Federal Court of Australia

Joyce (Trustee), in the matter of Domach v Domach [2023] FCA 888

ORDERS

THE COURT ORDERS THAT:

1.    The distribution of dividends from the estate of the respondent, to any creditors who have proved their debt, proceed in accordance with Part VI, Division 5 of the Bankruptcy Act 1966 (Cth), as if the respondent had filed a statement of his affairs and the creditors had been stated to be a creditor therein.

2.    The applicant give notice of these orders by ordinary post and (or) by email to the nominated email address for the respondent and each of the respondent's creditors and persons claiming to be creditors of the respondent, within 3 business days of the making of these orders.

3.    The respondent not be entitled to any surplus funds remaining after payment of the dividends to creditors until he has lodged his duly completed Statement of Affairs in the required form in the office of the Official Receiver and the applicant has dealt with the claims of any further creditors disclosed in the Statement of Affairs.

4.    There be liberty to any party claiming to be prejudiced by the making of these orders to apply to vacate or vary the orders on no less than 48 hours' notice.

5.    The applicant's costs of and incidental to this application be paid from the bankrupt estate of the respondent.

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

REASONS FOR JUDGMENT

FEUTRILL J:

1    The applicant is the trustee in bankruptcy of the bankrupt estate of the respondent. On 30 May 2023, the trustee filed an originating process for an order under s 146 of the Bankruptcy Act 1966 (Cth) that the distribution of dividends amongst creditors who have proved their debts shall proceed in accordance with Div 5 of Pt VI of the Act as if the bankrupt had filed a statement of affairs and those creditors had been stated to be creditors in it.

2    On 28 July 2023, I made orders under s 146 of the Act. Those orders were made because I was satisfied that the precondition to the exercise of the Court's power under s 146 had been met (the bankrupt had failed to file a statement of his affairs as required by the Act) and that the Court should exercise its discretion, on the application of the trustee, to make an order for the distribution of dividends among the creditors who have proved their debts. These are my reasons for being so satisfied.

3    The evident purpose of s 146 of the Act is to ensure that the absence of a statement of affairs does not prejudice those with an interest in the bankrupt's affairs: Harrison v Tsamasis [2008] FCA 1313 at [2] (Jacobson J) citing Official Trustee in Bankruptcy, in the matter of Shaw [1999] FCA 968 at [4] (Gyles J). That purpose informs the exercise of the discretion under s 146 of the Act.

4    The trustee's originating process was supported by her affidavit sworn 30 May 2023, an affidavit of Mr Philip Gerard O'Donnell sworn 4 July 2023 and an affidavit of Mr James Bruce McTernan affirmed 10 July 2023. The trustee's affidavit deposed to the facts supporting the originating process. The affidavit of Mr O'Donnell deposed to various unsuccessful attempts the trustee made between 30 May and 4 July 2023 to effect personal services of the originating process and supporting affidavit on the bankrupt. On 5 July 2023, I made orders for substituted service of, amongst other things, the originating process and supporting affidavit on the bankrupt by pre-paid ordinary post to his address. The affidavit of Mr McTernan deposed facts to the effect that the originating process and supporting affidavit were served in accordance with that order.

5    On 13 December 2021, a sequestration order was made against the estate of the bankrupt and the applicant (trustee) was appointed as trustee of the bankrupt’s estate. The act of bankruptcy took place on 13 April 2021.

6    The bankrupt has a number of assets, including real property, shares and cash at bank. The value of those assets is estimated to be $255,533.91. That estimate is based, in part, on a desktop valuation of the real property of $185,000 the trustee obtained. Against those assets the bankrupt has liabilities to the following creditors:

(a)    Australian New Zealand Banking Corporation group (ANZ): $150,667.57. (That liability is secured by way of a mortgage over the real property.)

(b)    City of Bayswater (with respect to rates): $4849.72.

(c)    The owners of strata plan SP16805: $46,663.69.

(d)    Water Corporation: $288.38.

7    As regards the debt owed to the City of Bayswater, that is the subject of a property (seizure and sale) order and a caveat lodged by the City in respect of a judgment debt under a court order made on 3 November 2015. The City has advised the trustee that it is a secured creditor under the provisions of the Local Government Act 1995 (WA).

8    There are three property (seizure and sale) orders in favour of the owners of strata plan SP16805 (strata company) in respect of strata fees and penalties. The strata company was the petitioning creditor. Additionally, there are four memorials over the real property in respect of court fines and penalties for various sums. These are not debts provable in the bankruptcy pursuant to s 82(3) of the Act.

9    The trustee opines that having regard to the amount of the debt owed to ANZ, the value of the real property and the other charges registered over the property, it is not reasonable to take action to sell the real property. That is, after taking into the account these matters, it is unlikely to produce a meaningful surplus, if any, that would be available for distribution to the bankrupt’s creditors. I accept the applicant trustee's evidence and opinion in that regard.

10    The trustee has adjudicated upon the strata company's proof of debt and admitted a debt in the sum of $46,663.69. That was not the full amount of the strata company's claim, however, the strata company has not appealed nor responded to the adjudication of its proof of debt.

11    Otherwise, the trustee deposed that she had investigated the possible creditors of the bankrupt's estate and the extent to which there were any transactions conducted by the bankrupt or a third party which would give rise to a claim pursuant to Div 3 of the Act. That is, claims that the assets the trustee has identified are not available for distribution the bankrupt's creditors in accordance with one of the provisions of Div 3 of Pt VI of the Act.

12    The trustee deposed that pursuant to s 109 of the Act she had paid the petitioning creditors' costs of the application for the sequestration order and the trustee's costs of the administration of the bankrupt's estate. Further, she deposed that she has concluded her investigations into the bankrupt's estate and is now in a position to declare a dividend to unsecured creditors in accordance with Div 5 of Pt VI of the Act, but she is not able to do so because the bankrupt respondent has failed to lodge his statement of affairs.

13    The trustee deposed that on 16 December 2021 a letter was sent to the bankrupt requesting that he complete and return a statement of affairs. The trustee made numerous attempts to have the bankrupt perform his obligation to make out and file with the Official Receiver a statement of his affairs and furnish a copy of that statement to the trustee in accordance with s 54(1) of the Act.

14    As a consequence of the bankrupt's failure to comply with obligations under s 54 of the Act, the Australian Financial Security Authority prosecuted the bankrupt and he was found guilty under s 54(1) of the Act for failing to make out and file a statement of affairs with the Official Receiver. Notwithstanding that offence, the bankrupt has still not completed and lodged a statement of affairs. The trustee deposed that she believed there is little prospect that the bankrupt will perform his obligation under s 54(1) of the Act. I accept that that there is a reasonable basis for the trustee's statement of belief in that respect and, on the facts stated in her affidavit, there is a compelling inference that the bankrupt has no intention of complying with his obligation.

15    I also take into account the bankrupt's apparent avoidance of personal service of the originating process and supporting affidavit. Likewise, I take into account his failure to appear notwithstanding that it is reasonable to infer that he received notice of the originating process and affidavit in support and that the trustee's application would be heard on 28 July 2023. All these matters taken together indicate that the bankrupt has not co-operated with the trustee and has no intention of so doing.

16    Notwithstanding the absence of a statement of affairs, I accept that the trustee has made reasonable endeavours to ascertain the assets and liabilities of the bankrupt and to identify any unsecured creditors that may be entitled to a distribution from bankrupt's estate. The bankrupt's lack of co-operation is manifestly frustrating the distribution of a dividend to the bankrupt's creditors. Further, it is hindering the trustee's performance of her duty to do so 'with all convenient speed' in accordance with s 140(1) of the Act.

17    There are two matters arising from the facts deposed in the trustee's affidavit that require further explanation. First, the assets and liabilities the trustee has identified suggest that there is a possibility that the bankrupt may be solvent. That raises a question as to whether a sequestration order ought to have been made against the bankrupt. Second, the only creditor that appears to have lodged a proof of debt and to have had an amount admitted is the strata company which was, of course, the petitioning creditor that resulted in the sequestration order. Here, the concern relates to the extent to which there may be other creditors that the trustee has not identified.

18    As to the first consideration, a similar concern was raised by Jacobson J in Harrison v Tsamasis at [7]. His Honour considered other decisions of this Court where a sequestration order was made against an apparently solvent bankrupt who had failed to file a statement of affairs: Harrison v Tsamasis at [10]-[12] citing Rees (Trustee), in the matter of Stubberfield v Stubberfield (Bankrupt) [1999] FCA 1862 at [17], [19] (Spender J) and Official Trustee in Bankruptcy v Raeffaele, in the matter of Tindaro Raeffaele [2003] FCA 328 at [7] (Allsop J).

19    As mentioned earlier, the sequestration order was made on 13 December 2021. That was an order of a judge of the Federal Circuit and Family Court of Australia (Division 2). There has not been an appeal from that order and it has not been set aside. Nor is there any application to annul that order under s 153B(1) of the Act. Having regard to these matters, and that the evidence is unclear as to the question of the bankrupt's solvency before the sequestration order was made and of the solvency of his estate now that the trustee has incurred costs administering that estate, I do not consider that the Court is in a position to question, on this application, the validity of the sequestration order. That is, the only question for determination by the Court on this application is whether an order should be made under s 146 of the Act. The operation of that provision is predicated on the assumption that a sequestration order has been made and has not been set aside or annulled.

20    As to the second consideration, the facts deposed in the trustee's affidavit regarding the nature and extent of investigations made to identify the bankrupt's creditors are not extensive. Nonetheless, those investigations that the trustee has undertaken have identified a number of creditors and the steps taken to identify those creditors must be viewed against the backdrop of the relatively modest amount of assets available for distribution to creditors and the trustee's priority to payment of her costs in the administration of the bankruptcy before distribution to creditors. Having regard to these matters, I am satisfied that the trustee's duty to declare and distribute dividends among the creditors who have proved their debts should not be further delayed by the failure of the bankrupt to furnish his statement of affairs.

21    Having regard to the possibility that there may be sufficient assets in the bankrupt's estate to discharge debts owed to as yet unidentified creditors, in addition to the orders the trustee requested in the originating process, to address that possibility, I will make an order similar to the additional order Jacobson J made in Harrison v Tsamasis (see his Honour’s reasoning at [18]).

Associate:

Dated: 1 August 2023