Re Mellington, M.W.

[1990] FCA 85

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( ?OR LI!4ITED DIST313UTION O N L Y )

BANKXUITCY ACT 1966

I N TBE FEDZ-Z\L COiJIiT O F AiiSTLAL1.L. !

)

C-ENZ.X>.i	DI:iISIO?i	1
I
3>.NK9U?TZY	DISPXICT O F TB:	!
)
STATZ	O F VICTORI-\	1

EX J A R T E : D A V i D 2ENRY SCOTT a s T r u s t e e o f t h e s a n k r u p t

E s c a c e o f :< rchae l Zayne X e l l r n g i o n

A ? p l ~ c e n c

and

and

Second 3 e s s o n d e n c

COURT:	;qoodward 2
DATZ:	7 March 1990
? L A C E :	Xe lbourne

T h l s r s a n a p p l l c a c r o n oy che c r u s c e e o f a bank r i l p t

e s t a c e f o r an o r d e r p u r s u a n c co S 1 2 2 o f i h 2 3 a n k r u o c c v Ace

-

1966 t h a t a payment o f $ 6 , 8 6 6 . 6 3 , made on o r about 4 A p r r l

1 9 8 5 , by he bankrupc t o t h e r e s ? o n d e n c s be d e c l a r e d v o l d a s

.

a g a ~ n s t t h e a p p l r c a n t , a s c r u s c e e o f cne p r o p e r t y o f che

-

b a n k r u p t , a s b e l n g a paymenc hav:xg che e f f e c i o f q r v l n g t h e

r e s p o n d e n i s a p r e f e r e n c e , p r :o r~ :y o r a d v a n t a g e o v e r che

o t h e r c r e d r c o r s of che b a n k r u p t .

The paysen: r n q u e s c l o n -das made r u r s u a c c t o c:?e

t e rms of se:rlemenc of a p r a v r o u s oankrupccy e c i t r o n , irhich

was chen xrcndrawn by l e a v e of che Cour: on 15 A p r l l 1985.

The paynenc slas nade more t h a n 3 nonzhs , o u r l e s s t h a n 6

noncns , b e f o r e t n e d a t e of p r e s e n c a t r o n o f i h e l a c e r

s u c c e s s f u l petition on 16 September 1983 . I: was i h e r e f o r e

w i t h r n t h e p e r r o d p r e s c r ~ o e d by S 122 o f che Ac t .

The s h o r t p o i n t , a g r s e d by che p a r c l e s , x h l c h I

have t o decermr;le i s i ~ h e t h e r , i n che a d i n l t c e d l y confused

s t a c e o f t h e j a n k r u p c ' s a f f a r r s , t h e Courc c a n be s a c l s f i s d

t h a t t h e bankrupc x a s i n f a c c insolvent a c che d a c e o f che

caymenc. S e c c i o n 1 2 2 o n l y applies eo a paymenc n a d e ,

"by a p e r s o n xno i s u n a b l e :o pay nLs d e b c s a s

chey become due from h l s own noney" .

The d ~ f f i c u l t y a r r s e s from che f a c t chac che

bankrupc Itspc n o t h r n g chac c o u l d p r o p e r l y be d e s c r i b e d a s

books o f i c c o u n t , -dhich c o u l d g r v e a p l c r u r e o f h i s f r n a n c l a l

- -

a r r a r r s ;	no r	d i d he	compr le	any	scacemenc	o f	h i s	E r n a n c i a l
p o s i c ~ . ~ n	i n	che	o r d i n a r y	c o u r s e	of	h r s	j u s r n e s s	a c	any

r e l e v a n c r i m e . And 1: r s a g r e e d bec;reen che p a r c ~ e s c h a t

e v i d e n c e x h l c h he gave i n t n e c o c r s a o f h r s p u b l r c

.

examlnac ion c e n n o t be r e l ~ e d upon, whlch i s sihy n e l c h e r p a r c y

c h o s e t o c a l l t h e b a n k r u p t C O g r v e e v i d e n c e 12 t n r s

proceeding.

- j-

- 7

. L c chc C o u r t i s l e f t wlch is a s e r r = s o 5

- -

a s s e r t r o n s by che oankrupc r n tra-0 scacemencs o f a r r a l r s , and

che b e s c e n d e a v o u r s o f ;he : rusceo t o c o l l e c c a a c e r ~ ~ l

r e l e v a n t eo che l r ' t e l y s c a c e o f che t h o s e a f f a - r s on =he d a z e

:n q u e s c r o n .

-,' ~ n e problem f a c e d by h Cour; 1s c o m p o ~ n e e d

b e c a u s e L E seems t h a c c h e r e g a s a csme -<hen cne 3ankrup'c

c o n d u c t s d a s u b s t a n ' c l a l c a r r y i n g b u s r n e s s and had s i g n i f ~ c a n c

i n t e r e s t s i n boch r e a l esta:e and p e r s o n a l p r o ? e r t y . sowever

h ~ s p o s l c i o n a p p e a r s t o have deteriorated fairly r a p r d i y ,

p r o b a b l y d u e co d r o u g n t c o n d r c l o n s Ln h i s r e g r o n from 1982 co

1 9 8 6 ; and c h e r e =an b e no doubc t h a t irhen h e iras f r n a l l y

d e c l a r e d bankrupc he .$as h o p e l e s s l y i n s o l g e n c .

The d i f f l c u l c y l r t s in d e t e r n r n l n g h l s ? o s r c l o n on

a p a r c r c u l a r d a t e when c n e r e i s no f r r a b a s e from whlch co

move backward o r f o r w a r d t o t h a t d a c e ( s e e ? e . >.cclon Hasce

C o l l e c t i o n s c L:d ( I n L r q u l d a c r o n ) ; Crawford v 0 ' 3 r l e n

(19811 vx 6 9 1 a t 7 0 2 - 2 ) ; and t h e r e r s no c l e a r s i c :u re a s t o

p r e c l s s l y wnac o c c u r r e d becween c h a c d a c e a n d ens c lme when

h r s a f f a r r s c o u l d be c l o s e l y examined by a c r u s c e e . i-ven che

bankrupt's	p r e s e n t	p o s z c ~ o n i s	noc	c l e a r ,	h e c a u s s	of	t h e
u n r e l l a b l l r c y	o f	h i s	s t a c e n e n t s	and	t h e	d l f f r c u l c y	i n

o s t a h l l s h i n g some of :he o b ] e c : ~ v e f a c t s . ;.:07~e71r c i e Courc

,

muse do t h e b e s c i t can i n :he c r ccumscancos .

The e v r d e n c e of che a p p l r c a n c was c o n c a l n e ? I n a n

affidavit, which h e swore , f i l e d on 1 3 September 1 9 8 9 . I n

~t ne sa lc i c h a c , f o l l o w i n g h i s i n v e s c i g a c i o n s , he oe l l evec i

t h a c ,

" A s a c 1 0 t h W r l l l 9 8 5 cne 2ankrupc h a s a

deEic~anc: r of a s s e c s a s a c a i n s c l i a o ~ 1 i c i e s o f

no= l e s s chan $ L 0 8 , 4 8 d 00 a - . a che

d e f l c l e n c v	c o u l d	h a v s	o++n	i l S h	as
s 4 0 0 , 0 0 0 . 0 0 . "

>.nnexed t o che ? ? f i d a v : t , and a c o p c s d 3 y i c , -,{as a

d e c a l l e d conmenearl(, by che c r u s t e e , zn :he b a n k r u p t ' s

a f f i d a v i z of means x h ~ c h he had svocn or 1 3 A p r ~ l 1985 . Tnac

- F

a r r ~ d a v i t o f means conc luded w i t h t h e es"c-mcs c h a c h i s

a s s e z s exce6ded n i s liabilities by 5 5 4 2 , 0 0 0 . 0 0 . I c was i n

-

r e l i a n c e upon t h ~ s a r r i d a v ~ t t h a c cne Courc had 3 r s v l o u s l y

g i v e n	l e a v e	f o r	t h e	e a r l ~ e r	p e c i c i o n	co	be	i i i t hd rawn .	I n
L

c n a t a f f i d a v ~ t h e ciebcor (,ihom 1 s n a l l c o n c l n u e co c a l l ' t h e

oankrup: ') s e t o u t h i s a s s e c s a s f o l l o w s -

( a ) Eareh moving and f a r m i n g l a n c a n d equ ipmen t -

j200,OOO

( b )	House	a t	1 0	Zenderson	r	e	,	Ouyen	-
5 7 5 , 0 0 0

( C )	s o u s e	a c	8 3	S c o t t S c r e s t ,	Ouyen	-	$ 7 0 , 0 0 0
( d )	Farm	a c Ouyen	pcrcnaseci	unde r	i e r m s	c o n c r a c c	from

V R & ?! D ?!orrish $ 5 0 0 , 0 0 0

10T.L.L Sa4J,OOO

I n a d d i t i o n t h e bankcupc rz ferz2 .d C O a s u ~ s c a r . z ~ a l mounc of

e a r t h - n o v ~ n q equipment h e l d on l e a s e , :rt x h i c n ne c l a i x e d a n

equ:ty	of	$ 1 3 3 , 5 0 0 . 0 0 .
A s t o t h e s e ~ t e m s che c r u s t e e commented a s f o l l o w s

-3 -

(2) ~ l a n t and zqulomenc

A clearlng sale was held c;n 21 Zune 1 9 8 5 an6
real~sed $43,777.00 nowever 1 0 c all plane was sold and e2e

clearlnq sale vould nave reailsed less chan che value of tne

equipment as par:  of a c o ~ n g csncern. -1.ccsrd:nql.r z.-

trustee accepted, for jresenc pur?oses, che bankrupt's

-raluatlon of $200,000.00

(b) %use - 10 Henderson Screet, Ouven The trustee commented chac propercy .ialues ln Ouyen

have fluctuated greatly In recent years. Apparenciy cks bankrupt pali $80,000.00 for lc i x June 1984; :c was valued by tne ANZ Sank ac $70,000.00 in October 1 9 8 4 ; and 1c iras sold in July 1988 f c r $47,500.00. 3ecause of eh? diiflculcy Ln fixing any more accurate esclmace, che cruscoe

accepted the bankrupt's valuat~on	of $75,000 00.
(S	3ouse - 83 Scoct Screet, Ouven Sy an agreement under S 86 of che Famllv Law Act,

made in November 1984, this property passed co the bankrupt's

il~fe, alchouqh the ban~rupc remained l~anle for carta~r:

mortgage payments. The propercy -<as -ralued ac 550,000.00 : z

che Family Courc agreement but, havrng jassed cs che wife, i r

- ,

should noc have neen lnclueed es any ?arc or cna oankrupc's

assecs.

(d) ?arm at Ouyen ourchased under term concract Xere che trustee commented,

"-As already advlsed no formal valuac~ons are

d.1~11dble. The ~ E I I ~ L U P ~ ~ u ~ c h a s s d che pcopercles on 1 11.1984 and my rnvesc:gac~ons reveal :he propercias xere purchased 'ac che very cos of che marXecJ, and c there has

been a consrderable deprsss~on :n che narret

s~nce.	Cercalnly all accsmpts by the ~ a n ~ r u g c	- - .
CO sell propercy during 1985 a	,	and I

nare f~rsed	the opinion siqce ban.crcpccy, chat
r cannoc :eal:se a?.y sqdlcy. Accorzilr~~ly	1
have valued cne propercy ac cosc."

The amount alloued on t h ~ s basrs was $330,000.00 However the bankrupc made no payner?: on chrs properry afcer paylac a deposlc cf 533,009 rn November 1984. The vendors rescinded the contract ~n December 1985.

In che rssulc the bankrupt's assaks, ilhich h2

valued at $815,000.00, were accepted by the cruscee as hav:ng
a valuation of noc more cnan $605,000.00

Turn:ng'then to che question of i+abil~ties, under

-

the headlng of 'Varrdfis Cred~tors' che crustee commented as

"I refer to :he llsc of czedltors supplisd herewith. You ~ 1 1 1 note chat the f~gure I have given 1s certain. There is anocher S90,692 snown as elcher 1984/55, 1985, or

quantify che anounc of creditors dus as ac	unldencrfied, and ~n addrtion I cannot
10.5.1985 and pard prior eo i8.2.1986, however I noce chat cred~cors cocallrng $105,738 rere paid :n the Sour monzhs zfter 10.4.1985 a2d I suspect a large proporc~on of this amounc relaced zo che per~od prlor to 10.4.1985, and quite possibly many paymencs after cne period - or :our nonchs also relace to e perlod prlor."

The bankrupt conceded 'varlous crsdrtors' rn che sum of $60,000.00, but che trustee's cotal for tnem wis $215,177.

-
- 1 -

i n a d d l e i o n co t h e s e , i h e r e x e r o t h r e e s p e c i f i s d creditors

l ~ s c e d by che bankrupc , c o t a l l r n g $81 ,000 , h which t h e

- . t e e had no s e r i o u s d r s a g r e e m n t . Bzc oile c r e d l e o r , V.? &

?ID :.!orrrsh ( r e 'Wymlot F a r m s ' ) was a c c e p c e d by che t r u s c e e a s

b e i n g oved 5309,375 r a c h e r t h a n S295,000 .

I n a d d l t ~ o n , che c r u s c e e s a l 5 c h a c che b a n k r u p t -das

l ~ a b l e f o r cne f i r s c moresage l o a n on =he S e n d o r s o n S c r a e t

p r o p e r t y . He was a b l e i o c a l c u l a c c che d e b i a s a c 1 0 A p r i l

1985   a s $10 ,000 .00 .

..

Eowever i n 2 malor d : f f e r enc= becireen t h e t r u s t e e

and t h e bankrupc on :he 11sc of c r e d l c o r s was t h a t , wnereas

t h e bankrupc had cla l rned a n e o u i t y o f $133 ,500 i n v a r i o u s

i t e m s of equipment h e l d on h ~ r e p u r c h a s e concrac:s a n d Lease

agreements, t h e c r u s t e e accepted t h a i c h c z e ;uzs a d e ? r c i e n c y

unde r c h i s kieadlng, owed by t n e d e b c o r , o f $ 9 6 , 6 5 8 .

A c c o r d l q g l y , che t o c a l l ~ a o i l r i i e s a c c e p t e d by che

trustee x e r e $713,454 a s a g a l n s c che b a n k r u p c ' s a d m ~ s s l o n o f

l ~ a b l l l c l e s t o c a l l l n g $302 ,500 , a f t e r a l l o w ~ n g f o r h l s

a l l e g e d e q u l t y l n che hire p u r c h a s e ecu lpmenc .

I n t h e r e s u l t , che t r u s c c e b e l ~ e v e d c h a t che

d e f l c z e n c y shown by t h e s e f i g u r e s amounced r o 5108 ,484 , a c

- -

:he v e r y l e a s c , whereas che b a n k r u p c r s a = r l d a v i c of means had

shown $542,500 a s che s u r p l u s o f a s s e c s o v e r l l a b l l r t l e s .

H I S l a t e r statement o f a f f a ~ r s showed chac a t i h e d a c e of

b a n k r u p t c y , 18 F e b r u a r y 1986 , t h e r e was a d e f ~ c i e n c y o f

$437 ,176 - a t u r n a r o u n d o r :use u n d e r 5 1 x ~ l L ~ o n i t e n

months , d u r i n g x h l c h cime he had noc Seen c r a d i n g .

~t would be zempclng t o c h ~ n k t h a i eh2 bankrupc

mighc have mln:mlzed n:s ? robloms i n A p r l i 1985 i n o r d e r t o

- -

s t a v e o z r ban ' t rupzcy ,	and	~ h e n	c o n c e a l e d	some	a s s e t s on	1985
when	t h e blow had	f a l l e n	3uz	eh2	c r u s c e e ' s	b e s t e s c l x a c e of

- ,he l : ke ly final deficiency :n c:?? b a n ' t r u p c ' s e s c a i e i s

becueen $520.000 and $670 ,000 . The re seems t o o r no room f o r

n i d d e n a s s e c s eo a s s l s c che r e s p o n a e n c s ' c a s e .

However, t h e Courc cannoc a c e upon t h e c r u s c e e ' s

b e l i e f t h a t t h e b a n k r u p t .&as i n s o l . ~ e n c on 4 ? . p r l l 1985 . I t

must dece rmlne eh2 i laccar f o r i t s e l f , on t h e b a l a n c e of

p r o b a b i l i c i e s , ba sed on s u c h f a c z s a s c a n be f o u n d .

Thera a r e a number o f f a c z o r s d h l c h p o l n t i n ia . four

of i n s o l v e n c y . The quesc1on i s whe the r t h e y a r o s u f f i c : e n c l y

p e r s u a s i v e t o s a c l s f y t h e onus 3f p r o o f on t h e e r u s t e e . The

.

r e l e v a n t f a c t o r s a r e :

( l ) B e f o r e 4 A p r i l 1985 che b a n k r u p t had l n c u r r e d

a nuinber	of	u n p a i d d e b t s which i re re a c l e a s e 3	monchs	o l d -
l n c u r r e d i n 1984 .	These	c o c a l l e d a c l 2 a s t S186,814	and	t h e r e

was a f u r t h e r d e b c o f S20 ,000 d a t ~ n g f r o q 2ar .uar~f 1985.

These d e b c s were owed t o 25 different creditors.

( 2 ) Xhen che c l e a r l n g s a l e o f t h e o a n k r u p c ' s p l a n e

and equipment iras h e i d on 2 1 J u n e 1985 , some $15 ,000 o f che

p r o c e e d s	had	c 3 be	p a l d	i x m e d l a t e l y	co	t h e	V i c t o r i a n	P o l i c e
-

i n s a c l s f a c t i o n o f o u c s c a n d i n g S h e r i f f ' s o r d e r s . L E is

r e a s o n a b l e =o assume chac c h e s e o r d e r s r e l z c e d co d e b c s

~ n c u r r e d - ~ e 1 1 b e f o r e J . p r ~ 1 1985 , : ~ h r c h c o u l d nnc be s a c ~ s f r e d

unt.1 che clearing s a i e had been h e l d . ?he same c a n be s a ~ d

o f che amount o f $21 ,500 paid co a n o ~ h e r c r e a ~ c o r alter che

s a l e p u r s u a n c =o a r e s c r z l n r n g o r d e r

( 3 ) The d e b i i ihrcn l a d co che nak l -g of a

s e q u e s t r a c l o n	o r d e r	2 g a r n s r	che	o .=nkrupt	x a s	an	amoLnc	o f
$ 1 judgment was e n t e r e d i n April	9	1	x h i c h	had	been	owlng	s l n c e 1983 and	f a r x h i c h

1984. T h i s amoun: x a s l i ?c luded

r n t h e sum of $186 ,184 r e f e r r e d CO l n p a r a g r a g h ( 1 ) above .

( 4 ) Dehc c o l l e c t ~ n g r e c o r d s o f Dun and 3 ~ 2 d s ~ r 2 e t

showed i h a c ~ u d g m e n i s had been e n c e r o d agaLnsc t h e ~ a n k r u p t

r n f a v o u r o f v a r l o u s c r e d l c o r s f o r che f o l l o v l n g anoun:s a t

r e l e v a n t t l m e s :

3	J 'anuary	1985	$ 1 , 7 1 3
5	Tebrua ry	1985	S S , 4 9 3

1 2 A p r i l	1935 .	$3,5CO
1 0 flay	1985	513 ,332

28 Play 1985 $18 ,368

nose o f t h e s e amounts a r e a l s o : n c l u d e i i n =he

c o t a l o f $185 ,814 I n p a r a g r a p h (1) above .

( 5 ) Dur lng cne l e r l o d from 1 Zanuary 1 9 8 5 co 12

A p r ~ l 1985 che ANZ 3ank s e e q s t o have c i ~ s n c n o u r e c no l e s s

t h a n 35 cheques p r e s e n t e d oy t h e bankrupt.

( 5 ) O n 11 oecenbec 1984 , cne b a n k r s p c e x e c u t e d a

s t o c k mor tgage o v e r 1057 s h e e p and 56 c a c c l e d h l c n were on

t h e ' w y n l e t Farm' p r o p e r c y whlch he was p u r c z a s l n g .

.

The o n l y c a u n t e r v a r l i n g e v r d e n c s s u g g e s t i n g i h a c

t h e Sankrupc migh t hzve 5ccn z c l v e n t a c cna r s l s . r anc tine v a s

a s f o l l o w s :

( a ) Ea l e a s e d a new 1985 n e r c s d s s Be22 . ~ o r i : ?

591 ,157 from Custom C r e d r i B o l d i n q s Lcd o n 2L ? e b r d a r y i 9 8 5

( 5 ) s e Sonaced 5 2 7 , 0 0 0 r o a hear: r r a n s p l a n c r r u s c

and a t r a n s p l a n c r e c i p r e r c on 20 December 1984 .

A:zhough c h e s e paymeccs c o u l d be s a g g o s t r v e o f a

b e l i e f by che bankrupc i n h ~ s own s o l v e n c y , cney c o u l d a l s o

be s e e n i n a n o t h e r l i g h t - che f i r s t a s n e r e i r r e s p o n s i b i l i t y

and t h e second a s r e c k l e s s g e n e r o s l z y .

a a v l n g c o n s i d e r e d a l l t h i s m a c e r ~ a l , I f i n d t h a c

che t r u s c e e h a s nade ouc h i s c a s e The re r s c o g e n t e v ~ d e n c e

t o s u g g e s t c h a t che b a n k r u p t c o u l d noc s a y h i s d e b c s a s cney

f e l l due. 13 Apri ' l 1985. i c i s c e r t a i n c h a t he was noc p a y i n g

them, even i n t h e f a c e of c o u r z o r d e r s , and 5:s cheques -.ere

- -

r e g u l a r l y	d i s h o n o u r e d .
I have taken i n c o a c c o u n t h r s ocha: a s s e t s cnac

might havs been r e a l i 3 e d a c a r ime , a s I musi do ( s e e

S a n d e l l V ? o r c e r ( 1 9 6 6 ) 115 C L 3 6 6 6 a c 5 7 0 - 7 2 ) . 5owever I am

satisfied, on che b a l a n c e o f p r o b a b i l i t i e s , t h a z c i e s e a s s e c s

were n o i s u f f ~ c i e n t , by a c o n s i d e r s b l e 'xarg:?, i o pay h r s

d e b c s o n che r e l e v a n c d a c e .

L

h c c o r d i n g l y I s h a l l make t h e z r d e r sough: i n ~ n e

app1ica t :on .

-LL-

:iowcvcr I csk-. :hc ; . ~ = w =hzc che respondents 6.6

n o t benave u n r e a s o n a b l y , r n a l l c ~ c c u m s ~ a n c e s , :n r e s l s c ~ n g

ch2 i r u s c e e ' s c l a l ? ; and s o I 3 r o p o s e zo o r d s r chac che

. -

r e s p o n d e n t s a	y	:he	c r u s z e e o n l y one ha::	o f	n:s	c o s c s o f	che
application.

I c e r c l f y t h a t t h l s and i h e

10 p r e c e d r n g p a g e s a r e a t r u e

and a c c u r a t e copy of he Reasons

f o r Judgmeni here12 o f

The Ban Mr C u s c l c e Roodward

A s s o c l a t e

S o l i c i t o r f o r t h e App l rcanc :

S o l ~ c ~ c o r f o r che X e s p o n d e n ~ s :

Date o f h e a r l n g :  17 November 1989