~ JUDGMENT No. IT++/ee rg CATCHWORODS BANKRUPTCY - application for discharge - matters relevant to the exercise of Court's discretion - suspended discharge subject to conditions - periodical payments to be made subsequent to expiration of suspension period - ability of Court to impose and enforce such conditions. Bankruptcy Act 1924 Bankruptcy Act 1966 s.150(5), (6), (11) Federal Court of Australia Act 1976 Bankruptcy Act 1914 (UK) Bankruptcy Act 1883 (UK) Acts Interpretation Act In Re Jones (1926) NZLR 318 Re Reilly (1979) 36 FLR 268 Re Harding (1981) 57 FLR 320 Re Gray (1960) 19 ABC 29 Re Maher (1985) 7 FCR 240 Re Kersten (1986) 10 FCR 47 Re Mallan (1975) 6 ALR 161 Re Mallan (1975) 7 ALR 259 In Re A Debtor (1939) 1 Ch. 489 Maslen v Official Receiver (1947) 74 CLR 602 Re Summers; Ex parte Official Receiver (1907) 2KB 166 Re BHonas (1935) ABC 29 Re: R.W. BEAUMONT EX PARTE: R.W. BEAUMONT NO. WAG 765 of 1983 LEE J. PERTH 15 APRIL 1988 IN THE FEDERAL COURT OF AUSTRAL GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA JUDGE MAKING ORDER IA DA OF ORDER WHERE MADE we wee eH KH No. WAG 765 of 1983 RE: R.W. BEAUMONT Bankrupt EX PARTE: R. W. BEAUMONT Applicant MINUTE OF ORDER LEE J. 15 APRIL 1988 PERTH THE COURT ORDERS THAT: The the and The the to bankrupt is discharged subject to the operation of order of discharge being suspended until 8 May 1988 subject to the following conditions. bankrupt is discharged subject to the condition that bankrupt undertake to the Court to pay, and do pay, the Official Receiver for the benefit of his creditors, the sum of $12,500 by the instalments on or before the dates and in the amounts set out below: 23 May 1988 - $2,000.00; 23 June 1988 - $2,000.00; 22 July 1988 - $2,000.00; 23 August 1988 - $2,000.00; 23 September 1988 - $2,000.00; 21 October 1988 - $1,500.00; 21 November 1988 - $1,000.00. There be liberty to the bankrupt to apply on seven days' notice to the Official Receiver, to be released from compliance with any of the above conditions or released from any of the terms of the undertaking given to the Court. Any costs incurred by the Trustee are to be costs paid by the estate. Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL 'CURT OF AUSTRALTA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA ewe ye we No. WAG 765 af 1983 RE: F.W. BEAUMONT Bankrupt EX PARTE: R. W. BEAUMONT Applicant CORAM: LEE J. 15 April 1988 REASONS FOR JUDGMENT This is an application by a bankrupt pursuant to s.150 of the Bankruptcy Act 1966 for an order discharging him from bankruptcy. Beaumont became bankrupt upon the making of a sequestration order against his estate on 22 November 1983. The property of the bankrupt vested in the Official Trustee. Prior to 1982, the bankrupt had carried on business as a Plumber for approximately 15 years. He had traded in partnership in several plumbing businesses. His interest in one of those Partnerships was sold for a substantial sum in March 1979. The purchase price was payable by an initial payment and deferred instalments. The bankrupt apparently used the major part of the initial payment to acquire a property and to erect a home thereon. 2. In addition, the bankrupt spent "nds on stock, ptant and improvements necessary fe establise a deer farm on tne praperty. He borrowed monies for that purpose and the property was charged with several mortgages. Thereafter, he continued to trade as a plumber in partnership, and in duly 1981 he entered into another partnership trading as a manufacturer of plastic pipes. In 1981, the plumbing business became unprofitable and apparently traded at a loss. The bankrupt then commenced trading on his own account as a plumber and used funds from that business to meet debts due to the creditors of the plumbing business previously conducted in partnership by the bankrupt. After eight months, by March 1982, the partnership manufacturing plastic piping had ceased to trade having traded unprofitably. The bankrupt had assigned his entitlement to the remaining instalments payable to him for the sale of his interest in the plumbing partnership referred to above, to a creditor of the manufacturing Partnership to secure a debt of that partnership. On 19 April 1982, Beaumont authorised a registered trustee to act as controlling trustee of his property and to convene a meeting of his creditors under Pt.X of the Act. The creditors met on 14 May 1982 and 8 November 1982 and at the latter meeting a resolution was passed pursuant to the provisions of 5.204 of the Act removing the gehtor = rroperty from the contro] or Div.2 of Pt.X and requiring "ne debtor ra tile his petition an bankruptcy forthwith. The debtor failed to f11l2 his petition as directed by the resolution of the creditors. Apparently thereafter the controlling trustee continued to manage the bankrupt's affairs and realized several assets of the bankrupt and received surplus proceeds from secured creditors who had realized other assets. According to the Official Receiver's report referred to below. it would appear that approximately $17,000 was realized by the controlling trustee by sale of assets or receipt of surpluses from secured creditors. Between November 1982, when the bankrupt was directed by his creditors to file his petition in bankruptcy, and November 1983 when a sequestration order was made on a creditor's petition, the bankrupt was employed for some months by an irrigation supplier but was otherwise unemployed. Upon the making of the sequestration order on 22 November 1983, the bankrupt was required to file a statement of his affairs within fourteen days (sub-s.54(1)(a)), but failed to ado so within the time provided and in fact did not file such a statement until four months later. The statement of affairs sa filed appears to have been almost entirely histuricai and therefore imaccurate. it listed assets that had already been realized by the controlling trustee and by mortgagees and incorrectly forecast surpluses to be received when in fact deficiencies and substantially reduced surpluses had already been realized. In addition, the statement failed to disclose the true liabilities of the bankrupt by recording liabilities of $46,850.00 when eventual claims against the estate amounted to $166,457.00. The principal undisclosed debt was an amount of $29,371.00 due to the Deputy Commissioner of Taxation for unremitted tax instalments collected from employees and for the bankrupt's liability for income tax. No funds were available to the bankrupt estate from the monies realized by the controlling trustee. I assume that the accounts of the controlling trustee were duly filed showing distribution of those funds. In the absence of any resolution of the creditors for the debtor to enter a deed of assignment or arrangement or to accept a composition, there would have been no distribution to creditors. The bankrupt was thirty-seven years of age at the date of bankruptcy and at that time was unemployed. Since 9 August 1984, he has been employed as the manager of a business, Challenge Plastics, manufacturing plastic plumbing components. He has made no contribution to his estate. In his report on the bankrupt's application for an order for discharge, the Official Receiver, on behalf of the Official Trustee, has advised that the realizable and realized 43se1- of 'he estate amount to only $1,509.uQ which would be sufficient to meet payment of official fees and costs of administration but permits no dividend to be paid to creditors. Pursuant to sub-s.149(1), the bankrupt would have been discharged from bankruptcy on 22 November 1986, but on 14 November 1986, the Official Receiver on behalf of the Official Trustee, lodged an objection to the discharge of the bankrupt on the ground that the conduct of the bankrupt, before and after bankruptcy, had been unsatisfactory in that the bankrupt had failed to comply with the resolution of creditors requiring him to file a petition in bankruptcy; had failed to file a statement of affairs within fourteen days of a sequestration order being made against his estate, and had failed to advise the Official Receiver of changes in his residential address. As a result of the lodgement of that objection, the bankrupt will not be discharged from bankruptcy until the objection lapses on 22 November 1988 (sub-s.149(7),(14)). The bankrupt has not made application for an order directing that objection lapse at an earlier date (5.149(9)), but applies to the Court, pursuant to 5.150, for an order discharging him from bankruptcy. 6. No creditor has filed a notice opposing the application for discharge and ro creditor attended the hearing of the application. Counsel for the Official Receiver advised that the Official Receiver did mot oppose the bankrupt's application for discharge, but wished to draw the Court's attention to matters considered to be relevant to the exercise of its discretion. Pursuant to sub-s.150(3), the Official Receiver on behalf of the Official Trustee, submitted a report to the Court which is {prima facie evidence of the statements contained in it 412)). In addition, upon the hearing of this I received in evidence an affidavit sworn by the had the benefit of evidence on oath from the provided in response to questions put to him by his sel for the Official Receiver and by the Court. In his report, the Officer Receiver has repeated the 4% of unsatisfactory conduct by the bankrupt previously 3 eunds for the objection to discharge from bankruptcy ted further particulars of conduct regarded by the E ceiver as being unsatisfactory, namely, that the been uncooperative at an official interview; had turn his business questionnaire despite being directed fe the Deputy Registrar at his public examination; had a change of address and failed to reply to from the Official Receiver. in addition, the "rfitiai Keveiver has stateqd in his report that grounds exist under sub-s.150(4) cof the Act to require the Court to refuse, or to suspend, an order of discharge, namely that the bankrupt omitted to Keep sufficient accounts or records disclosing his business transactions within a period of five years preceding the date of bankruptcy. In his affidavit and in his evidence before me, the bankrupt admitted, or did not deny, each of the matters of complaint referred to by the Official Receiver, but offered explanations in respect of them. The explanations have not excused the bankrupt's conduct and I am satisfied that the bankrupt has failed to keep the Official Trustee properly informed of his changes in residential address and of his financial affairs. The bankrupt's attitude has displayed a lack of acceptance of his responsibilities under the Act. Although the delinquent conduct of the bankrupt involving failure to file a debtor's petition when required to do so by his creditors, to file a statement of affairs after commencement of the bankruptcy, and to advise a change of address, are serious matters - indeed the latter defaults may involve a contempt of court (sub-s.54(3)) or an offence punishable by imprisonment (sub-s.80(1)) - those events have already been the cause of the extension of the bankrupt's period of bankruptcy and the question that is presently before the Court is whether it is now appropriate to consider discharginy the bankrupt from that extended bankruptcy. The grounds that have caused the extension of the period of bankruptcy will, of course, be relevant in considering that question in addition to other matters such as the bankrupt's conduct and attitude to bankruptcy in the extended period of bankruptcy, the welfare of the bankrupt, the interests of the creditors and the interests of the public. (See In Re Jones (1926) N.Z.L.R. 318; Re Reilly (1979) 36 F.L.R. 268; Re Harding (1981) 57 F.L.R. 320; Re Gray (1960) 19 A.B.C. 29; Re Maher (1985) 7 F.C.R. 240; Re Kersten (1986) 10 F.C.R. 47.) The bankrupt, through his counsel, concedes that the grounds specified by the Official Receiver in his report in respect of sub-s.150(6) do exist. Therefore, the Court is required to refuse the application for discharge or to order a discharge suspended in its operation (sub-s.150(5)). I turn now to the facts established before me relevant to the question of discharge and to the grounds advanced by the bankrupt as to why the Court's discretion to grant a suspended discharge should be exercised. The bankrupt has been regularly employed for approximately four years and appears to hold a key position as an employee of the company conducting the business known as Challenge Plastics, The utter st 28 located in the f3tate of Yicroria and the Bankruret aac ce residing there for 3ome years. The bankrupt advised that he is receiving a net weekly wage of approximat+.,/ 3350.00 per week after payment of taxation. He 1S paying $120.00 a month maintenance for the issue of his second marriage and rent of $165.00 per week. The bankrupt now seeks an order discharging him from bankruptcy as his employer wishes to make greater use of his services and 1n particular to use his skills in negotiating export opportunities in the Republic of China. It 15 clear that shculd the bankrupt be freed from his bankruptcy, he would take on the position of managing director of the company and receive the opportunity to acquire a capital interest in the company which would reflect his worth to the enterprise. It is apparent that the bankrupt has made a success of this employment and is on the threshold of making a_ successful re-entry to the world of commerce. The bankrupt has devoted himself to the success of the business, Challenge Plastics, and has worked long hours for what may be regarded as limited reward. He has a reasonable expectation of recognition of this service by receiving some equity in the capital of the company conducting the business. To this point, that expectation is intangible and it has not 10, crystallised. However, it 1 rf] an expectation that has been earned in the course of (the bankruptcy ari if at 15 tTapable of realization, 1t 15 a realization ain which the creditors in the bankruptcy should share. Although the bankrupt appears to be quite capable of conducting his financial affairs properly after his discharge from bankruptcy, and there appears to be no risk of reckless commercial conduct or indiscriminate use of credit facilities, the fact remains that this has been a most unsatisfactory bankruptcy for the various reasons set out in the Official Receiver's report and referred to above. The deficiency in the estate is approximately $165,000.00 and over a period of five years there will have been no dividend distributed to creditors and no contribution to the estate made by the bankrupt. After the bankrupt gave evidence, the matter was adjourned for the bankrupt to consider his position and to ascertain whether he may be able to obtain the assistance of his employer to make some proposal to his creditors. Upon the resumption of the hearing, counsel for the bankrupt advised that the bankrupt's employer would pay to the bankrupt a sum of $12,500 in instalments to be used by the bankrupt as a contribution to his estate, provided that the Court ordered that the bankrupt be discharged from bankruptcy and suspended the operation of the order of discharge for no more than one month. ll. The Court was aunfeemed that Aricrity creditors ir the estate, namely, the Deputy Commissioner of Taxation and former employees of the bankrupt, would have their debts paid in full by such a contribution to the estate, and the balance of unsecured creditors whose claims amounted to $157,388.00, would receive approximately 0.79 cents in the dollar by way of a dividend. The Bankrupt proposed seven successive monthly instalments as a contribution to his estate being five monthly payments of $2,000.00, a payment of $1,500.00 in the sixth month, and a final payment of $1,000.00 in the seventh month. It was suggested that the payments of instalments in that manner could be stipulated as conditions of a suspended order of discharge, notwithstanding that the performance of the conditions would take place after the expiration of the period of suspension of the order and after the discharge of the bankrupt from bankruptcy. (See Re Mallan (1975) 6 A.L.R. 161 and (1975) 7 A.L.R. 259 (High Court) and see also Re Kersten (supra)). It appears to be settled law that conditions may be imposed upon a suspended order for discharge with the intent that the conditions operate as personal orders against the bankrupt after his discharge and that such conditions may impose upon the bankrupt a liability in respect of after acquired property that otherwise would not vest in the trustee in bankruptcy after the discharge. (See In Re A Debtor (1939) 1 Ch. 489 per Sir Wilfrid 12. Greene M.R. p.on.) Tt 15 met necessary that the conditions imposed owe Ilancurrent and moterminous with the period of suspension (p.502). (See also Re Kersten (supra)). The Court's ability to enforce such personal orders would rest in 1tsS powers of arrest and commitment to gaol pursuant to sub-s.78(1)(f) of the Act and powers ta punish for contempt contained in sub-s.28(4) of the Act and s.31 of the Federal Court of Australia Act 1976. (See Maslen v Official Receiver (1947) 74 CLR 602.) It might be noted that the Act makes express provision in one respect for a discharged bankrupt to be subject to the sanction of the Court after discharge by declaring the discharged bankrupt to be guilty of contempt of court where he fails to comply with the obligation imposed upon him by the Act to assist the trustee after his discharge in the realization and distribution of his property vested in the trustee. (See sub-s5. 152(1) and (2)). The question of whether a discharged bankrupt may be subject to a further sanction of revocation of the order for discharge in the event that he fails to comply with an order attached as a condition to the suspension of discharge is perhaps less certain of answer. Te AMT Y ROI - - & x ¥. 'a Dect aee on ee | 13. I have had the benefit of submissions from counsel far both the bankrupt and the Official Receiver which contend that the Court has power to rescind an order for discharge under its general power to rescind orders contained in s.37 of the Act. In Re Mallan, White J. expressed the view that the conditions attached to the order for discharge could be enforced by way of revocation of the discharge order under s.37 and further expressed the view that sub-s.152(3), which makes express provision for the rescission of an order for discharge of a discharged bankrupt who fails to comply with the requirements of that section, was not to be read as qualifying in any way the general powers of 5.37. In Re Mallan, the Court was considering the power of the Court to impose conditions on the suspension of discharge under 8.150 of the Act as it existed in 1975. Subsequently, by amendments introduced in 1980, 55.149, 150 and 151 of the Act have been amended. In particular, sub-ss.150(11) and 151(4) have been inserted. They are in identical terms and make express provision for the Court to suspend, rescind or vary an order made under 5.150 or s.151 at any time whilst the operation of an order for discharge is suspended. According to Re Mallan, the Court already possessed that power, although the reasoning applied in In Re A Debtor (supra) in respect of a similar provision of the Enqjish Bankruptcy Act 1914 May undicate ctnakt it 15 only the personal orders against the bankrupt that are capable of rescission and not the order for discharge once it is operative and the period of suspension has expired. Section 37 makes no distinction between personal and other orders. The amendments inserted in 1980 could be taken to reflect an intention by Parliament that the power to rescind an order for discharge is only exercisable whilst such an order is inchoate. The fact that sub-s.152(4) of the Act makes express provision for the consequences of rescission of an operative order for discharge where the express power to rescind such an order is exercised under that section, tends to support such a construction. Sections 150 and 151 contain no provisions equivalent to sub-s.152(4). If 5.15AB of the Acts Interpretation Act is called in aid neither the Explanatory Memorandum, Second Reading Speech by the Minister or the report of the debate on the proposed legislation provides assistance in either confirming the meaning of the provision or determining it. In Re Summers; Ex parte Official Receiver (1907) 2KB 166, the Court held that it had power to rescind an order for discharge which had been made conditional upon the bankrupt consenting to judgment in the amount of unsatisfied debts and 15. discharging the Judgment by payments of ainstalments. The Court relied upen 5.104 of the Rankrtuptw Act 19°? which provided a similar qeneral power to rescind to that cantained in s.37 of this Act. It 15 acknowledged ain Re Mallan (supra) at p.165, the former English Act, interpreted in In Re Summers; Ex parte Official Receiver, (supra) differed from the 1966 Act under consideration in Re Mallan and, of necessity, it differs further from the Act as amended in 1980 under consideration in this case. It may be noted that 5.119 of the Bankruptcy Act 1924, replaced by the Bankruptcy Act 1966, limited the conditions that may be imposed on an order for discharge to a requirement that the bankrupt consent to judgment being entered against him by the trustee for any balance of provable debts not satisfied at the date of discharge that balance to be paid out of future earnings or after acquired property. Further provisions requiring a4 discharged bankrupt to assist the trustee to realize property and making the order for discharge subject to rescission if he did not which were equivalent to sub-ss.152(1),(2) and (3) were contained as a sub-section of 5.119 (sub-s.119(11)). It was held in Re Bonas (1935) ABC 29 that the Court had a power under 5.26 of the Bankruptcy Act 1924, the equivalent of s.37 in this Act, to rescind a discharge order in the case of fraud or other just and sufficient cause. lb, One can 3ee good reason for the legislature considering Dy] at ote be undesiraszse to aslow completed orders for discharge from bankruptcy toa be subject Lo a general power of rescission, but being satisfied that the Court may enforce personal orders against the bankrupt which operate beyond the order for discharge it 15 unnecessary to determine whether the insertion of sub-s.150(11) was intended to qualify the general power to rescind contained in s.37. In exercising the discretion to either refuse an order for discharge or grant an order suspended in its operation, it 15 necessary for me to have regard to several competing considerations in the present case. On the one hand, there is a history of errant conduct on the part of the bankrupt and inadequate attitude to his obligations as a bankrupt. In addition there is the conceded fact of the bankrupt''s breach of the provisions of sub-s.150(6) of the Act. Furthermore, in consideration of the interests of creditors and the public, it is to be noted that the bankrupt has made no contribution to his estate in the period of bankruptcy and a substantial deficiency will remain. On the other hand, the bankrupt has undergone an extended period of bankruptcy and has been bankrupt now for approximately four and a half years. On the material presently before me there is no real prospect of the creditors being 17. advantaged by the continuation of the bankruptcy for the full term oF five years and the lacr ar objection from creditors may retlerct an acquiescence in that view on their part. In addition, the bankrupt has undertaken anew direction in his aincome-gaining activities and commercial dealings and there 1s every reason to expect that he should be able to succeed if freed from the bankruptcy. Furthermore, the public interest may be served if the bankrupt 1s free to take up the further opportunity of financial rehabilitation offered by his employer and in particular it may be in the public interest to remove any prospect of the bankrupt, whilst endeavouring to improve his financial position, being involved in any breach of the Companies Code by carrying out any acts of management of the company as an undischarged bankrupt. Finally, not only is the bankrupt unlikely to make any significant contribution to his estate on his existing income, but indeed it is only a discharge from bankruptcy that will put the bankrupt in a position to make a contribution to his estate as a result of assistance to be provided to him by his emplcyer if he is freed from his disadvantaged status. Having considered all these matters, I am of the opinion that it is appropriate to make an order discharging the bankrupt from bankruptcy, the operation of such order to be _ suspended subject to conditions. Although sub-s.150(6) describes specific conduct that requires an order for discharge to be refused or suspended, if. Ids not consider 1t 15 necessary in the particular circumstances of this case to cundition the suspension of the order with any terms that relate to the actual conduct that has attracted sub-s.150(6) in this case, namely, the failure to keep and preserve books and records of account to sufficiently disclose the business transactions and financial position of the bankrupt for a period of five years prior to the date of his bankruptcy. The role that the bankrupt has fulfilled in the past four years and the future before him as an employed manager would appear to make any conditions related to that previous default of marginal relevance. In addition, if after discharge the bankrupt occupies the position of a director of his employer, he will be bound by stringent provisions of the Companies Code that require him to ensure that the company keeps proper books and records of account. I have considered making the period of suspension of the order for discharge coextensive with whatever period is required for the conditions obliging the bankrupt to pay a sum to the Official Trustee for distribution to his creditors to be satisfied, but the result of such a term of suspension of the order may be that the bankrupt will not be discharged from his bankruptcy before the effluxion of the prescribed period of bankruptcy under the Act if his employer is unable to put the bankrupt in a position to pay the whole of that sum to the Official Trustee at an early date. a a 5 RR Oi ne ptt st. AM UPS tpat willserve the hest ainterests of the credi*ors and will properly take inte account the public interest as well as the interests of the pankrunt, witil be an order discharging the bankrup from bankruptcy, the operation of such an order being suspended until 8 May 1988 subject ta the condition that the bankrupt undertake toa the Court to pay, and do pay, to the Official Receiver by instalments on the dates set out below the sum of $12,500 as a contribution to his estate for distribution to the creditors in his bankruptcy. 23 May 1988 - $2,000.00 23 June 1988 - $2,000.00 22 July 1988 - $2,000.00 23 August 1988 - $2,000.00 23 September 1988 - $2,000.00 21 October 1988 - $1,500.00 21 November 1988 - $1,000.00 I will hear counsel as to any other orders to be made. 20. Tocertcty that the preceding "ime teen of 4) ages are a true copy cto tre Feasons for Judgment of his Honour Mr. Justice Lee. Associate: Patna Cawutl Date: /5& Apr , 1788 Counsel for the Applicant: Mr. S. Slater Solicitors for the Applicant: Robinson Cox Counsel for the Official Receiver: Mr. I. Campbell Solicitors for the Official Receiver: Australian Government Solicitor Date of Hearing: 16 and 23 March 1988 Date of Judgment: 15 April 1988