FEDERAL COURT OF AUSTRALIA

Williamson v Michell (Trustee) [2019] FCA 481

ORDERS

THE COURT ORDERS THAT:

1.    The application be dismissed.

2.    In relation to costs, the matter be listed for mention at 9.30 am on 15 April 2019.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

THE COURT ORDERS THAT:

1.    The first respondent’s interlocutory application dated 22 October 2018 (seeking an adjournment of the proceeding sine die) be dismissed.

2.    In respect of the bankrupt estate of Gregory John Williamson, the decision of the first respondent dated 27 September 2018 to admit a portion of a proof of debt lodged by the second respondent (namely to admit the proof of debt to the extent of $111,220) be varied such that the proof of debt is admitted to the extent of $54,885.10 and otherwise rejected.

3.    In respect of the bankrupt estate of Gail Elizabeth Williamson, the decision of the first respondent dated 27 September 2018 to admit a portion of a proof of debt lodged by the second respondent (namely to admit the proof of debt to the extent of $33,442.63) be reversed, such that the proof of debt is rejected in full.

4.    In relation to costs, the matter be listed for mention at 9.30 am on 15 April 2019.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MOSHINSKY J:

Introduction

1    The first applicant, Gregory John Williamson (Mr Williamson) became bankrupt pursuant to a debtor’s petition accepted by the Official Receiver on 4 February 2013. The second applicant, Gail Elizabeth Williamson (Mrs Williamson) became bankrupt pursuant to a debtor’s petition accepted by the Official Receiver on 5 February 2013.

2    There are two proceedings before the Court. By proceeding No. VID 118 of 2018 (the Annulment Proceeding), Mr and Mrs Williamson seek annulment of their bankruptcies pursuant to s 153B of the Bankruptcy Act 1966 (Cth). The respondent to that proceeding is Stephen John Michell, the trustee of the bankrupt estates of Mr Williamson and Mrs Williamson (the Trustee).

3    By proceeding No. VID 691 of 2018 (the Proof of Debt Proceeding), Mr and Mrs Williamson seek review, pursuant to s 104 of the Bankruptcy Act, of decisions of the Trustee to admit certain proofs of debt. The proofs of debt were lodged by Simon Wallace-Smith (the Liquidator) in his capacity as liquidator of Pakenham Automotive Pty Ltd (in liq) (Pakenham Automotive). The respondents to the Proof of Debt Proceeding are the Trustee and the Liquidator. The Liquidator did not participate in the proceeding.

4    The Proof of Debt Proceeding involved a challenge to two decisions of the Trustee; one in relation to Mr Williamson, the other in relation to Mrs Williamson. Although the application refers to decisions of the Trustee made on 15 June 2018, the Trustee later revoked these decisions and substituted new decisions dated 27 September 2018. Accordingly, the proceeding was conducted by reference to the Trustee’s decisions made on that date. The decisions in issue are:

(a)    In respect of the estate of Mr Williamson, a decision to admit a proof of debt lodged by the Liquidator to the extent of $111,220. This comprised two components (the sum of which is in fact $111,221):

(a)    an amount of $33,442.63; and

(b)    an amount of $77,778.37.

(b)    In respect of the estate of Mrs Williamson, a decision to admit a proof of debt lodged by the Liquidator to the extent of $33,442.63.

During the hearing, counsel for Mr and Mrs Williamson said that Mr Williamson does not challenge the whole of the amount of $77,778.37. The challenge is limited to a figure of $22,893.27.

5    The two proceedings were heard together. The Trustee opposed the annulment application. In relation to the Proof of Debt Proceeding, the Trustee adopted a role akin to an amicus curiae. In other words, his participation was directed to assisting the Court rather than adopting an adversarial position.

6    On 22 October 2018, the Trustee filed an interlocutory application in the Proof of Debt Proceeding, seeking an order that the proceeding be adjourned sine die on the basis that it had no utility. The interlocutory application was set down for hearing at the same time as the substantive hearing on the basis that there was substantial overlap between the issues raised by the Proof of Debt Proceeding and by the interlocutory application. In my view, it is appropriate for the Proof of Debt Proceeding to be determined on its merits. It follows that the interlocutory application is to be dismissed.

7    In relation to the Annulment Proceeding, for the reasons set out below, I have concluded that the application for annulment of the bankruptcies should be dismissed.

8    In relation to the Proof of Debt Proceeding, I have concluded that:

(a)    In respect of the bankrupt estate of Mr Williamson, the decision of the Trustee dated 27 September 2018 to admit a portion of a proof of debt lodged by the Liquidator (namely to admit the proof of debt to the extent of $111,220) should be varied such that the proof of debt is admitted to the extent of $54,885.10 and otherwise rejected.

(b)    In respect of the bankrupt estate of Mrs Williamson, the decision of the Trustee dated 27 September 2018 to admit a portion of a proof of debt lodged by the Liquidator (namely to admit the proof of debt to the extent of $33,442.63) should be reversed, such that the proof of debt is rejected in full.

Applicable principles

Annulment

9    Section 153B of the Bankruptcy Act relevantly provides as follows:

(1)    If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.

(2)    In the case of a debtor’s petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented.

10    The applicable principles were summarised by Tracey J in Bulic v Commonwealth Bank of Australia Ltd (2007) 5 ABC(NS) 122 at 126; [2007] FCA 307 at [12]:

Section 153B(1) and its predecessors have been considered in many decisions of this and other Courts. These authorities establish a number of relevant propositions. They are:

(1)    An order can be made under s 153B(1) of the Act notwithstanding that the applicant has been discharged from bankruptcy: Re Oates; ex parte Deputy Commissioner of Taxation (1987) 17 FCR 402.

(2)    An applicant who seeks an annulment of his or her bankruptcy “carries a heavy burden”. It is incumbent on an applicant “to place before the Court all relevant material with respect to his or her financial affairs so that the Court may be properly informed and may make a judgment that is based on the actual circumstances of the applicant”: Re Papps; Ex parte Tapp (1997) 78 FCR 524 at 531.

(3)    In determining whether or not a sequestration order “ought not to have been made” the Court is not confined to a consideration of whether the order should have been made on the facts known to the Court at the time at which it was made. The Court must take account of facts, known at the time at which the sequestration order was made and at which it determines an annulment application, even if those facts were not before the Court at the time at which the sequestration order was made: Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239 at 243; Re Raymond; Ex parte Raymond (1992) 36 FCR 424 at 426.

(4)    A sequestration order “ought not to have been made” if, on the facts known at the time of the annulment application, the Court would have been bound not to make the sequestration order: Re Frank; Ex parte Piliszky (1987) 16 FCR 396.

(5)    The Court will be so satisfied if it is established that the debtor was not, at the time the sequestration order was made, indebted to the petitioning creditor: Re Deriu (1970) 16 FLR 420 at 422.

(6)    If the Court is so satisfied, it is not precluded from annulling the bankruptcy because the bankrupt had not sought to have the default judgment set aside or failed to oppose the creditor’s petition or failed to seek a review of the sequestration order: Re Raymond; Ex parte Raymond at 426.

(7)    The power conferred on the Court by s 153B(1) is discretionary in nature. Even if persuaded that the sequestration order ought not to have been made, the Court can, in appropriate circumstances, decline to annul the bankruptcy: Boles at 243.

(8)    Considerations which may have a bearing on the exercise of discretion include unexplained delay in the making of the application, whether or not the applicant is solvent, whether or not the applicant has made full disclosure of his or her financial affairs and a failure by the bankrupt to oppose the creditor’s petition and attend the hearing at which the sequestration order was made: Re Williams (1968) 13 FLR 10 at 24-5; Boles at 247; Re Papps; Ex parte Tapp at 531; Rigg v Baker (2006) 155 FCR 531; Cottrell v Wilcox [2002] FCA 1115 at [7]. Additional considerations are collected in Hassall DA, “Annulment of Bankruptcy and Review of Sequestration Orders” (1993) 67 ALJ 761 at 766.

11    The above passage was approved by the Full Court of this Court in Francis v Eggleston Mitchell Lawyers Pty Ltd (2014) 12 ABC(NS) 25 at 30-31; [2014] FCAFC 18 at [16]; see also Cheung v Burness (Trustee) [2018] FCA 1145 at [5].

12    In Heinrich v Commonwealth Bank of Australia [2003] FCAFC 315 at [20], the Full Court referred to two stages of consideration in relation to an annulment application:

The Court must first consider whether the sequestration order ought not to have been made. If it so finds, then the Court must consider whether, in the exercise of its discretion, the bankruptcy should be annulled: Re Deriu (1970) 16 FLR 420. Later evidence of previously unknown facts may disclose matters which show that the sequestration order ought not to have been made. That is, the Court is entitled to consider not only the case as disclosed at the time when the sequestration order was made, but also those facts now known then to have existed. The Court excludes those facts which have occurred since the order was made. Later evidence of previously unknown facts may disclose matters which show that the sequestration order ought not to have been made: Re Frank; Ex parte Piliszky (1987) 16 FCR 396; Stankiewicz v Plata [2000] FCA 1185 at [19]; Re Williams (1968) 13 FLR 10 at 23; Re Ditfort; Ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347. These authorities, all of which were cited by the learned primary judge in his judgment, were accepted at first instance as reflecting the relevant law.

13    The above passage concerned a case where a sequestration order had been made. Where the bankruptcy is founded upon the presentation of a debtor’s petition, the question raised at the first stage of consideration is whether “the petition ought not to have been presented or ought not to have been accepted by the Official Receiver”. Section 153B(2) provides that, in the case of a debtor’s petition, an annulment order may be made whether or not the bankrupt was insolvent when the petition was presented. Nevertheless, the question of solvency at that time remains relevant: see Beaman v Bond (2017) 254 FCR 480 at [41] per McKerracher J (with whom Gilmour and Charlesworth JJ agreed).

14    The Court has power to annul a bankruptcy based on a debtor’s petition if the presentation of the petition was an abuse of the process provided by s 55 of the Bankruptcy Act: Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 599. In that case, Gibbs CJ, Murphy, Brennan and Dawson JJ held (at 599) that there will be an abuse of process if a debtor presents his or her own petition for a purpose foreign to the bankruptcy laws. See also BWK Elders (Australia) Pty Ltd v White (2004) 3 ABC(NS) 70; [2004] FCA 1611 at [5] per Finkelstein J.

15    In Shaw v Yarranova Pty Ltd (2017) 252 FCR 267, the Full Court of this Court (North, Perry and Charlesworth JJ) said (at [112]) that “the conduct of the bankrupt is a relevant consideration in determining whether an order annulling a bankruptcy should be made, as is whether an annulment will be conducive of or detrimental to commercial morality and the interests of the public”. See also Marek v Tregenza (1963) 109 CLR 1; Re Lawson (1939) 11 ABC 137.

Review of trustee’s decision regarding proof of debt

16    Section 82 of the Bankruptcy Act specifies the types of claims that are capable of proof in a bankruptcy. In particular, s 82(1) provides:

Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

17    Section 83 provides that a creditor is not taken to have proved a debt until it is admitted and s 84 sets out the manner of proving a debt.

18    A claim by a liquidator against a bankrupt estate of a former director under s 588M(2) of the Corporations Act 2001 (Cth) (recovery of compensation for loss resulting from insolvent trading) is a claim capable of proof under s 82: Taylor v Rudaks (2007) 166 FCR 451. The Trustee submitted, and Mr and Mrs Williamson did not dispute, that a claim by a liquidator against a bankrupt estate under s 588FF(1) of the Corporations Act in relation to an uncommercial transaction is also capable of proof under s 82 of the Bankruptcy Act. In the absence of any dispute between the parties on this point, I am prepared to proceed on this basis. In any event, in view of the conclusions I reach below in relation to the Proof of Debt Proceeding it is unnecessary to determine this point.

19    Section 102(1) provides that the trustee shall examine each proof of debt and the grounds of the debt sought to be proved and, subject to the power of the Court to extend time, shall, not later than 14 days after the expiration of the period specified in the notice of intention to declare a dividend as the period within which creditors may lodge their proofs of debt, either: admit the proof of debt in whole; admit it in part and reject it in part; reject it in whole; or require further evidence in support of it.

20    Section 104 of the Bankruptcy Act provides as follows:

(1)    A creditor, or the bankrupt, may apply to the Court for review of a decision of the trustee under subsection 102(1), (3) or (4) in respect of a proof of debt.

(2)    The Court may, upon the application, confirm, reverse or vary the decision of the trustee.

(3)    Subject to the power of the Court to extend the time, an application under this section to review a decision shall not be heard by the Court unless it was made within 21 days from the date on which the decision was made.

21    In Coshott v Burke (2012) 10 ABC(NS) 459; [2012] FCA 517, Rares J said at [56]:

The function of the Court under s 104 is not to consider the correctness or otherwise of the trustee’s decision in light of the material before the trustee, but to determine in light of the material before the Court whether the applicant for review has a debt that should be admitted to proof or has established that a debt admitted to proof ought not to have been. The court can take into account inconsistencies in the material provided to the trustee and the evidence before the Court: Re DK Rogers; Ex parte v CMV Parts Distributors Pty Ltd (1989) 20 FCR 561 at 562-563 per Von Doussa J; Re Payne; Ex parte Hurst [1986] FCA 439; BDT Holdings Pty Ltd v Piscopo [2009] FCA 151 at [4] per myself. An application to review a trustee’s decision under s 104 is an original proceeding that the Court hears de novo: see too Tanning Research Laboratories Inc. v O’Brien (1990) 169 CLR 332 per Brennan and Dawson JJ, with whom, on this matter, Toohey J agreed at 354.

The evidence

22    There was an order made that evidence in one proceeding be evidence in the other proceeding.

23    Mr and Mrs Williamson rely on the following affidavit evidence:

(a)    affidavits of Mr Williamson dated 1 December 2017, 19 April 2018 and 5 June 2018;

(b)    affidavits of Mrs Williamson dated 1 December 2017 and 19 April 2018;

(c)    affidavit of Susan Williamson (the sister of Mr Williamson) dated 18 April 2018;

(d)    affidavit of Peter Goodin dated 24 April 2018;

(e)    affidavits of David Ng dated 26 April 2018, 7 November 2018 and 14 November 2018; and

(f)    affidavits of Dean Williamson (the son of Mr and Mrs Williamson) dated 7 May 2018 and 18 June 2018.

24    There was cross-examination of Mr and Mrs Williamson and Susan Williamson. The other deponents were not required to attend for cross-examination.

25    Both Mr and Mrs Williamson commenced their evidence by admitting to several false statements in their sworn affidavit evidence. Mr Williamson also admitted to procuring false evidence from another person for the purposes of these proceedings. In light of these matters, I do not accept the evidence given by Mr Williamson or Mrs Williamson unless it is corroborated by third-party evidence.

26    The Trustee relies on the following affidavits:

(a)    affidavits of the Trustee dated 3 April 2018, 2 May 2018, 18 October 2018, 26 October 2018 and 14 November 2018; and

(b)    affidavit of Warren White (a chartered accountant who is responsible for the day-to-day conduct of the administrations) dated 15 November 2018.

27    By the affidavit dated 26 October 2018, the Trustee indicated his reliance on a number of affidavits filed in a proceeding brought by the Liquidator against Mr and Mrs Williamson (proceeding No. VID 412 of 2012) (the Liquidator’s Proceeding). No objection was taken to this approach.

28    The main affidavit of the Trustee is that dated 3 April 2018, which annexes a large number of documents. Consistently with the approach taken in the affidavit and submissions, I will refer to the annexures to this affidavit as the Exhibit Book.

29    In addition to the affidavits referred to above, the Trustee relies on outlines of evidence of Colin Draper and Linda Draper. They were not required to attend for cross-examination and their outlines of evidence were admitted into evidence without objection. The outlines stand as the evidence-in-chief of Mr Draper and Ms Draper.

30    Both the Trustee and Mr White were cross-examined. I accept their evidence.

Annulment Proceeding

Mr and Mrs Williamson’s submissions

31    Mr and Mrs Williamson seek annulment of their bankruptcies on the basis that their debtor’s petitions were an abuse of process for the following reasons:

(a)    Mr and Mrs Williamson were solvent at the time of lodging their petitions and would not have done so if they had been properly advised; and

(b)    Mr and Mrs Williamson’s debtor’s petitions were not for a purpose provided by s 55 of the Bankruptcy Act, but for the collateral purpose of frustrating the Liquidator’s Proceeding.

32    Mr and Mrs Williamson submit (and the Trustee appears to accept) that the presentation of their debtor’s petitions was an abuse of process because it was intended to:

(a)    stymie the Liquidator’s Proceeding, which was listed for hearing on 3 February 2010; and

(b)    defraud creditors, particularly the Liquidator, by relying on false creditors to “control the numbers” at creditors’ meetings.

33    Mr and Mrs Williamson’s written submissions note that the Trustee had, in his affidavit, described the presentation of the debtor’s petitions as being part of an elaborate scheme to defraud creditors. Mr and Mrs Williamson’s submissions state that they do not quarrel with this characterisation.

34    Mr and Mrs Williamson’s written submissions note that they pleaded guilty to and were convicted of offences arising out of their debtor’s petitions and information provided to the Trustee. The submissions note that:

(a)    Mrs Williamson pleaded guilty to and was convicted of the federal offence of knowingly signing a false declaration on the basis that her statement of affairs included several false creditors; and

(b)    Mr Williamson pleaded guilty to and was convicted of the federal offence of failing to disclose accurate information to his trustee in bankruptcy at a meeting on 21 October 2014, by failing to disclose to the Trustee that the purported creditors Athena Commodities and Trading Ltd (Athena), Verity Tone Investments and other named entities were not genuine creditors.

35    Mr and Mrs Williamson’s primary contention is that they were solvent at the time of presenting their debtor’s petitions. They submit, in the alternative, that if they were, in fact, insolvent at the time of presenting their petitions, the effect of s 153B(2) of the Bankruptcy Act is that the Court still has the power to annul their bankruptcies. In other words, the effect of s 153B(2) is that the insolvency of a bankrupt does not preclude an order being made under s 153B(1) of the Bankruptcy Act.

36    Mr and Mrs Williamson submit that:

(a)    In respect of Mr Williamson, apart from the Liquidator’s claim (which is disputed), the only creditor who has lodged a proof of debt is the Australian Taxation Office (ATO) in the sum of $10,719.72.

(b)    In respect of Mrs Williamson, apart from the Liquidator’s claim (which is disputed), the only creditor who has lodged a proof of debt is the ATO in the sum of $38,315.09.

(c)    The ATO would not be prejudiced by orders annulling the bankruptcies as Mr and Mrs Williamson propose that the annulment be subject to payment into Court by them of the amounts required to discharge the claims made by the ATO.

37    In relation to the interests of the Liquidator, Mr and Mrs Williamson primarily rely on their contentions in the Proof of Debt Proceeding (discussed below).

38    In their written submissions, Mr and Mrs Williamson acknowledge that their conduct in lodging the debtor’s petitions, and their subsequent conduct in providing false information to the Trustee and not cooperating with the Trustee, has been “appalling”.

39    Mr and Mrs Williamson concede that their conduct, taken in isolation, may be an appropriate reason for the Court to decline to annul their bankruptcies. They submit, however, that to look at their conduct in isolation, without considering the Liquidator’s alleged misconduct in pursuing claims that were palpably unfounded, would lead to a distortion that would not be in the public interest.

40    Mr and Mrs Williamson submit that:

(a)    The mere fact of a bankrupt having committed offences against the Bankruptcy Act in the course of the bankruptcy is not necessarily a barrier to the exercise of the discretion in favour of annulment, referring to Ozer v Australian Liquor Marketers Pty Ltd [2000] FCA 291 at [7].

(b)    In this case, the public interest is best served by annulling the bankruptcies, thereby placing the Liquidator in a position where he can seek leave to proceed with the Liquidator’s Proceeding.

(c)    This would not result in a “win” for Mr and Mrs Williamson, as their conduct will have resulted in significant costs and expenses associated with the administration of their bankrupt estates, as well as their convictions.

(d)    Annulment would be the most appropriate way to resolve an “absolutely diabolical mess”, which originated from an abuse of process and illegal conduct by Mr and Mrs Williamson, but was also “contributed to and made even more diabolical” by the conduct of the Liquidator.

(e)    Although this case raises “multiple troubling issues”, there are, on balance, cogent reasons why the Court should exercise its discretion to annul the bankruptcies.

Trustee’s submissions

41    The Trustee opposes the relief sought in the Annulment Proceeding.

42    The Trustee submits that the discretion under s 153B of the Bankruptcy Act is not enlivened. Among other things, the Trustee submits that, while it might be open to a creditor of Mr and Mrs Williamson to annul the bankruptcies given the circumstances in which they filed their petitions, it is not open to Mr and Mrs Williamson, as the authors of the false statements and the fraudulent scheme, to rely on their falsity as a basis for an annulment order.

43    The Trustee further submits that, even if the Court accepts that the discretion is enlivened, the Court should not annul the bankruptcies because:

(a)    Mr and Mrs Williamson cannot satisfy the Court that they were solvent at the time that they presented their petitions, or at present;

(b)    Mr and Mrs Williamson have been party to an elaborate scheme to defraud their creditors, which has involved knowingly signing false statements of affairs, permitting third parties to participate as creditors knowing them to be making false claims, and relying upon a third party’s false claim to being a secured creditor to preclude the Trustee from realising their assets;

(c)    in the course of their bankruptcies, Mr and Mrs Williamson have concealed rental receipts on an inherited property in Cowes (the Cowes property), a bank account containing a significant amount of money, and a vintage motor vehicle from the Trustee for the purpose of keeping those assets beyond the reach of creditors;

(d)    both Mr and Mrs Williamson have been convicted of knowingly signing a false declaration in their statements of affairs;

(e)    both Mr and Mrs Williamson have given false evidence in their affidavits in this proceeding;

(f)    while Mr and Mrs Williamson have sought, as an alternative to bankruptcy, a composition pursuant to s 73 of the Bankruptcy Act, they have not been prepared to meet the cost of convening a creditors’ meeting to consider one in the past, nor have they detailed any proposal for such a composition in this proceeding; and

(g)    given the above matters, it is not in the public interest that the bankruptcies be annulled.

Consideration

44    Mr and Mrs Williamson entered bankruptcy on their own petitions. They did so to avoid the consequences of the Liquidator’s Proceeding. It appears that Mr and Mrs Williamson were unable to defend that proceeding and would have been unable to pay the judgments sought by Pakenham Automotive and the Liquidator had the proceedings not been stayed by the bankruptcies.

45    At the time of their bankruptcies, Mr and Mrs Williamson were the sole registered proprietors of two real properties and there was substantial equity in the properties. It appears that, as the Trustee submits, rather than incurring the costs of defending the proceeding and the risk of losing and paying the Liquidator, Mr and Mrs Williamson chose to enter an elaborate scheme to defraud their creditors. This involved procuring: a third party to claim to be a secured creditor over the properties and to lodge caveats over the titles; and other third parties to claim to be unsecured creditors so as to control any vote at a creditors’ meeting. This was done solely with the objective of fraudulently circumventing the operation of the Bankruptcy Act and defeating the ability of the Liquidator to obtain judgment in the Liquidator’s Proceeding.

46    At the time of submitting their petitions, Mr and Mrs Williamson signed false statements of affairs with a view to fraudulently obtaining control of creditors’ votes in their own bankruptcies in order to ensure that their properties would not be available to creditors. Before entering bankruptcy, apparently in combination with their then solicitors, they granted mortgages on their properties to a fictitious creditor, so that any trustee who sold them would have no surplus proceeds to distribute.

47    Having been caught and prosecuted for making those false statements, Mr and Mrs Williamson have, as the Trustee submits, sought to obstruct and to avoid the consequences of their bankruptcies. The evidence establishes that they have concealed assets and failed to disclose assets and income. They have used secret bank accounts to conceal cash assets and income from the Trustee. They have given false evidence in their affidavits in these proceedings, as they each conceded early in their oral evidence.

48    In the circumstances of this case, as described above, I consider that the discretion to annul the bankruptcy of each of Mr and Mrs Williamson is enlivened, on the basis that “the petition ought not to have been presented”. However, in the exercise of the discretion, I decline to annul the bankruptcies. My reasons are as follows.

49    First, I am not satisfied that Mr and Mrs Williamson were solvent at the time they presented their petitions or that they are now solvent. Mr and Mrs Williamson have given evidence of their financial position at the time of their bankruptcy, excluding the false creditors contained in their statement of affairs. This is presented in balance sheet form. However, insolvency for the purposes of the Bankruptcy Act is a cash flow test: ss 5(2), 5(3). Mr and Mrs Williamson’s evidence is that they were unable to pay the legal costs of defending Pakenham Automotive’s action against them. That suggests they were cash flow insolvent.

50    Further, Mr and Mrs Williamson have not filed material that demonstrates that they are now solvent. In particular, the affidavits they have filed do not address their ability to pay the significant fees and expenses incurred by the Trustee and the prior trustees of the bankrupt estates over the five years since their appointment. In the case of the Trustee, in respect of the period up to 17 October 2018, these are estimated to be $280,834.92 with respect to Mrs Williamson and $311,113.39 with respect to Mr Williamson. These amounts do not include the remuneration of former trustees. They also do not include the Trustee’s costs from 17 October 2018 onwards, which are estimated to be $41,250 in respect of each estate. Mr White prepared a spreadsheet that sets out the position of each of Mr and Mrs Williamson’s bankrupt estates. The spreadsheet shows that, factoring in the quantum of the trustees’ remuneration and expenses, the costs of realising assets and the creditors’ claims, Mrs Williamson’s estate is predicted to have a net deficiency of $134,146.30 and Mr Williamson’s estate is predicted to have a net deficiency of $160,145.05. Even if the amounts allowed for the Liquidator’s proofs of debt are adjusted in accordance with my conclusions in relation to the Proof of Debt Proceeding, substantial deficiencies will remain. Further, although Mr and Mrs Williamson have indicated that they wish to challenge the Trustee’s remuneration, it is not possible at present to predict whether that challenge will be successful and, if so, to what extent.

51    Secondly, as set out above, Mrs Williamson pleaded guilty to and was convicted of knowingly signing a false declaration and Mr Williamson pleaded guilty to and was convicted of failing to disclose accurate information to his trustee in bankruptcy.

52    Thirdly, Mr Williamson has failed to make disclosure of assets after his bankruptcy. In particular, Mr Williamson did not disclose his interest in vehicles that he owns, by failing to list these assets in his statement of affairs.

53    Fourthly, Mr and Mrs Williamson failed to disclose their use of secret bank accounts to conceal rental receipts. Mr and Mrs Williamson obtained the use of a Westpac bank account in the name of associates, Linda and Colin Draper (the Draper Account) and a Westpac debit card linked to it. The account was used for receiving (at least) rental income from the Cowes property, being approximately $32,215.06 over the period from 4 February 2013 to 3 February 2016. None of the receipts were disclosed to the Trustee.

54    Fifthly, Mr and Mrs Williamson engaged in dishonest conduct to conceal assets. The use of the Draper Account was an exercise to dishonestly conceal rental receipts from the Cowes property.

55    Sixthly, there has been a lack of co-operation with the Trustee in the course of the bankruptcies. Mr and Mrs Williamson’s conduct included the following:

(a)    use of the Draper Account to conceal income and assets, and to conceal expenditure;

(b)    completing a false statement of affairs;

(c)    manipulation of creditor voting by use of false creditors;

(d)    failing to respond to questions asked about their assets when asked by the Trustee, including questions about income and assets;

(e)    Mr Williamson lying to the Trustee as to his knowledge of contact details for Colin Draper; and

(f)    granting a false equitable mortgage to Athena to obstruct the sale of the vested properties by caveat.

56    I am satisfied that the conduct of Mr and Mrs Williamson has materially contributed to the delays in and the costs of finalising the administrations.

57    Seventhly, there has been delay in making the annulment application. Mr and Mrs Williamson were bankrupted on 4 February 2013 and 5 February 2013. The Annulment Proceeding was commenced on 9 February 2018, almost 5 years later. In Federal Circuit Court proceedings for possession of the two real properties in 2016, Mr and Mrs Williamson consented to orders for possession and sale and consented to a declaration as to the legitimacy of the appointment of the Trustee. No explanation is given by Mr and Mrs Williamson for the delay in bringing the application.

58    Eighthly, Mr and Mrs Williamson have not put forward a proposal to pay the costs of the trustees. Mr and Mrs Williamson have not offered to pay, or undertaken to the Court to pay, the fees and charges incurred in the course of the administration of the Trustee, nor those of the prior trustee, nor those of the Official Trustee. Their submissions indicate a preparedness to have the proceeds of the sale of the two real properties applied to meet the Trustee’s costs, but only after they are taxed.

59    Ninthly, there are outstanding matters that require investigation. In particular, there are matters pertaining to the use of the Draper Account that require investigation. I accept the Trustee’s oral evidence that this is a matter that warrants investigation.

60    Mr and Mrs Williamson entered into bankruptcy voluntarily by their own petitions. Their purpose was to misuse the bankruptcy regime to create an elaborate scheme to defraud creditors. Their scheme having now been discovered, they no longer have a use for the process and seek annulment. In my view, in these circumstances, and in light of the other matters referred to above, it would not be in the public interest for their bankruptcies to be annulled.

Proof of Debt Proceeding

61    I will deal first with the review of the Trustee’s decision in respect of Mr Williamson’s estate, and then with the review of the Trustee’s decision in relation to Mrs Williamson’s estate.

Review of the Trustee’s decision in relation to Mr Williamson’s estate

The proof of debt

62    The Liquidator originally submitted a proof of debt claim in Mr Williamson’s estate for the sum of $328,019.00 (Exhibit Book 620-621).

63    By a notice dated 15 May 2018 (sent under cover of letter dated 15 May 2018 from the Trustee to the Liquidator), the Trustee informed the Liquidator of his decision to admit the Liquidator’s proof of debt to the extent of $107,999.25 and to reject the balance (Exhibit GW-1 to the affidavit of Mr Williamson dated 5 June 2018).

64    By letter dated 27 September 2018 from the Trustee to the Liquidator (Exhibit SJM-1 to the affidavit of the Trustee dated 18 October 2018), the Trustee revoked the previous notice and substituted a new notice admitting the claim to the extent of “$111,220.00 (cents disregarded from $111,220.99)” and rejecting the balance. The hearing proceeded on the basis that this was the relevant decision for the purposes of the review under s 104 of the Bankruptcy Act.

65    The amount of $111,220.99, which was admitted, has two components:

(a)    an amount of $33,442.63; and

(b)    an amount of $77,778.37.

In fact, the sum of these two amounts is $111,221, rather than $111,220.99.

66    It is convenient to make brief reference to the insolvent trading provisions of the Corporations Act, which formed the basis of the claim against Mr Williamson. Section 588G(1) provides in summary that the section applies if: (a) a person is a director of a company at the time when the company incurs a debt; (b) the company is insolvent at that time or becomes insolvent by incurring the debt; and (c) at the time, there are reasonable grounds for suspecting that the company is insolvent or would become so insolvent. Section 588G(1A) provides that, for the purposes of s 588G, if a company takes action set out in column 2 of the table set out under the subsection, “it incurs a debt at the time set out in column 3”. Item 7 of the table is entering into an “uncommercial transaction” within the meaning of s 588FB. In such a case, the time that the debt is incurred is when the transaction is entered into. Section 588M provides for the recovery of compensation for loss resulting from insolvent trading. Section 588M(1) provides in summary that the section applies where: (a) a person (referred to as the director) has contravened s 588G(2) or (3) in relation to the incurring of a debt by a company; (b) the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency; (c) the debt was wholly or partly unsecured when the loss or damage was suffered; and (d) the company is being wound up. Section 588M(2) provides that the company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.

67    The basis upon which the Liquidator claimed these amounts from Mr Williamson is outlined in the statement of claim filed by the Liquidator and Pakenham Automotive in the Liquidator’s Proceeding (Exhibit Book 627-640). The claims against Mr Williamson were based on an alleged breach of the director’s duty to prevent insolvency trading under s 588G(2) of the Corporations Act. That alleged breach was said to entitle the liquidator to rely on s 588M(2) to recover directly from Mr Williamson. It was alleged that, between about July 2009 and 15 November 2010, Pakenham Automotive incurred unsecured debts totalling $150,396.53, which debts remained outstanding at the date of liquidation (15 November 2010). The debts listed include a debt to Peter and Sandra Timmins (for renting premises occupied by Pakenham Automotive, referred to in the evidence as the Racecourse Road premises). It was further alleged that, between about April 2010 and July 2010, Pakenham Automotive transferred its business, plant and equipment to Mrs Williamson (trading as LSX Garage) for no consideration. This transfer was alleged to have been an “uncommercial transaction” and treated as a component of the Liquidator’s claim under s 588M(2), together with the unsecured debts. It was alleged that Pakenham Automotive was insolvent within the meaning of s 95A of the Corporations Act from at least 1 July 2009 and that Mr Williamson (who was alleged to have been a director within the meaning of s 9 of the Corporations Act at the relevant times) failed to prevent the Pakenham Automotive from incurring each of the debts and transferring its business, plant and equipment to Mrs Williamson as alleged. It was alleged that Mr Williamson was aware that there were grounds for suspecting that the company was insolvent, and that a reasonable person in the position of Mr Williamson would have been aware at the relevant times that there were grounds for suspecting that the company was insolvent. It was alleged that unsecured creditors of the company had suffered a loss. On the basis of these allegations, it was contended that Mr Williamson had contravened s 588G(2) of the Corporations Act in respect of each of the debts listed in the statement of claim and in respect of the transfer of the company’s business, plant and equipment to Mrs Williamson (trading as LSX Garage). On this basis, an order was sought pursuant to s 588M(2) that Mr Williamson pay $329,888.53 to Pakenham Automotive.

68    The amount of $33,442.63, which was admitted by the Trustee, related to the transfer of the business, plant and equipment from Pakenham Automotive to Mrs Williamson (trading as LSX Garage). The basis upon which the Trustee accepted this claim to this extent was explained in the Trustee’s letter dated 15 May 2018. For the reasons there set out, the Trustee determined that the written down value of plant and equipment transferred was $27,942.63. The Trustee then added goodwill of $5,500 to that amount to arrive at $33,442.63. There was no change to this amount in the Trustee’s subsequent letter dated 27 September 2018. I note that the Trustee’s letter dated 15 May 2018 did not explore whether the insolvent trading provisions (in particular, s 588M) were capable of applying to the transfer of the business, plant and equipment from Pakenham Automotive to Mrs Williamson. While it is true that the table under s 588G(1A) provides that if the company takes action set out in column 2 (which includes an uncommercial transaction), it incurs a debt at the time set out in column 3, in order to claim compensation under s 588M it would be necessary to show that “the person … to whom the debt is owed has suffered loss or damage”. The Trustee’s letter did not discuss whether this provision applied in the circumstances. However, it is not necessary to examine this issue, in light of the conclusions I have reached below.

69    The amount of $77,778.37, which was admitted by the Trustee, related to the Liquidator’s claim under s 588M in respect of debts incurred by Pakenham Automotive while insolvent. At the hearing of the proceeding, counsel for Mr and Mrs Williamson said that only the amount of $22,893 (of the $77,778) was challenged (transcript, p 132). The amount of $22,893 (precisely, $22,893.27) represents rent said to be owing to Peter and Sandra Timmins in respect of the Racecourse Road premises.

Consideration

70    As noted above, the Liquidator has not participated in this hearing. Accordingly, he has not put on evidence and submissions in support of the proofs of debt. In these circumstances, the material in support of the proofs of debt is limited to the material that was before the Trustee for the purposes of making his decision.

71    Mr Williamson denies ever having acted as a director although he does concede that he did assist the business. I consider the material to establish that he was a director at the relevant times: see [9.12] of the Trustee’s affidavit dated 18 October 2018. The affidavits relied on by the Trustee in that paragraph are effectively before the Court, as the Trustee indicated in his 26 October 2018 affidavit that he sought to rely on them.

72    In relation to the amount of $33,442.63, Mr Williamson contends that the evidence does not establish on the balance of probabilities what property (if any) was transferred and the value of any such property. In relation to the amount of $22,893.27, he contends that Dean Williamson transferred a share of a property to Mr and Mrs Timmins as consideration for discharging the debt. Mr Williamson does not otherwise put in issue whether the insolvent trading provisions applied to the transactions. I will deal with each of the amounts in turn.

73    In relation to the amount of $33,442.63, I accept Mr Williamson’s submission that the material before the Court does not establish on the balance of probabilities what property (if any) was transferred to Mrs Williamson (trading as LSX Garage) and the value of any such property. There was an exchange of correspondence between the Trustee and the Liquidator in which the Trustee sought further information from the Liquidator. The Liquidator did not provide further information (perhaps because he saw no or little prospect of any recovery). The Trustee, through Mr White, then made some further enquiries. In particular, Mr White interviewed (by telephone) Robert Timms and Brett Simmonds. Both Mr Timms and Mr Simmonds had worked at both Pakenham Automotive and LSX Garage. The evidence includes file notes of the interviews with them, but does not include any affidavit evidence from them. Thus they were not available for cross-examination. There are significant limitations in the information provided by Mr Timms and Mr Simmonds, as recorded in the file notes. These matters were explored in the cross-examination of Mr White. In particular:

(a)    when Mr Timms and Mr Simmonds were questioned, they did not have the depreciation schedule in front of them – this document listed Pakenham Automotive’s plant and equipment and would have directed their attention to the items in issue;

(b)    likewise, when they were questioned, Mr Timms and Mr Simmonds did not have the results of the Liquidator’s sale of plant and equipment – this is relevant because items of plant and equipment that were sold by the Liquidator could not have been transferred to LSX Garage;

(c)    during the interviews, Mr White did not raise with Mr Timms or Mr Simmonds that there were items of plant and equipment that were packed in a container – this is relevant because the evidence indicates that a number of items were packed in a container and not transferred to LSX Garage;

(d)    Mr Timms indicated in the course of the conversation that a number of the items that had been moved from Pakenham Automotive to LSX Garage had, in fact, been subsequently taken away from the LSX premises – this suggests that such items were not transferred to LSX Garage;

(e)    Mr Timms said in the interview that he did not believe a “4 point hoist” had been taken across;

(f)    with respect to several of the items, Mr Timms could not recall whether they had been taken across;

(g)    in relation to a brake lathe and a tyre changer, Mr Timms said that these went across, but were later repossessed by Pakenham Automotive – in other words, these items were not transferred to LSX Garage;

(h)    although Mr Timms expressed the view that “50% of the equipment was transferred initially”, as Mr Timms had not been presented with the depreciation schedule, it is unclear what equipment he was referring to; and it is also unclear whether he was referring to 50% of the items by number or by value;

(i)    further and in any event, Mr Timms went on to state that “much of [the equipment that was transferred] was later repossessed by Dean/Greg [ie, Dean Williamson and Mr Williamson]” – this indicates that much of the equipment was not, in fact, transferred to LSX Garage; Mr Timms was not asked to clarify what equipment was left after this had occurred.

74    In light of the above, it is unclear what plant and equipment was, in fact, transferred to LSX Garage. Without this information, it is not possible to ascribe a value to the plant and equipment that was transferred. Similarly, there does not appear to be probative material to support the goodwill component that the Trustee allowed. Accordingly, the material does not establish that business, plant and equipment valued at $33,442.63 (or any lesser amount) was transferred from Pakenham Automotive to Mrs Williamson trading as LSX Garage.

75    In relation to the amount of $22,893.27, this sum is attributed to rent owing to Peter and Sandra Timmins for the Racecourse Road premises. The grounds on which this claim is disputed are that:

(a)    Up until 21 June 2010, Dean Williamson and Nicole Timmins had a combined 25% ownership in the Racecourse Road premises and Peter and Sandra Timmins had no entitlement to claim 100% of the rental.

(b)    On 21 June 2010, Nicole Timmins transferred her interest in the premises to Dean Williamson, who in turn transferred his 25% interest to Peter and Sandra Timmins in consideration for Peter and Sandra Timmins agreeing to wipe the outstanding rent.

76    In my view, on the evidence before the Court, these grounds are made out.

77    It is true that, as Mr Williamson concedes, the transfer document records the consideration for Dean Williamson transferring his 25% share as being a gift. However, the evidence of Dean Williamson is to the effect that he transferred his 25% interest to Peter and Sandra Timmins in consideration for Peter and Sandra Timmins agreeing to wipe the outstanding rent. Dean Williamson was not required to attend for cross-examination. Further, no evidence was adduced from Peter or Sandra Timmons (by way of an affidavit) to contradict that evidence. In these circumstances, I accept the unchallenged evidence of Dean Williamson and find that the debt owing to Peter and Sandra Timmins was discharged by the transfer of the interest in the property. It follows that it is not established that the amount of $22,893.27 was owed by the company to Peter and Sandra Timmins. The insolvent trading claim in relation to that amount is therefore not established.

78    In summary, the challenges to the amounts of $33,442.63 and $22,893.27 have been made out.

Review of the Trustee’s decision in relation to Mrs Williamson’s estate

The proof of debt

79    The Liquidator originally submitted a proof of debt claim in Mrs Williamson’s estate for the sum of $179,492.00 (Exhibit Book 617-619).

80    By a notice dated 15 May 2018 (sent under cover of letter dated 15 May 2018 to the Liquidator), the Trustee informed the Liquidator that he admitted the Liquidator’s proof of debt to the extent of $33,442.63 and rejected the balance (Exhibit GW-1 to the affidavit of Mr Williamson dated 5 June 2018). This is the same amount as one of the claims that was accepted in relation to Mr Williamson’s estate. It relates also to the transfer of business, plant and equipment from Pakenham Automotive to Mrs Williamson (trading as LSX Garage), but is put on a different basis in relation to Mrs Williamson (discussed below).

81    By letter dated 27 September 2018 from the Trustee to the Liquidator, the Trustee revoked the previous notice and substituted a new notice. However this substitution merely varied the reasons for partial rejection. The amount admitted remained the same, being $33,442.63.

82    The basis of the claim for $33,442.63 as against Mrs Williamson is set out in the statement of claim filed in the Liquidator’s Proceeding. The Liquidator and Pakenham Automotive contended that the transfer of the business, plant and equipment constituted an “unreasonable director-related transaction” that was voidable pursuant to ss 588FDA and 588FE of the Corporations Act. Further, it was contended that the transfer was an “uncommercial transaction” and an “insolvent transaction” and voidable pursuant to ss 588FB, 588FC and 588FE of the Corporations Act. On these bases, compensation was sought pursuant to s 588FF.

Consideration

83    The basis upon which Mrs Williamson challenges the amount of $33,442.63 is the same as Mr Williamson’s challenge to that amount, discussed above. In summary, Mrs Williamson contends that the evidence does not establish on the balance of probabilities what property (if any) was transferred and the value of any such property. For the same reasons as set out above in relation to Mr Williamson, I accept this submission. Thus the challenge to the amount of $33,442.63 has been made out.

Conclusion

84    In the Annulment Proceeding, I will make an order dismissing the proceeding. I will list the matter for mention in relation to costs.

85    In the Proof of Debt Proceeding, I will make orders to the following effect:

(a)    The Trustee’s interlocutory application dated 22 October 2018 (seeking an adjournment of the proceeding sine die) be dismissed.

(b)    In respect of the bankrupt estate of Mr Williamson, the decision of the Trustee dated 27 September 2018 to admit a portion of a proof of debt lodged by the Liquidator (namely to admit the proof of debt to the extent of $111,220) be varied such that the proof of debt is admitted to the extent of $54,885.10 and otherwise rejected.

(c)    In respect of the bankrupt estate of Mrs Williamson, the decision of the Trustee dated 27 September 2018 to admit a portion of a proof of debt lodged by the Liquidator (namely to admit the proof of debt to the extent of $33,442.63) be reversed, such that the proof of debt is rejected in full.

86    I will hear from the parties on costs in relation to the Proof of Debt Proceeding.

Associate:

Dated:    10 April 2019