W H Group Pty Ltd v Lehane
[2007] FMCA 735
•15 May 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| W H GROUP PTY LTD v LEHANE | [2007] FMCA 735 |
| BANKRUPTCY – Review of sequestration order made by registrar – solvency of the debtor – proposal for the debtor to refinance debts and redevelop real estate – uncertainty of loan proposal – extent of debts may exceed capacity to borrow – review application dismissed. |
| Bankruptcy Act 1966 (Cth), s.52 Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) |
| Angus Property Development v Dwyer and Anor [2007] FMCA 528 Martin & Anor v Commonwealth Bank of Australia (2001) 217 ALR 634 Sandal v Porter (1966) 115 CLR 666 |
| Applicant: | WH GROUP PTY LTD TRADING AS CAMERON KIRK ROSE |
| Respondent: | NOEL LEHANE |
| File Number: | SYG2746 of 2006 |
| Judgment of: | Driver FM |
| Hearing date: | 15 May 2007 |
| Delivered at: | Sydney |
| Delivered on: | 15 May 2007 |
REPRESENTATION
| Solicitors for the Applicant: | Mr J Merewether Merewether & Co Solicitors |
| Solicitors for the Respondent: | Mr B Palmer Michael Dennis, Solicitor |
| Solicitors for Australian Pensioner Finance Co Pty Ltd: | Ms P Madgwick Home Wilkinson Lowry Lawyers |
| Solicitors for GE Commercial Corporation (Australia) Pty Ltd: | Ms J Watkins Dibbs Abbott Stillman |
ORDERS
The review applicant is excused from compliance with rules 7.06(2) and 7.06(5) of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) for the purposes of these proceedings.
The review application is dismissed with costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG2746 of 2006
| WH GROUP PTY LTD Trading as CAMERON KIRK ROSE |
Applicant
And
| NOEL LEHANE |
Respondent
REASONS FOR JUDGMENT
(revised from transcript)
I have before me an application to review a sequestration order made by Registrar Hedge on 17 April 2007. The applicant is the debtor, the subject of the sequestration order, and the application for review was made on 24 April 2007. It was clearly within time.
The matter came before me on referral from the Registrar’s list on 8 May 2007 and I gave directions for a hearing on the application today. The application seeks orders that the sequestration order be set aside and that the petition be adjourned while Mr Lehane seeks to obtain refinancing in order to discharge his debts and undertake the redevelopment of certain property. Because of the speed with which this matter has come on for hearing, and because I was satisfied that the key interested parties were present, I excused the applicant from compliance with Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) 7.06(2) and (5).
The application is supported by an affidavit by Mr Lehane filed on 24 April 2007 and two affidavits by his solicitor, James Merewether, both filed on 11 May 2007. The application is opposed by the petitioning creditor, W H Group trading as Cameron Kirk Rose. The petitioning creditor, in addition to relying upon all of the material presented in support of the petition, also relies upon the affidavit of Michael Gerard Dennis, solicitor, filed on 7 May 2007.
I was also assisted today by the presence of representatives of the Official Trustee. The Official Trustee neither opposes nor supports the review application. I gave leave for the representatives of two supporting creditors to appear and make submissions. Ms Madgwick appeared for the Australian Pensioner Finance Co Pty Limited and told me that her client has the benefit of a judgment debt in the Local Court for approximately $50,000.
Ms Watkins appeared on behalf of GE Finance Corporation and tendered documents concerning a debt currently standing at $234,050.81. There are currently proceedings in the Supreme Court of New South Wales in which GE seeks to obtain security for that debt.
The general principles in relation to a review application were summarised by Raphael FM in Angus Property Development v Dwyer and Anor [2007] FMCA 528 at paragraph 7. I adopt with respect His Honour’s statement of the principles.
The only contested issue in this case on the review is whether Mr Lehane is able to pay his or her debts for the purposes of s.52(2)(a) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”). In all other respects, I would be satisfied as to the matters of which s.52 requires proof based on the material which was already before the Registrar.
The circumstances in which the sequestration order was made were somewhat unfortunate. Mr Lehane had had the benefit of legal representation but lost it when his legal representative withdrew shortly before the hearing of the creditor’s petition. Mr Lehane has also suffered from a workplace injury which had prevented him from working and his inability to earn an income appeared to worsen his financial position. I am told he has just resumed working on light duties. There was a question before the registrar whether Mr Lehane would be able to obtain loan finance in order to pay his debts. That question was a live one at the time of the sequestration order, but the most recent information was in transit by facsimile when the sequestration order was made. I am now in a better position to assess the capacity of Mr Lehane to pay his debts than was the Registrar.
The question to be considered is whether Mr Lehane is solvent for the purposes of s.52(2)(a). The meaning of “solvent” and “insolvent” is dealt with in Butterworth’s Bankruptcy Law and Practice Service at pages 6102 and 6103. The learned authors deal with the history of those terms in the bankruptcy legislation and note that in determining solvency account is taken not only of the debtor’s cash resources available to meet debts as they become due and payable, but also the debtor’s ability to raise funds through realising or charging assets: Sandal v Porter (1966) 115 CLR 666. However, the ability to realise assets does not extend to those assets required to carry on the debtor’s business. Other relevant circumstances including the nature of the debts and of the debtor’s business, if any, are to be taken into account in determining solvency. The temporary lack of liquidity, as opposed to an endemic shortage of working capital, does not constitute insolvency.
Mr Lehane presses on the Court the view that, while he is temporarily financially embarrassed, he has the capacity, within a reasonable time, to borrow funds in order to meet his debts. His affidavit discloses that he owns two pieces of real estate, the first is a house on 20 acres of land at Inverell. Mr Lehane purchased this property in January 2003 for $220,000. A development application has been approved for two five-acre blocks and one 10-acre block. Mr Lehane deposes that the property is worth $450,000 at present, but would be worth about $600,000 in the event that the subdivision proceeds. He believes the subdivision will cost about $13,000. The property is subject to a mortgage to the Colonial Bank/Commonwealth Bank of $171,000. The property has been listed for sale for about six months, but has obviously not yet been sold.
The other piece of real estate owned by Mr Lehane is a house on 20 acres at Glenn Innes. Mr Lehane deposes that he purchased this property in August 2006 for $490,000. He deposes it is worth about $600,000 now. He has applied for development approval for a redevelopment of that property. There is a mortgage over the property to La Trobe Home Loans of Australia for $349,000. This is the home in which Mr Lehane lives.
Mr Lehane discloses his known debts in paragraph 8 of his affidavit. He mentions the debt allegedly due to Australian Pensioner Finance Co Pty Limited and notes that the debt is the subject of proceedings in the Local Court. However, he did not specifically mention that that creditor had been successful in obtaining default judgment which, while it had been set aside, has now been reinstated by the Local Court at Inverell on 13 April 2007. For the purposes of this application, I proceed on the basis that that debt has been established. It is a debt of approximately $50,000.
Mr Lehane was not as frank as he should have been in relation to the GE Commercial Corporation Australia Pty Limited debt. That was a debt of between $400,000 and $500,000 and I am told that $234,050.81 is currently owed. The debt arises out of a personal guarantee and GE asserts the right to obtain a mortgage to secure the debt. That is the subject of the proceeding in the Supreme Court of New South Wales in Equity, being case 2704 of 2007. If Mr Lehane remains bankrupt, the Bankruptcy Act may present an obstacle to the pursuit of that proceeding by GE. On the other hand, if Mr Lehane is discharged from bankruptcy, that proceeding will no doubt continue. Whatever may happen, the debt to GE, which I accept is established for the purposes of this application, significantly impacts upon Mr Lehane’s capacity to borrow. While Mr Lehane asserts a potential capacity to borrow a little over $1 million, that must be discounted in several respects.
Page 9 of the annexures to the affidavit of Mr Merewether made on 11 May 2007 is a letter from Mr Muir to Mr Merewether on behalf of Guardian Loans Pty Limited in relation to the proposal by Mr Lehane to refinance his debts. Mr Muir states in that letter that Provident Capital has offered the lesser of $1,040,000 or 65 per cent of a valuation in respect of the refinance of properties owned by Mr Lehane at Glen Innes and Inverell. Those are the properties I have already referred to.
The refinancing would need to take account of the existing mortgages. The refinancing would also need to take account of the debts due to GE and Australian Pensioner Finance. It is, in my view, at best speculative whether there would be any equity remaining after the discharge of those debts if the loan is limited to a 65 per cent of a valuation of the property (which has not yet been obtained). On the basis of Mr Lehane’s belief as to the current value of his properties (which has not been verified by an independent valuation) he has a potential capacity to borrow about $680,000, but his known debts are over $800,000. If the redevelopment of both properties proceeds, the likelihood of the refinancing being a viable proposition increases, but the time frame for those redevelopments is, on the available material, uncertain.
Mr Lehane appears to me to be a sincere debtor who would much prefer to pay his debts than suffer bankruptcy if that could be arranged. There was evidence before the Registrar of earlier and ultimately fruitless efforts by Mr Lehane to achieve that objective. The debt owed to the petitioning creditor is only $11,500 taking into account payments already made to the petitioning creditor by Mr Lehane. Most of the other debts disclosed by Mr Lehane are relatively modest.
If there was a good prospect of Mr Lehane borrowing sufficient funds within a short timeframe to discharge his debts that would be sufficient to persuade me that the sequestration order be set aside and that the petition be adjourned for a period to permit that finance to be obtained and the debts paid. However, the only finance which seems immediately in prospect is a loan of $50,000 which would only be sufficient to pay for a valuation of Mr Lehane’s properties and an application fee for the larger loan proposed and the discharge of the debt to the petitioning creditor.
The interests of other creditors also now need to be taken into account. Further, there is no certainty that the larger loan would be obtained or that, even if it is obtained, there would be sufficient equity in the properties to discharge the debts now known to exist. This fails to persuade me for the purposes of s.52(2)(a) of the Bankruptcy Act that Mr Lehane is able to pay his debts as and when they fall due or within a reasonable time.
I conclude that the orders made by Registrar Hedge on 17 April 2007 were properly made. It remains open to Mr Lehane to discuss with his trustee in bankruptcy any proposal he may want to put to creditors to be discharged from bankruptcy. The Bankruptcy Act makes provision for just such a course and if Mr Lehane is sincere in his efforts, he may be able to put forward to creditors a proposal acceptable to them In the meantime, the public purpose underlying the Bankruptcy Act for the orderly administration of the estate of a debtor who is insolvent should be pursued.
I will order that the review application be dismissed with costs.
I certify that the preceding twenty (20) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 20 May 2007
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