Det Regist y CATCHWORDS BANKRUPTCY - Application for order directing that bankrupt shall not be discharged by virtue of s$.149 - Principles which guide Court when dealing with such an application - Relevance of need for further investigation by trustee into bankrupt's conduct and assets - Applicability of business records provisions of Cwith Evidence Act to correspondence file of bank. Bankruptcy Act 1966, s.149 Evidence Act 1905, ss.7A, 7B, 7C, 7H Vanguard Service Print v. Mercovich (unreported, Sweeney, Sheppard & Beaumont JJ., 20/9/85) Re Reilly (1979) 23 A.L.R. 357 Re Kersten (unveported, Sheppard J., 11/3/86) Re__Palenk Palenkas; Ex parte Raymor (Brisbane) Pty. Ltd. (1982) 66 F.L.R. 115 Re Florance (unreported, McGregor J., 15/2/85) Trade Practices Commission v. TNT Management Pty. Ltd. (1984) 56 A.L.R. 647 Matson v. The Official Trustee (unreported, Bowen C.J., Beaumont & Spender JJ., 19/5/86) RE: ZDENEK WEISS; EX PARTE: OFFICIAL TRUSTEE IN BANKRUPTCY W.293 of 1978 Burchett J. Sydney 27 June 1986 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) ) BANKRUPTCY DISTRICT OF THE STATE OF ) ) ) NEW SOUTH WALES AND THE No. W.293 of 1978 AUSTRALIAN CAPITAL TERRITORY RE: ZDENEK WEISS Respondent /Bankrupt EX_PARTE: OFFICIAL TRUSTEE IN BANKRUPTCY Applicant MINUTE OF ORDER OF THE COURT Judge Making Order: Burchett J. Where Order Made: Sydney Date of Order: 27 June 1986 THE COURT ORDERS AND DIRECTS THAT the bankrupt, Zdenek Weiss, shall not be discharged from bankruptcy by virtue of s.149 of the Bankruptcy Act 1966. NB: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY No. W.293 of 1978 RE: ZDENEK WEISS Respondent /Bankrupt EX PARTE: OFFICIAL TRUSTEE IN BANKRUPTCY Applicant REASONS FOR JUDGMENT BURCHETT J. Zdenek Weiss (Mr. Weiss), a solicitor, became a bankrupt on his own petition on 28 April 1978. By virtue of s.149 of the Bankruptcy Act 1966, in the events which have happened, it is common ground that, unless I make an order pursuant' to sub-sec.(12), he will be statutorily discharged from his bankruptcy, at the expiry of a period which expires on 30 June 1986. The Official Trustee in Bankruptcy, as trustee of the estate of Mr. Weiss, has made application for an order under $.149(12) directing that Mr. Weiss shall not be discharged from bankruptcy by virtue of s.149. 2. S.149 makes provision for the statutory discharge of bankrupts, unless sooner discharged by an order of the Court, upon the expiration of three years from the date of the bankruptcy, or in certain cases where objections have been lodged at the expiration of five years. There are transitional provisions, which are relevant to the position in the present case, and there are special provisions, as for example in cases of second bankruptcies. There is provision for an extension of the period of five years, and an extension to 30 June 1986 was ordered by consent, in relation to Mr. We1ss. By sub-sections 12 and 13 of s.149 1t is provided as follows: "(12) The Court may, at any time before the discharge of a bankrupt, on_ the application of the Registrar, the Inspector-General, the trustee or a creditor, direct that the bankrupt shall not be discharged from bankruptcy by virtue of this section. (13) In deciding whether to make an order under sub-section (12), the Court shall take into account such matters (if any) as are prescribed for the purposes of this sub-section." Matters have been prescribed, as contemplated in sub-s.13, by Rule 51A which reads as follows: "The following matters are prescribed for the purposes of sub-sections 149(10) and (13) of the Act: (a) whether the bankrupt is able, or 185 likely within 5 years from the date of the bankruptcy to be able, to make a significant contribution to his estate; (b) (c) (d) (e) (f) (g) The discretion under s.149(12) 3. whether the discharge of the bankrupt would prejudice the administration of his estate; whether the bankrupt has co-operated in the administration of his estate; the conduct of the bankrupt, in respect of the period both before and after the date of the bankruptcy; any matters arising out of the conduct of the bankrupt as a bankrupt, being matters that are the subject of an investigation that is not completed; the age and state of health of the bankrupt; any evidence adduced by the bankrupt, the Inspector-General, the trustee, the Official Receiver or a creditor relating to- (1) the circumstances in which the debts of the bankrupt were incurred, including the bankrupt's experl1ence in, and understanding of, financial Matters and of the obligations imposed on the bankrupt as a result of incurring the debts; and (11) the conduct of the bankrupt's creditors, including the nature and extent of any inquiries made by the creditors into the bankrupt's ability to pay his debts and whether the bankrupt was induced to incur debts by conduct on the part of the creditors that departed from the standards of normal and reasonable commercial practice." is a broad one, which should not be fettered by any gloss on the words of the statute. It must of course be exercised judicially, and not arbitrarily or 4. capriciously. In exercising the discretion, the Court wiJl have regard to the statutory scheme pursuant to which, in the normal course, failing a successful earlier application for a discharge, a bankrupt will be discharged at the expiry of one or other of the statutory periods. But the statute also contemplates that there will be cases which will not follow that course. I note the comment of the Full Court (Sweeney, Sheppard and Beaumont JJ.) in Vanguard Service Print v. Mercovich (unreported, 20 September 1985): "We bear in mind that bankruptcy proceedings usually involve more than the determination of the rights and obligations of the immediate parties to an application. The public interest is involved: considerations of commercial morality become important in some cases. But we also have to do justice as between the parties to cases which are before us." In Re Reilly (1979) 23 A.L.R. 357 at 365 Lockhart J. said (in a passage which has received subsequent approval: see Re Kersten (unreported, Sheppard J., 11/3/86)): "In considering whether a bankrupt' should receive a discharge it has been laid down repeatedly that the court must have regard not only to the interests of the bankrupt and his creditors but also to the interests of the public and of commercial morality. In the exercise of its discretion the court must also consider the conduct of the bankrupt relevant to his bankruptcy." Though the latter statement was made with reference to applications for discharge, I think 1t expresses considerations 5. applicable to the exercise of the discretion of the Court under s.149(12). S.149 was originally enacted pursuant to the Report and recommendations of the Clyne Committee, paragraphs 228-235 of which demonstrate that the automatic statutory discharge it gave was intended to provide particularly for those cases where, under the previous law, a discharge would have been readily granted by the Court upon application. The intention was to enable bankrupts in such cases to obtain their discharge "with the minimum of trouble and expense". But it was thought that the new system would need to be made "subject to the necessary safeguards un the interests of creditors and the community." Sub-s.12 was inserted by a subsequent amendment clearly designed to strengthen those safeguards. {Relevant sections of the Clyne Committee Report are to be found set out in the judgment of Woodward J. in Re Maher 61 A.L.R. 592). So far as the normal case 1s concerned, I respectfully agree with the statement of Fitzgerald J. in Re Palenkas; Ex parte Raymor (Brisbane) Pty. Ltd. (1982) 66 F.L.R. 115 at 116: "The policy underlying the present legislation recognizes that 1t is in the interests of the public as well as the person unable to pay his debts, that he should not be unduly denied freedom, equality of status = and opportunity, or the ability and inducement to support himself and his family and contribute to society by his efforts. Accordingly, the Act is in large part relevantly concerned with obtaining:and administering the assets of the person unable to pay his debts for the benefit of his creditors and releasing the debtor from his obligations. However, the legislature has thought it appropriate that there should be a period during which the 6. status and consequences of bankruptcy continue." This passage was also adopted by Toohey J. in Re Cook; Ex parte The Deputy Commissioner of Taxation for the State of Western Australia (unreported, 4 April 1985). Of course one should not lose sight of the implications of the reference to "obtaining and administering the assets of the person unable to pay his debts". Nor should the Court fa1l to give due weight to the necessity in the public interest of ensuring that a proper investigation has not been curtailed by the concealment of the circumstances that would call for it, or of assets, or by the withholding of co-operation by the bankrupt. These are matters which would certainly be relevant upon a discharge application, and are specifically prescribed, as matters which are required to be taken into account, by paragraphs (b) to (e) inclusive of Rule 51A. In Re Florance (unreported, McGregor J., 15 February 1985) an order was made that the bankrupt should not be discharged pursuant to s.149. McGregor J. said: "(T)here 1S evidence of non-co-operation with the trustee since the date of the sequestration order and further evidence that the trustee does need more time for investigations...". The case involved a solicitor who had been struck off the roll of practising solicitors. In excess of $2.5M had been paid to his 7. clients by the Solicitors Fidelity Fund, which had furnished details to the trustee only some two months' before the application. The trustee's case was, 1n part, that he had been unable to complete his investigation of the dealings by the bankrupt which had resulted in the claims made on the Solicitors Fidelity Fund. It seems to me, with respect, that his Honour rightly regarded the need to complete the investigation as significant. An essential part of the reciprocal provisions made by the bankruptcy law for the benefit of each of creditors, debtors, and the community itself, is that there should be an adequate investigation of the conduct and affairs of the bankrupt. Ina case presenting features which call for an exercise of discretion upon the question when and on what terms the bankrupt should be discharged, the investigation should generally be carried to a conclusion before a discharge is granted or permitted to occur. There may be cases where it would be unfair to a bankrupt to delay his discharge by reason of an incomplete investigation, lethargically pursued, to the torpor of which he has. not contributed. But no such unfairness may appear where there has been concealment or lack of co-operation on his own part. In the present case, the Official Trustee contends that a number of circumstances, and particularly two, require the making of the order sought. Of the two principal matters, one relates to the acquisition by Mr. Weiss of a home unit, Unit 80, 8. 157 Victoria Road, Bellevue Hill. It was purchased for $40,000, after the bankruptcy, from a company controlled by Peter Clyne, who also played a leading role in the other principal matter to be discussed. The home unit was transferred 1nto the name of Mr. Weiss's mother, who lives in Czechoslavakia. It was conceded by Mr. Weiss in his s.69 examination, in December 1983, that the $40,000 was provided as follows: "In general terms he (1.e. Clyne) owed me some fees and in about 1981 we have taken stock and by that stage for (sic) what he owed me was about $20,000 and I then owed the balance...". He then referred to his paying certain liabilities of Mr. Clyne, and these further questions and answers ensued: "Q. Of the $40,000 being the consideration, how much of 1t was provided either by your foregoing fees or by your having already discharged some liabilities of Mr. Clyne? A. The total amount. Q. The $40,000? A. Yes. Q. So no part of that consideration was supplied by Mrs. Weiss? A. Oh no." In answer to further guestions, Mr. Weiss acknowledged that his bankruptcy was the reason the home unit had been transferred into his mother's name and not his own, and that "had it been bought in (his) name (he) would have expected that the trustee in (his) bankrupt estate would have moved to have ut vested in him". Mr. Weiss arranged for the telephone to be connected to the home unit in a name other than his own, the name of a person unconnected with that address. He thought the gas and electricity account might have been in the same name. He lived in the home unit himself and claimed to own the contents, including two Chinese bedside tables and a screen he _ had purchased in 1982 while a bankrupt for some $2500 (of which $1500 was borrowed from Mr. Clyne). It is impossible to avoid the conclusion that a deliberate attempt was made to conceal what had occurred, that is to say, the acquisition of the home unit by the use by Mr. Weiss, as a bankrupt, of very substantial debts owing by Mr. Clyne. Mr. Weiss, during the same examination, said that "it did not cross (his) mind that there was some obligation on (his) part to disclose to (his) trustee after acquired assets". Before me, he gave no evidence, and there was accordingly no further explanation of how it came about that he, a solicitor, felt able to enter into the transaction in respect of the home unit, and to attempt its concealment in the manner described. Following the s.69 examination in December 1983, proceedings were taken 1n which Lockhart J. on 30 July 1985 found that the Official Trustee was entitled to the home unit as after~acquired property of the bankrupt. From his Honour's decision an appeal was brought, in which judgment is presently reserved by the Full Court. Of course, the evidence led in that 10. case may well have differed from the limited evidence presented to me; however in any event it is not open to me to defer decision in the application I am considering - after 30 June the time for decision will have passed. In the course of enquiries in Vienna into the estate of Mr. Clyne, who is also bankrupt, his trustee, Mr. O'Brien, came across certain documents at a Viennese bank Known = as "Creditanstalt Bankverein"". That was in October 1985, and the documents were translated 1n November or December. Thereafter, the Official Trustee instituted these proceedings, and also on 9 May 1986 examined Mr. Weiss further under s.69. The examination had, I infer, been delayed to permit the prior conclusion of certain criminal proceedings against Mr. Weiss in which, it should be noted, ultimately no bill was filed. Mr. We1ss admitted under examination that he had an account at the Viennese bank, which he had opened some four or five years ago, and also that he had a safety deposit box at the bank. He had not disclosed these matters to his trustee. He denied ever having used the safe deposit facility, and he asserted that there was only a sum of 200 Austrian schillings in the account, that is roughly the equivalent of 10 to 15 Australian dollars. He said that he did not think there had been any transactions at all in relation to the bank account, and he denied that it was a secret account. He also denied that the safe was "attached to that account for the use of that account". il. The credibility of the various answers limiting the significance of the account and the safe is greatly diminished by a number of considerations. In the first place, it is difficult to imagine a legitimate reason why, in his particular circumstances, Mr. Weiss obtained either of these facilities. He said that he did not know whether or not the account earned interest, and he asserted that he did not know for what reason he had opened the account or for what reason he had obtained the safe deposit box, although he recalled discussing the use of a safe with a Mr. Jankowitsch of the Bank to whom he had been untroduced by Mr. Clyne. In the second place, early in his resumed examination he was asked: "Did you receive any advice from anybody including Mr. Clyne as to whether or not you should attempt to build up a reserve of funds overseas?" to which he replied "I do not recall." He explained that he had been "fairly active in overseas transactions for (sic) all sorts, of all types". Asked "Did you have any discussions with anybody or receive any correspondence in July 1980 about the setting up of secret bank accounts in Vienna?" he replied "I do not recall that." A few questions later he was asked: "Was there arranged for you in July 1980 a safe and a secret bank account at the Creditanstalt Bankverein, Julius Planderplatz (sic - seil. Tandler Platz) Branch in Vienna?" and answered: "Not at that date, no." His subsequent denials cannot easily dissipate the effect of that answer. 12. Furthermore, to this point the trustee has been afforded no opportunity to check the truth and accuracy of what has been said about the account and the safe. Mr. Weiss said that he had lost the bank book. He was requested by the trustee to sign an authority "to have access to any safety deposit boxes held by (him)". Up to the time of his further examination he had failed to sign this authority, and when asked about it, he said that he had sought advice whether he was required by the bankruptcy law to do so, and then forgot about the matter. He raised no reason for being unwilling to sign such an authority which, if his answers about the safety deposit box were true, and unless he has some other unacknowledged safety deposit box, would hardly seem to be a matter calling for the incurring of the expense of advice. Upon his examination, he stated that he would sign the authority "subject to approval of my legal adviser". No evidence was tendered that his legal adviser has yet approved. Mr. Weiss's assertion upon his further examination that he simply did not know why he had opened the account, or obtained the safety deposit box, is extremely hard to accept, but it is clear that he would have had the opportunity to have utilised both, since he has travelled to Vienna several times, in particular about Christmas 1982 and again in late 1984 or early 1985. He said he could not recall the reason for the visit at about Christmas 1982. 13. It ts the Official Trustee's contention that in all the circumstances, Mr. Weiss's discharge from bankruptcy should await further investigation of Mr. Weiss's arrangements with the bank, and of any assets of his held there, by inquiry in Vienna. The Official Trustee expects receipt of the authority. promised subject to the approval of Mr. Weiss's legal adviser, to facilitate greatly those inquiries. In support of the Official Trustee's case, evidence was called from Mr. O'Brien who produced copies of the documents he had obtained from the bank's files, together with translations he had procured. These were tendered in reliance upon the business records provisions of the (Commonwealth) Evidence Act 1905. Counsel for Mr. Weiss objected that the copies of the documents, having been obtained by Mr. O'Brien for purposes including the examination in bankruptcy of Mr. Clyne, were excluded by sub-s.(1) of s.7C. That sub-s. provides: "(1) A statement is not admissible under section 7B in a proceeding if it was made or obtained for the purpose of, or in contemplation of, any judicial or administrative proceeding." This objection cannot be sustained. The provision is directed at excluding proof of documents, forming part of business records, which were made or obtained for the purpose mentioned. The purpose of the person who procures a copy, by which as secondary evidence the documents may be proved, is quite immaterial. 14. It was next objected that certain of the documents, being communications from Mr. Clyne to the bank, were not "made by a qualified person" within sec.7B(1)(c). A "qualified person" is defined in s.7A(1), in relation to a statement made in the course of, or for the purposes of, a business, in terms which include "a servant or agent employed or engaged in the business" or "a person associated with the business in the course of another business" who, in either case, "had, or may reasonably be supposed to have had, personal knowledge of the facts stated". To understand this definition, it is necessary to bear in mind also the wide definition, in the same section, of "business" which includes: "(a) any business, profession, occupation, calling, trade or undertaking whether or not engaged in or carried on for profit and whether engaged in or carried on in Australia or elsewhere, including any business, profession, occupation, calling, trade or undertaking engaged in or carried on by the Crown in right of the Commonwealth or of a State; and (dD) the administration of the government of the Commonwealth, of a State, of a Territory or of another country, whether carried on in Australia or elsewhere". In applying these provisions to the documents tendered I can have regard to s.7H, which enables inferences to be drawn, for the purpose of deciding questions of admissibility, from the form or content of the documents. It seems to me that I should 15. infer from the documents that Mr. Clyne was writing to the bank as a person associated with the business of the bank in the course of another "business" (as defined). The definition of "business" includes "any business... or undertaking", whether or not engaged in or carried on for profit. It is an inclusive, not a true exclusive, definition, and must be regarded as very wide, forming, as it does, part of remedial legislation which should be construed liberally: Trade Practices Commission v. INI Management Pty. Ltd. (1984) 56 A.L.R. 647 at 650. Mr. Clyne wrote under a letterhead which described him as a "Consultant in matters of Law, Finance and Taxation". What he wrote indicates he was carrying on financial activities through the bank, as its customer, on behalf of himself and as a consultant handling moneys for others, including Mr. Weiss. He asserts, and the bank's replies accept him as having, a measure of control of an account called "the Slezak account" on behalf of Mr. Weiss; he directs payments from accounts at the bank to banks and organisations in Australia; he seeks to sell roubles on behalf of a client through the bank; he asks whether he should sell half of "the Krugerrands"; and he directs payment of 124,000 schillings (about 6,000 to 9,000 Australian dollars) to the Slezak account. These activities, both on his own behalf and as an agent, involve the investment of moneys in a distant foreign country, and the supervision and control of the moneys invested. They constitute a business or undertaking. Accordingly, I admitted the documents. 16. It ig unnecessary for the purposes of this judgment to set out the detail of the correspondence between Mr. Clyne and the bank. That correspondence repeatedly asserts the existence of an account, much more substantial than Mr. Weiss's evidence on examination suggests, held at the bank on his behalf. The totality of those records of the bank which have been evidenced seems consistent only with its acceptance of those assertions. Mr. Weiss gave no evidence before me to rebut the inferences raised by the documents. It was submitted his evidence on examination was sufficient for that purpose, but that evidence was not of course led in answer to such a tender, nor does it respond to all of the available inferences. In my view, a case has been established, upon the evidence as it stands, that Mr. Weiss has an interest in the Slezak account which he has not disclosed to the Official Trustee. Even if the evidence which I have admitted as business records is left out of account, it is established, at least, that there are questions which require to be investigated, in relation to the evidence given by Mr. Weiss on 6 May 1986, before he should be permitted to obtain his discharge. There are some other matters which should be mentioned. Mr. Weiss, though the evidence reveals he has earned and spent substantial amounts as a solicitor since his bankruptcy commenced, has failed to pay any of the costs he was ordered to pay in respect of an application for leave to travel and the 17. litigation in respect of the home unit. This weighs against him, though much less so than the other matters already dealt with in this judgment. In his favour, the principal matter urged was the unusual length of his bankruptcy, since 1978. I have given this very considerable weight, but I think an order is nevertheless required. In Matson v. The Official Trustee (Full Court, Bowen C.d., Beaumont and Spender JJ., 19/5/86), which involved a virtually identical period, the Court affirmed an order under s.149(12), saying: "The period which had elapsed was, no doubt, a relevant consideration to be taken into account in the appellant's favour. But it was to be balanced against the serious misconduct found against the appellant." Likewise, in this case the period has to be balanced against the matters I have found to require an order. It should be made clear that in balancing all the factors I have taken into account the circumstances, including distance and the relative recency of Mr. O'Brien's discovery of the records of the Austrian bank relating to Mr. Weiss, which have delayed investigation up to the present time. Further delays may not be regarded in the same light upon a future application for discharge. That would of course depend on the circumstances then evidenced. In the result, I make an order directing that the bankrupt, Mr. Weiss, shall not be discharged from bankruptcy by virtue of section 149 of the Bankruptcy Act 1966. 18. I certify that this and the preceding seventeen (17) pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Burchett. Ch. Ainelout a Associate Dated: 27 June 1986.