Okill v Pasupati
[2012] FMCA 93
•14 February 2012
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| OKILL & ANOR v PASUPATI | [2012] FMCA 93 |
| BANKRUPTCY – Creditor’s petition – whether proposed further appeal in relation to judgment that formed the basis for bankruptcy notice and existing cross-claim against company of which creditors are directors warrant adjournment or constitute other sufficient cause not to make a sequestration order – whether sufficient reasons to go behind the judgment – where the debtor has not established that he is able to pay his debts – sequestration order. |
| Bankruptcy Act 1966 (Cth), ss.5, 52 |
| Australia & New Zealand Banking Group Pty Ltd v Foyster [2000] FCA 400 International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 Makhoul v Barnes (1995) 60 FCR 572 National Australia Bank Limited v Pasupati [2011] NSWSC 540 Pasupati v Okill [2011] NSWSC 1383 Rigg v Baker (2006) 155 FCR 531; [2006] FCAFC 179 Rotstein v Slaveski (2010) 8 ABC(NS) 200; [2010] FCA 493 Rozenbes and Others v Kronhill and Another (1956) 95 CLR 407; [1956] HCA 65 Sandell v Porter and Another (1966) 115 CLR 666; [1966] HCA 28 Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372; [1980] FCA 138 Totev v Sfar and Another (2008) 167 FCR 193; [2008] FCAFC 35 Wentworth v Rogers; Wentworth and Russo v Rogers (2006) 66 NSWLR 474; [2006] NSWCA 145 |
| First Applicant: | PHILIP OKILL |
| Second Applicant: | BRETT RAYMONT |
| Respondent: | KUMARESHWARA PASUPATI |
| File Number: | SYG 1905 of 2011 |
| Judgment of: | Barnes FM |
| Hearing date: | 2 December 2011 |
| Delivered at: | Sydney |
| Delivered on: | 14 February 2012 |
REPRESENTATION
| Solicitors for the Applicants: | Somerset Ryckmans |
| Solicitors for the Respondent: | Hancocks Solicitors |
ORDERS
A sequestration order be made against the estate of Kumareshwara Pasupati.
The applicant creditors’ costs (including any reserved 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 (Cth).
A copy of these orders be given to the Official Receiver in Sydney within two (2) days by the applicant creditors.
THE COURT NOTES THAT:
The date of the act of bankruptcy is 23 August 2011.
A consent to act as trustee has been signed by Adam Shepard and has been lodged with the Official Receiver in Sydney.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1905 of 2011
| PHILIP OKILL |
First Applicant
| BRETT RAYMONT |
Second Applicant
And
| KUMARESHWARA PASUPATI |
Respondent
REASONS FOR JUDGMENT
Background
On 26 August 2011 the applicant creditors, Philip Okill and Brett Raymont, filed and presented a creditors’ petition seeking that a sequestration order be made against the estate of the respondent, Kumareshwara Pasupati. The creditors’ petition asserted that Mr Pasupati owed the applicants the amount of $224,088.95 pursuant to a Certificate of Judgment obtained by them in the Supreme Court of New South Wales on 7 April 2011 based on a costs assessment by a costs assessor. The petition relied on an act of bankruptcy on 23 August 2011 consisting of a failure by Mr Pasupati to comply with the requirements of a bankruptcy notice served on him on 13 April 2011. The time for compliance with the bankruptcy notice had been extended until 23 August 2011.
The parties addressed and I have considered the grounds in the undated notice of intention to oppose the petition sought to be relied on by the respondent, notwithstanding his failure to file such a notice as ordered at least three days before the hearing. As these grounds relate in part to earlier proceedings involving the parties it is convenient first to outline the litigation between the parties.
Relevantly, until December 2007 Mr Pasupati was the Chief Financial Officer of Print Management Australia Pty Ltd (PMA). He was (but is no longer) also a director of PMA. The applicant creditors are directors of PMA.
In 2008 PMA instituted proceedings in the Supreme Court of New South Wales against Mr Pasupati seeking to recover over $2.4 million which it alleged he misappropriated while employed by PMA (the PMA proceedings).
Mr Pasupati filed a cross claim against PMA on 30 July 2008 and also against Messrs Okill and Raymont in the PMA proceedings. He relied on a number of grounds, including oppressive conduct within s.232 of the Corporations Act 2001 (Cth).
As explained by McDougall J in Print Management Australia v Pasupati [2009] NSWSC 964, PMA and the applicants in these proceedings (Messrs Okill and Raymont) were separately represented in the PMA proceedings. Messrs Okill and Raymont successfully sought an order against Mr Pasupati for security for their costs of the cross claim against them. McDougall J described Mr Pasupati’s claim of oppression as “somewhat unusual” (at [15]) and was of the view that much of the case against the applicants was “weak in the extreme” (at [23]). His Honour had regard to Mr Pasupati’s claim that his financial situation was so “parlous that if an order for security [for costs] were made it would effectively bring the [cross-claim against Messrs Okill and Raymont] to an end” (at [24]), and accepted that Mr Pasupati’s financial position was “hopeless” some 18 months before the December 2007 termination of his employment by PMA (at [27]). On 31 August 2009 McDougall J ordered that Mr Pasupati provide security for costs in the sum of $150,000, that the cross-claim against Messrs Okill and Raymont be stayed until the security was provided and that Mr Pasupati pay the costs of the application. The cross-claim in the PMA proceedings against the applicants was dismissed with costs by Gzell J on 28 April 2010 by reason of Mr Pasupati’s failure to provide such security for costs.
The applicants sought an assessment of their costs in the PMA proceedings on 17 August 2010. The costs were assessed at $224,088.95 on 4 April 2011. Judgment was entered in the Supreme Court for this amount on 7 April 2011 (the Judgment).
On 11 April 2011 the applicants caused a bankruptcy notice to be issued which (as attested to in the affidavit of Mark Slater of 13 April 2011 and is not disputed) was served on Mr Pasupati on 13 April 2011.
On 3 May 2011 Mr Pasupati filed an application to set aside the bankruptcy notice. The time for compliance with the bankruptcy notice was extended by this court (ultimately until 23 August 2011).
On 12 May 2011 Mr Pasupati sought review of the determination of the costs assessor. On 5 August 2011 a review panel affirmed the costs assessor’s findings.
On 16 August 2011 Registrar Hedge dismissed Mr Pasupati’s application to set aside the bankruptcy notice.
On 23 August 2011 Mr Pasupati filed a summons in the Supreme Court of New South Wales seeking leave to appeal against the determination of the review panel. Such proceedings were apparently pending at the time of preparation of the notice of opposition.
An initial stay was granted on 24 August 2011 by Hill J of the Supreme Court of New South Wales pending payment into court of $50,000 by Mr Pasupati by 21 September 2011. This amount was not paid, but on 21 September Mr Pasupati sought an extension of the stay.
On 22 September 2011 Latham J vacated the stay.
On 2 November 2011 James J heard the application for leave to appeal to the Supreme Court. On 24 November 2011 His Honour dismissed the application for leave to appeal and ordered that Mr Pasupati pay the costs of the application of Messrs Okill and Raymont (see Pasupati v Okill [2011] NSWSC 1383).
The PMA proceedings and Mr Pasupati’s cross-claim against PMA remain on foot. In his affidavit of 1 December 2011 Mr Pasupati stated that there was “debate” between the solicitors for PMA and his solicitors as to the form and content of his cross-claim. He annexed a draft further amended cross-claim said to have been provided to the solicitors for PMA for comment (but not, apparently, filed). In his affidavit of 3 May 2011 filed in proceedings SYG858/2011 and relied on in these proceedings, Mr Pasupati stated that the matter was scheduled to be given a hearing date when next in court (at that stage on 20 June 2011). However in his affidavit of 1 December 2011 he stated that the PMA proceedings should be listed in the next 7 – 14 days for the purpose of finalisation of the cross claim. He anticipated a two-week hearing in March 2012, but no basis was given for that expectation.
Supreme Court Proceedings in relation to the Costs Assessment
The first two grounds in the notice of opposition reflect the fact that at the time the notice was prepared Mr Pasupati had filed a summons in the Supreme Court of New South Wales seeking leave to appeal from the review of the costs assessment which affirmed the costs assessor’s determination of costs which formed the basis for the Certificate of Judgment relied on in the bankruptcy notice and the creditors’ petition.
Ground one disputes that the respondent is indebted to the creditors as alleged and continues:
There has not been a proper hearing of the Summons Seeking leave to Appeal filed in the Supreme Court on the merits of the Debt, especially in the circumstances where there has not been a forensic examination of the accounting underlying the loan accounts alleged to be established by Print Management Australia Pty Limited (“PMA”) in favour of the Applicants _ Okill and Raymont in relation to the payment of their legal expenses in their action against Pasupati.
The ground is said to be “elaborated” on in later grounds. It appears that this is intended to be a reference to the ground in which the court is asked to go behind the judgment that formed the basis for the bankruptcy notice.
Ground two in the notice of opposition sought that the creditor’s petition not be heard before the application for leave to appeal from the costs assessment. That matter has been heard. Judgment was delivered on 24 November 2011 by James J. This aspect of the notice of intention to oppose the petition does not provide a basis either for a further adjournment or for the court not to make a sequestration order.
However Mr Pasupati maintains his contention that the court should adjourn these proceedings or that it should not make a sequestration order. Insofar as this contention relates to a foreshadowed proposal to appeal or to seek leave to appeal from the judgment of James J in Pasupati v Okill, there is no evidence of any such appeal or application for leave to appeal. Mr Pasupati’s states in his affidavit of 1 December 2011 that he has instructed his solicitor “to prepare an appeal” as James J “does not appear to have taken consideration of all issues and evidence”. This assertion is unparticularised. There is no other evidence of any proposed grounds for a further appeal or application for leave to appeal.
In written submissions, Mr Pasupati appeared to take issue first with the rejection by James J of the contention that it was arguable that by virtue of the indemnity principle no costs were payable by Mr Pasupati to the creditors because Messrs Okill and Raymont had never been liable to pay the costs to their solicitors.
The “indemnity principle” issue arose because there was evidence before the costs assessor that PMA made a loan to Messrs Okill and Raymont to meet their legal costs in relation to Mr Pasupati’s cross-claim against them in the PMA proceedings. Their solicitor had claimed that such loan would be repayable from costs recovered from Mr Pasupati or otherwise would be added to the applicants’ loan accounts as directors of PMA.
In submissions in these proceedings the solicitor for Mr Pasupati appeared to take issue with the absence of documentation from the applicants to establish that there was no breach of the indemnity rule in circumstances where the audited financial statements of PMA were said not to disclose such loans to Messrs Okill and Raymont.
Issue was also taken before James J and in these proceedings with the quantum of the costs claimed by Messrs Okill and Raymont in relation to the cross-claim and the security for costs application and the failure of the Costs Review Panel to consider evidence not before the costs assessor.
In addition, the respondent appeared to take issue with the fact that no new evidence had been before James J on the basis that if leave to appeal had been granted evidence relevant to matters such as the claimed loan from PMA could have been obtained from Messrs Okill and Raymont by reliance on court procedures such as a notice to produce (see Pasupati v Okill at [38]) .
Because leave to appeal was not granted by James J, Mr Pasupati is of the view that he did not have a “proper hearing” on the merits of the debt. He relies on the fact that there has not been a “forensic examination of the accounting underlying the loan accounts” said to have been established by PMA in favour of the applicants in these proceedings in relation to their legal expenses incurred in relation to Mr Pasupati’s cross claim against them in the PMA proceedings.
As discussed further below, Mr Pasupati sought production of documents in these proceedings for the purposes of, in effect, a re-hearing of the costs assessment application (on the basis that this court should go behind the judgment that formed the basis for the bankruptcy notice). The applicants objected to the notice to produce. I determined that it was appropriate to defer determination of the objections to the notice to produce, on the basis that in the circumstances of this case the court should, as discussed below, inquire first into whether there was sufficient reason to question the existence of a real debt behind the Judgment (see Makhoul v Barnes (1995) 60 FCR 572). The hearing proceeded on that basis.
It appears that Mr Pasupati would have sought to raise the same issues and, apparently, seek the same documents, had any appeal been heard by the Supreme Court. It may be that he would raise such issues were there to be any appeal from the decision of James J. That prospect does not, however, establish that there are genuine and arguable grounds to appeal from the decision of James J not to grant leave to appeal.
Insofar as Mr Pauspati now raises matters that were considered by James J (in particular the operation of the indemnity principle and the quantum of the claim), the fact that he disagrees with the views of James J does not establish any arguable basis for any further appeal. His Honour dealt with the grounds on which Mr Pasupati sought leave in detail. The arguments now put for Mr Pasupati about the indemnity principle and the quantum of costs were both addressed. It has not been explained how the manner in which James J addressed these issues would give rise to a ground of appeal.
On the evidence before the court the general contention that there are “serious concerns” raised in relation to the judgment of James J is not such as to establish that the creditors’ petition should be adjourned to enable the respondent to formulate, file and pursue any appeal or application for leave to appeal against the judgment of James J.
In reaching this conclusion I have also had regard generally to the factors relevant to the exercise of the court’s discretion in this respect (see Rotstein v Slaveski (2010) 8 ABC(NS) 200; [2010] FCA 493).
Moreover insofar as the prospect of a further appeal is said to constitute other sufficient cause not to make a sequestration order, I have borne in mind not only that on proof of the matters contained in s.52(1) of the Bankruptcy Act a petitioning creditor has a “prima facie right to the making of a sequestration order” (Deputy Commissioner of Taxation v Cumins (2008) 101 ALD 78 at 81; [2008] FCA 353 at [14] per Gilmour J, but also that the respondent debtor bears the onus to demonstrate that for other sufficient cause a sequestration order should not be made under s.52(2)(b) of the Act (and see Cain v Whyte (1933) 48 CLR 639; [1932] HCA 6 and Commissioner of Taxation v Bayeh (1999) 100 FCR 144; [1999] FCA 1223 at [12]). He has not met such onus.
Under s.52(2)(b) the court may, in a proper case, adjourn or dismiss a creditor’s petition in the exercise of its discretion where the debtor demonstrates a genuine dispute as to his or her liability to pay the debt. In general, the court should not proceed to make a sequestration order where an appeal is pending against the judgment on which a bankruptcy notice is based, provided such appeal is based on genuine and arguable grounds. As Gilmour J stated in Cumins at [17] – [ 18]:
The mere fact that an appeal has been lodged does not without more, give rise to a duty to postpone the hearing of the petition: in Re Flatau: Ex Parte Scotch Whisky Distillers (1882) 22 QBD 83 (CA) at 84-85; nor will the court as a matter of course inquire into the validity of a judgment debt: Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212 at 222-223.
The test to be applied has been described variously. The judgment debtor must point to grounds having "a real chance of success on appeal": Re Lewin: Ex Parte Milner (1986) 11 FCR 312 at 318; or ensure "that substantial reasons are given for questioning" whether there was in truth a debt: Wren [1972] HCA 5; 126 CLR 212 at 225. It is not enough to rely upon mere assertion. The onus is on the applicant for a stay to show the existence of a genuine dispute by adducing evidence establishing the substantial nature of the grounds of challenge: Verma, Virendra Kumar v Deputy Commissioner of Taxation [1983] FCA 388 referred to with approval in Re Verma 4 FCR 181 at 187.
However as Gray J stated in Narain v Euroasia (Pacific) Pty Ltd [2010] FCA 1352 at [52]:
It cannot be the case that a court dealing with a creditor’s petition is bound to permit the debtor to invoke every possible avenue of appeal. The capacity of some debtors to generate new proceedings, in vain attempts to overturn judgments against them, is part of the experience of every judicial officer who deals with bankruptcy cases. The existence of a discretionary power carries with it the proposition that each exercise of discretion must be based on the circumstances of the particular case.
In this case the costs assessment has been the subject of a costs review and an application for leave to appeal to the Supreme Court.
In circumstances where there was a costs assessment, a determination by a costs review panel and an unsuccessful application for leave to appeal to the Supreme Court, the fact that there has not been what Mr Pasupati would regard as a full judicial hearing on the merits of the debt is not other sufficient cause such as to warrant dismissing the petition. In this respect it is important to note that the costs assessment process (in which Mr Pasupati had the opportunity to make objections) was not akin to a default judgment.
On the evidence before the court it has not been established that the debtor has genuine and arguable grounds to pursue any further avenue of appeal from the decision of James J such as to satisfy me that for other sufficient cause a sequestration order should not be made or that there should be an adjournment.
Review of Registrar’s Decision
Ground three in the notice of opposition relies on the fact that on 6 September 2011 Mr Pasupati had sought review of the decision of a Registrar of this court made on 16 August 2011 dismissing his application to set aside the Bankruptcy Notice that formed the basis for the creditors’ petition. That review application was dismissed by this court on 20 October 2011 and does not provide a basis on which the proceedings should be further adjourned or for the court not to make a sequestration order.
“Oppression” Action
The next ground in the notice of intention to oppose the petition (ground four) is as follows:
The Respondent has an Oppression Action in the Supreme Court against PMA. The Respondent has filed an Amended Cross-Claim and is presently in the process of making further Amendments which are to be filed by 19th October 2011. The Cross-Claim is inexcess (sic) of $12,000,000.00 and if I would be severely prejudiced if I was to loose (sic) the right to pursue this claim. It is anticipated that this matter will be allocated a date for hearing in late February/March 2012.
This claim relates to Mr Pasupati’s cross-claim against PMA in the PMA proceedings. In the draft further amended cross-claim in evidence in these proceedings, Mr Pasupati asserted oppressive conduct on the part of PMA within s.232 of the Corporations Act; a “quasi partnership” between Messrs Pasupati and Okill which was said to have broken down such as to warrant one of them acquiring the other’s shares in PMA or PMA being wound up; breach of a shareholders agreement and breach of asserted express and implied terms of an employment contract. Mr Pasupati sought various orders, in particular that PMA purchase his shares “at a fair value” and damages (of which particulars were to be provided or to be proved by a forensic accountant’s report). Mr Pasupati estimates the value of his cross-claim at $12 - $13 million.
In support of this ground Mr Pasupati relied in part on a valuation report by John Thynne dated 28 June 2011 annexed to Mr Pasupati’s affidavit of 1 December 2011 in relation to the value of his shares in PMA as at 28 June 2011. On this basis he asserted that his shareholding in PMA had a value of somewhere between $4,027,054 and $5,999,470 (in contrast to a December 2007 valuation prepared by Deloitte Touch Tohmatsu which would suggest a value in the range of $1,214,000 to $1,469,000). In addition, Mr Pasupati claimed that when his contract of employment was terminated, PMA owed “substantial funds” to him in relation to “reasonable notice period”, superannuation, “unpaid employment benefits”, long service and annual leave and also that PMA had failed to uphold the dividend policy obligations of a 2004 shareholders agreement.
The notice of opposition did not clarify the manner in which the PMA cross-claim was relevant for the purposes of these proceedings. It was submitted that Mr Pasupati would suffer great prejudice should a sequestration order be made prior to the hearing of the PMA matter.
I have considered the PMA cross-claim in the context of s.52(2)(b) of the Bankruptcy Act and whether, together with all the other material before the court, it constitutes “other sufficient cause” not to make a sequestration order or is such that the hearing of the creditors’ petition should be adjourned. The contention that Mr Pasupati’s claim against PMA exceeded the amount relied on in the creditors’ petition and was relevant to whether the court could be satisfied that he was able to pay his debts within s.52(2)(a) of the Bankruptcy Act is considered below.
It is convenient to consider first any suggestion that the hearing should be adjourned. The remaining cross-claim in the PMA proceedings is not against the creditors. It does not constitute an appeal against the judgment relied on as the foundation of the bankruptcy proceedings. Rather, Mr Pasupati’s proceedings against PMA are a cross-claim brought in the context of proceedings by a third party (PMA) against him in which PMA seeks to recover more than $2.4 million which it is alleged that Mr Pasupati misappropriated while employed by PMA as its Chief Financial Officer.
Mr Pasupati conceded that there was some “debate” between the solicitors for PMA and his solicitors as to the form and content of his cross-claim. It is not clear that the matter is in fact ready for a hearing, notwithstanding the submission that it was likely to be listed for hearing in February or March 2012. I cannot be satisfied on the evidence before the court when such matter is likely to be heard by the Supreme Court. Moreover, the evidence filed in these proceedings (and relied on from proceedings SYG858/2011) does not include affidavit evidence filed by Mr Pasupati in support of his cross-claim against PMA in the PMA proceedings. Even an arguable claim (in this case against a third party) for an amount equal to or exceeding the amount owed to the creditors does not necessarily constitute “other sufficient cause” to dismiss the petition (Rigg v Baker (2006) 155 FCR 531; [2006] FCAFC 179 and see Totev v Sfar and Another (2008) 167 FCR 193; [2008] FCAFC 35). It is not possible to determine the prospects of success of the cross-claim on the evidence before the court.
It is in the public interest that creditors’ petitions be dealt with promptly. The litigation in question is long-running (having commenced in 2008). In this case I cannot be satisfied that the claim is likely to be resolved soon or that it has “sufficient validity…to justify a dismissal or adjournment of the petition” (Re Schmidt; Ex parte Anglewood Pty. Ltd. (1968) 13 FLR 111 at 116).
Mr Hancock for Mr Pasupati submitted that if the creditors’ petition succeeded and a sequestration order was made the applicants would “get rid of a headache for them” consisting of Mr Pasupati’s oppression cross-claim against PMA. Insofar as this is a contention that the pursuit of the creditors’ petition involved an improper motive or abuse of process on the basis that it was for the purpose of stifling the cross-claim in the PMA proceedings (see Bayne v Baillieu; Bayne v Riggall (1908) 6 CLR 382; [1908] HCA 39), such a claim is not made out on the evidence before the court. The onus of proof is on the person who alleges an abuse of process. That onus is a heavy one.
It must be established that there is a real intention of the part of the creditors to use the process for some purpose which is not legitimate and some real exertion of pressure (see Rozenbes and Others v Kronhill and Another (1956) 95 CLR 407; [1956] HCA 65). Indeed, even if a creditor has an interest in a debtor being made bankrupt to stifle litigation, it has been said (Re Cohn; Ex parte Binningup (South) Pty Ltd (unreported, Federal Court of Australia, French J, 10 November 1992) at [22], that is not in itself enough to warrant refusing to make a sequestration order if the petitioning creditors are otherwise entitled to the order sought.
In this case the evidence is not such as to warrant inferring any such improper purpose on the part of the creditors who have invoked and pursued the processes provided for under the Bankruptcy Act. The fact that they are directors of PMA (the plaintiff in the PMA proceedings) does not establish such an improper motive. For the reasons given elsewhere in this judgment, I am satisfied that the petitioning creditors are otherwise entitled to the sequestration order sought. Any potential impact on the pursuit by Mr Pasupati of his cross-claim against PMA (and I note in that respect that the cross-claim against Messrs Okill and Raymont has been dismissed) is not such as to establish an improper motive or abuse of process or other sufficient cause not to make a sequestration order. Nor is it such as to warrant adjourning the hearing of the creditors’ petition pending determination of Mr Pasupati’s claim against PMA.
Going behind the Judgment
Grounds five and six in the notice of opposition both appear to relate to the respondent’s contention that the court should go behind the judgment on which the bankruptcy notice is based, that is, the costs assessment.
These grounds are:
In the premises this Court should go behind the judgment and examine the consideration alleged to support the judgment, in particular the Financial Records of both Applicants –Okill and Raymont, as well as the Financial Records of the Company known as Print Management Australia Pty Limited (“PMA”), which is alleged to have lent moneys to the Applicants to pay for their legal costs and disbursements. In the circumstances, as a minimum, this court should look at the Audited financial Accounts of PMA for the financial years 2009 and 2010. In addition, the Court should look at the meeting records of the company to confirm the validity of any actions by PMA allegedly ratifying use of company funds to pay for the expenses of the Applicants, both directors of PMA against the Respondent, who is a former director of PMA Further, the court should look at the accounting in respect of Barrister expenses, especially when PMA has paid the accounts of the Barristers, and such payments have not been reflected in the alleged PMA loan accounts of the Applicants.
At the later part of the costs assessment process, and at the most relevant time, when the Costs Assessment was finally determined by the Costs Assessor of the Supreme Court, the Respondent was not represented and was suffering from clinical depression. In the circumstances, the Costs assessor allowed the Applicants to only provide advice (information based on instructions) on any potential breach of the indemnity rule, by only requiring a written response rather than requesting the original source documents, such as financial accounts. In the circumstances, the Costs Review Panel refused to allow fresh evidence as part of the process, notwithstanding that the fresh evidence in fact ought to have already been supplied by the Respondents and or their solicitors.
At the start of the hearing in this matter the respondent called on a notice to produce addressed to the applicants seeking production of documents said to be in relation to the application for a costs assessment that was the subject of the certificate of determination relied upon in the Judgment founding the bankruptcy notice.
The notice to produce referred to particular documentation such as solicitor’s invoices, receipts showing payments, details of cheques and EFT transfers, correspondence between the applicants and their solicitors with respect to invoices and payment, time sheets or time entries utilised by the applicant’s lawyers in the generation of such invoices and trust account receipts with respect to the applicants for the period August 2008 to date. In addition the respondents sought production of:
All documents between the Applicants and Print Management Australia Pty Limited (“PMA”) in respect of the “alleged” loan or other agreements for the payment (or otherwise) of legal fees and disbursements, and/or payment of the alleged loans by the Respondents (sic).
All loan agreements between the Applicants and PMA, in respect of the legal fees and disbursements incurred in respect of the costs certificate of determination founding the said judgment relied upon in the bankruptcy notice including all payments, receipts, cheques, accounts, etc.
Any documents in relation to costs agreement and or tax invoices and or receipts between counsel engaged on behalf of the Applicants and [their lawyers] (or PMA if on behalf of the Applicants with the solicitors for PMA and/or [the solicitors for the applicants]) with respect to counsel involved in the proceedings;
All documents which establish Proof of payment by the Applicants to PMA of their loan accounts during the period July 2008 to July 2010.
The applicants raised some objections to the notice to produce.
It became apparent that in essence the documents sought in the notice to produce were documents which the respondent would seek to rely on if the court decided to go behind the costs assessment and enquire as to the existence of the debt. Having failed in his application for leave to appeal to the Supreme Court, the respondent now, in effect, seeks a fresh hearing of the costs assessment application in this court (with the benefit of any relevant additional evidence obtained pursuant to the notice to produce).
However, as I indicated to the parties, the court may choose to conduct the inquiry as to whether to go behind a judgment as a two-stage process, inquiring first into whether there is sufficient reason to question the existence of a real debt behind the judgment and then, if there is, determining that issue (see Makhoul v Barnes at 584 and Wolff v Donovan (1991) 29 FCR 480; [1991] FCA 222). After hearing submissions, I indicated that I intended to first proceed to determine whether there was sufficient reason to question the existence of a real debt behind the judgment, on the basis that if that was established, the objections to the notice to produce would be dealt with prior to determining whether there was a debt. If, on the other hand, I was not persuaded that there was sufficient reason to question the existence of a real debt behind the judgment, I would, subject to resolution of the other grounds in the notice of opposition to the creditor’s petition, determine whether or not to make a sequestration order. These matters were addressed in submissions.
For the reasons that follow I am of the view that it has not been shown that there are substantial reasons for questioning whether behind the costs assessment there was in truth and reality a debt due to the petitioning creditors in the sense considered by Barwick CJ in Wren v Mahony (1972) 126 CLR 212 at 225; [1972] HCA 5 such as to warrant going behind the judgment. The court should accept the Certificate of Judgment as satisfactory proof of the petitioning creditors’ debt.
I have borne in mind that the court’s decision on the application to set aside the bankruptcy notice did not involve the same issue as now arises on the petition. What is in issue in these proceedings is whether there are circumstances justifying the exercise of the court’s discretion to accept the Certificate of Judgment as proof of the debt for the purposes of s.52(1) of the Bankruptcy Act and the discretion whether or not to make a sequestration order (see Makhoul v Barnes at 579 – 583).
The judgment is in relation to the applicant’s costs of the cross-claim against them in the PMA proceedings and their application for security for costs. Mr Pasupati was the former Chief Financial Officer and a former director of PMA while Mr Okill and Mr Raymont are directors of PMA. Mr Pasupati’s evidence is that the applicants have a combined shareholding of 57.5% in PMA. He holds the remaining balance of the shares in PMA. He disputes that he was validly removed as a director.
PMA commenced proceedings in the Supreme Court of New South Wales against Mr Pasupati alleging breaches of his director’s duties and seeking to recover money said to have been taken or paid by him in the course of his employment and the balance said to be due on his loan account. Relevantly, Mr Pasupati brought a cross-claim against PMA and Messrs Okill and Raymont alleging, among other things, oppressive conduct, misleading and deceptive conduct, and breaches by Messrs Okill and Raymont of their directors’ duties.
As outlined above, Messrs Okill and Raymont sought security for costs of the cross-claim. In support of that application their solicitor swore an affidavit as at 24 June 2009 (which is annexed to an affidavit of Mr Pasupati relied on in these proceedings) which stated that up to the date of the affidavit Messrs Okill and Raymont had incurred costs in defending the cross claim in an amount of approximately $40,000. However their solicitor also estimated that the total party/party costs of Messrs Okill and Raymont in respect of the cross-claim (excluding GST) would be $292,400. On 31 August 2009 the Supreme Court ordered that Mr Pasupati provide security for Messrs Okill and Raymont’s costs of the cross claim in the sum of $150,000 (Print Management Pty Ltd v Pasupati).
McDougall J was of the view that that the quantification of the amount of security sought in the order of $294,000 failed to take into account the extent of the overlap between Mr Pasupati’s case against PMA and his case against Messrs Okill and Raymont or to make a proper allowance for the fact that the great bulk of the issues would be defended by PMA at its own cost. His Honour made the point that what was in issue was the entitlement of Messrs Okill and Raymont to the separate costs they would incur by reason of the need to defend the separate claims brought against them by Mr Pasupati in circumstances where they had some separate representation. His Honour was of the view that Mr Pasupati should provide security for the applicant creditors’ costs of the cross claim against them in the sum of $150,000, that costs should follow the event and that Mr Pasupati should pay Messrs Okill and Raymont’s costs of the interlocutory application and that such costs be assessed and paid forthwith. No security for costs was provided. The Supreme Court subsequently dismissed Mr Pasupati’s cross claim against Messrs Okill and Raymont with costs on 28 April 2010.
On 17 August 2010 the petitioning creditors applied for assessment of the costs awarded to them under the orders of the Supreme Court of 31 August 2009 and 28 April 2010 (that is their costs of the application for security of costs and their costs of the cross-claim against them). The costs applicants sought costs and disbursements totalling $344,851.85. Despite requests from the costs assessor, Mr Pasupati did not provide objections to the bill of costs, notwithstanding that he was granted an extension of time for the lodging of objections. According to Mr Pasupati’s affidavit evidence, he unsuccessfully sought a further extension of time in circumstances where his lawyer had ceased to act for him. He claimed he was suffering from clinical depression at the time. There is no other evidence as to the existence or the impact of any such condition at the relevant time. He claims that he advised the costs assessor that he understood that Messrs Okill and Raymont had not personally paid the claimed costs which had been paid by PMA.
Prior to making the assessment, the assessor wrote to the solicitors for Messrs Okill and Raymont referring to the bill of costs and fees claimed for the work of counsel, noting that copies of fee agreements and fee notes were all addressed to the solicitors for PMA and that she had not received any documents that indicated either that the costs applicants had paid counsel or that they were liable to pay counsel. The assessor sought relevant documentation to establish that the claim for such fees was not a breach of the indemnity rule.
In reply, the solicitors for Messrs Okill and Raymont responded that they were instructed by their clients that PMA had agreed to advance and did advance loan amounts to enable payment of defence costs and representation expenses on behalf of the directors from July 2008 pending determination of the costs claims. These costs were said to consist of the costs payable to the solicitors for Messrs Okill and Raymont and so much of the costs of counsel as related exclusively or primarily to the defence of the directors (whether or not PMA also obtained any benefit). The solicitors also advised that they were instructed that as between PMA and its directors (the applicants) any costs recovered by the directors from Mr Pasupati were required to be paid to PMA in reduction of the loan advances, that if no amount was recovered the loan advances would be reallocated pro-rata to the directors’ loan accounts and that no indemnity had been given by PMA to its directors in respect of their legal costs.
The costs assessor issued a certificate of determination determining that the amount of the costs payable by Mr Pasupati was solicitor’s costs of $125,591.95 and disbursements of $96,572 (a total of $222,163.95). This formed the basis for the Judgment.
In these proceedings the respondent relies substantially on his contentions about the indemnity principle in support of the proposition that there are substantial reasons for questioning whether in truth and reality there is such a debt due to the petitioning creditors. He also takes issue with the quantum of the costs.
In a statement of reasons dated 4 April 2011 the assessor referred to the remarks of McDougall J in relation to the extent of the overlap between the costs incurred by the applicants and the costs incurred by PMA (which had separate solicitors but the same counsel) and the fact that security for costs of only $150,000 had been ordered.
The assessor’s reasons make it clear that she considered both whether there had been a breach of the indemnity rule as well as the extent to which the costs claimed should be allowed. In light of the respondent’s contentions in these proceedings, it is notable that the assessor stated:
3. The applicants have claimed fees for three counsel of which only one has a contractual relationship with the applicants' solicitors. Mr Garnsey QC and Mr Connell of Counsel were both instructed by PMA's solicitors and all fees were rendered to that firm pursuant to the agreement with those solicitors. No fees were rendered to the applicants for any work relating to the cross claim. In response to my enquiry as to whether there had been a breach of the indemnity rule, I was informed by the applicants' solicitor PMA provided a loan to the applicants for their defence costs and the loan is repayable from costs recovered from the respondent. If the applicants are unsuccessful in recovering costs from the respondent, the loans will be added to their loan accounts as directors of PMA. Mr Garnsey QC and Mr Connell acted for the applicants on the cross claim and the application for security for costs. On the basis of this advice I accepted that there had not been a breach of the indemnity rule.
4. In regard particularly to the memorandums of fees of Mr Garnsey and Mr Connell but also to the bill generally, I was not assisted in the assessment by the applicants' approach of ambit claims. Claims for costs were made without regard to whether they were covered by the two costs orders and little detail was provided to enable me to determine if the items claimed related to the cross claim, the principal proceedings or the defence of PMS. Where costs were claimed for work that related to the principal proceedings or PMA as the first cross defendant those costs were not allowed as they were not covered by the costs order."
Thus, the costs assessor accepted that there was no breach of the indemnity rule. However the disbursements claimed, including counsel’s fees, were reduced substantially, as were some aspects of the costs claimed.
On 12 May 2011 Mr Pasupati applied for a review of the determination by the costs assessor. In the meantime, the Certificate of Judgment for the amount of the costs assessment had been entered in the Supreme Court of New South Wales on 7 April 2011 and the creditors had caused the bankruptcy notice to be issued and served on Mr Pasupati.
On 5 August 2011 a review panel affirmed the costs assessor’s findings and ordered that costs incurred in the course of the review be paid by Mr Pasupati. The statement of reasons of the review panel was considered in detail by James J in Pasupati v Okill in determining the application for leave to appeal against the review panel’s determination.
As James J pointed out, it was not submitted by Mr Pasupati that the review panel had adopted an incorrect approach to its task. The review panel addressed the issue of whether it should take into account evidence which had not been before the assessor. The panel had regard to the advice to the assessor that no indemnity had been given by PMA to the directors. It addressed the difference between an estimate of the costs of defending the cross-claim given by the applicants’ solicitor in June 2009 (which was described as “probably an educated guess”) and the bill submitted for assessment which contained actual times from time records and counsel’s fees (at [27]).
The review panel also considered the application of the indemnity principle. The panel was of the view that it was important to note that the issue of the indemnity was raised by the assessor, and not by Mr Pasupati, and that the assessor would have been entitled to proceed without requesting the information sought from the applicant’s solicitors. In any event the material provided in the response to the assessor was said to be sufficient to satisfy her that there was no breach of the principle that a party cannot be liable to pay, pursuant to a costs order, an amount greater than the amount that party has paid or is liable to pay for the party’s own legal costs.
The review panel gave reasons why it declined to consider PMA financial documents that were not before the assessor, indicating that there was no evidence as to how and when those documents came into the possession of Mr Pasupati. It found it inappropriate that Messrs Okill and Raymont should be ordered to provide copies of all invoices and receipts in relation to legal costs to Mr Pasupati (as he had sought) in circumstances where such documents were likely to contain some confidential details and the PMA proceedings were continuing. The panel was of the view that it was not appropriate to order a non-party (PMA) to provide copies of all invoices and receipts in relation to legal costs in the PMA proceedings, where there had been no submission to the assessor and it was not the role of the assessor or the panel to engage in a discovery exercise that may be part of the PMA proceedings.
The panel also stated that it had not examined PMA financial documents sought to be relied on by Mr Pasupati, largely because they were not put before the assessor and no explanation had been given for when they came into the possession of Mr Pasupati and whether they could have been put before the assessor.
Importantly, the panel observed that it was not uncommon for the sort of arrangements said to be in place between PMA and its directors to be made “but not properly documented”. In other words, the panel was of the view that one could not assume that if the documents compiled by PMA’s accountant did not contain details of loans, no such loan had been made. Reference was made to the fact that the assessor and the panel had direct material indicating that Messrs Okill and Raymont were liable to pay such costs. This observation is of some significance in the context of Mr Pasupati’s submission in these proceedings that it is relevant that the PMA documentation he has does not contain details of such loans to the applicants.
Insofar as Mr Pasupati takes issue in these proceedings with the approach of the Review Panel, the judgment that formed the basis for the bankruptcy notice was based on the Certificate of Determination of the Costs Assessor. It is, however, notable that James J expressed the view that the members of the review panel were clearly conscious of the principle on which costs were to be assessed (at [79]). Moreover, neither the costs assessment or the review can be regarded as equivalent to a judgment obtained by default without real trial of the issues.
Mr Pasupati unsuccessfully sought leave to appeal against the review panel’s determination affirming the determination of the costs assessor. While the fact that the debtor was unsuccessful in his application for leave to appeal against the review panel is not conclusive as to whether the court should go behind the costs assessment, the failure of the debtor’s contentions both before the review panel and in the Supreme Court is relevant in relation to the sustainability or arguability of such contentions (see Richardson v Leonard Cohen & Co [2008] FCA 1392 at [20], [21] and [49]).
James J dealt in some detail with Mr Pasupati’s claims based on the indemnity principle, including his submissions (reiterated in these proceedings) about the inadequacy of the applicants’ solicitor’s email as a response to the assessor’s inquiry and his argument that it was relevant that a comparison of the balances of PMA loan accounts of Messrs Okill and Raymont and the financial accounts of PMA for the financial years ending 30 June 2008 and 30 June 2009 showed that indebtedness on the loan accounts had decreased and not increased.
His Honour discussed authorities in relation to the indemnity principle, which, I note, were not canvassed by the respondent in these proceedings. In particular, James J referred to the fact that it was essential for the party resisting a costs order to establish that under no circumstances did the client have any liability to pay costs to his solicitors (see Wentworth v Rogers; Wentworth and Russo v Rogers (2006) 66 NSWLR 474; [2006] NSWCA 145 and cases considered therein discussed in Pasupati v Okill at [62] – [68]). Importantly, his Honour found that rather than there being any evidence of an agreement between Messrs Okill and Raymont and their solicitors that under no circumstances would they be liable for costs, there was a written offer by their solicitors to Messrs Okill and Raymont dated 1 August 2008 to enter into a costs agreement which was accepted by Messrs Okill and Raymont and which provided for their liability for costs (at [69] – [73]).
It is clear that Mr Pasupati has had the opportunity to ventilate his contentions in relation to the indemnity principle, insofar as that is now said to be a basis to go behind the Certificate of Judgment that formed the basis for the bankruptcy notice. No issue has been taken in these proceedings with the law in relation to the indemnity principle or the application of that law by James J such as to suggest that there are substantial reasons for questioning whether a debt was in fact due to the applicants. Mr Pasupati’s arguments based on what is, or is not, revealed in PMA documentation about loan accounts do not establish that there is an issue about whether the indemnity principle operated such as to warrant going behind the judgment. As James J observed at [74] it is:
…immaterial to the operation of the indemnity principle that an agreement might have been made between PMA and Messrs Okill and Raymont that PMA would lend [them] the amount of their costs, that amount to be charged to their directors’ loan accounts with PMA, or that PMA did in fact pay the costs of Messrs Okill and Raymont.
Insofar as it was submitted for Mr Pasupati that the indemnity principle was simply that a litigant cannot claim more than he or she has paid in legal costs, no authority was cited in support of this proposition.
As Santow JA stated in Wentworth v Rogers at [45] the indemnity principle is as follows:
Where a party to an action has an agreement with their legal adviser that they do not have to pay any costs, then the general law principle states that that party cannot recover party and party costs against their adversary.
If PMA had paid the creditors’ legal costs, that would not of itself establish a breach of the indemnity principle, contrary to the respondent’s contention. Moreover, even if there is, as seems to be suggested, no evidence in available PMA financial records consistent with the applicants’ claim to the assessor about their loan accounts, this does not establish substantial reasons for doubting whether there is really a debt due to the creditors. How the costs were in fact paid is not determinative of whether there is a debt owed to the applicant creditors by Mr Pasupati. It has not been established that evidence in relation to arrangements for a loan between PMA and the creditors, or the absence of such evidence, is material to the operation of the indemnity principle (and see James J at [74]). Such material would not directly address the critical issue of whether under no circumstances the applicants had any liability to pay costs to their solicitors. Insofar as it seems to be suggested (albeit not expressly) that there could not be such an obligation as no loans were documented, Mr Pasupati’s submissions do not satisfy me that sufficient reason is given for doubting whether there is a debt due to the creditors based on the law in relation to the indemnity principle. Contrary to Mr Pasupati’s contention, there was relevant documentation before the Supreme Court (consisting of the costs agreement between the applicants and their solicitors) which James J saw as leaving no room for the operation of the indemnity principle.
Mr Pasupati also took issue with the quantification of the applicants’ legal costs. However even if his challenge to the quantification of the costs were to be accepted, so that the amount of the judgment (which, it must be recalled, is in relation to an assessment of legal costs) were to be reduced, I am satisfied that it would remain in excess of $5,000, the minimum amount required to found a creditors’ petition (see Oliveri v Stafford and Others (1989) 24 FCR 413 at 431 – 432; [1989] FCA 486 per Gummow J). Such circumstances do not warrant going behind the judgment.
Moreover, James J addressed Mr Pasupati’s contentions in relation to the quantum of the costs. As his Honour observed, the costs assessor disallowed many items and significantly reduced the total amount of costs sought. His Honour accepted that in the application for costs assessment the applicants’ solicitors had made some claims for costs that were not within the costs orders, but was of the view that the costs assessor was clearly aware of the principle to be applied, closely examined individual items in the bill of costs and disallowed many of the items claimed. Mr Pasupati has had the opportunity to have his arguments in that respect considered by the Supreme Court in his application for leave to appeal (in which he was represented by Counsel), including his arguments in relation to whether regard should be had to fresh evidence. His claims about the quantum of costs do not warrant going behind the Judgment.
Mr Pasupati took issue with the fact that the costs review panel did not allow fresh evidence. That was also one of the issues raised by him in the Supreme Court before James J, as was the issue about whether or not there needed to be some forensic examination of the accounting underlying the loan accounts alleged to have been established by PMA or documentation in respect of barristers’ expenses. Each of these matters and other such concerns raised by Mr Pasupati’s solicitors in these proceedings were, in essence, dealt with in the decision of James J.
As indicated, the costs assessment was not in any way akin to a default judgment. Mr Pasupati had the opportunity to argue his position on the merits. The fact that he did not do so by providing objections when the matter was first before the costs assessor does not provide a basis for going behind the judgment. More generally, his submissions do not establish that there are substantial reasons given for questioning whether in truth and reality there is a debt due to the petitioning creditors.
It has not been established that the costs assessment was obtained by fraud, collusion or miscarriage of justice. The allegations that the respondent makes about the adequacy of the disclosure by the solicitors for the applicants to the costs assessor and the material provided to the costs assessor do not establish fraud, collusion or miscarriage of justice. Nor has it been established that there is fresh, previously unobtainable, evidence of such probative value and significance that, taken together with the material before the costs assessor, it would in all probability mean that there was no debt owed to the creditors.
As discussed above, the evidence from PMA about loan accounts would not be of this nature.
It has not been established that there is sufficient reason to question the existence of a real debt behind the Certificate of Judgment. Hence it is appropriate to consider the other objections to the creditors’ petition in the context of considering whether a sequestration order should be made.
Solvency
In paragraph seven of the notice of opposition the respondent contends that he is “solvent” and that:
If for any reason the Court determines that the Respondent is not solvent, the court in its discretion ought not to make an order sequestrating the estate of the respondent until the Respondent has had the opportunity to place into evidence a solvency report. As well as to allow the hearing of the Respondent’s oppression case against PMA.
First, what is in issue under s.52 of the Bankruptcy Act, is not, strictly speaking, whether a person is “solvent” within the s.5(2) definition, but rather whether he has satisfied the court that he “is able to pay his…debts” such that the discretion to dismiss the petition within s.52(2)(a) of the Act should be exercised (see International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 at [8] – [10] and [31]). The respondent did not address or take issue with the principles canvassed in the applicants’ submissions relevant to the determination of this issue (see for example Australia & New Zealand Banking Group Limited v Foyster [2000] FCA 400 at [17] – [19]; International Alpaca Management Pty Ltd v Ensor and Eykamp v Deputy Commissioner of Taxation (2010) 8 ABC(NS) 105; [2010] FCA 797 at [7]).
At the start of the hearing of the creditors’ petition the respondent sought an adjournment in order to file a solvency report, but in circumstances where orders had been made on 20 October 2011 giving him the opportunity to file and serve any affidavit evidence in support of the notice of opposition on or before 10 November 2011 and there had been no prior indication of any need for an adjournment, the application for an adjournment was refused.
It has not been established that it is in the interests of the parties and the administration of justice that there be a further adjournment in order to enable Mr Pasupati to put before the court a “solvency report” as sought in the notice of opposition. I note in that respect that after the initial adjournment application was refused the hearing proceeded. During the applicant’s submissions, at 3.00 pm on the day of the hearing, Mr Pasupati’s solicitor for the first time sought leave to re-open his case to file a further affidavit which, among other things, was intended to address solvency. Leave to re-open was refused. I am satisfied that Mr Pasupati had ample opportunity prior to the hearing to put evidence of his solvency or other matters relevant to s.52(2) of the Act before the court.
The onus under s.52(2)(a) of establishing that he is able to pay his debts is on the debtor (ANZ v Foyster at [17]). There has been proof of the matters in s.52(2)(a). The debtor had the opportunity before the hearing to put evidence before the court in relation to his ability to pay his debts. Orders were made on 20 October 2011 for him to file any affidavit evidence in support of the notice of opposition by 10 November 2011. He did not do so. There is no suggestion that his financial position has changed. I am not satisfied that in the interests of the administration of justice or of the parties that there now be an adjournment to allow the debtor a further opportunity to provide evidence such as a solvency report.
The bare assertion of solvency in the notice of opposition does not establish that Mr Pasupati is able to pay his debts within s.52(2)(a) of the Bankruptcy Act. I have considered the matters relied on in the respondent’s written submission relevant to this issue. However, the issue is not simply whether the respondent has assets which exceed his indebtedness to the petitioning creditors. Indeed, as Hely J stated in ANZ v Foyster at [17] – [19]:
The onus of proving sufficiency of assets lies on the respondent. It is not sufficient for the respondent simply to establish that he has assets which exceed his liabilities in value. It must also be established that the assets are available to be realised and that they are capable of ready realisation. If a debtor is able to pay his or her debts, but is recalcitrant, the creditors may resort to other remedies, such as execution against property and garnishee proceedings, but not to sequestration. Bankruptcy is not a proceeding designed for the recovery of debts: see Re Sarina; Ex Parte Wollondilly Shire Council (1980) 32 ALR 596, 599.
Although a sequestration order will not be made against the estate of a debtor who is recalcitrant but plainly solvent, the Bank submitted, on the basis of Trojan v Corporation of Hindmarsh (1987) 16 FCR 37, 46-48, that the discretion under s 52(2)(a) should not be exercised unless the debtor demonstrates that the petitioning creditor will be satisfied from the ordinary remedies such as execution and guarantee. Trojan decides that even if a debtor establishes solvency, the Court retains a discretion whether or not to dismiss the petition. The Full Court said, at p 48:
"... the principle laid down in the Sarina case would not necessarily be satisfied by a sterile demonstration of an ability to achieve a payment which was not in reality at all likely to be compelled. Section 52(2)(a) envisages a situation which will probably bear fruit in payment. It is not easy to see any other reason why the legislature saw fit to make a demonstration of ability to pay only a discretionary ground of dismissal of a petition, and not an absolute bar to its success."
Under s 52(2)(a) the respondent must satisfy the Court that he is "able to pay his ... debts", including liabilities: s 5(1). In my view, the subsection refers to a state of affairs which requires account to be taken of debts which will fall due in the reasonably immediate future pursuant to existing obligations: Bank of Australasia v Hall [1907] HCA 78; (1907) 4 CLR 1514, 1527-1528 as well as debts which are presently due and payable. However, whether that is so or not, for the reasons explained by Katz J in International Alpaca Management Pty Ltd account needs to be taken, if not in assessing solvency, then in the exercise of the discretion whether or not to dismiss the petition, of liabilities which will become payable in the reasonably immediate future.
Only limited aspects of his financial position are addressed in the affidavits Mr Pasupati relied on from proceedings SYG858/2011 and in his affidavit of 1 December 2011 (which he was given leave to file in court notwithstanding its lateness). The main evidence in that respect is in the affidavit of Mr Ryckmans of 1 December 2011 filed in response to Mr Pasupati’s affidavit of 1 December 2011.
While s.52(2)(a) does not necessarily require a debtor to have cash resources immediately available to pay all creditors immediately, provided he has other assets realisable within a relatively short period (see Re Sarina; Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163; [1980] FCA 66 and Sandell v Porter and Another (1966) 115 CLR 666 at 670; [1966] HCA 28), to make a finding under s.52(2)(a) the court should be satisfied “either that no debts of [the debtor] will become payable in the reasonably immediate future or that, if they will, [the debtor] will be able to pay them” (International Alpaca Management Pty Ltd v Ensor at [8] – [10] and [31]). On the limited evidence before the court I cannot be so satisfied.
There is clear evidence of the judgment debt due to the petitioning creditors in the sum of $224,088.95 and that Mr Pasupati is liable for the costs ordered by the Review Panel of $2,136.75 and by Registrar Hedge in relation to the unsuccessful application to set aside the bankruptcy notice in the sum of $7,036.75.
Mr Pasupati has not disclosed any other liabilities. Nor has he claimed that he has no other liabilities and I cannot be satisfied that that is the case. In that respect I note that the applicants put evidence before the court in support of the proposition that Mr Pasupati had debts and liabilities exceeding $7 million. While the evidence before the court is not such that the court can be satisfied as to the extent and amount of Mr Pasupati’s indebtedness, it does raise sufficient concerns to reinforce the court’s lack of satisfaction under s.52(2)(a) of the Act in a number of respects.
Thus, while the solicitor for Mr Pasupati submitted that his indebtedness to PMA would be disputed in the PMA proceedings, there is evidence of a Notice to Admit Facts served on him on 21 July 2011 in those proceedings in relation to amounts owed by him to PMA totalling $1,702,852.21 (not including interest) and of the absence of service of any notice disputing such facts by Mr Pasupati. Mr Hancock indicated that issue would be taken with such asserted liability, although this had not yet occurred.
Further, there is evidence from the applicants that Mr Pasupati is the defendant in possession proceedings by the National Australia Bank (NAB) in the Supreme Court (proceedings 2009/294556) seeking possession of the Strathfield property he gives as his address, which, it appears, he owns jointly with his former wife.
On 9 June 2011 the Supreme Court (on the application of Mr Pasupati’s former wife) ordered the appointment of trustees for sale of this property under s.66G of the Conveyancing Act 1919 (NSW) (National Australia Bank Limited v Pasupati [2011] NSWSC 540). Relevantly (having regard to the absence of evidence from Mr Pasupati to explain his financial position in relation to this property), Buddin J noted that there were three caveats on the property, one in favour of PMA and two in favour of solicitors who had previously acted for Mr Pasupati, in relation to debts of $75,000 and $125,000.
Similarly, it is relevant to note that Buddin J indicated that as at September 2010 the value of the Strathfield property was in the order of $1,800,000 according to NAB, while the balance due under the mortgage and enforcement costs as at 25 February 2011 was over $2,124,350 (increasing at the rate of $7,500 per month). While his Honour also referred to the fact that Mr Pasupati was defending the NAB proceedings and had brought a cross-claim against NAB, there is no evidence in these proceedings as to the nature or state of such proceedings. There is no direct evidence from Mr Pasupati as to the current position in relation to his home or any debt to the NAB.
It appears that the Strathfield property has not yet been sold, but there is no evidence that any indebtedness to the NAB has been discharged.
It must be said however that legal costs incurred by PMA in prosecuting the PMA proceedings cannot be said to be a liability of Mr Pasupati as the creditors suggested. Those proceedings have not yet been determined.
The applicant creditors also put before the court a copy of a verified financial statement of Mr Pasupati dated 16 June 2008 filed in proceedings in the Family Court of Australia. Mr Hancock submitted that this document ought not to have been before the court because the Family Court was said to have ordered that PMA was not to be granted access. However there is no evidence to establish that the Family Court made confidentiality orders that would render such evidence inadmissible in these proceedings or that would prevent the court from having regard, at least in general terms, to this financial statement, albeit it is of limited relevance having regard to the time that has passed since its preparation. In my view it cannot be taken as an accurate representation of Mr Pasupati’s present financial situation.
It does, however, raise further unanswered concerns about Mr Pasupati’s present financial position.
Mr Pasupati referred in his submissions and his affidavit of 1 December 2011 to the fact that he was a 42.5% shareholder in PMA, owning 170,000 shares. He annexed a valuation report prepared on 28 June 2011 which gave a range of values for the shares between $25.39 per share and $33.29 per share compared to a Deloittes’ valuation said to have been relied on by PMA which valued the PMA shares in the range of $8.80 per share. Mr Ryckmans, the solicitor for the creditors, put evidence before the court of five different valuations between August 2000 and February 2008 as to the value of the PMA shares and observed that no minority discount had been applied by the most recent valuation obtained for Mr Pasupati to the value of his shares. It is not possible in these proceedings to determine the value of these shares on the disputed, but limited, evidence. In any event, on the limited evidence before the court Mr Pasupati’s shareholding in PMA is not such that I can be satisfied that he is able to pay his debts.
In particular, apart from the absence of disclosure of his total indebtedness there is no evidence that Mr Pasupati could sell such shares (whatever their value) within a reasonable period of time. As Buchanan J stated in Eykamp v Deputy Commissioner of Taxation at [7]:
…whatever mechanism is employed to secure the necessary funds, and satisfy the Court that it provides adequate evidence of solvency, it remains necessary that it produce results within a realistic time frame.
Nor can I be satisfied that Mr Pasupati could pledge or mortgage his shares in PMA, insofar as one may have regard to money from other persons (see International Alpaca Management Pty Ltd v Ensor). The shareholders agreement in relation to PMA provides in cl.5.6 that:
Shareholders must not provide their shares as security, or create or give any encumbrance over their shares in favour of any party without the prior consent of all Shareholders, which may be withheld by each of them at their absolute discretion.
Mr Pasupati has pending proceedings against PMA consisting of the cross claim which he asserts is in the order of $13 million. That cross-claim has not been determined. Nor have the PMA proceedings against Mr Pasupati. On the limited evidence before the court I am not satisfied that the fact that Mr Pasupati relies on a cross-claim in the PMA proceedings is such as to satisfy me that he has funds available to pay all the debts he owes within a reasonable time in the sense considered in Re Sarina; Ex parte Council of the Shire of Wollondilly and Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372; [1980] FCA 138. Further, it is not possible on the limited evidence about those proceedings for this court to determine the merits of such claims (Foyster) or when they are likely to be resolved.
Mr Pasupati also relied on the fact that he had an indemnity costs order against PMA made on 29 August 2008 in the PMA proceedings which was payable forthwith and said to be in the sum of $123,181.69 based on the fact that his solicitor had prepared an application for costs assessment in that sum. However the indemnity costs order is intended to indemnify Mr Pasupati for the costs that he is liable to pay his solicitors in connection with those proceedings. It cannot be said that such funds would be available in order to enable him to meet other indebtedness.
In written submissions Mr Pasupati relied on what was said to be a claim in a building construction dispute in relation to his Strathfield property. There is no evidence before the court to substantiate such a claim. If it is to recompense Mr Pasupati for losses, this raises the possibility that he has other indebtedness. In any event such a claim does not of itself, or in conjunction with the other material, go to show that Mr Pasupati has met the onus of showing that he is able to pay his debts within s.52(2)(a) of the Act.
I note the sake of completeness that even if a debtor is able to pay his debts from the moneys of other people (cf International Alpaca v Ensor), there is no evidence that any such loans have been forthcoming or would be sufficient to meet all of Mr Pasupati’s debts presently payable or becoming payable in the immediate future. There is evidence that after Mr Pasupati sought leave to appeal from the determination of the review panel the Supreme Court stayed the judgment pending payment into court by Mr Pasupati of $50,000 by 21 September 2011. Mr Ryckmans’ undisputed evidence is that Mr Pasupati failed to pay $50,000 into the Supreme Court.
On 21 September 2011 he filed an application seeking to extend the stay ordered by Hall J and relied in support of the application on an affidavit of Edward Lancaster of Greywalls Resources NL which suggested that a loan would be forthcoming. There is no evidence that this eventuated.
I also note that while Mr Pasupati describes himself as a Company Director, there is no evidence as to any income earned by him or of cash assets or assets readily converted to cash. Mr Pasupati’s submissions and evidence about the relevance of particular actual or contingent assets (even if accepted in full) is not such as to satisfy me that he is able to pay his debts within s.52(2)(a) of the Bankruptcy Act.
No issue was otherwise taken by the debtor with the formal issues in s.52(1) of the Bankruptcy Act. I am satisfied on the evidence before the court with proof of the matters required under s.52(1) of the Act including the matters stated in the petition, service of the petition and the fact that the debt on which the petitioning creditors rely is still owing. I am not satisfied that the debtor is able to pay his debts within s.52(2)(a) of the Act or that for other sufficient cause a sequestration order ought not to be made. In all the circumstances I am satisfied that a sequestration order should be made against the estate of Kumareshwara Pasupati.
I certify that the preceding one-hundred and eleven (111) paragraphs are a true copy of the reasons for judgment of Barnes FM
Date: 14 February 2012
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