Vanguard Service Print v Mercovich, F.J

[1985] FCA 486

Re: VANGUARD SERVICE PRINT
And: FRANK JOSEPH MERCOVICH
No. WAG 58 of 1985
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIAN DISTRICT REGISTRY
GENERAL DIVISION
Sweeney J.
Sheppard J.
Beaumont J.

CATCHWORDS

Bankruptcy - application in the alternative for orders that period before which bankrupt to be discharged be extended to a total period of seven years or that bankrupt not be discharged except on an application under s. 150 of Bankruptcy Act 1966 - whether exercise of discretion by primary judge miscarried - matters to be considered in an application under sub-sec. 149(8) of the Act - review of evidence.

Bankruptcy Act 1966, ss. 149, 150

HEARING

PERTH
#DATE 20:9:1985

ORDER

1. The appeal be dismissed.

2. The appellant pay the respondent's costs of the appeal.
   
   Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

THE COURT: This is an appeal from a decision of Toohey J. dismissing an application for orders pursuant to para. 149(3)(c), sub-sec. 149(8) and sub-sec. 149(12) of the Bankruptcy Act 1966 ("the Act"). The appellant is a creditor in the bankruptcy of the respondent ("the bankrupt"). The orders were sought in the alternative. No submission was made to us that his Honour's refusal to make an order under para. 149(3)(c) of the Act should be disturbed. Reliance was placed solely on submissions that his Honour was in error in refusing to make an order pursuant to sub-sec. 149(8) or sub-sec. 149(12). The sub-sections are as follows:-

"(8) The Court may, at any time before the expiration of 5 years from the date of the bankruptcy, on the application of the Registrar, the Inspector-General, the trustee or a creditor, order that the period at the expiration of which an objection entered under paragraph (3)(c) will lapse be such period, being a period exceeding 5 years, commencing on the date of the bankruptcy as is specified in the order.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(12) The Court may, at any time before the discharge of a bankrupt, on the application of the Registrar, the Inspector-General, the trustee or a creditor, direct that the bankrupt shall not be discharged from bankruptcy by virtue of this section."

The order sought pursuant to sub-sec. 149(8) of the Act was that "(t)he time at the expiration of which objections dated 18 January 1983 filed herein will lapse will be 12 February 1987 or until further orders". If such an order were made, the bankrupt would not be discharged before 12 February 1987, unless in the meantime he made a successful application pursuant to s. 150 of the Act. If an order were made pursuant to sub-sec. 149(12), the bankrupt would not be discharged except upon an application under s. 150.

On 12 February 1980 sequestration orders were made against the bankrupt and one Terence Harold Griffiths on the petition of the appellant, which is apparently a firm. In the ordinary course, the bankrupt would have been discharged after three years pursuant to sub-sec. 149(1) of the Act. However, on 18 January 1983, the Official Receiver lodged an objection to discharge under sub-sec. 149(3). Under the scheme of the Act, an objection lapses five years after the date of the bankruptcy in the absence of an order made to the contrary. Pursuant to sub-sec. 149(8) the Court has by consent extended the period of five years from time to time. The reason for the extensions was to enable the application and then this appeal to be prosecuted. The last order extended the period to 4 October 1985 or until further order.

Before the learned primary Judge the appellant relied upon four of the grounds prescribed by Rule 51A to be matters the Court is required to take into account in applications made pursuant to sub-sec. 149(12); see sub-sec. 149(13). For our purposes the relevant provisions of the rule are those contained in paragraphs (c) and (d), they being whether the bankrupt has co-operated in the administration of his estate and the conduct of the bankrupt in respect of the period both before and after the date of bankruptcy.

The application does not appear to have been served upon the Official Receiver or upon any creditor. No information was placed before the Court as to the Official Receiver's view of the bankrupt's co-operation except information which was contained in a report dated 19 May 1980. The matters relied upon in support of the bankrupt's alleged failure to co-operate in the administration of his estate consisted of the bankrupt's alleged failure to reply to correspondence from the Official Receiver's office and, in particular, his failure to supply statements of assets and liabilities. His Honour said that the bankrupt disputed this version of the facts but his Honour was satisfied that there had been some non co-operation and said the significance to be attached to it depended on the other grounds relied upon by the appellant. In passing it may be noted that the Official Receiver said in his report that he was not aware that the conduct of the bankrupt since the date of bankruptcy had been other than satisfactory.

So far as conduct before the bankruptcy is concerned, the matters relied upon were the bankrupt's trading activities in the period of four or five years prior to his bankruptcy. The material relied upon forms part of the Official Receiver's report earlier mentioned which, so far as relevant, is as follows:-

"Frank Joseph Mercovich has been involved as a Shareholder/Director of the following companies:

1. In March 1975 he commenced with Fresh Food Industries Pty Ltd. He stated that he left this company due to dispute and it was subsequently liquidated in 1979.

2. In December 1975 he formed C.J.M. Food Services Pty Ltd. This company traded under the name of the Hungry Baron at Dog Swamp Shopping Centre. The bankrupt left this company in August 1977 and an Official manager was appointed in November 1977. In November 1978 the company was liquidated with debts of approximately $40,000.

3. In May 1977 he formed Telepad Australia Pty Ltd. This company sold advertising. It was liquidated in March 1978 when the creditors were owed aproximately $50,000."

As is noted in his Honour's judgment very strong reliance was placed by counsel for the appellant upon the matters disclosed in these paragraphs. His Honour said:-

"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."

We should mention at this stage that the proceedings were conducted on the appellant's behalf in a somewhat unconventional way. As we read the transcript, counsel for the appellant began by referring to the affidavits and other material upon which he relied. One could be forgiven for thinking that he was opening a case in which there were affidavits filed on behalf of the appellants and an affidavit filed on behalf of the bankrupt and that in due course there would be a clear indication of whether counsel wished to cross-examine the bankrupt. However, what began as an opening developed into a final address. In the course of that address counsel for the appellant had made the remarks referred to in the passage quoted from his Honour's judgment. When the bankrupt was asked what he had to say about the matter the following exchange took place between his Honour and the bankrupt:-

"MR. MERCOVICH: I think the best I can do, sir, is to reply to what Mr. Gilmour had to say. A lot of what he has had to say is just sort of continuous innuendo. He talks about suspicion, etcetera. If the Court feels there are any grounds for any suspicion I feel the best thing I can do is give oral evidence under oath and answer all of Mr. Gilmour's questions, whatever questions he wants to put to me, because there is a hell of a lot left up in the air.

HIS HONOUR: Mr. Mercovich, at this stage I have affidavits filed by Mr. Gilmour which you have had a chance to respond to and which you have responded to. There has been no invitation by Mr. Gilmour to cross-examine, or no request to the Court for leave to cross-examine you on the affidavit, and therefore I propose to deal with the matter on the material I have - namely, his affidavit with the exhibits, that is, his two affidavits, and your lengthy affidavit with the material exhibited to it.

MR. MERCOVICH: Yes, sir. Perhaps I can only reply to what Mr. Gilmour had to say then.

HIS HONOUR: I think it would be convenient if you could follow the order he adopted."

Later the bankrupt said:-

"MR. MERCOVICH: Every time we come to Court, either himself or his predecessor, they say they want this and they want that, and irrespective of what I say, they want something more. If he wants information regarding what outgoings I have, I am quite willing to take the stand right now and answer questions to that effect - if he needs that information to satisfy him. It is purely an oversight that it is not in my affidavit. We cannot put everything in."

After a remark by his Honour the bankrupt continued:-

'. . . his grounds are saying that I failed to co-operate with the administration of the estate. As I say, sir, I cannot reply to that other than with the possibility of giving further evidence now, which I am willing to do. However, I will make one comment, and that is that I believe the only person who is in a position of being able to make that initial assessment of whether I failed to co-operate would have been the trustee, certainly not Mr. Gilmour, and I would make the point that the trustee has not lodged any objection. Mr. Gilmour relies on a very brief conversation he had with one particular officer in the trustee's office. He proceeded from that and talked about my conduct immediately before - when I say immediately, prior to my date of bankruptcy. He saw fit to go back a period of more than five or six years, and he referred to three companies, I think it was, in which I was involved, Fresh Food Industries, CJM Food Services and Telepad Australia. In the record of the public examination which does form part of the file there, there were similar questions asked of me regarding those companies and there were answers there. If Mr. Gilmour had referred to that, he would have seen that I answered various questions regarding those companies, including one regarding Fresh Food Industries that I was not involved with for something like three years prior to its date of liquidation. In fact it was liquidated for the purposes of reorganisation, not because of pressure from creditors. He would also have observed that regarding CJM Food Services, it went under official management approximately four or five months after my involvement totally ceased and I think in my statement under oath at that time I stated that the assets shown by the official management at that time were something like 95 per cent. I am sorry; if it had been liquidated something like a 95 cents on the dollar pay out would have been made and that was the report of the official manager to the creditors which was made about four months after I left that company. Certainly in fact it was liquidated about 12 or 18 months later. The creditors only received, I think, a negligible amount but at that time it had been under the hands of an official receiver and he was the one who lost the money, certainly not myself.

Regarding Telepad Australia, I was involved with that company and I cannot deny that it lost money and it was liquidated. It was under my control and I readily admit that, but it does not indicate the record of something like six or seven years that Mr. Gilmour is trying to imply. Mr. Gilmour questioned how I had managed to find money to pay a solicitor. Well, that can be explained quite simply. Approximately, I suppose it would have been, two months ago now I went and talked to Mr. Adams who is the effective control of Chatsworth Nominees Proprietary Limited and I explained my difficulties to him and I explained I could not afford a solicitor and I really needed one and he agreed it would be okay for me to take an advance out of the company to pay a solicitor."

His Honour referred to the bankrupt's statement about these matters. He said:-

"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-organization, 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."

Just before his bankruptcy the bankrupt was carrying on business as a publisher and was selling advertising. He carried on business under the name, Nationwide Publications (W.A.). As his Honour recounts in his judgment, the bankrupt said in an affidavit that he ceased to be the proprietor of the business on 1 February 1980. That day the nature of the business was changed to one carrying out typesetting and publishing work. The business was sold to a company, Chatsworth Nominees Pty Limited. Since the sale, the bankrupt has been employed by Chatsworth Nominees. There was evidence led in the appellant's case which was designed to cast an aura of suspicion over the real relationship between the bankrupt and Chatsworth Nominees. But nothing concrete emerged. One of the matters relied upon was a copy of an income tax return lodged by the bankrupt in respect of income earnt by him during the year ended 30 June 1984. The return shows his occupation as "typesetter" and an income consisting only of earnings as an employee of Chatsworth Nominees of $8,320. The income tax return was prepared by a tax agent, Howells & Associates who are public accountants. The contact given the Commissioner of Taxation was Mr. P. Howells.

In evidence is a letter dated 30 May 1985 signed by Mr. Howells on the letterhead of Howells & Associates to the bankrupt's solicitors in which he says that the bankrupt is employed as an employee of Chatsworth Nominees as trustee for a trust known as "The R.B. Adams Trust" as manager of Nationwide Publications". In his letter Mr. Howells said that the bankrupt was not a beneficiary under the trust deed. A copy of the trust deed is in evidence and appears to confirm what Mr. Howells said. Nevertheless counsel for the appellant made a number of submissions based on the income tax return. He said that the income tax return falsely described the bankrupt's occupation, which was not typesetter but manager and disclosed an income which, in the circumstances, appeared to be derisory. In his submission there appeared to be a hint that the trust deed ought not to be accepted at its face value but this was not really pressed.

A number of other matters was relied upon. It is unnecessary to refer to the detail of these. His Honour referred to all the matters relied on in his judgment. In summary the important matters which the appellant claimed ought to have entitled him to succeed at first instance were:-

1. The bankrupt's failure to co-operate fully with the Official Receiver.

2. The unsatisfactory trading record of the bankrupt revealed in that part of the Official Receiver's report earlier quoted.

3. The bankrupt's failure to disclose fully the nature of his employment, his own income and his true relationship with Chatsworth Nominees.

4. The bankrupt's failure to contribute more than a very small sum to his creditors.

In the course of his reasons his Honour referred to the fact that there had been no cross-examination of the bankrupt. Of his relationship with Chatsworth Nominees he said that the bankrupt had asserted in his evidence that he had no interest in the business. He said that the bankrupt's evidence in this respect had not been tested by cross-examination and he was therefore obliged to accept the bankrupt's account of his association with the company.

His Honour's conclusions were as follows:-

"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 criticism 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)."

Counsel for the appellant conceded that the appeal was against a discretionary judgment and that he had to make good one at least of the well known grounds upon which discretionary judgments may be challenged; see House v. The King (1936) 55 C.L.R. 499. His grounds were essentially:-

(a) A consideration of the undisputed facts in the matter led to the conclusion that his Honour had not properly directed his mind to the seriousness of the conduct and other matters which were relied upon. In short, so counsel for the appellant submitted, no conclusion was open to his Honour other than that an order under sub-sec. 149(12) should be made.

(b) His Honour's statement in the second paragraph of his conclusions just quoted that, before a bankruptcy is prolonged beyond five years, there must be something more reprehensible in the conduct of the bankrupt than would merely justify an extension of the bankruptcy from three years to five years, reflected a misunderstanding of the true meaning and effect of the provisions of s.149.

(c) His Honour, at least inferentially, had accepted the bankrupt's explanation for his unsatisfactory trading activities before his bankruptcy, notwithstanding that that explanation was given in an unsworn statement made from the body of the Court. There being no acceptable evidence to support what the bankrupt said, his Honour should not have taken the bankrupt's explanation into account.

We propose to deal with these grounds in the reverse order to that in which they have been stated.

It is true that there is no sworn evidence to support the bankrupt's explanations as to his trading activities prior to his bankruptcy. But in the course of what he said the bankrupt referred to his public examination where he said he had given the explanations which were given to his Honour. Furthermore, the bankrupt offered, not once, but on a number of occasions, to go into the witness box. The appellant was represented by counsel; the bankrupt appeared in person. The appellant, by its counsel, must be taken to have deliberately chosen not to cross-examine the bankrupt.

There is a question in our minds as to what weight his Honour gave the various matters put by the bankrupt in explanation of his conduct. He referred to the fact that the remarks were made in the course of the bankrupt's address. He did not say that he accepted the explanations, and, in the concluding paragraphs of his judgment to which reference has been made, he said that the bankrupt's conduct before bankruptcy was open to criticism. That would lead us to think, in the absence of a clear statement to the contrary in the judgment, that his Honour did not accept the bankrupt's unsworn explanations for his conduct. But if that view be incorrect, it seems difficult to us to criticize the course his Honour took in the light of the bankrupt's repeated offers to go into the witness box and the clear election of counsel for the appellant not to cross-examine him.

In all those circumstances we are of opinion that ground (c) fails.

We are more troubled by the second ground. An understanding of it requires a rading of the three paragraphs which conclude his Honour's judgment and which are earlier quoted. The material statement is in the second of the paragraphs. It is, ". . . 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". The statement appears to be made in connection with his Honour's treatment of the application made pursuant to sub-sec. 149(8) and not with that made pursuant to sub-sec. 149(12). That application appears to be disposed of in the first of the quoted paragraphs. Nevertheless, if the statement be erroneous, it opens the way for the appellant's submission that the exercise of his Honour's discretion miscarried at least insofar as the application is based upon sub-sec. 149(8).

In our respectful opinion the statement is not correct. Pursuant to para. 149(3)(c), objections may be lodged as of course, by the Registrar, the Inspector-General or the trustee provided the objector has sufficient reason to believe that there exists one or more of the grounds specified in sub-sec. 149(4); see Van Reesema v. Official Receiver (1983) 50 A.L.R. 253 at p. 264. By sub-sec. 149(7) an objection entered under para. 3(c) lapses at the expiration of the period of five years from the date of the bankruptcy. But that is subject to the Court being empowered, under sub-sec. 149(8), to make an order that the period at the expiration of which an objection entered under para. 3(c) will lapse be such period as is specified in the order. Except in cases where the Court has given leave to the creditor to enter an objection, the questions of whether an objection should be lodged and the ground upon which it may be lodged are for the objector to determine. In those cases, the Court will not be seized of the matter until it needs to determine an application made pursuant to sub-sec. 149(8). Once that occurs, the matter is, so to speak, at large. It may be that the Court, in its consideration of the matter, is limited to the consideration of matters which fall within one or other of the grounds specified in sub-sec. 149(4). But it is for the Court to make up its mind as to the seriousness of the matter and what extension of the period of five years it will grant. It is in no way bound by the consideration of the matter by the objector. Furthermore, the objector himself can only bring about an extension of the original three year period up to a period of five years. He may be strongly of opinion that the total period of five years is inadequate. His only means of achieving an extension of it is to make an application under the sub-section.

The grounds specified in sub-sec. 149(4) do not indicate that the conduct of the bankrupt in the period after his bankruptcy is to be determinative of the matter. His conduct before the bankruptcy may have been so reprehensible as to warrant the conclusion that he should remain a bankrupt for a very long period. In a similar category may be conduct committed by the bankrupt in the initial three year period and not in the period between the expiration of that period and the period of five years. In our opinion the Court's discretion is not at all fettered in the way that the statement in the judgment suggests. We would therefore uphold ground (b).

We turn to ground (a). We are satisfied that there is no substance in this ground so far as concerns the application made pursuant to sub-sec. 149(12). Having read the evidence, the transcript of the proceedings before his Honour, and his Honour's judgment, we are quite unable to perceive how it could be said that the exercise of his Honour's discretion miscarried. We bear in mind that bankruptcy proceedings usually involve more than the determination of the rights and obligations of the immediate parties to an application. The public interest is involved; considerations of commercial morality become important in some cases. But we also have to do justice as between the parties to cases which are before us. The appellant was represented by counsel. It had every opportunity of presenting its case fully and properly. Further information as to the bankrupt's failure to co-operate with the Official Receiver in more recent years, if that were the case, was available from the Official Receiver. No such information was forthcoming. Over five years have gone past. Neither the Official Receiver nor any creditor, including the appellant, has sought to initiate steps to recover additional moneys from the bankrupt's earnings or to have invalidated any transaction into which the bankrupt has entered either before or after his bankruptcy. No steps, so far as we are aware, were taken by anyone to relist the bankrupt's public examination. In all those circumstances we are of opinion that there is no basis whatever for saving that his Honour's discretion miscarried so far as concerns sub-sec. 149(12).

Nevertheless, we need to consider what should be done in relation to so much of the application as was based upon sub-sec. 149(8). His Honour's discretion having miscarried so far as that application is concerned, it is for us to exercise our own discretion.

In our opinion, the appellant has failed to make out a case sufficient to justify the withholding of a discharge of the bankrupt from his bankruptcy at the time at which the learned Judge dealt with the application. At that stage, the bankrupt had been bankrupt for a period of five years and four months and, in our view, misconduct of a serious kind would need to be established in order to warrant the denial of a discharge.

In the ultimate analysis, the appellant failed to adduce evidence sufficient to satisfy us that the bankrupt has been guilty of behaviour of that order. At best, from the appellant's standpoint, the matter was allowed to rest in assertion from it matched by vigorous counter-assertion from the bankrupt. It is hardly necessary for us to say that allegations of misconduct of this kind must be established to the comfortable satisfaction of the Court in the form of admissible evidence. Here not only did the appellant fail to cross-examine the bankrupt on his affidavit evidence, but no attempt was made to tender, pursuant to sub-sec. 69(20) of the Act, the transcript of evidence at the bankrupt's public examination. In the result, in our opinion, the appellant has failed to lay a satisfactory evidentiary foundation for the case it seeks to make out. It must follow that in the absence of a comfortable satisfaction on our part that the bankrupt has been guilty of the behaviour sought to be attributed to him, it is not appropriate that we exercise the discretion conferred by sub-sec. 149(8) in favour of the appellant by further extending the period of the bankruptcy.

In the result the appeal is dismissed with costs.