Moloney v Duarte
[2014] FCCA 1716
•1 July 2014
FEDERAL CIRCUIT COURT OF AUSTRALIA
| MOLONEY v DUARTE | [2014] FCCA 1716 |
| Catchwords: BANKRUPTCY – Creditor’s Petition – whether the judgment debtor is solvent – whether even if solvency is established, the Court should exercise its discretion to nonetheless grant the petition – solvency established – no grounds not to exercise discretion in favour of solvent judgment debtor – Creditor’s Petition dismissed. |
| Legislation: Bankruptcy Act 1996 (Cth) |
| International Alpaca Management Pty Ltd v Ben Ensor & Ors [1995] FCA 1054 Re Sanders (2003) 1 ABC(NS) 408 Trojan v Corporation of Hindmarsh (1987) 16 FCR 37 |
| Applicant: | ANNABELLE ELIZABETH MOLONEY |
| Respondent: | CHARMAINE DUARTE |
| File Number: | SYG 934 of 2014 |
| Judgment of: | Judge Altobelli |
| Hearing date: | 30 June 2014 |
| Date of Last Submission: | 30 June 2014 |
| Delivered at: | Sydney |
| Delivered on: | 1 July 2014 |
REPRESENTATION
| Counsel for the Applicant: | Mr Jones |
| Solicitors for the Applicant: | Comino Prassas Solicitors |
| Counsel for the Respondent: | Ms Guo |
ORDERS
The Creditors Petition filed 7 April 2014 be dismissed.
The Applicant Creditor is to pay Respondent’s Debtor costs as agreed or as assessed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 934 of 2014
| ANNABELLE ELIZABETH MOLONEY |
Applicant
And
| CHARMAINE DUARTE |
Respondent
REASONS FOR JUDGMENT
(revised from the transcript)
Pursuant to an Order that was made by Judge Raphael on 19 May 2014, the Respondent was granted leave to file and serve amended notice of grounds of opposition by 26 May 2014 together with an affidavit in support. An amended notice was indeed filed on that date. It opposes the Creditor’s Petition on two bases. Firstly, that the applicant creditor has not established a valid act of bankruptcy and secondly, that the respondent debtor is able to pay her debts and is therefore solvent.
The Creditor’s Petition was filed on 7 April 2014 and alleges that the Respondent Debtor owes to the Applicant $16,569 in respect of a judgment of the Local Court dated 19 September 2013 in favour of
DC Legal Pty Limited, which judgment was then assigned to the Applicant Creditor. The circumstances of this assignment are not directly relevant except as to background. There is what might loosely be described as related litigation part heard in the Local Court between the judgment debtor and a third party which, if successful and according to the Respondent, will provide funds to satisfy the judgment debt in question. In short, the judgment debtor was seeking to avoid what she perceives as having to pay the same debt twice.
Her present argument is that she could at any time pay the judgment debt but chooses not to. Not because she is insolvent but because from her subjective perspective, she should not have to in circumstances where her cross-claim is pending. What appears to have complicated the matter is that the person against whom the cross-claim has been brought appears to be complicit in some sense in the present Creditor’s Petition.
The Court emphasises that these matters are referred to as background only and are not matters in respect of which the Court is asked to adjudicate or, indeed, informs the present judgment. What the Court is asked to adjudicate, in effect on a voir dire basis, is whether the judgment debtor has established that she is solvent. If she has, then subject to anything that counsel for the Petitioning Creditor might say, the Creditor’s Petition will be dismissed. If she has not, then the judgment debtor has reserved the right to attack the Petition on other grounds and directions will need to be made in this regard.
The Evidence
The evidence before the Court was quite substantial.
I had the benefit of outlines given. Documents were tendered in evidence. The judgment debtor, Ms Duarte actually gave evidence. She was cross-examined. For the most part, the Court finds her to be a truthful witness. There was the odd lapse particularly in terms of some of her financial evidence, to which reference will be made where appropriate, but it is not as if the lapses are so great that the Court would find that the lapse overshadows her remaining evidence. There is no basis on the evidence heard for a generalised finding as to credit that would be adverse to the judgment debtor.
The Applicable Law
The applicable law is principally but by no means exclusively contained in section 52 of the Act and in particular, at subsection (2) of that Act which says in effect:
That the Court may dismiss a creditor’s petition if the debtor establishes that she is able to pay his or her debts.
Reference will also be made to the definition of solvency contained in the Act.
Solvency
Has the Debtor established that she is solvent? The High Court’s decision in Sandell & Porter [1996] HCA 28 stands for the proposition that solvency requires the Respondent Debtor to be able to pay debts as they fall due out of her own money. This includes both cash on hand and money reasonably quickly realisable by asset realisation. Temporary lack of liquidity will not generally constitute insolvency. As previously referred to section 5(2) of the Bankruptcy Act1966 (Cth) defines solvency as being:
Able to pay debts as and when they become due and payable.
The decision in Re Sanders (2003) 1 ABC(NS) 408 stands for the proposition that account must be taken of debts which fall due in the reasonably immediate future pursuant to existing obligations and whether the respondent debtor will be able pay them.
In assessing solvency the Court ought not to take account of realisable assets required for the respondent debtor to live a reasonably comfortable and dignified existence: International Alpaca Management Pty Ltd v Ben Ensor & Ors [1995] FCA 1054.
And finally, in Re Sarina ex parte Wollondilly Shire Council, the Court held that if the respondent debtor is in a position to pay debts owed within a reasonable time, no sequestration order ought to be made. The respondent placed considerable reliance on this case.
I will examine now the evidence about solvency from two perspectives. Firstly, the cash flow and secondly, on a balance sheet basis. The evidence here hinges on Annexure C to the judgment debtor’s affidavit of 26 May 2014 as well as her later affidavit of 25 June. The primary focus of cross-examination was on this evidence, and quite properly so. The cross-examination demonstrated that there was a clear error in the income. It should not be $9408 per calendar month as deposed to but, at most, $7574. However, that still exceeds her monthly expenses of $7150.
Whilst the evidence suggests that the Respondent lives frugally she, nonetheless, seems to get by. Despite the cross-examination, there is no evidence of any other creditor knocking at her door, speaking metaphorically, except the judgment debtor in question. Even Hones La Hood, apparently a firm of lawyers who are owed money by the Respondent, chose not to appear to support the Creditor’s Petition even though it filed a Notice of Appearance. Whilst cross-examination was effective in tinkering around the edges of matters relating to both income and expenses and, perhaps, raising a few ambiguities here and there, the fact is and remains that the evidence shows that each month the judgment debtor has available to her about $424 with which she could, if she so wanted, either pay principal or interest on the unsecured debts that she deposes to.
It should be noted there was nothing in the evidence, not even the slightest suggestion, that the judgment debtor was behind on her property loans or her credit cards. There is only one unhappy creditor, the petitioning creditor and the respondent gives an explanation for not wanting to pay, the merits of which are not directly relevant to the solvency issue. From a cash flow perspective therefore, the Respondent Judgment Debtor has established to the reasonable satisfaction of the Court, that she is a solvent.
To the extent that it is necessary, has the Judgment Debtor established solvency on a balance sheet basis? Her evidence was again carefully tested in cross-examination. The weakness of the Respondent’s case is that she cannot establish the value of her properties either by using lay opinion evidence or hearsay evidence. But it would, on the facts of this case, be a travesty of justice to hold that against her in circumstances where, firstly, her unsecured debts are so small. Indeed, they total about $40,000 and the evidence is that only one of those unsecured creditors, the petitioning creditor as to $16,000, is seeking to invoke this Court’s jurisdiction.
Secondly, there is no evidence at all to suggest that she is unable to pay her credit card debt. Thirdly, there is no evidence at all to suggest that she cannot pay her secured debts. Indeed, in each case, the evidence positively affirms these facts. Moreover, and significantly, the evidence is that she has available to her at least $20,000 in cash at the bank and appears to have some capacity to borrow. In these circumstances and even on a balance sheet basis, if that were the applicable test, the Respondent has established to the Court that she is solvent. The Respondent had sought to argue her case on the basis of Re Sarina ex parte Wollondilly Shire Council, successfully, as it turns out. Whilst the Court has considered whether there are grounds to nonetheless exercise the discretion it has against her, there are no such grounds. Accordingly, the Creditor’s Petition will be dismissed subject to the opportunity I will give to Mr Jones to address me on that.
Costs should follow the event. So again, subject to anything that
Mr Jones might want to say, the applicant creditor is to pay the respondent debtor’s costs to be as agreed, if not agreed as taxed.
In the reasons that I have just given, I have turned my mind to the question of whether, notwithstanding the findings that I have made about the respondent’s solvency, I should nonetheless exercise my discretion. The discretion, of course, is referred to in section 52(2) of the Act.
In the reasons I gave, I indicated that I saw no grounds on the evidence before me to, nonetheless exercise the discretion against the judgment debtor respondent. However, I did indicate that I was prepared to hear from Mr Jones, counsel for the applicant on the question of the exercise of discretion. Mr Jones has very helpfully referred me to two authorities. Firstly, the decision of Her Honour Bennett J in Knudson & Yates (2003) FCA 1079 trading as the Hargreaves Practice reported (2003) FCA 1079. Mr Jones referred me to paragraph 24 of the said reasons:
As pointed out by the Full Court in Trojan v Corporation of Hindmarsh (1987) 16 FCR 37 (‘Trojan’) at 48, a sterile demonstration of an ability to achieve payment which was not in reality likely to occur, may still result in a sequestration order. The Full Court noted in Trojan (at 46), that there is a difference between a situation where it is established that a petitioning creditor may pursue remedies of execution and garnishee against a debtor who had demonstrated ample assets and income available for the application of those remedies (see Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 373) and the situation where there is no alternative remedy because the assets are insufficient to meet the debt relied upon in the petition. In the present case, the evidence is that an attempt at execution demonstrated this was not an alternative remedy and that the assets were insufficient. There is no question of guarantee.
Mr Jones also took me to page 48 of the decision of the Full Court in Trojan & Corporation of Hindmarsh (1987) 16 FCR 37, which was referred to by Bennett J in the first named case.
These authorities certainly demonstrate that the discretion has parameters and that distinctions need to be drawn between a situation where a finding of solvency amounts to what Bennett J described as a sterile demonstration of an ability to achieve payment which was not, in reality, likely to occur.
The difficulty that the Applicant faces, as explained by Mr Jones, is that the Applicant is the assignee of the judgment debt and would therefore need to obtain leave before it could seek, for example, to enforce the judgment debt in question by other means including execution. I accept what he says and that therefore the Court’s leave would be needed.
As it turns out, nothing that Mr Jones has put to me causes me to exercise the discretion contrary to the respondent. Firstly, accepting that the present petitioning creditor is the assignee of the judgment debt then she must have taken the assignment with full knowledge of any restrictions that would arise in the context of execution. Secondly, there is no evidence before me, nor was it asserted, that the assignee has made any effort to seek the Court’s leave. In any event, the material difference between the present case and, for example, Her Honour’s decision in Knudson & Yates is that in that case, and as paragraph 24 demonstrates, there was evidence of an attempt at execution. In the present case, there is no evidence of any other attempt to enforce this debt.
In the circumstances, I distinguish the authorities to which I have been referred and confirm that there is nothing on the evidence before me that would suggest that in a circumstance where a finding has been made as to solvency for some reason, the discretion should nonetheless be exercised against the person so found to have been solvent.
I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Judge Altobelli
Associate:
Date: 22 August 2014
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