Re Mark Turner v Kinian Pty Ltd

[1992] FCA 396

39'0 S2

JUDGY ENT NQ ,A - ,

.

ERAL COURT OF AUSTRALIA )

The bankrupt is a specialist medical practitioner carrying on practice at Penrith and Katoomba. She was made bankrupt on 5 September 1990 and in the ordinary course of events will be discharged at that time in 1993. An application is made on her behalf today for discharge from bankruptcy under section 150 of the Bankruptcy Act 1966 (the Act). The application

for discharge is opposed by two creditors, MGICA Limited and Suncorp Finance Limited, who ask that the application be adjourned on the grounds that they are inadequately informed about the circumstances of the estate. In this regard they particularly criticise the trustee for failing to supply information which could be significant on the issue of discharge.

to be called Resi-Statewide Mortgage Corporation Limited	(Resi) and later became the Bank of Melbourne. The bank
assigned the debt to MGICA which was the only creditor to file a notice of intention to appear and oppose the application for discharge. The single ground stated in the notice was:

MGICA in fact was the assignee of a debt which was the original substantial cause of the bankrupt's indebtedness. Dr Underwood guaranteed a loan to her former husband by what used

That the applicant has failed during the course of her bankruptcy to contribute financially towards the debt owing to MGICA Limited.

Suncorp only appeared in the latter stages of this hearing, apparently upon being advised by the representatives of MGICA during the luncheon adjournment of the Court, that the application was being heard today.

The application for discharge is dated 18 March 1992 and, according to the evidence, was posted to creditors, including MGICA and Suncorp, on 26 March. It seems that Suncorp received their copy by post on or about 30 March and MGICA maybe a day or so earlier. What was served was a copy of the application for discharge and no more. As required by the Act, the trustee prepared, in connection with this application

is no formal obligation on the bankrupt or the trustee to	for discharge, a report dated 15 April 1992. Although there
serve such a document on creditors, it apparently came to the notice at least of MGICA. It was, however, a very scant report and provided very little information which could enable any creditor to decide an attitude to the application, still less the Court which comes to the matter without any background knowledge at all.
The applicant has filed a significant amount of af f idavit evidence in the application. In addition to an affidavit of service, there was filed on 22 April 1992 an affidavit by Dr Underwood herself of some 18 pages with a large number of annexures. This affidavit explains to the Court how she became insolvent and a bankrupt and there has been no challenge to the contents of the affidavit. Although served very late, it cannot be said that there was anything in the affidavit that was not or would not have been available to creditors at a much earlier stage. In fact, there were a number of earlier stages when creditors could have obtained the information contained in the affidavit.
There was filed today a further affidavit of Dr Underwood and an affidavit sworn by her solicitor, Mr Graham, respectively dated 28 and 27 April. This additional material is not of great moment to the application. As a consequence, the application for adjournment was argued, as much due to my intervention as anything else, but without objection, as a
discharge. general investigation of and argument on the application for
Prior to becoming a bankrupt, Dr Underwood executed on 18 July 1990 a section 188 authority appointing Michael Jones of Jones, Sistrom and Company as her controlling trustee for the purpose of a Part X meeting designed to consider a proposal to avoid bankruptcy. The first meeting of creditors called by the controlling trustee was held on 20 August 1990. On this occasion a majority in number of the creditors supported the doctor's proposal but due to the opposition of two creditors, 75 per cent in dollar value of the creditors did not do so.
The resolution was therefore not passed and the meeting was adjourned to 3 September 1990. On that occasion a further meeting took place but little occurred. Once again it was not possible to have the resolution passed, and the meeting was adjourned to 2 October. In the event it seems that that meeting did not take place because in the meantime the applicant's estate was sequestrated. At the two meetings of creditors, Suncorp was present but MGICA was not.
The bankrupt's problems arose by reason of her guarantees of Resi's and other loans to her husband to finance business ventures which failed. As a consequence of her signing these guarantees, and collateral mortgages given over properties which she owned, Dr Underwood has been effectively deprived of the entire proceeds of her working life. Although as a
been able to command a significant income, at 37 years old specialist medical practitioner she undoubtedly has always
with two children aged 5'/, and 3 years and now separated from her husband, she is alone with family responsibilities that she can only finance by the income from her medical practice.
Since separating from her husband, the bankrupt has received no financial assistance from him. Although he is not bankrupt, he does not appear, on the evidence before me, to have any significant assets and may not have any or a significant income. At present the bankrupt lives in a rented house at Winmallee. Because of the hours of her practice, she is required to employ a full time nanny to look after her children with the usual costs that such an enterprise involves, not to mention the consequent problem that she is unable to spend as much time with her young children as she would prefer to do.
It is clear on the evidence before me that Dr Underwood has co-operated with the trustee and with the creditors to a very commendable degree. She has supplied information of a detailed kind and has provided that information again in her affidavit of 22 April filed with the Court. She has also provided some contribution to the estate. This came in two forms - one, by collecting some $20,000, being previously unpaid fees owed for professional services rendered to her patients; the second, by withdrawing a proof of debt which had been originally lodged by a company called T.A. Underwood Pty
company and in which she is the controlling shareholder and Limited (the company) which was her medical practice service
major figure.
There is some strength in the point made on behalf of MGICA, and Suncorp which adopted MGICA's submissions, that there are a number of things about this bankrupt estate which, on the face of the papers, seem to have passed the trustee by, or at any rate have not been vouchsafed to the creditors or to the Court. On the information supplied to the Court, the company appears not to have been significantly investigated by the trustee. At best no information has been given to the Court about the company's situation. As the company is little more than an "alter ego" of the bankrupt, there is little doubt that any of its assets of significance could be accessed by the bankrupt in one form or another or at some time or another.
The company appears to be entitled to all or some of the bankrupt's patient fees. This is her income so she is presumably employed by or contracted to the company. The $20,000 in back fees contributed to the estate was therefore at once a contribution to the estate from Dr Underwood's income, as well as an entitlement of the company. As the latter, it may not otherwise have been part of the bankrupt estate. The company owns the medical practice in which she practises, including presumably the equipment, the furniture and any other immediate assets of the practice. It is also, I
think, the lessee of the premises in which the practice is
carried on.
The company also owns the goodwill of her practice, but that could hardly be sold without taking Dr Underwood out of the practice and requiring her to start up somewhere else. That would not be in anyone's interests and certainly would not be a step which a trustee would ordinarily be expected to take. The doctor's shares in the company were ceded to the trustee at the outset of the bankruptcy. If the trustee had thought that they had any value at all, he would undoubtedly have brought them to the attention of the creditors and of the Court.
Obviously if creditors had desired to investigate these matters with a view to assessing whether such conclusions are unfair or invalid, Dr Underwood could have been cross-examined today, even on the adjournment application in which MGICA sought to argue, as a ground for allowing it time to establish its sole objection, the need for investigation of the company. The trustee might also have been invited to come to Court to answer questions about the company. Neither of these courses was taken or even mentioned as a possibility or desire.
In fact, there is no reason for believing that the company has any appreciable realisable assets, nor is there any basis for speculating today that the company might be the possessor of
account in the estate. I also do not think it reasonable to such assets as would avail creditors if they were brought to
make the assumption that the trustee, whose reports are admittedly sparse, would have been likely to overlook the possibility that the company may be the direct or indirect holder of assets which could be brought to account in favour of creditors. If the company had anything liquid to which the bankrupt could lay claim, the trustee would hardly have written to creditors, as he did, indicating that there was no prospect of a payment to creditors out of this estate. Except
in an administrative and reporting sense, the trustee has not been subjected to any criticism by either of the objecting creditors, and he otherwise appears to have carried out his functions in a fully professional way.
There are, however, some disturbing aspects about the debts proved in the estate. The evidence establishes that the final nail in Dr Underwood's financial coffin was hammered in a transaction in which she became involved on 10 October 1988 when she signed a significant number of documents in the office of a solicitor named Colin Helliar of the firm Helliars in Parramatta. Although Dr Underwood says that she did not know what she was signing and did not have the documents explained to her, it is fairly clear that she did know at that time that her husband was borrowing $120,000 from companies associated with Mr Helliar for the purpose of a business enterprise involving property, and that she was being required to support his liability for that loan. In fact she signed personal guarantees and mortgaged some of her property.
Two of the companies to whom she pledged her guarantee and assets were Olten Holdings Pty Limited and Burney Nominees Pty
Limited. Olten had Mr Helliar as a shareholder and a director. Although company records do not show that he has any direct or overt connection with Burney, the evidence establishes that Burney's agreement to lend money was obtained, and its funds were disbursed, by Mr Helliar without any particular recourse to anyone else.
The evidence also shows that the loan of $120,000 from these two companies was made pending what Mr Helliar described, according to Dr Underwood's evidence, as the certainty of a loan from the Westpac Bank to replace it. Hence, the loan was taken for one month only at an interest rate of no less than 25 per cent per annum reducible by 3 per cent providing the interest was paid on time. It appears that no interest was paid at all, as a consequence of which the two companies associated with Mr Helliar commenced the activity which led to Dr Underwood's bankruptcy.
It seems to me that there is and would always have been a considerable doubt about whether these companies ought to have been allowed to prove debts in this estate. As it was their votes that rejected the proposed Part X arrangement, their exclusion as creditors would have resulted in a totally different consequence for Dr Underwood and for her creditors. She would have avoided bankruptcy. Because of her Part X proposal, the creditors would have received $700 a month from
proposal, the estate was denied those moneys, although it did her income for 3 years. In the event, by the defeat of the
receive instead the $20,000 from previously unpaid fees which I earlier noted.
This is not an inquiry into the Part X trusteeship or the administration of the bankrupt estate, and of course the trustee has neither been present nor been heard. He may well have, and I assume does have, an explanation for accepting the

- l0 -

proofs of the two companies associated with M r Helliar apparently without question. Whatever the explanation might be, it is too late to do anything about it now. More relevantly, therefore, it is reasonable to observe that the situation now presented to the Court would not be advantaged, in terms of the interests of the creditors, by delaying this hearing to allow an investigation of any of the matters to which attention has been drawn today. It is in fact worthy of note that in a letter dated 27 April to the solicitors for the bankrupt, the firm Helliars wrote that the two companies Burney Nominees and Olten Holdings do not now oppose the discharge because they see no commercial advantage in doing so. What advantage they gained from forcing the bankruptcy is not clear.

Not only was MGICA not present at the creditors' meetings in August and September 1990 to consider the proposed Part X arrangement; it also seems to have made few inquiries of the trustee since the bankruptcy was pronounced. In fact the only

contact revealed by the evidence is a letter of 23 October

1991 to the trustee. I do not have that letter but I do have the reply dated 4 November in which Mr Jones advised that no dividend would be paid in the administration.

The evidence discloses that MGICA did nothing to obtain any additional information from the trustee until a few days ago, when after seeing his scanty report of 15 April, it sought further information through the solicitors for the bankrupt. What was obtained is annexed to Mr Graham's affidavit of 27 April. It reveals that after paying costs and disbursements of administration to date totalling just over $15,500, the trustee holds slightly under $11,000 for distribution to creditors, subject only to further costs. The total unsecured indebtedness proved in the bankruptcy was a figure of over $380,000.

I am mindful of the fact that much if not all of the material relevant to the application for discharge has only become available to MGICA in the last few days. Ordinarily that might favour an adjournment to permit a creditor to investigate any matters that might be helpful in determining the discharge application. On the other hand, this was the first case called this morning and it is the last matter being completed in the list this afternoon. A number of hours have passed while other matters were dealt with during the course of the day. Together with the lunch period, this permitted an opportunity to read and consider objectively the material that	has been filed. Nothing specific has emerged from this	lengthy consideration to give substance to MGICA's
submissions, or to suggest that an adjournment would aid the consideration of the discharge application.
It was contended on behalf of MGICA that little or no prejudice will accrue to the bankrupt if there is an adjournment, overlooking that she will have to give up another day's practice and earnings and make another trip to Sydney. It does not seem to me that the Court should be used to enable parties of substance, well advised and well staffed, to look after their own affairs. MGICA appears to have accepted the trustee's letter of 4 November 1991 that there would be no payments made out of the estate. It seems to have done nothing at all to follow up the matter, notwithstanding the passage of another five months.
The discharge application itself was served four weeks ago. Nothing seems to have been done by these objectors until 21 April 1992 when MGICA filed its notice of intention to appear and oppose the application. Then today, without notice to anyone and without any actual or suggested evidence in support, the application for adjournment was made for the first time. These are not powerful circumstances suggesting the exercise of a discretion in favour of those who have been so inactive.
I myself read all the material during the luncheon
matter was first called because most of the material was not adjournment. From that reading, which I had not done when the
before the Court, a clear conclusion can be reached that the difference between the $11,000, which the trustee has in hand at the moment, and the $382,346.06 worth of debts owed, could not possibly be made up by any further work on the part of the trustee. Indeed, $11,000 is itself a relatively small sum of money with which to pursue other assets with any depth, and creditors would be required to fund the trustee further if anything of substance was to be done. Neither of the present objectors suggested that they would be willing to supply moneys for such a purpose, no doubt because further investigations, even further asset realisation, would be unlikely to make a dent in the debts proved in the estate so as to increase the distribution to creditors.
I have earlier recorded a view that the $120,000 plus interest owing to the two companies associated with M r Helliar might be removable from the estate altogether. As it would now presumably require appropriate legal action to do so, it could only be conceived if it might significantly benefit other creditors. The mere mathematics prove that to be more theoretical than realistic. If the debts of Olten Holdings and Burney Nominees were removed, there would still be far more owing to other creditors, including MGICA and Suncorp, than could be obtained from any remaining assets in or due to the estate. The advances necessary for, and the cost of, their removal would ensure that little more would be available
Moreover, MGICA does not advance this possibility as a ground for distribution to the remaining creditors than at present. for an adjournment or for refusing discharge.
Even if the assumption is made that there are some other assets not yet brought to account, it would be a significant step to conclude that the trustee had so failed in his obligations that he had omitted some major assets. I do not come to that conclusion, first, as a matter of fairness. Because there was no notice and it was not suggested by MGICA as a ground for its objection to the discharge, or for the adjournment of the application, the trustee has not been heard. Second, there is no evidence to support it. Third, for the reasons I have given earlier, it is unrealistic and quite unlikely that such a failure might have happened in this case.
Most importantly for present purposes, all these matters could have been investigated at the Part X meetings or subsequently. The meetings concluded in September 1990 and two days later the bankruptcy came into existence. Nineteen months have passed since that time during which period the creditors could have obtained any information they wanted from the trustee or, through him or her solicitors, from the bankrupt. Neither of these objectors did so. Suncorp was present at the meetings and could have subjected the controlling trustee and the bankrupt to examination on any matters it wished. It did not do so. MGICA chose to absent itself from the meetings and to do nothing thereafter. Its counsel advisedly sought neither
to explain nor excuse this attitude.
The creditors could also have required further information from the bankrupt following the service of the notice of application for discharge. Again, with the exception of a request for particulars which was made approximately a week ago, in reply to which information was supplied, nothing else has been done. For example, although one or other of them must have or be able to obtain them, neither the trustee nor the bankrupt was subpoenaed to produce at today's hearing, the records of the company, T.A.Underwood Pty Limited, including its bank statements, tax returns or other documentation which would have revealed any accessible assets or income, or any information which might have been worthy of investigation as being beneficial to the estate. I say "beneficial to the estate" in the context that the estate has approximately $11,000 and owes approximately $380,000. It would not avail the creditors at all to have further costs incurred simply to discover that a few dollars worth of assets were omitted, especially if they were of a comparatively speculative nature, as is likely. In sum, then, MGICA can point to nothing now that suggests any benefit to anyone from delay.
Discretionary action by the Court should not now be substituted for this inaction. It is not appropriate to adjourn the proceedings, and I refuse that application. However, that does not mean that the applicant is entitled to
has provided a three year period for bankruptcy. Although I a discharge, and I now turn to this application. Parliament
agree with those authorities which say that there should not be an onus placed upon a bankrupt to establish special circumstances entitling a discharge, nonetheless something has to be shown as to why early discharge should be granted.
In addition to the statutory prescription, there is a public interest in enforcing, generally speaking, a reasonable withdrawal from ordinary commercial and financial activity of people who have become bankrupt. On the other hand, there is no doubt a public interest involved in ensuring that people are not kept in bankruptcy for no good reason. The trustee has informed the Court that the bankrupt has co-operated with the administration of the estate. He does not appear to think that: her remaining in bankruptcy would add anything to the likelihood that he will be able to recover more funds for creditors than he has been able to do thus far. If necessary, the provisions of section 81 are available to permit an examination of a bankrupt after discharge, although that would not seem to be a particularly efficient use of time on the present information and would of course quickly dissipate the $11,000 presently held.
Despite MGICA's contention that Dr Underwood could and should have contributed some of her income to her estate, it was unable to suggest what amount might have been contributed or what funds the bankrupt might have had to fund a contribution.
trustee has not commented adversely on the fact that she has She is of course not obliged to make a contribution, and the
not done so. Ironically, she would have contributed $25,000 if the Part X proposal had been accepted. I take into account that the applicant, as a functioning specialist medical practitioner, has a sizeable gross income. However, expenses of practice, income tax liability and other necessary items of personal and professional survival no doubt quickly reduce her gross income to much smaller disposable proportions.
One of her affidavits states that in about 6 months time she will need to rent another surgery because her present arrangements with the doctor with whom she is now sharing premises will come to an end as he wishes to go out on his own. Furthermore, her long hours of work and her efforts to bring up her two young children as a sole parent will no doubt increasingly cause her to consider moving from her present rented accommodation, where she has no security, to a house purchased in the interests of securing her own and the children's future.
No submission or evidence was advanced as to how any or any serious contribution from the bankrupt would have been feasible or could have seriously benefited the creditors, and I cannot imagine it for myself. The objection to discharge is rejected.
That leaves the Court's residual discretion to grant or refuse discharge. The circumstances under which Dr Underwood became
hindsight, it is easy to say that what she did was headstrong bankrupt are particularly unfortunate. In the cold light of
and foolish. However, the ordinary relationship between husband and wife will, and in the Court's experience often does, result in people doing things of a financial nature which would never be undertaken for third or arm's length parties. There is a strong inference from the evidence in this case that emotional pressure which husbands and wives can bring on each other were brought to bear on Dr Underwood in this instance. In this context, it should be recorded that MGICA has brought no evidence of having pursued the primary debtor, Dr Underwood's husband, for its debt at all. This suggests that it is not as concerned with its money as with less worthy matters.
The Act provides that when faced with an application under section 150, the Court is bound to refuse or suspend an order of discharge if any of the provisions of sub-section (6) has been made out. I have given attention to each of the sub- paragraphs of section 150 (6) and can find no basis on which to hold that any of them has been established or is likely to have occurred in this particular case. I have little doubt that the relevant culpable provisions of sub-section (6), particularly the provisions of sub-paragraph (e), were not the cause of her bankruptcy.
There is a public interest in encouraging insolvent persons to come forward promptly to declare their insolvency, and to co- operate with creditors and trustees without the requirement of
expensive legal proceedings. That seems to have been done by
this bankrupt with a significant degree of expedition. Soon after becoming insolvent, she quickly appointed her own trustee under section 188 and earnestly sought an arrangement for her creditors which would have benefited them more than has in fact occurred. It would also have disadvantaged her because of the proposed monthly subventions of income to the creditors for three years.
When a sufficient number or value of creditors could not be persuaded to approve the proposed arrangement, she immediately accepted the consequences and went into bankruptcy. She could have challenged the debts of Olten Holdings and Burney Nominees, but did not do so, or encourage the trustee to do so. She could have left the unpaid fees where they were, or insisted on the apparently legal entitlement of her company to them. To the extent of more than $20,000, she did not do so. She could have pressed creditors or the trustee to pursue her estranged husband to make payments towards the debts, which were primarily his, but did not give in to this obvious temptation presumably because she knew it would be a useless expenditure. All these matters point toward the exercise of discretion in her favour.
The alternative proposition of suspending the order of discharge for a period should, it seems to me, only be undertaken if some advantage to the public interest or to the creditors would be gained by doing so. I did at one stage
to enable further inquiries and further actions to be give thought to suspending the operation of a discharge order
undertaken in the trusteeship. However, for the reasons earlier given, I have decided that there would be no practical advantage in doing so.
Counsel for the bankrupt has, with erudition and eloquence, put strongly the point of view that a person should not be kept in bankruptcy merely to attach some type of special or judgmental opprobrium to bankruptcy. On the other hand, although delay should not be used by way of an extra penalty, early discharge is not something that should be lightly ordered. I asked him if he knew of any other case in which a person has requested and been given a discharge without any positive evidence as to what disadvantage they suffer by being a bankrupt and what advantage they will gain by being discharged from bankruptcy. Although experienced in this jurisdiction, he was unable to draw my attention to any such case and I do not know of any.
Section 150 is, however, in very broad discretionary terms. There is no reason for retaining in bankruptcy someone who has fulfilled the ultimate public interest of being fully open and frank with creditors at an early stage of insolvency, and of participating in a full and open way, even being generous, in the administration of the bankruptcy. This is a particularly worthy response in someone who, having acquired significant assets prior to bankruptcy, knew that she would lose them all
commercial life all over again. I think that this is a case because of the bankruptcy and virtually have to start her
in which due cause has been made out for the exercise of the statutory discretion to grant a discharge and I make an order of discharge effective immediately.

., . m

I	r r ' , ) / . ! l	,
1 p:::	:d,z(l - . -- - ! 3 B ::(I?	cc-py df !hb

i RC;SS~~S i.21 J:ldg,il~ni hcrcln of h's HDmur

? JLmc; c? E 11iS!d