Re Jonson, Keith Michael; Prentice, Maxwell William as the Trustee of the Estate of Keith Michael Jonson, a bankrupt, Official Receiver for the Bankruptcy District of the State of New South Wales v Jonson,
[1997] FCA 868
•1 September 1997
FEDERAL COURT OF AUSTRALIA
BANKRUPTCY - Official Receiver - power to obtain information and evidence - notices to third parties to give evidence and produce books and documents - whether notices should be set aside - whether notices issued for a proper purpose
Bankruptcy Act 1996: s 77C
Bond v Tuohy (1995) 56 FCR 92
Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301
Karounos v Official Trustee (1988) 19 FCR 330
Pioneer Concrete (Vic) Pty Ltd v Trade Practices Commission (1982) 152 CLR 460
Re Bond; Ex parte Ramsey (1994) 54 FCR 394
Re Excel Finance Corporation Ltd; Worthley v England (1994) 52 FCR 69
Re Hugh J Roberts Pty Ltd (in Liq) [1970] 2 NSWR 582
Re J T C Mckee, Ex parte: Laroar Holdings Pty Ltd, Spender J, unreported, 4 December 1996
Terry v Prentice, Lindgren J, unreported, 2 December 1994
RE: KEITH MICHAEL JONSON; EX PARTE: MAXWELL WILLIAM PRENTICE As Trustee of the estate of Keith Michael Jonson, a bankrupt, OFFICIAL RECEIVER FOR THE BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES v VERA JONSON and ASHBURY ST LEDGER PTY LIMITED
NB 2908 of 1994
LOCKHART J
SYDNEY
1 SEPTEMBER 1997
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NB 2908 of 1994 ) GENERAL DIVISION )
RE:
EX PARTE:
KEITH MICHAEL JONSON
A BankruptMAXWELL WILLIAM PRENTICE As Trustee of the estate of Keith Michael Jonson, a bankrupt
First ApplicantOFFICIAL RECEIVER FOR THE BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
Second ApplicantAND: VERA JONSON
First RespondentASHBURY ST LEDGER PTY LIMITED
Second Respondent
JUDGE: LOCKHART J PLACE: SYDNEY DATED: 1 SEPTEMBER 1997
MINUTES OF ORDER
THE COURT ORDERS THAT:
The notice of motion dated 4 August 1997 of Mrs Jonson and Mrs MacDonald is dismissed with costs.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NB 2908 of 1994 ) GENERAL DIVISION )
RE: KEITH MICHAEL JONSON
A Bankrupt
EX PARTE: MAXWELL WILLIAM PRENTICE As Trustee of the estate of Keith Michael Jonson, a bankrupt
First ApplicantOFFICIAL RECEIVER FOR THE BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
Second ApplicantAND: VERA JONSON
First RespondentASHBURY ST LEDGER PTY LIMITED
Second Respondent
JUDGE: LOCKHART J PLACE: SYDNEY DATED: 1 SEPTEMBER 1997
REASONS FOR JUDGMENT
This is a motion to set aside two notices, each dated 18 July 1997, issued by the Official Receiver pursuant to s 77C(1) of the Bankruptcy Act 1966 (“the Act”). The Official Receiver issued the notices at the request of Maxwell William Prentice (“the trustee”) as trustee of the bankrupt estate of Keith Michael Jonson (“the bankrupt”). One notice is directed to Mrs Vera Jonson, the wife of the bankrupt, and the other is directed to Mrs Doreen MacDonald, the accountant for Ashbury St Ledger Pty Limited (“Ashbury”), a company to which reference shall be made later. The notices require Mrs Jonson and Mrs MacDonald:
“To provide information for the purpose of the performance of the functions of the trustee of the estate of the bankrupt and for that purpose to attend and give evidence and produce books and documents in your possession at the office of the Official Receiver at Insolvency and Trustee Service Australia, 10th Floor, 255 Elizabeth Street, Sydney at 10am on Wednesday, 6th August 1997 before Louise Anne Thomson who is an officer authorised in writing by me.
The books and documents you are required to produce are those in your possession in respect of the following matters for the period 1st July 1993 to date and the information and evidence you are required to give includes that in respect of those same matters:
1. The Bankrupt(s) place of residence, and terms of tenure or residence at that or those place(s) of residence;
2. The Bankrupt(s) involvement (as shareholder; director; creditor; debtor; employee; consultant or otherwise) in Jonson & Associates Pty Limited, Jonson and Associates and Jonson Business Consulting and any predecessor or successor corporation, partnership or association.
3. The Bankrupt’s interest in and disposal of that interest in the properties at: (i) to (xiii) [the notice describes thirteen properties in various parts of Sydney and of South Australia].
4. The Bankrupt’s alleged indebtedness to Howard Finance Limited and dealings in respect of that alleged indebtedness.
5. The Bankrupt’s alleged shareholding in Mac-4 Developments Pty Limited, Oakland Primary Producers Proprietary Limited and Brimbella Pty Limited and dealings in respect of those alleged shareholdings.”
The notices are signed by Mr Caddy as Official Receiver and each bears three notes. The first note says that, pursuant to s 77C(2) of the Act, the addressee may be required to give evidence under oath either orally or in writing. The second note states that failure by the addressee without reasonable excuse to comply with the notice may render her liable to imprisonment for six months or a warrant may be issued for her arrest pursuant to ss 267D and 267E of the Act. The third note says that s 81G of the Act provides that if the addressee refuses or fails to provide the books sought by the notice, neither the books referred to in the notice nor any secondary evidence of such books are admissible in proceedings for the recovery of amounts payable under ss 139ZG and 139ZL or involving the question whether a transaction is void under Division 3 of Part VI of the Act.
The background facts may be briefly stated.
A sequestration order was made against the estate of the bankrupt on 12 December 1994 and the trustee was appointed trustee of the bankrupt’s estate.
The trustee asserts that:
the bankrupt and Mrs Vera Jonson have been living together as man and wife since 1975 and married to each other since May 1979;
Mrs Jonson acquired the whole of the issued share capital of Ashbury as a shelf company on 16 July 1993 from her solicitors for the purpose of engaging in the property transactions to which reference will be made later;
Mrs Jonson and a sister of the bankrupt were appointed as the directors of Ashbury immediately after the acquisition of its share capital by Mrs Jonson. Also, the alternate directors of Ashbury were the brother and sister of the bankrupt.
Since the acquisition of all the shares in Ashbury by Mrs Jonson its sole activity has been to act as trustee of two unit trusts known as the Jonson No 2 and Jonson No 4 Investment Trusts.
The units in the two trusts are held by a company, Charterhouse Australia Pty Limited (“Charterhouse”), and the whole of its capital was acquired by Mrs Jonson as a shelf company from her solicitors on or about 16 July 1993 in the course of the transactions mentioned later.
The directors at all relevant times of Charterhouse are Mrs Jonson and a sister of the bankrupt, and the alternate directors are the brother and sister of the bankrupt.
The sole activity of Charterhouse at relevant times has been to act as trustee of two trusts known as the Jonson No 1 and the Jonson No 3 Investment Trusts, the units in which are held by Mrs Jonson and the children of the bankrupt.
On 1 June 1993 the bankrupt was the registered proprietor of thirteen properties at various places in New South Wales and South Australia (“the properties”).
On 17 June 1993 the Supreme Court of New South Wales entered judgment for Westpac Savings Bank Limited (later Westpac Banking Corporation) in the sum of $3,023,108.60 together with costs in a proceeding in the Commercial Division of the Supreme Court against the bankrupt, who thereafter became indebted to Westpac in that sum together with interest and costs, there being no stay of the judgment.
On 16 July 1993 Mrs Jonson became a director and the company secretary of Ashbury and her sister and the brother and sister of the bankrupt became its directors.
Westpac represented approximately 93.7% in value of all the creditors of the bankrupt.
As at 9 August 1993 and thereafter the bankrupt and Mrs Jonson and Ashbury were insolvent and knew or had reason to know or ought to have known that the bankrupt had no assets of substantial value available to satisfy the claims of his unsecured creditors apart from the value of the properties, after deducting therefrom the amount required to pay out mortgagees of the properties.
Between 9 August and 14 December 1993 the bankrupt and Mrs Jonson and Ashbury caused the transfers of the properties to take place, the transferee being in most instances Ashbury, and in other instances the bankrupt and Mrs Jonson. The consideration expressed in the respective transfers accorded with the valuations of those properties by a firm of valuers.
The monies secured by the mortgages in respect of the properties transferred amounted to $1,238,314.62 and were paid to the mortgagees on completion of the transfers. The balance of the expressed transfer consideration was not paid to the bankrupt.
The transfer consideration in respect of certain of the properties was less than their true value at the date of transfer.
If those transactions had not taken place the properties would have constituted divisible property of the bankrupt in his bankruptcy.
The bankrupt and Mrs Jonson and Ashbury knew or had reason to know or ought to have known of all these relevant facts and that the purpose of the transactions was to deprive the bankrupt’s unsecured creditors and any trustee in bankruptcy of his estate of the net equity value of the properties, and that there was no other legitimate purpose for the transactions.
By reason of those matters the transactions are void as against the trustee as settlements of property under s 120(1) of the Act or as dispositions of property with intent to defraud creditors under s 121 of the Act.
In 1993 Westpac commenced a proceeding in the Supreme Court of New South Wales, Equity Division (No 5319 of 1993) against the bankrupt, Mrs Jonson and Ashbury seeking declarations that the transfers of certain of the properties previously mentioned were void and of no effect by reason of s 37A of the Conveyancing Act 1919 (NSW).
On 29 May 1997 the Supreme Court of New South Wales ordered that the Supreme Court proceeding be transferred to this Court pursuant to s 5(1)(b) of the Jurisdiction of Courts (Cross Vesting) Act 1987 (NSW).
On 28 May 1997 the trustee commenced a proceeding in this Court (No NG 7619 of 1997) against Mrs Jonson and Ashbury as respondents seeking declarations and other claims for relief, being substantially the same relief that was sought in the earlier Supreme Court proceeding in respect of the properties.
The matter came before another judge of the Court who on 17 June 1997, being of the view that proceeding NG 7619 of 1997 should have been brought in the matter concerning the bankruptcy of the bankrupt (NB 2908 of 1994), ordered that the trustee commence a fresh proceeding in that matter containing the same claims for relief as in proceeding NG 7619 of 1997 and in the Supreme Court proceeding which had been cross vested to this Court. The cross-vested proceeding, number 5319 of 1993, was ordered to be heard concurrently with proceeding NB2908 of 1994. The proceeding brought in this Court, number NG 7619 of 1997, has been dismissed with all questions of costs being reserved.
On 2 July 1997 the trustee commenced the present proceeding in matter number NB 2908 of 1994. The relief sought by the trustee in the proceeding NB 2908 of 1994 was with respect to each of the properties previously mentioned. Declarations are sought that they are void as against the trustee as settlements of property under s 120(1) of the Act or dispositions of property with intent to defraud creditors under s 121 of the Act together with certain other relief.
In the result, the proceeding which is currently relevant is proceeding NB 2908 of 1994 and it is in that matter in which Mrs Jonson and Mrs MacDonald have filed the amended notice of motion seeking to set aside the two s 77C notices.
Counsel for Mrs Jonson and the company argued that the two s 77C notices should be set aside primarily on the ground that their basic purpose was to cross-examine Mrs Jonson and Mrs MacDonald to enable the trustee to make tactical and other decisions about how the substantive proceeding to set aside the transfers of land should be conducted - as counsel put it, a form of dress rehearsal of cross-examination in the case itself. It was argued that the notices were issued to obtain the advantage afforded by s 81G of the Act in that, if either Mrs Jonson or Mrs MacDonald refused or failed to comply with the requirements of the notice to give information or produce books, then at the hearing of the substantive proceeding they would be barred from having the information or the books admitted into evidence; and that this was a deliberate course engaged in by the trustee in issuing the two notices.
In this regard reliance was placed upon the evidence of Mr D P Moore, an accountant who assists the trustee as trustee of the bankrupt’s estate; it is Mr Moore who has the primary carriage of the administration of the bankruptcy under the trustee’s supervision.
Mr Moore gave evidence that the trustee issued the notices to obtain information about the income of the bankrupt, about his activities within several business entities and also about the properties of the bankrupt and the reasons for their transfer. Mr Moore agreed that the reasons for issuing the notices included the fact that the bankrupt held the relevant properties, that he and Mrs Jonson were directors of Ashbury and that the properties were transferred to Ashbury as trustee for two family trusts of which the members of the bankrupt’s family are beneficiaries.
Another reason advanced by Mr Moore in cross-examination was that the notices were issued specifically to ascertain from other sources what the income of the bankrupt is. He knew at the time the notices were issued that the directions of another judge of this Court made on 17 June 1997 included directions for the issue of subpoenas and notices to produce and that the purpose of such documents was to compel production of documents from the persons to whom the notices were directed. He said that the course afforded by s 77C was adopted:
“Because the purpose of s 77C was to keep matters out of court and do it for a less expensive cost to obtain the same information [than notices to produce and subpoenas before the courts].”
He said that he is aware that s 81G provides that, if there is a failure to comply with the notices by way of providing information or documents, that information or documents may not be used in proceedings of the kind currently before the Court. He said that he did not make the decision to have the notices issued. That was a decision of the trustee; and he said that they decided that it was more appropriate to conduct the examinations in the manner that they are doing. He said that they wished to hear:
“Mrs Johnson’s thoughts on the matter in her own words and they would be under oath anyway, so we couldn’t see any advantage in waiting for further time because it’s an examination under oath.”
He said that the notices were issued because the trustee and he wished to ask questions about the income of the bankrupt and his current business interests, and thought it was better to do this “in one fell swoop”. When asked if the notices were issued to take advantage of s 81G of the Act which provides severe consequences for non-compliance with the notices he said:
“I would have to take legal advice on that ... I mean it is not a question that I could say and because I am not the trustee again he would probably seek legal advice to answer that as well.”
He said that he merely “recommended” to the trustee, he did not make the decisions. In arranging for the notices to be issued he wished to have the advantage of questions being put to Mrs Jonson and her answers then tested by reference to further questions, a procedure not available until the actual trial other than by s 77C notices. He said:
“Well, presumably she would be telling the truth under oath, but we wished to test it against previous submissions and comments she had made and comments and submissions made by her husband.”
Later in his evidence Mr Moore said:
“The purposes that the notices were issued were discussed with the Official Receiver in several conversations that covered a range of topics including the residence of the bankrupt, the company involvement of the bankrupt, the income of the bankrupt and the property transactions in the period preceding the bankruptcy. And other points which we have, I suppose, subsequently came to light since the notices were issued.”
Later, in cross-examination, Mr Moore said that his understanding of s 81G was that:
“If a person refuses to give evidence which the trustee is entitled to and if he is entitled to ask for it under oath and refuses to give it then I do realize that one of the sanctions to, I suppose, promote the forthrightness of the witness, is to have s 81G in place whereby they cannot refuse to give evidence in an earlier case and then use it at a later stage in situations where the onus of proof is reversed ... I would assume that the notices would be complied with and 81G would not be a consequence unless, well, I would assume that all documents would be produced so it does not really become something to contemplate too heavily ... I did realize the section (81G) was there. It is like offence sections are there but you do not contemplate using them.”
When asked by counsel for Mrs Jonson and Mrs MacDonald:
“Q. And were you wishing to ensure that documents and information not provided pursuant to the notices would be barred from the proceedings?”
He said in answer:
“I was not wishing to ensure that. I was conscious of the knowledge that that section does exist. It had not been contemplated apart from being recognized that it’s there as is offence sections.”
He then said in answer to a question from myself:
Q:“I just want to get this clear myself. Do you mean you were aware of the section [81G] and what it said and you were aware of the sanction it could impose on a witness but you wanted by the notices was to get the information or get the documents?”
A: “Yes”
Q: That is what you issued them for?
A: Yes.
Q: But you knew that if they did not do that then they would suffer a sanction?
A: Only if it was enforced.”
Having seen Mr Moore give his evidence, in my opinion the upshot of it is that he was aware of s 81G and the consequences of a person failing to comply with a s 77C notice; and he was aware that if Mrs Jonson or Mrs MacDonald did not comply with the notices then they would be prevented from giving the relevant information or tendering the relevant documents at the final hearing. However, the purpose that the trustee sought to achieve by the notices was to obtain relevant information about the bankrupt’s affairs because the trustee thought that it was desirable to obtain that information. Mr Moore’s awareness of s 81G and its consequences was not central to that purpose.
I should add that the bankrupt has already been examined by the trustee under s 81 of the Act.
The relevant principles are clear.
The power given by s 77C of the Act is one with far reaching consequences and must be approached responsibly by applicants for summonses and controlled carefully by the Court.
Because the power is exercised in the interests of creditors the Court should not take an unduly technical or restrictive approach to the use of the power. The power is basically designed to establish what assets the bankrupt has, what has happened to them and whether action should be begun or continued to recover them.
These principles have been expressed by a Full Court of this Court in Karounos v Official Trustee (1988) 19 FCR 330 with respect to s 81 of the Act and in my view substantially the same principles apply to s 77C.
A Full Court of this Court in Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301 considered s 596B of the Corporations Law, which enables the Court to summon a person for examination about “examinable affairs” if the court is satisfied that the person might be able to give information about them, and s 597(9) which enables the Court to direct persons to produce documents “relevant to matters to which the examination relates or will relate”. The Court described the power under s 596B as a broad and discretionary one to test whether the creditors in a winding up may receive a tangible benefit from the satisfaction of any judgment obtained, and to enable the liquidator to determine whether it is prudent to commence or maintain litigation. The Court said that s 596B should be given a broad and generous construction having regard to its statutory purpose provided that the result does not operate oppressively to the private interests of the person examined.
In my view these observations of the Full Court are substantially applicable to questions which arise under s 77C.
In ReExcel Finance Corporation Ltd; Worthley v England (1994) 52 FCR 69 a Full Court of this Court considered s 597 of the Corporations Law whereby the Commission or a prescribed person can apply to the Court for an order which enables the Court to examine a person on matters relating to affairs of the relevant corporation. The Court cited with approval (at 90) the judgment of Street J in Re Hugh J Roberts Pty Ltd (In Liq) [1970] 2 NSWR 582 at 585 in these terms:
“ ‘A liquidator needs information concerning his company just as much in connection with current or contemplated litigation as in connection with other aspects of its affairs. In using the statutory machinery of private examination he will in many cases be gathering evidence as an ordinary and legitimate use of this procedure ... In my judgment it is immaterial in basic substance whether the private examination is sought to be used by a liquidator to gather information in connection with proceedings he believes he might be able to bring, proceedings he contemplates bringing, proceedings he has decided to bring, and proceedings he has already brought. There is no presently relevant distinction in substance between gathering information referable to commencing proceedings and gathering information referable to continuing proceedings.’ “
Their Honours then said (at 91):
“On the same page Street J counselled liquidators not to be diffident in using a private examination for the ordinary and legitimate purpose of gathering in information. His Honour warned, of course, that the process should not be abused, giving, as an illustration, an attempt, where litigation was either contemplated or commenced, to summon the prospective or existing defendant’s probable witnesses and examine them simply for the purpose of destroying their credit. So to do would involve using the examination process to obtain a forensic advantage in litigation, whether or not that litigation was yet commenced. Another, albeit related, case of abuse would be the conduct of an examination to enable a ‘dress rehearsal of the cross-examination’ to be instituted of a trial impending or contemplated. Other examples may be the use of an examination summons to obtain de facto discovery where a discovery order had been refused in proceedings already on foot. It is neither possible nor desirable to catalogue all the circumstances where use of an examination summons might constitute an abuse of process.
Whether there will be, in a particular case, a use of the process or an abuse of it will depend upon purpose rather than result. The consequence of an examination may well be that the examiner has conducted a ‘dress rehearsal’ of cross-examination which may take place in a subsequent trial. The fact that the trial has commenced, or is contemplated, may throw light upon the purpose. But merely because other proceedings had been commenced or are contemplated would not involve, of itself, an abuse of process. This follows having regard to the nature of the investigative process which could throw light on the question, inter alia, whether there was evidence which would warrant a liquidator, for example, proceeding against an examinee. But it may be quite a different question where proceedings contemplated or instituted are not proceedings to be brought by the company, but proceedings brought by some other party for the advantage of that party rather than the company. For example, it would be an abuse of process for a creditor approved by the Commission for the purposes of s 597(1) to obtain an examination summons to conduct an examination for the purpose of obtaining evidence in proceedings which the creditor proposed to bring against the examinee for defamation. That would be a purpose completely foreign to the power of examination which is ultimately in aid of the company itself and not the personal advantage of the person seeking to conduct the examination.”
These observations aptly apply to s 77C of the Act.
I agree with Sheppard J in Re Bond; Ex parte Ramsey (1994) 54 FCR 394 at 401:
“The provisions of s 77 and the other provisions of Part V of the Act are designed to enable the trustee to make the fullest investigations into a bankrupt’s property, dealings and affairs.”
See also Re J T C McKee, Ex parte: Laroar Holdings Pty Ltd, Spender J, unreported, 4 December 1996. Spender J cited the passage from Sheppard J’s judgment in Bond with approval and said:
“It is part of the trustee’s function to get in the assets of a bankrupt estate and to distribute them rateably amongst the creditors. Part of that function, in my opinion, requires the trustee to investigate and assess the prospect of recovering funds from the existing action. The obtaining of information by evidence and the production of books relating to those matters of complaint is a matter which is, in my opinion, immediately connected with the performance of that function of a trustee.”
See also Bond v Tuohy (1995) 56 FCR 92 per Ryan J. See also the judgment of Lindgren J in Terry v Prentice, unreported, 2 December 1994.
Particular care must be exercised when the power conferred by s 77C is used to obtain information and documents about transactions that are impeached in current litigation commenced or continued by the trustee of a bankrupt’s estate against respondents who include a proposed examinee under s 77C. See Pioneer Concrete (Vic) Pty Ltd v Trade Practices Commission (1982) 152 CLR 460, in particular per Gibbs J at 468 and Mason J at 473 concerning s 155 of the Trade Practices Act 1974.
In my opinion the purpose of issuing the summonses under s 77C to both Mrs Jonson and Mrs MacDonald was essentially to obtain information about the property and affairs of the bankrupt, including his income and assets, and to examine the transfers of the properties and to probe the circumstances in which they were made.
It is true that the two current proceedings in which the trustee seeks to set aside the transfers of the properties relate to events that occurred before the bankrupt was made bankrupt in 1994, and that those proceedings (also the earlier proceeding in this Court (No 7619 of 1997)) concern basically the same subject matter, namely, the setting aside of the property transactions. The Court must be careful lest the powers conferred by s 77C on the Official Receiver are not misused, especially when much of the material to be examined pursuant to the exercise of the s 77C powers concerns the two proceedings presently on foot.
It will be important for the Official Receiver and the trustee, when the examinations are being conducted, to ensure that they are not used for any improper purpose, such as examining the witnesses simply for the purpose of destroying their credit or obtaining any other forensic advantage. It must be used for the purposes of legitimate enquiry to obtain information concerning the assets, liabilities, income and expenditure of the bankrupt and for the purpose of ascertaining information about the property transactions which are impeached in the current proceedings in this Court.
The motion of Mrs Jonson and Mrs MacDonald is dismissed with costs.
I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lockhart
Associate:
Dated: 1 September 1997
Counsel for the First Applicant: Mr G K Burton Solicitors for the First Applicant: Henry Davis York Solicitors for the Second Applicant Sally Nash & Co Counsel for the First and Second Respondents: Mr F P Carnovale Solicitor for the First and Second Respondents: Gillis Delaney Brown Date of Hearing: 5 August 1997 Date of Judgment: 1 September 1997
0
8
0