Re Kofteros, Michael

[1997] FCA 470

IN THE FEDERAL COURT OF AUSTRALIA
EXERCISING FEDERAL JURISDICTION  No VG 7064 of 1997
IN BANKRUPTCY

BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA

RE:  MICHAEL KAFTEROS

EX PARTE:             BLOOM TEXTILES PROPRIETARY LIMITED
  and

BLOOM TEXTILES PROPRIETARY LIMITED
  Petitioning Creditor
  and
  MICHAEL KAFTEROS  Respondent

COURT:        NORTHROP J
PLACE:         MELBOURNE
DATE:           21 MAY 1997

REASONS FOR JUDGMENT

This is the return date for a hearing of the petition for a sequestration order.  The petition is brought by a judgment creditor against the judgment debtor.  The act of
bankruptcy relied upon is the failure to comply with a bankruptcy notice which was issued on 11 September 1996 and based on a judgment debt for an amount of $23,787 plus a few cents.  The judgment was an order of the Magistrate's Court in Melbourne given on 22 August 1996. It was a default judgment based upon a claim for goods sold and delivered.

The debtor lives in Sydney, or at least appears to carry on business in Sydney.  The bankruptcy notice was a 28 day notice and was served on the debtor on 18 September 1996.  The debtor did not comply with any of the demands set out in the bankruptcy notice within the time specified in the bankruptcy notice. Accordingly the debtor committed an act of bankruptcy on 16 October 1996.  The petition was presented on 4 February 1997 relying upon that act of bankruptcy committed on 16 October 1996. The petition was returnable before the Court on 25 March 1997.

Having regard to the provisions of Order 77 of the Federal Court of Australia Rules of Court, the Bankruptcy Rules in force immediately before the amendments made to the Bankruptcy Act 1966 with effect in September 1996 apply. In this regard Bankruptcy Rule 20 provided, in substance, that a debtor who intends to appear at the hearing and to oppose the petition must file a notice in accordance with form 8 of the bankruptcy rules. Form 8, in substance, required the notice to be filed to state the name of the debtor and his intention to appear at the hearing and to set out the grounds of opposition to the petition and if given by a solicitor must contain the name and address of the solicitor. In the present case the debtor did not comply with the requirements of Rule 20. He did not file the requisite notice. Nevertheless, when the petition came on for
hearing on 25 March 1997 counsel appeared for the petitioning creditor.  There was no appearance by the debtor, but apparently because of a prior arrangement the petition was adjourned by consent to 14 April 1997.

On 14 April 1997 the petitioning creditor was represented by counsel and the debtor was represented by counsel even though the debtor had not complied with the requirements of Rule 6 of the Bankruptcy Rules.  The debtor sought an adjournment which was opposed by the petitioning creditor.  Eventually the Registrar, before whom the petition was being heard, made a number of orders including an order adjourning the further hearing of the petition to today and ordered that the debtor file and serve an affidavit setting out his current financial circumstances. The Registrar also ordered that the debtor file and serve a notice of opposition and any affidavits in support.  Both those documents were directed to be filed and served on or before 28 April 1997.  There was provision for affidavits in reply and orders were made with respect to the petitioning creditor's costs.  It was also made clear that the notice in relation to the opposition had to be in the form of a notice of intention to appear stating grounds of opposition and any affidavit in support to be filed and served by 28 April 1997.

The debtor failed to comply with those orders and directions.  When the matter came on for hearing before the Court today, counsel for the debtor applied for an adjournment which was opposed by counsel for the petitioning creditor.  The substance of the application for the adjournment was that the judgment obtained in the Magistrate's Court on 22 August 1996 was a default judgment based upon the failure of the debtor to
appear or file an appearance or give notice of intention to appear and defend the complaint in the Magistrate's Court.

The debtor has made two separate applications to the Magistrate's Court to have that judgment of 22 August 1996 set aside.  Each application has failed. In one of them the Magistrate gave detailed reasons why he refused the application to set aside the earlier judgment.  The judgment debtor has now commenced proceedings in the Magistrate's Court seeking damages for breach of contract based on the contract or agreement on which the claim by the judgment creditor was made to the Magistrate's Court and on which judgment was entered.

It is not necessary for this Court to go into any details of the matters before the Magistrate's Court.  It is sufficient to say that there is a degree of uncertainty as to the strength of the debtor's case and the claim for damages seems to have been adopted following a suggestion made by the Magistrate that at the most there could have been a cross-claim or demand made by the debtor in relation to the claim by the judgment creditor.  In the meantime the debtor has applied to the Supreme Court of Victoria for a writ of certiorari seeking to have the two judgments of the Magistrate's Court refusing the applications to set aside the earlier judgment reviewed for error on the face of the record.  It is said that that application will come on shortly in the Supreme Court of Victoria. 

It should be noted that at the hearing before the Registrar on 14 April 1997 there
was an affidavit filed on behalf of the debtor supporting the application for the adjournment.  No further affidavit has been filed to support the application for the adjournment made today.  But the Court allowed counsel to explain what had occurred since 14 April 1997. Of more importance, however, is the fact that there is no evidence before the Court to explain why the debtor failed to comply with the orders of the Registrar made on 14 April 1997, namely that the debtor file and serve the affidavit as to financial circumstances and to give notice of intention to appear stating the grounds of opposition supported by any affidavit in support thereof.  This conduct goes very close to being a contempt of the court and of itself, in other proceedings in the Federal Court, could form the basis to justify the striking out of a defence or dismissal of an application.

The Court, despite objection by counsel for the judgment creditor, allowed counsel for the debtor to file in Court a facsimile copy of an affidavit sworn in Sydney yesterday, 20 May 1997.  This affidavit purports to be an affidavit setting out the current financial circumstances of the debtor.  The affidavit is very stark and does not really assist the Court at all to form a view as to the financial position of the debtor.  The affidavit does not state the occupation of the debtor or what business if any he is conducting, although one can infer that his business is the manufacture of clothing since the judgment is based upon the cost of cloth sold by the creditor to the debtor. From what appears in other material it appears the debtor has doubts about the authenticity of that cloth for the purpose of making up clothing.

The affidavit merely says that the deponent is the debtor.  He sets out his assets which consists of plant and equipment, a motor vehicle, furniture and fittings and stock on hand; a total of $177,000. His liabilities being trade creditors, other creditors of $65,000, higher purchase and a private loan making it total of $140,000.  There is nothing further in the affidavit.  There is nothing in the affidavit to state that the debtor is able to pay his debts as and when they are due and payable.  There is nothing to suggest what his profits or income are and there is nothing to illustrate whether he is in fact solvent or insolvent. This is of particular importance, having regard to the provisions of the Bankruptcy Act where essentially a sequestration order ought to be made if a debtor is insolvent.  The affidavit does not make it clear whether the judgment debt of the creditor is included in the liabilities set out in the affidavit.  On the crude figures given it appears that the difference between assets and liabilities is of the order of $37,000 but again it is impossible to ascertain what the nature of that difference is and whether it is a real difference in value or not and whether it should be reduced by $23,787 - the amount of the judgment debt.

In these circumstances counsel for the debtor has urged the Court to adjourn the hearing of the petition pending a hearing and determination of the Supreme Court application.  Counsel referred to expressions of opinion contained in Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 and, in particular, to passages at 148 in the joint judgment of the Full Court in that case. The facts of that case were very different to the facts of the present case since the challenge to the judgment had been on foot for quite some time before the petition was heard in that case.

The Court is fully aware of the need to give a debtor a full opportunity to present a case showing he is not insolvent or not liable under the judgment debt. But the issue before the Court on a hearing of a petition is that contained in sections 43 and 52 of the Bankruptcy Act. Under section 43 the Court is empowered to make a sequestration order against the estate of the debtor. Section 44 sets out what must be established. The minimum amount of the debt is specified. The debt must be for a liquidated sum. The act of bankruptcy on which the petition is founded must have been committed within six months before the presentation of the petition. All of these provisions have been complied with here. The petition must be verified by affidavit. Under section 52 at the hearing of a creditor's petition, the Court shall require proof of the matters stated in the petition, service of the petition and the fact that the debt is still owing and if it is satisfied of those matters may make a sequestration order.

Subsection 52(2) is of importance.  If the Court is not satisfied with the proof of any of those matters or is satisfied by the debtor that he is able to pay his debts or for other sufficient cause a sequestration order ought not to be made, it may dismiss the petition.  Nowhere has the debtor in this case stated that he is able to pay his debts.  The affidavit which has been filed in court does not go that far.  The mere fact that assets may exceed liabilities of itself does not establish an ability to pay debts.  The only basis for the adjournment is to try to have the judgment set aside in circumstances where there have been long delays on the part of the debtor and where two applications have been unsuccessful. Now, for the first time, a claim has been made for damages for breach of contract and an attempt made to quash the orders of the Magistrates Court, refusing to
set aside the judgment debt.

In all the circumstances, the view the Court has formed is that the debtor has had ample opportunity to pursue whatever rights he may have had in relation to the judgment debt, that he has deliberately - that is the only way it can be put - ignored the orders of this Court in relation to filing of affidavits and compliance with the Bankruptcy Rules. It is a case where it is quite clear that the debtor has quite a large number of other creditors, trade creditors and other creditors, and that having regard to the policy behind the Bankruptcy Act it is undesirable to allow a debtor who is not solvent to continue trading.

The Court has come to the view that this is a case where the application for the adjournment should be refused.

Following further submissions, the Court continued.

Having refused the application for the adjournment and having looked at all the material relied upon by the petitioning creditor, I am satisfied with the proof of the matters of which section 52(1) of the Act requires proof. I make a sequestration order against the estate of the debtor. I order the costs of the petitioning creditor including reserved costs be taxed and paid according to the Act. It is noted that the act of bankruptcy occurred on 16 October 1996 and I direct that a draft of the order be delivered to the Registrar within seven days in accordance with rule 124 sub-rule 2 of the
Bankruptcy Rules.

I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment of the Honourable Justice R M Northrop.

Associate:

Date:

ATTACHMENT

Counsel for petitioning creditor:              Mr A Ellis

Solicitors for petitioning creditor:  Lakes Solicitors

Counsel for judgment debtor:                   Mr N Jones

Solicitors for judgment debtor:                 Clancy & Triado Pty
  as agents for Cordato Partners