Ma v Federal Commissioner of Taxation

[1992] FCA 359

Re: ERIC LESLIE GROOM; BETTY LESLIE GROOM and ALAN BERNARD GROOM
No. BN643 of 1992
FED No. 359
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
Cooper J.(1)

CATCHWORDS

Bankruptcy - Bankruptcy notice - application to set aside a bankruptcy notice or, alternatively, for an extension of time to comply with the notice - judgment debt for money due and owing under bills of mortgage - order for delivery up of the land - sale by public auction - properties passed in - whether bankruptcy notice should be set aside if the debt is overstated - right of secured creditors to issue and serve bankruptcy notices in respect of judgment debts being judgments obtained on the personal covenant to pay contained in the mortgage - sufficiency of the security - whether bringing application to set aside bankruptcy notice a sufficient ground upon which to grant an extension for compliance.

Bankruptcy Act Section 40, Section 41(6A).

Re Prossimo Ex parte Marco (1952) 16 ABC 86.

Re Taylor Ex parte Taylor v. Bill Acceptance (1985) 8 FCR 568.

Re J.A. Scott, Ex parte A.B. Scott (1921) 38 WN (NSW) 72.

Re Donald Robin Walker, Ex parte Walker v. Mercantile Credits Ltd. (No. 265 of 1992)

Re Reicher Ex parte Deputy Commissioner of Taxation B365 of 1990 - Unreported 1.11.90.

Walsh v. Deputy Commissioner of Taxation (1984) 156 CLR 337.

Emerson v. Wreckair Pty. Ltd. No. G68 of 1991 (An unreported decision of the Full Court, Brisbane, 31.1.92).

HEARING

BRISBANE

#DATE 21:5:1992

Solicitors for Applicant: Barker Gosling, Solicitors.

Counsel for Respondent: J. Sullivan

Solicitors for Respondent: Short Punch and Greatorix

ORDER

THE COURT ORDERS:

1. That each application be dismissed.

2. That the applicants are ordered to pay the costs of the respondent of and incidental to the applications to be taxed and in the event that a sequestration order is made against the applicants, founded upon the bankruptcy notice, any part of the costs which then remain unpaid is to be treated as if that part of the costs were petitioning creditors costs.
Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

This is an application by Eric Leslie Groom, Betty Leslie Groom and Alan Bernard Groom to set aside a bankruptcy notice issued against them by William Charles Abela on 24 April 1992 or, alternatively, for an extension of time to comply with the notice for a further 21 days.

1. The background of the bankruptcy proceedings is as follows. On 19 July 1990, Mr Abela obtained judgment in the Supreme Court of Queensland for the sum of $219,366.00 for money then due and owing under bills of mortgage over land at Cleveland, described as Lot 2 on Registered Plan number 87875 and Lot 2 of Registered Plan number 169496. The applicants cross-claimed for rescission of the mortgages, but this cross-claim was dismissed at that time. An appeal by the applicants against the judgment was dismissed by the Queensland Court of Appeal. The applicants do not dispute that the judgment debt on which the bankruptcy notice is based is, subject to any allowances to be made for funds received since judgment, $219,363.60.

2. On 18 October 1991, Mr Abela obtained an order for delivery up of the land into his possession in order to exercise his power of sale. Mr Abela is the second mortgagee in respect of each parcel of land. The first mortgagee is the National Australia Bank.

3. On 8 February 1992, the two parcels were offered for sale by public auction. The debt due to the bank at that date was in excess of $226,299.00 (see the advice of the bank dated 30 January 1992, exhibit B to Mr Abela's affidavit filed herein). The highest bid received at auction was $210,000.00 for both lots. The lots were then offered separately. The highest bid for the vacant allotment was $65,000.00. This would not clear the bank's indebtedness and the costs of sale. The house property, being the second lot, was offered separately but attracted no bid. The properties were passed in.

4. In the weeks following the auction, offers were received, but no offer reached a figure which would pay out the bank's first mortgage interests over the lots. On 26 February 1992, the vacant land was sold for $85,000.00 by private treaty. At settlement, an amount of $61,893.12 was paid to the bank, and, after the payment of all proper adjustments and costs of sale, Mr Abela received $17,625.90, credit for which has been given in the bankruptcy notice.

5. Since the auction, the best written offer received on the house property has been $172,500.00. For 90 days after the auction, the property was marketed by the auctioneers Raine and Horne. Since 8 May 1992, the property has been multi-listed for sale. The property remains unsold.

6. The debt due to the bank and secured under its first mortgage over the house property was, as at 1 April 1992, $178,188.86. The interest accruing to the bank at the rate of 16.5 per cent is being capitalised and added monthly to the bank debt.

7. The ground relied upon to set aside the bankruptcy notice is that the debt is overstated.

8. The evidence relied upon to establish this ground is paragraph 7 of the affidavit of Ms Leslie Groom where she deposes:
   

"I verily believe that the amount claimed by William Charles Abela has been mis-stated as the value of the property described as lot 2 on registered plan number 87875, County of Stanley, Parish of Cleveland, exceeds the amount of all other mortgages on the property save for mortgage number J675614D".

1. The mortgage number quoted in the extract which I have just read relates to the mortgage held by Mr Abela. It was submitted on the applicant's behalf that this evidence establishes that the land has a value beyond whatever may be presently owing to the bank, and that value, whatever it may be, must be credited against the balance of the judgment debt of $201,737.70 claimed in the bankruptcy notice. It is not suggested that the value exceeds the sum claimed in the notice. Rather, it is submitted that the notice contains an overstatement of what is due in an unspecified amount.

2. In support of the submission, reliance was placed on the decisions in Re Prossimo Ex parte Marco (1952) 16 ABC 86 at 89-90; Re Taylor Ex parte Taylor v Bill Acceptance (1985) 8 FCR 568; Re J.A. Scott Ex parte A.B. Scott (1921) 38 WN (NSW) 72.

3. It was submitted that the Prossimo decision stands as authority for the proposition that an overstatement of the judgment debt due in a bankruptcy notice under the Bankruptcy Act renders the notice invalid. Mr Sullivan, who appeared for the respondent, did not seek to question such a proposition on this application.

4. In Taylor the debtor was a guarantor. The creditors sold up, under a security, property of the principal debtor. The balance of the proceeds of sale were placed in a solicitor's trust account where they were held beneficially for the creditor subject to disposition in certain ways consequent upon the happening or non-happening of certain specified events. The bankruptcy notice was issued against the surety. The notice did not give credit for the monies standing in the trust account. It was held that the money in the trust account was held beneficially for the creditor and had to be applied against the debt of the principal debtor to the credit of the surety. This effected a reduction of the debt due by the surety and in consequence the bankruptcy notice overstated the debt due and was, therefore, invalid.

5. In Scott the judgment creditor held collateral security for his debts, the security being in the form of debentures issued by a third-party company. After judgment, but before the issue of the bankruptcy notice, the judgment creditor received 400 in respect of the debentures. Subsequently, but still before issue of the bankruptcy notice, a receiver was appointed on behalf of the debenture holders and realised certain assets. The judgment creditor was entitled to receive some payment pro tanto in satisfaction of the judgment debt. In the bankruptcy notice credit was given for the 400 received, however, no credit was given for the money held by the receiver for the debenture holders, including the judgment creditor.

6. In his reasons in Scott, Street J. at page 73 said:
   

"In his bankruptcy notice credit is given for the pounds 400 only.

In Re Raymond (66 LT 400), Lopez L.J. (p 402) said: 'I think that the view taken by Williams and Collins JJ. in Re Child ex parte Child (66 LT 204), was correct, and that the sum claimed by the judgment creditor as being due upon a final judgment ought to be the sum actually due; that is, that if there has been any payment or satisfaction the bankruptcy notice ought to be in respect of the reduced amount. I agree that there is in this case no evidence of any satisfaction which reduced the amount of the judgment debt.' In that case it was held that there was no evidence of satisfaction. Here, on the contrary, there is evidence of satisfaction pro tanto by the admission that something is held by the receiver for the debenture holders, including the judgment creditor. In these circumstances I think that the bankruptcy notice was issued for too large an amount and it must be set aside with costs".

1. The feature in Taylor and in Scott which entitled the bankruptcy notice to be set aside was that there was evidence that money was held beneficially for the judgment creditor in satisfaction of the judgment debt or part of it, which had the effect of reducing the judgment debt then due. That is not this case. Here there has been no satisfaction of the judgment debt beyond the sum of $17,625.90 for which credit has been given in the bankruptcy notice.

2. It is not correct to say that the mere holding of a security, which may upon realisation produce a surplus which will at that time reduce the judgment debt, precludes the respondent from serving a bankruptcy notice for the unsatisfied balance outstanding and due on the date of the issue of the bankruptcy notice unless the respondent abandons his interest under the mortgage.

3. The Bankruptcy Act recognises the right of secured creditors to issue and serve bankruptcy notices in respect of judgment debts being judgments obtained on the personal covenant to pay contained in the mortgage. The respondent does not have to make any election as to his security interest at this time, and the earliest point in time when such an election may have to be made is if he wishes to present a petition for bankruptcy or prove in the estates of the applicants in the event of their bankruptcy.

4. In any event, I am not satisfied that there is at this time sufficient value in the house property to generate a surplus after the payment out of the bank. All of the evidence as to the considerable efforts taken to sell the property to best advantage demonstrates that it is highly unlikely that a surplus can be achieved at this time. This is particularly so as the bank debt is increasing by the addition of capitalised interest. The belief of the deponent, Ms. Leslie Groom, unsupported by valuation evidence, does not persuade me that the property is readily saleable at a figure beyond the bank debt.

5. It was implicit in the applicant's submissions that the respondent, because he holds a security, must wait until there is an upward movement in the market which would produce a surplus after discharge of the bank debt. That is not correct.

6. In Re Donald Robin Walker ex parte Walker v Mercantile Credits Limited Number 265 of 1992, unreported, Brisbane, 24 April 1992, I had to consider a similar submission to that presently made in the context of an allegation that the judgment debt had been secured within the meaning of section 41(2)(b)(ii) of the Bankruptcy Act. It was alleged that the value of the land secured to the judgment creditor in that case exceeded the amount of the judgment debt. I agreed with Jenkinson J. in Re Reicher Ex parte Deputy Commissioner of Taxation B365 of 1990 Unreported 1.11.90), that the approach of the court to the approval of security in satisfaction of the judgment debt specified in a bankruptcy notice was as follows:
   

"In exercising the discretionary power of giving or refusing its approval of the security offered, the court would, as I think, be required to determine what delay in payment it considered reasonably consistent with the creditors interests and then to determine whether at the end of that period of delay, the security could be confidently expected to assure the creditor of prompt satisfaction of the judgment.

1. Although the applicants on this application do not directly submit that the judgment debt is secured sufficiently to comply with section 41(2)(b)(ii), the effect of the submission is essentially the same as to part of the judgment debt. The whole of the evidence is against the security presently held satisfying the relevant test. There is no evidence which would persuade me that the security is sufficient to confidently expect that the respondent is assured of prompt satisfaction of the judgment debt or part of it.

2. As I have said above, there has been no satisfaction of the judgment debt beyond that for which credit has been given. To require that some unspecified and unrealised value in the land must be credited against the judgment debt, even if I were satisfied that such a value existed, which I am not, is misconceived.

3. The application to set aside the bankruptcy notice is dismissed.

4. The applicants submit that the time to comply with the notice ought to be extended for a period of 21 days because they have brought an unsuccessful application to set aside the bankruptcy notice. They rely upon the decisions in Walsh v Deputy Commission of Taxation (1984) 156 CLR 337 and Emerson v Wreckair Pty Ltd (Number G68 of 1991, an unreported decision of the Full Court given at Brisbane on 31 January, 1992), as supporting the making of such an order. There is nothing in the decision in Walsh which would support the making of such an order. In Emerson, the court said, at page 17:
   

"As the time for compliance with the bankruptcy notice has been extended until the determination of this appeal the effect of an order dismissing the appeal would be that upon the dismissal taking effect an act of bankruptcy would have been committed by the appellants, assuming, of course, that they have not previously complied with its requirements. The court could, of course, extend the time further so as to give the appellants a last opportunity to avoid the commission of an act of bankruptcy and it may be proper in the circumstances to do so."

1. The court extended the period for a further 21 days. I do not read the judgment as grounding the extension on the fact that an application had been brought. Insofar as it is possible to see what the reasons were that moved the court to grant the extension, the only possible reason seems to have been that the time for compliance had been extended to the determination of the appeal and in the circumstances of that case, the court thought a last opportunity ought to be given to comply with the notice.

2. In the instant case, there is no material beyond the bringing of the application to set aside the bankruptcy notice upon which to grant an extension. There is no suggestion, for example, that the applicants are in a position to comply with the notice if given the time sought nor that their failure to comply with it to date was occasioned solely by their contention that it overstated the amount due. The judgment debt has been outstanding since July 1990 and I infer that the bank debt is in default and not being reduced. The respondent opposes any extension of time on the ground that it will affect the relation back date if a sequestration order is ultimately made. In all the circumstances, I am not persuaded that the interests of justice require that the time for compliance be extended for a further 21 days.

3. The application is refused.

4. THE COURT ORDERS:
   1. That each application be dismissed.

2. That the applicants are ordered to pay the costs of the

respondent of and incidental to the applications to be taxed and in the event that a sequestration order is made against the applicants, founded upon the bankruptcy notice, any part of the costs which then remain unpaid is to be treated as if that part of the costs were petitioning creditors costs.