Re: Catalno, S. J

[1990] FCA 840

840        40

JUDGMENT NO. ..-.-,,, ,

CATCHWORDS

Y	-- application for order that objection under
section 149 (3)(c) lapse - unsatisfactory conduct prior to bankruptcy
Bankruvtcv Act ss 149(3)(c) 149(9) 149(10) rule 51A
EINFELD J
SYDNEY
27 AUGUST 1990
IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION ) Nos W 1485 of 1986
BANKRUPTCY DISTRICT OF THE STATE ) W 1478 of 1986
OPEW-SOUTH WALES AND THE 1
AUSTRALIAN CAPITAL TERRITORY 1

Re: SAMUEL JOHN CATATAN0

AND ANOR

EINFELD J
SYDNEY

27 AUGUST 1990

MINUTE OF ORDERS

Mrs Catalano's bankruptcy is discharged as of the date of the hearing

The application by Mr Catalano is dismissed

No order as to costs

IN THE FEDERAL COURT OF AUSTRALIA )

GENERAL DIVISION	) Nos W 1485 of 1986
BANKRUPTCY DISTRICT OF THE STATE )	W 1478 of 1986
QF NEW SOUTH WALES AND THE	1
AUSTRALIAN CAPITAL TERRITORY	1

Re: SAMUEL JOHN CATALANQ

AND ANOR

REASON FOR JUDGmNT

Einfeld ;I	Svdney	27 Auaust 1990
INTRODUCTION

This is an application by husband and wife bankrupts pursuant to section 149(9) of the Bankruptcy Act for an order that the objection entered by their trustee under subsection (3)(c) of that section lapse on the date of the Court's order.

The objection was lodged at the end of November 1989 with the result that without the intervention of the Court, the bankruptcies will remain in place until December 1991.

Section 149 (3)(c) and (9) are as follows:

(3) A bankrupt is not discharged from bankruptcy by	virtue of this section if -
(c) the Registrar, the Inspector-General or the trustee has entered, or a creditor has, with the leave of the Court, entered, an objection, in accordance with the prescribed form and in the prescribed manner, to the discharge of the bankrupt by force of this section and the objection

h a s n o t been withdrawn or l a p s e d b e f o r e

the t i m e when the bankrup t would have been

s o d i scharged b u t f o r t h i s sub - sec t i on : o r

( 9 ) The Court may, a t a n y t i m e before the

e x p i r a t i o n o f 5 y e a r s from the d a t e o f

bankrup tcy , on the a p p l i c a t i o n o f the bankrup t ,

o r d e r t h a t the per iod a t the e x p i r a t i o n o f

which an o b j e c t i o n e n t e r e d under paragraph

(3) (c ) w i l l l a p s e be such pe r iod , b e i n g a

per iod	exceed ing	3	y e a r s	b u t	n o t	e xceed ing	5
y e a r s ,	commencing	on	the	d a t e	o f	the	b a n k r u p t c y

a s i s s p e c i f i e d i n the order .

Section 149 (10) provides that in considering such an order, the Court shall take into account any matters prescribed by the Rules.

In this connection rule 51A provides:

The f o l l o w i n g m a t t e r s a r e p re sc r ibed f o r the

purposes	o f sub - sec t i on	149 ( 1 0 ) and	(13) o f the A c t :
( a )	whether	the bankrup t i s a b l e ,	o r i s l ikely

w i t h i n 5 y e a r s from the d a t e o f the

b a n k r u p t c y t o be a b l e , t o make a

s i g n i f i c a n t c o n t r i b u t i o n t o his e s t a t e ;

(b) whether the d i s charge o f the bankrup t

would	p r e j u d i c e	the	a d m i n i s t r a t i o n	o f	his
e s t a t e ;

( c ) whether the bankrup t h a s co-operated i n

the a d m i n i s t r a t i o n o f h i s e s t a t e ;

( d ) the conduct o f the bankrup t , i n r e s p e c t o f

the per iod both b e f o r e and a f t e r the d a t e

o f the bankrup tcy ;

( e ) a n y m a t t e r s a r i s i n g o u t o f the conduct o f

the bankrup t a s a bankrup t , b e i n g m a t t e r s

t h a t a r e the s u b j e c t o f an i n v e s t i g a t i o n

t h a t i s n o t comple ted;

( f ) the age and s t a t e o f h e a l t h o f the

bankrup t ;

( g ) a n y e v i d e n c e adduced by the bankrup t , the

Inspector-General , the t r u s t e e , the

Official Receiver or a creditor relating
to -

(i) the circumstances in which the debts of the bankrupt were incurred, including the bankrupt's experience in, and understanding of, financial matters and of the obligations imposed on the bankrupt as a result of incurring the debts; and

(ii)the conduct of the bankrupt's creditors, including the nature and extent of any inquiries made by the creditors into the bankrupt's ability to pay his debts and whether the bankrupt was induced to incur debts by conduct on the part of the creditors that departed from the standards of normal and reasonable commercial practice.

Mr and Mrs Catalano were declared bankrupt in December 1986 with a total deficiency of liabilities over assets of $10 million. The application is opposed by the trustee in bankruptcy on the basis of the unsatisfactory conduct of the bankrupt before the bankruptcy.

THE FACTS

The facts are complicated but there does not appear to be any dispute about them. M r Catalano admitted in cross examination that his conduct could be read as being unsatisfactory.

A property at 16 Riverside Drive, Peakhurst (the property) was purchased by Mr and Mrs Catalano in January 1986. The deposit of $15,000 was paid by the (first) Catalano family trust fund. Mr Catalano contributed $115,000 to the purchase price, $100,000 of which was paid directly by the AFT Property Trust. This latter amount was asserted to be due to Mr Catalano for services rendered to AFT, but no record of such services or payment exists.

The title to the property was transferred by Mr and Mrs Catalano in April 1986 to a company called Poynden Pty Ltd. At the time of the transfer, it was a shelf company the shares of which were owned by Mr and Mrs Catalano. By the date of completion of the contract, Poynden was owned by another company associated with Mr Catalano's accountant. The latter company held shares in trust for the Catalanosf (second) family trust which was established in April 1986. As consideration for this transfer, loan accounts were created by the second company. These were extinguished by redemption of preference shares for the sum of $157.

Mr and Mrs Catalano were declared bankrupt after calls were

made on guarantees which they had executed in support of their	company Catalano Investment Pty Ltd (the company), which went
into receivership in June 1986.
The evidence establishes that Mr Catalano knew, prior to the transfer of the property from himself and his wife to Poynden, that there existed financial problems. M r Catalano admitted in evidence that company cheques had been dishonoured prior to April 1986 and conceded that the company had experienced a tight liquidity situation at that time.
While there existed no documentation to this effect, Mr Catalano asserted that the $100,000 and the property were always considered to be owned by the children of the parties, now aged between 7 and 18. He said that the transaction related to the children and was entered into as a form of insurance for them. The decision to purchase the property for this purpose was made in July 1985. According to Mr Catalano, "the property was always that of the children". Mr Catalano stated that the $100,000 contributed to the purchase price was always earmarked for that particular property and gifted for the children. It was in substance a gift by M r Catalano to the family trust.
There exists no documentation as to any of the transactions involving the $100,000. All that the evidence shows is that
the money went from AFT to provide the bank cheque to settle the purchase. Further, the potential beneficiaries of the family trust include the bankrupts. This fact somewhat
weakens the claim that the trust's aim was to benefit the children alone.
There was no evidence that Mrs Catalano acted, as far as the transfer of the property was concerned, otherwise than in accordance with her husband's wishes, but I believe that she would have known, and was probably told, of the effect of the transfer of the property on her and her husband's creditors.
Mr Catalano is presently employed as a consultant by Poynden for $26,000 per annum gross and he attends board meetings. Mrs Catalano works part-time for Poynden and earns a gross salary of $15,600 annually. Both bankrupts have the use of Company cars.
THE CLAIMS OF THE APPLICANTS
The applicants submitted that while the initial onus is on them to satisfy the Court that there are grounds for the exercise of the discretion in their favour, once this is established, the onus shifts to the respondent to show that an order should not be made.
The first ground on which the applicants rely is that a period of 3 years has expired since they were declared bankrupt. They submitted that the prima facie rule is that discharge of bankruptcy should take place after 3 years. In support of this submission counsel pointed to the legislative policy, and to some of the cases especially Van Reesema v Official
authority for the proposition that automatic discharge after 3 Receiver in Bankruvtcy [l9831 50 ALR 253. This was cited as
years is important. Counsel submitted that if the prima facie rule is to be displaced, it must be displaced "strictly".
The applicants did not argue that the trustee's attack on their conduct was not well founded, but submitted that the application is to be determined having regard to all factors listed in rule 51A, and not merely the adverse one relied on by the trustee.
The second ground on which the applicants rely is quite different. As a bankrupt, Mr Catalano is of course prohibited from being a company director and from taking part in the management of a company. If he were discharged, he could move from a consultancy to a directorship of Poynden, which would expedite the activities of the company and remove existing uncertainty as to potential breaches of the Companies Code. As well, Mr Catalano would be able to increase his own and the company's income.
The principal element of unsatisfactory conduct relied on by the trustee arises out of the transfer of the property in Mr and Mrs Catalanofs name worth $155,000 to the company acting as trustee for one of the family trusts at a time when bankruptcy was imminent. A less significant element involved a question of the transfer of some shares. The applicants admit that this is evidence of what appears to be
chance to litigate the impropriety or otherwise of either the unsatisfactory conduct, but submitted that they have not had a property or the share transfer.
Furthermore, it is said that the property question can be solved by the trustee commencing proceedings, and that he could have done so years ago. If he had, it is submitted, the objection would never have been entered and the bankrupts would have been automatically discharged after the usual 3 year period. This is the case, counsel submitted, because if orders had been made in such proceedings and complied with by the bankrupts, a Court would not have considered it reasonable for the trustee to enter an objection. There would, then, have been no reason for the bankrupts to be punished further.
Counsel also submitted that proceedings for the recovery of the property can be brought at any time. If fraud is alleged there is no limitation period. The trustee can do this notwithstanding any discharge and he is, therefore, not prejudiced by the orders sought in this application. Because the trustee has had the opportunity to bring such proceedings for the last 3 years and failed to do so, it would be unreasonable to make the applicants suffer because of the trustee's delay.
The applicants admit that they have taken property away from their creditors at a time when they knew that they might be in financial difficulties, but they say that this is not the
Furthermore, in relation to the deficiency in the estate, the first or last time bankrupt people have acted in this manner.
property is of insignificant value.
The applicants submit that they did not act fraudulently and that it is questionable that they have breached any law. Although the applicants' conduct may have been unsatisfactory in this respect, it was not sufficient to displace the prima facie rule. To do so the conduct would have to be such as to require continuing punishment and the protection of the community.
As far as Mrs Catalano is concerned, it was submitted that she signed the relevant guarantees and transfers upon the request of her husband without query.
THE POSITION OF THE RESPONDENT
The respondent based his submission on public interest grounds. It was not stated expressly but presumably the latter encompasses both the protection of the community and the punishment of M r and Mrs Catalano. The trustee submitted that the disposition of the property by Mr Catalano at a time when he was aware of the impending collapse of his business was unsatisfactory conduct. The respondent also relies on the concession by the applicants that their conduct was unsatisfactory and on the fact that the applicants have
to establish prima facie unsatisfactory conduct. The onus The trustee's counsel submitted that he had the primary onus refused to re-transfer the property to the trustee.
then passed to the applicants to establish grounds for the exercise of the discretion in their favour. In other words, if there was unsatisfactory conduct, a discharge should only be granted if good reasons are demonstrated.

- l0 -

In so far as the trustee has failed to commence proceedings in respect of the property, counsel submitted that once the unsatisfactory conduct has occurred, it did not matter what happened afterwards.

As far as Mrs Catalano was concerned, the respondent submitted that she knew that the company was in difficulties and that she was at no stage forced to sign any documents.

THE ISSUES

In this respect the parties made diametrically opposed submissions, both of them simply asserting the logic of their positions without citing authority. In the circumstances of this case I do not think much turns on the question of onus. Clearly an objecting trustee has to evidence any of the prescribed matters on which he relies, but the primary onus must always be on the bankrupt to establish the overall

validity of a case for discharge.

2. Rule 51 A

Both parties submitted that the court should consider all the matters listed in the rule. They cited as authority for this proposition Re Palenkas: Ex parte Ravmor (Brisbane) Ptv Ltd [l9821 66 FLR 115 in which Fitzgerald J stated with respect to rule 51A that "the court is required to take all such matters in account".

Re Palenkas did not concern an application under section l49 (9) and may therefore be distinguished. If it were held that each subparagraph of this rule was to be considered in this application, the Court would be faced with a problem. The respondent led evidence only on (d). There is therefore no evidence in respect of the other paragraphs. In order to consider them the Court would have to rely on inferences and assumptions. The applicants led evidence and press the relevance only of the matters in (c), (d) and (g)(i). In adversarial litigation of this kind, I think that it is only proper for the Court to consider the matters raised in the litigation and not go searching for other material on which to decide the case.

1. Evaluation of the bankrupts' conduct

Court in their dealings concerning the property. Despite I am not satisfied that the bankrupts have been frank with the	their insistence that the property was purchased for the
children, none of the transactions prior to April 1986 (when collapse was imminent) was linked to the family trust. Mr Catalano's concession that the property transfer was unsatisfactory conduct, and his unwillingness to dispute the trustee's objection, lead me to the conclusion that the bankrupts deliberately disposed of the property to the family trust to get it away from their creditors. The fact that they are themselves potential beneficiaries of the transfer adds significant doubts to the claim that the property was at all times earmarked for the children and that this transaction was merely a CO-incidental effectuation of what had always been the intention. No satisfactory explanation was offered as to why the property was not originally purchased in the children's names or transferred to them directly in or before April 1986. This must be especially suspicious, as is the excuse in relation to Mrs Catalano that she simply followed the instructions of her husband. Whilst in business dealings this may well have been true, this transaction was really something quite different. I doubt that she was the ignorant compliant bystander made out for her.
The argument that the trustee has delayed in commencing proceedings to recover this property is in my opinion not relevant to the issues raised by section 149(9) and rule 51A. Neither is it significant to my statutory task that the value of the property was very small in relation to the total
people engage in this type of enterprise, assuming this to be indebtedness. The further proposition that because many
true, these bankrupts should in some way be excused, tolerated or understood, is in my view preposterous and untenable.
The trustee submitted that it was in the public interest that a person guilty of such conduct as Mr Catalano be a bankrupt for a period of 5 years. To the extent to which the phrase
'public interest' refers to matters such as the protection of the community, it must be a question of whether the community should be protected for longer than three years from the unfettered business transactions of a bankrupt who has knowingly and deliberately cheated his creditors. If so, the question becomes 'for how long?'. Mr Catalano has already been bankrupt for more than 8 months since the expiration of the usual 3 year period.
As far as the question of punishment is concerned, similar considerations arise. Furthermore it must be decided whether extended bankruptcy as a form of additional punishment of a *'cheat1, is imposed by way of example or deterrence to others and/or to encourage Mr Catalano to change his ways. Obviously the clearest way of showing that people facing bankruptcy cannot get away with such actions is for the trustee to commence action for breach of section 120 of the Act and for fraud, although financial constraints will often operate to prevent or hinder decisions to do so.
Although not specifically prescribed by rule 51A, a bankrupt's needs and difficulties may also presumably be considered in
the Court's discretionary considerations. Somehow they have to be balanced against the adverse matters presented against him, however difficult this type of exercise always is. Mrs Catalano presented no counter- balancing considerations to displace her unsatisfactory behaviour. However, she was clearly a very minor player on the field and she was no doubt primarily motivated by the welfare and security of her children. I think she should be discharged. Mr Catalano presented some matters relating to his own and his employer's convenience and income, but I regret that they are not of sufficient force and weight to persuade me that this is the appropriate time to grant his discharge.
His application should dismissed. There will be no order as to costs.

1 certify that this and the '3

preceding pages are zi true copy of the

Reasons for Judgment heroin of his Honour

Justice Einfeld

Associnte

Dated: ~ 7 1 8 l+)

Solicitors	Patterson Houen
for the Bankrupts	Commins
Counsel and solicitor	Mr G L Turner
for the Trustee	instructed by Kemp Strang and Chippindall Solicitors
Date of Hearing	8 May 1990
Date of Judgment	27 August 1990