Russells (A Firm) v Donoghue
[2019] FCCA 1864
•4 July 2019
FEDERAL CIRCUIT COURT OF AUSTRALIA
| RUSSELLS (A FIRM) v DONOGHUE | [2019] FCCA 1864 |
| Catchwords: BANKRUPTCY – Application for sequestration order – jurisdiction to make sequestration order. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.43(1), 43(1)(b)(ii), 43(1)(b)(iii) Federal Circuit Court (Bankruptcy) Rules 2006 |
| Cases cited: Fuller v Alford (2017) 252 FCR 168 Deputy Commissioner of Taxation v Wachjo (2005) 216 ALR 682 Mathai v Kwee (2005) 3 ABC(NS) 268 |
| Applicant: | RUSSELLS (A FIRM) |
| Respondent: | GARRY JOHN DONOGHUE |
| File Number: | BRG 1264 of 2018 |
| Judgment of: | Judge Jarrett |
| Hearing date: | 21 June 2019 |
| Date of Last Submission: | 21 June 2019 |
| Delivered at: | Brisbane |
| Delivered on: | 4 July 2019 |
REPRESENTATION
| Counsel for the Applicant: | Mr Somers |
| Solicitors for the Applicant: | Russells |
| Counsel for the Respondent: | Mr Atkinson QC |
| Solicitors for the Respondent: | Ronan Fox |
ORDERS
A sequestration order be made against the estate of Garry John Donoghue.
The petitioning creditor’s costs of and incidental to the petition be taxed and paid in accordance with the Federal Circuit Court (Bankruptcy) Rules 2006.
IT IS NOTED:
The date of the act of bankruptcy is 12 June, 2018.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT BRISBANE |
BRG 1264 of 2018
| RUSSELLS (A FIRM) |
Applicant
And
| GARRY JOHN DONOGHUE |
Respondent
REASONS FOR JUDGMENT
The applicant seeks a sequestration order against the estate of the respondent because, it says, the respondent has committed two acts of bankruptcy and owes to the applicant a debt which exceeds the prescribed statutory minimum necessary to support the making of a sequestration order.
The respondent opposes the application. Whilst there is no dispute that he has committed an act of bankruptcy, he argues that for the reasons canvassed below, the Court has no jurisdiction to make a sequestration order against him.
I have concluded that the Court does have jurisdiction to make a sequestration order against the respondent’s estate and that it is appropriate for such an order to be made.
Background
It is common ground that the applicant has been engaged in substantial litigation with the Australian Tax Office since December, 2011 about his liability to taxation. The applicant firm acted as his solicitors in much of that and associated litigation. That litigation came to an end in about May, 2018 when judgment was entered in favour of the Commissioner against the respondent for $48,711,223.48.
In the course of the taxation litigation, the Commissioner for Taxation issued several Departure Prohibition Orders against the respondent with the purpose of ensuring that the respondent did not depart from Australia for a foreign country without wholly discharging his tax liability or making arrangements satisfactory to the Commissioner for the tax liability to be wholly discharged. However, notwithstanding those departure prohibition orders, the respondent was able to obtain several departure authorisation certificates allowing him temporary travel from Australia. Whilst he undertook to return to Australia, he has not returned and has been absent from Australia since about July, 2014.
The applicant has ceased to act for the respondent and there is now litigation between the applicant and the respondent about the applicant’s fees. The litigation is continuing, but the applicant has the benefit of an interlocutory costs order in the sum of $10,000 made against the respondent by a judge of the District Court of Queensland on 12 March, 2018.
On 22 March, 2018 a bankruptcy notice was issued at the request of the applicant against the respondent. The bankruptcy notice asserts a total debt of $10,000 based upon the order of the District Court to which I have just referred. A copy of that order was attached to the bankruptcy notice.
On 18 April, 2018 the petitioning creditor obtained an order for substituted service of the bankruptcy notice upon the respondent. There is no issue concerning service of the bankruptcy notice. Nor is there any issue that the bankruptcy notice was to be complied with by 12 June, 2018. There was no compliance with the bankruptcy notice.
On 10 December, 2018 the petitioning creditor filed the creditor’s petition presently before the Court. It alleged an act of bankruptcy based upon the respondent’s failure to comply with the bankruptcy notice. When the petition came before me for hearing, however, the petitioning creditor sought leave to amend the petition by adding an allegation that the respondent had committed a second act of bankruptcy. Although the respondent did not consent to the application, there was no opposition to the amendments sought by the petitioning creditor and I granted leave to add the following additional act of bankruptcy:
Alternatively, the respondent debtor, has, since 11 June 2018, with intent to defeat or delay his creditors:
i. remained out of Australia; and/or
ii. otherwise absented himself.
Jurisdiction to make a sequestration order
Section 43(1) of the Bankruptcy Act 1966 provides for the circumstances in which jurisdiction to make a sequestration order against the estate of a debtor arises. Where a debtor has committed an act of bankruptcy and at the time when the act of bankruptcy was committed the debtor:
a)was personally present or ordinarily resident within Australia;
b)had a dwelling house or place of business in Australia; or
c)was carrying on business in Australia, either personally or by means of an agent or manager
the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.
Thus, irrespective of the act of bankruptcy relied upon by the petitioning creditor in this case, the petitioning creditor must prove that one of the alternatives set out in s.43(1) of the Act at the time of the commission of the act of bankruptcy.
It is common ground that the applicant has not lived in Australia for many years. The petitioning creditor does not contend that the debtor was personally present or ordinarily resident within Australia when he was served with the bankruptcy notice.
However, the petitioning creditor contends that at the time he was served with the bankruptcy notice, the respondent had a dwelling house in Australia, had a place of business in Australia and carried on business in Australia. The respondent denies those matters.
The creditor’s petition alleges that at the time when the act of bankruptcy was committed, the respondent debtor had a dwelling house or place of business in Australia (see paragraph 3 of the petition). The petitioning creditor does not allege in the creditor’s petition that the debtor carried on business in Australia at the time he committed the relevant act of bankruptcy. Notwithstanding that, the petitioning creditor’s submissions were made on the basis that at the time the act of bankruptcy was committed, not only did the respondent have a dwelling house or place of business in Australia, but that he also carried on business in Australia.
The submissions by senior counsel for the respondent expressly recognised that the petitioning creditor was alleging that the relevant connection existed because the respondent was carrying on business in Australia. The absence of that allegation from the creditor’s petition was not the subject of argument before me. I have proceeded on the basis that each of the matters dealt with by the parties in their submissions, i.e. a dwelling house in Australia, a place of business in Australia or, carrying on business in Australia, ought to be addressed.
The evidence
Before going on, an observation needs to be made about the curious nature of the evidence in this case. The respondent has given no evidence himself. He relies upon affidavits sworn by his estranged wife, his daughter and his now solicitor. None of the respondent’s witnesses were cross-examined.
The applicant relies upon evidence from Ashley Tiplady, a solicitor who acted for the respondent over many years in his litigation against the Commissioner for Taxation and evidence from another solicitor, Mr Araki, presently employed by the petitioning creditor firm. Neither Mr Tiplady nor Mr Araki was cross-examined.
The evidence relied upon by the respondent establishes that:
a)the respondent married Sandra Lynne Donoghue on 11 March, 1985;
b)they lived in many places throughout the world but, in 1996, they purchased land at 52-54 Langside Road, Hamilton;
c)over the next two years, the couple built a house on the Hamilton land;
d)the couple separated, however, by at least 1998;
e)thereafter they entered into an informal separation agreement which, according to Mrs Donoghue, would see her continuing to live at the Hamilton premises with the parties’ daughter, Alexandra Geokas, and the respondent paying sufficient money to support Mrs Donoghue and their daughter in their lifestyle;
f)since separation, the respondent has had a series of girlfriends. Mrs Donoghue has also had some boyfriends;
g)in the ensuing 22 years Mrs Donoghue has continued to live at the Hamilton premises with her daughter, and the respondent has honoured the agreement;
h)the respondent does not now live in Australia and most probably lives in Ecuador and has a fiancé who is Ecuadorian;
i)the Hamilton property is registered in the name of Mrs Donoghue, albeit as trustee for the Donoghue Family Trust;
j)in the past, when the respondent has visited Brisbane, he has sometimes asked if he might stay in the guest room at the Hamilton premises and Mrs Donoghue has sometimes – but not always – acquiesced to such requests;
k)the respondent has not stayed at the Hamilton premises at all since 2014;
l)Mrs Donoghue makes decisions about the house entirely on her own and the respondent has no role in who lives there, how it is furnished, or the distribution of revenue which is received from the premises;
m)the respondent presently has no property at the premises and no keys. Ms Geokas says that the respondent has some old litigation files stored in a room at the Hamilton property;
n)as far as Mrs Donoghue is concerned, the respondent “has no more right than any other person to visit or enter the house except as my guest”;
o)although Ms Geokas, speaks to the respondent regularly, he has never indicated any intention or expectation of returning to Australia, let alone of staying at the Hamilton premises.
The evidence relied upon by the applicant establishes that from at least 2010 to 2015:
a)the respondent maintained a private, separate, lockable room at the Hamilton property, in which there was a study, bed and his personal belongings. He also had personal belongings stored in the garage and a wine collection locked in a wine cellar at the property. The evidence of Ms Geokas and Mrs Donoghue does not falsify Mr Tiplady’s evidence about this because he does not suggest that it was only the respondent who had a key to the room or that his key did not open other doors in the home;
b)the respondent resided in that room whenever he was in Australia. The evidence does not suggest how often that was. Mr Tiplady’s evidence is that the respondent told him that he treated the room as his home in Australia. That evidence was not challenged. Mr Tiplady saw the respondent have his former partner and her child travel from Sydney to stay with him at the Hamilton property from time to time;
c)the respondent was observed by Mr Tiplady carrying on business from his room in the Hamilton property, including providing instructions to his solicitor at the Hamilton property for the purpose of litigation being conducted in Australia;
d)the respondent kept equipment in the study in his private room of the Hamilton property included computers, electronic document archives, business documents and files and other equipment necessary to carry on business of website domain management services and involvement in the telecommunications industry. According to Mr Tiplady, the nature of the respondent’s business interests around the world, including Australia, are such that they can be operated remotely from anywhere in the world.
Mr Tiplady says that he ceased acting for the respondent in about July, 2015 and that he saw the respondent at the Hamilton property up until that time. Mrs Donoghue says that the respondent has not been at the house since 2014. The difference is not particularly significant, but I think that Mr Tiplady is probably mistaken about the date of his last contact with the respondent. The evidence of Mr Araki (filed by the petitioning creditor) shows that the respondent’s last departure from Australia was in July, 2014. There is no evidence that he has returned to Australia since then.
Nor is there any evidence that the respondent has occupied his room at the Hamilton property since 2014, or at the very latest mid-July, 2015 (if Mr Tiplady is correct). The evidence from Mrs Donoghue and Ms Geokas is that the respondent does not have a key to the home and does not stay there anymore. Although he speaks to his daughter regularly, according to her evidence he has never indicated any intention of returning to Australia “anytime soon”.
There is evidence that in the period April, 2012 to June, 2014 in all six incoming passenger cards the respondent completed and provided to the Commonwealth on his return to Australia, he recorded his intended address in Australia as the Hamilton property.
The petitioning creditor contends that the respondent maintains an equitable interest in the Hamilton property. It is owned by the Donoghue Family Trust, of which the respondent may be a beneficiary and appointor under the trust deed. Although the respondent appears to have no beneficial interest to the income of the trust, he remains a beneficiary as to the capital of the trust. But that does not give him any equitable interest in the assets of the trust. At best he has an entitlement to due administration of the trust, but that is all. I reject the applicant’s argument about this.
In 2008, so some 10 years after the parties separated, the respondent borrowed between $4m and $5m from the Commonwealth Bank. The evidence of Mr Tiplady and Mrs Donogohue is that it was borrowed by the respondent for business purposes. Mrs Donoghue says that he continues to use that facility for his business. In her capacity as trustee of the family trust Mrs Donoghue agreed to be the borrower of the funds and for the Hamilton property being used for security for the loan, which was advanced over a period of time. However, the only evidence is that the funds were borrowed for the respondent’s business purposes and he had, and continues to have, the use of those funds.
The respondent is responsible for repaying the loan secured over the Hamilton property. He has personally guaranteed that loan. The current balance owing on the loan is in the order of $5.5m. The monthly repayments of that loan are in the order of $45,205. Mrs Donoghue has no capacity to make the repayments on the loan and nor does the family trust. Only the respondent has the capacity to meet the loan repayments. According to Mrs Donoghue’s evidence, the loan repayments are made by the respondent from “a US Account” to Mrs Donoghue’s CBA bank account. From there, Mrs Donoghue repays the CBA Loan. The repayments are made in Brisbane, Australia.
There is nothing in the evidence about the source of the funds the respondent uses to repay the Loan. I accept that all the evidence demonstrates is that he obtained the loan for his business and continues to use it for that purpose. The petitioning creditor invites me to infer that the substantial monthly repayments are made from the respondent’s business activities. I think that inference is reasonable, especially where the respondent has not given any evidence to explain those dealings. I draw the inference and find that the substantial monthly repayments of the CBA borrowings are made from the respondent’s business activities
The evidence shows that the respondent listed the Hamilton property as the address for service of notices under his personal guarantee with the CBA. He also gave to the CBA the Hamilton property as his residential address. There is no evidence that the respondent has updated the Bank with any other address for service of such notices or any other residential address.
The address of the Hamilton property remains as the respondent’s address in records maintained with ASIC for a company called Sterling Pacific Pty Ltd. Ms Geokas deposes that Sterling Pacific Pty Ltd has never traded or operated and the only thing it has ever done is to purchase a car, used by Mrs Donoghue.
The address of the Hamilton property is also the respondent’s address in the Australian General Shipping Register, where he is listed as the registered agent of the vessel “Destination Waiheke”. There is evidence from the respondent’s solicitor that after making enquiries it seems that the vessel “Destination Waiheke” might have been sold to others and the listing in the Australian Shipping Register is an obsolete reference. Whatever might be the case, I do not consider much turns on this.
Dwelling House in Australia
Whether the respondent has a dwelling house or place of business in Australia at the time he committed the act of bankruptcy (that is in this case on 12 June, 2018) is a question of fact.
As to what amounts to a dwelling house, both parties referred me to a number of authorities. In Mathai v Kwee (2005) 3 ABC(NS) 268, Graham J opined that “a debtor will have a dwelling house in Australia if there is a house in Australia which he uses or has used and may use as his residence, and to which he may repair at his whim at any time.”
In Mathai, Graham J summarised the relevant authorities as follows:
111. It is possible for a debtor to have a dwelling-house in Australia even though he has not in fact been in occupation of it at any time during a given year (per Goff LJ, with whom Buckley and Orr LJJ agreed, in In re Brauch (A Debtor); Ex parte Britannic Securities & Investments Limited (“In re Brauch”) [1978] 1 Ch 316 at 335).
112. To have a dwelling-house in Australia it is not necessary that a debtor has a legal or equitable estate in the property in question. A licence to occupy a dwelling-house may suffice (per Goff LJ in In re Brauch at p 334).
113. A debtor who took five furnished rooms on two floors in a house in Piccadilly Circus, London, for three months and who occupied them together with his wife and a servant was found to “have a dwelling-house” in England. He was not a passing or casual visitor making a journey through the country for the purpose of seeing it. He was not like a person living at rooms in a hotel in the ordinary way (per Lord Esher, MR in In re Hecquard; Ex parte Hecquard (1889) 24 QBD 71 at 74; see also per Lindley LJ at p 75).
114. Where a debtor owns a house in Australia, does not occupy it although he could reoccupy it at any time, but has abandoned its use as a residence, he will not have a dwelling-house in Australia (per Wilcox J at first instance in Re Boles [2000] FCA 1782 at [48]).
115. If a debtor is away from his dwelling-house for a temporary purpose but with an intent to return, he may still have a dwelling-house. The more there is actual occupation, the easier it is to conclude that he has a dwelling-house (per Goff LJ in In re Brauch at p 335).
That summary was adopted and applied by Perry J in Fuller v Alford (2017) 252 FCR 168 at [45]-[47].
The applicant argues that I should find that the respondent’s reason for maintaining his dwelling-house in Australia is because the respondent is required to return to Australia, at some point it time, under departure authorisation certificates issued by the Australian Taxation Office. The applicant argues that I should infer that upon returning to Australia, he will then continue to reside in the rooms at the Hamilton property. I am asked to infer that it could take some time to deal with the ATO, given the respondent’s debt to it in excess of $48,000,000. However, I decline to draw those inferences. I think it highly unlikely that the respondent will return to Australia any time soon.
On the basis of the evidence set out above, I am not satisfied that the respondent had a dwelling house in Australia when he failed to comply with the bankruptcy notice on 12 June, 2018. Whilst he may have had access to the Hamilton property for living purposes when he was in Australia up to June, 2014, I am satisfied that those arrangements have long since come to an end. That is not to say that he might not live in the Hamilton home if he ever returns to Australia, but I am not satisfied that he may use the Hamilton property as his residence and that he may repair to it at his whim at any time. After an absence of so long, it would be remarkable, in my view, that Mrs Donoghue would permit him to come and go as he pleased as Mr Tiplady observed him do while he was acting for him. That is especially so given that he is either now, or soon to be, married to his present partner.
Place of business in Australia
The evidence satisfies me that the CBA loan obtained by Mrs Donoghue for the respondent is part of the respondent’s business activities. It was obtained for business purposes and is used for business purposes.
The loan was obtained here in Australia, from an Australian bank. The respondent gave a personal guarantee in respect of the borrowing. The respondent provides the funds so that repayments of the loan can be made. Those repayments are made here in Australia. The uncontroverted evidence is that for the purposes of that loan, the respondent has provided the address at the Hamilton property as his residential address and the address at which notices for the purposes of the personal guarantee might be served.
I note that there is no suggestion that Sterling Pacific Pty Ltd has any connection with the CBA loan. However, the respondent remains a director of that company registered in Australia and the Hamilton property is his address according to the records held by ASIC in respect of that company. Those matters are indicia of the respondent having a place of business in Australia: Deputy Commissioner of Taxation v Wachjo (2005) 216 ALR 682 at [11]. It was open to the respondent to give evidence about his involvement in the company and the purpose for which he remains a director but he did not do so.
I find that as at the date of the act of bankruptcy, 12 June, 2018, the respondent had a place of business in Australia namely the address of the Hamilton property. He maintained that address for the purposes of the loan that was obtained from the CBA and his dealings with the CBA in respect of that loan and in particular, the personal guarantee. I am satisfied that the requirement contained in s.43(1)(b)(ii) of the Bankruptcy Act is therefore met.
Carrying on business in Australia
I am also satisfied that for the purposes of s.43(1)(b)(iii) of the Bankruptcy Act the respondent is carrying on business in Australia. Although the respondent is not primarily liable for the CBA borrowings (the borrower being the trustee of the Donoghue family trust) the practical arrangements as explained by Mrs Donoghue demonstrate that it is a loan for business purposes obtained at the respondent’s request, used by him for his business and serviced by him here in Australia through the repayments of the loan as and when they fall due.
Whilst the evidence does not permit of a precise finding about the nature or extent of the respondent’s business, none is necessary. All that needs to be found is that he is carrying on business in Australia. As cases like In Re Mendonca; Ex parte FC of T (1969) 15 FLR 256 (esp at 260-1) and Re Vassis, Ex Parte Leo Leung (1986) 64 ALR 407 demonstrate the phrase was carrying on business in s.43(1)(b)(iii) has a very wide meaning.
The servicing of debt here in Australia for the purposes of the respondent’s business whatever that might be is, in my view, part of the respondent’s business. In circumstances where the loan was obtained here, the loan was funded in Australia, relies upon security in Australia and the repayments are made here in Australia from funds which I have found are generated in the respondent’s business, the requirement that the respondent was carrying on business in Australia as at the date of the act of bankruptcy, 12 June, 2018, is satisfied. I so find.
Alternatively, to the extent that there is some arrangement, either legally binding or otherwise between the respondent and Mrs Donoghue for the purposes of the CBA loan, that too, constitutes, in my view, the carrying on of business in Australia. It is plainly an arrangement or a facility that the respondent has organised with Mrs Donoghue to enable funds to be obtained for the purposes of his business. That arrangement was in place as at the date of the act of bankruptcy.
Formal matters
In order to make a sequestration order against the estate of the respondent, I must be satisfied of the proof of the matters contained in s.52(1) of the Bankruptcy Act. I am satisfied and I find that:
a)the matters stated in the petition are true;
b)the petition has been served on the respondent in a way authorised by the Bankruptcy act and the Federal Circuit Court (Bankruptcy) Rules 2006;
c)the debt on which the petitioning creditor relies is still owing.
I have not addressed the petitioning creditor’s alternative argument that the respondent has committed an act of bankruptcy by remaining out of Australia. It is unnecessary to do so. There is no dispute that he has not complied with the bankruptcy notice and that his non-compliance is an act of bankruptcy sufficient to support the petition now before the Court.
In those circumstances, it is appropriate to make a sequestration order against the estate of the respondent in the usual terms. I note that the date of the act of bankruptcy is 12 June, 2018. The petitioning creditor’s costs ought to be assessed and paid in accordance with the Federal Circuit Court (Bankruptcy) Rules.
I certify that the preceding forty-six (46) paragraphs are a true copy of the reasons for judgment of Judge Jarrett delivered on 4 July, 2019.
Date: 4 July, 2019
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