201 SS wee CATCHWORDS BANKRUPTCY - Petition for sequestration order - failure of debtor (a solicitor) to pay fees of receiver appointed under Legal Practitioners Act, 1898 (NSW) - no relevant judgment recovered - whether such fees constitute a debt upon which a sequestration order may be made. PRACTICE & PROCEDURE - Considerations to be taken into account in determining whether leave should be granted to allow a debtor to rely on an affidavit of solvency not filed in accordance with the Court's directions. Bankruptcy Act 1966, ss.40, 44, 52. ega rac oners Act 1898 (NSW), ss.65A, 65K(3), 65Q. P1400 of 1987 Re CHARLES ALROY GOLDBERG; Ex parte THE LAW SOCIETY OF NEW Wilcox J Sydney 6 June 1988 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF No. P1400 of 1987 THE STATE OF NEW SOUTH WALES AND eee ww SS SS SS THE AUSTRALIAN CAPITAL TERRITORY RE: CHARLES ALROY GOLDBERG Debtor EX PARTE: THE LAW SOCIETY OF NEW SOUTH WALES Petitioning Creditor CORAM: WILCOX J PLACE: SYDNEY DATE: 6 JUNE 1988 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The further hearing of the petition be adjourned until Friday 24 June 1988 at 9.30 am. 2. The costs be reserved. NOTE: Settlement and entry of orders is dealt with in Bankruptcy Rule 124. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF No. P1400 of 1987 THE STATE OF NEW SOUTH WALES AND ee ee ee ee ee ee THE AUSTRALIAN CAPITAL TERRITORY RE: CHARLES ALROY GOLDBERG Debtor EX PARTE: THE LAW SOCIETY OF NEW SOUTH WALES Petitioning Creditor CORAM WILCOX J PLACE: SYDNEY DATE: 6 JUNE 1988 EXTEMPORE REASONS FOR JUDGMENT There is before the Court for hearing today a petition taken out by The Law Society of New South Wales seeking a sequestration order against the estate of Charles Alroy Goldberg. The evidence, which has been supplemented to some extent by facts agreed between the parties, indicates that the debtor is a solicitor who has practised in New South Wales for some time. On 18 October 1985 an order was made by the Supreme Court of New South Wales for the appointment, pursuant to Division 2 of Part 8 of the Legal Practitioners Act 1898 (NSW), of a receiver, Miss Jean Sayer. The receivership still continues. The effect of the appointment was that Miss Sayer became entitled to deal with the whole of the property of the debtor, using "property" in the sense defined in s.65A of the Legal Practitioners Act. For practical purposes, the property there referred to is what is commonly described as the trust property of a solicitor. The receivership does not extend to the personal property of a solicitor, held on his or her own account beneficially. In due course certain fees were earned by Miss Sayer in her capacity as a receiver and she sent accounts to The Law Society for those fees. The fees were paid and The Law Society tock proceedings against Mr Goldberg for recovery of the sun of $4,005.10, being for fees which it had paid. A judgment was cbtained against Mr Goldberg in the Supreme Court in this amount and thereafter The Law Society issued a bankruptcy notice relying upon the said judgment. The debtor failed to comply with the requirements of the bankruptcy notice, so that an act of bankruptcy occurred. That act of bankruptcy became complete on 17 June 1987 and there is no present issue between the parties as to the fact that an act of bankruptcy was then committed. On 9 July 1987 a creditor's petition was presented to this Court by The Law Society, relying upon the debt of $4,005.10, no doubt together with costs. However, that sum was paid on 22 October 1987. On 10 November 1987 The Law Society made application to the Court for leave to amend its petition so as to substitute a new claim, namely for $11,759.04, being for moneys additional to the previous claim which had been paid to Miss Sayer, out of the Fidelity Guarantee Fund, for fees earned by her in her capacity as receiver. These moneys were paid prior to the date of the act of bankruptcy. After consideration of argument on behalf of both parties, the deputy registrar, Miss Sexton, gave leave to amend the petition so as to refer to this sum. There had not, at that stage, been any proceeding taken to obtain judgment for that amount in the Supreme Court, the District Court or the Local Court. Indeed, that continues to be the position as at the present time. Pursuant to the order made by Miss Sexton, the petition was amended and the amended petition was served upon the ddbtor. The debtor sought a reference of Miss Sexton's order to a judge of the Court. The matter was considered by Foster J, who affirmed Miss Sexton's decision. During the course of his consideration of the matter, his Honour held that there was not any need, under the Legal Practitioners Act, for The Law Society to recover judgment against a solicitor for fees paid to a receiver before being able to rely upon an indebtedness for those fees in support of a creditor's petition. 4. The matter came before Sheppard J on 6 April 1988, when there was discussion regarding the hearing of the petition. His Honour appointed today, 6 June, for the hearing and directed that any affidavits to be relied upon by the debtor be filed and served not later than 10 May. On 6 May the matter again came before Sheppard J. On that occasion his Honour was informed that the debtor proposed to file an affidavit oF solvency, but that this would be filed and served not later than 10 May. In other words the direction was retained, the hearing date being reaffirmed. In fact no affidavit was filed by the debtor until today. However, last Friday -- I am told very late in the day -- there was served upon the solicitors acting for The Law Society an affidavit of the debtor, dated that day, in which he set out various assets which he claimed, together with details of certain liabilities. The purpose of the affidavit was to endeavour to persuade the Court that the debtor had a surplus of assets over liabilities. There was also reference made to certain adjustments said to be necessary. One item relates to a claim for a refund by The Law Society in respect of the debtor's application for a practising certificate. The affidavit incorrectly states "from 1 June 1988"; apparently the correct date is from i July 1987. The claim for the refund is put upon the besis that the sun of $2,630 was paid for professional indemnity insurance and that, as the application for a practising certificate was refused and the debtor has not in fact practised, there should be a refund of this amount. The assumption is that the cover was cancelled. It seems to be common ground that the application for a certificate was refused, but I am told that it is not common ground that the debtor has not practised. It is also unclear as to whether there has been any cancellation of the insurance cover. In the circumstances, I am unable to form any opinion, one way or the other, as to whether this sum or any part of it is refundable. The affidavit also makes a claim that there are certain moneys held in the trust account and, of course, under Miss Sayer's control, in relation to which the debtor is entitled to costs earned by him. It is quite conceivable that, at the time when the receiver was appointed, there were moneys held in the trust account in relation to which the debtor had done work which would entitle him to a lien, and that, upon accounting to his client, he would have been entitled to transfer some of the money held on behalf of the client to his general account for costs earned. However, the situation is complicated, once a receiver is appointed, because s.65K(3) of the Legal Practitioners Act provides that a solicitor in relation to whom a receiver has been appointed "shall not be entitled to any payment in respect of or otherwise to enforce any such claim" -- that is a claim for moneys in the trust account -- "unless and until the proper claims of all other claimants are fully satisfied and the expenses of the receivership as defined in section 65Q have been paid". That sub-section has the effect of postponing the solicitor's entitlement to moneys in the trust account to claims by clients and the costs of the receivership. At the 6. present time, it is not possible to form any view as to whether there will be any moneys left in the trust account after these antecedent commitments have been met. The affidavit also refers to various debtors of Mr Goldberg; being, apparently, debts for legal work undertaken. The debtors include the Australian Legal Aid Office, the Legal Services Commission of New South Wales and the Legal Aid Commission of New South Wales. There are some fairly substantial payments claimed from these organizations. When I inquired why it was not possible for these moneys to be obtained in order to pay out the present claim I was told that, in respect of at least some of those claims, there were disputes. I do not know what proportion of these claims is in fact properly recoverable. There is no information to assist one way or the other. There are also claims against various private individuals for legal representation. The recoverability of these amounts is something about which there is no material. The affidavit also discloses various liabilities of the debtor. I think it is fair to say that, if all of the assets are truly assets, there is a surplus of assets over liabilities. But the material does not enable any proper evaluation of the position. When the affidavit of 3 June 1988 was tendered by counsel for the debtor respondent I indicated that I thought the more convenient course was to deal with the primary issue between the parties, to which I will come in a moment, and to consider the affidavit at a later stage. It is only if the 7. debtor fails on the primary point that any question arises as to the future conduct of the matter. I now turn to the primary point. Section 65Q(1) of the Legal Practitioners Act provides: "All moneys payable to the receiver as remuneration for his" (or her) "services, all costs of legal proceedings and other expenses incurred by him" (or her) "in the course of his" (or her) "receivership and any reimbursement made pursuant to section 65S ... shall, to the extent that they have not otherwise been paid to the receiver under this Act, be paid to him" (or her)" by the Society out of the fund." The relevant fund being the Fidelity Guarantee Fund. Sub-section (2) provides: "Any amount paid out of the fund for the expenses of the receivership shall be recoverable by the Society from the solicitor as a debt owing by him" (or her) "to the Society." Section 62U empowers the Supreme Court to review the expenses claimed by a receiver and this extends to a review upon the motion of the affected solicitor: see sub-s.(2). It has been held by the Court of Appeal of New South Wales that the entitlement of The Law Society to recover expenses of a receivership pursuant to s.65Q(2) arises prior to the completion of a receivership, that is to say, when the expenses are actually incurred: see Law Society of New South Wales v McKenzie [1983] 1 NSWLR 272. Although the matter has been put a number of ways, the argument put on behalf of the debtor comes down to one proposition. It is said on his behalf that, although it would have been open to The Law Society to sue him in a court of competent jurisdiction -- for example the Supreme Court of New South Wales or the District Court -- in order to recover the expenses charged by Miss Sayer, it is not open to The Law Society to rely upon s.650Q(2) to support a bankruptcy petition. The argument is that 8.65Q(2) makes the relevant money "recoverable" by the Law Society and that this is a specification of a particular method of obtaining payment so that The Law Society may take only the specified procedure. Reference is made to the principle which was referred to in Pasmore v The Oswaldtwistle Urban District Council [1898] AC 387. Another way in which the argument was put was to refer to s.44(1)(b) of the Bankruptcy Act 1966 and to argue that this is not a case where there is a debt, in the sense used by that paragraph, that is to say "a liquidated sum due at law or in equity". I do not think that the argument on behalf of the debtor can be accepted. This is not a case where the legislature, in providing a right, has nominated a particular course of procedure or court within which the proceeding must be taken (cf, for example, Barraclough v Brown [1897] AC 615). Section 659 provides that any amount paid out of the Fund shall be recoverable by the Society from the solicitor as a debt owing by him to the Society. To my mind, this means that it may be recovered by the Society in any way in which a debt may ordinarily be recovered. The argument for the debtor includes the proposition that an amount referred to in s.65Q does not become a debt unless and until judgment is given for that amount by a court 9. of competent jurisdiction. It is said that all that is conferred by the sub-section is a right to take proceedings, that is, an amount is to be recoverable but it becomes a debt only when the court so adjudges. I confess that I do not understand this concept. There can only be recovery if there is some antecedent liability. "The sub-section accepts this by referring to the amount being recoverable as a debt. This must mean that it is deemed to be a debt, notwithstanding that, at common law, there would have been no liability for the receiver's costs. I think that this is the way in which the sub-section was understood by Hunt J in Law Society of New South Wales v Gordon (unreported, 23 April 1982) where his Honour referred to an argument made on behalf of The Law Society that the claim was one of "a common indebitatus count to recover as a statutory debt the money paid by it to the Receiver at the defendant's assumed request"; and note his Honour's reference to State Government Insurance Office(Queensland) v Brisbane Stevedoring Pty Limited (1969) 123 CLR 228 at p.245. The effect of the sub-section, in my opinion, is to make the amount paid out of the Fund in law a debt which is recoverable by the Society in any usual manner. In other words, the relevant amount is an amount which would be able to be recovered by way of judgment if the Society sued Mr Goldberg in a court of competent jurisdiction. 10. .S0 understood, the claim falls within s.44(1)(b). That paragraph requires that the relevant debt be a liquidated sum. There is no question about the fulfillment of that requirement. It also requires that the relevant sum be "due at law or in equity". I understand this requirement to mean that the relevant sum must be recoverable in proceedings at law or in equity. If the relevant sum is recoverable as a debt, the requirement that the sum be "due at law" is satisfied. I think that it is not to the point to say that in fact the Society has not recovered judgment against Mr Goldberg. Although it is common for a judgment to be recovered against a debtor before bankruptcy proceedings are commenced -- and, of course, this is an essential ingredient of the use of s.40(1)(g) of the Bankruptcy Act -- it is not an essential prerequisite of successful bankruptcy proceedings that there be a judgment. What is required is that there be a debt "due at law or in equity"; and this requirement directs the Court's attention to the question whether the amount is recoverable, as distinct from recovered, "at law or in equity". Once it be determined that the amount is recoverable, then there is a compliance with the requirements of #.44(1)(b). It follows from the foregoing that I am of the opinion that the objection taken by the debtor on the point of principle is misconceived and that the first ground of opposition, which relies upon that objection, must be overruled. 11. The second ground of objection, on any view, goes to only part of the claim. It appears that certain of the fees which were charged by Miss Sayer, and which have been paid out of the Fund and are sought to be recovered by The Law Society, arise out of an attendance by her before the Statutory Committee of The Law Society as a witness and certain preliminary attendances, particularly on counsel, in connection therewith. No evidence is before the Court as to the circumstances of Miss Sayer's involvement in those proceedings. I gather that it is accepted that she is only involved because of the fact that she was a receiver; but it is said that, even so, her fees for those attendances would not be recoverable pursuant to s.65Q. I am not sure that this is the position. Section 65Q(1) refers to "all moneys payable to the receiver as remuneration for his" (or her) "services". A receiver may be paid moneys as remuneration for his or her services notwithstanding the fact that the services were rendered in connection with an inquiry by the Statutory Committee. That is not to say that all fees incurred, or costs raised, by a person who is in fact a receiver are necessarily fees earned in his or her capacity as a receiver. The person may happen to be attending in a different capacity. Everything must depend upon the facts; and there is no material to enable me to reach any view upon the question in the present case. 12. -However, it is clear that the objection which has been raised relates only to part of the services included in Miss Sayer's accounts. On any view, there is an amount of not less than $1,500 in relation to which no such objection can be made. It is not the proper task of the Court, in considering a petition for a sequestration order, to attempt definitively to determine the amount of any particular claim against a debtor; unless this is necessary in order to establish whether or not there is the required minimum debt. The amount of the claim may more appropriately be dealt with, if and when a sequestration order is made, at the time of lodgment of a proof of debt. On any view, there is a debt of more than $1,500 which falls within s.65Q. Consequently, it seems to me that I should not now go into the question whether the whole of the moneys now claimed fall within that section. The third matter which the debtor seeks to raise arises out of the affidavit to which I have earlier referred. The debtor says that this affidavit demonstrates that he has a surplus of assets over liabilities and that consequently the Court would be minded to dismiss the petition pursuant to 8.52(2)(a) of the Bankruptcy Act. That paragraph empowers the Court to dismiss a petition if it is satisfied by the debtor that he is able to pay his debts. I have to say that I am not so satisfied upon the affidavit which has been filed. As I have indicated, if accepted at face value, it indicates a surplus of assets over liabilities, but I do not know whether in fact all of the 13, claimed assets are available. In particular I am puzzled at the claim that these costs are available to the debtor for the payment of his debts in the circumstances that this petition has been allowed to proceed, claiming a relatively small amount compared with the amount of costs which are said to be owing to him. However, there is an antecedent question which is raised by the objection taken by counsel for the petitioning creditor, namely whether this affidavit should be allowed to be used at all. On that matter I sought assistance from counsel for the debtor as to the reason why there was a failure to comply with the direction made by Sheppard J. No reason has been given to me. I am faced with a situation where the Court, on 6 April, made a direction for any affidavits to be filed by 10 May and this direction was reaffirmed only four days before that date. Upon 6 May the debtor was legally represented. I am puzzled as to what occurred. It is possible that the affidavit was then in an advanced stage of preparation, so that a commitment to file within four days could responsibly be reaffirmed. If that was so, it is difficult to understand why the affidavit was served upon the petitioning creditor only on 3 June. In the absence of any explanation the possibility arises that this was done deliberately, so as to frustrate the hearing of the matter today; because the creditor would not then have any opportunity of investigating the numerous allegations which are contained within the affidavit. 14. An alternative view is that there was no draft affidavit on 6 May, but that the debtor merely hoped that he could get together an affidavit within the requisite period. If that were done, his conduct in not informing the Court that a lengthy and complicated affidavit would be required, but had not yet been drafted, was little short of misleading. Neither of these explanations visits any credit upon the debtor. In making that judgment I bear in mind that, as an experienced solicitor, he would have been aware both of the significance of the direction of Sheppard J and of the complexity of the matters which he proposed to put into evidence. This is not the case of a person lacking experience of litigation or of the ways of the Court. In the absence of any explanation as to the reason why the affidavit was not served until last Friday, I take the view that I ought not to allow the Court's direction to be flagrantly disobeyed, by permitting the reading of this affidavit. The inevitable result of permitting the affidavit to be read would be to accede to a request on behalf of the petitioning creditor for an adjournment whilst the matters raised in the affidavit are investigated. The petitioning creditor would be put to a lot of work investigating the value of various properties and the ownership of those properties and the position in regard to costs owed by various people to the debtor. There can be no guarantee that the costs of doing all this work would be recovered. os 15. It seems to me that the short answer to the debtor's claim that he is able to pay his debts as they fall due is to give him the opportunity to do so. The amount is relatively small. It might perhaps be said that the debtor is not entitled to another opportunity. The bankruptcy proceedings have been on foot for about 10 months and it is now seven months since the petition was allowed to be amended so as to insert the claim for $11,759.04. However, I am prepared to assume in favour of the debtor that he genuinely believed in the legal point to which I have referred. One might take the view that he was entitled to put that argument to the Court without necessarily having to find the money to pay out the petitioning creditor. On the other hand, if he is truly able to pay his debts as they fall due, then I think that it will be doing him no injustice -- now that the legal point has been determined against him -- to give him a final opportunity to make payment. I propose to adjourn the further hearing of the petition until Priday 24 June at 9.30 am. If, by that time, the debtor is in a position to pay out the claim then, no doubt, he will do so and an order can be made dismissing the petition. If he has not done this then, unless some significant new matter comes to my attention, it is my intention to make a sequestration order on that occasion. I reserve the costs until that day. 16. I certify that the fifteen (15) preceding pages are a true copy of the Reasons for Judgment of his Honour Justice Wilcox. Associate t feonne_ fcc k Date: 21 June 1988 Counsel for the Debtor: Solicitors for the Debtor: Counsel for the Petitioning Creditor: Solicitor for the Petitioning Creditor: Date(s) of hearing: Mr G J McVay Bowman & Mackenzie Mr M R Aldridge G S Lewis 6 June 1988