Newman and Inspector-General in Bankruptcy
[2005] AATA 324
•11 April 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 324
ADMINISTRATIVE APPEALS TRIBUNAL Nº V2004/887
GENERAL ADMINISTRATIVE DIVISION
Re: ROGER ALEXANDER NEWMAN
Applicant
And: INSPECTOR‑GENERAL IN
BANKRUPTCY
Respondent
DECISION
Tribunal: Mr E. Fice, Member
Date: 11 April 2005
Place: Melbourne
Decision:The Tribunal affirms the decision under review.
(sgd) Egon Fice
Member
BANKRUPTCY – objection to discharge - disposal of property – extension of bankruptcy discretionary - ground of objection a special ground - whether $70,000 property of applicant or bankrupt estate - adequate explanation
Bankruptcy Act 1966
Re Kirkwood and Jenkins and Peake (AAT 9861, 25 November 1994)
REASONS FOR DECISION
11 April 2005 Mr E. Fice, Member
1. On 15 December 2000, Dr Roger Alexander Newman became a bankrupt upon filing a Debtor's Petition. Dr Newman's trustee in bankruptcy, Mr Robert Morton (the Trustee), filed a Notice of Objection to Discharge with the Official Receiver, objecting to Dr Newman's discharge from bankruptcy. Upon review of that decision by the Trustee, the Inspector‑General in Bankruptcy (the Inspector‑General) affirmed the Trustee's decision. Dr Newman seeks a review of the Inspector‑General's decision pursuant to s 149Q of the Bankruptcy Act 1966 (the Act).
2. Dr Newman appeared in person and the Inspector‑General was represented by Mr Stephen Linden, a solicitor with the Australian Government Solicitor. The Tribunal had before it the documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975, Exhibits A1 to A3 tendered on behalf of Dr Newman and Exhibits R1 and R 2 tendered on behalf of the Inspector‑General.
BACKGROUND
3. In about August 2000 Dr Newman separated from his partner of 15 years, Ms Colleen Rowe. Dr Newman had income-splitting arrangements with Ms Rowe and he was also involved in a number of tax minimisation schemes on the advice of his financial planner, Ms Cheryl O'Loughlin. In the course of his separation, the Australian Taxation Office (ATO) issued a tax reassessment notice to Dr Newman for $433,000. Dr Newman was required to pay some $380,000 of that sum, with the remainder to be paid by Ms Rowe. Among the assets owned by the couple were shares in listed public companies to the value of approximately $130,000. These shares were held by three parties, Dr Newman, Ms Rowe and a service company used by the couple, Boulton Services Pty Ltd.
4. After his separation from Ms Rowe, Dr Newman, although locked out of the matrimonial home, visited his children from time to time. On these occasions he had discussions with Ms Rowe. In the course of one of those discussions Ms Rowe told him that she had sold $20,000 worth of the listed public company shares which were in her name.
5. According to Dr Newman, because he was concerned that Ms Rowe might also claim an interest in the shares which were in his name, he sought legal advice as to whether he could sell his shares. Acting upon that advice, he then sold his shares, realising $70,000 after paying fees of approximately $6000. The proceeds of the sale were paid into an account which he held with the Cairns Penny Bank. Almost immediately, Dr Newman withdrew $70,000 in cash from that account.
6. Dr Newman carried the $70,000 in cash with him wherever he went in the following 11 days. He said the reason for taking the money in cash was to secure it and to keep it out of reach of Ms Rowe. Ms Rowe apparently became aware that Dr Newman had sold shares in his name and she filed an application in the Supreme Court of Queensland on 8 November 2000 seeking an injunction to prevent Dr Newman from dealing with any property in his name, her name or the in the name of Boulton Services Pty Ltd.
7. On 3 November 2000, while Dr Newman attended to various shopping chores at the Cairns Shopping Centre, he said he either lost the plastic bag containing the $70,000 in cash or it was stolen from his motor vehicle, which was parked at the shopping centre at that time. The whereabouts of that money remains unknown. The Trustee claims that the $70,000, had it been retained by Dr Newman, would be the property of the bankrupt vesting in him as trustee of the bankrupt's estate, and it would be property which would ordinarily be divisible among his creditors. The Trustee maintains that Dr Newman has failed to give an adequate explanation regarding the manner in which the $70,000 sum was disposed of by him or he has failed to account for the manner in which the money was spent.
8. Therefore, the Trustee filed a Notice of Objection to Discharge on 11 December 2003, citing special grounds for objection pursuant to s 149D of the Act. The decision by the Trustee to file the Notice of Objection was reviewed by the Inspector‑General, who confirmed the decision.
PARTIES' CONTENTIONS
9. Dr Newman's main contention is that he has given an adequate explanation for the disappearance of the $70,000. He contends that there is no evidence that he has retained money or disposed of it in any fashion whatsoever.
10. Dr Newman also contends that there are wider issues of fairness and justice which ought to be applied to his case. He contends that to extend his bankruptcy for a further five years would be grossly unfair and unjust, particularly if one were to take into account the relatively small sum that is involved. Dr Newman is particularly critical of the Trustee's actions, and the fact that his principal creditor, the ATO, is "not hurting". He contends that the sole purpose of extending his bankruptcy is to punish him, rather than to further the administration of his estate.
11. The Inspector‑General relies on the provisions of s 149N(1A) of the Act. In particular, the Inspector‑General contends that as the objection to discharge specifies at least one special ground (a ground set out in s 149D); that there is sufficient evidence to support the existence of that special ground; and the bankrupt has failed to establish that he had a reasonable excuse for the conduct or failure that constituted the special ground, the objection to discharge must not be conceded.
12. The Inspector‑General contends that Dr Newman has failed to satisfy him that the nature and extent of the explanation given for the loss of the $70,000 is, in all the circumstances, "reasonably satisfactory". Furthermore, the Inspector‑General contends that Dr Newman has failed to adequately to explain what happened to the money.
13. The Inspector‑General also contends that policy considerations are relevant to his review of a decision by the Trustee to lodge a notice of objection. He refers to the 2002 bankruptcy legislation amendments which, he contends, were designed to strengthen the position of trustees in bankruptcy. To allow a bankrupt to be discharged from bankruptcy, notwithstanding a trustee's objection, would establish an unwarranted and dangerous precedent whereby a bankrupt could claim that money was lost or stolen, without adequate proof, in circumstances where the conduct expected of a person who has lost such a sum of money is not what would ordinarily be expected. The Inspector‑General further contended that the extension of bankruptcy for five years is not a discretionary matter, as it is prescribed by s 149A of the Act.
CONSIDERATIONS
14. At any time before a bankrupt is discharged from bankruptcy under s 149 of the Act, a trustee may file with the Official Receiver a written notice of objection to the discharge (s 149B). The trustee of a bankrupt's estate must file such a notice if he or she believes:
…
(a)that doing so will help make the bankrupt discharge a duty that the bankrupt has not discharged; and
(b)that there is no other way for the trustee to induce the bankrupt to discharge any duties that the bankrupt has not discharged. (s 149B(2))
15. The relevant grounds of objection are as follows:
149D(1) The grounds of objection that may be set out in a notice of objection are as follows:
(a)…
(aa)…
(ab)…
(b)…
(c)…
(d)…
(da)…
(e)…
(f)…
(g)at any time during the period of 5 years immediately before the commencement of the bankruptcy, or at any time during the bankruptcy, the bankrupt:
(i)spent money but failed to explain adequately to the trustee the purpose for which the money was spent; or
(ii)disposed of property but failed to explain adequately to the trustee why no money was received as a result of the disposal or what the bankrupt did with the money received as a result of the disposal;
…
16. The Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2002 sets out the background to the introduction of special grounds of objection. It explains that the grounds set out in s 149D relate to the various means by which a bankrupt's non co‑operation with the trustee can frustrate the trustee's efforts to administer the bankruptcy. It also explains that case law has established that punishing the bankrupt, of itself, is not a lawful reason for the extension of the bankruptcy. Prior to the amending legislation, the only valid reason for filing an objection was to advance the trustee's administration of the bankruptcy. It was said that this approach did not encourage bankrupts to co‑operate with trustees. The Explanatory Memorandum then provides, at paragraph 165:
165 The amendments propose to address this weakness in the present law by identifying some existing grounds, and adding some new grounds, as "special grounds". In these special ground cases, the trustee will not need to show that filing the objection will advance the administration, only that the special ground existed. Therefore, if the grounds of objection include a special ground, only the facts supporting that special ground need to be established. The special grounds are specified in paragraphs 149D(1)(ab), (d), (da), (e), (f), (g), (h), (ha), (k) and (ma). Item 109 proposes that paragraph 149C(1)(c), which requires a trustee to state the reasons for objection to discharge, not apply regarding objections filed on special grounds.
17. It is clear that the combination of the provisions set out in s 149B(2) and the special grounds set out in s 149D of the Act have substantially strengthened the powers of a trustee in bankruptcy to obtain the co‑operation of a bankrupt in the discharge of his or her duties. The Trustee's powers are further strengthened by s 149N(1A), which provides:
…
(1A) An objection must not be cancelled under subsection (1) if:
(a)the objection specifies at least one special ground; and
(b)there is sufficient evidence to support the existence of at least one special ground specified in the objection; and
(c)the bankrupt fails to establish that the bankrupt had a reasonable excuse for the conduct or failure that constituted the special ground.
Special ground for the purposes of s 149N(1A) means a ground specified in paragraph 149D(1)(ab), (d), (da), (e), (f), (g), (h), (ha), (k) or (ma).
18. Therefore, provided that the Trustee is able to show by evidence that Dr Newman failed to explain adequately what happened to the $70,000 in cash, and if Dr Newman is unable to establish a reasonable excuse for his failure to give an adequate explanation, then the Inspector‑General has no discretion and must confirm the decision made by the Trustee in Bankruptcy.
19. The central issue in this application is whether Dr Newman's explanation for the loss of the $70,000 is adequate. There is little guidance on this subject and such as there is, pre‑dates the amendments to the Act in 2000. Some guidance may be obtained from a statement made by the Tribunal in Re Kirkwood and Jenkins and Peake (AAT 9861, 25 November 1994). In that matter, the Tribunal was dealing with an objection on the grounds of the then s 149D(1)(g) which was not dissimilar to the current s 149D(1)(g) ground of objection. The Tribunal, at paragraph 21, said:
…
The Act requires a bankrupt make full disclosure of his property and matters relevant to the administration of his estate: s. 77. The task of the Tribunal standing in the shoes of the decision maker in considering an objection on the ground of s. 149D(1)(g) is to make an objective assessment of the bankrupt’s explanation surrounding the spending of money or the disposal of property. In Kirkwood’s case, it would include a consideration of when and in what circumstances the explanation was made, the nature and extent of the explanation and whether in all the circumstances it is reasonably satisfactory.
20. On hearing this matter, I invited Dr Newman to recount the circumstances surrounding the loss of the money. He declined to do so and referred me to the explanation given in the course of his public examination. Despite strongly encouraging Dr Newman to provide me with his explanation, he refused to do so.
21. According to the transcript of his public examination ("the transcript"), Dr Newman said that he withdrew the $70,000 in cash, being the proceeds of the sale of shares in his name, because he wished to keep that money hidden from Ms Rowe. He explained that, if he withdrew the money and put it into a savings account, Ms Rowe might be able to obtain an order granting her access to the money and he wished to avoid that happening. He said that he wished to hide it from Ms Rowe and her solicitors.
22. According to the transcript, Dr Newman initially carried the cash, bundled in $50 and $100 notes and being the size of half a loaf of bread, around in a briefcase. After carrying the money around for a few days in his briefcase, he considered that carrying a briefcase might make him conspicuous because he was generally dressed in casual clothes. For that reason, he then placed the money in a Coles plastic bag which was placed in another plastic bag to ensure that its contents could not be identified. Dr Newman described being very nervous carrying around that sum of cash and that he felt vulnerable because he did not want to lose it. He said that he was so nervous that he even slept with the money in the bed beside him.
23. According to the transcript, Dr Newman made inquiries of a number of banks to see whether it was possible to deposit the money in an overseas account. The purpose of depositing it in an overseas account was to make it untraceable. He mentioned that he spoke with the Singapore Bank, the ANZ Bank and Citibank. He obtained the telephone numbers of the various banks from the Yellow Pages and he made calls from public telephones, particularly those found at shopping centres. Dr Newman never proceeded with the idea of putting the money offshore because, on 3 November 2000, some 11 days after he first obtained the cash, he said that he either lost the money or it was stolen at the Cairns Shopping Centre.
24. According to the transcript, Dr Newman said that on 30 November 2000, he had been carrying a foldout expander file, in which he kept all his paperwork. He said that he would do his paperwork wherever he had access to a telephone. On that day, he intended to buy food from Coles and a weatherproof jacket. He said that he had been to Myer and Coles to buy goods for himself and that, when he came back (presumably to the table from where he was working in the shopping centre near the telephones), he had too much "stuff to carry around", particularly with the food he was carrying. He then made a trip to his car where he put all of the shopping bags. Having decided that he did not have much else to do except to make some telephone calls, he took his carry case containing his papers back into the shopping centre and made some telephone calls and checked off a few things on a list of things to do that day. After he completed those tasks, he walked back to his car. Before driving off, he said that he wanted to check that everything was "all right" and, most importantly, that the money was still there. He said that there were bags around the back and the front seat, but he could not find the bag containing the money.
25. According to the transcript, Dr Newman then panicked and tried to retrace his steps to see if he had left the bag containing the cash at any of the stores that he had been to. He went back and checked where he had been sitting shuffling papers in the food court. He went back to the Coles trolleys and the Myer clothes fitting room that he had previously used. He returned to his car but the bag was not there and he then realised that the rear passenger window had been left down. He explained that his car had no air‑conditioning and a passenger may have left it open. He returned to the place where he was residing and checked his room, which had been tidied up since he left that morning, but there was no bag of money there.
26. According to the transcript, Dr Newman went back into the shopping centre and made inquiries of employees of the stores that he had been to, but, in each case, they were junior employees of Coles and Myer. He made no approach to the management of Coles or Myer. He did not report the loss of the $70,000 to the Police and he did not make an insurance claim in respect of the loss. Dr Newman did not provide statements from any of the junior employees, or a cleaning lady named Anne who, he said, he had spoken with about the missing bag. Dr Newman's contention is that he either lost the bag by leaving it behind in the Cairns Shopping Centre, or that it was stolen from his car during the period that he went back to the food court area where he was working, after depositing the shopping he had already completed.
27. One difficulty with Dr Newman's explanation is that, in an affidavit sworn on 18 December 2000, he gave a different account about how the money disappeared. He said that on 3 November 2000, while leaving Cairns Central (shopping centre), he realised that, among the bags he was carrying, he did not have the money bag. Dr Newman said he went back and checked where he had been sitting and shuffling papers in the food court and he could not find the bag. He then said that he went to Coles and Myer to check to see whether a bag had been handed in. It was only then that he said that he returned to his car to check if he had left the bag in the car. He noticed the bag was not there but the rear passenger window was down. This explanation is substantially different to the explanation he gave in the course of his public examination.
28. Dr Newman's explanation for not reporting the loss of the money to the Police was that he believed it would cause more trouble. He also said that he wanted to keep the fact that he had the money a secret from Ms Rowe
29. In my opinion, the explanations given by Dr Newman regarding the disappearance of the $70,000 cash are manifestly inadequate and lack credibility. Looked at objectively, if Dr Newman had in fact lost the money at the Cairns Shopping Centre, or if it was stolen from his car at that time, one would have expected, at the very least, that he would report it to the Police. The money was lawfully his at that time and he had nothing to fear from making such a report. Taking such a course of action would have resulted in a thorough investigation regarding the disappearance of that money and it may be that Dr Newman wished to avoid such an investigation for some reason other than his stated reason of keeping Ms Rowe in the dark. Also, viewed objectively, one would have expected him to at least have made an inquiry regarding the possibility of insurance cover for that loss. It is also reasonable to expect that far more serious inquiries would have been made at the two stores at which Dr Newman suggested the bag containing the money may have been left. Dr Newman's explanation about being embarrassed and wishing the loss of the money to remain a secret, particularly as he was attempting to hide the money from Ms Rowe, makes no sense given that she was already aware that he had sold the shares and obtained $70,000. Overall, my opinion is that Dr Newman's explanation is neither reasonable nor satisfactory.
30. Dr Newman submitted that no evidence had been produced by the Inspector‑General that the loss of the money could be attributed to reasons other than those that he had given. However, that is not the test which must be satisfied under s 149N(1A)(b) of the Act. The Inspector‑General must not cancel an objection by a trustee in bankruptcy if there is sufficient evidence to support the existence of the grounds relied on in s 149D1)(g). Therefore, the question which must be answered in the affirmative is whether the evidence is sufficient to point to the inadequacy of the explanation given for the loss of the $70,000. For the reasons I have set out above, I am satisfied that there is sufficient evidence to support a finding that the explanation given by Dr Newman for the disappearance of the $70,000 was inadequate.
31. Dr Newman focussed his application on the fact that it would be grossly unfair to extend his bankruptcy for a further five years. He described the decision as a harsh and unusual punishment, given that he was bankrupted (for three years) over a debt owed to the ATO in the sum of $433,000 (of which he was liable for some $380,000), but that his bankruptcy could be extended for five years over the sum of $70,000. He also pointed, irrelevantly, to the fact that the Australian government had underestimated the surplus for the past three years by some $19 billion and had donated $1 billion for tsunami relief. His complaint was that he had not "duded" creditors and should not be subject to the penalty that he says would be imposed by the extension of his bankruptcy.
32. However that may be, the intention of the legislature, derived from the words used in the Act and the Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2002 is clear. The special grounds of objection to discharge were introduced not only to assist the advance of a trustee's administration of a bankruptcy, but also to encourage bankrupts to co‑operate with trustees. Dr Newman feels aggrieved at his circumstances but he is not prepared to provide a plausible explanation for the disappearance of the money. The Trustee has suggested that, if Dr Newman were prepared to pay $50,000 to the Trustee, the objection would be withdrawn. However, Dr Newman has refused that offer.
33. It was not clear at the hearing whether Dr Newman relied on justice and fairness to establish a reasonable excuse for his failure to provide an adequate explanation for the disappearance of the money. If that was what he intended, in my opinion, Dr Newman's plea for justice and fairness does not constitute a reasonable excuse for his failure to provide an adequate explanation as to what happened to the $70,000. The fact that the amount may be small compared with what is owed to the major creditor in his bankruptcy is not relevant.
CONCLUSIONS
34. The Inspector‑General is compelled to confirm the decision of a trustee in bankruptcy to issue an objection to discharge in circumstances where there is sufficient evidence to support the existence of at least one special ground specified in the objection. Although the Inspector‑General found that there was insufficient evidence to support the existence of the special ground set out in s 149D(1)(ab), he confirmed the decision of the Trustee in respect of the grounds set out in s 149D(1)(g). Having reviewed the evidence that was before the Tribunal, I am of the opinion that the Inspector‑General's decision to confirm the decision of the Trustee in bankruptcy was correct. Dr Newman has failed to explain adequately the disappearance of the $70,000 in cash.
35. Although Dr Newman's main argument was directed at the injustice that he would suffer were the bankruptcy period extended for a further five years, the evidence does not establish that he had a reasonable excuse for his failure to give an adequate explanation regarding the disappearance of the $70,000. Furthermore, given the amendments to the Act introduced in 2002 and the Explanatory Memorandum which accompanied those amendments, it is clear that the intention of the legislature is that it is no longer acceptable for a bankrupt to claim that he or she is being punished as a consequence of a decision to extend his or her bankruptcy. This was identified as a weakness in the existing law where there was a requirement for any objection lodged to advance the Trustee's administration of the bankruptcy. Given this much tougher approach by the legislature in dealing with bankrupts, and the fact that, in my view, Dr Newman's actions regarding the $70,000 are, on balance, designed to defeat creditors, even if they be wealthy creditors, the decision made by the Trustee was correct. Therefore, the Inspector‑General's affirmation of that decision must also be correct.
36. The Inspector‑General's decision must be affirmed.
I certify that the thirty‑six [36] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr E. Fice, Member
(sgd) Catherine Thomas
Clerk
Date of Hearing: 1 February 2005
Date of Decision: 11 April 2005
Solicitor for the applicant: Nil — Self‑representedSolicitor for respondent: Mr S. Linden, Australian Government Solicitor
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