Quitlong v ACM Group Limited - [2011] FMCA 688

FEDERAL MAGISTRATES COURT OF AUSTRALIA

QUITLONG v ACM GROUP LIMITED

[2011] FMCA 688

BANKRUPTCY – Application to review sequestration order – whether debtor able to pay his debts within s.52(2)(a) of the Bankruptcy Act 1966.

Bankruptcy Act 1966 (Cth), ss.52, 53, 153A, 153B
Federal Magistrates Act 1999 (Cth), s.104
Federal Magistrates Court (Bankruptcy) Rules (Cth), rr. 2.03, 4.06, 7.04, 7.06

Colgate-Palmolive Company and Another v Cussons Pty Limited (1993) 46 FCR 225
Deputy Commissioner of Taxation v Eykamp [2009] FMCA 989
Eykamp v Deputy Commissioner of Taxation (2010) 8 ABC(NS) 105 [2010] FCA 797
International Alpaca Management Ltd v Ensor [1999] FCA 72
Nye v Slater [1999] FCA 89
Re Noye; Ex parte Deputy Federal Commissioner of Taxation (1956) ABC 77
Re; Sanders Knudsen and Yates (t/a The Hargreaves Practice) v Sanders [2003] FCA 1079
Sandell v Porter and Another (1966) 115 CLR 666; [1966] HCA 28
Totev v Sfar [2008] FCAFC 35
Udovenko and Others v Mitchell (1997) 79 FCR 418
Vaucluse Hospital Proprietary Limited v Phillips& Anor (2006) 5 ABC(NS) 330; [2006] FMCA 44
Wren v Mahony (1972) 126 CLR 212; [1972] HCA 5

Applicant:

PAQUITO QUITLONG

Respondent:

ACM GROUP LIMITED

(ACN 127 181 097)

File Number:

SYG 2800 of 2010

Judgment of:

Barnes FM

Hearing date:

12 August 2011

Delivered at:

Sydney

Delivered on:

12 August 2011

REPRESENTATION

Applicant:

In person

Solicitors for the Respondent:

Mercantile Legal

Counsel for the Trustee in Bankruptcy:

Mr D.C. Eardley

ORDERS

The application for review of the sequestration order made by a Registrar of this court on 16 March 2011 is refused.
The sequestration order made on 16 March 2011 is affirmed.
The respondent creditor’s costs and the trustee’s costs including any reserved costs be taxed and paid from the estate of the applicant in accordance with the Bankruptcy Act 1966 (Cth).

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 2800 of 2010

PAQUITO QUITLONG

Applicant

And

ACM GROUP LIMITED

(ACN 127 181 097)

Respondent

REASONS FOR JUDGMENT

(Revised from transcript)

This is an application for review of a sequestration order made by a Registrar of this court against the estate of Paquito Quitlong on 16 March 2011. The affidavit supporting the application for review was stamped as filed on 4 April 2011. However, insofar as there was a need for an extension of time under s.104(2) of the Federal Magistrates Act 1999 (Cth) in relation to the application, I granted an extension of time on the basis of evidence on the file that because the cover sheet of the documents presented by Mr Quitlong on

4 April 2011 was headed “affidavit” it was not seen by the Registry to include an application for review. In addition, his payment for the application was mislaid in the Registry. When this administrative oversight was discovered the application was processed. It is clear that Mr Quitlong attempted to file his application within the time provided for in r.2.03(1) of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth). No objection was taken by the creditor in relation to the grant of an extension of time. I was satisfied that it was in the interests of the administration of justice that such an extension of time should be granted, notwithstanding that it is relevant in such circumstances to have regard to the merits and likelihood of success of the substantive application. In this case it was fair and equitable in all the circumstances to extend the time insofar as that was necessary and then to consider the application on its merits.
Mr Quitlong is self-represented. It must be said that it is rather difficult to discern from his application the basis on which he seeks that the sequestration order be set aside. He filed a number of documents in these proceedings, some of which were described as “affidavits”, all of which suffered from defects as to form, content, admissibility and relevance.
On the day when the matter initially came before me for hearing as duty Federal Magistrate, it emerged that the applicant had not filed a statement of affairs and there was no other financial information before the court. The matter was adjourned to enable the applicant to file and serve further affidavit evidence and if he served a statement of affairs on the Trustee, for the Trustee to prepare a report in relation to the bankrupt in accordance with r.7.04 of the Federal Magistrates Court (Bankruptcy) Rules.
Mr Quitlong subsequently filed a statement of affairs and the Trustee has prepared a report.
I note that, despite being ordered to do so, Mr Quitlong did not give notice of his review application to his creditors in accordance with r.7.06 of the Bankruptcy Rules. Given that he has not otherwise established that the review should succeed I have not considered whether to dispense with this requirement.
Mr Quitlong did not take the opportunity afforded to him on the last occasion the matter was before the court to file further affidavit evidence and to put information in relation to his financial situation before the court. In order to ensure that he had every opportunity to put evidence before the court Mr Quitlong was given the opportunity to give oral evidence with the assistance of questioning from counsel for the Trustee of his bankrupt estate. He had the assistance of a Tagalog interpreter.
I have taken into account all of the material before the court and have considered whether the circumstances are such that Mr Quitlong has established any basis on which the sequestration order should be set aside. I have borne in mind that it is open to the court to consider the alternative of annulment of a bankruptcy under s.153B of the Bankruptcy Act 1966 (Cth) (the Act) (see Vaucluse Hospital Pty Limited v Phillips& Anor (2006) 5 ABC(NS) 330; [2006] FMCA 44).
An application under s.104(2) of the Federal Magistrates Act 1999 (Cth) to review a decision of a Registrar to make a sequestration order is to be considered by the court is a hearing de novo (see Totev v Sfar [2008] FCAFC 35). In these circumstances it was necessary for the petitioning creditor to file fresh affidavits of final search and final debt as required under r.4.06 and to prove to the satisfaction of the court the matters in s.52(1) of the Act.
The creditor has filed further affidavits of final search and final debt as required under the Rules. As discussed below, I am satisfied on the material before the Court that the requirements of s.52(1) of the Bankruptcy Act are made out.
I note in that respect that no issue was taken and nor is any issue apparent in relation to service of the bankruptcy notice, the form or content of the bankruptcy notice, or with service or the form or content of the creditor’s petition.
It appeared that Mr Quitlong took issue, at least on the documents that he had filed, with the judgment on which the bankruptcy notice was based. That judgment (as evidenced in the copy of the judgment annexed to the bankruptcy notice) was a default judgment of the Local Court of New South Wales dated 12 November 2009 in the sum of $8,821.59.
Included in the exhibits before the Court is a copy of a notice of motion for default judgment for a liquidated claim that was filed in the Local Court on or about 27 October 2009 by the petitioning creditor. Judgment was entered on 12 November 2009.
The judgment in question was a default judgment. I have considered whether there is any basis on which the Court should go behind the judgment although when asked in oral evidence today Mr Quitlong did not take issue with his liability to the petitioning creditor, ACM Group Limited.
The Court has a discretion to accept a creditor’s judgment as proof of the debt relied on to found a creditor’s petition, but such discretion is “not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due” to the petitioning creditor (Wren v Mahony (1972) 126 CLR 212 at 224 – 225; [1972] HCA 5 per Barwick CJ at p.224).
In other words it is necessary to consider whether there are substantial reasons for doubting whether there really is a debt due to ACM. The Court is more ready to go behind a judgment which is obtained by default in circumstances where there is what the Court regards as a bona fide allegation that no real debt lay behind the judgment (Udovenko and Another v Mitchell (1997) 79 FCR 418).
Some of the documents filed by Mr Quitlong or tendered in evidence might be seen as raising an issue about his liability for the credit card debt that formed the basis for the bankruptcy notice (apparently on the basis of assertions that his credit card limit was exceeded, his credit card was stolen and/or he had some form of credit card insurance). However the evidence before the court does not establish the requisite doubt as to whether there was in truth a debt due to the petitioning creditor equal to or in excess of $5,000.
Not only did Mr Quitlong concede that he had no issue with the existence of the debt as at the time of the Local Court proceedings, but there is also evidence that after the default judgment was obtained, Mr Quitlong filed a notice of motion in the Local Court to set aside the default judgment. That motion was dismissed by the Local Court on 14 January 2010. In other words Mr Quitlong has had an opportunity to take issue in the Local Court with the basis for the judgment.
Mr Quitlong also filed a notice of motion to pay the Local Court judgment by instalments. His application to pay by instalments was refused on 15 January 2010. The fact that he subsequently reached an agreement to pay the debt by instalments (but breached that agreement) is not a reason to go behind the judgment.
On the evidence before the court I am not satisfied that substantial reasons have been given for doubting whether there is in truth and reality a debt due to the petitioning creditor. The court should accept the creditor’s judgment as proof of the debt relied upon to found the creditor’s petition. On the evidence before the court (including fresh affidavits of search and debt) I am satisfied with the proof of the matters specified in s.52(1) of the Bankruptcy Act.
I have considered whether I am satisfied by Mr Quitlong that he is able to pay his debts or whether for other sufficient cause a sequestration order ought not to be made within s.52(2) of the Bankruptcy Act. It is well established that the onus under s.52(2) is on the debtor who wishes to rely on those provisions (see Re; Sanders Knudsen and Yates (t/a The Hargreaves Practice) v Sanders [2003] FCA 1079 at [23]).

As indicated, Mr Quitlong has not put any proper written evidence before the Court in relation to his financial situation. He has, however, been given every opportunity to put oral evidence before the Court in relation to his financial situation. The Statement of Affairs that he completed and the Trustee’s Report are in evidence. These have been of some assistance to the Court in ascertaining Mr Quitlong’s financial situation. The Trustee expressed the view in his report that he did not believe that the bankrupt had proven his solvency as it appeared that he would not be able to meet the debts due to his creditors as and when they fell due. The petitioning creditor agreed with these submissions. On all the material now before the court Mr Quitlong has not established that he is able to pay his debts within s.52(2)(a) of the Act.
A debtor who is in a position to pay all the debts that he or she owes within a reasonable time ought not to be subject to a sequestration order. This does not necessarily require the debtor to have sufficient cash at hand or available on deposit to pay all of his creditors, provided he has other realisable assets (Sandell v Porter (1966) 115 CLR 666 at 670; [1966] HCA 28).
Sandell v Porter considered s.95 of the Bankruptcy Act as it then stood. Barwick CJ referred to the fact that insolvency at that time was expressed as an inability to pay debts as they fell due out of the debtor’s own money, but also made the point that “the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time-relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor”.
It was said that a conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and, generally speaking, ought not to be drawn simply from evidence of a temporary lack of liquidity. His Honour continued (at 670):
It is the debtor’s inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.
Consideration is to be given to debts that would fall due in the “reasonably immediate future” pursuant to existing obligations (Re Sanders at [27]). Under s.52(2)(a) it is necessary for the court to 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 Ltd v Ensor [1999] FCA 72 at [8] – [10] and [31]).
In this case the evidence in relation to Mr Quitlong’s financial position is in essence as summarised in the Trustee’s report. Mr Quitlong’s known liabilities include the debt owed to the petitioning creditor which was $9,137 at the time of the Trustee’s report. According to the most recent affidavit of debt it is now $9,318.82. He also has a small debt to the Australian Taxation Office of $357, a credit card debt to the Bank of Western Australia Ltd of $13,167 and a credit card debt to HSBC of $5,591. These debts amounted to over $28,433.82.

In addition a costs order for $5,382.60 was made in favour of the petitioning creditor in relation to the sequestration order to be paid out of the estate of Mr Quitlong. The Trustee has not yet advertised for the calling of proofs of debt.
It is apparent that apart from minor assets consisting of a very small amount of cash and an anticipated tax refund, a motor vehicle, tools of trade and some superannuation disclosed in Mr Quitlong’s statement of affairs (which do not exceed or reveal any ability to pay his debts), Mr Quitlong’s only substantial asset is an interest in a property in Harris Park of which he and his wife are joint proprietors. The Trustee has registered a caveat on the property. It is not otherwise encumbered. There is, however, authority to suggest that the court should not have regard to the possibility of realisation of assets normally considered as necessary for everyday living, such as a motor vehicle, household goods or a home (see International Alpaca Management Pty Ltd v Ensor at [15] – [16]).
Nonetheless the parties proceeded on the basis that some consideration should be given to this property. The Trustee obtained kerbside appraisals from local real estate agents which indicated that the market value for the property was estimated to be in the range of $350,000 to $400,000. The bankrupt’s share of the estimated equity on the average of these appraisals would be in the order of $187,500 (less selling costs.
The issue is whether Mr Quitlong has met the onus of satisfying the Court within s.52(2)(a) of the Act that he is able to pay his debts. On a simple analysis of assets as against known liabilities, Mr Quitlong’s assets do exceed his liabilities. However the mere existence of an excess of assets over liabilities is not of itself such as to satisfy the requirement that there be moneys which the debtor, or the bankrupt, can procure by realisation by sale or mortgage or pledge of his assets within a relatively short time (see Barwick CJ in Sandell v Porter at 670).
Mr Quitlong has an interest in the relatively substantial asset (compared to the amount of his debts) consisting of his interest as joint proprietor in his Harris Park home. However, as pointed out by Raphael FM in Deputy Commissioner of Taxation v Eykamp [2009] FMCA 989 at [12] (an appeal from which was dismissed in Eykamp v Deputy Commissioner of Taxation (2010) 8 ABC(NS) 105 [2010] FCA 797) in circumstances where a debtor owned one property herself and had a one half share of another:
In Stankiewicz v Plata [2000] FCA 1185 the Full Court Drummond, Sackville and Dowsett JJ said at [30]:
“[30] In order to satisfy the Court that he or she is "able to pay his or her debts", it is not necessary for the debtor to show that he or she has cash resources immediately available for this purpose. But the debtor must be able to realise assets, sufficient to pay the debt, within a relatively short time. As Barwick CJ said in Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666, at 670, the resources to be considered
"extend to moneys which [the debtor] can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time –“
In Nye v Slater (1999) FCA 89 Ryan J quoted from Re Noye; Ex parte Deputy Federal Commissioner of Taxation (1956) ABC 77 at [78] per Clyne J:
“[11] In Re Noye; Ex parte Deputy Federal Commissioner of Taxation (1956) ABC 77 at 78, Clyne J said:
"In my opinion if it appears upon the hearing of a petition that the debtor is not then able to pay his debts to the petitioning creditor and to his other creditors the Court cannot be satisfied that the debtor is able to pay his debts though he has assets which exceed in value the amount of his debts and, if given time to realise his assets, will be in a position to pay his debts. A distinction must be drawn between a debtor who is able to pay his debts and a debtor who will be able to pay his debts at some future date." (Emphasis added).
What was said in Re Noye at [78] is in point. It has not been established that Mr Quitlong’s interest in his home is presently available or realisable. The main difficulty that confronts any suggestion that the existence of Mr Quitlong’s interest in the Harris Park property is sufficient to enable him to satisfy s.52(2)(a) is that Mr Quitlong is only a part owner of that property. There is no indication that his wife is willing for the property to be sold. On the contrary, he told the Court that it was not the case that his wife was willing to sell the property; that she had made the major financial contribution to the property; that she had paid the mortgage payments and that she had paid off the mortgage.
It is relevant to have regard not only to the nature of the asset in question, but also to the fact that no steps that have been or seem to be intended to be taken in relation to any disposal of such property.

This is not a case in which there is any suggestion that the property which is Mr Quitlong’s home could be sold within a reasonably short time. The property is jointly owned. There is no evidence that Mr Quitlong has command over the property or that it is readily realisable. I also note that it is necessary to consider the question of solvency in terms of s.52(2)(a) before one considers whether a debtor is a recalcitrant debtor (see Re Sarina; Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163; [1980] FCA 66 ).
Even if funds available to a debtor are not limited to his own cash resources immediately available (Sandell v Porter (1966) 115 CLR 666 at 670; [1966] HCA 28), there is no suggestion or evidence that funds could or would be made available by any third party within a relatively short time to meet Mr Quitlong’s debts, whether secured on this property or otherwise. Mr Quitlong was asked whether he had endeavoured to obtain a loan to meet his indebtedness. He did not do so in the two years prior to becoming bankrupt. He approached St George Bank after he became bankrupt but, perhaps not surprisingly (as by then he was bankrupt), he was not able to obtain a loan.

Mr Quitlong’s level of indebtedness is increasing. He told the Court that he earned something in the order of an average of between $800 and $1,000 a week depending on overtime, and that there had been past variations depending on whether he was casual or, as now, full-time. He stated that he had medical expenses and household bills to pay (although there is no evidence of the extent of such expenses). He does not have a mortgage. He conceded that he spent an average of $150 a week on gambling, although he said he did not spend that all the time.
However Mr Quitlong’s evidence is that the petitioning creditor’s debt has been in existence for some time. Because the debt is a credit card debt, it is difficult to determine the actual time that it has been in existence. It can at least be said that there has been a substantial debt owing to the petitioning creditor since some time prior to the notice of motion for default judgment for the liquidated claim in October 2009. In evidence is a letter dated 25 November 2008 about the debt from ACM to Mr Quitlong as well as subsequent letters advising of default in his agreement to pay by instalments and in relation to possible legal proceedings.
Mr Quitlong made much of the fact that after judgment was obtained by the petitioning creditor, he reached an agreement (apparently not the first) with ACM to pay the amount of the judgment by instalments.

In evidence before the court is a copy of a letter to Mr Quitlong from the team leader of ACM dated 17 August 2010 referring to the fact that judgment was obtained on 12 November 2009 and that they had an agreement that Mr Quitlong would pay $100 a week. The letter pointed out that a payment had been made on 30 March 2010, but that as at 17 August 2010 no subsequent payments had been made and that Mr Quitlong had broken the agreement. It advised him that he had been served with a bankruptcy notice on 29 June 2010; that he had 21 days to resolve the matter and that time had lapsed and ACM could now file a creditor’s petition but that it would put the proceedings on hold provided the debt was finalised by 30 November 2010. That did not occur.
There is also evidence before the Court, that largely emerged in oral evidence and by virtue of some receipts tendered by Mr Quitlong, which reveals that between August 2009 and March 2011 (when there was an arrangement in place for payment of the debt to the petitioning creditor by instalments of $100 per week) only the equivalent of 15 weekly instalments were paid by him. This was something in the order of 15 per cent of the instalments that should have been paid in that time.
Mr Quitlong’s evidence was that he had two other credit card debts and that an arrangement for payment by instalments had also been reached in relation to one of those other debts. He has not however met his liability for that debt (which suggests that he has also had difficulty in meeting that debt).
Mr Quitlong was asked on a number of occasions about the reasons why he had not made the payments in relation to these debts.

He suggested variously that he had undergone a period of unemployment; that he had been unwell (that he was diabetic and that he did not make payments when he was sick); and that he had been a casual employee until some two months ago in explanation for his failure to meet his indebtedness to the petitioning creditor and other creditors. It is not simply a matter of Mr Quitlong’s ability to meet instalment payments now or in the future. He now has a total indebtedness to creditors, including the petitioning creditor, of something in the order of over $28,400 (without taking into account the costs order).
In all of the circumstances Mr Quitlong has not satisfied me that he is able to pay his debts within s.52(2)(a) of the Act.
Nor am I satisfied that for other sufficient cause a sequestration order ought not to be made within s.52(2)(b) of the Act. Mr Quitlong gave evidence of some ill health and some periods of unemployment. Again, there was a lack of clarity in his evidence about the precise extent of his time off work and his periods of unemployment, although he consistently maintained that he was a casual worker until recently and had that he worked for the same company.
He stated that he had a good permanent job and claimed that he would get back to normal. These assertions and the reasons Mr Quitlong gave for finding himself in the present situation are not such however as to amount to other sufficient cause that a sequestration order ought not to be made, particularly bearing in mind the prima facie right of a petitioning creditor to a sequestration order when the debt has been established.
Mr Quitlong submitted to the court that it would be bad for his reputation if he was bankrupt. The fact that it would be bad for a debtor’s reputation is not a reason for not making a sequestration order within s.52(2)(b) of the Act. He also raised the issue that property was involved and suggested that his wife was involved as a co-owner. There is no evidence from his wife before the court. I accept that Mr Quitlong’s bankruptcy may, and indeed most probably will, have implications in terms of the property in which he has a half interest with his wife. One must have some sympathy for the circumstances in which Mr Quitlong finds himself. However that is not such as to persuade me that I should exercise the discretion not to make a sequestration order.
I note that, as pointed out in the Trustee’s Report, if the sale of the Harris Park property proceeded so that sufficient funds were found to meet Mr Quitlong’s debts, his bankruptcy could be annulled under s.153A of the Act. Insofar as he expresses concern in relation to his reputation, subject to the operation of s.154 of the Act, it would be as if he had not been made bankrupt.
The Trustee’s Report indicates that the Trustee believes that the bankruptcy can be dealt with pursuant to s.153A of the Act, subject to no significant additional creditors’ claims becoming known.
In all the circumstances I am not persuaded that the sequestration order that was made by a Registrar of this court should be set aside. For the sake of completeness, I note also that I am not satisfied that this is a case in which the bankruptcy should be annulled under s.153B of the Act. I am not satisfied that it has been established that a sequestration order ought not to have been made, having regard to the evidence before the court in relation to Mr Quitlong’s solvency. In this context the bankrupt bears the onus of proof to establish his solvency. He has not met this onus for the reasons considered above.
More generally I have had regard to the fact that where an applicant seeks to rely on solvency, the material as to his financial position filed by him should be complete. It cannot be said that the applicant has filed such material. On the contrary. In any event, on the material now before the court I am not able to conclude that the sequestration order ought not to have been made on the basis of solvency of the debtor.

In these circumstances, it is not necessary to consider the exercise of the discretion under s.153B of the Act.
It is appropriate in these circumstances that the respondent creditor’s costs, including any reserved costs (in particular the costs of the last occasion the matter was before the court where the hearing was adjourned in light of the complete lack of financial information from Mr Quitlong) be taxed and paid from the estate of the bankrupt.
The Trustee also seeks his legal costs in relation to the appearance on the last occasion, preparation of the report and the appearance today. The Trustee is not a party to the proceedings but quite properly appeared on the last occasion and, at the request of the court, prepared a report (the statement of affairs having been filed) in accordance with the Rules. There was otherwise completely inadequate evidence from Mr Quitlong. The only evidence which might have put the court in a position to be able to be satisfied one way or the other, was the evidence elucidated through the Trustee’s report and with the assistance of counsel for the Trustee today. In these circumstances I am satisfied that it is appropriate that the Trustee’s costs including reserved costs, should be taxed and paid from the estate of the bankrupt in accordance with the Bankruptcy Act.
The Trustee initially sought costs on an indemnity basis. I have borne in mind the well-established principles in relation to indemnity costs (see Colgate-Palmolive Company and Another v Cussons Pty Limited (1993) 46 FCR 225). However, notwithstanding Mr Quitlong’s lack of success in these proceedings, I am not satisfied that this is a case in which he should have known that he had no chance of success or otherwise such as to warrant an award of indemnity costs in favour of the trustee. I bear in mind the fact of Mr Quitlong’s excess of assets over liabilities and that he is self-represented. I am not satisfied that indemnity costs should be awarded. It cannot be said that this was a totally frivolous and thoroughly unjustified proceeding, albeit I am satisfied in the particular circumstances of this case that it is appropriate that the Trustee’s legal costs of preparing a report, appearance and representation in these proceedings should be paid out of the bankrupt’s estate on the usual basis.

I certify that the preceding forty-eight (48) paragraphs are a true copy of the reasons for judgment of Barnes FM

Date: 2 September 2011