Re Benda, R.C. v Ex parte Benda, R.C

[1985] FCA 166

Re: ROBERT CHARLES BENDA
Ex Parte: ROBERT CHARLES BENDA
No. 532 of 1983
Bankruptcy
(1985) 6 FCR 346

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT
OF THE STATE OF WESTERN AUSTRALIA
Toohey J.(1)

CATCHWORDS

Bankruptcy - application for discharge - whether conduct of bankrupt fell within para 150(6)(c) of the Bankruptcy Act - observations concerning proof of matters under para 150(6)(c) - whether bankrupt's liability as guarantor a "debt provable in the bankruptcy" - considerations relevant to exercising discretion under s.150

Bankruptcy Act 1966 s.82, s.149(1), 150(6), 150(6)(c), 150(12)

Bankruptcy - Application for discharge - Liability arising under guarantees - Whether bankrupt "contracted a debt provable in the bankruptcy" - No expectation of being required to meet liability at time of entering into guarantees - Whether conduct of bankrupt fell within s 150(6)(c) of Bankruptcy Act 1966 (Cth). Bankruptcy Act 1966 (Cth), ss 82, 149, 150.

HEADNOTE

Held: (1) For the purposes of s 150(6)(c) of the Bankruptcy Act, the bankrupt "contracted a debt provable in bankruptcy" when he entered into guarantees in respect of certain debts even though, at the time of entering into each agreement, his liability was uncertain and contingent upon default by the principal debtor.

(2) Even though the bankrupt had no expectation of being called upon to meet such obligations when he entered into the guarantees, his conduct nevertheless fell within s 150(6)(c) of the Act in that he had no reasonable or probable grounds of expectation of being able to meet such liabilities should he be called upon to do so.

HEARING

Perth, 1985, April 22, 26. #DATE 26:4:1985

D S McManus, for the applicant bankrupt.

The Official Receiver in person.

Cur adv vult

Solicitors for the applicant bankrupt: McManus, Cullen & Clements.

SMW

ORDER

1. There be an order of discharge of the bankruptcy of Robert Charles Benda, the operation of the order to be suspended until 8 August 1985.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

Orders accordingly

JUDGE1

Robert Charles Benda, a bankrupt, seeks discharge from bankruptcy. He was made bankrupt on his own petition on 8 August 1983.

1. The period of bankruptcy contemplated by sub-s.149(1) of the Bankruptcy Act 1966 is three years. However sub-s.150(1) permits a bankrupt to apply to the Court for an order of discharge at any time after his public examination has been concluded or after the expiration of 12 months from the date of bankruptcy. Both of these preconditions are operative; there is another which is not relevant.

2. In the absence of one of the matters specified in sub-s.150(6), the Court has a broad discretion to make or refuse an order of discharge before the expiration of three years (sub-s.150(9)). Nothing in the section points to the need for an applicant to establish special circumstances or the like. But, even in the absence of the considerations mentioned in sub-s.150(6) or the lack of objection by creditors, the Court is obliged to look at all the circumstances including the conduct of the bankrupt and decide whether an early discharge is justified.

3. The Official Receiver's report of 11 April 1985 raised one matter relevant to the operation of sub-s.150(6) of the Act. Paragraph 18 of the report is in these terms:
   
   

"The bankrupt has contracted a debt provable in the bankruptcy without having at the time of contracting it any reasonable or probable grounds of expectation of being able to pay if (sic) after taking into consideration his other liabilities at the time".

1. This is a direct reference to para. (c) of sub-s.150(6). By reason of sub-s.150(12), the Official Receiver's report is, for the purposes of s.150, prima facie evidence of the statements contained in it. Sub-section 150(3) obliges the court to take the report into consideration on the hearing of the application. The bankrupt gave notice of intention to dispute this part of the report and another paragraph (para. 16) which refers to the conduct of the bankrupt prior to bankruptcy as not satisfactory because he "incurred a considerable liability by way of a personal guarantee for a company debt when not in a position to meet that liability". The conduct in question was the conduct referred to in para. 18 of the Official Receiver's report. Although the report is prima facie evidence of its contents, the bankrupt gave evidence to which I shall refer later in these reasons.

2. There is a preliminary question, whether in terms of para. (c), the bankrupt contracted a debt provable in the bankruptcy. The debt (there is in fact more than one) referred to in the Official Receiver's report arose under guarantees. The conduct of the bankrupt, if not falling within para. 150(6)(c), may still be relevant to the exercise of the court's discretion under s.150(9).

3. Although there is what I have described as a preliminary question, that question is best understood in the context of the circumstances leading to the bankruptcy. Until 1979 the bankrupt was employed in the insurance industry, latterly in managerial positions. In 1976, through a family company Kelmaris Nominees Pty. Ltd., he was involved in the building of 14 home units for resale at Karratha. The venture was successful. In 1979 he resigned from his position as manager of an insurance company and caused to be incorporated R. & R. Constructions (W.A.) Pty. Ltd. for the building of 20 home units at Kalbarri, a holiday resort north of Geraldton. Town and Country Western Australia Building Society provided finance. The company sold 12 units privately; Kelmaris Nominees bought 7; and the bankrupt bought 1. The building society provided finance for the purchase of the 8 units bought by Kelmaris Nominees and the bankrupt, with the bankrupt guaranteeing the company's debt.

4. In 1980 R. & R. Constructions built The Wagon Wheels motel at Harvey at a cost in excess of $300,000. Finance was provided by United Dominions Corporation and was secured by a first mortgage over the property together with a personal guarantee from the bankrupt and another director. The company leased the motel but in 1982 was compelled to take over the management itself. In evidence the bankrupt said that before R.& R. Constructions embarked on the motel project it obtained a feasibility study from Barker Consultancy Pty. Ltd. The study, which was tendered in evidence, supported the bankrupt's evidence that the project appeared to be a reasonable one. However the venture proved unsuccessful. The reasons advanced by the bankrupt, which I have no reason to doubt, were a substantial increase in interest rates on moneys borrowed with a consequent lessening of profit and a decline in trade due to the closure of the nearby Worsley and Wagerup mining sites. R. & R. Constructions was unable to meet its obligations under the mortgage and, in terms of the Official Receiver's report, "United Dominions Corporation took over the motel in November 1982". I understand this to mean that United Dominions Corporation entered into possession as mortgagee.

5. In April 1981 the bankrupt, through Kelmaris Nominees, began a charter boat service out of Kalbarri. The company leased a cabin cruiser from Finance Corporation of Australia Limited. The venture was unsuccessful, according to the bankrupt because he was required to spend too much time at the motel and was unable to supervise the charter business. That business ceased in December 1982 and the cruiser was returned to Finance Corporation which sold it for a sum sufficient to cover the amount due. That was the last venture in which the bankrupt was involved and since then he has been largely unemployed.

6. In April 1982 R. & R. Constructions went into liquidation. Kelmaris Nominees was unable to meet its mortgage repayments to Town and Country, again largely due to the increase in rates of interest. The bankrupt was called on to meet personal guarantees given in respect of the debts contracted by both companies. As he was unable to pay these debts, he filed his petition.

7. The documents containing the guarantees were not tendered in evidence nor were any precise details provided. What emerged from the material before the court was that the bankrupt had guaranteed the liability of Kelmaris Nominees to Town and Country and that he had guaranteed the liability of R. & R. Constructions to United Dominions Corporation.

8. His statement of affairs identified as contingent liabilities sums of $412,000 and $204,000 arising from the guarantees of R. & R. Constructions' obligations. The first of these sums related to the motel which was sold with a resultant shortfall of $208,100. The second related to the units at Kalbarri. The sale of these units resulted in losses of $19,678 and $95,143.

9. I conclude from the material before the Court, in particular the report of the Official Receiver, that immediately before his bankruptcy the bankrupt was under a present liability in respect of each guarantee by reason of the default of R. & R. Constructions, the principal debtor. In consequence these were debts provable in bankruptcy against the bankrupt within the meaning of s.82 of the Act.

10. But the submission of the bankrupt's counsel was that when the bankrupt entered into each guarantee there was no debt contracted by him. His liability, it was said, arose only upon default by the company concerned. It is true as a general proposition that the liability of a guarantor arises only upon default by the principal debtor. The Official Receiver did not suggest that this was not the case with the guarantees in question. But in the absence of the relevant documents the task of the court in determining whether para (c) is applicable is made unnecessarily hard. It is I think for the trustee who raises any of the matters mentioned in sub-s.150(6) to particularise the matter in as much detail as possible.

11. The preliminary question is to be answered, not so much by reference to general principles as by the language of the Act. The reference in para (c) to a "debt provable in the bankruptcy" must be taken as a reference to s.82 which makes provable in bankruptcy "all debts and liabilities, present or future, certain or contingent ...". Sub-section 82(4) permits an estimate of the value of a debt or liability "which, by reason of its being subject to a contingency, or for any other reason, does not bear a certain value".

12. When he entered into each guarantee the bankrupt may not have contracted a debt in the sense in which that word is ordinarily understood but I think that he contracted a debt provable in the bankruptcy, uncertain and contingent though the debt may have been. See Rowlatt on the Law of Principal and Surety 4th ed. 202.

13. Paragraph 150(6)(c) places on the bankrupt proof that at the time of contracting the debt he had reasonable or probable grounds of expectation of being able to pay it. In this regard the position of the bankrupt was not that when he entered into each guarantee he had an expectation of being able to pay if called upon to do so. Rather the tenor of his evidence was that each venture was viable so that he did not expect to be called upon to meet any obligation under the guarantee. I am not persuaded that the bankrupt did have reasonable or probable grounds of expectation of being able to pay any debt under the guarantees if required to do so. Thus sub-s.150(6) operates to preclude the court from making an order of discharge, except suspended, either unconditionally or subject to conditions. At the same time, while in my view the bankrupt's conduct fell literally within para 150(6)(c), it was different from and less blameworthy than the type of conduct that usually attracts the operation of this paragraph.

14. The Official Receiver's report refers to unsecured creditors in the sum of $70,968 and contingent liabilities of some $676,000. The contingent liabilities largely relate to the guarantees already mentioned and have been reduced by the sale of R. & R. Constructions' properties. When the application for discharge was filed, notice of intention to oppose was lodged by Broadlands Finance Limited, a creditor to the extent of $27,370. The matters upon which Broadlands intended to rely included the capacity of the bankrupt to earn substantial income as a commissioned salesman and his failure to make any effort to reduce his liability to that creditor. At the hearing Broadlands was granted leave to withdraw its notice of opposition. A letter was tendered from Finance Corporation of Australia Limited, also a creditor, stating that the bankrupt had assisted the company in resolving leasing accounts when his financial situation caused his insolvency. The letter continued "In fact, his efforts enabled us to save a number of accounts from deficiencies. In light of the above, it is not our intention to oppose his application for relief from bankruptcy". No other creditor gave notice of opposition to the application. Only one creditor proved in bankruptcy. No dividends have been paid nor is any likely to be paid.

15. An application for discharge from bankruptcy involves considerations wider than the interests of the bankrupt and his creditors. But the absence of any opposition from creditors to the application is a significant consideration. The Official Receiver makes no complaint of the bankrupt's conduct other than as mentioned earlier. It is also significant that since his bankruptcy the bankrupt has made 50 or so applications for employment. These have been unsuccessful and it is reasonable to conclude that the bankrupt's status has played some part in his lack of success. He is receiving unemployment benefits. He is divorced and has 3 children. He meets the cost of educating the two eldest children from money borrowed from his mother.

16. In all the circumstances I see nothing to be gained by refusing the application for discharge. The creditors will gain nothing and the bankrupt's prospects of rehabilitation will be stultified. Notwithstanding that the bankrupt contracted substantial liabilities, the evidence does not suggest that he entered into ventures that were doomed to failure or that he acted rashly in respect of his financial affairs. There is nothing in his conduct or in the circumstances of this bankruptcy to warrant attaching conditions to any order of discharge.

17. I propose that there be an order of discharge but that in all the circumstances the order be suspended until 8 August 1985 at which time the bankruptcy will have run for a period of two years.