Re Horesh, D.

Re: DAN HORESH;
Ex Parte: EDGEWATER SERVICE LIMITED
No. V P808 of 1991
FED No. 466
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
Olney J.(1)

CATCHWORDS

Bankruptcy - petition executed under common seal of company - irregularity in affixing of seal - evidence of company having authorised petition - no substantial injustice.

Bankruptcy - petitioner claiming as unsecured creditor - no reference in petition to security - petitioner denies being secured but seeks leave to amend petition - whether registered service agreement amounted to security.

Bankruptcy - power of Court to go behind judgment debt - judgment debt obtained by consent - judgment debtor a solicitor representing himself - proceedings compromised by agreement - whether there was in truth and reality a debt.

Bankruptcy - debtor claiming to be able to pay his debts - inadequate discovery of documents - debtor lacking credibility - probability that debtor is solvent and able to pay his debts.

Bankruptcy - costs - petition objected to on 4 grounds - debtor unsuccessful on 3 grounds but successful on ground of solvency - debtor's conduct prior to and during trial in failing to make a full and frank disclosure of his income, assets and liabilities - discretion to award costs to petitioning creditor.

Bankruptcy - payment into Court by debtor of amount of judgment debt - purpose of payment - disposal of money paid into Court after dismissal of petition on ground of solvency.

Bankruptcy Act 1966, ss. 5(1), 32, 33(1)(b), 44, 306, 308

Bankruptcy Rules, r. 12(2), Form 5

Transfer of Land Act 1958 (Vic.), ss. 98C

Corporations Law, s. 182(7)

Re Bunn; ex parte Bunn (1989) 20 FCR 393

Corney v. Brien (1951) 84 CLR 343

Wren v. Mahony (1971-1972) 126 CLR 212

Ross-Ireland v. Tour Finance Ltd (1965) 39 ALJR 49

Sarina v. Shire of Wollondilly (1980) 48 FLR 372

HEARING

MELBOURNE

#DATE 1:7:1992

Counsel for the petitioning creditor: Mr T. Irlicht

Solicitors for the petitioning creditor: Irlicht and Broberg

Counsel for the debtor: Mr P. Best

Solicitor for the debtor: Mr D. Horesh

ORDER

THE COURT ORDERS THAT:

1. The petition be dismissed;

2. The petitioning creditor's costs of the proceedings including reserved costs and any costs thrown away by the abandonment of the claim for damages be taxed and an amount equal to 80% of the sum taxed be paid by the debtor;

3. The sum of $10,200.06 paid into Court by the debtor on 30 March 1992 be paid out to the debtor upon the Registrar in Bankruptcy being satisfied that the judgment debt referred to in the petition and costs have been paid as to which there be liberty to apply;

4. Execution on the costs be stayed for a period of 21 days and if an appeal is lodged in that period such stay to continue until the determination of the appeal or further order.

Note: Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules.

JUDGE1

The petition in this matter, which is based upon an act of bankruptcy committed by the debtor on 12 June 1991 when he failed to comply with the demands of a bankruptcy notice, is opposed by the debtor on a number of grounds.

The objections are based upon the following assertions:

1. The execution and sealing of the Petition was invalid, unlawful and without the authority of the Petitioning Creditor in that

(a) The signatories to the petition LESLIE BUSSEY and ROBERT LACY BROOKS were not authorised by the Petitioning Creditor to sign the Petition or affix the seal of the Petitioning Creditor to the Petition.

(b) The Directors of the Petitioning Creditor did not authorize LESLIE BUSSEY and ROBERT LACY BROOKS or any other person to affix the seal of the Petitioning Creditor to the Petition as required by Article 68 of the Articles of the Petitioning Creditor.

(c) The seal of the Petitioning Creditor was not affixed to the Petition in the presence of two directors at the least or in the presence of one director and the secretary as required by Article 68 of the Articles of the Petitioning Creditor.

2. The Petitioning Creditor has failed to comply with section 44 of the Bankruptcy Act 1966 in that it holds securities over the property of the Judgment Debtor and registered on Certificate of Title Volume 8447 Folio 403 which would satisfy the debt, being a charge Number C 908668 and a Service Agreement dated the 29th September 1967, and

(a) it has failed to include in the Petition a statement that it is willing to abandon its securities for the benefit of creditors generally;

(b) it has failed to include in the Petition particulars of the securities held by it which would or could satisfy the alleged debt;

(c) it is unable by the terms of the securities to surrender the securities to the Trustee or otherwise assign the benefit of the securities if so requested by the Trustee pursuant to section 44(5) in that it is prohibited from doing so by the terms of the Service Agreement.

3. The Court should refuse to permit the Petitioning Creditor to rely upon the judgment founding the alleged debt, being the judgment of the Magistrates Court at Melbourne on the 12th September 1990, in that the Debtor had a complete defence to the claim on the ground that the Petitioning Creditor had no authority pursuant to clause 1(b)(i) or 2 of the Third Schedule to the Service Agreement or otherwise to levy the Judgment Debtor in the sum of $8,500.00 or any sum for fire prevention works or otherwise as permitted pursuant to the Service Agreement.

4. The Judgment Debtor is and has always been able to pay his debts and is not insolvent.

I propose first to deal with each discrete issue raised in the debtor's notice of objection and then to deal with matters which arise consequentially from the conclusions reached in relation to those issues.
1. The execution and sealing of the petition was invalid, unlawful and without the authority of the petitioning creditor.
The petition was filed with the Registrar in Bankruptcy for the Bankruptcy District of the State of Victoria on 3 September 1991. It bears the date 26 July 1991 and purports to be executed under the common seal of the petitioning creditor. The attestation clause at the end of the petition is in common form thus:

The Common Seal of Edgewater Service Limited was hereunto affixed in accordance with its Articles of Association in the presence of:

Beside the attestation clause appears the impression of a seal which bears the words and numbers:

The Common Seal of Edgewater Service Limited A.C.N. 004 514 596.

Below the attestation clause appear the signatures "L. Bussey" and "R.L. Brooks" which are written adjacent to the words Director and Secretary respectively.
Article 68 of the Articles of Association of the petitioning creditor provides:

SEAL

The Common Seal of the Company shall be under the control of the Directors and shall not be affixed to any document except with the authority of the Directors and in the presence of two Directors at the least or in the presence of one Director and the Secretary of the Company.

I find the following facts:

1. The common seal affixed to the petition is the common seal of the petitioning creditor.

2. The common seal was affixed to the petition by Robert Lacy Brooks (Brooks).

3. At all material times Brooks has been the secretary of the petitioning creditor.

4. The signature "R.L. Brooks" on the petition is Brooks' signature.

5. At the time the petition was signed and sealed Leslie Bussey

(Bussey) was a director of the petitioning creditor.

6. The signature "L. Bussey" on the petition is Bussey's signature.

7. Brooks affixed the common seal and signed the petition before it was presented to Bussey for signature and at a time when Bussey was not present.

8. The common seal was not affixed to the petition in Bussey's presence.

9. Brooks was not present when Bussey signed the petition.

10. In February 1991 Brooks was instructed by the board of directors of the petitioning creditor to commence bankruptcy proceedings against the debtor.

11. In March 1991 instructions were given to Messrs Chrapot Bock and Co. as solicitors for the petitioning creditor to institute bankruptcy proceedings against the debtor.

12. On 5 June 1991 the debtor filed an application for instalment order in the Magistrates' Court at Melbourne seeking an order for the payment by instalments of $30 per week of a judgment debt obtained by the petitioning creditor against the debtor on 12 September 1990.

13. On 22 June 1991 Brooks reported to a meeting of the directors:

... that Mr Horesh had made application under the Debt Recovery Act to pay off his $8,500.00 levy plus interest at the rate of $30.00 per week which basically represents interest only no principal. The Board unanimously agreed that this was totally unacceptable and that the Manager instruct Mr Bock to continue with the bankruptcy action against Mr Horesh.

14. The minutes of a directors' meeting held on 16 September 1991 record the following item of general business: HORESH: The date for the bankruptcy action against Horesh was set for 14th October 1991.

15. At a directors' meeting on 13 May 1992 the following resolution was passed:

Resolved that doubts having been raised by the Debtor relating to the sealing of the Petition whereby the Company seeks to have a Sequestration Order made against Dan Horesh and that doubts having been raised by the Debtor as to the authority of the Directors to seal such a Petition, to avoid any doubt (as to the authority to affix the common seal and the attestation thereof), the sealing by the Company of the Petition filed in the Federal Court of Australia in No: VP808 of 1991 and the attestation of such sealing by Leslie Bussey, as Director and Robert Brooks as the Secretary of the Company is hereby ratified.

The Bankruptcy Act 1966 (the Act) contains no provision as to either the form of a petition or the manner of its execution but rule 12(2) of the Bankruptcy Rules (the rules) provides that a creditor's petition shall be in accordance with Form 5. The relevant form makes provision for the petition to be signed by the petitioner in the presence of a witness. The form contains a footnote to the attestation clause which says:

If the petitioner is a corporation, the petition may be under the seal of the corporation and the sealing need not be in the presence of a person other than a person required to witness the sealing of a document by the corporation.

I interpret the footnote to mean that if the petition is executed under seal then it is not necessary for the affixing of the seal to be witnessed except as required by the corporation's articles of association. There is nothing in the Act or rules, including Form 5, to suggest that a petition presented by a corporation must be under seal. Section 308(a) of the Act provides that for the purposes of the Act a corporation may act by any person duly authorised in that behalf by the corporation. Section 182(7) of the Corporations Law provides that a document requiring authentication by a company may be authenticated by the signature of an officer of the company and need not be authenticated under the common seal of the company.
Section 306(1) of the Act provides:

Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.

There was clearly an irregularity in the manner in which the common seal was affixed to the petition but there is no doubt that the directors had authorised Brooks to institute bankruptcy proceedings against the debtor in the name of the company and that it would have been sufficient for Brooks as secretary to have signed the petition in that capacity. I do not think that the resolution of the directors passed on 13 May 1992 cured the irregularity but nevertheless it confirms the view that the proceedings were instituted with the authority of the directors.
There is no evidence to suggest that substantial injustice has been caused by the irregularity in the execution at the petition and none is asserted by the debtor. In my opinion the presentation of the petition, and the proceedings which have followed, are not invalidated by reason of the irregularity.
2. The petitioning creditor has failed to comply with section 44.
Section 44 of the Act provides:

(1) A creditor's petition shall not be presented against a debtor unless -

(a) there is owing by the debtor to the petitioning creditor a debt that amounts to $1,500 or 2 or more debts that amount in the aggregate to $1,500, or, where 2 or more creditors join in the petition, there is owing by the debtor to the several petitioning creditors debts that amount in the aggregate to $1,500;

(b) that debt, or each of those debts, as the case may be -

(i) is a liquidated sum due at law or in equity or partly at law and partly in equity; and

(ii) is payable either immediately or at a certain future time; and

(c) the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition.

(2) Subject to subsection (3), a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him exceeds the value of his security.

(3) A secured creditor may present, or join in presenting, a creditor's petition as if he were an unsecured creditor if he includes in the petition a statement that he is willing to surrender his security for the benefit of creditors generally in the event of a sequestration order being made against the debtor.

(4) Where a petitioning creditor is a secured creditor, he shall set out in the petition particulars of his security.

(5) Where a secured creditor has presented, or joined in presenting, a creditor's petition as if he were an unsecured creditor, he shall, upon request in writing by the trustee within the prescribed time after the making of a sequestration order, surrender his security to the trustee for the benefit of the creditors generally.

(6) A secured creditor to whom subsection (5) applies who fails to surrender his security when requested to do so by the trustee in accordance with that subsection is guilty of contempt of court.

Section 5(1) of the Act defines "secured creditor" in relation to a debtor to mean:

a person holding a mortgage, charge or lien on property of the debtor as a security for a debt due to him from the debtor.

The petitioning creditor is a service company which manages a multistorey block of flats known as "Edgewater Towers" at 12 Marine Parade, St. Kilda under a service agreement with the proprietors of the various stratum estates in the property. Each of the proprietors holds shares in the company. The debtor is the registered proprietor in his own name of flat 9C and is also registered jointly with one Susan Rechter as a proprietor of flat 1C. Flat 1C is the land comprised in Certificate of Title Volume 8447 Folio 403 which title is subject to registered service agreement No. C 908667 and charge No. 908668. The judgment debt in respect of which the bankruptcy notice was issued arose out of a claim by the petitioning creditor to recover from the proprietors of flat 1C the amount of a levy said to have been raised pursuant to the service agreement. Charge No. C 908668 does not secure the payment of such a levy and no further reference need be made to it.
Section 98C of the Transfer of Land Act 1958 (Vic.) permits the registration of a service agreement entered into between the service company in a building subdivision and the proprietor of any stratum estate therein. The section provides:

98C. (1) The service company in a building subdivision which has entered into a service agreement with the proprietor of any stratum estate therein (whether before or after the commencement of the Transfer of Land (Stratum Estates) Act 1960) or the registered proprietor of the stratum estate to which the service agreement relates may lodge the service agreement in the Office of Titles for registration under this Act.

(2) A service agreement registered under this Act may be cancelled or varied by agreement of the service company and the registered proprietor for the time being of the stratum estate or of the person for the time being empowered by law to deal with that estate, and such cancellation or variation may be registered by the lodging of an instrument in an appropriate approved form, upon the application of the service company or of the said registered proprietor or person.

(3) The following provisions shall have effect in relation to every registered service agreement which is in force (including any such agreement as varied pursuant to the last preceding sub-section):

(a) The rule of law relating to perpetuities shall not apply and shall be deemed never to have applied to any provision of the service agreement; and

(b) All those conditions covenants and agreements set forth in the service agreement (whether positive or negative and whether touching and concerning land or not) which bind or benefit the proprietor of the stratum estate or the service company (as the case may be) shall be binding upon and shall enure for the benefit of -

(i) the person for the time being entitled to receive or who, if the stratum estate were let to a tenant at a rent, would be entitled to receive the rent thereof; or

(ii) the service company and its successors - (as the case requires) notwithstanding that any such person or successor was not a party to or named in the service agreement or was not in existence at the time of its execution.

The only "conditions, covenants and agreements set forth in the service agreement" which are binding upon the debtor and which enure for the benefit of the service company which in any way come close to the concept of a "mortgage charge or lien" are those contained in paragraph 4(b) of the service agreement which provides:

(b) If any sum or sums payable to the Service Company hereunder or any part thereof respectively shall be in arrear for fourteen days after the same shall have become due (whether any formal or legal demand therefor shall have been made or not) or if the Proprietor shall at any time fail or neglect to perform or observe any of the Proprietor's covenants or agreements herein contained then and in any such case the Service Company may exclude the Proprietor or other person entitled to the benefit thereof from the exercise or enjoyment hereunder of the rights hereby granted AND in addition thereto it shall be lawful for the Service Company but without prejudice to any other remedy or power available to it in respect of such default and notwithstanding any actual or constructive waiver of any previous cause or right of entry or re-entry or of any other right or claim on the part of the Service Company to enter upon the Proprietor's land or any part thereof in the name of the whole and thereafter to execute and do such works acts and things (if any) on the Proprietor's land as shall be necessary or proper for remedying any such default and to take and remain in the possession or receipt of the rents and profits thereof until thereby or otherwise all sums of money expended in or about such works acts or things as aforesaid together with all costs and expenses occasioned by the exercise of this power shall have been fully paid and satisfied PROVIDED THAT if the Proprietor shall at any time pay to the Service Company all amounts owing to the Service Company hereunder together with interest on such sums at the rate of Eight per centum per annum and shall remedy any continuing breach of the Proprietor's covenants and agreements to the satisfaction of the Directors of the Service Company or where it is incapable of remedy shall provide an adequate monetary compensation for such breach he shall thereafter be entitled to exercise and enjoy the rights.

In my opinion the rights conferred upon the petitioning creditor by paragraph 4(b) cannot be properly classed as a "mortgage charge or lien" and accordingly the petitioner is not a secured creditor in respect of the judgment debt.
There is evidence, which I accept, that the petitioning creditor has never regarded itself as being a secured creditor of the debtor but should it be held to the contrary, it has undertaken to give up its security for the benefit of the creditors generally in the event of a sequestration order being made against the debtor. Upon the hearing of the application counsel advised that if necessary an application would be made to amend the petition accordingly. The Court has power at any time to allow the amendment of any written process, proceeding or notice under the Act (s. 33(1)(b)) and in the circumstances of the case, if it had been that I had reached the conclusion that the petitioner is a secured creditor I would have allowed an appropriate amendment to the petition.
The debtor says that the claimed security cannot be surrendered and seeks to rely upon the decision in Re Bunn; ex parte Bunn (1989) 20 FCR 393.
Most of the argument advanced in this context referred to a provision in service agreement (clause 2(b)) whereby the petitioning creditor covenanted that it would not assign the benefit of any annuity given to it and charged on the proprietor's land but nothing in that clause relates to the rights of the petitioning creditor in relation to a levy raised under the service agreement.
In any event, I do not think that Re Bunn is authority for the proposition advanced by the debtor. That case turned upon very special circumstances where the "security" sought to be surrendered for the benefit of the creditors was one created pursuant to an order under the Family Law Act. At p 401 of the report Neaves J said:

In my opinion, the petitioner lacks the capacity to surrender her security for the benefit of the creditors generally. A number of considerations lead me to that conclusion. One of those considerations is the nature of the power exercised by the Family Court of Australia in making the order creating the security. That power is a power to alter the proprietary interests inter se of the parties to a marriage. Any benefit which an order made under that power may confer on one of the parties to the marriage is clearly intended as a benefit personal to the recipient. It would be quite foreign to the underlying object and purpose of the legislative provisions to treat the recipient of the benefit as having a capacity to surrender that benefit in favour of the creditors of the other party to the marriage. A further consideration is the position in which the trustee would find himself in the event of a sequestration order being made against the debtor. The debtor's interest in the real property would vest in the trustee subject to the charge created by the order of the Family Court of Australia and the power of sale which that order confers. Under the terms of the order, the charge on the debtor's interest in the property remains effective until such time as the amount of $212,654 and interest is paid to the petitioner or until the debtor's interest in the property is sold in the manner therein provided. No action on the part of the petitioner could alter that position. The position could only be altered by an order of the Family Court of Australia made in exercise of the power to vary its earlier order conferred upon it by s 79A of the Family Law Act.

There is nothing in the foregoing which is in any way analogous to the present facts and, if it were necessary to decide the issue, I would find that the petitioning creditor does have the capacity to surrender for the benefit of the creditors generally its rights under the service agreement in so far as they relate to the debtor's liability to pay a levy under the service agreement.
3. The Court should refuse to permit the petitioner to rely upon the judgment.
That the Court has power, upon the hearing of a bankruptcy petition, to "go behind" a judgment debt which is the foundation of the act of bankruptcy relied upon in the petition, is well established: The leading Australian cases on this question are Corney v. Brien (1951) 84 CLR 343 and Wren v. Mahony (1971-1972) 126 CLR 212. The power is discretionary (Ross-Ireland v. Tour Finance Ltd (1965) 39 ALJR 49). In Wren v. Mahony, Barwick C.J. said at pp 224-5:

Lord Esher in emphasizing that the Bankruptcy Court did not go behind a judgment as a matter of course but only if appropriate circumstances were shown to exist, said in Re Flatau; Ex parte Scotch Whisky Distillers Ltd. (1888) 22 QBD at pp 85-86: "There is no statute which imposes any such obligation on the Court of Bankruptcy. Section 7 (of which s. 52(1) is a counterpart) does no more than give a discretion." His Lordship, in using this expression, was not intending, in my opinion, to weaken the emphasis he had always placed on the need for the Court of Bankruptcy to be satisfied of the existence of the petitioning creditor's debt. Rather, if one reads all his expressions in the several cases I have cited, he was pointing out that the Bankruptcy Court could in general accept a judgment debt as sufficient proof of that debt particularly where it resulted from a fully heard contest between parties but that it always had the power to go behind the judgment and if the case was a proper one, should do so. The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration. It is not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor's debt is a mere matter of its own discretion. Nothing in Corney v. Brien (1951) 84 CLR 343 lends support for such a view. Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor's debt. The Court's discretion in my opinion is a discretion to accept the judgment as satisfactory proof of that debt. That 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 petitioner.

It is clear that the grounds upon which the Court should exercise its discretion are not limited to cases where there are substantiated suggestions of fraud, collusion or miscarriage of justice.
The service agreement under which the petitioning creditor manages Edgewater Towers (the property) contains (in clause 3) a covenant on the part of the proprietor (which binds the debtor) to pay a quarterly service charge and any additional service charge specified in the Third Schedule to the agreement.
Paragraph 1 of the Third Schedule fixes a quarterly service fee and specifies the purposes for which the same may be applied. Paragraph 2 of the Third Schedule provides:

ADDITIONAL SERVICE CHARGE referred to in Clause 3 of the Service Agreement;

Subject to the Auditor or Auditors certifying that the amount expended by the Service Company in any one year ending the 30th day of June upon any purpose or purposes upon which the Service Charge may (pursuant to paragraph 1(a) of this Schedule) be expended, exceeds the total Service Charges received during such year by the Service Company from the proprietors (other than the Service Company) of the allotments comprised in the subdivision the Directors of the Service Company may by resolution determine that there shall be levied equally upon each of such proprietors an Additional Service Charge of such amount as shall be specified in such resolution Provided that the amount so specified shall not exceed such amount as when paid by all such proprietors will equal the amount certified by such Auditor or Auditors as aforesaid. Such Additional Service Charge shall be paid in the manner and at the time or times determined or specified by the Directors of the Service Company in the resolution whereby such Directors determined to levy such Additional Service Charge.

Early in 1988, the City of St. Kilda issued a notice under the Building Control Act 1981 requiring the carrying out of certain fire protection works to the property. The petitioning creditor acting on behalf of the owners appealed from that decision to the Building Referees Board, and on 10 November 1988 the Building Referees Board issued a determination. The petitioning creditor then engaged a firm of consulting engineers to investigate the likely cost of the required works but they appeared reluctant to specify a precise costing. The various reports of the engineers and the determination gave rise to considerable discussion at directors' meetings until at a meeting on 7 August 1989 it was resolved to raise a levy of $800,000. Immediately after the close of the meeting, Brooks reminded the chairman that a gantry system was required for the roof at a cost in the vicinity of $125,000. The chairman then made contact by telephone with the other directors and it was resolved that a levy be raised in the sum of $8,500 per unit. The minutes of the directors' meeting held on 7 August 1989 contain the following addendum which appears after the recording of the closing of the meeting:

GANTRY. In addition to the Minutes for the meeting. Due to the requirements of a gantry system which will aid Edgewater Towers in repairs, painting, window cleaning etc. the Manager contacted the Chairman to make contact with the other Directors for approval to increase the levy to $8,500 so a gantry system can be installed.

CARRIED

On 26 August 1989 a meeting of directors resolved that the minutes of 7 August 1989 be accepted as a true record and that the levy of $8,500 be payable in 30 days. Shortly thereafter, notice of the levy was forwarded to the proprietors of the units within the property. The amount specified in each notice was $8,500 regardless of the size of the unit. Shortly after despatch of the notices the debtor, who is qualified as both a solicitor and an accountant and practises as such, telephoned Brooks on a number of occasions to discuss the levy. On at least one occasion, in a long conversation, he indicated that he had before him the articles of the petitioning creditor and the service agreement and referred to numerous clauses and paragraphs in both documents. He said it was patently unfair to be levying an amount on single bedroom flats equal to the levy on two bedroom flats, and in particular, an equal levy on one lot which was commonly described as the restaurant. Brooks pointed out to the debtor that he was powerless to vary the amount of the levy as the service agreement required equality. At the annual general meeting of members of the petitioning creditor held on 16 October 1989, the fire protection works and the levy were again canvassed. The debtor was present and involved himself in the discussion relating to the non-payment of the levy by many of the members and moved a motion that everyone should pay the levy immediately or be charged interest, which motion was duly carried.
On 24 January 1990 Messrs Chrapot Bock and Co. acting as solicitors for the petitioning creditor wrote to the debtor demanding payment of the levy and interest. The debtor replied on 26 January 1990 asserting that no valid levy had been raised and after some further correspondence on 28 February 1990 the debtor wrote:

28 February 1990 Messrs Chrapot Bock and Co.,

Solicitors,

Suite 13,

2nd Floor,

82.Acland Street,

ST. KILDA VIC 3182

WITHOUT PREJUDICE

Dear Sir,

Re: Edgewater Services Ltd. Unit 9C, 12 Marine Parade, St. Kilda. Thank you for your letter of the 23rd February 1990. I have considered carefully the Minutes of the two purported Meetings of the Board of Directors but I am of the view that both Minutes as recorded do not constitute a valid Resolution to raise the sum of $850,000 from shareholders.

However, notwithstanding such possible invalidity of the Resolution, and on a "Without Prejudice" basis, I am prepared to pay such levy provided the allocation of the total levy to each flat is amended to conform with the Memorandum and Articles of Association of the Company.

This being the case the sum of $850,000 should be allocated to the individual flats on the basis of there being 103 flats. Pending the formal Amendment of the levy, I do not consider myself bound to make any payment.

Should you choose to institute legal proceedings, the matter will be defended and the action transferred to the Supreme Court for a proper Resolution of the matter. Yours faithfully, (signed) DAN HORESH

Although this letter is expressed to be without prejudice it was put in evidence in these proceedings by the debtor who must be regarded as having waived any privilege that may otherwise have attached to it.
On 24 April 1990 the petitioning creditor commenced proceedings against the debtor and the other joint owner of flat 1C claiming $8,500 and interest. The particulars of claim assert that the complainant (the petitioning creditor) raised a levy of $8,500 per flat pursuant to the service agreement on or about 26 August 1989 and required the same to be paid within 30 days but the defendant (the debtor) had refused or neglected to pay the same. Interest in accordance with the service agreement at 8% was claimed. At the same time the petitioner commenced similar proceedings against the debtor in respect of flat 9C.
The debtor filed notice of defence to both proceedings on 28 May 1990. Relevantly, his particulars of defence (which were the same in both cases) denied that any valid resolution to raise the levy was ever made.
On 25 June 1990 the debtor sought further and better particulars of the claim and in particular in respect of paragraph 4 (the paragraph alleging the raising of the levy) he sought:

(a) Particulars of the purpose for which the Levy was purported to be raised,

(b) Particulars of the total amount required for the purpose,

(c) Particulars of the number of flats in the building known as "Edgewater Towers" and the unit entitlement and unit liability of each flat or class of flats.

(d) Particulars of the method by which the total amount of the purported levy was allocated against each flat and against the Defendant.

(e) Particulars of the Resolution made by a Meeting of the Directors or Members resolving to raise a levy.

(f) Evidence that the Resolution purporting to raise the levy has been confirmed by a subsequent meeting.

(g) Particulars of the Act, By-Law, Rule or other sub-ordinate legislation by which the Complainant purports to require payment within a prescribed time.

(h) Particulars in respect to the Complainant entitlement to charge 8% Interest on outstanding money.

The petitioner filed particulars in response to the request on 4 July 1990 which answered the matters raised in relation to paragraph 4 as follows:

(a) To comply with fire orders;

(b) not yet determined;

(c) this is not a proper request;

(d) this is not a proper request. See the resolution herewith;

(e) Resolution herewith;

(f) see (e);

(g) this is not a proper request;

(h) as per Agreement mentioned herewith.

(The particulars filed had annexed to them a copy of the minutes of the directors' meeting of 26 August 1989.)

On 12 July 1990 the debtor wrote 2 letters to the petitioner's solicitors. In one he complained of what he felt was the inadequacy of the particulars supplied and threatened to seek an order from the Court. In the other letter he wrote:

12 July 1990 Messrs Chrapot Bock and Co.,

Solicitors,

Suite 13, Second Floor,

82 Acland Street,

ST. KILDA VIC 3182

Dear Sirs,

Re: HORESH ats of EDGEWATER SERVICES LTD. MAGISTRATES' COURT PROCEEDINGS CASE NO: 141032/90

I refer to the above proceedings and advise that I wish to put the following matters on record in an effort to resolve this matter without causing the parties to incur further legal costs. This being so, the Complainant is now put on notice that my position as the Defendant to these proceedings are as set out below:

1. Generally I accept and recognise my obligation as an owner of a flat at Edgewater to pay my share towards the costs of upgrading the fire facilities at the building.

2. In raising the levy I take the view that the Board of Directors did not comply with the provisions of the Memorandum and Articles of Association of the Company.

3. Notwithstanding that the Levy was not properly raised, I was and am still prepared to make payment if the following information is provided:

(1) The total amount of the levy decided upon by the Board of Directors at their meetings on the 7th and 26th of August 1989.

(11) The method used to allocate the total levy raised to the individual flats -.

4. I note with concern that my letter to you of the 28th February 1990 was totally ignored and that the Company saw fit to unnecessarily incur legal expenses. I have enclosed a copy of my letter of the 28th of February 1990.

5. As a matter of fact I consider the current proceedings to be an abuse of the process of the law as it was not necessary, taking into account my undertaking to pay the levy if the information requested is provided. Under no circumstances it can be claimed that the particulars sought are not reasonable thus entitling the Board of Directors to ignore. This being so, I again repeat my willingness to pay the levy in question if the Company provides me with the particulars sought.

Finally, I advise that if you fail to act in the manner indicated above and the matter proceeds to a full court hearing I intend to use this letter on any question of costs, so that even if your client wins the case, I will seek an Order for all legal costs to be paid by the Complainant.

Yours faithfully, (signed) DAN HORESH

On 13 July 1990 the debtor filed a further request for particulars of the claim and same was answered by the petitioner's solicitors on 25 July 1990. After some further correspondence, the debtor obtained an order for particulars on 4 September 1990 and on 10 September 1990 further particulars were filed in respect of both proceedings. At a prehearing conference before a Magistrate on 12 September 1990, by agreement with the petitioning creditor, the debtor consented to judgment being entered against himself in both actions for an amount equivalent to the amount claimed and interest to that date with no order for costs. Execution was stayed for one month. No order was made in respect of the co-defendant in the proceeding in relation to flat 1C. The amount of the judgment relating to flat 9C was paid on 19 November 1990.
The bankruptcy notice was served on 29 May 1991 and on 5 June 1991 the debtor filed an application for an instalment order in respect of the judgment, but on 12 June 1991 (the day on which the act of bankruptcy occurred) he withdrew his application. The petition was served on 3 October 1991 and was returnable on 14 October 1991 when it was adjourned. On 23 October 1991 the debtor commenced proceedings in the Magistrates' Court seeking to set aside the judgment. The relevant paragraphs of the particulars of claim state:

4. The plaintiff is one of two proprietors of Unit 1c, Edgewater Towers holding a 2/3 share in common with Susan Rechter who holds a 1/3 share as registered on Certificate of Title Volume 8447 Folio 803; the co-proprietors are jointly liable for debts related to the unit and a claim cannot be made against one only if joint debtors. ...

6. The plaintiff seeks an Order that the consent judgment be set aside on the grounds that the judgment was made by mistake as to the parties against whom it could be made.

The application was heard on 11 March 1992 and dismissed with costs.
If he had chosen to do so, the debtor may well have raised as a defence in the Magistrates' Court proceedings, the fact that the raising of the levy by the petitioning creditor had not been carried out in accordance with paragraph 2 of the Third Schedule to the service agreement. I am satisfied from Brooks' evidence that in the period prior to the commencement of the proceedings that the debtor had available to him a copy of the service agreement and I do not accept that he was unable to comprehend its contents. The debtor is a practising solicitor. He represented himself throughout the Magistrates' Court proceedings and demonstrated his familiarity with the procedures of that Court. He maintained throughout that the levy had not been validly raised but nevertheless in correspondence with the solicitors acting for the petitioning creditor in those proceedings and by his conduct at the general meeting on 16 October 1989 he acknowledged his liability to pay the levy, and in fact paid same in relation to flat 9C after consenting to judgment. He now says that he did not understand that he would have had a good defence to the claim by reason of the provisions of paragraph 2 of the Third Schedule. His evidence at trial as to whether he appreciated at the time that he had such a defence is quite unsatisfactory in that it contains numerous contradictions. On balance I find that he was fully aware of the full effect of the terms of the service agreement at the time he consented to judgment and that he chose not to pursue that issue. Indeed, the defence as pleaded clearly encompassed the whole question of whether the levy had been validly raised.
In my opinion the debtor waived any defence he may have had to the claim when he consented to judgment. He was a person particularly well placed to form a judgment as to his chances of succeeding in his defence and he exercised that judgment in a full awareness of all of the facts of the case. When he says that he did not at the time appreciate the effect of paragraph 2 of the Third Schedule, I do not believe him.
The proceedings in the Magistrates' Court were compromised on the basis that there be judgment for the amount claimed plus interest to the date of judgment but no order for costs. Clearly, by agreeing to forego costs, the petitioning creditor agreed to accept something less than it would have obtained had it proceeded to trial and been successful. Similarly, the debtor must have regarded the agreement as to costs as being of some advantage to himself. Given the nature of the proceedings, the circumstances in which the compromise was reached and the debtor's undoubted capacity as a practising solicitor to know and understand the effect of what he was agreeing to, the compromise of the proceedings put an end to any defence that may then have been open to the debtor to raise. It cannot therefore be now said that there was not in truth and reality a debt due to the petitioning creditor. If one did not previously exist, it came into being by virtue of the agreement to compromise the proceedings. In these circumstances, this is not a case for this Court to exercise its discretion to "go behind" the judgment upon which the petition is based.
4. The judgment debtor is and has always been able to pay his debts and is not insolvent.
Section 52(2) of the Act provides, inter alia, that if the Court is satisfied by the debtor that he is able to pay his debts, it may dismiss the petition. The onus is on the debtor to satisfy the Court as to his ability to pay his debts, but if he succeeds in so doing, the appropriate order is for the petition to be dismissed. The ability to pay debts is not the same thing as establishing that upon a balancing of assets against liabilities there would be an excess of assets. Rather it is necessary to establish that the debtor has a present capacity to pay all his debts (not merely the debt due to the petitioning creditor) within a reasonable period.
In support of his assertion that he is able to pay his debts the debtor has filed an affidavit of one Philip Murray, a registered valuer who has valued a total of 18 properties (all in the nature of flats or home units) in respect of which the debtor is either the sole proprietor or a joint proprietor.
Of those properties, 11 are held in the debtor's name as sole proprietor and their total market value as at the date of valuation (April 1992) was $1,075,000. The total amount owing on mortgages secured on the properties was $797,788 leaving a net asset value of $277,212. An analysis of the amounts payable for mortgage interest and the annual rental value of each property shows that there is an annual revenue deficiency of $29,473. This does not take into account other costs of ownership such as rates and taxes, insurance, body corporate and management fees, agent's commission, repairs and maintenance and provision for vacancies.
A full analysis of the 7 properties jointly owned has not been carried out and it is only possible to say that assuming the debtor's various undivided interests in the properties entitle him to an equivalent share in their net value after allowing for mortgage debts, he has a total net equity valued at $231,136. It is reasonable to assume that these properties are "negatively geared" as claimed by the debtor but the amount of the net annual deficiency has not been calculated. In evidence the debtor estimated that the total shortfall on his various property interests was about $35,000 per annum but given the demonstrated deficiency in respect of the 11 solely owned properties it is likely that it would be somewhat more than the amount admitted to. Jointly owned properties are of course less readily available assets for the purpose of funding the payment of debts as the co-operation of the joint owners is always necessary.
Apart from his interests in flats, the debtor claims to have the following assets:

1. 1987 Honda Prelude - Motor Vehicle $22,000

2. Coins Collection of Australian and overseas Numismatic items located at a safe deposit box at Commonwealth Bank, Melbourne (Safe No. 4401) Current value 20,000

3. Various office equipment and

furniture located at my practice 10,000

4. WORK IN PROGRESS AND UNBILLED

(a) Legal 43,000

(b) Accounting and Taxation 15,000

5. GOODWILL OF PRACTICE

(a) Accounting Practice 50,000

(b) Legal Practice 40,000

6. CASH AT HAND

(a) Deposit with the Federal Court of Australia being the amount of the Judgment Debt 10,210

(b) Cash at Bank 10,927 $221,137

And he admits to the following liabilities:

I. UNSECURED LOANS

(a) Various Bankcards and Mastercards $54,000

(b) Ed Credit Co-operative 1,327

(c) VTA Credit Co-operative 6,443

(d) Custom Credit 17,000 II. SUNDRY CREDITORS

(a) My share in settlement of dispute over Body Corporate fees at 19 Mitford Street, St. Kilda (Body Corporate fees and levies) 6,000

(b) RACV Finance -

loan for car: balance outstanding 10,864 $95,634

Accepting all of these figures at their face value it would seem that the debtor claims his present net asset position to be:

Equity in flats solely owned $277,212 Equity in flats jointly owned 231,136 Other assets 221,137 729,485 Liabilities 95,634 Net assets $633,851

The debtor's real problem is that his credibility is such that I have grave reservations in accepting his unsubstantiated assertions about his assets and liabilities. In a number of respects his evidence and his conduct have proved to be quite unsatisfactory. My opinion of him, after observing him in the witness box, is that he would evade answering difficult questions unless pressed and that on occasions he would say what he thought at the time to be most helpful to his case as he saw it, only to change his evidence later when confronted with facts that could not be explained away.
One example, which as it happens is of considerable importance, and which reflects adversely on the debtor's credit, has to do with a conversation he admitted he had with the petitioning creditor's then solicitor Mr Bock in December 1990.
In his affidavit sworn 26 November 1991 Bock said:

On or about the 17th or 19th December, 1990, I had a telephone conversation with the Judgment Debtor during which I suggested that he pay the debt, the subject of these proceedings. He advised me then that he would not pay the debt. I informed him that I would doubtlessly receive instructions to issue a Warrant of Seizure and Sale. He advised me that he had no problem with that as he had no assets.

In evidence before the Court Bock was referred to this paragraph in cross-examination, and the following exchange took place between counsel for the debtor and the witness:

Now, in regard to the statement that you allege there on behalf of the judgment debtor did he advise you that he had no problem with those as he had no assets. Do you have a clear memory of that statement?---Yes.

Did you make a diary note of that statement?---No. So you are relying entirely on your memory?---That's right. Right. On - - -?---His words were "That's all right, I have nothing anyway."

Did you - - -?---I'm sorry, "I have nothing the sheriff can get, anyway.

Later, the debtor was asked about this aspect of Bock's evidence by his own counsel, and the following exchange occurred:

MR BEST: Now, you heard Mr Bock's evidence that you made a statement to him to the effect that you had no assets - or something along those lines. What do you say as to that?---I think Mr Bock - it was - I told this to his - I didn't say I've got no assets probably I've got nothing - but I think Mr Bock should have realised the circumstances. HIS HONOUR: Well, what did you say, is the question?---Probably I said, "I probably have nothing." But that was as a joke. Did you say, "I've got nothing the sheriff can get at"?---No, I didn't say that. I just said, "I've got nothing." But I really was joking and he should have - - -

All right. Well, let us not worry about that. You were asked what you said?---Yes, I usually joke a lot and that is one occasion where I joked, but I didn't say, "I have no assets."

Later when cross-examined by counsel for the petitioning creditor the matter was again referred to and the following exchange took place:

MR IRLICHT: ...after this conversation, the conversation about assets. Now, what - now, I am putting to you that the relationship between you and Mr Bock was such that it is not likely that you would have joked?---No, no, at the time - yes, I always joke. In fact I even joked with Mr Broberg when he - so it is not - - -

Well, all right. So you say - now, Mr Bock, when he was in the witness-box and corrected his affidavit as it were and said that what he said - what you said was that there are no assets on which a sheriff could levy - - - ?---I didn't say that, no. I see, you swear positively that you never said - - - ?---Yes. I said, "I probably have nothing". I said, "I have nothing." You said you have nothing. Now, I put to you that the truth of the situation is there are no assets on which a sheriff can levy?---That's not true.

That is not, all right?---The sheriff can take the flat and sell it.

Now, just - - -

HIS HONOUR: The question is: what were the words you used to Mr Bock. Mr Bock - - - ?---I said, "I have nothing." Well, just a moment. Mr Bock said this morning he gave a general answer and then he said something like: there's nothing the sheriff can touch?---I didn't say that. And then that has been put to you and you said, "No," and I think I put to you that you did not mention the sheriff or something like that and you agreed that he did not mention the sheriff. Is that - - - ?---He did mention and I didn't say that, no.

Following the conclusion of the cross-examination, the same matter was raised with the debtor from the bench. The transcript records the following exchange:

HIS HONOUR: Just one thing. You were asked a couple of times about this conversation with Mr Bock. You said it was a jest or a joke. He says you had said something about "There's nothing the sheriff could find," or something like that?---I didn't say that, no.

And it was specifically put to you that - whether you mentioned the sheriff, and you said, no, you did not mention the sheriff?---No, I just - I usually joke all the time and that's - I just said that I have nothing and that's - - - Well, yes, all right, I know you have said that?---The sheriff was not mentioned.

Well, why in your affidavit of 13 January 1992 at paragraph 14, do you say in the second sentence:

From my recollection I remember saying to Jack Bock in a jest, that the sheriff may find that I have nothing. ?---Well, I don't know. I mean, I can't recall whether I used the word "sheriff" or not, all right. Well, I mean, you could recall it there. I mean, you do not doubt - there is your affidavit?---Yes, I do - I agree with you. It does mention the sheriff and the - - -?---I may have said it. I have no recollection that I used the sheriff, but if it said - - -

You see, as I understood your denial that the reference to the sheriff was made in some way was a reflection upon the credibility of Mr Bock, that it would seem that no such reflection is justified. That it appears that when he talked - when he said that his recollection was that reference was made to the sheriff, that that appears to be consistent with what you were swearing on your oath back in January?--- Well, it's very - I mean, when I was here I mean, I didn't pay much attention to the fact that he's mentioned it here. Well, I'm trying to explain why it said - - -

I mean, if you are saying you have not been paying attention to the questions and answers, it does not help very much?---No, no, the way I used it there because he used the word "sheriff" I repeat it there. That's the only explanation. But I really - to be truthful, I have no recollection of mentioning the sheriff. As a joke I said, "I have nothing." That's all, I mean, the other reason I used it because he used it.

A second instance of the same type of equivocation on the debtor's part arose out of his evidence concerning whether or not at the time of the Magistrates' Court proceedings he was aware that he had a defence on the basis that the petitioning creditor did not have any power to raise the levy. I do not propose to repeat the evidence in detail, rather, I comment only that the debtor demonstrated considerable ambivalence on this matter.
Another aspect of the debtor's case which does him no credit is his failure to give adequate discovery of documents relating to the issue of solvency. The transcript shows that on 27 November 1991 the petitioning creditor sought an order for discovery. The debtor, who appeared in person said he was "happy for discovery but not on the question of solvency". He then went on to say:

I mean I do not have to really to show them all my financial affairs.

The judge (Heerey J) then intervened and the following exchange occurred:

HIS HONOUR: I am not going to rule in advance on the question of discovery. You will presume that Mr Irlicht will serve a notice and you will make discovery and if he is not satisfied well, he will have to come back to the court and seek an order for further discovery so I cannot decide that advance and I will not make any order for discovery. MR HORESH: Or to limit the discovery to just - - - HIS HONOUR: No, I will not do that. I will allow the rules to operate.

As it happened no documents were discovered concerning the debtor's claimed assets relating to his practice as a solicitor and public accountant. Although he asserts that he has work in progress and unbilled of a total value of $58,000, that the goodwill of his practice is worth a total of $90,000 and that he has cash at bank of $10,927 no discovery was given even of bank statements from which it may have been possible to establish in a general way whether the assertions about his practice were credible. When taxed about this, he said that he is entitled to his privacy. Nor did he discover any income tax returns and this for the reason, as he said, that he had not filed returns for the last 3 financial years. When pressed as to how it is that a registered tax agent had not filed returns for such a period he said that the taxation department had not sent him a reminder. I find such an explanation quite unbelievable.
Several other aspects of the debtor's evidence about his assets and liabilities should be commented on. He has disclosed that his office furniture and equipment is subject to a chattel mortgage by way of additional security in relation to the mortgage on one of his flats. He has provided no details at all (nor discovered any documents) as to the claimed coin collection which he has valued at $20,000, while the liability shown as $6,000 (being his share in the settlement of a dispute over body corporate fees for a property at St. Kilda) is in fact a liability of $14,850 for which the debtor and others are jointly liable.
The debtor did not disclose as a liability, but admitted to an unsatisfied warrant of execution against him for $1,070.60 which was issued in January 1992.
Whilst I am of the view that the uncorroborated evidence of the debtor cannot be relied upon, and further, although I am satisfied that the debtor has deliberately concealed from the petitioning creditor and the Court the true state of his financial affairs, nevertheless having regard to the substantial net equity he has in various flats, particularly in the flats he holds in his own name, (one of which is not subject to any mortgage) it is more probable than not that he is solvent and that he is able to pay his debts. For his own reasons he apparently chooses not to pay the judgment debt founding the petition. In these circumstances the petition will be dismissed.
5. Costs.
The debtor has succeeded in avoiding having a sequestration order made against him. He has however failed on three of the four issues which were contested at trial and on the issue upon which he succeeded I have found his evidence unreliable and evasive. Had he not failed to make a proper disclosure of the details of his income, assets and liabilities, it is possible, indeed likely, that the petition would not have gone to trial.
I am satisfied that the petitioning creditor has acted reasonably throughout. I accept Bock's evidence as to the conversation between himself and the debtor in December 1990. This was a conversation between 2 solicitors who one would expect in ordinary circumstances would be entitled to rely upon what a professional colleague has said and to act accordingly. There was no reasonable way whereby the petitioning creditor could have ascertained the true financial standing of the debtor without going to trial and even then the debtor succeeded in substantially concealing many relevant facts.
On 7 June 1991 (2 days after applying to the Magistrates' Court for an order that the judgment be paid at the rate of $30 per week) the debtor wrote to the petitioning creditor's solicitors, in part, as follows:

7th June, 1991 Messrs. Irlicht and Broberg

Solicitors

414 Lonsdale Street

MELBOURNE. 3000

TRANSMISSION BY FAX: 670 9553 Dear Sirs,

re: DAN HORESH - BANKRUPTCY Case No. 1256

Judgment Creditor: Edgewater Service Ltd. I refer to the above Bankruptcy Notice served on me on the 29th May 1991 while on a visit to the Office of Chrapot Bock and Co., Solicitors.

I have now considered all the circumstances surrounding the issue and service of this Bankruptcy Notice and have formed the opinion that this Bankruptcy Notice constitutes an abuse of the process of the Law and is actuated by improper motive and is designed to achieve aims not actually connected with the alleged debt owing to the Judgment Creditor. I shall outline later on in this letter the reasons for making the above conclusions.

However, at the outset I wish to put you on notice that if you persist with these proceedings you are not likely to be able to satisfy the requirements of Section 52 of the Bankruptcy Act 1966.

In terms of Section 52(2)(a) I advise that I am in a position to pay my debts and on any view you will not be able to claim that I am not able to pay my debts. In this regard I advise as follows:

1. My net assets that are capable of being realised on a short notice exceed 70 or 80 times the amount claimed in your Notice.

Accordingly, if a Bankruptcy petition is presented, I intend to produce evidence to show that I have realisable properties exceeding the sum of $10,200.06.

2. In regard to the question of "cash flow", I now advise that I have now available a line of credit of $20,000 that I can use immediately to pay the amount of the debt. I enclose herewith photocopies of two credit cards each having an available and unused credit facility of $10,000. These cards are as set out below. - CPA Gold Mastercard (Commonwealth Bank) Account No. 5353-1603-7100-0955

- ANZ Bank VISA Card Account No. 4564-6350-2040-1449 The credit facility represented by these cards exceeds the amount of the Judgment debt, and I intend to keep this credit facility unused; to meet any necessary requirement to prove to the Court that I am able to pay my debts. In addition, I put you on notice that the minute a Petition for Bankruptcy is served on me I will immediately draw the money on these cards and make payment to the Court as evidence that I am able to pay my debt.

In these circumstances I am of the view that you will not be able to obtain a Sequestration Order against me on the presentation of a Petition for Bankruptcy. ...

Nothing in this letter identifies specific assets and liabilities and indeed indicates that the only way the debtor could raise money to pay the judgment debt was by borrowing it on 2 credit cards. In the absence of relevant details and in view of the fact that the letter was written whilst the debtor's application for an instalment order was pending, there was in my opinion no obligation upon the petitioning creditor to investigate the debtor's affairs before proceeding with the petition.
In addition to the four issues which were litigated the debtor had made a claim for damages against the judgment creditor and others which he did not abandon until the commencement of the trial. Even as late as 18 May 1992 the affidavit material filed by the debtor indicated a clear intention to proceed with that aspect of his claim and the petitioning creditor was entitled to come to Court prepared to meet it.
The power of the Court to order the payment of costs in proceedings under the Act is conferred by section 32 and is discretionary. In my opinion the debtor should bear the major burden of the costs having regard to the fact that he was unsuccessful on 3 of the 4 issues litigated and withdrew a substantial claim at the last minute. For the reasons set out above I do not think it appropriate to order the petitioner to pay costs in respect of the issue on which the debtor succeeded. In the circumstances I consider that substantial justice will be achieved if the debtor is required to pay 80% of the petitioning creditor's costs of the proceedings including reserved costs and costs thrown away by the abandonment of the claim for damages.
6. The money paid into Court.
The debtor paid into Court on 30 March 1992 the sum of $10,200.06 pursuant to leave granted by Heerey J on 27 November 1991. In a hearing before me on 30 March 1992 counsel for the debtor said:

And I just wish to put it on the record, that the judgment debtor today paid in the amount of debt to the court of $10,200.06 and I hold in my hand an Australian government receipt. That is paid in under the grounds in Sarina's case, that it is paid in to show that the debtor is able to pay the debt but it is not intended that it be available to the judgment creditor for its own use. If your Honour pleases.

Whether or not the debtor was able to pay the debt is of course, quite irrelevant. The debtor had by his objection taken upon himself the burden of proving that he could pay his debts. For my own part, I am at a loss to understand the advantage that is perceived to have been achieved by such a payment. It is obvious from the debtor's evidence that the money in Court had been borrowed at interest on one or more of his credit cards. The payment in proved nothing.
Whether or not I have the authority to order that the money in court be paid out to the petitioning creditor towards satisfaction of the judgment debt upon which the petition was founded is an issue which I have not addressed. There are factual differences between this case and Sarina v. Shire of Wollondilly (1980) 48 FLR 372 which counsel for the petitioning creditor relies upon in support of his application that the money in Court be paid out to the petitioning creditor. However, in the absence of authority, and having regard to the expressed condition upon which the payment in was made I am not prepared to break new ground in this direction.
However, the money is in Court, and it is and remains at the Court's disposal. In addition to the judgment debt, there is now in force a judgment of the Court against the debtor for the costs of these proceedings and it seems to me to be quite appropriate that the money remain in Court to abide the taxation of those costs and the payment of the judgment and costs. The money was paid in to establish that the debtor had the ability to pay the judgment and in my opinion it would be quite unreasonable for it to be returned to the debtor until he has met his obligations with respect to the judgment and costs. Accordingly, I propose to order that the money paid into Court be paid out to the debtor upon the Registrar in Bankruptcy being satisfied that the judgment debt and costs have been paid, with liberty to apply.

[1992] FCA 466

01 JULY 1992