FEDERAL COURT OF AUSTRALIA

Lawman v Queensland Building Services Authority [1999] FCA 1781

BANKRUPTCY - creditor’s petition - application for annulment of sequestration order - debtor made bankrupt despite offer exceeding the judgment debt upon which bankruptcy notice founded - Court not informed of offer - whether sequestration order should be set aside on ground that proceedings an abuse of process - whether bankrupt solvent - test for solvency

Bankruptcy Act 1966 (Cth) ss 52 and 153B

Queensland Building Services Authority Act 1991 (Qld)

International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 cited

McPherson, The Law of Company Liquidation (4th ed)

RAYMOND MICHAEL LAWMAN v QUEENSLAND BUILDING SERVICES AUTHORITY AND GRAHAM ROSS BENDEICH, TRUSTEE

Q 213 OF 1999

HEEREY, DRUMMOND AND DOWSETT JJ

17 DECEMBER 1999

BRISBANE

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.                  The appeal be dismissed.

2.                  The costs of both respondents be paid out of the bankrupt’s estate with priority according to s 109(1)(a) of the Bankruptcy Act 1966 (Cth).

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

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

THE COURT:

1                     On 19 February 1999 a sequestration order was made against the estate of the appellant.  He later applied for the annulment of his bankruptcy under s 153B of the Bankruptcy Act 1966 (Cth).  On 28 August 1999 Kiefel J dismissed that application.

2                     The act of bankruptcy relied on was failure to comply with a bankruptcy notice issued on 28 May 1997.  The judgment founding the notice was a determination of the Queensland Building Tribunal subsequently lodged with the District Court of Queensland pursuant to the Queensland Building Services Authority Act 1991 (Qld).  The amount claimed in the notice was $11,043.49.

3                     Delays occurred in serving the bankruptcy notice.  On 21 August 1998 an order was made for substituted service by posting a copy to the appellant care of his then solicitors Klooger Phillips & Co and by publishing an advertisement in the Sunshine Coast Daily.

4                     On 8 October 1998 the respondent filed a bankruptcy petition.  The debt alleged in the petition was a lesser amount, viz, $10,740.67.  It appears that this was the amount of the judgment and the difference ($302.82) was interest on that amount from 14 February to 28 May 1997.  On 2 December 1998 the petition was adjourned until 11 December and then to 5 February 1999.

5                     In the meantime, negotiations took place between Klooger Phillips & Co and the respondent.

6                     According to the appellant, his solicitors told him in January that the respondent wanted $16,781.25 if bankruptcy was to be avoided.  That amount included the debt and interest, together with costs in the bankruptcy proceedings.  On 4 February the appellant paid his solicitors $14,000 and, he says, instructed them to pay that amount to the respondent.

7                     On the next day, 5 February, the appellant appeared in person before the District Registrar.  He sought an adjournment to allow him to pay the balance of $2,781.25.  The petition was further adjourned to 19 February at 9.30 am.  The District Registrar’s Record of Proceedings of 5 February bears the notation “Pay the debt within 14 days”.

8                     The appellant says that on 11 February his solicitor told him that the $14,000 had been paid to the respondent.  The respondent, however, says that negotiations continued in which the appellant’s solicitor offered amounts ranging from $12,000 to $14,000, but it insisted on the full amount of the claim plus costs plus interest.  Whether or not the appellant’s solicitor told the appellant the $14,000 had been paid on the 11^th, it is clear enough from the correspondence which followed that there was no such payment.

9                     On 18 February the appellant’s solicitors wrote to the respondent’s solicitors enclosing a trust account cheque for $14,000.  The letter stated that this was “(f)urther to the writer’s recent telephone conversation with Greg Rostron”.  However the letter did not state what the purport of that conversation was.  It did not state whether the payment was in full settlement or on account.  The letter only stated that:

“(a)part from the writer’s telephone conversation with your Mr Rostron, there has been no formal request from you for the amount directed to be paid to your client at our client’s last appearance before the Federal Court.”

10                  The appellant says that on the morning of 19 February he attended at his solicitor’s office with $2,781.21 in cash and that in his presence the solicitor telephoned the respondent and told them this amount could be paid into their account at Maroochydore, but the respondent refused to accept this payment.  The respondent denied that such a conversation occurred.

11                  At 8.15 am on 19 February the respondent’s solicitor attended at his client’s office.  The respondent’s Collections Officer checked her computer and ascertained that no payment had been received from the appellant.  She then swore the affidavit of debt.  Upon returning to his own office, the respondent’s solicitor was shown the appellant’s solicitor’s letter of the previous day and the cheque for $14,000.  The solicitor already had firm instructions not to accept less than the full amount of debt plus interest plus costs.  He telephoned his client advising of the receipt of the cheque and received confirmation of instructions to proceed with the petition.

12                  On arrival at the court, the respondent’s solicitor telephoned the appellant’s solicitor.  The latter not being available, a message was left saying the $14,000 was not accepted and the petition would proceed.  The respondent did not bank the cheque.

13                  Neither the appellant nor his solicitor attended at the Court.  A sequestration order was made.  No mention was made of the $14,000.  During the course of the morning, the appellant’s solicitor sent a fax to the Court as follows:

“We act on behalf of Mr Lawman.

Mr Lawman appeared before the Court on Friday 5 February 1999 at which he had the hearing of the QBSA’s creditor’s petition adjourned for a period of 14 days.

This morning our client advises us that he was under the impression that it was 14 working days.  We have been advised by the solicitors for QBSA that they intend proceeding with the hearing of the creditor’s petition today.

Our client has already paid $14,000 to the QBSA in reduction of the sum of $16,781.25 which we are advised is the total amount outstanding to the QBSA.

Our client advises us this morning that he will be paying the balance of $2,781.25 to the QBSA this afternoon.  In the circumstances we believe it appropriate that this matter be stood over to this afternoon or Monday morning, the 22 February 1999.

We have instructed our town agents to attend at the Federal Court this morning and we believe that they will arrive at the Court shortly.”

14                  It is to be noted that this letter is inconsistent with the appellant’s assertion that he paid $2,781.21 to his solicitors on the morning of the 19^th.

15                  The District Registrar replied advising that the fax had been received at 10.33 am.  The petition had been heard at 9.35 am and a sequestration order made about 9.40 am.

16                  The learned primary judge concluded that it was not clear whether the respondent even came to hear of an offer of both the $14,000 and the $2,781.25.  The appellant’s solicitor was not called by him and the respondent’s subpoena directed to the solicitor was not answered because of a dispute over conduct money.

17                  The appellant argued before her Honour that the demand for $16,781.25 was an abuse of process because it involved a claim for costs which had not been taxed.

18                  In our view that argument was rightly rejected.  There can be no suggestion that the bankruptcy proceedings were brought for a collateral or improper purpose.  The respondent, who could expect to receive an order for costs on the making of a sequestration order, was entitled to put, as the price for withdrawing the petition, a figure which included an estimate of those costs.  There was apparently no evidence as to how the difference between the judgment debt and the $16,781.25 was calculated, but equally there was no suggestion that it could not be a reasonable estimate of interest and costs.

19                  In the circumstances, we do not think it was incumbent on the respondent’s solicitors to mention to the Court the receipt of the $14,000.  Nor did they act unethically in not doing so.  The matter had not been settled as between the appellant and respondent.  The respondent was insisting on payment of $16,781.25 prior to the adjourned hearing of the petition.  It is beyond argument that the appellant failed to meet that requirement. In any event, for the reasons to be mentioned in a moment in relation to the appellant’s solvency, such a mention would have made no difference to the outcome.

SOLVENCY

20                  It is said that her Honour erred in finding that the appellant was insolvent as at 19 February 1999, the date of the sequestration order.  Pursuant to s 52(1)(a) of the Bankruptcy Act, it is a discretionary ground for dismissing a petition, notwithstanding satisfaction as to the matters identified in subs 52(1), that the debtor is able to pay his or her debts.  Presumably the appellant asserts that had all of the material facts been known as at the date of hearing of the petition, the Court would have been satisfied that he was able to do so.

21                  As demonstrated by Katz J in International Alpaca Management Pty Ltd v Ensor [1999] FCA 72, use of the expression “his or her debts” in subs 52(2) may be contrasted with subs 5(2) which prescribes that:

“A ‘person’ is ‘solvent’ if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.”

22                  Nonetheless his Honour concluded (par 18) that the wording of s 52(2)(a) should generally be treated as requiring a consideration of the debtor’s capacity to pay his debts as and when they fall due, rather than the debts actually due at the date of hearing.  In any event, as his Honour pointed out at s 19, even if that narrower view of the meaning of subs 52(2) were taken, the Court would be inclined to consider capacity to pay debts to become due in the future as relevant to the exercise of the discretion conferred by the sub-section.

23                  Section 52(2)(a) requires more than a comparison of the totality of the debtor’s assets with the totality of his or her liabilities.  Such a comparison would necessarily involve substantial speculation concerning matters such as the reliability of valuations, the prospects of realizing such valuations in a particular time frame and the likely cost of realization.  The following extract from McPherson, The Law of Company Liquidation (4th edition) at pp 57-8 provides a useful discussion of a similar problem in a slightly different context:

“From this it follows that insolvency in this form is principally a question of fact, and one which may be established in a number of ways.  It may be shown, for example, that the company has failed to honour bills of exchange, that a receiver for debenture-holders has taken possession of all the assets, that there are large numbers of outstanding debts and unsatisfied judgments, or that admissions have been made by the company or its solicitors of its inability to pay or of the absence of assets on which execution can be levied.  Ultimately, however, the issue in every case is whether, on the evidence placed before it, the court is prepared to make an order that the company be wound up; and since the determination of this question involves, at least partly, the exercise of judicial discretion, the court is entitled to take account of a variety of factors, such as the nature of the company’s undertaking, the character of the unpaid debt and the fact that it was incurred for the purpose of making the company a going concern rather than in the course of trading activities.  Even financial solvency (balance sheet insolvency) may become relevant at this point, for the court is not disposed to wind up a company with assets which are capable of being realised in order to pay the debt without at the same time so crippling the company that it becomes unable to continue its business.  As was said in a South African case:

‘The proper approach in deciding whether the company should be wound up on this ground appears … to be that, if it is established that a company is unable to pay its debts, in the sense of being unable to meet the current demands upon it, its day to day liabilities in the ordinary course of its business, it is in a state of commercial insolvency … If the company is in fact solvent, in the sense of assets exceeding its liabilities, this may or may not, depending on the circumstances, lead to a refusal of the winding-up order.  The circumstances particularly to be taken into consideration against the making of an order are such as show that there are liquid assets available out of which, or the proceeds of which, the company is in fact able to pay its debts.  Nevertheless in exercising its powers the court will have regard to the fact that … a concern which is not in financial difficulties ought to be able to pay its way from current revenue or readily available resources.’

24                  In the present case, Kiefel J observed that the trustee had reported an estimated deficiency of liabilities over assets of some $1.8 million.  During argument of the appeal, it emerged that this calculation was probably erroneous in that the trustee had treated as an asset of the appellant the net value of property at Caloundra after deduction of the secured debt, but then included the secured debt as a contingent liability.  One would have expected either inclusion of the full value of the asset and the debt, or inclusion of the net value of the asset and exclusion of the debt.  The appellant was also treated as being entitled to half of the net value of the assets of a company, Clearview Properties Pty Ltd in which he held half of the shares.  The value of certain land owned by the company was calculated by deducting a secured debt from the estimated value, but the secured debt was again shown as a liability, reflecting the same error.  Quite apart from this problem, for reasons which we have previously mentioned, the value of the assets of Clearview and of the Caloundra property must have been a matter for speculation.  The appellant argued at first instance that given sufficient time to realize his assets, he would be able to pay his debts as they became due.  As her Honour pointed out, this may have amounted to a concession that the properties were not readily saleable at the values claimed in the valuations.

25                  Her Honour concluded from the cross-examination of the appellant that in January 1999, prior to the hearing of the petition, and apart from the debts secured on the properties mentioned above, he was indebted in an amount exceeding $200,000 which was not in dispute.  A much larger sum, $374,812.71, is now claimed by unsecured creditors.  The appellant said that he had been expecting a further $50,000 “draw-down” on a loan facility which would have been used to pay many of his trade creditors.

26                  The undisputed debts are of some interest.  There was a debt of $18,682.63 to Action Plasterers.  The appellant asserted in evidence that he had given what appears to have been an oral charge over his former matrimonial home to secure this debt.  He said that the debt was to be paid when the units, which had been, or were to be built on the Caloundra property, were completed and sold.  There was a further sum of $6,500 owing to his former wife, apparently borrowed from her to assist “some street kids”.  Over $11,000 was owed to solicitors, and $18,580 was owed for insurance cover.  Other debts included:

Alltone Blinds                                       $4,600

Choice Management Services               $2,580

Colonial State Bank                              $514.95

Credit Union Australia              $3,485.45

K & V Equipment Maintenance            $1,050

Optus                                                  $1,300.35

R & R Earthmoving                              $4,367.

27                  These debts totalled in excess of $72,000.  There were other debts which the appellant disputed, but there was one other undisputed debt to Grasshopper Holdings Pty Ltd, the amount of which is unclear.  It appears to have been in excess of $100,000, possibly secured upon some of his equipment.  The trustee reported that the assets allegedly subject to the charge were probably insufficient to meet even a substantial proportion of the debt.  The only cash on hand as at the date of bankruptcy appears to have been $14,000 in a solicitor’s trust account and a small amount of interest.  As we have observed, the appellant claimed to be expecting a further advance of $50,000 from his financier.  This became unavailable after the advertisement of the bankruptcy notice.  In those circumstances, her Honour was correct in concluding that the appellant was unable to pay his debts as at the date of hearing of the petition.

28                  The appeal should be dismissed.  We would expect that the costs of both respondents be paid out of the bankrupt’s estate with priority according to s 109(1)(a) of the Bankruptcy Act.  Should any party wish to submit otherwise, such submission must be made in writing, filed in Brisbane Registry within seven (7) days and served on the other parties.  They may respond in writing within a further period of seven (7) days.

Associate:

Dated:              17 December 1999