Re Daniberg, F. Ex parte Daniberg, F
[1989] FCA 173
•28 APRIL 1989
Re: FRANK DANIBERG
Ex Parte: FRANK DANIBERG
No. NSW 472 of 1988
FED No. 173
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DIVISION OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Gummow J.(1)
CATCHWORDS
Bankruptcy - application for discharge under s. 150 of Bankruptcy Act 1966 - bankrupt seeking discharge one year after sequestration order - objection by Trustee and creditors - Trustee's inquiries incomplete at date of application.
Bankruptcy Act 1966
Bankruptcy Amendment Act 1987
Companies (Victoria) Code 1981
HEARING
SYDNEY
#DATE 28:4:1989
Counsel for the Applicant bankrupt: P. Strasser instructed
by Weiss & Co.
Counsel for the Trustee and for M.R. Aldridge instructed
Australian Bank Ltd. by P.W. Turk & Associates
Solicitor for National Westminster M. Hughes of Messrs.
Finance Australia Ltd. and Natwest Minter Ellison
Australia Bank Ltd.
ORDER
That the application for discharge be dismissed.
Note: Settlement and entry of orders is dealt with by Order 36 of the Federal Court Rules.
JUDGE1
The applicant became bankrupt by sequestration order made 23 March 1988, upon his own petition. Mr. R.C. Brien of Messrs. Bentley & Co., chartered accountants, was appointed trustee of the bankrupt estate.
By his application dated 23 March 1989, the applicant seeks from the Court an order of discharge under s. 150 of the Bankruptcy Act 1966 ("the Act").
The public examination of the applicant commenced before a Deputy Registrar on 9 September 1988, and was continued before another Deputy Registrar on 6 December 1988. On that day, the examination was adjourned generally. As the law stood before coming into force of the amendment effected by s. 53 of the Bankruptcy Amendment Act 1987, the circumstance that the public examination of the bankrupt had not been concluded would have been a fatal obstacle in the path of any application for discharge under sub-s. 150 (1) of the Act. However, with effect from 3 March 1989, sub-s. 150 (1) provides that a person who becomes a bankrupt may apply to the Court at any time for an order of discharge.
The application for discharge was opposed by Australian Bank Ltd. (which appeared by the same counsel as the Trustee) and by National Westminster Finance Australia Ltd. and Natwest Australia Bank Ltd. (which appeared by their solicitor).
The applicant's statement of affairs notes creditors' claims totalling $2,457,900 with assets of $1,139,780, leaving a total deficiency of $1,318,120. The Trustee's report pursuant to sub-s. 150 (3) of the Act was filed 14 April 1989. In his report, the Trustee says that he has received to date proofs of debt from nine creditors and that the proofs have not yet been fully dealt with. Details are as follows:
Creditor Amount of Claim
1. Australia & New Zealand
Banking Group Ltd. $3,270.72
2. State Bank of New South Wales $3,073.09
3. Michael J. Glynn & Associates $1,755.00
4. National Australia Bank Ltd. - Melbourne $1,827.70
5. National Australia Bank Ltd. $2,745.97
6. Westpac Banking Corporation $13,689.59
7. National Australia Bank $2,361,466.26
8. Australian Bank $1,612,821.99
9. National Westminster Finance $238,855.29
The bankrupt contends that the debt claimed by Michael J. Glynn & Associates is in truth the debt of a third party. The claim by Westpac Banking Corporation is pursuant to a guarantee given by the bankrupt. The other four small claims appear to represent moneys owing under credit card facilities previously enjoyed by the bankrupt. The debt claimed by National Westminster Finance is what is left of a total borrowing which on the Trustee's oral evidence was in the vicinity of $4m - $5m. The debt claimed by the Australian Bank is based on a judgment recovered by it in 1986. The evidence indicates that the principal sum of substantially more than $5m was borrowed by the bankrupt from the Australian Bank. As to debt No. 7, that of the National Australia Bank, it may well be that this will diminish substantially because that bank holds third party security. To understand the position concerning this debt, it is necessary first to turn to the history of the bankrupt.
The bankrupt was born on 16 June 1934. He matriculated from school in Hungary in 1952. He became an instrument maker by trade, and arrived in Australia in 1957. He lived in Australia from 1957 to 1964. In this period he was employed as a tool maker and instrument maker for Holbrooks Ltd., and also did various odd jobs such as driving a taxi and working as a waiter. In 1964, he went to the United States of America as a procurement officer for the Office of the Australian Consulate General in New York. In 1966, he promoted a corporation North American Data Systems Incorporated, and became Chairman of the Board of Directors. The business of the corporation was described by the bankrupt as that of programming and system developments for computers manufactured by IBM, RCA and Honeywell. The stock of the company was publicly listed and in about 1968 the bankrupt received in connection with the flotation of the company approximately $US l.5m. He says that he then returned to Australia and decided to demonstrate to his acquaintances here that he had made good. He said that in oral evidence that he gave away approximately $A 1m.
Between 1971 and 1973, the business operations of the United States corporation came to an end. There were no unpaid outside creditors but shares in North American Data Systems Incorporated became worthless.
For about 16 years prior to his bankruptcy in 1988, the bankrupt engaged in Australia in real estate activities, namely the acquisition, development and resale of residential, industrial and commercial properties, together with investment in real estate. He borrowed funds from various sources from time to time to assist in these activities, and in about 1980 with the goal of obtaining lower interest rates, he commenced borrowings in foreign currencies mainly those of the United States, Japan and Switzerland. He blames the decline in his fortunes, leading to his present bankruptcy, to a sharp decline in the value of the Australian dollar. The bankrupt lodged no income tax returns for the years between 1978 and 1987. He says that for the whole of this period he had no taxable income which would have required him to lodge a tax return. He lived partly from moneys brought back from the United States, and from moneys provided, whether by loan or otherwise, from companies controlled by him. There is a considerable number of these companies.
From Part VI of the bankrupt's statement of affairs it appears that there are some 64 companies with a total debt due to the bankrupt of $7,781,400, with an estimated realisation value of $108,000. The bankrupt was a director and shareholder of these companies. It would appear from the Trustee's investigations that with the exception of Exten Pty. Ltd., Sixth Leeron Property Pty. Ltd. and Ninety-Fourth Evolution Pty. Ltd., these companies have no funds and are defunct, albeit not placed in liquidation.
The Trustee's report contains the following passage:
"In the majority of cases, and particularly in the case of borrowings from the Australian Bank, all loans were made in the name of the bankrupt with cross collateral and guarantees being provided by the associated companies who were the eventual recipients of funds for the purpose of acquiring property. It appears the bankrupt would channel various borrowings in his own name through a company styled United Plan Finance Pty. Ltd. which would then in turn on-lend the money to the company utilised to purchase the property in question. Any profits on the transaction, if any, would again be put through United Plan Finance. On querying the bankrupt as to why this was done, he advised that as United Plan Finance Pty. Ltd. was a finance company any losses on foreign exchange borrowings could be claimed as a tax deduction."
The three companies which are named were all incorporated in Victoria. They have been placed in liquidation on the application of the Trustee. The Trustee is the liquidator of two of them, Sixth Leeron Property Pty. Ltd. and Ninety-Fourth Evolution Pty. Ltd. The former partner of the Trustee, Mr. William Hamilton, is the liquidator of Exten Pty. Ltd.
Exten Pty. Ltd. owns and conducts a shopping centre at Wangaratta in Victoria. The liquidator is undertaking the necessary steps to have the property put to auction. An informal valuation indicates an approximate value of $1.8m. National Australia Bank is principal creditor of this company with a registered first mortgage over the shopping centre. The bankrupt and other associated companies are guarantors of the indebtedness to the National Australia Bank. The advances by the Bank were made in Swiss francs and Japanese yen. Thus, the sale price of the shopping centre yet is to be established, and there is a further uncertainty given the variation of exchange rates for the currencies in which the borrowings were made. In his report, the Trustee says:
"Based on current figures and valuations, it would appear that the property, if realised at valuation, would provide a shortfall to the National Australia Bank of approximately $200,000.00. This would then give rise to a claim from the Bank pursuant to the other security held by associated companies (Sixth Leeron Property Pty. Ltd. and Ninety-Fourth Evolution Pty. Ltd.) as dealt with hereunder. It also has an effect on the flow of funds to the bankruptcy administration, given that the bankrupt is a major creditor in the companies and is also the effective sole shareholder of same."
The only asset of Sixth Leeron Property Pty. Ltd. was land sold at auction for $400,000 of which $280,000 was retained by the National Australia Bank pursuant to a guarantee of the debt of Exten Pty. Ltd. to that bank. The balance, net of costs, of approximately $110,000 is available in the insolvent administration of the company. The dividend to the bankrupt's estate from the winding-up of Sixth Leeron Property Pty. Ltd. should be in the vicinity of $30,060. There is the possibility of an increased dividend if the debt of the National Australia Bank is paid in full out of the assets of Exten Pty. Ltd.
The third company, Ninety-Fourth Evolution Pty. Ltd., has as its only asset vacant land again subject to first mortgage to the National Australia Bank pursuant to guarantees provided to the company for the indebtedness of Exten Pty. Ltd. to that bank. The property has been valued with a market value of $750,000 but the Trustee has since formed the view that at auction the property might realise as little as $150,000. Again, any potential dividend to the bankrupt's estate from this source is subject to the clearance of the debt of Exten Pty. Ltd. to National Australia Bank. The Trustee says in his report that it is difficult to ascertain at present what will flow from this source to the bankrupt's estate but that there may be additional funds of approximately $140,000.
In sum, excluding the claims of National Australia Bank on the footing that it will be paid out from the securities it holds, the total of creditors' claims comprising the proofs received and other claims appearing in the statement of affairs is $1,879,307.90, the estimated dividend $198,778.58, giving a dividend rate of 10.6 cents in the dollar.
In the course of the Trustee's oral evidence in chief, there was the following exchange:
"Now, Mr. Brien, if funds become available to you in the estate are there any further examinations that you wish to carry out? - I believe there would, in the first instance of parties associated with Mr. Daniberg as opposed to Mr. Daniberg himself. There were - and my reference to other companies, it was apparent that Mr. Daniberg, on occasion, used nominee directors to assist him in his business endeavours as a co-director, for example, in most of the companies in question. There were certain indications in the records and computer printouts of records that indicated the bankrupt had an interest in other companies which he has denied knowledge of or not knowledge so much but activity. I think the directors of those companies I would be endeavouring to examine. This may lead to a further examination subject to what arises from the section 81 examination."
During his bankruptcy, the bankrupt has been acting as a representative of a jewellery business conducted by a friend, Mr. John Molnar. Mr. Molnar allows the bankrupt to draw $400 per week against any commission for sales negotiated by him with large retail concerns. The bankrupt describes himself as "not cut out for the type of work that (this) requires". The bankrupt also has been taking casual jobs such as a storeman and doing clerical work. During his bankruptcy he has earned an additional sum of approximately $3,000. All his income has been spent on his personal living expenses and he says he has some difficulty in making ends meet. The bankrupt is married but has been separated from his wife for some years. He has grown up children.
The bankrupt has given some consideration to going into business repairing quartz watches, but his preference is to undertake a course as a full-time student at Bond University in Queensland and, after graduation, to enter the academic life. He has passed the entrance examination for admission to the Master of Business Administration course. The course lasts approximately 3 years. There are arrangements between the university and Westpac Banking Corporation whereby finance is made available for students undertaking courses at the university. Mr. Daniberg applied, but was told by the Bank that his application should not be made whilst he was an undischarged bankrupt.
The evidence as to the dealings between the bankrupt and Westpac Banking Corporation as regards the financing of his proposed course of study is far from satisfactory. It is not made plain whether the Bank took the position that it was willing to enter the necessary arrangements but for the circumstance that the applicant was an undischarged bankrupt, or whether the Bank, being well aware of the history of the bankrupt, would be prepared to finance his studies, immediately he was discharged, and despite the deficiency that would remain unsatisfied in that bankruptcy administration.
In his report, the Trustee dealt with the matters referred to in sub-s. 150 (6) of the Act. He says that the books and records of the bankrupt were to a large degree minimal, but that this did not of itself give rise to any matter of consequence given that the majority of the business activities of the bankrupt were conducted through corporations; it would appear that the books and records of the companies were kept up at least during the period in which they were actively engaged in business.
The potential deficiency in the estate is plainly one of some magnitude. The claims of the major creditors arise from shortfalls revolving around exchange rate fluctuations, the majority of the liabilities of the bankrupt and his associated companies being in "off shore" loans. To the extent of the information in the Trustee's possession the bankrupt has, to the extent of known assets, accounted to the Trustee when a request has been made, but it is difficult for the Trustee to determine that all assets have been accounted for. The Trustee, in my view correctly, takes the position that whilst the propensity of the bankrupt for foreign currency borrowings was speculative, given the exposure to exchange rate fluctuations if there were no adequate hedging arrangements, nevertheless the bankrupt was acting through substantial financial intermediaries and this must be a factor in mitigating any characterisation of his bankruptcy as having been contributed to by the rash or hazardous speculation within the meaning of sub-s. 150 (6) (e) (i).
The Trustee concludes his report by saying that he objects in principle to the discharge, given the nature and size of the deficiency to creditors. The Trustee also points out that whilst the claims of creditors arise in many instances from guarantees provided by the bankrupt to companies, and whilst there are substantial funds owing to the bankrupt from those same companies, nevertheless the indebtedness upon borrowings from outside creditors is on any practical consideration the indebtedness of the bankrupt.
Where none of the matters specified in sub-s. 150 (6) is established, the Court may refuse to make an order to discharge, may make an order of discharge, or may make an order of discharge but suspend the operation of the order either unconditionally or subject to conditions.
As French J. observed in Re Hardie; Ex parte Hardie (14/11/88, unrep.):
"The Court does not grant early discharge lightly or as a matter of course and this is so even where there has been a complete satisfaction of the debts because the bankruptcy, so far as the debtor is concerned, confers the benefit of an interest-free extension of the time within which debts may be paid even where they are paid ultimately in full."
In the present case, unless sooner discharged in accordance with section 150, the applicant would not be discharged from bankruptcy, in the ordinary course, until March 1991: section 149. In ordinary circumstances, the public interest would require the statutory period of three years to run before there can be a discharge; to permit a discharge in this case, thirteen months after bankruptcy, could tend to encourage others to think that bankruptcy is of little moment or significance in the conduct of commercial enterprise: Re Kersten (1986) 10 FCR 47 at 51.
I take into account the points made on behalf of the bankrupt, including the consideration that at the age of 55 he wishes as soon as possible to be free to embark upon a fresh career, and to be able to obtain the credit to finance his studies, and the consideration that substantial proportions of the large amounts borrowed by him have been recovered by the financial institutions concerned.
I am also mindful that the Trustee's inquiries are far from complete, that the quantification of the size of the estate is inextricably connected with the administration of the liquidations of the three designated companies in Victoria, and that if funds became available to the Trustee, he could well wish conduct examinations under s. 81 of the Act of persons associated with Mr. Daniberg.
In my view, it would be fundamentally wrong in the circumstances of this case to make an order discharging the bankrupt after 13 months. This course is opposed by the Trustee and substantial creditors, and where there is an estimated dividend rate of 10.6 cents upon unsecured creditors' claims of $1,879,307.90. In saying this, I am not unmindful that the company liquidations would continue and the powers of examination given under the Companies (Victoria) Code 1982 would no doubt continue; I am also mindful that a discharge may be granted upon conditions.
The appropriate order in all the circumstances is that the application for discharge should be dismissed.
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