FEDERAL COURT OF AUSTRALIA

BANKRUPTCY – sequestration order – creditors special resolution requiring execution of deed of arrangement - failure to execute deed – whether sufficient cause for non-execution – untimeliness of statement and proposal – variation of composition – form of deed – whether deed only a draft – whether untested defence and counterclaim – whether respondents’ solvent.

Bankruptcy Act 1966 (Cth), s 221(1)

Bankruptcy Legislation Amendment Act 1996 (Cth)

Supreme Court Act 1935 (WA), s 18

Re Tsangaris; Ex parte Gaymark Investments Pty Ltd (1986) 39 NTR 15, referred to

Re Curry; Ex parte Goldsea Pty Ltd (1992) 40 FCR 32, distinguished

Policy Nominees Pty Ltd (Provisional Liquidator appointed) and Thomas v McDougall and Morrow (Full Court, Federal Court of Australia, 16 October 1997, unreported), followed

Gee v Schmutter (1970) 123 CLR 503, followed

Re Joseph Coci and Ors; Ex parte Barwick Management Pty Ltd, (R D Nicholson J, Federal Court of Australia, 10 September 1997, unreported), distinguished

Govedrica v Jovanovic (Mansfield J, Federal Court of Australia, 4 May 1998, unreported), distinguished

Re D’Onofrio; Ex parte Blyth (1983) 65 ALR 545, followed

Sandell v Porter (1966) 115 CLR 666, applied

Lakatos; Ex parte Lakatos v Deputy Commissioner of Taxation (1996) 33 ATR 145, applied

Re Sarina; Ex parte Wollondilly Shire Council (1980) 48 FLR 372, distinguished

Re Stansfield T/A Gaucho Apparel Ex parte McLeay & Sons Carpets Pty Ltd v Deputy Commissioner of Taxation (1989) 20 ATR 1565, distinguished

STANLEY FREDERIC ROBSON v ALBERT INGRILLI AND IRENE HAZEL INGRILLI WAG 7042; WESTERN AUSTRALIAN PLANNING COMMISSION v ALBERT INGRILLI AND IRENE HAZEL INGRILLI, WAG 7063 of 1998

R D NICHOLSON

PERTH

2 OCTOBER 1998

THE COURT ORDERS THAT:

1.                  In Matter WAG 7042 of 1998:

(a)                A sequestration order be made against the estates of the respondents.

(b)               The applicant’s costs be paid out of the estates of the respondents.

2.                  In Matter WAG 7063 of 1998:

(a)                The application be dismissed.

(b)               There be no order as to costs.

Note:      Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

R D NICHOLSON J:  In Matter No WAG 7042 of 1998 the applicant applies for a sequestration order pursuant to s 221(1) of the Bankruptcy Act 1966 (Cth) (“the Act”).  In Matter No WAG 7063 of 1998 the applicant creditor applies for a sequestration order under s 43 of the Act.  The respondents oppose the applications.

It is common ground that in the event the applicant’s application succeeds it would not be necessary for the Court to decide the applicant creditor’s application.  By consent, the applicant creditor was heard on the applicant’s motion.

Background circumstances

The applicant creditor acquired land in September 1991.  The land was described as lot 15 and part lot 14.  A written lease agreement was entered into by the respondents with the applicant creditor.  The terms of the lease were subsequently varied by a reduction in the rent and a division of the rent into two streams:  one for lot 15 of $442 per month and the other for part lot 14 (on which a market garden was and is being operated by the respondents) of $34,704 per annum.  Abutting a portion of part lot 14 are lots 102 and 103 on which a service station operates.  A service station house was built adjacent to the service station but partly erected on part lot 14, on the land leased to the respondents.

The respondents fell heavily into arrears in payment of the rent for part lot 14.  On 30 March 1995 the applicant creditor commenced an action against the respondents for recovery of rental arrears of $123,175 and mesne profits at the rate of $667 per week together with interest.  The respondents are defending the writ and have issued a counterclaim in which they allege they have been damaged by a denial of their rights of possession of that part of lot 14 on which the service station house is built.  They have particularised their damages as equal to or in excess of the applicant creditor’s claim.  The respondents have also made claims under s 52 of the Trade Practices Act 1974 (Cth), s 10 of the Fair Trading Act 1987 (WA) and for unconscionable conduct.

The applicant creditor’s evidence is that it issued a notice to quit to the respondents on 31 January 1995 and from that date refused to accept the rent for lot 15.  The respondents remained in possession of the leased premises.

On 9 December 1998 the respondents each signed an authority under s 188 of the Act and completed a proposal for composition of their debts.  On 22 January 1998 a meeting of the creditors of the respondents was held but adjourned.  On 4 March 1998 the adjourned meeting of the respondents’ creditors was held.  At that meeting it was resolved by way of special resolution that a deed of arrangement be entered into by the respondents.

A draft “deed of arrangement” (“the Deed”) was prepared after the reconvened meeting.  The respondents would not sign the deed.  That proposal provided it was conditional upon the creditors in each estate resolving to accept the composition and was based on the sum of $60,000 to be derived from third party sources and to be paid by the date of the first meeting of creditors.

The application brought by the applicant was made on 9 April 1998.

Requirements of act

Relevantly for the purposes of the application s 221(1) provides:

“221(1)  Where:

(a)               …

(aa)      …

(b)               a debtor, having been required by a special resolution of a meeting of creditors called in pursuance of such an authority to execute a deed of assignment or a deed of arrangement, has failed without sufficient cause to execute the deed within the time prescribed by this Act; or

(c)                …

the Court may, if it thinks fit, on the application of the Inspector‑General, a creditor or the controlling trustee, forthwith make a sequestration or der against the estate of the debtor.”

It is not in dispute that pursuant to s 221(1) the Court has an unqualified discretion to make a summary sequestration order:  Re Tsangaris; Ex parte Gaymark Investments Pty Ltd (1986) 39 NTR 15.  It is submitted for the applicant and is not in dispute apart from its application to the particular facts, that in exercising the discretion the Court should have regard to the purpose and objects to the Part X procedure; the interests of the creditors as a whole:  Re Tsangaris at 23; and the insolvency of the debtors: Re Scheme of Arrangement; Wangaratta Woollen Mills Ltd v Driller (1969) 14 FLR 267 at 278.

As to whether the respondents had “sufficient cause” not to execute the Deed, it is submitted for the applicant they were fully aware of the consequences of executing the authorities pursuant to s 188 of the Act and did so with a view to avoiding a sequestration order and entering into a Part X administration.  In support of this, reliance is placed on evidence that at a second meeting of creditors on 4 March 1998 the respondents were involved in discussions with creditors prior to the resolution; the terms of the resolution were fully explained to the respondents; and the respondents failed to indicate any objection at that meeting to the proposed deed of arrangement.  Additionally, there is evidence the respondents were referred to an independent solicitor, at the cost of the controlling trustee, and were advised of the effect on them of the Deed.  It is therefore submitted for the applicants the Court should conclude the respondents failure to execute the Deed was a tactic to delay payment of creditors and an abuse of the Part X procedure.

As to the insolvency of the debtors it is submitted for the applicant that the respondents, having committed the act of bankruptcy by signing the authorities under s 188, have had raised in relation to them a presumption of insolvency:  ss 40(1)(i) of the Act and Pretorius v Daltons Carpet Tiles Pty Ltd and Ors (1984) 54 ALR 743 at 750.  In addition, it is contended the respondents are unable to pay their debts as and when they fall due.  Reliance is also placed on the absence of any affidavit from the respondents evidencing an attempt by them to reduce their level of indebtedness.

In support of the submissions for the applicants reliance is placed particularly on Re Teresa McMahon; Ex parte John Philip Martin (Supreme Court of Western Australia (Jackson J) unreported, 4 February 1969, No 624 of 1969).  At p 5 Jackson J stated:

“a debtor for the purposes of Part X of the Act is defined (section 187) to mean ‘a person who is unable to pay his debts as they become due out of his moneys’.  It is only such a person who may give an authority under section 188 for calling of a meeting of his creditors.  It may well be that having given that authority he is thereafter precluded from asserting that he is not ‘a debtor’ by claiming that he can pay his debts.  Secondly it appears a reasonable construction of section 221 that a person who has put his affairs in the hands of his creditors is, in effect, bound to comply with their wishes and that the penalty for non-compliance is sequestration.”

The respondents oppose the application on a number of grounds which it is appropriate to address sequentially, all of which are said to provide “sufficient cause” of their failure to execute the Deed.

Untimeliness of statement and proposal

Section 188A of the Act provides that “within 14 days after an authority under s 188 becomes effective, the debtor must give the controlling trustee a statement of the debtor’s affairs and a proposal for dealing with them under this Part.”  Section 188(2) provides that an authority signed by a debtor under the section is not effective unless, in the case of a registered trustee, the person has consented in writing and the signature of the debtor and the trustee or solicitor are each attested by a witness.  Prior to the Bankruptcy Legislation Amendment Act 1996 (“the Amendment Act”) s 188(2) of the Act provided that a condition for the effectiveness of the authority was that: 

“(c)  within 10 days before signing the authority, the debtor gave to the trustee or solicitor:

(i)                 a statement of the debtor’s affairs;

(ii)               a statement indicating how the debtor proposes that his or her affairs be dealt with under this Part”.

In Re Curry; Ex parte Goldsea Pty Ltd (1992) 40 FCR 32 at 35 it was held there had been want of compliance with this former paragraph and in circumstances where the authority had been signed by the debtor on 19 November 1991 and the statement of her affairs was not provided until 20 November 1991.

The evidence in the present case shows the following.  The statements of affairs and composition proposals were executed by each of the respondents on 9 December 1997.  The authority authorising the applicant to call a meeting of creditors was signed by each of the respondents on the same date.  The applicant consented by signing the authorities on 11 December 1997 so they became effective on that date.  Because the statements of affairs were made before the authorities became effective and not after they had done so as required by s 188A of the Act, it is said the authorities were not effective and/or there were no proper statements of affairs or proposals.

It should be noted the composition proposal was expressed to be made “pursuant to s 188(2)(c)(ii)” of the Act.  That could not have been the case because by the date on which the composition was executed by each of the respondents that section had been amended by the Amendment Act.

In my opinion, there is no reason for reading the words “within 14 days after an authority under s 188 becomes effective” as they appear in s 188A of the Act as imposing a mandatory requirement that a statement of a debtor’s affairs and a proposal be provided after that date.  The purpose of the requirement in s 188A of the Act is to provide to the controlling trustee the statement and proposal to enable the controlling trustee to deal with them under the Part.  By operation of subs 189(1), upon an authority becoming effective the property of the debtor becomes subject to control under the Division.  It is for that reason the statement and proposal are required.  If they are available earlier they are necessarily available “within 14 days after an authority under s 188 becomes effective” and they enable the Division and the Part to operate.

I would distinguish Curry’s case on the ground that the former s 188 (2)(c) imposed, as a condition precedent to an authority becoming effective, the condition requiring the provision of the statement and proposal within 10 days before the signing of the authority.  The Amendment Act deleted this provision and did not insert any new condition precedent to an authority becoming effective.

No reason of legal policy is advanced on behalf of the respondents to support a construction which would result in non-compliance with s 188A where a statement and a proposal are given prior to the authority becoming effective but necessarily thereby within 14 days after the authority does become effective, nor is any such reason of legal policy apparent.  The words “within 14 days after an authority under s 188 becomes effective” are in their context to be understood as mandating only that “not later than 14 days after an authority under s 188 becomes effective” the statement and proposal shall be given.

Variation of composition

It is then submitted for the respondents the authorities and the proposal were provided on the basis that creditors would either accept or reject the composition but not vary it.

The composition proposal contained in it two elements:  (1)  the sum of $60,000, derived from third party sources, was to be paid by the date of the first meeting of creditors; the funds would be returned to the third party less administration costs if the Composition was not accepted.

It is apparent from the provisions of s 189 of the Act that when an authority given by a debtor under s 188 becomes effective, the property of the debtor becomes subject to control under Division 2 of Part X.  Section 189(1A) provides:

“The control continues until one of the following events happens:

(a)               the creditors resolve at a meeting called under this Part that the property cease to be subject to control;

(b)               the debtor and a trustee make a deed of assignment or a deed of arrangement following a special resolution of creditors;

(c)               the creditors accept a composition under this Division;

(d)               4 months pass since the authority under section 188 became effective;

(e)               the Court, under section 2089, releases the property from control;

(f)                the debtor becomes a bankrupt;

(g)               the debtor dies.”

Subsection 189(2) sets out limitations on a debtor’s right to deal with his or her property which is subject to control under the Division.

Where the debtor has given the controlling trustee a proposal for dealing with the debtor’s affairs under the Part the controlling trustee must prepare a report stating whether he or she believes creditors’ interests would be better served by accepting the proposal or by the bankruptcy of the debtor:  par 189A(1)(b).  Additionally, a controlling trustee appointed under s 188 must prepare a written statement about the special resolutions that may reasonably be expected to be passed pursuant to s 204 at a meeting of creditors called under the authority:  subs 189B(1).  There is also an obligation on a controlling trustee to call a meeting of the debtor’s creditors:  subs 190(1).  That is a meeting which the debtor, unless prevented by illness or other sufficient cause, must attend:  s 195(1).

The creditors at the meeting so called have the powers referred to in s 204(1):

“The creditors may, at a meeting called in pursuance of an authority under section 188, by special resolution –

(a)               where the debtor’s property is subject to control under this Division, resolve that the debtor’s property be no longer subject to control under this Division;

(b)               require the debtor to execute a deed of assignment or a deed of arrangement  under this Part;

(c)               accept a composition; or

(d)               require the debtor to present a debtor’s petition within 7 days from the day on which the resolution was passed.”

It is apparent from this statutory regime, and in particular par 189(1)(b) and par 204(1)(b), that it was not within the control of the respondents to tell the creditors they could only take or leave the composition proposal.  Once the authority was signed and the proposal made, the control of the respondents’ property passed from them and it was open to the creditors to require them “to execute a deed of assignment or a deed of arrangement under this Part”.  If it was the case that the debtors considered the proposal was put forward only on the basis it could be accepted or rejected, they were mistaken as to the effect of the relevant statutory regime.

Furthermore, there is clear authority that it is impossible to confine the power conferred on a meeting of creditors by s 204 of the Act to one requiring the debtor to execute a deed of assignment or a deed of arrangement under Part X or acceptance of a composition substantially in conformity with the proposal which a debtor is required to give to the named trustee or solicitor:  Policy Nominees Pty Ltd (Provisional Liquidator appointed) and Thomas v McDougall and Morrow (Full Court, Federal Court of Australia, 16 October 1997, unreported).

Form of Deed

For the respondents it is next contended the special resolution passed by the creditors on 4 March 1998 required the respondents to execute a document described as “a deed of arrangement” whereas in fact the deed they were called upon to execute was “a deed of assignment”.

The special resolution passed by the creditors was to the effect the respondents “execute a Deed of Arrangement pursuant to Part X of the Bankruptcy Act”.  It was further resolved “the Deed to include the necessary statutory inclusions as are required by the Bankruptcy Act and associated Rules”.  The resolution specified that at least certain special provisions would be included, including:

“(a)     an assignment in favour of the Trustees of all of the debtors divisible property for realisation in the interests of creditors”.

The deed executed by the respondents was described on its face as a “Deed of Arrangement”.  By cl 5 of the Deed the respondents conveyed and assigned to the trustees thereby appointed all of their divisible property together with the capacity to exercise and take all proceedings or exercising all powers in, over or in respect of any such property upon trust to deal with that property in accordance with the deed.  An obligation was cast by the same clause on the trustees to realise the property as soon as practicable.  Doubtless to that end, the respondents covenanted that on or before 30 June 1998 they would have vacated the land and they would consent to the order sought by the applicant creditor in respect of the Supreme Court proceeding.  By cl 7 of the Deed the trustees were obligated to apply the proceeds from the realisation of the respondents’ property in making payments in the order prescribed by s 108 to 114 (inclusive) of the Act as modified by subs 237(2).  Clause 9 provided the Deed would bind the secured as well as unsecured creditors of the respondents.

Subsection 187(1) defines for the purposes of Part X, subject to appearance of contrary intention, the following:

“’deed of arrangement’ means a deed (not being a deed of assignment, a deed in respect of a composition or a deed executed for the purposes of a proclaimed law) providing for the arrangement of the affairs of a debtor with a view to the payment, in whole or in part, of his or her debts;

“deed of assignment” means a deed by which a debtor assigns all his or her divisible property for the benefit of his or  her creditors;”

It is apparent from these definitions that a “deed of assignment” cannot be a “deed of arrangement.”

Subsection 213(1) of the Act provides, subject to the Part, a deed of assignment and the deed of arrangement executed by a debtor is void unless it is entered into in accordance with the Part and complies with the requirements of Part X.  A deed of assignment must provide for the assignment of all the divisible property of the debtor for the benefit of his or her creditors and “shall be substantially in accordance with the approved form”:  subs 214(2).  The approved form (Form 14) provides that a deed of assignment should include operative covenants for the conveyance and assignment to the trustee of all the debtor’s divisible property upon trust to deal with the same in accordance of Part X of the Act for the benefit of the creditors of the debtor and as to any surplus after paying in full the several debts and liabilities of the debtor together with costs and charges on trust for the debtor.

These contentions for the respondents are answered by authority.  A deed of arrangement may contain an assignment of the divisible property of the debtor as a means of providing or of securing the payment of the debtor’s debts or some part of them and is not necessarily thereby a deed of assignment:  Gee v Schmutter (1970) 123 CLR 503, particularly at 508-509.  Furthermore, provision for the creditors to benefit if the provisions of the deed are fulfilled does not have the consequence that the divisible property is assigned “for the benefit of the creditors” within the meaning of the definition “deed of assignment” in subs 187(1):  see Gee at 510.  As in Gee, the deed in issue here did not purport to be a deed of assignment, as defined, and, on the authority of that decision, was not in truth a deed of assignment within the meaning of the Act.  There is no basis therefore for the submission of the respondents that there was a sufficient cause for them not executing the deed because the deed was not a deed of arrangement as envisaged by the special resolution.

Deed as a draft

It is not in dispute that the Deed sent to the respondents’ solicitors was stamped “DRAFT”.  In an accompanying letter dated 20 March 1998 from the trustee it was stated:

“We enclose a copy of the draft Deed for your consideration together with a copy of the minutes of the creditors’ meeting held on 4 March 1998.

We would be obliged for your earliest attention in the matter please as the Deed is required to be executed on or before Wednesday 25 March.  …”

It is submitted the respondents had sufficient cause not to sign the Deed because the final document was never put to them for execution.

In a letter dated 25 March 1998 the solicitor for the respondents advised the trustee he was instructed by the respondents “the Deed does not reflect their understanding of what the terms of their Part X arrangement was to be and accordingly, [the respondents] advise that they cannot execute the Deed … in its present form.”  It is apparent from this that the respondents did not as a matter of fact decline to execute the Deed because it was a draft or suggest it could not have been executed had they considered it otherwise acceptable.  In those circumstances it cannot now be open to them to contend it was  sufficient cause for their non-execution that the document was described as a draft.

Untested defence and counterclaim

It is submitted for the respondents that a further reason why they have “sufficient cause” not to execute the Deed is that they have an untested defence and counterclaim in the Supreme Court action.

In support of this submission the case for the respondents relies upon the decision in Re Joseph Coci and Ors; Ex parte Barwick Management Pty Ltd, (R D Nicholson J, Federal Court of Australia, 10 September 1997, unreported).  It was there held the nature of the cross-claim in issue established a sufficient cause why a sequestration order ought not to be made until the cross-claim was resolved.  As the reasons for judgment disclosed, the nature of the cross-claim was argued before the court and the pleadings were available to the court for examination.  Furthermore, the “sufficient cause” which was in issue arose under sections other than par 221(1)(b).

The precise nature of the untested defence and counterclaim was not the subject of evidence before this Court.  This is not therefore a case where the Court could have concluded the untested defence and counterclaim were so arguable that they could constitute a “sufficient cause”.

There is also a sound reason of legal policy why the existence of an asserted defence and counter‑claim would be unlikely to constitute a sufficient reason for the purposes of par 221(1)(b) in circumstances where the defence and counterclaim were known prior to the execution of the authority by the debtor.  As has already been considered, the effect of the execution by a debtor of an authority is to trigger the application of a statutory regime having the effect of passing control of his or her property to a controlling trustee and leading to a requirement to execute a deed.  Where an untested defence and counterclaim are known at the time of the execution of the authority, it cannot be a “sufficient cause” for failure to execute a deed emanating from the processes initiated by the execution of the authority.

Importantly, the respondents’ defence and counterclaim in the amount claimed is highly improbable on the evidence before the Court.  They have quantified their alleged loss in not having possession of the land on which the service station house has been built in the same amount as the arrears of rental for the whole property.  There is evidence the rental value of the disputed portion of that land is between $100 and $120 per week; that is, $5,200 and $6,240 per annum.  The annual rental value of the whole of lot 14 is $34,707.  I accept this Court cannot judge the defence and counterclaim but that does not mean that the Court cannot conclude on the facts that, even if the defence and counterclaim succeeded at their highest, they could provide no sufficient answer to the claim against which they are made in terms of quantum.

On the question of defence and counterclaim this is not therefore a case like that of Govedrica v Jovanovic (Mansfield J, Federal Court of Australia, 4 May 1998, unreported).  There the strength of the actions was established to the satisfaction of the Court.

For the respondents, reliance is placed on Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 116 per Gibbs J.  There Gibbs J said, where a debtor claims to be entitled to unliquidated damages in tort against the petitioning creditor, the court as a general rule was not an appropriate forum to decide the claim.  He saw the role of the court as limited to forming a view as to whether it appears that there is sufficient validity in the debtor’s claims to justify a dismissal or adjournment of the petition.  For the reasons given, the evidence here leads to the conclusion that there is no such sufficient validity.

It is further submitted for the respondents the Court should adjourn the application, pending resolution of the litigation in the Supreme Court of Western Australia. In support of that submission reliance is placed upon Re James and Anor; Ex parte Carter, Holt, Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14 at 20 and 22.  At 20, Olney J cited the passage from Re Schmidt previously referred to, including a passage to the effect that in many cases it would be more convenient, assuming the debtor showed a real claim to litigate, to adjourn the proceedings to enable the claim to be tried in the ordinary courts.  At 22 Olney J concluded he was unable to say, in the words of Gibbs J, that it was probable the debtors have against the petitioning creditor a claim which is likely to succeed so that he was not satisfied there was any “other sufficient cause”.

Reliance was also placed for the respondents on the decision of the Full Court of this Court in Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 where it was held that a refusal to grant an adjournment may in some cases prevent the party seeking it from presenting his case or defence so that this may result in injustice of such kind or magnitude as to warrant interference on appeal.  There is no basis for a finding of fact that such circumstances pertain here.

Respondents’ solvency

It is submitted for the respondents that on the date when they signed the authority, 9 December 1997, their joint “provable debts” amounted to $58,636 and their joint assets amounted to $191,000.00.  It is therefore submitted the respondents are able to pay their debts and for that reason a sequestration ought not to be made.  In support reliance is placed on the decisions of Re Sarina; Ex parte Wollondilly Shire Council (1980) 48 FLR 372 and Re Stansfield T/A Gaucho Apparel Ex parte McLeay & Sons Carpets Pty Ltd v Deputy Commissioner of Taxation (1989) 20 ATR 1565.  While those are authorities arising in relation to s 52 and proceedings on a creditor’s petition it is submitted they are relevant to the issue of the existence of “sufficient cause” for the purposes of par 221(1)(b).

The statement of affairs executed by the first respondent on 9^th December 1997 disclosed he had liabilities of $238,568.00 and assets of $96,000.00.  The second respondent filed a statement of affairs showing assets in the same amount and liabilities of $238,632.

Included in the statement of the first respondent was freehold real estate comprising land at Munster and Karnup valued at approximately $80,000.  The second respondent included the same asset.  It subsequently emerged the second respondent has no interest in the realty so that the total value of $160,000 comprises part of the claimed assets in the estate of the first respondent.

The position at 9 December 1997 was therefore that the respondents claimed their joint assets were in the order of $191,000.  However, that position was reached without the claim by the applicant creditor for $123,175.80 together with main mesne profits and interest being taken into account.  Following the completion of the statements the second respondents’ mother died on 19 December 1997.  As a consequence she held the amount of $56,572.96 being her half share of that estate.  The second respondent was prepared to apply this amount totally to the payment of creditors of she and the first respondent.

The controlling trustee’s evidence of the assets and liabilities of each of the respondents as at the date of the hearing and the effect thereon of their admissions and denials is as follows:

Assets of second respondent

Liabilities of second respondent

Assets of first respondent

Liabilities of first respondent

The combined asset and liability position of both respondents as they assert it flowing from this statement is that their total joint assets substantially exceed their total joint liabilities equate to $69,404.62.

The key to that being the case is the claim on behalf of the first respondent that he is the owner of realty to the value of $160,000 and that such asset can be taken into account in determining the solvency of both himself and of the second respondent.

There are three reasons why that does not assist the respondents.  The first is that the interest of the first-named respondent in the land in question is the subject of a writ of fieri facias.  The effect of such a writ is to authorise the sheriff or other officer to seize and sell all the real estate the subject of the writ as may prove sufficient to realise a sum sufficient to satisfy the judgment or order under which the writ was issued together with costs, fees and expenses of seizure and sale:  Supreme Court Act 1935 (WA), s 18.  The writ also binds the property in the goods of the execution debtor:  s 125(1).

Secondly, the first-named respondent’s interests are an undivided interest as tenant in common.  It has been held that an undivided share in a dwelling house was not a “readily realisable asset” where it cannot be sold until a court exercises its discretion to direct a sale nor can it be realised within a relatively short time so as to satisfy a court that a debtor is able to pay his debts within the meaning of the words in s 52(2)(a) of the Act:  Re D’Onofrio; Ex parte Blyth (1983) 65 ALR 545.

This is significant for application of the usual tests to determine whether a debtor is solvent.  The matter is to be approached in accordance with the well known statement in Sandell v Porter (1966) 115 CLR 666 at 670-671 where Barwick CJ said:

“Insolvency is expressed in s.9 as an inability to pay debts as they fall due out of the debtor’s own money.  But the debtor’s own moneys are not limited to his cash resources immediately available.  They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time-relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor.  The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity.  It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.  Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor’s assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.”

As expressed in Re Lakatos; Ex parte Lakatos v Deputy Commissioner of Taxation (1996) 33 ATR 145, in applying Sandell v Porter the test of solvency is not whether assets exceed liabilities but whether, looking at the financial circumstances of the debtor in their entirety, the debtor is able to use his or her cash resources with his or her money to meet the debts as they fall due.  Both the existence of the writs of fieri facias and the nature of the first respondent’s interest have the consequence that the land cannot be an asset of the character capable of meeting his debts.

Thirdly, since 1996 when s 187(1A) was introduced to the Act, Part X has applied to a debtor who is a person for the time being insolvent even if that person may ultimately cease to be insolvent.  As a consequence, a person with temporary liquidity problems is brought within the reach of Part X proceedings.

For these reasons I do not consider it can be concluded that the debtors are solvent and that the condition of solvency gave them a “sufficient cause” not to execute the Deed.

In the case of the second-named respondent there are no relevant interests in real estate.  Each debtor must be approached on their own statement of assets and liabilities.  No authority has been referred to which would justify the second-named respondent having the advantage of assets held by the first-named respondent even if they were in the category of readily realisable assets.

This is not a case where the respondents are able to pay their debts so that a sequestration order should not be made:  cf  Re Sarina; Ex parte Wollondilly Shire Council.  Likewise there is nothing in Re Stansfield trading as Gaucho Apparel Ex parte McLeay & Sons Carpets Pty Ltd which assists the respondents.

Conclusion

For these reasons I consider the respondents have failed to establish that there is any “sufficient cause” why the Court should not exercise the discretion pursuant to par 221(1)(b) to make a sequestration order against the estate of each of the respondents.

Given this conclusion it is not necessary to resolve the claim in WAG Matter No 7063.  In these circumstances, there should be no order as to costs.

Associate:

Dated:              1 October 1998