Re Clark, R.J. & Anor v Ex Parte Galatian Pty Ltd

[1991] FCA 765

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3175 /a\

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

IN THE FEDERAL COURT

OF AUSTRALIA )

No. QP 2111 of 1991

DUEENSLAND DISTRICT REGISTRY)	)
)
BANKRUPTCY DIVISION	1
BETWEEN:

ROBERT JAMES CLARK. GRAHAM ROBERT CLARK

Ex Parte: GALATIAN PTY LTD

JUDGE	:	Heerey J.
PLACE	:	Brisbane 0 5 D E C 1991

FEDERAL COURT OF

m:	15 November 1991	AUSTRALIA	PRINCIPAL
REGISTRY

EX TEMPORE REASONS FOR JUDGMENT

This is the return of an application for a sequestration order and also the debtors' application to set aside the bankruptcy notice on which the petition is founded. The judgment debt in question arises from a judgment in the District Court of Queensland at Southport on 11 February 1991 for the sum of $23,500.74 with interest of $5,405 and costs to be taxed.

cor~orations Law, the relevant sub-sections of which provide:

The debtors, Robert James Clark and Graham Robert Clark, who reside in Victoria, were the directors of a company called Terene Pty Ltd ("Terene"), which traded under the business name of Landmark Tours and was the trustee of a trading trust for that purpose. Terene operated a bus transport business and the judgment creditor's debt is for fuel sold and delivered between December 1988 and February 1989.

The judgment was obtained under the provisions of s.592 of the

Where:

(a)

a company has rncurred a debt;

(b)

rmmediately before the time when the debt was ~ncurred:

(i)	there were reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or
(ir)	there were reasonable grounds to expect that, if the company rncurs the debt, it w ~ l l not be able to pay all its debts as and when they become due; and

(C)

the company was, at the time when the debt was rncurred, or becomes at a later time, a company to which thls sectron applres;

any person who was a dlrector of the company, or took part in the management of the company, at the time when the debt was incurred contravenes this subsectlon and the company and that person or, rf there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt.

In any proceedings against a person under subsection (l), it is a defence if it is proved:

(a)

that the debt was incurred without the person's express or rmplied authority or consent; or

(b)

that at the time when the debt was mcurred, the person did not have reasonable cause to expect:

(i)	that the company would not be able to pay all its debts as and when they became due; or
(ii)	that, ~f the company incurred that debt, ~t would not be able to pay all its debts as and when they became due.

Proceedings may be brought under subsection (1) for the

recovery of a debt whether or not the person against whom

the proceedings are brought, or any other person, has been convicted of an offence under subsection (1) in respect of the incurring of that debt.

In proceedings brought under subsectlon (1) for the recovery of a debt, the l~abrlity of a person under that subsection in respect of the debt may be established on the balance of probab~lrties.

I can eliminate one matter immediately. It was said that the debts were incurred by Terene on behalf of another company called Sunliner Queensland Pty Ltd ("Sunliner") (now in liquidation) in the belief that Sunliner would pay. It is accepted, of course, that thls cannot affect the liability of Terene to the creditor.

However, there is the undoubted principle that a bankruptcy court is entitled to go behind the debt on which the bankruptcy notice is founded, and will be more inclined to do so when that judgment has been obtained by default, as is the case here. In an affidavit filed in this matter, Mr Robert James Clark has deposed that at the time the debt was incurred the company Terene was solvent, and that there was never any belief that Terene could not pay its debts.

That assertion derived some support from the accounts of the company which were in evidence, which showed that for the year ended 30 June 1989 the trust of which the company was a trustee, made an operating profit before tax of $5,908. Admittedly, this was a very small return on a gross turnover of approximately $4.8 million, but nevertheless it is consistent with the company being able to pay its debts.

There is further the circumstance that the company apparently

traded up until October 1991. A winding-up order was made in	the Supreme Court of Victoria on 2 October 1991. Two
petitions had been lodged, but the earlier of those was not filed until 17 December 1990. So given the circumstance that companies which are insolvent usually do not manage to trade for any significant time, there is the fact here that Terene did trade for over two and a half years after the debts were incurred.
Mr English, who appeared for the petitioning creditor, put the
case of his client very fairly and said, in my opinion, everything that could properly be said on his client's behalf.

In particular he pointed out that after the default judgment was made in February of 1991, Mr Clark attempted to resolve the matter by making a settlement offer which the judgment creditor did not accept. And also there was no attempt to set aside the District Court judgment, and the first intimation of an intention to oppose the bankruptcy petition was on 10 October 1991.

However, that evidence, while doubtless relevant, is also consistent with the acceptance by the debtors of a moral obligation to pay the company's debts if they could, and it does not in my opinion amount to a conclusive admission that they had incurred the debts back in 1989/90 without reasonable grounds to expect that the company would not be able to pay all of its debts.

It also appears that in March 1989, Terene entered into a contract of sale with Sunliner to sell its business and received $20,000 as part of the deposit, but the sale fell through. It was anticipated that from the proceeds of that sale all the debts could be paid. But I do not think I can go the further step, at least for the purpose of determining whether the debtors have an arguable case on this issue, to conclude that back in December 1988 to February 1989 that debts were being incurred when the debtors knew that the

company could not pay them.

One cannot avoid feeling sympathy for the judgment creditor which is a small business operating a service station, and, equally with the judgment debtors, no doubt has suffered the difficult economic conditions with which the community faces. Nevertheless, I think that in applying well-settled principles, I should exercise the Court's jurisdiction to go behind the judgment debt and therefore I will make an order setting aside the bankruptcy notice. It will follow that the petition is dismissed.

As to costs, the debtors were represented at an earlier stage by solicitors, but were not able to provide the necessary funds for the hearlng and Mr Robert Clark appeared on behalf of himself and the other debtor.

I do not think I can order costs in favour of an unsuccessful party. What Mr English says as to the history of this matter is without doubt true and, as I have said, one cannot avoid feeling sympathy for the position his client is in. It does seem that the debtors were not well served by their legal advisers in Melbourne. Looking at the affidavits on the file there seems to have been a very poor level of attention to their obligation. I think rather I should decline to make any order for costs against the petitioning creditor because of those matters.

I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment of the Honourable Mr Justice Heerey

Mr Robert James Clark	appeared on behalf of himself and
Mr Graham Robert Clark
Solicitor acting as
Counsel for the
Petitioning Creditor:	Mr S J English
Solicitors for the
Petitioning Creditor:	English & Company