Saxon Building Projects Pty Ltd v Donnelly, Max

[1998] FCA 1398

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY – application for annulment of bankruptcies – whether respondents made misleading misstatements in statement of affairs – whether respondents could not have honestly and reasonably believed that they were insolvent at time of filing petition

Bankruptcy Act 1966 (Cth), ss 153B, 116, 82

Re Thanos (unreported, Davies J, Federal Court of Australia, 14 October 1998), cited
Re Mottee;  ex parte Mottee & Anor [1977] 29 FLR 406, cited
Re A Debtor; ex parte Debtor v Allen & Anor  [1967] Ch 590, cited
Re Moncada;  ex parte Moncada (1986) 11 FCR 205, cited

SAXON BUILDING PROJECTS PTY LIMITED v MAX DONNELLY (IN THE MATTER OF ALLAN HAMEN HONEYSETT AND CYNTHIA ANNE HONEYSETT)
NG 7415 of 1998

O’CONNOR J
SYDNEY
2 NOVEMBER 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 7415   of   1998

BETWEEN:	SAXON BUILDING PROJECTS PTY LIMITED APPLICANT
AND:	MAX DONNELLY (IN THE MATTER OF ALLAN HAMEN HONEYSETT AND CYNTHIA ANNE HONEYSETT) RESPONDENT
JUDGE:		O'CONNOR J
DATE OF ORDER:		2 NOVEMBER 1998
WHERE MADE:		SYDNEY

THE COURT ORDERS THAT:

1. The application be dismissed.

NOTE:SETTLEMENT AND ENTRY OF ORDERS IS DEALT WITH IN ORDER 36 OF THE FEDERAL COURT RULES.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 7415  of 1998

BETWEEN:	SAXON BUILDING PROJECTS PTY LIMITED APPLICANT
AND:	MAX DONNELLY (IN THE MATTER OF ALLAN HAMEN HONEYSETT AND CYNTHIA ANNE HONEYSETT) RESPONDENT

JUDGE:	O'CONNOR J
DATE:	2 NOVEMBER 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

This is an application, as amended on 21^st May 1998, for the annulment of the bankruptcies of each of Allan Hamen Honeysett (second respondent) and Cynthia Anne Honeysett (third respondent).  The first respondent is Max Donnelly as trustee for the second and third respondents.

The application is made pursuant to s 153B of the Bankruptcy Act 1966 (Cth) (“the Act”).

BACKGROUND

On 13^th June 1995, the applicant and the second and third respondents (trading, then, as “Fitta Fences and Security”) entered into an agreement for building work.

On about 31^st January 1996 the applicant told the second and third respondents that the work was defective and amounted to a breach of the agreement.  The applicant on 24^th November 1997, commenced proceedings in the NSW District Court against the second and third respondents claiming costs for rectification of the work.  This was served on 8^th December 1997.  The matter was mentioned before the District Court on 10^th December 1997 when it was adjourned for 2 weeks.  On 15^th December 1997, upon the application of the second and third respondents, Mr Max Donnelly (the first respondent) was appointed trustee for the bankrupts.

On 24^th December 1997, a report to creditors was prepared and served on them.

Her interest in each of two parcels of land which had been held as joint tenants by the second and third respondents were transferred by the third respondent to the second respondent on 12^th March 1997.  Each transfer was for the consideration of $1.00.

Pursuant to O 77, r 44 of the Federal Court Bankruptcy Rules, the first respondent filed a report dated 23^rd July 1998, on the conduct and examinable affairs of the second and third respondents.   The person who prepared the report for the first respondent, Mr Cuitanovic, was required to attend for cross-examination and was legally represented.

Section 153B of the Act states:

“If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor’s petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.”

The applicant claims that the debtor’s petitions in this case ought not to have been presented and ought not to be accepted and seeks to have them set aside.

The claim is made on two bases – firstly what are described by the applicant as false and misleading misstatements in the statements of affairs filed by the second and third respondents respectively.

The first alleged misstatement made by both the second and third respondent is that the applicant is claiming a sum of $250,000 against the respondents when, in fact, the claim is $100,000.  

The second misstatement is that the third respondent failed to disclose in her statement of affairs, the transfer of her interests in the two parcels of land in March 1997.

Secondly, that the second and third respondents could not have honestly and reasonably believed that they were insolvent at the time they filed their petition, having, according to their statement of affairs, a positive net asset position of $55,802, and they not being able to have taken into account contingent liabilities in assessing this position as to solvency.

The making of deliberately false misstatements in the statement of affairs would be a basis for an exercise of discretion under s 153B. If an application accompanied by such a statement of affairs were presented it ought not to have been, nor should it have been accepted.

In Re Thanos (unreported, Federal Court of Australia, 14 October 1988), Davies J said, in relation to the facts before him:

“Had the deputy Registrar been informed of the true position, she would have been entitled to refuse to accept the petition until it was accompanied by a substantially accurate statement of affairs.” (at p 10)

In that case the bankruptcy was obtained on false information provided by the debtor and done, it was found, with a view to frustrating other proceedings in the Family Court.

Here the true position was always known to the Official Receiver.  While there is no reference to the two land transactions, ownership of the two parcels of land was however disclosed in the second respondent’s statement and the matter was investigated.   The $250,000 claim by the applicant which, it is submitted is a false statement was, in my view a justifiable claim reflecting an amount pleaded by the applicant in the District Court and subsequently included in the proof of debt by the applicant.

Mr Cuitanovic, a partner in the firm of accountants acting as trustee in bankruptcy in this matter was cross-examined on the report he provided to the Court.   In relation to the statement of claim filed on behalf of the applicant he said he saw “two figures in the document, $250,000 and $100,000, and so I took the higher amount”.     He said that he considered it to be a claim for $250,000, based on his experience that “creditors like to lodge a claim higher, the highest claim as possible”.  (Transcript, p 35)

He also was cross-examined in relation to the transfers of property referred to above and said it had warranted investigation which he said he had carried out, including arranging for the second and third respondents to get independent legal advice.

In relation to the transfers, although the third respondent did not include them in her statement of affairs, the true nature of the transactions was known when the petitions were presented and nothing in relation to the property was concealed from the Official Receiver.

These matters do not, in my view, amount to a basis for annulment.  The facts are materially different to those in Re Thanos (supra).

The second basis for this application is that the second and third respondents did not honestly and reasonably believe they were insolvent at the time of the application, their applications being made to protect the compensation payments which were part of the assets of the second respondent. (See s 116 of the Act.)

In Re Mottee;  ex parte Mottee [1977] 29 FLR 406, Riley J at 415 said:

“The principle which I think may be extracted from the cases to which I have referred is that, where a man who is insolvent, or reasonably believes that he is insolvent, presents a petition against himself, and does not thereby commit (as in Re Betts (22)) a fraud on his creditors, his bankruptcy will not be annulled merely because his motive in presenting his petition was, in the words of Evershed M.R., “to protect himself from evils which he might otherwise suffer”.”

This principle, which has been accepted and applied subsequently, requires consideration of whether the respondents here were insolvent, or reasonably believed they were insolvent.

The honesty of the respondents in this case is not challenged.  In an affidavit sworn by the second respondent and tendered in these proceedings he says:

“On 11^th December I decided to declare myself bankrupt because I believed that the amount of claims which would be brought against me exceeded by assets.”

This statement was not challenged by the applicant although the second respondent was required for cross-examination.   The evidence in this matter discloses that at the time the debtor’s petition was presented, the respondents had already had three people proceed against them at the Consumer Claims Tribunal in respect of their failed business venture.  The statement of claim of the applicant had been served.  They were aware of a large number of jobs they had done while in business which were defective.  They had liability for this defective work declined by their insurer.   At the time of the petition they had not quantified these potential liabilities but believed they were extensive and would be greater than the amount of their assets.

The applicant submits that the potential and actual claims which were made against the respondents are not able to be taken into account in deciding whether a party is solvent or insolvent at the time of petition citing the authority of Re A Debtor; ex parte Debtor v Allen & Anor [1967] Ch 590.That case held that debts not presently payable could not be considered when determining solvency.

Counsel for the second and third respondents submits that the Court should decline to follow this case because the principle for which it stands is at odds with the current bankruptcy legislation operating in Australia.

He referred to the structure of the Act including the definition of debt, to include liability, the absence of definition of liability and the provisions of s 82 which allow present and future debts and liabilities, certain or contingent, to be proved in a bankruptcy. He said that looking at the structure of the legislation one could conclude that persons in the position of the second and third respondents were acting reasonably in taking these contingent debts into account when presenting a debtor’s petition, and should not be accused of abuse of process in so doing. Whether they were correct, as a matter of law, in so doing need not, in the circumstances of this case be decided.

In Re Moncada;  ex parte Moncada (1986) 11 FCR 205 at 208, Jackson J as he then was said:

“One of the circumstances in which the presentation of a debtor’s petition may relevantly amount to an abuse of the process is when the debtor is not, at the time of presentation of the debtor’s petition, insolvent in the sense described in Sandell v Porter (1966) 115 CLR 666 at 670. I say that the circumstance that the debtor is not insolvent may (as distinct from “must”) give rise to an abuse of process because the debtor may not be insolvent in fact but may “reasonably” (or perhaps “honestly” – it is unnecessary to decide which is the correct test) but wrongly believe that he is insolvent, and in such a case the presentation of the petition would not be an abuse of process.”

It is my view that the second and third respondents in this case, taking into account everything known to them at that time, both reasonably and honestly believed that they were insolvent when they presented their petitions.

There is therefore no basis for annulment orders and the application is dismissed.   At this stage, I make no order as to costs.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Connor

Associate:

Dated:             2 November 1998

Counsel for the Applicant:	A Colefax with P Lane
Solicitor for the Applicant:	Nigel Duncan & Associates
Solicitor for the First Respondent:	Gordon & Johnstone
Counsel for the Second and Third Respondents:	D Robinson
Solicitor for the Second and Third Respondents:	Cunich Lawyers
Date of Hearing:	28 September 1998
Date of Judgment:	2 November 1998