Walton v Klewer
[2005] FMCA 878
•20 September 2005
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| WALTON v KLEWER | [2005] FMCA 878 |
| BANKRUPTCY – Creditor’s petition – whether the petition contains a defect – date of the act of bankruptcy – whether the petition is an abuse of process – failure to file a certificate of judgment of the Local Court in the Local Court registry – solvency of the debtor – whether the debtor is a recalcitrant but solvent debtor – capacity to borrow against equity in her home. |
| Bankruptcy Act 1966 (Cth), ss.41, 52 |
| International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 Klewer v Walton [2004] FCAFC 284 Re Sarina; ex parte Wollondilly Shire Council (1980) 32 ALR 596 Sandell v Porter (1966) 115 CLR 666 |
| Applicant: | IAN WALTON |
| Respondent: | LUCY PATRICIA KLEWER |
| File Number: | SYG 2483 of 2004 |
| Judgment of: | Driver FM |
| Hearing dates: | 23 June & 20 September 2005 |
| Delivered at: | Sydney |
| Delivered on: | 20 September 2005 |
REPRESENTATION
| Counsel for the Applicant: | Mr D Durston, pro bono publico |
| Counsel for the Respondent: | Mr P See |
| Solicitors for the Respondent: | Hannigans |
ORDERS
A sequestration order be made against the estate of Lucy Patricia Klewer.
The applicant creditor’s costs, including reserved costs if any, be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth).
The Court notes that a copy of these orders is to be given to the Official Receiver in Sydney within two days after the orders are entered.
The Court notes that the date of the act of bankruptcy is 30 March 2004.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG2483 of 2004
| IAN WALTON |
Applicant
And
| LUCY PATRICIA KLEWER |
Respondent
REASONS FOR JUDGMENT
Introduction and background
Ian Walton seeks a sequestration order against Lucy Klewer. Mr Walton proceeds upon his amended creditor’s petition filed on 23 September 2004. The petition is supported by the following affidavits:
·the affidavit of Mr Walton filed on 27 May 2005 verifying paragraphs 1, 2 and 3 of the amended petition;
·the affidavit of debt of Mr Walton filed on 22 June 2005;
·the affidavit of personal service of the creditor’s petition of Amanda Williams filed on 3 December 2004;
·the affidavit of service of certain affidavits of Noel Hart Austin filed on 31 May 2005;
·the affidavit of service of certain further affidavits by James Joseph McKeown filed on 3 December 2004;
·the affidavits of search by Stacey Mary Wills and Gregory James Freeman both filed on 22 June 2005;
·four affidavits by Francis Gregory Hannigan filed on 27 May 2005, 14 June 2005, 23 June 2005 and 11 January 2005.
Mr See, who appeared for Mr Walton, also tendered a number of documents in support of the creditor’s petition, which form exhibits A1–A6.
The petition is opposed by Ms Klewer on three grounds. The grounds are set out in her notice of intention to oppose the petition filed on 7 December 2004, namely:
·the amended creditor’s petition allegedly misstates the date of the act of bankruptcy;
·the creditor’s petition is said to be an abuse of process; and
·Ms Klewer asserts that she is not insolvent.
Ms Klewer relies on three affidavits by herself filed on 7 December 2004, 13 December 2004 and 23 June 2005. She also relies upon an affidavit by Paul Batley filed on 7 December 2004.
Despite earlier indications to the contrary, the only deponent who was required for cross-examination was Ms Klewer. At the end of the hearing, I gave leave for Ms Klewer to file a further affidavit as to her solvency, with particular reference to her asserted efforts to refinance the mortgage on her family home, within 21 days. An affidavit with exhibited documents was filed on 11 July 2005.
The matter was listed for a resumed hearing on 20 September 2005, for the purpose of Ms Klewer being cross-examined on her affidavit filed on 11 July 2005. At the resumed hearing I permitted Mr Durston to file in court an affidavit by a medical practitioner, Dr Andrew Duguid, to the effect that Ms Klewer was unfit to attend court on 20 September 2005 due to an anxiety and depression disorder that was exacerbated by an assault in hospital on 8 August 2005. I accepted that affidavit and excused Ms Klewer from attendance for cross-examination. I received her affidavit filed on 11 July 2005 without cross-examination.
Mr Durston appeared pro bono publico for Ms Klewer on the hearing of the creditor’s petition on 23 June 2005. It is appropriate that the Court place on record its appreciation for the willingness of counsel to appear on this basis, especially at short notice. Mr Durston tendered a number of documents in opposition to the creditor’s petition, in addition to documents which had earlier been tendered in the proceedings by Ms Klewer herself. These form exhibits R1-R5.
The background to these proceedings is rather complex. The debt claimed in the creditor’s petition arises from a private criminal prosecution of Mr Walton by Ms Klewer for assault. Mr Walton was, and apparently remains, principal of John Paul College, a school operated by the Roman Catholic Diocese of Lismore. Three of Ms Klewer’s seven children were at that time students of the school. There was an altercation between Ms Klewer and Mr Walton on 7 March 2001 as a result of an incident at the school between one of Ms Klewer’s children and another student. The incident involved Ms Klewer’s son Robert, then aged 13, who is disabled. Ms Klewer claimed that she was assaulted by Mr Walton who physically removed her from the school administration area. She complained to the police, who, instead of acting upon her complaint, charged Ms Klewer with making a false complaint. On 6 December 2004 Ms Klewer was acquitted of the charge against her.
The police apparently refused to deal further with Ms Klewer’s complaint against Mr Walton and she instituted a private criminal proceeding against him. That case was heard on 10 December 2001 in the Local Court. Magistrate O’Keefe held that Ms Klewer had not proved her case beyond reasonable doubt. He ordered Ms Klewer to pay Mr Walton’s costs. It is that costs order which has ultimately led to the creditor’s petition.
Ms Klewer has commenced other proceedings against the Roman Catholic diocese of Lismore arising out of the cancellation of the enrolment of two of her children. Ms Klewer has so far been unsuccessful in those proceedings.
Ms Klewer appealed against the decision of Magistrate O’Keefe in the NSW Supreme Court on 9 January 2002. The case was heard by Master Harrison. Ms Klewer was unsuccessful. Later in 2002, Ms Klewer applied for a rehearing before a judge. The case was heard by Levine J. Once again, Ms Klewer was unsuccessful. Both of these cases resulted in further costs awards against Ms Klewer.
On 4 December 2002 Ms Klewer appealed to the NSW Court of Appeal. The appeal was dismissed on 3 February 2003 with costs. That decision was made by a registrar and on 19 March 2003 Ms Klewer sought the review of the decision. The review was undertaken by Santow JA and Ms Klewer was successful. As a result, the NSW Court of Appeal heard an appeal against the decision of Master Harrison but the appeal was dismissed with costs on 14 October 2003. Ms Klewer sought that the orders of the Court of Appeal be set aside pending an application for rehearing of the appeal and pending an application for leave to appeal to the High Court but that application was also dismissed with costs.
In March 2004 a registrar of the Court of Appeal dismissed with costs a further motion from Ms Klewer for a stay pending representations to the NSW Attorney-General’s Department. Ms Klewer suffered a further costs order following her withdrawal of a further motion seeking to set aside previous adverse costs orders. The costs of the various proceedings in the NSW Supreme Court and Court of Appeal had been assessed at $27,691.86.
Ms Klewer did not pay any of the costs due to Mr Walton and was served with a bankruptcy notice in respect of the sum of $10,504 arising out of the decision of the Local Court in the private criminal prosecution. Ms Klewer was served personally with the bankruptcy notice on 11 February 2004. On 26 February 2004 Ms Klewer applied in the Federal Court for the bankruptcy notice to be set aside. On 7 April 2004 Tamberlin J dismissed that application with costs. Mr Walton claims the sum of $10,521.50 in costs as a result of that proceeding.
Ms Klewer appealed against the decision of Tamberlin J on 23 April 2004. On 5 November 2004 the Full Federal Court constituted by Ryan, Merkel and Conti JJ dismissed that appeal with costs. The decision is reported as Klewer v Walton [2004] FCAFC 284. Mr Walton claims a further sum of $9,249.63 arising from that proceeding.
Ms Klewer sought special leave to appeal to the High Court, both against the decision of the Full Federal Court upholding the bankruptcy notice and the decision of the NSW Court of Appeal dismissing her appeal in relation to her private criminal prosecution. Both special leave applications have been dismissed[1].
[1] Klewer v Walton [2005] HCA Trans 523; Klewer v Walton [2005] HCA Trans 522
Ms Klewer has been engaged in other proceedings against the state of New South Wales which have apparently been resolved and against the Coffs Harbour City Council which appear not to have been finally resolved.
Submissions
Mr See submits that Mr Walton has satisfied all of the requirements necessary to satisfy me, pursuant to s.52 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”), that a sequestration order should be made. He submits that there is no substance to the assertion that the amended creditor’s petition misstates the date of the act of bankruptcy. That assertion is based upon the proposition that Ms Klewer had engaged the automatic extension of time to comply with the bankruptcy notice under s.41(7) of the Bankruptcy Act by asserting a cross-claim, set off or cross demand against Mr Walton of equal or greater value than the debt due to Mr Walton that could not have been set up in the criminal proceedings in the Local Court. The amended creditor’s petition asserts that an act of bankruptcy was committed on 30 March 2004, being the last day for compliance with the bankruptcy notice, pursuant to an order made by the Federal Court extending time under s.41(6A) of the Bankruptcy Act. That order was made on 9 March 2004. Mr See submits that no issue of an extension of time under s.41(7) arises because Ms Klewer withdrew that assertion during the course of the Federal Court proceedings.
Mr See also submits that the allegation that the amended creditor’s petition is an abuse of process cannot succeed. The asserted abuse of process arises from the alleged failure by the creditor to file a certificate of the order of the Local Court with the registrar of the Local Court at Coffs Harbour. Mr See points out that this issue was dealt with by the Full Federal Court (in relation to the bankruptcy notice) at paragraphs [9]-[15] of the Full Federal Court decision and that I am bound by that decision.
Mr See further submits that Ms Klewer has failed to discharge her onus of proof on the question of solvency.
While formally presenting Ms Klewer’s written submissions on the first two grounds of opposition to the creditor’s petition, Mr Durston restricted his oral submissions to the question of solvency. Ms Klewer asserts that she is a solvent but recalcitrant debtor. Mr Durston submits that the unchallenged evidence presented by Ms Klewer shows that she owns a house and land in which she has an equity of approximately $400,000. He further notes that at most, Ms Klewer’s debts could not exceed $100,000 and that Ms Klewer is taking steps to refinance the property to provide funds sufficient to pay her debts if Ms Klewer was willing to pay them. Ms Klewer refuses to pay Mr Walton. Instead, she plans to purchase another property and rent out her existing home, in order to increase her income. Ms Klewer also has a 75 per cent interest in a military superannuation fund with a value of over $100,000, as a result of a Family Court order. Mr Durston submits that I should not make a sequestration order against a solvent but recalcitrant debtor.
Mr Durston finally submits that I should take into account that Ms Klewer has a disabled child who would be disadvantaged by the loss of his home, which would almost certainly result from the making of a sequestration order. He submits that Ms Klewer is taking steps for the orderly disposition of her debts and that there is no policy reason why a sequestration order should be made.
Reasoning
I agree with Mr See that there is no substance to the first ground of opposition to the creditor’s petition. The time for compliance with the bankruptcy notice expired on 30 March 2004, in accordance with the order of the Federal Court made on 9 March 2004. I accept from the affidavit of Mr Hannigan, filed on 11 January 2005, that on 18 March 2004 Ms Klewer retracted her allegation that she had a counter-claim, set off or cross demand which might have engaged the extension of time available under s.41(7) of the Bankruptcy Act.
I also accept that the second ground in the notice of opposition to the creditor’s petition cannot succeed. It is true that at paragraph 14 of its decision, the Full Federal Court found that there was no evidence that a “certificate of the order” of the Local Court had not been filed with the registrar of the Local Court at Coffs Harbour before the issue of the bankruptcy notice. The Full Federal Court did not have the benefit of the affidavit of Mr Batley filed in these present proceedings on 7 December 2004. That evidence establishes to my satisfaction that a certificate of the order was not in fact filed with the registrar of the Local Court prior the issuing of the bankruptcy notice. The question is, whether, if that evidence had been put before the Full Federal Court, it would have made a difference. I find that it would not have made a difference. It is in my view sufficiently clear from paragraphs 10-13 of the Full Federal Court decision that their Honours did not consider that the filing of a certificate of the order was a necessary precondition to the recovery of the debt established by the costs order of the Local Court. I am bound by that decision and accordingly the second ground in the notice of opposition must fail.
While I am sympathetic to the circumstances of Ms Klewer, as the mother of a disabled child and six other children, that circumstance would not of itself persuade me to refrain from making a sequestration order. Ms Klewer has been a persistently unsuccessful litigant in numerous proceedings and has suffered many adverse costs orders. It was her choice to engage in that litigation. She is an intelligent woman undertaking legal studies and knew the risks.
The remaining and most significant issue to be decided is whether Ms Klewer is solvent. I accept that she is a recalcitrant debtor. I believe that she has no intention of paying the costs order supporting the bankruptcy notice and the creditor’s petition. I accept that a sequestration order should not be made as a means of compelling payment of a debt by a solvent but recalcitrant debtor: Re Sarina; ex parte Wollondilly Shire Council (1980) 32 ALR 596 per Deane J.
Exhibit R4 establishes that Ms Klewer owns a house property at 30 Coachmans Close, Korora, New South Wales with a market value of $625,000. Under cross-examination Ms Klewer disclosed that she owes $218,000 to the Commonwealth Bank in respect of a mortgage over the property. Ms Klewer’s affidavit filed on 23 June 2005 shows that her other debts are modest and that, as at 17 June 2005, payments on the mortgage were up to date. Under cross-examination Ms Klewer disclosed that her income is derived from social security benefits and child support payments but that her income is augmented by the income of several of her children (some of whom are adults) and who pay their salaries and social security benefits into her bank account. It appears that the family income and ordinary living expenses are finely balanced. Ms Klewer would require access to some of her equity in the family home in order to pay any significant amount to her creditors having the benefit of costs orders in the various legal proceedings she has been engaged in. Apart from furniture and household effects, Ms Klewer’s only other assets of any significance are her interest in the military superannuation fund and a Ford Falcon motor vehicle with a present value of $2,300.
Ms Klewer’s outstanding debts are difficult to quantify. She has been the subject of numerous adverse costs orders but some of those are yet to be assessed. There is no sign that the state of New South Wales requires payment of costs orders in its favour. Mr Walton does require payment of his various costs orders but, even on the basis of the evidence of Mr Hannigan (his solicitor), Mr Walton is unlikely to be able to recover more than $70,000 in costs. Ms Klewer’s indebtedness to the Coffs Harbour Council is the subject of ongoing proceedings. She is also indebted to the Commonwealth in respect of a student loan and HECS but her income has not reached a level triggering a payment liability.
In her affidavit filed on 11 July 2005 Ms Klewer deposes that she should not have to pay Mr Walton and the Coffs Harbour City Council until she has exhausted her appeal rights[2]. She deposes as to her efforts to refinance her home (which appear not to have been completed) and as to her other assets.
[2] In the case of Mr Walton those rights of appeal have now been exhausted.
The solvency of a debtor is determined by the answer to the question to whether she can pay her debts as they fall due from her own resources. The resources of the debtor include a capacity to sell assets or borrow funds within a relatively short time: Sandell v Porter (1966) 115 CLR 666. Mr See referred me to the observations by Katz J in International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 at [13]-[19]. At paragraphs [15] and [16] of his judgment His Honour referred with approval to the following statement by the Australian Law Reform Commission in its report Insolvency: the Regular Payment of Debts ALRC 6, 1997 at [161]:
In determining whether a non-business debtor is insolvent, regard should not be had to the possibility of realising assets which are usually regarded as necessary to a reasonably comfortable and dignified existence, nor to those which cannot be realised without significant loss and consequent disruption. On this basis, a [non‑business] debtor would be insolvent if his only means of paying his debts were by selling household goods, motor vehicle or his home.
With all due respect to His Honour and the ALRC there is a degree of unreality to this proposition to the extent that it relates to the home of a debtor. The unreality arises because commonly the only asset which can satisfy claims against a debtor is a home. Where a sequestration order is made and a trustee in bankruptcy appointed, it is very common for the trustee to require the sale of the debtor’s home in order to satisfy claims upon the bankrupt estate. If it is reasonable and proper for a trustee in bankruptcy to sell a debtor’s home, it is surely reasonable and proper for a debtor to pay his or her debts by selling his or her home or borrowing against it in order to avoid bankruptcy. The value of real estate has increased dramatically in recent years and it is common for the owners of real estate to use that equity to refinance debts. In my view, the capacity of a debtor to pay debts by accessing equity in real estate needs to be taken into account in assessing solvency.
However, if the ability to access equity in real estate is to be used to demonstrate solvency, it needs to be real, not merely theoretical. Ms Klewer has enquired about refinancing her home, but has not yet done so. Ms Klewer’s enquiry was initiated six months ago. Ms Klewer’s plan was to purchase a cheaper house to live in and to let out her existing home, in order to increase her income. The mere existence of that plan does not prove solvency. The plan has not been put into effect. Even if it had been, the equity liberated would be put into more real estate. Ms Klewer’s capacity to pay her debts would be unimproved. Although her income would increase, so would her indebtedness. There would be no increase in liquid assets.
Ms Klewer’s only other substantial asset is her interest in the military superannuation fund. That interest is not readily realisable. Access before age 55 is at the discretion of the trustees. Also, it is unclear to me whether the benefit payable to Ms Klewer would be a lump sum, a pension, or a combination of the two.
I conclude that Ms Klewer has failed to demonstrate her solvency. There is no other reason why a sequestration order should not be made. Ms Klewer has committed an act of bankruptcy and her creditors should have the benefit of the orderly administration of her financial affairs.
I certify that the preceding thirty-four (34) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 20 September 2005
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