Re Mullen, R.K. v Ex parte Mullen, R.K
[1987] FCA 631
•16 NOVEMBER 1987
Re: ROGER KEITH MULLEN
Ex parte: ROGER KEITH MULLEN
No. 198 of 1984
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
French J.(1)
CATCHWORDS
Bankruptcy - application for discharge - objection to discharge - notice of opposition to application - allegation of misconduct - no misconduct alleged in report - trustee's duty in report to court - lack of business acumen - not necessarily culpable neglect - post discharge co-operation by bankrupt - duty to co-operate - principle governing discharge after 3 years.
Bankruptcy Act s.150
Re: Daff and Daff; Ex parte: The Bankrupts (Unrep. 9/9/85, Toohey J.)
Re: Tarvydas; Ex parte: The Bankrupt (Unrep. 25/11/85, Toohey J.)
Re: Zion; Ex parte: The Bankrupt (Unrep. Smithers J., 26/9/86)
Re: Maher (1985) 61 ALR 592
HEARING
PERTH
#DATE 16:11:1987
Counsel for the Applicant: Mr J.R. Brooksby
Solicitors for the Applicant: Paterson & Dowding
Counsel for the Trustee: Mr K.L. Christensen
Solicitors for the Trustee: Phillips Fox
Counsel for MGICA Ltd: Mr M.F. Holler
Solicitors for MGICA Ltd: Parker & Parker
ORDER
The bankrupt is discharged.
Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
Roger Keith Mullen became a bankrupt upon his own petition on 6 April 1984. Under the provisions of s.149 of the Bankruptcy Act he would have been automatically discharged on 6 April 1987, but for the lodgment by the trustee of an objection to discharge on 30 March 1987.
He now applies for discharge from his bankruptcy by order of this Court pursuant to s.150 of the Act.
When made bankrupt he was 39 years of age and married with two dependent children, Kellie and Brett, aged 11 and 8. He had separated from his wife in April 1982. She retained custody of the children. A trust was set up for their benefit known as "The Kellie and Brett Mullen Trust" and she is the trustee of it.
Although a pharmacist by qualification, Mullen's business interests were diverse.
He was a 50% partner in the Wickham Pharmacy, carried on the business of the Paraburdoo Pharmacy and was managing director of Mullen Nominees Pty Ltd, which operated trucking, air charter and electrical goods retailing businesses.
He was a director of North West Travel Pty Ltd and North West Rental Cars Pty Ltd. He was also Chairman of Directors of an investment company called Calpurnicus Pty Ltd. He had some 100,000 shares in that company which were forfeited for non-payment of calls.
Following the withdrawal of financial support by the Westpac Banking Corporation in September 1982 and unsuccessful approaches to various lending institutions, receivers and managers were appointed over Mullen Nominees Pty Ltd. North West Travel Pty Ltd and North West Car Rentals Pty Ltd went into liquidation and a receiver and manager was appointed to another company with which he was associated, namely, Roger M. Pty Ltd.
It appears to have been accepted by the trustee that the bankruptcy arose from the failure of the various companies and the liabilities incurred by reason of personal guarantees in respect of finance provided to those companies.
Assets and liabilities disclosed in the statement of affairs were $355,100.00 and $1,345,780.00 respectively.
Realisations by the trustee have yielded $100,778.00 to date, while proofs of debt of $539,382.00 have been received.
As yet unrealised assets include buildings on leased land at Wickham and Paraburdoo, an aircraft hangar at Roebourne Airport and Mullen's equity in a house at Lot 446 Flight Street, Miami.
There are debts of unknown value said to be due by a company called Etan Pty Ltd pursuant to an employment contract and rentals owing by the same company for the use of the premises at Wickham known as the Wickham Sound Lounge.
Some giftware, jewellery and electrical goods, video recorders and television sets were sold by the receivers and managers of Mullen Nominees Pty Ltd, but are believed by the trustee to have been the property of the bankrupt.
The picture is complicated by the terms of a property settlement between Mullen and his wife. That settlement is embodied in an agreement dated 14 November 1983.
Under that agreement he transferred to his wife as trustee of the Kellie and Brett Mullen Trust, his interest in their house at Attadale subject to mortgages to Alliance Acceptance Co. Ltd and Australian Guarantee Corporation Ltd.
He also assigned his interest in the Wickham Pharmacy premises and a house at 15 Oleander Place, Wickham - both subject to the consent of the lessor, Cliffs Western Australian Mining Co. Pty Ltd.
He undertook to pay amounts due under the Alliance mortgage and to discharge the AGC mortgage within a year of the date of the agreement.
To secure the discharge of the AGC mortgage, Mullen charged to his wife in her capacity as trustee, his interest in the Wickham Sound Lounge building.
The agreement was expressed to be subject to approval by the Family Court of Western Australia pursuant to s.87 of the Family Law Act 1975 and it was duly approved.
He defaulted in relation to the Alliance and AGC mortgages and the Attadale house has been sold for the benefit of those mortgagees.
Trustee's fees to date have been paid, but there has been no dividend to creditors.
Since his bankruptcy Mullen has been employed as a pharmacist in Darwin from 1 July 1984 to September 1985, in Bundaberg, Queensland from September 1985 to June 1986 and at the Promenade Pharmacy in Bedford until May 1987.
He says that he has not earned in that time sufficient to make any significant contribution, having received between $20,000.00 and $22,000.00 in each of the years since his bankruptcy commenced.
Since 5 May 1987 he has carried on the business of a pharmacy at a shopping centre in Innaloo. It is one of a group of pharmacies which trade under the name "Pharmacy 777".
His acquisition of this business was made with the approval of the trustee and financed by the vendor and a loan from the National Bank in Rivervale, guaranteed by a company called Sigma Rumbles Ltd.
The lease of the pharmacy premises has not yet been assigned to him as there is a provision in it barring assignment to a bankrupt. The head lessee is Chevrolet Nominees Pty Ltd, a company associated with the Pharmacy 777 group. It continues to hold the lease while Mullen occupies the premises.
Mullen is experiencing some difficulties in dealing with suppliers to the pharmacy as he is obliged to advise any who deal with him on credit terms that he is an undischarged bankrupt.
He presently pays $70.00 per week maintenance for his children. He is trying to operate on the basis that he takes drawings of $2,000.00 per month. Out of that he must make provision for tax.
The trustee's objection filed on 30 March 1987 was based on two grounds:-
1. That the bankrupt is able or is likely within 5 years from the date of his bankruptcy to be able to make a significant contribution to his estate.
2. That the discharge of the bankrupt by force of s.149 would prejudice the administration of the estate in that it has been and is a vexed administration and the trustee envisages that a further and sustained co-operation on the part of the bankrupt will be required to successfully conclude investigations and to facilitate the realisation of assets.
As can be seen neither ground involved any suggestion of misconduct.
His report to the Court pursuant to sub-s. 150(3) of the Act also avoided any allegation of misconduct under sub-s.150(6) or at all. While there was a passing reference to Mullen having been disciplined by the Pharmaceutical Council of W.A., this was neither explained nor relied upon at the hearing. In the light of the report it was a more than a little surprising to see a Notice of Opposition to Discharge filed on 6 July 1987 which alleged:-
"1. You brought on, or contributed to, your bankruptcy by culpable neglect of your business affairs, including but not limited to your affairs as a director of companies which went into liquidation (North West Travel Pty. Ltd., North West Car Rentals Pty Ltd) or which had a Receiver and Manager appointed to them (Mullen Nominees Pty Ltd).
2. Prior to your bankruptcy, you divested yourself of assets that would otherwise have been available as part of your assets, by entering into deeds and maintenance agreements pursuant to sections 86 and 87 of the Family Law Act and further that you entered into the agreements with your wife in anticipation of bankruptcy and in anticipation of companies of which you were a director either going into liquidation or having Receivers and Managers appointed over them."
Mr D.R. Spencer, an employee of the trustee, gave evidence about the discrepancy between the report and the notice of opposition:-
"Unfortunately at that time we had two days' notice to get that report submitted. Unfortunately, there was not sufficient time to review the file in as much detail as what was warranted."
As an explanation of the omission from the report of any allegation of culpable neglect, this is less than satisfactory. The application for discharge was filed on 13 April 1987. There was ample time to file a considered report and it was the personal non-delegable duty of the trustee to do so.
If a bankrupt is to meet allegations of misconduct, he is entitled to know the basis upon which they are made. A court is entitled to the assistance of a report which properly informs it of the facts supporting such imputations. - Re: Daff and Daff; Ex parte: the Bankrupts (Unrep. 9/9/85, Toohey J.), Re: Tarvydas; Ex parte: The Bankrupt (Unrep. 22/11/85, Toohey J.)
Counsel for the trustee seemed to suggest that Mullen's lack of business acumen could support an inference of culpable neglect. While there may be some cases in which the cognitive deficiency can be elevated into volitional default, this is not one of them.
The failure of a businessman to take steps necessary for the proper conduct of his business may be culpable if he knows what he ought to do.
According to the circumstances, the same conduct might not be culpable in the case of an inexperienced or uneducated person. That is not to suggest that inexperience or ignorance will provide a general excuse for allegations of neglect.
However the attempted equation between lack of acumen and culpable neglect cannot be sustained in this case. Nor was there any other evidence to satisfy me that Mullen's bankruptcy was brought about or contributed to by culpable neglect of his business affairs.
Counsel for the trustee also contended, for the first time, in his closing address, that Mullen had, after knowing himself to be insolvent, continued to trade and thereby engaged in misconduct of the kind contemplated by para.150(6)(b) and possibly also para.150(6)(c).
Not only does the allegation find no place in the trustee's report, it is not mentioned in the Notice of Opposition to Discharge filed by the trustee. Nor is it raised in the original objection to automatic discharge.
Mullen told the Court that in September 1982 the Westpac Banking Corporation withdrew financial accommodation for his companies.
Having reduced the liability to Westpac by some $185,000.00 between October and November 1982, he found himself in a difficult liquidity situation. With his accountant he tried early in 1983 to re-finance the business enterprises. The R. & I. Bank and Perpetual Trustees were prepared to accommodate him, but the arrangement failed for want of co-operation from his estranged wife who was then a director of Mullen Nominees Pty Ltd.
He was cross-examined briefly on the continued trading of the companies up until the appointment of receivers and managers. I could not, however, be satisfied on the evidence that he had, after knowing himself to be insolvent, continued to trade or contracted a debt provable in bankruptcy without having at the time of contracting it any reasonable or probable grounds of expectation of being able to pay it.
As to his ability to make a contribution to the estate, there was no evidence to suggest the source of such a contribution. His present salary, reflected in his drawings, is a modest one and there is no reason to suppose that there will be any dramatic increase in that over the next 2 years.
As to the property agreement with his wife, I think it sufficient to say that the evidence does not persuade me that it was entered into in anticipation of bankruptcy. However, the principal thrust of the trustee's case was that the settlement agreement required further investigation with a view to determining whether it could be set aside.
Mullen's co-operation, it was said, was necessary to further this investigation and also there were outstanding inquiries in relation to the affairs of his companies.
The trustee's witness, Mr Spencer, readily agreed that Mullen would co-operate even were he to be discharged from bankruptcy.
The nature of the assistance contemplated related largely to the supply of information as to the circumstances and events that occurred at the time of the settlement agreement.
It is important to note that the fact of discharge does not dissolve the statutory duty upon the former bankrupt to co-operate with his trustee. Section 152 of the Act enjoins the discharged bankrupt to provide "such assistance as the trustee reasonably requires in the realization and distribution of such of his property as is vested in the trustee".
Failure to comply with the obligation constitutes a contempt of court. The obligation is serious and the sanction powerful. There is no need for the trustee to rely upon voluntary co-operation.
A Notice of Intention to Oppose the Application for Discharge was also filed by a creditor, MGICA Ltd, on the grounds that all assets in the estate had not been realised and that "...the Family Court matter hasn't yet been finalised re distribution of assets".
In the event MGICA, although represented by counsel, did not lead evidence, cross-examine or otherwise actively participate in the proceedings.
Mullen has now been a bankrupt for some 3 1/2 years. The principles which should govern the Court in approaching the exercise of its discretion under s.150 were enunciated by Smithers J. in Re: Zion; Ex parte: The Bankrupt (Unrep. Smithers J., 26.9.86) at 3:-
"In my view it is the policy of the law that bankruptcy should in most cases come to an end at 3 years and when there is an objection at the end of 5 years from the decree for sequestration of the estate, but that in a case where public interest so requires the discharge may be delayed or made conditional according to the requirements of the public interest in the circumstances of the case. Public interest will require that a discharge be delayed or made conditional if the conduct revealed or the character of the bankrupt indicates that the return of the bankrupt to the commercial world in full freedom might involve unacceptable risk to persons likely to be engaged in commercial relations with him in the future. In other words, it is for the applicant to show that balancing the policy of the law in favour of the return to commercial life of a bankrupt against the dangers that might accrue to the public from full commercial capacity of the applicant, it is appropriate that the discharge be granted."
This case is one in which the bankrupt came seriously undone to the substantial detriment of his creditors. I have not been satisfied of any relevant misconduct on his part but have regard to the public interest and considerations of commercial morality in dealing with this application - Re: Maher (1985) 61 ALR 592.
In doing so however I also respect the policy of the law as embodied in the provisions of s.149 and expounded by Smithers J. Having regard to the post discharge constraint imposed by s.152, I do not consider that there is anything to be gained by allowing the bankruptcy to continue and I will direct that Mullen be discharged.
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