LIMITED DISTRIBUTION JUDCMENT No. 464 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF No. P285 of 1986 NEW SOUTH WALES AND wwe eww we SS DS THE AUSTRALIAN CAPITAL TERRITORY RE: PHILLIP MORRISON and ELIZABETH MAY MORRISON Talso known as PHILLIP JAMES and ELIZABETH JAMES) Debtors EX PARTE: SHORELINE CURRENCIES (AUSTRALIA) PTY LIMITED (In Liquidation) Petitioning Creditor CORAM: Burchett J. DATE: 21 August 1987 PLACE: Sydney REASONS FOR JUDGMENT The male debtor, who was the chairman of directors of the petitioning creditor, and the female debtor, his wife, who was also a director of the company, left Australia by air on FODESAL COURT AUSTRALIA OF purpose of a holiday for a period of 30 days, intending that the country in which they would spend the most time abroad would be the United Kingdom. The central issue in the petition is whether, as the petitioning creditor alleges, they then departed and have since remained out of Australia with intent to defeat or delay their creditors. ($.40(1)(c)(1) of the Bankruptcy Act 1966). A little over a month after their departure, the debtors, as directors of the company, held a directors' meeting at an address in London. The exact date of the meeting does not appear in the minutes which bear the signature of the male debtor as chairman, but it seems to have been held about 5th September 1986. At that meeting the debtors, who were the only directors present, resolved "that in their opinion the company was insolvent and unable to pay its debts." They proceeded to resolve further that applications should be made to the Supreme Court of New South Wales for the winding up of the company and that applications should be made forthwith for the appointment of a provisional liquidator pending the hearing of the winding up application. In the absence of any sufficient reason to think that the company may have been the victim of an unexpected catastrophe, it would seem reasonable to conclude that when the debtors left Australia, the lengthening shadow of the coming liquidation must already have appeared over the company. It could hardly be that the debtors had no inkling of the decision they were so soon to take. In fact, as will appear, they had good reason to believe the business could not carry on much longer. It was not a likely time for both of them to leave the company rudderless in order to go on a one month's holiday. Yet that is the reason they gave for their travel, and upon which in part their counsel now relies to answer the petition. According to the books of the company, which of course were kept under their control, the debtors owed it the sum of $614,883.90, payable at call. It was formally admitted + by their counsel that an amount in excess of $1,500.00 was owed by them to the petitioner in relation to their loan accounts with the petitioner. Counsel said that he was not able to admit a precise figure because the debtors said they did not know how much was owed. It is clear on the evidence that at any rate they must have known that they owed in excess of $600,000.00, and they must have anticipated that the appointment of a liquidator or provisional liquidator would lead to an immediate demand for payment. [In fact, a provisional liquidator was appointed on Sth September 1986, pursuant to an order made in the Supreme Court of New South Wales, and demand was made for payment of the moneys mentioned on 18th September. The company was wound up by an order of the Supreme Court on 7th October, and the creditor's petition was taken out on 19th November. On 20th November, I appointed an interim receiver pursuant to the provisions of s.50 of the Act, and upon his application, I ordered that a Letter of Request should issue pursuant to s.29(4) of the Act requesting the High Court of Justice, London, England, to act in aid of the Federal Court of Australia. Pursuant to the Letter of Request, a receiver was appointed in London who obtained Mareva injunctions against the debtors. The response of the debtors to the provisional liquidator's demand , made through a firm of London solicitors, Messrs Charles Russell & Co., was to advise that a solicitor in Sydney, a Mr Jankowski, had "already been instructed to transfer the deeds to the Vaucluse property to you, the intention being that the proceeds of sale of the property should be paid to you in part reduction of the debt," to advise that cars had already been sold and the proceeds paid "in part reduction of the debt", and to advise that Mr Jankowski "is still acting for Mr and Mrs Morrison in Australia." It will be observed that this response, made as I have said through solicitors, did not deny the amount claimed, nor did it offer to pay to the creditor any part of the large sums which the evidence shows the debtors had taken with them when they left Australia or received from Australia shortly afterwards. In considering whether or not they intended when they left to defeat or delay their creditors, it 1s relevant to take into account that in fact the substitution for cash of a promise to provide the proceeds of sale of real estate, even so far as the proceeds might extend, obviously tended to delay the creditor. By a separate hand-written letter dated 30th September 1986, the debtors requested a "break-down of the directors (sic) loan account", but again did not dispute the amount claimed or suggest that it was inflated. Their letter gave no other address than that of Messrs Charles Russell & Co. It would appear from a further letter from that firm dated 20th October 1986 that not even they were able to communicate promptly with the debtors who, they then wrote, were "we believe ... not currently in the United Kingdom." A . further letter from the debtors to the liquidator dated 3rd November, 1986 gave as the address from which 1t was written simply the word "London". For the first time, this letter queried the amount of their obligation under the director's loan account, but it did not assert that there had been any large overstatement of the amount of their obligation. It declined to agree to the sale of any further property of theirs in order to recoup the amount owed, while seeking to excuse this attitude on the basis that they could not verify the figures by inspection of the books. It suggested that some unspecified payments "may not have been credited to the loan account". (Emphasis added.) The letter of 3rd November 1986 concluded with an assurance of cooperation "wherever possible", but stated:- "As we believe that it would be made impossible for us to carry on business of any kind in Australia the reality is that we must concentrate on earning a living elsewhere." The letter does not say whether the alleged reality was apparent prior to their departure from Australia, or had arisen later. If it was apparent at the time of their departure, a consciousness of such a reality would by no means negative the intent alleged in the petition, and might even provide a motive for it. Whether or not the alleged reality only became apparent later, the difficulty of accepting the reason given at the time of the original departure remains. During the period 30th April 1986 to 27th August 1986, each of the debtors received, in addition to normal payments of salary, instalments of $10,000 or $20,000 each aggregating to a total of $180,000.00 in respect of each debtor, together with a sum of $48,400.00 as holiday pay and $8,470.00 as "loading". In the books of the company, the two sums of $180,000.00 were recorded as wages. The petitioning creditor claims that these sums were improperly paid and received. In the absence of explanation from the debtors, the fact that the payments commenced to be made whilst they were in control of the company, and so shortly before their departure and the company's collapse, is relevant as part of the circumstances. Two further sums of $25,000.00 each, paid in or about May, 1986 by cheques drawn on the bank account of the company, are also claimed by the petitioning creditor to be recoverable from the debtors, but I do not think it 1s necessary for the purposes of this judgment to go into the details of those payments and the evidence about them. It was proved that within a couple of days of the departure of the debtors, the male debtor, in the presence of the female debtor, arranged for prompt transmission to them in England of the proceeds of a cheque for $163,000.00 drawn on a company, Tarka International Pty Limited, which was owned and controlled by the male debtor and had nothing to do with the petitioning creditor. Just after their departure, a further $180,000.00 was sent to them by employees of the petitioning creditor, as I infer upon their instructions. The property at Vaucluse to which earlier reference was made stands in the names of Phillip James and Elizabeth James as joint tenants by virtue of a transfer registered on 6th August 1986. On all the evidence, it is clear to demonstration that the name "James" is an alias adopted for their own purposes by the debtors. The property was sold by a contract entered into by the debtors on 30th October 1986 for a price of $440,000.00. This was its market value. I have already noted that the debtors indicated in writing their willingness to have the proceeds of sale of this property applied towards payment of the petitioning creditor's debt. Ina letter sent by the debtors to the solicitors acting for the receiver in the United Kingdom dated 8th December 1986, the amount of the debt is admitted at $610,000.00. That letter asserts: "Our assets in Australia were handed freely to the liquidator (through our solicitor) immediately we put the company into liquidation. We have at all times acknowledged the debt and have been willing to pay same." In fact the evidence does not suggest that any other real estate was "handed freely to the liquidator", though certain relatively small sums and the deeds of certain real estate (at least part of which was not in the debtors' true names) have come to his hands. The debtors' letter also clearly acknowledges that a certain account at the Bank of Ireland, London Branch, the credit balance in which amounted to 81,000 pounds sterling, was claimed by the debtors as theirs. On the evidence, the moneys in that account formed part of a sum of 250,000 pounds sterling deposited on 5th September 1986 in the name "Stanley", being part of funds originally deposited between May and July 1986 by the petitioning creditor with a company in Cyprus, Inter-Exchange Insurance Limited. Prior to the departure of the debtors, a Mr J.C. Jeffrey, a motor dealer, was asked by them if he would "be interested in looking after the business for them while they were away." They told him they needed a holiday and they would be back about 6th September in order to move into their new house at Vaucluse, the house earlier mentioned. Although reference was made to a hope of setting up "a leverage currency operation in London", the reason for the trip given to Mr Jeffrey was their need of a holiday, "to take a break" after a very hard period of work. Mr Jeffrey was, as the debtors knew, without expertise or experience in a business of the kind operated by the petitioning creditor. If the debtors were aware that the company was entering difficult waters, they chose a strange time to leave the bridge, and an even stranger pilot to whom to relinquish the helm. In fact, the evidence shows that action of which they were aware had just been taken by the Corporate Affairs Commission, which was very likely to have a serious impact on the company's business. Also, articles had appeared in newspapers which must have been expected to have an adverse effect upon the company, which depended to a substantial extent on advertising. Its business involved the obtaining of investments from the public. Mr Jeffrey, who was called in the debtors' case, said that before they left Australia he was fully aware that litigation then current with the Corporate Affairs Commission could affect the operation of the company. 10. If, despite his inexperience, the writing on the wall could be read by him, 1t must have been written large for the debtors. The event proved him right. Within three weeks of the debtors' departure, there was what he described as a "run on the company" by investors withdrawing their funds. Significant newspapers also refused to accept the company's advertisements, so that it could neither staunch the draining away of the investments which were its lifeblood nor replace them. Mr Jeffrey spoke to the male debtor by telephone after the debtors had left, when the male debtor referred to » "problems Anne Lampe (a journalist) and the Herald have been causing." But the newspaper articles had commenced prior to the departure of the debtors. As at late August, the male debtor gave to Mr Jeffrey as a reason for not coming back, that "we are waiting to see what happens here in London" - a reference to an alleged attempt to set up business there of which, however, no independent evidence whatever was adduced. In September, Mr Jeffrey received instructions from the debtors to sell the house at Vaucluse, their cars, and their furniture, and that "all the money is to go to the liquidator". This instruction evidences a recognition that the amount owed was substantially more than the value of the house ($440,000.00), since no limit was placed on the amount to be paid to the liquidator, despite the possibility, which ll. must have been obvious to business people, that a sale could chance to be made at above the true market value. Counsel for the debtors submitted that the central issue was whether the petitioning creditor had proved the reguisite intention to defeat or delay creditors. He also put in issue the amount of the indebtedness alleged, which of course bears, as part of the total picture, on the question whether the circumstances enable the inference of intention to be drawn. He put no submission under s.52(2) of the Act, nor in my opinion could any such submission have been sustained if it had been made. In many, probably most, cases under s.40(1)(c), the requisite intent can only be proved by inference. I discussed circumstances which could give rise to an inference of the intent specified in the provision in Re Vassis; Ex parte Leung (1986) 9 F.C.R. 518 at 523-4. It is unnecessary to repeat that discussion. In this case, as in that, the circumstances are compelling. They are not here answered by evidence from the debtors themselves. Their counsel attempted to tender affidavits of the debtors, but notice had been given requiring them to attend for cross-examination, and they were not present. Their whereabouts were not disclosed to the Court. Under the circumstances, I refused to admit the affidavits. While Mr Jeffrey was called in their case, a witness who in the nature of things knew little but what they had told him at 12. about the time of their departure and shortly afterwards, no evidence was presented in their case through any witness possessed of real knowledge of the activities of the business. In particular, the suggestion that there was an attempt to extend the operations of the business, or to commence a new business of a similar kind overseas, was without any corroboration at all. Objective evidence of such an attempt, had it been made, would most probably have been readily procurable. In the face of the circumstances of this case, I am quite satisfied that the debtors did not depart from Australia for the purpose of a holiday. It 1s indeed almost inconceivable that they would have done so. The other reason alleged, to set up business in London, would actually provide a motive to attempt to evade creditors, at least for a time, in order to retain the use of as much capital as possible for the purposes of the new business. I hold that the intent specified in s.40(1)(c)(i) is established both in respect of the debtors' departure and in respect of their remaining out of Australia. As I have said, counsel for the debtors also put in issue the amount of their indebtedness. I am quite satisfied that the debtors owe the petitioning creditor in respect of their loan account the sum of $610,106.24, the amount sworn to by Mr Harkness. Direct evidence of the loan arrangement which 13. gave rise to the largest part of this amount, the evidence of accountants concerned with the preparation of the books of the company, and the admissions of the debtors themselves ali confirm the evidence of Mr Harkness. I am also satisfied on the evidence, which stands uncontradicted and unexplained, that the debtors owe the petitioning creditor very substantial additional sums, including an amount of $227,000.00 in respect of payments which were described as wages, holiday pay and loading, but which were without justification. For these reasons, I am satisfied that the debtors have each committed the act of bankruptcy alleged in the petition, and I am satisfied of proof of the other matters of which s.52(1) of the Act requires proof. Although, as I have said, no issue was raised under s.52(2) in the submissions of counsel for the debtors, I have considered whether I could be satisfied of the matters referred to in paras. (a) and (b) of that provision, and have concluded that neither of these is made out. I note that Alexander Robert Mackay Macintosh, a registered trustee, has consented to act as trustee of the estates of each of the debtors. I make a sequestration order against the estates of the debtors. I order that the costs (including reserved costs) of the petitioner be taxed and paid according to the Act. I direct that a draft of this order be delivered to the Registrar within 7 days in accordance with Rule 124(2) of the Bankruptcy Rules. 14. I certify that this and the 12 preceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr Justice Burchett. Associate: Sean Cilla Date: 21 August 1987 Counsel for the debtors: Mr S. Gullotta Solicitors for the debtor: R.J. Jankowski Counsel for the petitioning Mr D. Heydon creditor: Solicitors for the petitioning Dawson Waldron creditor: Dates of hearing: 26 & 27 March 1987