Rubock v Cooper

[2017] FCCA 1355

FEDERAL CIRCUIT COURT OF AUSTRALIA

RUBOCK & ANOR v COOPER [2017] FCCA 1355

Catchwords:
BANKRUPTCY – Review of registrar’s sequestration order – sequestration order set aside.

Legislation:

Bankruptcy Act 1966, s.52

Federal Circuit Court Act 1999, s.104

Cases cited:

Pattinson v Hadjimouratis (2006) 155 FCR 226 at [3] – [20] per Nicholson J, [39] per Jacobson J
Re Sarina; Ex p Wollondilly Shire Council (1980) 43 FLR 163, 165
Sandell v Porter (1966) 115 CLR 666, 670
Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8 at [44]

First Applicant: ERIC GRANT RUBOCK

Second Applicant: KYLIE MARIA WILKINS

Respondent: NICHOLAS DAVID COOPER

File Number: ADG 351 of 2015

Judgment of: Judge Young

Hearing dates:

10 November, 6 December 2016 &

16 June 2017

Date of Last Submission: 16 June 2017

Delivered at: Darwin

Delivered on: 21 June 2017

REPRESENTATION

The Applicants appearing in person

Counsel for the Respondent: Mr Runjajic

Solicitors for the Respondent: Perry Lawyers

ORDERS

1. The sequestration order and costs order made on 30 November 2015 are set aside.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT DARWIN

ADG 351 of 2015

ERIC GRANT RUBOCK

First Applicant

KYLIE MARIA WILKINS

Second Applicant

And

NICHOLAS DAVID COOPER

Respondent

REASONS FOR JUDGMENT

1. This is an application pursuant to section 104(2) of the Federal Circuit Court of Australia Act1999 (‘FCCA Act’) to review a decision of a Registrar on 30 November 2015 to make a sequestration order against the estate of the applicants and an order that they pay the petitioning creditor’s costs in the sum of $7,979.10.

2. The basis of the creditor’s petition was a single debt of $6,371.40 arising from a costs order made by a Registrar against the applicants on 24 November 2014.

3. The applicants filed their application for review within time on 21 December 2015. On the same day they paid the sum of $7,979.10 directly to the creditor. This sum was accepted by the creditor and a receipt given.

4. The applicants gave evidence before me that they had mistakenly believed that this was the sum of the judgment debt and it was the debt that they had intended to pay.

5. The matter was listed for directions on 6 May 2016 and heard on 10 November 2016 and 6 December 2016.

6. The applicants were not legally represented before the Registrar and were not legally represented before me.

7. The applicants sought, in substitution for the orders made by the Registrar, as I read the applicants’ inexpertly self-drafted application, orders setting aside the sequestration order and, in the alternative, an annulment order and orders that they provide a statement of affairs to the trustee, that the trustee provide a remuneration notice setting out his fees and that the applicants enter a debt agreement with the trustee to pay the trustee’s fees.

8. In an affidavit filed in support of the application to this court the first applicant said that he had sought an adjournment from the petitioning creditor’s lawyer before the hearing on 30 November 2015 and told him that the applicants were expecting a large tax return that would enable them to settle the matter “in the very near future”. He said that he told the lawyer that the applicants had assets but “limited cash flow at present”. The affidavit also complained about the nature of the hearing before the Registrar and claimed that an affidavit which asserted the applicant’s solvency was “rejected without enquiry as to our payment plan or our solvency”. He said he had requested a hearing by video link but after arrangements had been made for that to happen these were unaccountably altered and the hearing took place by telephone. The first applicant asserted that he suffered from industrial deafness and had difficulty understanding the conversation with the Registrar which was conducted by telephone between the applicants, who reside at Humpty Doo on the outskirts of Darwin, and the Registrar sitting in Adelaide. He says, in substance, that he was prevented from fully explaining the applicants’ position to the Registrar and thus denied procedural fairness.

9. In the hearing before me the respondent produced a transcript of the hearing before the Registrar. The hearing was brief. The transcript runs over a little more than two and a half pages. Before the Registrar the applicants relied on an affidavit filed that day. The affidavit read as follows:

   That I am not insolvent. My assets are much more than my liabilities.

   I have put my Northern Territory coastal line fishing licence on the market no. A133 for sale or lease.

   My taxation return is currently being prepared and finalised (Hayes Knight Accountants Darwin).

   I do not want to be declared bankrupt and swear that if given 90 days to complete either of the above scenarios then I will have the ability to settle this matter outright.

10. The first applicant, speaking on behalf of himself and the second applicant, his partner, explained to the Registrar that he sought an adjournment of 90 days. Consistently with the affidavit he said that he was waiting on a tax refund and on receipt of that or the sale or lease of the fishing licence he would be able to pay the debt.

11. The Registrar replied “But, as I understand what you’ve said, you’re not in a position to pay the amount claimed today.” The first applicant answered:

    “No. I’ve had little opportunity in the last week. I’ve been chasing work. I’ve been in casual contract employment for the last couple of years. Most of the moneys gained from that have gone to pay the mortgage on both my house and my business. I believe that with this lump sum [a reference to the expected tax refund] that happens, I will be able to satisfy the needs of Cullen Bay Marina Management and sort this out.”

12. The Registrar then went on to begin his reasons for decision. He recorded the first applicant’s assertion that he was not insolvent and that his assets exceeded his liabilities but said, accurately, the affidavit went no higher than that. He said that where the first applicant conceded that he was “not able to pay the amount” he would not grant the adjournment and indicated that he proposed to make a sequestration order. At that point the first applicant interrupted to say that he could not “catch” all that the Registrar was saying and asked him to repeat what he had said. The Registrar partially repeated himself saying “It said in your affidavit you are not insolvent and your assets are more than your liabilities” to which the first applicant said “Correct”. The Registrar then went on to complete his reasons for decision, saying that he was not satisfied as to that claim (of solvency) because there was “nothing in your affidavit which confirms that” and “There is not the usual material which I would expect to see in an affidavit of that type …”. The Registrar then went on to make the sequestration order.

13. The claim of lack of procedural fairness was advanced by the applicants in their affidavit in support of the application to this court (in an annexure to the affidavit which was really in the nature of submissions) in this way:

    The Registrar did ask the Applicants if they could pay the sum owed immediately but the Applicants were confused and misunderstood the context of the question. They thought ‘immediate’ precluded taking a day to collect and transfer liquid assets between accounts and family members. The Applicants did not understand that they were being asked whether they were capable of paying the debt in full and settling the matter without sequestration.

    The phone line to the remote court was then terminated before the Applicant (sic) could clarify their understanding.

14. In the hearing before me the first applicant, who also spoke on behalf of the second applicant who was present in court, said that when the Registrar asked him whether he was in a position to pay the amount “today” he agreed that he could not because it was late afternoon and he was at home on the rural outskirts of Darwin and unable to get to a bank in time to make arrangements to pay the debt. He said that he had, in fact, previously made arrangements with his son to advance the sum necessary to pay the debt if required and if he had been able to arrange a bank transfer, for example the next day, he would have been in a position to pay the debt. I asked the first applicant why he had not told the Registrar that. He replied that he had primarily been hoping for an adjournment and was only going to provide that information if it became necessary. There was no affidavit material to support the claim of an arrangement with the applicants’ son or the ready availability of money to pay the debt.

15. The hearing before the Registrar was relatively brief and the applicants’ claims were not explored in any detail. That is understandable because the affidavit filed by the applicants made a bald assertion of solvency and did not attempt to substantiate the claim that the applicants’ assets exceeded their liabilities or attempt to substantiate a claim that they were in a position to pay the debt in a relatively short period.

16. The affidavit did not set out any proposed timeline for the sale or lease of the fishing licence or say when the tax refund would be received or its amount. The applicants did not refer to any arrangement with their son that would permit the payment of the debt the next day. In these circumstances it is not surprising that the Registrar concluded that the debtors were insolvent.

17. I accept that the hearing was brief and conducted by telephone conference with a person with less than perfect hearing. Ideally, the Registrar should have asked the first applicant whether there was anything further he wished to say before proceeding to judgement but I am not satisfied that this, in itself, led to a denial of procedural fairness. As the Registrar noted, the applicants’ affidavit material did not attempt to substantiate the bald claim that their assets exceeded their liabilities. The first applicant told me that he did not tell the Registrar about the arrangements with his son because he hoped for an adjournment. He implied that he was reserving this information until it became necessary to disclose it. If so, choosing such a course, that is, deliberately refraining from informing the Registrar of a relevant matter was, in the circumstances, a misjudgement. The first applicant gave a detailed oral explanation to the Registrar, set out in the passage above, of the reasons he had been unable to pay the debt and in his affidavit mentioned only the prospective sale of the fishing licence and a tax refund as means by which the applicants might pay the debt. There was no mention of any other arrangement. If there was an arrangement with the applicants’ son that would have permitted the payment of the debt within a short time: time enough to get to a bank, then that was an opportunity to tell the Registrar. I am satisfied that the applicants were given an opportunity to say what they wished to say to the Registrar and I am not satisfied they were denied procedural fairness.

18. I have dealt with the applicants’ claim that they were denied procedural fairness in the hearing before the Registrar because they raised it as a ground. It is also relevant to show their conduct in the hearing and to explain the conclusion reached by the Registrar. However, it is not strictly necessary for me to reach a conclusion on the denial of procedural fairness claim because a hearing under section 104 of the FCCA Act is a hearing de novo and the matter is considered afresh[1]. The party seeking the sequestration order must still satisfy the court that the necessary conditions for a sequestration order have been met.

    [1] Pattinson v Hadjimouratis (2006) 155 FCR 226 at [3] – [20] per Nicholson J, [39] per Jacobson J.

19. The nub of this case is whether the applicants were at the time of the sequestration order or are now solvent. Sub-section 52(2) of the Bankruptcy Act provides:

    (2)  If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:

    (a)  that he or she is able to pay his or her debts; or

(b)  that for other sufficient cause a sequestration order ought not to be made;

it may dismiss the petition.

1. The sub-section has been interpreted to mean that if the debtor is able to pay his or her debts “within a reasonable time” a sequestration order ought not be made[2]. A debtor is not required to be able to pay all creditors in cash in full immediately. In Sandell v Porter[3] Barwick CJ said that the available means of payment are

   …not limited to his cash resources immediately available. They extend to monies which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.

   [2] Re Sarina; Ex p Wollondilly Shire Council (1980) 43 FLR 163 at 165.

   [3] (1966) 115 CLR 666, 670.

2. Regrettably, the applicants have not at any point filed material that would dispel the prima facie appearance of insolvency created by their failure to comply with the bankruptcy notice. The applicants did not provide any evidence that their son was in a position to advance money to the applicants to pay the debt if time had been afforded to get to a bank. Nevertheless, as noted, the sum of $7,979.10 was paid to the creditor, and accepted, shortly after the sequestration order, giving credence to the applicants’ claims that they were in a position to pay the debt given a little time, in this case 21 days.

3. If this was the only information about the applicants’ financial affairs it would not permit a conclusion that the applicants were solvent at the time the sequestration order was made. However, the respondent trustee filed a report dated 8 November 2016 as to the bankrupt estates of the applicants. The conclusion of the report is that:

   “Based upon the information in the Bankrupts’ SOAs [Statement of Affairs], there are likely to be sufficient assets in each of the joint and separate estates to payout the debts and annul the bankruptcies. A valuation of the property owned by the Bankrupts and confirmation of ownership of the separate property held by Ms Wilkins will be required to confirm the position.”

4. The trustee prepared a detailed statement of the applicants’ financial position. As noted the trustee has not obtained valuations of assets but he has provided “low” and “high” estimates of dollar values. I have summarised the effect of that financial statement in the following table:

Joint estate low	KM Wilkins low	EG Rubock low	Joint estate high	KM Wilkins high	EG Rubock high
Cash	0	0	0	0	0	0
Real property	600,000	200,000	0	700,000	300,000	0
Mortgages to CBA and/or PCCU and selling costs	(558,178)	(12,000)	(553,178)	(15,000)	0
Motor vehicles (Equity)	0	0	0	0	0	0
Vessels	0	0	0	0	0	0
Commercial fishing licence	0	0	0	0	0	50,000
Tax refund	0	0	17,284	0	0	17,284
Resources available	41,822	188,000	17,284	146,822	275,000	67,294
Less
Realisation charge  (7%)	4,328	14,000	1,210	11,328	21,000	4,709
Petitioner’s costs	7,979	7,979	7,979	7,979	7,979	7,979
Trustee’s remuneration to 4.11.2016	28,724	10,681	10,864	28,724	10,681	10,864
Trustees remuneration to finalisation	20,000	8,000	8,000	15,000	8,000	8,000
Trustees disbursements to finalisation	7,000	500	500	5,000	250	250
Total	68,031	41,160	28,553	68,031	44,910	28,802
Balance available	0	146,840	0	78,791	230,090	38,482
Consumer creditors	35,136	8,446	0	21,973	1,928	0
Tax debt	0	0	0	0	0	0
Balance available	0	138,394	0	56,818	228,162	38,482

1. The applicants did not provide any specific evidence of their employment or income at the time of the hearing before me although the first applicant told me he was employed and described himself in an affidavit as a “maritime lecturer”. The trustee’s report said that at the time of his appointment the applicants were unemployed and receiving government benefits but subsequently may have obtained employment although those details had not been given to him.

2. The trustee’s report stated that the applicants had operated a tourism business but had been affected by negative conditions in the industry and had difficulties finding employment.

3. The trustee’s report provided further information about particular assets. The applicants were the owners of a pearl lugger “Anniki” evidently used in their tourism business. This was the subject of a mortgage to the Commonwealth Bank (CBA). The applicants estimated the value of the vessel at $250,000. The CBA requested that the trustee disclaim his interest in the vessel and he agreed. However, after the sequestration order was made the vessel sank. The vessel is now the subject of an insurance claim. No more details were available. The trustee was uncertain whether any value would be realized from this asset. There is also another small boat which the trustee considered to have negligible value.

4. The home of the applicants at Humpty Doo is subject to mortgages to the CBA and the People’s Choice Credit Union. The second applicant also owns a house in Queensland. It is tenanted but the rents are paid to the Charters Towers City Council pursuant to an arrangement to meet rates payable for the property. It appears from the report that $10,159 is owed.

5. The commercial fishing licence was, according to inquiries by the trustee, due to expire on 30 June 2016 and had not been used by the first applicant since 2014. The licence was renewable to 31 December 2016 on the payment of a fee of $2,075. There was no evidence that the licence had been renewed. The trustee had not been able to confirm the value, if any, of the licence and formed the view that there was no value available to the creditors.

6. A tax refund of $17,283 due to the first applicant had been received by the trustee after the sequestration order.

7. The trustee also reported that he had been advised by the CBA that the applicants were failing to maintain payments as required by their agreements with the bank and said that a demand was issued by the CBA on 19 October 2016 claiming a total debt of $414,345. There was no direct evidence of that matter.

8. In submissions to me the applicants said that they were not insolvent at the time of the sequestration order because a taxation refund was due to be received and pointing to the prospect of realization of assets. The tax refund was in fact received by the trustee and, although the date of receipt was not in evidence, I consider it likely that that sum was received a relatively short time after the sequestration order.

9. In relation to the realisation of assets, the applicants said that they were taking steps to sell both the fishing licence and the Queensland house owned by the second applicant. The only evidence about the sale of the Queensland property was a statement by the first applicant in an affidavit filed before the hearing that stated “We were in negotiations with the people who rent out property in Charters Towers as they were and still are very interested in buying the property from us”. There was no indication of the likelihood of sale, likely sale price or when any such sale was expected to take place. The applicants did not provide any information about the prospects of sale of the fishing licence. They did not mention that it was a periodic licence and subject to expiry unless renewed. Considering the evidence of the trustee on the subject it may be that the licence had expired at the time of the hearing before me.

1. I am conscious that the debt which was the subject of the creditor’s petition was a relatively small one. As previously mentioned, on 21 December 2015, the date of the application to this court, the applicants paid the petitioning creditor the sum of $7,979.10. This was a sum equal to the amount of the costs order made at the time of the sequestration order. The applicants told me in submissions that they thought this was the amount of the judgement debt and had misunderstood that the judgement debt remained outstanding. Nevertheless, it demonstrates that the applicants had access to some cash resources at that time, sufficient to pay the judgment debt, and given the receipt of a tax refund of $17,283 a relatively short time later it would appear that they had the means to pay the costs ordered as well.

2. Although it is finely balanced I am satisfied on the balance of probabilities that the applicants’ were solvent at the time the sequestration order was made. At that time I consider that they were probably able to procure the means to pay their debts within the “relatively short time” referred to in Sandell v Porter.

3. The present situation is another matter. The trustee’s remuneration to 4 November 2016 was, across the joint and individual estates, $50,449. The trustee expected to be entitled to further remuneration of $31,000 to $36,000 to finalisation of the administrations plus another $5,500 to $7,000 for disbursements. The statutory realisation charges were expected to be a further $19,538 to $37,037. These figures total $106,487 to $130,486. Although I do not suggest that any of these charges are other than proper, the comparison of this amount with the amount of the debt, $6,371.40, illustrates one aspect of the serious consequences of bankruptcy. The trustee will not be entitled to these fees and charges if the sequestration order is set aside.

4. There is one other matter that must be addressed. The applicants commenced this proceeding naming the trustee as respondent. The correct respondent to an application to set aside a sequestration order is the petitioning creditor. The respondent trustee did not take the point at any stage. The solicitor who appeared for the trustee also apparently appeared for the petitioning creditor in the hearing before the Registrar. I consider that the petitioning creditor was likely to have been aware that this proceeding was on foot. I did not realise the defect until after I reserved judgment.

5. I called the matter back before me on 1 June 2017. I made an order amending the application to make it clear that the applicants were seeking to set aside the sequestration order. I made an order that the respondent trustee notify the petitioning creditor that an application to set aside the sequestration had been made and an order that if the petitioning creditor did not appear or seek to be joined as a party the matter be determined in its absence (relying on Federal Circuit Court Rule 11.01(4)). I also made an order that the applicants were to notify all known creditors of the application in conformity with Federal Circuit Court (Bankruptcy) Rule 7.05.

6. The respondent trustee filed an affidavit proving its compliance with the notice order. The petitioning creditor did not appear. The applicants filed an affidavit proving that they notified their known creditors on 6 June 2017 of the application by e-mail. Ms Wilkins also gave oral evidence that she had followed up the notice to each of the creditors with a phone call. The written notice was not in the correct form (Form B12) required by Rule 7.05(4) but I am satisfied the substance of the notice was given and I will dispense with strict compliance with the rule.

7. Given that I have found that the applicants were not insolvent at the time of the sequestration order I will set aside the order made by the Registrar.  I have given consideration to whether the applicants should pay the costs or some part of the petitioning creditor’s costs of the original application. Although the applicants’ failure to adduce appropriate evidence was the primary reason for the order made I also take into account that the representations to the petitioning creditor made by the applicants that they had the means to pay were substantially correct. The creditor also decided to pursue the option of bankruptcy proceedings rather than seeking execution against the assets of the applicants which, on the basis of the trustee’s report, were more than adequate to satisfy a debt of $6,371.40 and any likely legal costs. On balance I consider that costs should follow the event.  

8. As mentioned the applicants paid the petitioning creditor the sum of $7,979.10 shortly after the sequestration order was made in the mistaken belief that this was the sum owed for the debt. I find that the petitioning creditor’s debt has been paid. In fact, the petitioning creditor has been overpaid $1,607.70. I will not make any order about this. The additional payment may have been made under a mistake but that is a matter for the applicants.

9. I have considered the position of the trustee who has incurred fees in the bankruptcy. The application to set aside the sequestration order was made within time and the trustee was thus on notice that the sequestration order might be set aside. In the circumstances it would have been prudent to avoid incurring fees until the matter was resolved[4]: Kyriackou v Shield Mercantile Pty Ltd (No 2). I will not make any order for the trustee to recover any part of his fees.  

   [4] [2004] FCA 1338 at [42], [43].

I certify that the preceding forty-one (41) paragraphs are a true copy of the reasons for judgment of Judge Young

Associate: 

Date:  21 June 2017