IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY Jadge making order: Date of order: eee No. W67 of 1978 THE BANKRUPTCY ACT 1966 Section 150 o APPLICATION FOR DISCHARGE DENNIS EDWYNNE ROBINSON ORDER Beaumont, J. 4 August, 1983. Where made: Sydney. THE COURT ORDERS: Ll. The public examination of the bankrupt shall be deemed to have been concluded on 3 July, 1978. 2. I order the discharge of the bankrupt. 3. I order the bankrupt to pay the costs of the Official Receiver. IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) BANKRUPTCY DISTRICT THE STATE OF ) NEW SOUTH WALES AND THE AUSTRALIAN ) CAPITAL TERRITORY ) No. W67 of 1978 THE BANKRUPTCY ACT 1966 Section 150 APPLICATION FOR DISCHARGE DENNIS EDWYNNE ROBINSON CORAM Beaumont, J. DATED: 4 August, 1983. REASONS FOR JUDGMENT This 1s an application for an order for discharge made pursuant to s.150 of the Bankruptcy Act 1966 ("the Act"). In his report dated 19 May, 1983, the Cfficial Trustee reported on the background to the application in terms wnich I summarise as follows. On 14 February, 1978, a sequestration order was made against the bankrupt upon the petition of Mercantile Credits Limited, a creditor. An objection to the discharge of the bankrupt from his bankruptcy by force of s.149 of the Act was lodged on 20 January, 1981, by the Official Receiver as trustee on the following grounds: "There is a deficiency in the estate in excess of $1,000,000.00." The objection has not been withdrawn. In his statement of affairs, the bankrupt disclosed the following assets: Land at Emu Plains $2,150,000.00 Less amount owing under mortgage to Mercantile Credits Limited 2,206,263.00 Deficiency 56,263.00 Land at Emu Plains $2,140,000.00 Less amount owing under mortgage to Industrial Acceptance Corporation Limited 2,535,571.00 Deficiency 395,571.00 Land at 166 Francis Street, Richmond $126,000.00 Less amount owing under mortgage to the Westpac Banking Corp. Ltd. 107,013.00 18,987.00 Cash at Westpac Banking Corp. Ltd. 60 Martin Place, Sydney 25 Cash in hand 110.00 Book debt - Mr. A. Ward 5,000.00 $24,097.25 ° The bankrupt was, at the date of bankruptcy, the registered proprietor of the following parcels of land at Emu Plans over which the petitioning creditor held a4 registered mortgage: Lot 3, Old Bathurst Road, Emu Plains Lot 1, in Deposited Plan 534 698, Emu Plains Sec. 20, Russell Street, Emu Plains The mortgagee has estimated the value of the above security as realising an amount of $1,591,000.00, resulting in an expected deficiency on sale of $615,263.19 (see below). Although the mertgegee has entered into possession of the property, a sale has not as yet occurred. The bankrupt was, at the date of bankruptcy, the registered proprietor of the following parcels of land (also at Emu Plains) over which Citicorp Australia Limited held registered mortgages: Lot 2, Old Bathurst Road, Emu Plains Portion 68, Old Bathurst Road, Emu Plains Lot 3, Greendale Road, Wallacia By 28 April, 1982, the above properties had all been sold together with additional security in the form of real estate mortgaged by Dennis Robinsen Investments Pty. Ltd., as guarantor, "which resulted in a net deficiency on sale of $3,401,915.37. Westpac Banking Corp. Ltd. has informed the Official Trustee that the land at 166 Francis Street,Richmond was sold on 4 May, 1981 for an amount of $91,500.00. The bank has lodged a claim in the estate for an amount of $15,969.09, being the balance owing under mortgage. An amount of $2,708.03 has been brought to the credit of the estate as follows: Deposit on petition $20.00 Proceeds from rent on property situated at 188 Riverside Road, Emu Plains 1,713.03 Contributions: 1978 $625.00 1979 350.00 975.00 $2,708.03 The book debt proved to be irrecoverable. In his statement of affairs, the bankrupt disclosed unsecured creditors for amounts totalling $893,821.15. In addition, the bankrupt disclosed Leitz Leeholme Stud Pty. Ltd. as a creditor for an unknown amount being for alleged damages for breach of a lease. The bankrupt also disclosed the three secured creditors referred to above. Of the ten proofs of debt lodged against the estate, five have been admitted to rank for dividend for amounts totalling $1,148,438.00 as follows: NAME OF CREDITOR AND AMOUNT YEAR DETAILS Ordinary Deferred Total T.E. Dawson & Associates - account- ancy fees $2,534 2,534 1974 toDeputy Commr. of. 211,301 211,301 Y/E Taxation - income 30.6.72 tax assessed on Y/E Penrith, Emu 30.6.73 Plains Transport Co. Pty. Ltd. (In Liq.) payment of which was guaranteed by the bankrupt D.W. Sutherland 2,037 2,037 1974 & Associates - to accountancy fees 1975 Deputy Commr. of 348,507 119,246 467,753 Y/E Taxation - income 30.6.69 tax 1973, Leitz Leeholme 464,813 464,813 Stud P/L ~ rent in respect cf lease $1,029,192 $119,246 $1,148,438 Mercantile Credits Ltd., the petitioning creditor, has lodged a claim in the estate for $3,352,592.00. The claim has been admitted in the sum of $615,263.00 being the amount of the unsecured debt at the date of the bankruptcy. The balance of the debt has not been dealt with as the company's security is still subject to realisation. A further four proofs of debt are the subject of further investigation as follows: NAME OF CREDITOR AMOUNT Intermarine Australia $ 173,830.00 Ltd. Condor Street Trading 200,950.00 Pty. Ltd. Westpac Banking 15,969.00 Corp. Ltd. Citicorp Australia 3,401,915.00 Ltd. $3,792,664.00 The balance of funds in the estate account are sufficient to pay the petitioning creditor's costs, the fees and costs of administration. No dividend will be paid in this estate. The bankrupt 1s a divorced man aged 49 years with no dependants. He is currently employed as a caretaker by Kent Farm Pty. Lamited, a family company, on a net weekly income of approximately $80.00. In a questionnaire lodged with the Official Trustee on 1 April, 1983, the bankrupt disclosed that the only asset he possessed was cash in hand of $154.00. Copies of income tax returns preduced by the bankrupt disclosed his gross income for the previous five years as follows: FINANCIAL YEAR GROSS INCOME ENDING 30 JUNE 1978 ($987.00) Loss 1979 $7,510.00 1980 $3,320.00 1981 $4,400.00 1982 $5,625.00 In 1967, the bankrupt purchased land at Emu Plains for an amount of $125,000.00. The property was financed by means of an advance under a mortgage to Mercantile Credits Limited. A portion of this land was sold for $125,000.00 which discharged part of the mortgage debt. From 1968 to 1973, the bankrupt began purchasing various holdings of land in the Emu Plains district for the purpose of resale as industrial sites. Finance was obtained by means of advances under mortgages to Industrial Acceptance Corporation Limited (now known as Citicorp Australia Limited) and Mercantile Credits Limited. These loans were made either to the bankrupt or to various companies controlled by ham. The bankrupt's financial difficulties began in 1973 with the drop in land sales. In April, 1975, the bankrupt entered unto an arrangement with Industrial Acceptance Corporation Limited and Mercantile Credits Limited to have his affairs managed. On 1 July, 1973, the bankrupt entered into a six year lease agreement with Leitz Leeholme Stud Pty. Limited for the lease of the property known as Leeholme Stud, Luddenham Road, St. Marys. Although he contracted the lease in his own name, the property was operated and managed by Scarlet Stud Pty. Limited. The lease provided for an annual rental of $59,250.00 for the period ending 30 June, 1976, and a further amount of $150,000.00 per annum for the period 1 July, 1976 to 30 June, 1979. The bankrupt repudiated the lease agreement on 8 March, 1976. The lessor accepted the repudiation and terminated his occupancy of the premises. Leitz Leeholme Stud Pty. Limited was awarded damages in an amount of $464,812.50 in proceedings in the Supreme Court of New South Wales. Prior to 1976, the bankrupt and Peter Freeburn were engaged in a partnership carrying on a dairy business trading as The Wines Dairy at Wallacia. At that time, the bankrupt held shares in Ballina Waterways Pty. Ltd., Spillway Inn Pty. Ltd., Silverdale Heights Pty. Ltd. and Emu Stud Pty. Ltd. Because of the bankrupt's deteriorating financial position and has inability to meet his share of the commitments of the partnership, a deed was executed on 24 November, 1976 under which the bankrupt transferred his shares in the above companies to Mr. Freeburn in exchange for an assignment to the bankrupt of Mr. Freeburn's interest in the dairy farm. A second registered mortgage was taken by Mr. Freeburn over the dairy farm property in the sum of $90,000.00 to secure moneys previously advanced to the bankrupt. In April, 1977, by order of the Court, the bankrupt transferred his interest in the dairy farm to his former wife, subject to the encumbrances thereon. From 28 December, 1964, the bankrupt was a director and shareholder of Billiard Equipment Pty. Ltd., Dennis Robinson Investments Pty. Ltd., Wyong Hotel Investments Pty. Ltd., Summerland Investments Pty. Ltd., Scarlet Lodge Pty. Ltd., Scarlet Stud Pty. Ltd., W.A. Trotting Transport Co. Pty. Ltd., Trans-Australia Stock Transport Co. Pty. Ltd., ' t W.A. Livestock Depot Pty. Ltd. and Livestock Transport Co. Pty. Ltd. On 28 September, 1964, Billiard Equipment Pty. Ltd. was incorporated. The bankrupt and his then wife, Thelma May Robinson, were directors and shareholders. The company was formed with the object of carrying on the business of manufacturing and supplying sporting or billiard equipment. Mrs. Robinson resigned as director on 24 December, 1971, and Mr. D.W. Sutherland was appointed in lieu. The bankrupt gave personal guarantees to the Bank of New South Wales on 10. behalf of the company. On 18 February, 1977, the company was ordered to be wound up upon the petition of the Deputy Commissioner of Taxation. The company was finally struck off the register on 18 April, 1980 pursuant to s.308 of the Companies Act, 1961 (N.S.W.). On 16 December, 1969, Dennis Robinson Investments Pty. Ltd. was incorporated. The bankrupt and his former wife were directors and shareholders. The objects of the company were to invest, sell and deal in land. Again, Mrs. Robinson resigned as director on 24 December, 1971 and Mr. D.W. Sutherland was appointed in lieu. The company acquired various parcels of land in Emu Plains which were mortgaged to Citicorp Australia Limited. It would appear that the company gave guarantees for liabilities of the bankrupt to Citicorp Australia Limited and the guarantees were supported by these mortgages (see above). Wyong Hotel Investments Pty. Ltd. was incorporated on 8 September, 1970. The bankrupt and G.R. Robinson were the directors and shareholders. The company was formed with the object of managing and conducting a hotel and motel business. The company purchased the Grand Hotel at Wyong. The purchase was financed by a mortgage to the Bank of New South Wales to secure an advance in the amount cf $126,000.00 and a bill of sale over the hotel stock to the vendors, M.K. & R.M. Gascoigne, in the sum of $150,000.00 ll. executed on 29 July, 1974. On the sale of the hotel, the proceeds were sufficient to discharge the bill of sale and the mortgage. A surplus of $46,000.00 was retained by the Bank to satisfy certain other liabilities. Summerland Investments Pty. Ltd. was incorporated on 25 February, 1971. The bankrupt, Mr. R.J. Pidcock and Mr. P. Freeburn were appointed directors. The bankrupt was a major shareholder in the company. The company was formed with the objects to develop land for subdivision and resale, and to erect residential and commercial buildings. The company purchased properties at MTintenbar, Pimlico and Newrybar which were mortgaged to Custom Credit Corporation Limited to secure advances in the amount of $270,000.00. It would appear that the mortgagee has not yet realised all its securities. Scarlet Lodge Pty. Ltd. was incorporated on 9 September, 1971. 'The bankrupt and Mr. D.W. Sutherland were its directors. The bankrupt said that he was "the beneficial owner" of the company. The company was formed with the objects of breeding and training racehorses. The company's assets included stables and improvements at Warwick Farm which were mortgaged to Industrial Acceptance Corporation Limited. The mortgagee realised its security but incurred a deficiency on sale. On 23 October, 1979, the company was struck off the register as a defunct company 12. pursuant to s.308 of the Companies Act 1961 (N.S.W.). Scarlet Stud Pty. Ltd. was incorporated on 13 September, 1973. The bankrupt, Mr. D.W. Sutherland and Mr. E.K. Hayes were appointed directors. The bankrupt was the major shareholder in the company. The company was formed for the purpose of breeding and training racehorses. On 5 May, 1974, a floating charge was given over the property and assets of the company to Patrick-Intermarine (Australia) Ltd. to secure a liability of $380,000.00 (see above). In November, 1979, the company was struck off the register as a defunct company pursuant to s.308 of the Companies Act, 1961 (N.S.W.). In his report, the Official Trustee also said that in respect of the dairy farm at Wallacia, the bankrupt kept a cash book, ledger and journal. These recerds were preduced and in the opinion of the Official Trustee, are sufficient for the type of business carried on by the bankrupt. To the Official Trustee, the bankrupt attributed the cause of his bankruptcy to: "Recession - Land not saleable at value of mortgages". Although shortly expressed, no challenge has been made to the accuracy of this statement. 13. In the opinion of the Official Trustee, the conduct of the bankrupt during his bankruptcy was satisfactory other than that he failed to return questionnaire forms forwarded to him at Kent Farm, Castlereagh Road, Castlereagh by the Official Receiver on behalf of the Official Trustee in Bankruptcy, trustee of the bankrupt estate, on 1 July, 1979, 4 July, 1980, 1 July, 1981 and 1 July, 1982. In response to these particular allegations, the bankrupt says (and he was not cross-examined on the point) that he gave all but the 1980 questionnaire to his accountant, Mr. T.E. Dawson, and he believes that Mr. Dawson forwarded them to the official Receiver with a copy of each year's income tax return. The bankrupt claims that the first time he became aware that the Official Receiver had not received the questionnaires was when he read the Official Trustee's report. So far as the 1980 questionnaire is concerned, he says that he personally forwarded that document to the Official Receiver with a letter dated 14 April, 1980. He believes that the Official Trustee has both that letter and the 1980 questionnaire in his possession. In the letter dated 14 April, 1980, the bankrupt said: "I have been maintaining and upkeeping the property to an acceptable standard whilst awaiting a sale. In return I am receiving board and lodging that is valued at $30.00 per week as shown in the attached questionnaire. It has been further agreed that I shall receive double an agent's commission on completion of a sale for services rendered. As =I am not a benefaciary under my father's will (sic)." 14. The application was adjourned on a number of occasions so that the Official Trustee could explore the possibility that other assets might be available for the purposes of the bankruptcy. In particular, evidence was given that the bankrupt had fa1led to disclose his ownership ef a narrow strip of land running from Castlereagh Road to Peach Tree Creek, Penrith. However, I am satisfied, from evidence given by a Realisation Cfficer employed in the Official Receiver's office, that the land is of no more than nominal value. I am also satisfied that the bankrupt has no entitlement to any interest under his mother's will. I am further satisfied that the bankrupt has no beneficial interest in a lease from the State Rail Authority of New South Wales, held in has name, of certain land at Emu Plains (lease agreement T 81/459). The bankrupt acknowledges that he holds this leasehold interest upon trust for Prairie Vale Pty. Ltd., a company controlled by Mr. G.A. Wray. Apparently, a dispute has arisen between Mr. Wray and Mrs. J.E. Bingham in which Mrs. Bingham claims reimbursement for moneys paid by her on behalf of Prairie Vale Pty. Ltd. in connection with the Emu Plains land. The bankrupt states that, upon payment by Prairie Vale Pty. Ltd. of the amounts in question, he will transfer the leasehold ect to the th interest to that company, thus giving ef acknowledged trust. This property, therefore, stands outside the bankruptcy (Bankruptcy Act, 1966, 15. para.116(2)(a)). The bankrupt gave evidence of an arrangement between members of his family arising out of the proposed sale of the family property known as Kent Farm, Castlereagh Road, Castlereagh (see the letter dated 14 April, 1980 quoted above). If a sale eventuates, it is proposed, apparently, that the bankrupt will receive, presumably for his efforts in that behalf, an amount being twice the scale commission payable to a real estate agent in such a transaction. Although the bankrupt, through his counsel, offered to submit to a condition that the bankrupt consent to the entry of judgment in favour of the Official Trustee in this amount, the provisions of sub-section 150(7) preclude this course: any such amount should be characterised as in the nature of income and sub-section 150(7) provides that the Court shall not, under sub-section 150(5), suspend the operation of an order of discharge subject to conditions that require, or have the effect of requiring, the bankrupt to make payments from his income at any time after the expiration of the pericd of five years commencing on the date of his bankruptcy. That period has already passed. In the circumstances, the Official Trustee neither opposes nor supports the application for discharge. He reports no matters pursuant to sub-section 150(6). Despite 16. the massive deficiency, no creditor appeared on the hearing to oppose the application, although the petitioning creditor did appear at an early stage of these proceedings. There is no suggestion that any of the matters specified in sub-section 150(6) are established. No attempt has been made to make out a case that the conduct of the bankrupt either before or after the bankruptcy, was unsatisfactory. On an application for discharge, the function of the Court is "not merely to relieve unfortunate debtors". It is an equally important part of its duty "to protect and uphold commercial morality" and "to protect the trading community and the public generally against persons who have shown themselves in the past to be unfit to trade or to be indifferent to or ignorant of those principles of commercial morality by which all honest traders should be guided" (see Re Todd No. 2 10 S.R. (N.S.W.) 490 at p.504). In the present case, by virtue of the structure of the legislation as it now stands, the Court 1s constrained to refuse the discharge or to grant 1t unconditionally. This follows from the absence of any offending conduct of the type prescribed by sub-section 150(6) and from the terms of sub-section 150(10). Under the latter provision, the Court has no power to suspend the operation of an order of 17. discharge beyond the period of three years commencing on the date of the bankruptcy. In the present case, that period has already passed. For the reasons I have already given, no question of any payment from income can arise by virtue of the operation of sub-section 150(7). Can it be said, then, that the conduct of the bankrupt is such as to Warrant a refusal of the application? In my opinion, although the case is, in many respects, a marginal one, his conduct 1s not, of itself, sufficient to merit such a penalty (cf. Re Kolomy (1981) 56 F.L.R. 157; Re Harding (1981) 57 F.L.R. 320). Although the trading record of the bankrupt, in its personal and corporate aspects, was quite unimpressive, involving as it does, a succession of business failures, the fact remains that none of these failures, on the evidence before me, can be attributed "to any dishonesty, neglect, misfeasance or even incompetence on the part of the bankrupt. Whilst one is left with an uncomfortable feeling as to the bankrupt's capacity in this regard, in the absence of any specific attack on him on this score, he must be given the benefit of the doubts I have. In coming to this conclusion, I have given considerable weight to the circumstances that the Official Trustee had ample opportunity to investigate these matters and that he was represented by counsel at the hearing of the application. 18. The size of the deficiency and the nominal contribution made by the bankrupt to his estate are of greater concern. Prima facie, they are sufficient to disentitle the applicant to the relief he seeks. But there are mitigating factors to be taken into account. In the first place, the deficiency, massive though it is, arises from the collapse of the real estate market in the 1973 - 1975 period and thus, it may be sa&id, arises to some extent from circumstances beyond the control of the bankrupt. Secondly, the unfortunate creditors who suffered most of the deficiency are experienced financiers who must be assumed to have lent moneys to the bankrupt at commercial (but quite proper) rates of interest in the knowledge that any collapse of the speculative real estate market could seriously jeopardise their prospects of recovery of principal, let alone interest. Thirdly, and most important, it could not be suggested that the earning potential of the bankrupt is sufficrent to make any impact, let alone a significant impact, upon the shortfall which exists: in this sense, continuation of the applicant's status as a bankrupt would appear to be futile so far as existing creditors are concerned. I have found this a most troubling aspect of the case. At first glance, it would appear that the bankrupt deliberately elected to embark upon a period of subsistence living and thus chose not to realise his true earning 19. potential. On further examination, however, such first impressions may do less than justice to the bankrupt. He lacks vocational qualifications and, in the main, his experience has been of an entrepreneurial kind. And, it is submitted, economic conditions which have prevailed since his bankruptcy have not been conducive to employment, on favourable terms, of a person in the position of the bankrupt. I have formed the view that I should give the bankrupt the benefit of my doubts in this context also. Is then the size of the deficiency alone a reason for refusing a discharge? In my opinion, given the origin of the deficit, it is not of itself a sufficient reason to visit upon the bankrupt a continuation of his status as a bankrupt. In this connection, it may be observed that, so far as one can predict, the refusal of a discharge would probably not result in any significant increase in contributions to the bankrupt's estate. The evidence in the application suggests that the bankrupt has little, 1f any, earning capacity and there is no reason to expect any improvement in this connection. In this sense, the refusal of the application would achieve very little. On the other hand, the applicant has suffered the status of a bankrupt for five and a half years. Is this a sufficient period in the circumstances? In my opinion, although the case 1s marginal and, in many respects, 20. unsatisfactory, it is sufficient: 1t is almost twice the period envisaged by the statute as the ordinary term of bankruptcy. Given the size of the deficiency and the poor "track record" of the applicant, with some hesitation, I am persuaded that he has now served an adequate term of bankruptcy in all the circumstances. I propose to make an order of discharge but, because of the nature of the case, the bankrupt must pay the costs of the Official Trustee. I propose to make the following orders: 1. I order that the public examination of the bankrupt shall be deemed to have been concluded on 3 July, 1978. 2. I order the discharge of the bankrupt. 3. I order the bankrupt to pay the costs of the Official Receiver. T certify that this and the I preceding pages are a true copy of the Reasons for Judgment herein of his Honeur Mr. Justice @caumemr ches, Associate 19 SP