CATCHWORDS Bankruptcy - Application for discharge from bankruptcy - Opposition by Official Receiver - Consideration of conduct disentitling discharge - Unsatisfactory trading record - Application allegedly premature - Exercise of court's discretion. Bankruptcy Act 1966 - section 150. Re: Sandor Bentley No. W 928 of 1980 Beaumont, J. 8 August, 1983. Sydney. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION NEW SOUTH WALES AND THE AUSTRALIAN ) ) ) ) BANKRUPTCY DISTRICT THE STATE OF ) ) ) ) ) CAPITAL TERRITORY No. w928 of 1980. RE: SANDOR BENTLEY APPLICATION FOR DISCHARGE ORDER JUDGE MAKING ORDER: BEAUMONT, J. DATE ORDER MADE: 8 August, 1983. WHERE MADE: Sydney. THE COURT ORDERS: 1. I order that the application for discharge be refused. IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) BANKRUPTCY DISTRICT THE STATE OF ) NEW SOUTH WALES AND THE AUSTRALIAN ) CAPITAL TERRITORY ) No.W928 of 1980 RE SANDOR BENTLEY APPLICATION FOR DISCHARGE CORAM: BEAUMONT, J. DATED: 8 AUGUST, 1983. REASONS FOR JUDGMENT This is an application for discharge made pursuant to s.150 of the Bankruptcy Act 1966 ("the Act"). The applicant was made bankrupt on 23 September, 1980 upon the petition of W.J. Friend Pty. Ltd., a creditor for $34,434.00. 'On 12 November, 1980 the bankrupt made application for an order that the bankruptcy be annulled. He was given leave to withdraw his application on 2 February, 1981. The bankrupt disclosed the following assets in his statement of affairs: Ford sedan motor vehicle $3,000.00 Less amount owing under hire purchase to Australian Guarantee Corp. Ltd. 3,300.00 Deficiency $ 300.00 2. House property at Northbridge registered in the bankrupt's name only and purchased on 13 March, 1974 $270,000.00 Less amount owing under first mortgage to Newcastle Permanent Building Society. Ltd. $40,000.00 Less amount owing under second mortgage to Lensworth Finance Ltd. 20,000.00 60,000.00 . $210,000.00 Cash in hand e 5.00 $210,005.00 Finance Corporation of Australia Ltd. claim to hold a third mortgage over the house property in respect of an advance of $130,000.00 made to Ruru Pty. Ltd., a company in which the bankrupt was a shareholder and director. In addition, the bankrupt's wife has claimed an interest in the property. The bankrupt claimed that a company known as Neman Pastoral Co.(No. 2) Ltd. (In Liquidation), of which he was a shareholder and director, was indebted to him in the amount of $527,432.00 made up as follows: 18 September, 1978 to 15 December, 1978 - salary and holiday pay $18,693.06 Loan account 508,739.00 $527,432.00 har i 3. A proof of debt for the above amount was lodged on behalf of the bankrupt's estate but on 18 May, 1983, the liquidator rejected the whole of the bankrupt's claim for salary and holiday pay and also rejected $198,030.10 of the moneys claimed to be advanced by the bankrupt to the company. The balance of the claim is still beang investigated. An amount of $94.81 was brought to the credit of the estate account as follows: Deposit on petition $20.00 Balance of bank account 74.81 $94.81 The bankrupt disclosed six unsecured creditors in his statement of affairs for amounts totalling $40,328.00 as follows: 2 creditors for personal guarantees given in 'respect of debts in- curred by Neman Pastoral Co.(No. 2) Pty. Ltd. $36,015.00 3 creditors for moneys advanced by means of two bankcards and an American Express Card 4,063.00 1 creditor for services rendered 160.00 $40,238.00 In addition, the bankrupt disclosed the hire 4. purchase and secured creditors referred to above. He also disclosed Finance Corporation of Australia Ltd. as a contingent creditor for an unknown amount. The proofs of debt lodged by unsecured creditors were admitted to rank for dividend in the sum of $49,989.00. On 14 April, 1965 a sequestration order was made against the applicant upon the petition of John Fairfax & Sons Ltd., a creditor. In his statement of affairs filed in respect of that bankruptcy, the bankrupt disclosed assets valued at $4,528.00 and unsecured liabilities totalling $10,166.00. Proved creditors in the estate amcunted to $14,788.51 and realisations totalled $1,065.35. A dividend of 4.122 cents in the dollar was paid to proved creditors. On 1 August, 1969, the bankrupt was granted an order of discharge conditional upon the payment of $600.00 which was to be paid in three equal yearly instalments. The bankrupt complied with the condition. The bankrupt is a married man aged fifty-nine years and is unemployed. He suffered a heart attack in Pebruary this year but has, apparently, recovered. He dces not receive social security payments and is supported by his wife who is employed as a manageress of a fabric company. No details of his wife's present income are known. His wife pays rent amounting to $180.00 per week for the lease of a house at Killara and owns a 1978 Toyota car valued at $2,000.00. On 2 March, 1972 the bankrupt and Brian Samuel Climo (also now a bankrupt) formed Ruru Pty. Ltd. They were the sole shareholders and directors. The company had a paid up capital of $2.00. The objects of the company were to purchase and redevelop land in the outer western suburbs of Sydney for sale on a package deal of house and land. The company obtained finance for its activities from Cambridge Credit Corporation Ltd. and later from Finance Corporation of Australia Ltd. The bankrupt and Climo were called upon from time to time to sign personal guarantees in respect of the finance obtained, although neither had sufficient assets to support the guarantees. The bankrupt says that the company was successful until 1974 but experienced financial difficulties as it was unable to obtain further finance from Cambridge Credit Corporation Ltd. as that company was itself in financial difficulties. Ruru Pty. Ltd. was ordered to be wound up on 23 August, 1977. The company's statement of affairs disclosed assets totalling $200,000.00 and liabilities totalling $274,554.00. In September, 1972 the bankrupt and his wife, Helen Bentley, formed Neman Pastoral Co. Pty. Ltd. They were the sole shareholders and directors. The paid up capital was $2.00. A company known as Neman Pastoral Co. (No. 2) Pty. Ltd. was to purchase and develop land. On 14 September, 6. 1979, Neman Pastoral Co. (No. 2) Pty. Ltd. entered into a scheme of arrangement with its creditors. John Edward Walker and Hugh Charles Thomas were appointed to manage the scheme. The company's statement of affairs disclosed assets totalling $814,000.00 and liabilities totalling $1,104, 787.00. The liabilities did not anclude the debt which the bankrupt claimed the company owed him (see above). The company was ordered to be wound up on 18 March, 1982. The bankrupt has been unemployed since the company ceased trading. Although the Official Trustee does not report any matters under sub-section 150(6), he draws two matters to the attention of the Court. In the first place, the bankrupt is cn bail pending trial for offences alleged to arise from his activities in connection with the affairs of Ruru Pty. Ltd. (in Liquidation). The charges are: common law conspiracy - one charge; s.173 Crimes Act. 1900 (N.S.W.) (fraudulently appropriating property) - five charges; s.175 Crimes Act, 1900 (N.S.W.) (false entry) - five charges. The charges were laid in 1979 and involve a total sum of $1,398.50. The bankrupt says that the charges are "fabrications and mischievous". He was committed for trial on these charges by Mr. Waller, S.M. on 4 June, 1980. At the same time, Brian Samuel Climo and Gwendoline L. Henniker were also 7. committed for trial on similar charges. When the matter first came before me, I was informed that no date had been set for the trial, apparently because one of the defendants (not the bankrupt) had made a no-bill application which was still under consideration. Since more than three years had elapsed since the committal of the defendants, I asked that further enquiries be made as I had difficulty in understanding why such a delay had occurred. The Official Receiver later tendered a letter from the Corporate Affairs Commission which, so far as material, says: "I confirm that 1f a no-bill application by one of the bankrupt's co-defendants can be disposed of by early December 1983, it is expected that it will then be sought to fix a date at the beginning of term in 1984 for the proposed trial to begin." The bankrupt has decided not to make a no-bill application himself. He has, apparently, not made any ry representations to have the hearing of the charges expedited or even sought to have a date fixed for hearing. I was informed that, whatever the fate of the pending no-bill application, the proceedings against the bankrupt would be pursued. The second matter brought to my attention by the Official Receiver concerns the role of the bankrupt in the affairs of Neman Pastoral Co. (No.2) Pty. Ltd. In this connection, there was tendered an extract frem a report of 8. the Consumer Affairs Council in 1979 as follows: "Neman Pastoral Co. (No.2). Pty. Limited -- This company was incorporated in New South Wales and has as its principal director Mr. Sandor Bentley. The registered office of the company is at 274 Alfred Street, North Sydney. The only other director of the company 1s Mrs. Bentley. The company, trading as Homeland Estates, was involved in the selling of house and land package deals in about seven estates in the Marayong,Doonside and Prospect areas in Sydney's western suburbs. The company employed sales tactics which prejudiced the interests of purchasers who were anxious to occupy their new homes. Purchasers were discouraged from obtaining independent legal advice before signing a contract for sale of land and the company was selling land to which it had no clear title. The land was not subdivided and the company's form of contract contained special conditions providing for a twelve month period in which the subdivision plans would be approved by the Registrar General and another six months period in which the building of a home would be completed. The company could not meet the promised completion dates. The company relied upon deposits from purchasers to finance its subdivision and building programme. Many purchasers were introduced by the company to various finance companies who assisted purchasers by granting personal loans to cover the deposit, usually set at $4,000. The proceeds of the personal loans were paid to the company as deposit on the contract until settlement was effected instead of being deposited in a trust account held by an independent stakeholder. Because of this the Department sought and obtained formal written undertakings from the company that deposits would be placed with an independent stakeholder and that 9. all customers would have the opportunity to seek independent legal advice before being required to sign any documents. Towards the end of January, 1979, the company provided another formal written undertaking regarding its sales methods including an undertaking that advertising of sales would stop and that there would no longer be salesmen on any of the company's sites. Some 200 purchasers to this time had entered into contracts with the company. In February, 1979, the activities of the company -were referred to in Parliament by the Minister for Consumer Affairs. On 19th March, 1979, the Equity Division of the Supreme Court heard a petition for the winding up of the company. The matter was stood over for consideration as to whether or not a Scheme of Arrangement could be put before the Court and Walker, Meares and Co., Chartered Accountants, undertook to investigate the proposal. The finalization of such Scheme was still under consideration at the end of the period covered by this Report." In response to this material, the bankrupt says: "a) Road works (pavement, carriageway, drainage systems, kerbs and gutterings) were completed in the value of approximately $1,200,000.00 b) Twenty four (24) houses were completed. Approx. value of $180,000.00 c) Fourteen (14) houses were partly constructed approx. value of $112,000.00 da) Deposits were refunded in the vicinity of $700,000.00." The bankrupt also tendered an extract from Hansard, 10. being the answér by the then for Consumer Affairs to a question without notice on 27 February, 1979 which, so far as material, reads: "The name of the company discussed in the past few days in the news media is Neman Pastoral Company (No. 2) Pty. Limited, a New South Wales registered firm whose principal director is Mr. Sandor Bentley. The only other registered director of that company appears to be Mrs. Bentley. The company, trading as Homeland Estates, has been involved in selling land, and house and land package deals in about' seven estates in the Marayong, Doonside and Prospect areas in Sydney's western suburbs. Mr. Bentley was previously a partner with a Mr. Climo in a éegroup of companies, including Ruru Pty. Limited, which were named in the 1976-77 report of the Consumer Affairs Council after they had collapsed owing about one hundred customers their deposits on unregistered land. These companies had ceased trading by the time of the report. Mr. Bentley is reported to have had a relatively minor role in them. -.. Mr. Bentley returned to the notice of the Department of Consumer Affairs in February last year when a complaint was received concerning Neman Pastoral. It is asserted that the Government should somehow prevent a person named in the annual report for anti-consumer conduct from continuing in business. Even the dullards opposite would realize that there are something like 110,000 registered proprietary companies in this State and that it would be impossible to keep track of all their directors. In any case, being named in the annual report is not necessarily proof of criminal behaviour. ... The gist of the original complaint against Neman Pastoral was that it had failed to meet its obligation to complete a house in the period stipulated. Some more complaints of a similar nature were received by my department over the ensuing few months. The department investigated these complaints and found no evidence that ll. fraud or any other illegality was being committed. The company was building homes and subdividing land. But the department did find that Neman Pastoral was undercapitalized and that it had severe liquidity problems to the extent that it absolutely relied on customers' deposits to finance its current work programme. In order to chase up this badly needed finance, 1t was employing sales tactics that prejudiced the interests of customers who were too anxious to get into their new home to await independent legal advice beforehand. It was selling land that had no clear title. It was selling land that was not registered with the local council. Until registration, of course, buyers have no equity in the land and construction cannot be started. The company's form of contract contained special conditions providing for a 12-month period in which it would get its subdivision plans approved by the Registrar General and another 6-month pericd in which building would be completed. In other words, its customers would have to wait eighteen months before title was clarified or deposit refunded. Competent independent legal advice would have prevented customers from signing contracts with such condition. Many customers were discouraged from obtaining independent legal advice. The company could not meet the completion dates it gave to its customers. Few of them had the deposit--usually about $4,000--and were introduced by the company to various finance companies which gave them personal loans to cover the deposits. These loans were paid to the company instead of being deposited in a trust account or with an undependent stakeholder. The reason for these overly-aggressive practices was that Neman Pastoral needed all the cash it could lay hands on to carry on its business." Finally, on this aspect of the matter, the Official Receiver relies on a statement in the letter from the 12. Corporate Affairs Commission dated 20 July, 1983 (see above) where the solicitor for the Commission says that he has received a brief from the Commission's Investigation Division in relation to Neman Pastoral Co. (No. 2) Pty. Ltd. However, the solicitor says that he has not yet briefed counsel to advise whether any proceedings should be taken against Mr. Bentley. In support of his application for an early discharge, the bankrupt says that, since his bankruptcy, he has been unable to obtain gainful employment. He says that, as a builder, he is unable to be licensed while bankrupt. He explained this in his oral evidence as follows: "THE OFFICIAL RECEIVER: Mr. Bentley, assume that you were granted a discharge from, your bankruptcy, what type of activity . would you be taking up, if any?-~-I will take out first a builders licence and go into building as contractor, or sub-contractor, for the first instance. What capital would you expect to be looking at to start you off?---As a sub-contractor I do not need any capital. So you get an advance?~--No advance because it is paid out like weekly wages ~ the sub-contractor's charge. You said yourself you are 60 years of age or thereabouts and you have just had open heart surgery. You would have to employ people, would you not?---Of course. That 2s what I meant. I will sub-contract with a licence from builders and hire a couple of men. All depends on the size of the job. But you would have to get an advance against costs tc meet their first week's 13. wages, would you not?---Definitely. I beg your pardon?--~Yes. So in other words, you would be starting off, for all intents and purposes, in the debit?---When you taken it very seriously, word by word, yes. HIS HONOUR: You just have not got any working capital, have you?---Of course. Mr. Bluett would have it if I would have it." "the Official Receiver opposes the application on a number of grounds. He says that the application 1s premature, relying on the fact that the statutory three year period has not yet passed. Next, he points to the unsatisfactory trading record of the bankrupt. Then he says that the conduct of the bankrupt in connection with the affairs of Ruru Pty. Ltd. and of Neman Pastoral Company (No.2) Pty. Ltd. is dasentitling conduct for present purposes. So far as concerns the latter ground of objection, the general principles in this area are well established. In Re Todd (No. 2) (1910) 10 S.R. (N.S.W.) 490, Street, J. said (at p.504): "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 14. by which all honest traders should be guided." In my opinion, there 1s considerable force in the submissions of the Official Receiver. Prima facie, the application 1s premature. Prima facie, there are aspects of the bankrupt's past business conduct which are cause for considerable concern. In my opinion, the bankrupt bears a heavy onus in a case such as this to demonstrate why the Court's discretion should be exercised in his favour. Given the serious setback to his health and the necessarily inchoate nature of his business plans, it 1s difficult to perceive any substantial ground for urgency so far as his release from bankruptcy is concerned. On balance, in my opinion, the bankrupt has failed to discharge the heavy onus imposed upon him by the circumstances relied upon by the Official Receiver. For these reasons, the application for discharge should be refused. I certify that this and the t3 preceding pages are a true copy of the Reasons for Judgment herein of his Honour | Mr. Justice @.wmrw ut uns Associate !