Pattison v Schiffer
[2007] FMCA 319
•16 March 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| PATTISON v SCHIFFER | [2007] FMCA 319 |
| BANKRUPTCY – Trustee’s claim based on assessment of income earned during bankruptcy – assessments pursuant to s.139Y – s.139ZG(4) certificate – challenge to validity of certificate – accusation Trustee acted “arbitrarily, or capriciously or in bad faith” – alleged failure to apply industrial award which was said to be applicable – evidentiary onus – credibility of bankrupt – conduct of bankrupt during bankruptcy – lack of information provided by bankrupt – best fit comparator – use of CPI to assess reasonable income – bankrupt’s failure to satisfy evidentiary onus – trustee did not act arbitrarily, capriciously or in bad faith – judgment for the trustee. |
| Bankruptcy Act 1958, ss.30, 130ZG, 130ZF,137ZA, 139N, 139S, 139W, 139X, 139Y, 139ZG, 178 |
| Re Ellis; ex parte Jefferson & Stevenson (unreported FCA 17 February 2007) Re Nelson and Inspector–General of Bankruptcy (1994) 35 ALD 113 |
| Applicant: | PAUL ANTHONY PATTISON |
| Respondent: | HORST DIETER SCHIFFER |
| File Number: | MLG1345 of 2003 |
| Judgment of: | O’Dwyer FM |
| Hearing dates: | 6 October 2005, 7 December 2005, 23 March 2006, 18 May 2006 and 13 September 2006 |
| Delivered at: | Melbourne |
| Delivered on: | 16 March 2007 |
REPRESENTATION
| Counsel for the Applicant: | Mr Cull |
| Solicitors for the Applicant: | Mendlesons |
| Counsel for the Respondent: | Mr Broberg |
| Solicitors for the Respondent: | Irlight & Broberg Solicitors |
ORDERS
The respondent pay the applicant $96,961.74 plus interest on that sum pursuant to statute.
Costs reserved with liberty to apply.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG1345 of 2003
| PAUL ANTHONY PATTISON |
Applicant
And
| HORST DIETER SCHIFFER |
Respondent
REASONS FOR JUDGMENT
Introduction
In this proceeding the applicant is the former trustee in bankruptcy of the estate of the respondent. By an application filed on 28 November 2003 the applicant seeks judgment against the respondent in the sum of $96,961.74 together with interest on that sum pursuant to statute, plus costs.
The basis of the applicant’s claim is assessments made by the applicant under s.139Y of the Bankruptcy Act 1966 (“the Act”) of the reasonable remuneration the respondent might be expected to have received in respect of employment during the term of his bankruptcy. There were four assessments totalling the sum claimed. Pursuant to s.130ZG(4), a certificate was issued by the applicant which set out the nature and amount of the debt owed.
The respondent challenges the validity of the s.139ZG(4) certificate. The basis for that challenge is an attack on the validity of the underlying assessments made pursuant to s.139Y.
An application for summary judgment was issued by the applicant and determined in his favour on 19 March 2004. However, on appeal to the Federal Court, Weinberg J set aside the summary judgment as he found that there were arguable grounds open to the respondent to challenge the underlying assessments that form the basis of the s.139ZG certificate. In finding that there were arguable grounds, however, Weinberg J. did not make a finding as to the merit of such grounds, which was to be left for trial.
The principal contention of the respondent is that the applicant, in making the four assessments of the reasonable remuneration he might have received during the relevant periods during the bankruptcy, acted “arbitrarily, or capriciously or in bad faith” (see Re Ellis; ex parte Jefferson & Stevenson (unreported FCA 17 February 1995)).
The respondent argued that there are a number of bases for a finding be that the applicant acted “arbitrarily, or capriciously, or in bad faith”.
Background
A sequestration order was made against the estate of the respondent on 17 May 1995 and was discharged on 13 July 2003 after an extension was granted at the request of the applicant. In respect of the extension of the bankruptcy, in 1998 the applicant objected to the respondent’s discharge from bankruptcy, which objection was appealed by the respondent to the Administrative Appeals Tribunal. On 20 July 1999 the Administrative Appeals Tribunal upheld the objection to the discharge and a further appeal by the respondent to the Federal Court was dismissed on 10 August 2001. The extension of the bankruptcy was as a result of the respondent failing to comply with his obligations under the Act and make full disclosure of his assets.
Prior to his bankruptcy, the respondent had accumulated considerable wealth and had established a successful business. He employed 300 employees and had a business with a turnover of $20 million per annum. He had a substantial dwelling in Toorak and was the owner of a houseboat moored on Lake Eildon with a value in excess of $200,000.
The cause of his bankruptcy related to the failure of his corporate enterprises which were involved in engineering and manufacturing activities. Prior to his corporate enterprises collapsing, he had invested in state–of–the–art high technology machinery, the purchase of which was financed through bank loans. Soon after, a major customer, GMH, invested in its own machinery and ceased to engage the respondent’s company. Despite attempts to find new markets, the Commonwealth Bank of Australia, the major financier of the respondent’s corporate enterprises, realised its securities and wound up the corporate structure by which the respondent conducted his businesses. However, the respondent was a personal guarantor of his company’s liabilities and because of the indebtedness of his corporate entities to the extent of $12 million, the bank obtained the sequestration order against the respondent’s estate.
The legislative framework
Section 139S of the Act sets out the formula to be used for determining the contribution payable by a bankrupt. It is not necessary to set out that section in detail, but to note only that there is a formula to be applied, which formula was used by the applicant.
Section 139Y of the Act sets out the conditions under which a trustee may regard a bankrupt as receiving reasonable remuneration. It states that:
“(1) If:
(a) the bankrupt is engaging or has engaged during a contribution assessment period in employment or other work or in activities that resemble employment or other work; and
(b) the bankrupt does not receive or did not receive any remuneration in respect of the employment, work or activities or receives or received remuneration that is less than the remuneration (in this subsection called the reasonable remuneration) that:
(i) in the case of employment where an industrial award or agreement prescribes rates or minimum rates of salary or wages for the employment – might reasonably be expected to be or to have been received by the bankrupt in respect of the employment by virtue of that award or agreement; or
(ii) in any other case – might reasonably expected to be or to have been received by a person who engaged in similar employment, work or activities where there was no relationship or other connection between that person and the person for whom the employment, work or activities were carried out;
then for the purpose of making an assessment, the trustee may determine that the bankrupt receives or received the reasonable remuneration in respect of the employment, work or activities.”
Deputy President McMahon in Re Nelson and Inspector–General of Bankruptcy (1994) 35 ALD 113, when considering the operation of s.139Y made the following helpful observations:
“Section 139Y(1)(b) draws a distinction between what might reasonably be expected to be or to have been received by ‘the bankrupt’ in subpara (i), and what might reasonably be expected to be or to have been received by ‘a person’ in subpara (ii).
The second subparagraph therefore does not necessarily refer to the bankrupt but refers to a hypothetical person engaged in similar employment, work, or activities in an arm’s length situation. In my view, however, it is necessary to pay some regard to the particular circumstances of the bankrupt in order that the expectation can be seen to be reasonable. One can not ignore the fact that the applicant is an undischarged bankrupt, that he is aged 58, that he has unsuccessfully sought other employment and that he is precluded from engaging in some of the ordinary concomitants of his employment as a law clerk. Some of these aspects must colour the nature of ‘similar employment, work, or activities’. Not only will the duties vary in different cases, but the similarity of the activities or work will vary by reference to the personal circumstances of the person concerned.” (pages 117 – 118).
Section 139ZG of the Act sets out the circumstances under which contribution is payable. Sub-sections 139ZG(4) and (5) provide:
“(4)The trustee may, in connection with proceedings to recover the debt:
(a) sign a certificate setting out the nature and the amount of debt; and
(b) file the certificate in court in which the proceedings have been instituted.
(5)In such proceedings, the certificate is prima facie evidence of the existence of the debt and the amount of the debt.”
Issue of credit
The credit of the parties is an important issue in this proceeding. Although there is not a great deal of direct conflict in the evidence between the parties, nonetheless the respondent ascribed to the conduct of the applicant bad faith, capriciousness and arbitrariness, and in respect of himself, asked the Court to accept his evidence as truthful.
I have had the benefit of observing the applicant, Mr Pattison, in the witness box and I have formed the view, without qualification, that he is a credible and reliable witness and I have no hesitation in accepting what he says as accurate and truthful.
In anticipation of difficulties with the respondent’s evidence, his representative foreshadowed that the respondent might exhibit some difficulties with his memory. I was invited to accept such as being reflective of his medical condition caused by “a triple stroke”.
This occurrence was relatively recent and was variously described as three strokes or one where there were three blood clots in the brain occurring at the one time. Whilst accepting that a stroke, should one have occurred, can be quite debilitating and can affect people’s cognitive powers, significantly, no medical evidence was presented in support of his alleged condition. Whilst it does not necessarily follow that a stroke will leave a victim with residual difficulties in mobility and speech, however, for a stroke(s) said to be as severe as that suffered by the respondent, it was surprising that he did not exhibit any residual disabilities in those regards.
I was unpersuaded by the respondent’s very selective memory lapses at what appeared to be very pertinent points in evidence–in–chief and cross–examination. In any event, much of the material that was generated by the respondent predates any onset of medical problems and cannot be explained by such problems.
After observing the respondent in the witness box and evaluating the conflict and inconsistencies in his evidence, his evasiveness, his professed poor memory when it suited him and his generally belligerent attitude to the administration of his estate by the applicant, I am of the view that the respondent is not a credible witness and that where there is conflict between himself and the applicant, the applicant’s evidence is to be preferred. Also I find that the applicant was clearly justified in not accepting the little information provided by the respondent during the term of his bankruptcy as accurate or truthful. In these circumstances, the applicant was also justified in ignoring that information and was not bound to determine the reasonable income of the respondent based on that limited information.
The respondent’s conduct during bankruptcy
In summary, it is fair to say that the conduct of the respondent during his bankruptcy with the applicant, as his trustee in bankruptcy, was obstructionist, uncooperative, misleading and deceptive.
The bankruptcy was for an extended period of eight years. In each of the eight years of the administration the respondent was required to file a statement as to his income and respond to various other questions designed to ascertain what, if any, further contributions he could make to his creditors. For a significant number of those years, the respondent did not provide any information, despite being repeatedly requested to do so.
The applicant discovered during the administration of the estate that the respondent had failed to disclose significant assets and was involved through his corporate activities in significant financial dealings, being:
i)ownership of a houseboat moored on Lake Eildon;
ii)ownership of AMP shares;
iii)receipt of various motor vehicles;
iv)involvement with trusts; and
v)the purchase by Kilsyth Springs Pty Ltd of a significant commercial property in Tauton Drive, Cheltenham.
Continued involvement with companies
Prior to his bankruptcy the respondent resigned his directorship of a number of companies which he later stated continued to employ him. In place of his own directorship of those companies his wife was appointed as a director, together with his daughter. In evidence he accepted that his wife was a gardener who earned approximately $200 per week in that capacity and that his daughter lived in New South Wales and was engaged in a business associated with horses. It was, in effect, conceded by him that his wife and daughter did not partake in the management and running of the companies of which they were directors. His wife’s only involvement was to merely sign cheques. He conceded that those cheques were signed at his direction and that the running of the companies was, to all intent and purposes, conducted by himself.
Further, the uncontradicted evidence was that the respondent, during the time of his bankruptcy, continued to act as a director, reinstated himself as director, for some companies and became director of other companies in breach of the Act. He was, for example, a director of DME Pty Ltd while at the same time describing himself as a consultant to that company. He was also director of Splade Pty Ltd, Condor Scooters Pty Ltd and Kilsyth Springs Pty Ltd which operated a business known as Condor Manufacturing.
In breach of his obligations there was evidence that the Respondent continued to trade. For example, he continued to trade with TP Castings Pty Ltd which, incidentally, obtained a judgment against him.
During this time, in answer to written questionnaires, he indicated that he was employed by various employers as either a fitter and turner or a consultant, all of such employees were companies associated with himself or his wife and daughter. He asserted, in responses to requests for information from the applicant, to being employed as a fitter and turner or a consultant. His stated level of income from this source was $200 per week. It should be emphasised that the information concerning his employment and level of remuneration was provided in the very few answers he gave at the commencement of his bankruptcy in response to written requests for information from the applicant.
During the bankruptcy the respondent was interviewed by the applicant personally and a few times by his staff. The conclusion reached by the applicant based upon his own observations, and from information provided to him by his staff and other people involved with the liquidation of his companies, was that the respondent was uncooperative and not forthcoming with honest responses to questions asked of him. Based upon the evidence presented before me and on my assessment of the respondent, the applicant, in my view, is more than justified in forming that conclusion. The inevitable result was that the applicant was deprived of necessary information required to form an accurate assessment of the respondent’s financial affairs during the term of the bankruptcy.
A significant event happened early in the administration of the estate. The respondent applied for permission from the applicant to allow him to travel to Thailand to pursue contacts he had to gain work for himself in the manufacture of patrol boats. My understanding, is that the respondent was seeking to gain through a joint venture contracts for himself (or associated companies) relating to the manufacture and supply of specified parts for the patrol boat project. The respondent considered this a significant development for him and an opportunity which he deeply resented being denied to him. It was denied to him, however, because once he had applied for permission to travel the applicant, not unreasonably, required further information about his financial circumstances, which he refused to provide. In respect of that refusal I draw an adverse inference that had he complied with the request for information the respondent may have disclosed to the applicant information which the respondent thought may be prejudicial to his position. I have no reason to believe that the applicant would have denied him travel should he have provided the information requested of him.
How the applicant assessed the reasonable remuneration
The applicant made four assessments pursuant to s.139Y. They were:
8 December 1994 to
7 December 1995
amount of contribution $24,583.70.8 December 2000 to
7 December 2001
amount of contribution $26,734.04.8 December 2001 to
7 December 2002
amount of contribution $28,090.99.8 December 2002 to
12 July 2003
amount of contribution $17,553.21.Total
$96,961.74.
On 10 November 1995, the applicant assessed the reasonable remuneration for the respondent for the period 8 December 1994 to
7 December 1995 as $24,583.70. In the notice given to the respondent advising of the assessment, I am satisfied that he was also advised of his appeal rights both to the Inspector General and to the Administratve Appeals Tribunal. The respondent admits to making inquiries of those parties with respect to an appeal, but decided not to do so. His reasons for not doing so were not articulated by him, but it is of general knowledge that should he have wished to pursue his appeal rights, he would have had to provide information about his remuneration and business activities. Again, I draw an adverse inference from his failure to appeal; namely, that should he have provided such information, it would be adverse to his position vis–à–vis the applicant and any requirement to make a contribution from any remuneration earned.
In assessing the first period, the applicant adopted the following approach. First, pursuant to his powers under s.139X(2) of the Act, he disregarded the information provided by the respondent in his annual statement of income based upon his understanding that the information was incorrect. As already stated, I am of the view that the applicant was justified in doing so. He next sought information from the Internet to find a like position to which the respondent could be employed.
He came upon an advertisement for a position described as “Chief Engineering Executive”. It is best that the pertinent aspects of that advertisement be set out in full. They are:
"Chief Engineering Executive
Position number 1313-03.
General Functions and Tasks
·Determines and is responsible for the engineering administrative function, perhaps in the nature of an engineering consultant in respect of the engineering work in the company.
·Reviews and evaluates engineering work and prepares long range plans to attain objectives.
·Exercises financial control over expenditure subject to overall policy.
·Exercises control over production and will be concerned with the quality of finished products in a predominantly engineering operation.
·Exercises control over efficient functioning of engineering plant in coordination with production and other operating areas in a manufacturing operation.
·Assists with overcoming problems of a technical nature.
·Exercises functional control over selection, training, evaluation and development of engineering staff as an administrator.
Relationships and Authority
·Reports to the chief executive officer or to the head of an operating division in respect of its engineering function.
·Supervises professional engineers in specialised areas, such as investigation, design, project and development work.
·Oversees any engineering service functions performed.
Entry Qualifications and Experience
·Professional engineer with tertiary qualifications and broad engineering experience in the appropriate field together with good management skills and planning ability.”
The applicant was of the view that the description “Chief Engineering Executive” best fitted the type of work he understood that the respondent was qualified to do through experience and was the best–fit comparator to the work he was actually performing at the time of the assessment. I accept the applicant’s evidence both as to his state of thinking on this issue and also of his understanding of the work actually being done by the respondent at the time of assessment.
The applicant then looked to the remuneration being paid to various industry groups at the time and was satisfied that the best–fit industry group applicable to the Chief Engineering Executive Role – that is, applicable to what he understood the respondent was engaged in – was the Metal and Auto Industrial grouping. Again, I accept the evidence of the applicant, both as to his approach and also to the fact that the industry group decided on best fitted the nature of the work undertaken by the respondent. He ascertained that the average income for a Chief Engineering Executive in the manufacturing Metal and Auto Industry was $74,665. He used this figure as the basis for his calculation of the contribution required pursuant to the formula set out in s.139S of the Act.
Tax paid or payable – deemed tax payable
A significant aspect is the fact that in calculating the amount of the contribution required to be paid, no allowance was made by the applicant for any deemed income tax payable on that amount of $74,665. Had there been an allowance made for deemed tax payable on that amount then the contribution sought by the applicant would be considerably lower. The explanation given by the applicant for not making any allowance for deemed tax payable was that no tax was paid by the applicant because income declared by the respondent as being assessable income at the time would not have attracted tax. As it transpired, after the respondent did file taxation returns which disclosed over a lengthy number of years income of only $6,500 per annum, no tax was payable by the respondent. The argument of the applicant was that in reality no tax was payable and no allowance should be made for tax in those circumstances.
CPI adjustments on first assessment
In respect of the last three assessments, the applicant adjusted the first assessment progressively in accordance with consumer price index movements applying during the relevant periods.
The respondent’s formal qualifications, work experience and business experience
The respondent had nine years of primary education in Germany before undertaking an apprenticeship which saw him attend once per week at a trade school for a period of three years. The apprenticeship he undertook was that of a turner. On migrating to Australia he was required to undertake an apprenticeship for a limited period of time to become fully qualified in Australia as a fitter and turner.
He worked as an employee as fitter and turner for some years before commencing his own business.
In his own business he exhibited many significant skills including planning, implementation, executive management, strategic planning and generally, business acumen.
Evidentiary onus
Bearing in mind s.139ZG(5) of the Act, in the circumstances of this case, it is my view that an evidentiary onus is placed upon the respondent to show that the applicant acted in the way described in Re Ellis; ex parte Jefferson & Stephenson. To my mind that would require the respondent to show the applicant acted with treachery or an intent to deceive, acted in a way that was unaccountable and reflective of unpredictability, whim or fancy; was unreasonable and not attributable to any process or rule or law; was selected at random or was a despotic or tyrannical use of unlimited power (using some dictionary definitions of the phrase). Whilst not wishing to define the expression used in too limited a manner, it is reasonable, in summary, in order for the applicant to be found to have acted in the terms expressed in Re Ellis; ex parte Jefferson & Stephenson to find the applicant acted in a manner that cannot be rationally justified in the circumstances in which the applicant was faced, and in such a way as to ignore a proper process available to him.
Respondent's submissions
The basic premise of the respondent, in answer to the claim by the applicant, is that the first assessment made should not be accepted. There are various reasons propounded by the respondent for this which are set out in more detail below. Consequently, the certificate that was issued pursuant to s.139ZG(4) of the Act is invalid because the notices of assessment upon which that certificate is based are invalid.
As stated earlier, the respondent is reliant upon Re Ellis; ex parte Jefferson & Stephenson, asserting that the assessments made by the applicant were made “…arbitrarily, or capriciously, or in bad faith and that the assessment and notice were therefore bad…”In all regards where complaint is made by the respondent about the process adopted by the applicant, the respondent alleges that the applicant so acted.
The respondent argued that a finding of one such attribute of the applicant’s behaviour would suffice to challenge the validity of the assessments.
The bases for the respondent’s submissions in relation to Re Ellis;
ex parte Jefferson & Stephenson are as follows:a)The respondent was not qualified for the position of Chief Engineering Executive which the applicant used as the basis for calculating the respondent’s reasonable remuneration under s.139Y(1)(b)(ii) of the Act in assessing the first contribution assessment. He did not, for instance, have the formal qualifications requisite for the position as set out in the advertisement. To use that advertisement as the basis for assessing the reasonable income was therefore capricious, arbitrary and an act of bad faith.
b)The salary table utilised by the applicant in calculating the respondent’s reasonable remuneration related to businesses with an annual turnover of at least $16 million. The respondent gave evidence that the turnover of the businesses in which he was employed was less than $200,000 – $300,000 per annum during the period of his bankruptcy. Again, it was contended, a capricious and arbitrary use, reflective of bad faith.
c)The applicant used the first assessment with CPI increases to calculate the three further assessments for value without any evidence to show that wages necessarily increased according to CPI. Once again, a capricious and arbitrary approach, reflecting bad faith.
d)The notices of assessment were misleading in that they:
i)did not mention that the respondent was assessed on the basis of employment as a Chief Executive Officer; and
ii)referred to: “tax actually paid” rather than tax paid or payable contrary to s.139N of the Act.
Application of an award
The respondent also argued that the applicant had erred in believing that the applicable section under which to make the assessment was s.139Y(1)(b)(ii) of the Act. The respondent argued that by qualification and work experience, the proper description for him was as a fitter and turner to which an industrial award applied.
Therefore, the respondent argued, the applicant erred in not applying the applicable award to him pursuant to s.139Y(1)(b)(i) of the Act. Bearing in mind it is not the Court’s role to consider a merits review of how the applicant went about making the assessment and thereafter substituting the Court’s own assessment, it follows that if the contribution assessment was wrong in not applying the award, like a house of cards the applicant’s claim collapses.
The respondent produced an award applicable to fitters and turners with various adjustments made, if appropriate, for leading hands and those involved in supervision of other employees. In summary, should the award apply to the respondent, then manifestly the applicant was wrong in how he went about making the first assessment and it follows that the three subsequent assessments, and the certificate issued pursuant to s.139GZ(4), are invalid. The award said to apply at the time of the assessment on 10 November 1995, incidentally, is the Metal Industries Award 1984–Part I.
Alleged pre–occupation with pre-bankruptcy employment
There was one further submission made by the respondent to the effect that the applicant, in forming a view as to what remuneration was reasonable for the respondent at the time of the assessment from an arm’s length arrangement, was preoccupied with and blinded by the respondent’s pre–bankruptcy involvement in a large corporation with high turnover. This, it was said, was in contradistinction to the reality of the respondent during bankruptcy where his only skills were those of a fitter and turner. The respondent argued that the respondent’s employment prior to bankruptcy should not be a factor in determining the reasonable remuneration during his bankruptcy.
The Applicant’s submissions
The applicant submitted that the respondent was an unreliable witness for all the reasons that I previously referred to. As already indicated, I accept the applicant’s submissions in these regards.
In respect of the respondent’s submission in relation to the application of an award as being the appropriate means to assess any contribution under s.139Y, the applicant submits that in order for s.139Y(1)(b)(i) to apply, the bankrupt must have been employed in similar employment to which an award applies. I accept this general proposition by the applicant that the clear meaning of s.139Y(1)(b)(i) and its operation as envisaged by the legislature was in respect of a bankrupt employed in a recognised position for either no remuneration, or remuneration less than what an award would have prescribed. There was no acceptable evidence before me, or indeed before the applicant when he made the first assessment, that the respondent’s employment was limited to that of a fitter and turner, with or without supervisory duties. It is clear, in my view, and certainly open to the applicant to have believed at the time, that the respondent was engaged in activities significantly beyond that of a fitter and turner, and further that he employed those skills and experience he had employed as a director and principal manager of his pre–bankruptcy business, but on a much smaller scale.
The applicant submits that the respondent’s evidence included the following:
a)An assertion only that the respondent was a fitter and turner;
b)An admission that he supervised employees;
c)An admission that he reviewed and evaluated work;
d)An admission that he was a managing director and shareholder in a company or variety of companies with an annual turnover of around $20 million prior to his bankruptcy;
e)An admission that subsequent to his bankruptcy, he was no longer listed as a director of Kilsyth Springs Pty Limited.
f)An admission that the only two other people who could have been directors of Kilsyth Springs Pty Limited were his wife and daughter;
g)An admission that his wife is a gardener with no technical experience who took no role in the management of the company and merely “signed cheques”;
h)An admission that his daughter was young at the relevant times, was involved in a “horse business in New South Wales” and took no role in the management of the company;
i)An admission that the respondent could not recall whether he was self–employed, employed by his wife or by Kilsyth Springs Pty Limited, employed as a consultant to a company or employed by another entity;
j)An admission that the respondent requested the applicant’s permission to travel overseas for the purposes of attending a conference to negotiate an international joint venture in the shipping industry;
k)An admission that in 2003, whilst the respondent was still bankrupt, he was appointed as a director of three companies;
l)An admission that he did not advise the applicant of his appointments; and
m)An admission that between 1995 and 2003 his annual taxable income was around $6,500 each year.
The applicant contended that the respondent on his own evidence, and that of the applicant, was performing activities that resembled the employment of a fitter and turner, an engineer, an engineering supervisor, a consultant, a chief engineering executive, a chief executive officer, a chief strategy officer, chief financial officer and/or a managing director.
The applicant contended that even though the respondent was not an appointed director of Kilsyth Springs Pty Limited, or another entity at the time of the assessment, it should be inferred that he was a “shadow director” as no other appointed director was capable of performing the role.
As a “shadow director”, as contended by the applicant, it should be inferred that he set wages, expenditure, employed, made company appointments and gave strategic direction. This is supported by the admitted evidence that the respondent sought to travel overseas to source international engineering contracts. Significantly, in my view, the applicant argues that it is not possible to identify “employment” at the time of the applicant’s income contribution assessment period to which an award would apply. During this period, the applicant contends the respondent performed every role within his company (companies). During this time the respondent was engaged in work and activities that resembled employment and covered numerous different “employment” classes. It followed, it was submitted, that the applicant was obliged to deem the respondent’s income according to the reasonable remuneration for a person engaged in similar activities. To the extent that the applicant was prepared to admit that there might have been another measure of reasonable income, the applicant suggested that reasonable remuneration for a Chief Executive Officer in an engineering corporation would have been appropriate. In making that submission, it was implied that the reasonable remuneration for a Chief Executive Officer would be considerably more than that of a Chief Engineering Executive.
In response to the respondent’s contention that the notice of assessment required some strict conformity to form and detail, the applicant points out that there is no prescribed form for a notice of assessment. It is not to be treated as a bankruptcy notice is treated, as suggested by the respondent.
The applicant points out that a notice of assessment is subject to at least two forms of merits review at the election of the respondent (see ss.137ZA and s.137ZF of the Act).
It is also noted by the applicant that under s.30 of the Act, the respondent can apply for various declarations regarding the notice at any time (see Re Ellis; ex parte Jefferson & Stephenson).
The applicant further points out that a bankrupt can apply under s.178 of the Act for relief against any decision of the trustee at any time.
The applicant invited the Court to make note of the respondent’s failure to avail himself of these avenues of redress and to infer that his lack of endeavour in these regards is indicative of a concern on the respondent’s part that through such processes a full disclosure may have been made of his financial activities during his bankruptcy.
In respect of the respondent’s complaint about the notice referring to “tax actually paid”, the applicant contends that it was deemed income, that what little disclosure that had been made of the applicant’s income did not attract tax, and there was no expectation that a return would be filed. Further, when returns were filed many years past their due date, the level of income disclosed did not attract any taxation. In light of all of that, there was not a breach of s.139N of the Act.
In respect of the issue concerning the use of the CPI, the applicant argues that he was in the position where, because of a refusal to cooperate and provide evidence of income by the respondent, the use of the CPI was a reasonable way of calculating the assessment and such use of the CPI was by implication authorised by the Act (see ss.139W, 139X and 139Y). The applicant argued that the CPI was an entirely acceptable, extrinsic indicator.
The applicant stands by the prima facie proof of debt pursuant to s.139ZG(5) as set out in the certificate pursuant to s.139ZG(4).
Conclusion
There is no question that the respondent was engaged during the currency of his bankruptcy in employment as set out in s.139Y(1)(a).
A significant aspect of the respondent’s defence to the claim is based upon the premise that the evidence of the respondent should be accepted. Such evidence as the nature of his work being merely that of a fitter and turner, that his level of income was $200 per week, and the gross turnover of all the companies he had some involvement with during the period of his bankruptcy was variously described as $40,000 to $60,000 or $200,000 to $300,000. He was not engaged in any way that resembled the level of activity, nor did he employ the skills that he previously employed, when he was conducting his businesses prior to bankruptcy.
The basic premise of the respondent that his evidence is to be believed is unacceptable. I have no hesitation in finding that the position adopted by the applicant during the bankruptcy; namely, that the applicant could not give any credence to the information provided by the respondent, was one that was totally justified.
That being so, the applicant was left in the invidious position of attempting to form an assessment of the reasonable remuneration that the respondent might have earned during the assessment periods if employed in these activities by an arm’s length employer. In forming a view as to the skills of the respondent, it is not, in my view, unreasonable for the applicant to have examined in detail the nature of the skills employed by the respondent when he conducted his businesses prior to bankruptcy as a measure of what skills he possessed and whether they were being employed during the bankruptcy. It is not correct to say, as the respondent alleges, that the applicant attempted to assess the reasonable remuneration of the respondent based upon what he may have been earning prior to his bankruptcy during the period of successful operation of his businesses. There is no evidence of that whatsoever. Should that have been the case, the assessment would have been considerably higher. Indeed, the applicant gave evidence of how he used that prior employment history of the respondent in the context of his understanding of his operations during the period of his bankruptcy. I am satisfied, that in the terms used by Deputy President McMahon in Re Nelson and Inspector–General of Bankruptcy when determining objectively what would be reasonable for this particular bankrupt, the applicant erred on the side of caution and did not attribute levels of income that he would have received prior to his bankruptcy.
The applicant, in his evidence, went to some length to explain how he attempted to get the best match possible, the best comparator, with the skills possessed by the respondent and the application of those skills in an industry closely resembling the industry in which the respondent was engaged during the period of bankruptcy.
The applicant found the assessment a difficult task given the respondent was a man of considerable skills and experience in a particular industry whose skills would be of great value to the companies he had an association with. Most of those skills were clearly identified in the advertisement used by the applicant as a basis for assessment. On the evidence presented, I am satisfied that the respondent possessed all of the skills as set out in the advertisement and only lacked the requisite formal qualifications. The explanation proffered by the applicant as to why he thought the respondent nonetheless met the requirements of the position of Chief Engineering Executive was because of his manifest and considerable experience in the industry and his obvious attraction to others in the industry as an employee, notwithstanding a lack of formal qualifications.
Having regard to the difficulties presented by the respondent in respect of matching him to a suitable comparator because of his background, I am of the strong view that his lack of qualifications to precisely match the advertisement is not reflective of capriciousness, bad faith or arbitrariness on the part of the applicant. I am satisfied that the advertisement is the best match of the skills and worth of the respondent to an arms length employer. The applicant in his evidence exhibited a considered, logical and sound evaluation of the skills of the respondent and the conclusion he reached that they best suit the description of a Chief Engineering Executive is one not at all characterised by capriciousness, arbitrariness, or bad faith.
On the issue of how the applicant married up the requirement in the advertisement that Chief Engineering Executive report to a CEO, the applicant’s response was simply disarming. In the context of the respondent’s activities during the bankruptcy, as understood by the applicant, it was obvious that the respondent was the CEO. As far as the applicant was concerned, the respondent did all the tasks of the Chief Engineering Executive and additionally acted as a CEO.
The evidence of the applicant was also that he went to some length to try and determine, having identified what the best–fit comparator for the respondent would be by way of job description, what that job would be entitled to by way of remuneration in a defined industry. The applicant went to some trouble in determining the industry group that best suited the circumstances of the respondent during the period of his bankruptcy. He then, as a matter of practice, decided to apply the average level of remuneration for that particular job within that industry; hence his arrival at the figure of $74,665. He then applied the formula under s.139S of the Act and came up with the contribution figure of $24,583.70.
I might say at this stage, as in other stages set out below, I am more than satisfied that in entering into the exercise the applicant did in trying to determine the reasonable remuneration that the respondent might have earned during the assessment periods, he exhibited an earnest and logical approach. It cannot therefore be said, in my view, that in fixing the reasonable remuneration as he did, the applicant acted arbitrarily, capriciously or in bad faith. To the extent that the respondent relies upon a finding that he so acted, the respondent’s case fails. There is no evidence that there was another more appropriate comparator to be used, or a different, better process available to the applicant to determine the reasonable income.
In respect of the contention that the applicant acted arbitrarily, capriciously, or in bad faith by applying the CPI to the first assessment of reasonable remuneration, I am of the view that again the approach of the applicant was reasonable. It was certainly open to the applicant, in my view, to apply a CPI adjustment to the first assessment in circumstances where the respondent had refused to provide details of his income during the latter assessment periods. I agree with the applicant’s contention that the application of CPI was, by implication, open to him pursuant to ss.139W, 139X and s.139Y. In any event, I am satisfied with the evidence of the applicant that when he chose to apply the CPI, he did so based on his experience about rises in income being reasonably reflected in CPI increases and that the process adopted was also reasonable in circumstances where the respondent had refused to provide any details whatsoever as to the level of his income, or business activities.
In respect of the contention of the respondent that the proper process to have been adopted by the applicant was to apply industrial awards to the assessment of his reasonable remuneration, again that whole argument is premised upon an acceptance of the respondent’s evidence of the skills and work he did during the bankruptcy as that of only a fitter and turner, or at the best, a fitter and turner with supervisory functions. This, in my view, is a palpably unacceptable submission on the part of the respondent. The attempt by the respondent to argue that the description of Chief Engineering Executive as set out in the advertisement from the internet had no application to the respondent ignored the reality of the respondent’s broad and unique qualifications by way of experience and his apparent application of those skills during his bankruptcy.
In my view the applicant did not make an error in approaching the assessment of the reasonable remuneration. The approach adopted by the applicant was certainly, in my view, an approach reasonably open to him. Indeed, it was one which exhibited consideration, logic and was mindful of the need to determine what was reasonable in the circumstances known about the respondent’s remunerative activities. The exercise the applicant engaged in when determining the reasonable income is certainly not one that can be categorised as being arbitrary, capricious or done in bad faith.
The contention of the respondent that somehow the notice of assessment was misleading or inaccurate is one which I find unproved. I do not accept the contention of the respondent that the nature of such a notice is akin to a bankruptcy notice. There was an issue as to whether a copy of the advertisement for the Chief Engineering Executive was attached to the notice. The evidence of the applicant was that it was and I accept that evidence. In any event, the notice clearly spelt out the basis of the calculation and alerted the respondent to avenues of review. I do not accept the evidence of the respondent, which was with difficulty coached out of him, that he was confused by the notice. On the face of the notice I have no doubt that what was demanded by it, and the review options open to the respondent, were clearly spelt out. It ill behoves the respondent now to argue that he was confused by the process and mislead.
In respect of the allegation that the applicant erred in the notice of assessment by referring to “tax actually paid” being nil and not having allowed for deemed tax payable on the deemed income, I accept the contentions of the applicant in this regard. The position of the applicant is further buttressed by the fact that in reality, after assessments had been filed by the respondent with the Australian Taxation Office, no tax was payable during the assessment period.
In any event, at the time the assessment was made, because it was an assessment of reasonable income and because the applicant was of the reasonable belief that no tax would be paid, he was justified in not deducting any amount for deemed income tax as his duty to the creditors was to gain a contribution from the assessed disposable income of the respondent, and not disadvantage the creditors by giving, in effect, a credit and benefit to the respondent for deemed tax.
The approach of the applicant, in that context, does not amount to a penalty, or punishment of the respondent.
In all regards, the respondent has failed to satisfy his evidentiary onus of proof that the applicant acted, when assessing the contributions to be made, in a manner that was arbitrary, capricious, or in bad faith; or in any other way made an error capable of defeating the applicant’s claim.
For the reasons set out, I find that the assessments made by the applicant are valid, and it follows that the s.139ZG(4) certificate is also valid and prima facie evidence of the debt owed. Accordingly, there will be judgment for the applicant in the sum of $96,961.74 and interest according to statute.
I certify that the preceding seventy–one (71) paragraphs are a true copy of the reasons for judgment of O’Dwyer FM
Associate:
Date: 16 March 2007
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