Welch, Re R.A. & Anor Knight, Ex Parte D.W

[1986] FCA 301

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RESTRICTED DISTRIBUTION	!
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IN THE FEDERAL COURT OF AUSTRALIA	)
GENERAL DIVISZON	1
BANKRUPTCY DXZTeICT OF THE SOUTHERN	) Nos. X55 & X56 of 1985 !
DISTRICT OF T@E STA2E OF QUEENSLAND )

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-	RE :	!
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ROBERT ALLEN WELCH and	!
DENISE WELCH	! I

Debtors	I
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EX PARTE: i I

DESMOND WILLIAM KNIGHT	i
as trustee of the	I
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estates Of ROBERT	!
ALLEN WELCH and DENISE	!
WELCH

Applicant

- DATE: 2 July 1986

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EX-TEMPORE REASONS FOR JUDGMENT

BURCHETT J.

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These are applications by a trustee under s.222(4)(b) of

the Bankruptcy Act 1966 for a declaration that a deed of

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assignment by each of a husband and his wife	is void, and for a	i
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sequestration order against each of the husband and the wife. I

Basically the same evidence was relied on i each case,

though from several points of view the case is stronger in

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respect of the husband: therefore I shall consider his case 8 .

first, and if the case fails against	him, I shall reject	both.	I
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Before discussing the basis upon which the case has been I

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put, I think I should draw attention to what was said by Toohey

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J. in Re Doukidis, an unreported decision delivered on 26 June

1986. His Honour said of the evidentiary situation in that case:

"In support of the application to set aside

the composition, there was filed an affidavit

by the applicant's solicitor. The affidavit

makes a number of assertions of which the

solicitor cannot have first hand knowledge

and it makes a number of other assertions on the basis of information and belief without disclosing the source of that information. I

deprecate this practice, particularly where allegations are made concerning the conduct of another. Counsel for Mr. Doukidis rightly

took exception to much of the affidavit and I

received it in evidence on the clear

understanding that would I attach no

importance to matters of hearsay. Quite serious allegations were made of failure by Mr. Doukidis to dlsclose the full extent of his assets to the creditors' meeting. Those

allegations should have been supported by affidavits of persons in a position to speak to relevant matters or by the oral evidence of such persons or by a combination of both."

In the present case, affidavit evidence was put before me that the total of amounts for which proofs of debt had been lodged very greatly exceeded the total shown in the Statement of Affairs, but it was conceded that the larger part of all proofs

of debt had not been accepted. There was no attempt, in the

affidavit that was filed in the applicant's case, to prove any

particular debts not disclosed or understated. It seems to me

that if the case is presented on that basis, the Court should

have put before it admissible evidence showing that in fact the relevant debts were owing, which totalled the undisclosed amount which is alleged.

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However, the debtor gave evidence in which he frankly

conceded that he believed he had understated the total of the

debts he owed. While he did not concede any particular figure, I

think I should in the context of this case and his answers

generally, understand the concession as intended to refer to a

substantial amount.

Having conceded this, the debtor explained that he had

found his business as a builder of houses on the coast was in

difficulties, which were beyond his understanding of accounting,

and had placed his affairs in the hands of accountants. He had

relied on them in the compilation of the Statement of Affairs, and he had also relied on answers received to requests for details of amounts owing, which ad been sent to his creditors.

He was, as one would expect, cross-examined to test the veracity of this explanation, and In argument i was put that he

had said he was not in financial trouble a mere 12 months

earlier. The suggestion was that so large an indebtedness - the Statement of Affairs set out unsecured creditors in excess of

$280,000, which after payment of secured creditors there are no

assets to meet - together with a substantial additional amount

indebtedness now conceded, should not be accepted as explicable

in such a business over such a period.

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However, I did not understand the assertion of the debtor to be that his business was financially healthy 12 months

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before; but rather that he had not realized its true state, which

was probably in fact very sick indeed.

The other matter relied on relates to the fact that Part

111 of the Statement of Affairs shows an estimated surplus of

assets, after allowing for secured creditors. Two houses are

shown in a column headed "eitimated value of security", with

against them sums respectively of $230,000 and $225,000, totalled

at $455,000. A column headed "amount of debt" shows $236,000

plus $6,000 interest plus $2,000 owed to a second secured creditor, totalled at $ 2 4 4 , 0 0 0 ; and a column headed "estimated surplus" is completed at $211,000.

It is important to note the figure is an estimate only,

and that at the meeting creditors were told, as the minutes show,

that much lower values had been estimated by another valuer.

However, I think, on the authorities, if the Statement of Affairs is materially inaccurate, the relevant sub-section is

satisfied, notwithstanding what was said at the meeting. The

question is, what was disclosed in the statement of affairs? not,

what was disclosed at the meeting? though, of course, the fact of

further disclosure at the meeting is relevant	to the exercise of
the Court's discretion.

The first inaccuracy alleged in respect of this aspect

of the case is that the amount of interest is understated by

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$9000. This fact was conceded by the debtor in evidence. The

second matter is that no selling expenses were taken into account

in the calculation of the estimated surplus, although the debtor

said that he would have expected, and of course he had some

experience, that the selling of the securities would cost a total

of about $10,000. However, he also said he was told not to take

that into account, and it seems to me that the form, in clear

terms, provides merely for the amount of the debt to be

subtracted from the value of the security, in order to show an

estimated surplus, or in the case of an estimated deficiency, for

the reverse calculation to be performed.

The question, therefore, 1s whether asubstantial

understatement of the total, which is very large, of unsecured

creditors, and an omission of $9000 interest in relation to a

secured indebtedness of $ 2 4 4 , 0 0 0 , are, or either of them is,

material within the meaning of the subsection.

. I think they are material, applying the tests stated in

Re Morris, 4 8 F.L.R. 341. If I had not accepted that they are

material, it would have been necessary to consider also the question whether the estimate of the value of the security could

have satisfied the provision, on the evidence, given that it was

an estimate only, which was supported by a real estate agent and

the debtor's own expertise in respect of such properties, but was

contradicted by other views, and not ultimately borne out upon

sale. Of course, the ultimate sales were mortgagee sales, and

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the evidence threw no reliable light on movements in the market

over a substantial period before they were effected.

But materiality of an omission or misstatement does not

end the matter. Section 2 2 2 ( 5 ) provides:

"The Court shall not make an order declaring a

c	deed or composition or a provision of a deed
or composition to be void on a ground
specified in sub-section(4) unless it is
satisfied that it would be in the interests
of the creditors to do so."

In Re Williamson, 43 FLR 305, at 312, Lockhart J. said:

"Plainly the dlscrepancy -

that is the discrepancy with which	he was dealing in
that case -

was substantial: disclosure a in the

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statement of affairs of twenty-five creditors

owed $22,051 when in fact here were

sixty-four creditors owed $72,000 or $79,000.

If these were the only relevant facts, the

i applicants' case would be formidable."

But he also said, at 313:

"The evidence suggests that the debtors were foolish, rather than dishonest, in the way

they handled their financial ffairs,

culminating in the executlon of the deeds of

assignment.

If I were to accede to the submissions of

counsel for the applicants and avoid the

deeds and then either make summary

sequestration orders or leave it to the

creditors to decide whether fresh deeds

should be executed, I have the firm view

!	that, at the end of the day, what little there may be available now for unsecured creditors will be spent in more legal and
administration costs, whittllng away even
further what remains for unsecured creditors,

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wlthout any benefit to them or the public. I

must take a practical view and not indulge In

speculation as to theoretical possibilities

of other assets emerging or other creditors possibly coming to light if the debtors are

made bankrupt. There is nothing to suggest

that either	possibility	would	become	a
reality.

The present position is understandably

unwelcome to the applicants; but in my

opinion the correct course to take 1 s to

allow things to remain as they are and for

the deeds to continue in existence."

It was put in the present case that it is important that the debtors should be examined, and further, that in bankruptcy an

order could be made under s.131. As to the latter point, I think

the possibility 1s remote, having regard to the position of the

debtors on the evidence, which I accept.

As to the former point, it is, in my view, significant that the male debtor gave evidence before me which, though he was

cross-examined on a number of aspects, appeared credible (and

indeed, I think I should say I was generally impressed by him as

a witness, having had that opportunity to observe him), and it

was not suggested that he had been fraudulent, elther in any

aspect of his business or in respect of any inaccuracies shown in

his Statement of Affairs. I think some regard might be had to

the notorious difficulties which have occurred in the building

industry at various times over recent years, and particularly in

some localities. Had there been any real suggestion that the

evidence indicated a deliberate attempt at concealment of his

true position, or any basis for my taklng the vlew that there was

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a real possibility that that had occurred, I would regard such

matters as serious matters to be taken into account.

Several particular matters which it was suggested might

be investigated, if a sequestration order were made, were the

subject of cross-examination before me, and I saw no reason to doubt the answers that were given ln respect of those matters. It was urged that there might be further information obtainable under the procedures that would apply if a sequestration order

were made, but I regard the prospect as quite remote. It was

argued that a resolution of creditors showed that they thought

that a sequestration order would be in their interests, and that

regard should be had to their judgment.

have taken all the matters which were urged into account, but having done so, I am not satisfied that it would be

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in the interests of the creditors to make the order	that is	I
sought in either of the applications.

Accordingly, the applications are dismissed, but in all

the circumstances, which include the responsibility of the

respondents for their Statements of Affairs, and the need that

such issues as were raised in these applications should be

brought before the Court in a case that does genuinely raise the

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questions that were raised here, I think it is proper to make no

order as to costs.	So I dismiss the applications, but make no
order as to costs.

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I certify that this and the

preceding eight (8) pages are

a true copy of the Reasons for

Judgment herein of his Honour

Mr. Justice Burchett. I l

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Dated: 2 July 1986.	!
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