Re Mercovich, F.J. & Anor v Ex parte Vanguard Service Print

Re: FRANK JOSEPH MERCOVICH and TERENCE HAROLD GRIFFITHS
Ex Parte: VANGUARD SERVICE PRINT
And: FRANK JOSEPH MERCOVICH and TERENCE HAROLD GRIFFITHS
No. 51 of 1980
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT
OF THE STATE OF
WESTERN AUSTRALIA
Toohey J.

CATCHWORDS

Bankruptcy - application by creditor for order extending beyond the period of five years from the date of bankruptcy the period at the expiration of which objections against discharge would lapse - discussion of matters to be taken into account - whether fact that bankrupt has made no contribution to his estate from income earned during bankruptcy relevant - whether creditor must establish conduct beyond that which would justify an extension of the bankruptcy from three to five years - policy of Bankruptcy Act in respect of discharge from bankruptcy.

Bankruptcy Act 1966 sub-s.131(2), ss.149 and 150

Bankruptcy Rules r.51A

HEARING

PERTH
#DATE 24:6:1985

ORDER

The application made by Vanguard Service Print on 13 March 1985 be dismissed.

There be liberty to apply as to the costs of the application.

JUDGE1

On 12 February 1980 in the Supreme Court of Western Australia sequestration orders were made against Frank Joseph Mercovich and Terence Harold Griffiths. The orders were made on the petition of Vanguard Service Print. In the ordinary course sub-s.149(1) of the Bankruptcy Act 1966 would have effected a discharge from bankruptcy at the end of 3 years. However on 18 January 1983 the Official Receiver, in exercise of his power under sub-s.149(3), entered an objection to the discharge of each bankrupt.

Those objections had the effect of precluding a discharge from bankruptcy pursuant to sub-s.149(1). However, by reason of sub-s.149(7), an objection entered under para. (3)(c) lapses at the expiration of 5 years from the date of bankruptcy or, if the Court makes an order under sub-s.(8) or (9), the period fixed by the order. Sub-section (8) empowers the Court, at any time before the expiration of 5 years from the date of bankruptcy, on the application of any of the persons therein specified including a creditor, to order that the period at the expiration of which an objection entered under para. 149(3)(c) will lapse be such period exceeding 5 years, commencing on the date of the bankruptcy, as is specified in the order.
The application now before the Court is an application made by Vanguard Service Print on 13 March 1985 seeking various orders aimed at continuing the bankruptcies. The parties have been before the Court on several occasions this year, mainly because of objection taken by Mr. Mercovich to aspects of the application and to an order made by the Supreme Court of Western Australia designed to preserve the status of the bankrupts until the substantive application could be determined. These matters are the subject of three judgments given by me, one on 29 March 1985 and two on 27 May 1985. I need not refer to the reasons for judgment in those matters save to say that the way is now clear to deal with the substantive application.
I should also mention that from time to time orders have been made by this Court extending the time at the expiration of which the objection of the Official Receiver will lapse. The latest order extends that time until 5 pm on 24 June 1985, the date on which this judgment is being delivered. It is also necessary to mention that at the last hearing counsel for Vanguard Service Print said that, although the application sought orders against both Mr. Mercovich and Mr. Griffiths, there was no case in relation to the latter. The application was abandoned so far as it related to him. No specific orders are necessary in the case of Mr. Griffiths for the objection of the Official Receiver in relation to him will expire at 5 pm today and he will be discharged from bankruptcy by force of the Act.
Vanguard Service Print seeks orders under three provisions of the Act. The relief claimed is in the alternative so that if an order is made under one provision, no further orders are sought. Primarily the applicant seeks an order under sub-s.149(12) viz. a direction that the bankrupt shall not be discharged from bankruptcy by virtue of this section. The effect of such an order is to cast an obligation on the bankrupt to seek a discharge pursuant to s.150. Alternatively the applicant seeks an order under sub-s.149(8) whereby the Court may order that the period at the expiration of which the Official Receiver's objection will lapse be a period exceeding 5 years, commencing on the date of the bankruptcy, as is specified in the order. If no order is made under either of those sub-sections, the applicant seeks an order under para. 149(3)(c) giving it leave to enter an objection to the discharge of the bankrupt. Such an order would be of little value to the applicant unless the Court exercised its power under sub-s.(7) and extended the time at the expiration of which that objection lapsed. The period of 5 years from the date of bankruptcy has already expired.
Although sub-s.149(12) is couched in wide terms, the power to direct that a bankrupt shall not be discharged from bankruptcy is qualified by sub-s.(13) which requires the Court to take into account "such matters (if any) as are prescribed for the purposes of this sub-section". The prescribed matters are to be found in rule 51A. Of the matters so prescribed, the applicant relies upon the following:

"(a) ...

(b) ...

(c) whether the bankrupt has co-operated in the administration of his estate;

(d) the conduct of the bankrupt, in respect of the period both before and after the date of the bankruptcy;

(e) ...

(f) the age and state of health of the bankrupt;

(g) any evidence adduced by the bankrupt, the Inspector-General, the trustee or a creditor relating to -

(i) the circumstances in which the debts of the bankrupt were incurred, including the bankrupt's experience in, and understanding of, financial matters and of the obligations imposed on the bankrupt as a result of incurring the debts;

and

(ii) ... ".

The ground of non co-operation is based on an allegation that Mr. Mercovich failed to reply to correspondence from the Official Receiver's Office, in particular that he failed to supply statements of assets and liabilities for the financial years ended 30 June 1983 and 1984. There is also an allegation that Mr. Mercovich failed to supply the Official Trustee with his change of address but it became apparent that this allegation had no foundation and it was withdrawn. Mr. Mercovich's answer, in the form of an affidavit, is to deny that he failed to reply to correspondence. He says that he is uncertain whether he furnished the Official Receiver with a statement of assets and liabilities for the year ended 30 June 1983 but that such a statement is available and can be produced upon request. This of course does not explain why the statement was not furnished to the Official Receiver, if indeed it was not furnished. Mr. Mercovich adds that he has not furnished a return for the year ended 30 June 1984, saying that he received the relevant documents from his accountant in March this year after the present proceedings were on foot and that he was uncertain as to the course he should follow. His affidavit includes a photocopy of his income tax return for the financial year last past. The income tax return is on Form S as an employee. It would hardly seem to warrant the services of an accountant in its preparation; it is also hard to understand why the document was not prepared until 9 months after the end of the relevant financial year.
I am satisfied that there has been some non co-operation on the part of Mr. Mercovich in the administration of his estate. The significance to be attached to that non co-operation rather depends upon the other grounds upon which the applicant relies.
The next ground relates to the conduct of Mr. Mercovich, both before and after the date of his bankruptcy. The applicant's counsel described Mr. Mercovich's business history before his bankruptcy as "appalling", adding "... since 1975 Mr. Mercovich has walked away from a series of unmitigated business disasters of failed companies and financial collapses, moving on merrily to his next venture and leaving tens of thousands of dollars of unpaid bills in his wake". These are strong words. In support of them the applicant points to the report of the Official Receiver dated 19 May 1980. This report mentions Mr. Mercovich's involvement as shareholder and director in Fresh Food Industries Pty. Ltd. which was liquidated in 1979, C.J.M. Food Services Pty. Ltd. which was liquidated in November 1978 and Telepad Australia Pty. Ltd. which was liquidated in March 1978. In April 1978 he and Mr. Griffiths formed a partnership trading as Nationwide Publications (W.A.) and it was in connection with this business that they were made bankrupt, with creditors in excess of $145,000. As to the period after bankruptcy, the applicant points to the fact that Mr. Mercovich has been in constant employment but has paid no more than $500 to his estate. No payments have been made since 13 December 1982 though Mr. Mercovich appears to have an annual income of $8,000 or thereabouts and the use of a motor vehicle provided by his employer Chatsworth Nominees Pty. Ltd.
The applicant also points to what it describes as a "suspicious circumstance" relating to Mr. Mercovich and his employer, Chatsworth Nominees. An extract from the register under the Business Names Act 1962 (W.A.) shows that Nationwide Publications (W.A.) was registered as a business name on 9 May 1978, the proprietors being Mr. Mercovich, Mr. Griffiths and Mr. Dye. On 2 June 1978 Mr. Dye ceased to be a proprietor and on 12 January 1979 Mr. Griffiths ceased to be a proprietor. On 11 February 1980 a change was registered, noting that on 1 February 1980 Mr. Mercovich ceased to be a proprietor and that Chatsworth Nominees replaced him. 11 February 1980 was one day before the sequestration order was made against Mr. Mercovich. It appears to be the applicant's case that Mr. Mercovich's retirement from the firm and his replacement by Chatsworth Nominees was in the nature of a sham and that Mr. Mercovich has a continuing interest in the business.
The applicant's reliance upon para. (f) of rule 51A goes no further than to say that there is nothing in the age or state of health of Mr. Mercovich which precludes him from making some contribution to his estate. As to the remaining ground, para. (g) of rule 51A the applicant did not point to any matters other than those which had been mentioned in connection with paras (c) and (d).
Mr. Mercovich swore an answering affidavit to which he annexed a number of exhibits. No application was made on behalf of the applicant to cross-examine him on that affidavit and, unless particular contents are inherently incredible or are shown to be false by other material before the Court, I must accept what is said in the affidavit.
Mention has already been made of Mr. Mercovich's answer to his alleged failure to reply to correspondence and furnish returns to the Official Receiver. He has produced a copy of his income tax return for the year ended 30 June 1984 which shows a gross income of $8,320 from Chatsworth Nominees and no deductions. The return is not signed or dated though it is described in Mr. Mercovich's affidavit as "a photocopy of my income tax return for the financial year ending 30 June 1984, which clearly sets out my assets and liabilities". Of course the income tax return does not set out assets and liabilities; it sets out income.
Mr. Mercovich also refers in his affidavit to that part of the Official Receiver's report dealing with liabilities. It is unnecessary to refer in any detail to Mr. Mercovich's comments except to say that he points to an apparent duplication in creditors with the result that the deficiency in the joint estate of Messrs. Mercovich and Griffiths is $42,669 rather than $54,619. Mr. Mercovich does not deal with the fate of the various companies in which he was involved but, in the course of his address to the Court, he said that he had dealt with these matters in the course of his public examination. His response in short was that he had not been involved with Fresh Food Industries Pty. Ltd. for some 3 years before its liquidation and that the liquidation was effected for the purposes of a re-organisation, not because of pressure from creditors. An official manager was appointed of C.J.M. Services Pty. Ltd. 4 or 5 months after Mr. Mercovich's involvement in that company ceased and at a time when, if the company had been liquidated, a payment of 95 cents in the dollar or thereabouts could have been made to creditors. Mr. Mercovich accepted that Telepad Australia Pty. Ltd. lost money and was liquidated while he was still involved with it.
Mr. Mercovich deals at some length with the circumstances leading to his bankruptcy. The Official Receiver's report contends that his conduct was not satisfactory "in that after knowing himself to be insolvent in early 1978 he continued to trade and obtain credit to the amount of $100 upwards". Mr. Mercovich's answer is that had he "ceased trading at the first hint of trouble with my cash flow I would not have been able to pay the majority of my creditors substantial sums in reduction of the amounts due to them". That, I may say, is hardly an answer to the Official Receiver's criticism. As to Nationwide Publications (W.A.), Mr. Mercovich concedes that he was inexperienced in the publishing business, though denying any incompetence in the management or administration of the business. He says in his affidavit "I have since such time been managing the business of my present employer and this business has thrived under my direction to the present time".
In his affidavit Mr. Mercovich deals at some length with his relationship with Chatsworth Nominees and the circumstances in which that company became the proprietor of Nationwide Publications (W.A.). He asserts that the company is trustee for the R.B. Adams Trust. He deposes to the fact that on 1 February 1980 he ceased to be the registered proprietor of the business and that on that day the nature of the business was changed from publishers and advertising sales to typesetting and publishing. He asserts that his relationship with Chatsworth Nominees is no more than employee and employer and that he has no interest in that business. In the circumstances I must accept Mr. Mercovich's account of his association with Chatsworth Nominees. I have his sworn evidence on that matter, he was not cross-examined on his affidavit and such other material as there is gives rise to no more than a suspicion of continued involvement with Chatsworth Nominees.
Mr. Mercovich has been bankrupt now for 5 years and 4 months. The amount owing to Vanguard Service Print is of the order of $15,000. No other creditor has sought to extend the statutory period of bankruptcy. There has been a lack of co-operation on Mr. Mercovich's part; his conduct before bankruptcy is open to criticism; and he can be further criticised for failure to make any substantial contribution to his estate, in particular for his failure to make a payment since December 1982. On the other hand, it was open to the trustee to apply to the Court under sub-s.131(2) of the Bankruptcy Act for an order that part of the bankrupt's income be paid to the trustee for the benefit of his creditors. No such action was taken. This is not to criticise the trustee for there may have been good reason why such a step was not taken. But, in the absence of such a step, I do not think that failure to make contributions from an insubstantial income warrants an order under sub-s.149(12) of the Act.
The policy of the Act is clear. In ordinary circumstances a bankrupt is discharged from bankruptcy at the expiration of 3 years. If there has been something in his conduct warranting an extension of that time, there may be an extension for an overall period of 5 years. The grounds set out in rule 51A are in many respects a duplication of the grounds upon which an objection may be entered under sub-s.149(4). An objection entered under para. 149(3)(c), to which sub-s.(4) relates, lapses at the expiration of 5 years from the date of bankruptcy unless the Court otherwise orders. It seems to me to follow that before a bankruptcy is prolonged beyond 5 years there must be something more reprehensible in the conduct of the bankrupt than would merely justify an extension of the bankruptcy from 3 years to 5. Despite all the criticisms that may be made of Mr. Mercovich's conduct, I am not persuaded that his failings are of such a serious nature as to justify an extension of his bankruptcy any longer.
In those circumstances I am not persuaded that an order under sub-s.149(8) is appropriate. As mentioned earlier in these reasons, an order under para. 149(3)(c), giving the applicant leave to enter an objection, is of no value to Vanguard Service Print unless there is a corresponding order under sub-s.(7) extending the time at the expiration of which that objection lapses. For the reasons already given, I would not be prepared to grant that extension and therefore no order should be made under para. 149(3)(c).
It follows that the application should be dismissed.

[1985] FCA 272

24 JUNE 1985