beneficiaries of the trust arrangements and/or as persons otherwise having rights against the company of which the debtor's parents are directors. In any event, the moneys I am satisfied which are sought to be the subject of a loan are effectively moneys which once advanced would create, in the absence of a written agreement to the contrary, a debt immediately due and payable to the parents on demand, albeit that they have indicated that they will not make demand for repayment at least for a period of six months.
It was further sought to be argued for and on behalf of the debtor that this court has a discretion to otherwise consider the material and to refuse to make a sequestration order and indeed proceed to dismiss the petition. It was submitted for and on behalf of the applicant that that discretion would only apply if the court was satisfied that the applicant had otherwise demonstrated solvency.
In my view, the submission on behalf of the applicant in relation to that issue is correct. The debtor having failed to establish solvency and thereby discharge the onus upon him to do so in this application, where solvency is the key issue, has therefore failed to provide any or any proper basis upon which this court could consider the exercise of discretion not to proceed to make a sequestration order.
The court is otherwise satisfied upon the material filed for and on behalf of the respondent that the other requirements of s.52 of the Bankruptcy Act have been complied with and that it is therefore appropriate to make a sequestration order in the usual form.

I certify that the preceding sixty-three (63) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate:

Date: 3 March 2006