FEDERAL COURT OF AUSTRALIA

BANKRUPTCY – application for discharge of ex parte orders  - appointment of trustee - control of debtor’s property – whether sufficient evidence to justify making of orders - whether orders in the interests of creditors – trader’s bill of sale – preservation of property.

Bankruptcy Act 1996 (Cth) ss  50(1), (2), (3) and (4)

Bankruptcy Regulations rr 4.06, 4.07

Re Mader; ex parte Henderson (unreported, Pincus J, 17 July 1986), followed

Deputy Commissioner of Taxation v Clyne (1983) 50 ALR 118, followed

Re Penning, Ex parte State Bank of S.A. (1989) 89 ALR 417, cited

Penning & Steel Tubes Supplies Pty Limited (1988) 80 ALR 689, cited

STEVEN LEONDARIS v

KGB DESIGN & CONSTRUCTION PTY LTD

NG 8120 OF 1998

TAMBERLIN J

SYDNEY

27 OCTOBER 1998

Upon the continuance of the undertaking as to damages given by the creditor in respect of Jim and Elizabeth Anastasiou, the orders of the Court made on 12 October 1998, with the variations set out below, are to remain in force until 9 November 1998 or such further date as may be fixed for hearing of the creditors’ petition.

The Court also orders that:

Order 6 be varied to read as follows:

“6.       The debtor, Steven Leondaris, be restrained, without prior approval of the Court from paying, lending, or depositing any money with, transferring or delivering any property to, any other person, company or entity except in the ordinary course of business.”

Further orders be made as follows:

“11.     The trustee, Andrew Hugh Jenner Wily, is authorised to make payment out of the account of such business and reasonable living expenses of the debtor as the trustee shall approve.

12.       The trustee’s remuneration be at the rate set by the Insolvency Practitioners’ Association of Australia.

13.       Costs of the s 50 application and the action to set aside the orders made on 12 October 1998 be reserved.

14.       Reserve liberty to apply on forty-eight hours notice.”

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

REASONS FOR JUDGMENT

Before me is an application by the debtor to discharge orders made ex parte on 12 October 1998 under s 50 of the Bankruptcy Act 1966 (Cth), (“the Act”) appointing Mr Wily, a registered trustee, to take control of the debtor’s property until further order.  Liberty to apply on twenty-four hours notice was reserved to both parties.  The orders were made after an undertaking as to damages was given by the debtor as to any damages which might be suffered by the parents of the debtor’s wife (“Mary Leondaris”), Mr and Mrs Anastasiou under a trader’s bill of sale (“the bill of sale”).

On 15 October 1998, the present application was filed.

The Act

Section 50 of the Act relevantly provides:

“S 50. (1) At any time after a bankruptcy notice is issued in relation to a debtor, but before the debtor becomes a bankrupt, the Court may:

            (a)        direct the Official Trustee or a specified registered trustee to take control of the debtor’s property; and

            (b)        make any other orders in relation to the property.

(1A)     The Court may give a direction or make an order only if:

            (a)        a creditor has applied for the Court to make a direction; and

            (b)        the Court is satisfied that it is the interests of the creditors to do so; and

            (c)        the debtor has not complied with the bankruptcy notice.

(IB)      If the Court directs a trustee to take control of the debtor’s property, the Court must specify when the control is to end.

(2)       Without limiting the generality of subsection (1), the Court may, at any time after giving a direction under subsection (1), summon the debtor, or an examinable person in relation to the debtor, for examination under this section in relation to the debtor.

(3)       A summons to a person under subsection (2) shall require the person to attend:

            (a)        at a specified place and at a specified time on a specified day; and

            (b)        before the Court, the Registrar or a magistrate, as specified in the summons;

to be examined on oath under this section about the debtor and the debtor’s examinable affairs.

(4)       A summons to a person under subsection (2) may require the person to produce at the examination books (including books if an associated entity of the debtor) that:

            (a)        are in the possession of the first-mentioned person; and

            (b)        relate to the debtor or to any of the debtor’s examinable affairs.”  (Emphasis added)

The Regulations

Regulation 4.06 of the Bankruptcy Regulations requires service of the s 50 order together with the application, and supporting documents.  Regulation 4.07 provides for the expenses of the trustee before sequestration and reg 4.08 provides for an award of damages where a s 50 order has been made on a creditors’ petition, which is subsequently dismissed.  In view of this latter provision, in the circumstances of the present case, I am not persuaded that any undertaking as to damages by the creditor is appropriate as a condition of the making of the order.  However, in relation to Mr and Mrs Anastasiou, I consider that an undertaking in favour of those parties for damages is appropriate and that the undertaking in their favour ought to be required as a condition of continuance.

As Pincus J indicated in Re Mader; ex parte Henderson (unreported, 17 July 1986), on a s 50 application decisions on such questions as to whether the applicant was a creditor or whether there had been an act of bankruptcy fall to be decided on an interlocutory basis.  The Judge must take a preliminary viewwith the consequence that any decision on these questions will not give rise to an issue estoppel.

It is submitted for the debtor that there was not sufficient evidence to justify the making of the order and that there was not sufficient disclosure made to warrant either the making or the continuance of an ex parte order.

There is evidence before me that the bankruptcy notice, dated 3 September 1998, was served on the debtor on 4 September 1998.  This is verified by an affidavit of Mr Mitchelson, dated 4 September 1998.  There is also, in evidence, a letter under seal of the Local Court at Sydney of a consent judgment against the debtor and his wife, Mary Leondaris, in the sum of $33,124.97, which included interest of $3,264.97 and costs, on an indemnity basis, assessed from 16 December 1997 to the date of judgment.  A creditors’ petition was filed on 12 October 1998 based on non-compliance with the bankruptcy notice.  As at the hearing dates this had not been served.  On the evidence, I am satisfied that a bankruptcy notice has been issued; that an application has been made on behalf of a creditor for a direction under s 50, and that the debtor has failed to comply with the bankruptcy notice.

The remaining requirement is that the Court be satisfied that it is in the interest of the creditors to make such an order.

The evidence before me, on the making of the order, was that there was a judgment in the above amount and that a bankruptcy notice had been served and not complied with.  I was also informed of the previous history of the matter concerning the issue of an earlier bankruptcy notice, which was set aside on the basis that an order for payment by instalments had been made.  In particular, I was informed of an application before the Registrar in the Downing Centre Local Court, when the instalment order made by that Court on 11 June 1998 was rescinded.  One of the grounds for rescission was that the debtor had not disclosed, as part of his assets, an interest in a sandwich shop business.  There is also, in evidence, a Sequestration Order made by Einfeld J on 6 October 1998 against the debtor’s wife, Mary Leondaris.  Furthermore, there were copies in evidence of cheques drawn by Mary Leondaris in an account entitled “S Leondaris, M Leondaris”.  Also, I was furnished with a copy of the affidavit as to the property and means of the judgment debtor filed in the Local Court to support an application for payment by instalments.  This affidavit makes no reference to any interest of Mr Leondaris or his wife in any sandwich shop business.  It does refer, however, to a loan from J and E Anastasiou, who are the parents of Mrs Leondaris, in an amount of $40,000, and a judgment debt to Ray White of Maroubra for $7,500.

There is in evidence a bill of sale, dated 15 May 1997, between the debtor and the parents of his wife in relation to a loan and advance of $45,000.  The place of business of the debtor was there stated to be “Shop F3.03(A) Market City Retail Centre, Quay Street, HAYMARKET” and the business name was described as “LEONDARDO'S SANDWICH BAR.”  The bill of sale was lodged in the Land Titles Office on 22 May 1997.  The concern of the creditor is that the sandwich shop business is largely a cash income business and that if assets are removed from the business premises by the debtor, the value of the business will be diminished.  I am satisfied that there was sufficient evidence before me to warrant the making of the ex parte orders on 12 October 1998.  This view has been confirmed by subsequent evidence filed by the creditor.  The question remaining is whether these orders should be continued.

On 16 October 1998, further evidence was filed by the creditor in support of the continuation of the orders. This contains  a statement by Mrs Leondaris that the debtor had negotiated to sell the business and that the sale was just about completed.  When asked who the purchasers were, Mrs Leondaris is alleged to have said that they were the persons who hold a bill of sale over the premises; that is to say her parents.  She was unable to give any details as to the price negotiated for the sale.  It appears from the evidence that mention was made before the Registrar of the Local Court that the business may be worth approximately $100,000.  There is also in evidence an invoice in an amount of $4,375, which was sent to Mary Leondaris of “Leondaris Sandwiches, F3.03a Haymarket” in respect of promotions and rent.  There is reference in the evidence to outstanding invoices to Market City Properties Pty Limited in an amount of $8,750.  In addition, there is a letter from the trustee, dated 16 October 1998, in relation to the sandwich bar, in which the trustee estimates the weekly turnover as approximately between $6,500 and $7,400 per week.  The trustee was unable to make any accurate determination as to the value of the business but it appears to have some substantial value.

In support of his application to rescind the orders made on 12 October 1998, the debtor tendered a business names extract, which shows that the business name “Leonardo’s Sandwich Bar” was registered on 12 September 1996; that the principal place of business is “Shop F3 03A Market City, Haymarket NSW”, and that the person carrying on the business is the debtor.  There is no reference in this search to Mary Leondaris.  A copy of a registered sub-lease M3725230, which has been executed by the parties, indicates that the only sub-lessee is the debtor. There is a live dispute between the parties as to whether the business is owned by the debtor alone or as co-owner with his wife.

In an affidavit dated 15 October 1998, Mr Jim Anastasiou, one of the holders of the bill of sale, states that the son-in-law defaulted in two payments, thereby breaching the provisions of the bill of sale.  This was said to be by reason of a judgment and an attachment against his property by the appointment of the trustee.  He states that he has been advised of the orders and wishes to enter into possession of the business pursuant to his security in order to protect the value of the business.

There is further evidence from Mr Anastasiou, filed on 20 October 1998, as to the circumstances in which the bill of sale was entered into and the moneys were advanced.  He states that his understanding from the debtor and Mary Leondaris was that the whole of the moneys were applied towards outfitting and completing the shop.  The circumstances in which the moneys under the bill of sale were advanced is also dealt with by Mary Leondaris in an affidavit sworn and filed on 20 October 1998.

Mr Robert John Djundja, the solicitor for the debtor, has stated that he advised the Local Court that the failure to include the value of the business was an oversight by the debtor due to his poor understanding of the matters that were meant to be disclosed in the affidavits of assets and means and that the omission was not intended to mislead the Court.  However, the submissions of Mr Djundja were not successful in persuading the Registrar, in the light of the new disclosure as to the existence of the business, that the judgment debtor could not afford to pay and the order was rescinded.

Principles

In Deputy Commissioner of Taxation v Clyne (1983) 50 ALR 118 at 123, Neaves J described the purpose of s 50, as it then stood, as follows:

“The section is clearly a provision in aid of the creditors of a debtor who has already committed an act of bankruptcy and has a creditor’s petition pending against him.  It is a necessary and ancillary provision designed to enable appropriate steps to be taken to preserve and protect the property of a debtor so that, in the event of a sequestration order being made, that property will be available for distribution equitably amongst them in accordance with the statutory provisions contained elsewhere in the Bankruptcy Act 1966.  That this is its purpose is reinforced by consideration of the provisions contained in s 50(2) with their emphasis on obtaining information concerning the debtor or his trade dealings, property or affairs.

Although subsequent amendments have been made to the section, the above represents, in my view, an accurate statements as to the purpose of s 50.”

Although amendments have been made to the section, the substance of the above remarks are apposite in the present case.  These remarks of Neaves J were followed and applied in Re Penning, Ex parte State Bank of S.A. (1989) 89 ALR 417, where von Doussa J decided that, if the creditor’s petition is eventually dismissed, an appointment made under s 50 is voidable but is not void ab initio and therefore has valid operation until set aside.

Where a trustee has been appointed, any conduct without the permission of the Court, which has the effect of hindering the control or possession of the trustee of the property, may amount to contempt: Penning & Steel Tubes Supplies Pty Limited (1988) 80 ALR 689 at 697.

Consideration

A number of submissions have been made which are directed to questions which may need to be determined on a final hearing.  These raise questions as to the validity of the bill of sale; the making of allegedly false declarations, and the true ownership of the sandwich shop business.  The evidence on these matters is insufficient to make any final determination.  Nevertheless, this is a case in which I consider that such property should be preserved in the interest of the creditors, particularly in the light of the proposed sale of the business to Mr and Mrs Anastasiou, which has not been denied, and of their decision to enter into possession of the property of the debtor.  Therefore, the order should remain in force until 4.15 pm on 9 November 1998 or such further date as may then be determined.  In the light of further evidence and submissions, I consider that Order 6 should be amended to read:

“6.       The debtor, Steven Leondaris, be restrained, without prior approval of the Court from paying, lending, or depositing any money with, transferring or delivering any property to, any other person, company, or entity except in the ordinary course of business.”

I also consider that additional Orders 11, 12, 13 and 14 should be made in the following terms:

“11.     The trustee, Andrew Hugh Jenner Wily, is authorised to make payment out of the account of such business and reasonable living expenses of the debtor as the trustee shall approve.

12.       The trustee’s remuneration be at the rate set by the Insolvency Practitioners’ Association of Australia.

13.       Cost of the s 50 application and of the action to set aside the orders made on 12 October 1998 be reserved.

14.       Reserve liberty to apply to all parties on forty-eight hours notice.”

Associate:

Dated:              27 October 1998