JUDGMENT No. onl. Zeal wctcban CATCHWORDS BANKRUPTCY - presentation of debtors' petition while creditor's petition still pending - whether Court should accept or reject the debtors' petition on ground that petition had a purpose foreign to the Bankruptcy Laws - insufficient evidence to infer such a purpose. Bankruptcy Act 1966, s 56(7AA), s 56(7AB), s 115 Edelsten vy Deputy Commission of Taxation (NSW) (1989) 86 ALR 257 Re Cornish; Ex Parte English (1984) 6 FCR 257 Ciyne_v Deputy Commissioner of Taxation (1984) 154 CLR 589 RE_ GEORGE D H v4 ; EX PARTE F INCRETE VI MITED AND RE_GEORGE 2 AND NICHI r4 No. NP 2237 of 1994 No. NP 3234 of 1994 Sackville J. Sydney. 28 November, 1994 FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NP 2237 of 1994 GENERAL DIVISION ) No. NP 3234 of 1994 RE: GEORGE ZORBAS and NICHOLAS ZORBAS EX PARTE: F & G CONCRETE SERVICES PTY LIMITED AND RE: GEORGE ZORBAS and NICHOLAS ZORBAS CORAM: SACKVILLE J. PLACE: SYDNEY DATE: 28 NOVEMBER, 1994 MINUTES OF ORDER THE COURT: 1. DIRECTS the Registrar, pursuant to s5s.56(7AA) of the Bankruptcy Act 1966, to accept the debtors' petition. 2. ORDERS the creditor to pay the costs of the debtors. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY ) No. NP 2237 of 1994 GENERAL DIVISION ) No. NP 3234 of 1994 id RE: GEORGE ZORBAS and NICHOLAS ZORBAS EX PARTE: F & G CONCRETE SERVICES PTY LIMITED AND RE: GEORGE ZORBAS and NICHOLAS ZORBAS CORAM: SACKVILLE J. PLACE : SYDNEY DATE: 28 NOVEMBER, 1994 NS FOR Background In this case two debtors have presented a petition against a partnership of which they were members, pursuant to s.56(1) of the Bankruptcy Act 1966 (Cth) ("the Act"). At the time they presented the petition, a creditor's petition was pending against the partners. Section 56(7AA) and s.56(7AB) of the Act provide as follows: "56(7AA) [Creditor's petition pending] Where, at the time when a debtor's petition is presented under this section, a creditor's petition 1s pending against the partnership, or against any of its members (whether alone or jointly with another person), the Registrar -2- must refer the debtor's petition to the Court for a direction accept or reject it. 56 (7AB) [The Court may direct Registrar] Upon a reference under subsection (7AA), the Court may direct the Registrar: (a) to accept the petition; or (b) to amend the petition by deleting from it the name of any partner against whom the creditor's petition is pending and to accept the petition, as so amended, under subsection (4); or (c) to reject the petition." The question in the present case is whether the direction should be to accept or reject the debtors' petition. The matter was referred to me by the Registrar on 22 November 1994. An affidavit was read by Mr Appleton on behalf of the petitioning creditor and submissions were made on behalf of both parties. It became clear that some of the submissions made by Mr Appleton were based on a misreading of the effect of the relation back provisions of s.115 of the Act, in the particular circumstances of this case. No argument was directed at that time specifically to the operation, or possible operation, of 8.122 of the Act, relating to the avoidance of preferences. Nor was argument addressed to the significance of the failure of the debtors either to give evidence or to provide an explanation for the filing of the petition: see Re Cornish; Ex parte English (1984) 6 FCR 257, at 259; Re Crowl: Ex parte Kleinwort Benson Australia Ltd (1988) 17 FCR 37, at 39-41. I caused the matter to be relisted on 24 November 1994 to allow the opportunity for further argument on these issues. That argument took place. Sequence of Events The sequence of events in relation to the competing petitions was as follows: e On 29 July 1994, the creditor presented a petition for sequestration orders against the estate of each of the debtors. The act of bankruptcy alleged against George Zorbas was his failure to comply with a bankruptcy notice served on 10 June 1994. That act of bankruptcy was committed on 24 June 1994. The act of bankruptcy alleged against Nicholas Zorbas was his failure to comply with a bankruptcy notice served on 28 June 1994. His act of bankruptcy was committed on 12 July 1994. Mr Nemes for the debtors accepted that acts of bankruptcy had been committed on the dates alleged. e On 31 October 1994 the debtors presented a petition under s.56 of the Act. Each debtor attached a statement of affairs. The statement of Nicholas Zorbas showed unsecured creditors of $1,227,800 and assets (other than secured property) of $15,768. The statement of George Zorbas showed unsecured creditors of $1,227,500 and assets (other than secured property) of $21,021. e On 22 November 1994, as already mentioned, the matter was referred to the Court by the Registrar for directions under 8.56(7AA) of the Act. Relation Back Provisions Mr Appleton initially submitted that the relation back provisions of the Act operated differently according to whether the debtors became bankrupt on their own petition, or on the petition of the creditor. As pointed out by the Full Court of the Federal Court in Edelsten v Deputy Commissioner of Taxation (NSW) (1989) 86 ALR 257, at 259, the date of the commencement of the bankruptcy may be important. For example, s.120 of the Act provides, in relation to settlements, that time shall be computed from "the commencement of the bankruptcy". Section 5 defines that term to mean the date upon which the bankruptcy is deemed to have commenced by s.115. Section 115(1) and s.115(2) provide as follows: "115(1) [On creditor's petition] The bankruptcy of a person who becomes a bankrupt on a creditor's petition...shall be deemed to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by that person within the period of 6 months immediately preceding the date on which the creditor's petition was presented.... 115(2) [On debtor's petition] The bankruptcy of a person who becomes a bankrupt by virtue of the presentation of a debtor's petition shall: (a) if he has committed any act or acts of bankruptcy within the period of 6 months immediately preceding the date on which the petition was presented - be deemed to have relation back to, and to have commenced at, the time of the commission of that act, or the first of those acts, as the case may be; or (b) if he has not committed any such act of bankruptcy - be deemed to have commenced at the time of the presentation of the petition." In the present case, the debtor George Zorbas committed an act of bankruptcy on 24 June 1994. This was within six months of the -~5- presentation of the debtors' petition on 31 October 1994. Thus, by virtue of s.115(2)(a), if he became bankrupt on his own petition, the bankruptcy would be deemed to have commenced on 24 June 1994, the only date on which he committed an act of bankruptcy. The same process of reasoning would apply to the debtor Nicholas Zorbas, although his bankruptcy would be deemed to commence on 12 July 1994, the date on which he committed an act of bankruptcy. Under s.115(1) there would be no difference in these dates if the debtors became bankrupt on the creditor's petition. Thus, the relation back provisions do not vary in their application in the circumstances of this case, regardless of whether the bankruptcy of the debtors results from their own petition or that of the creditor. (Of course, it is possible that the debtors believed when lodging their petition that there would be a difference, but there is no evidence of their beliefs on the issue; they did not swear affidavits and did not give oral evidence. ) The Evidence The affidavit evidence shows that in February 1994 the debtors each held an interest in certain land at Drummoyne. It appears that George Zorbas held a one share interest as tenant in common and Nicholas Zorbas held the other half share as joint tenant with his (Nicholas') wife. A transfer dated 10 February 1994 executed by the proprietors was in evidence, showing a consideration of $333,000. The date of registration of the transfer does not appear, but a settlement sheet from the solicitor for the transferors suggests that all but about $7,000 -6- of the purchase price was paid to the Commonwealth Bank as the secured creditor or to the vendors' solicitor for costs and disbursements. On 6 January 1994, a transfer executed by George Zorbas of land at Ermington was registered. George Zorbas was the registered proprietor of that land. The transfer was expressed to be to a Ms Tsoli and was for a consideration of $110,000. A discharge of mortgage was also registered on 6 January 1994, but there is no evidence as to the amount paid out to the mortgagee. Nor is there evidence as to whether there was any relationship between Ms Tsoli and Mr George Zorbas, other than as purchaser and vendor. Company searches show that, at the time of the statement of affairs, each debtor was a director and shareholder in at least one proprietary company. George Zorbas held 100,000 fully paid ordinary shares in Z & G Pty Ltd, while Nicholas Zorbas held 150,000 fully paid ordinary shares in Z & G Pty Ltd. There is no evidence as to the activities of that company. Neither debtor disclosed his shareholding in the statement of affairs, despite the form specifically asking that all shares owned should be listed. Road Traffic Authority records show that a Mercedes Benz vehicle, registered number TID 891, was registered in the name of "Nickolas (sic) Zorbas". There appears to have been no dispute that this was a reference to the debtor Nicholas Zorbas. The -7- statement of affairs provides for the debtor to list all motor vehicles owned, whether or not registered in the debtor's name. No disclosure was made in Nicholas Zorbas' statement of affairs concerning the Mercedes Benz. The deponent of the affidavit swore that he had seen the motor car being driven at the end of October 1994 and that it appeared in good condition. A photograph of the vehicle (revealing it to be a Mercedes Benz 560 SEL) was in evidence. Princip] A direction to the Registrar to reject the debtors' petition should be made if that petition constitutes an abuse of the process provided by s.55 of the Act: Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589, at 598. In that case the majority of the Court (Gibbs CJ, Murphy, Brennan and Dawson JJ) said (at 599-600): "It is a purpose foreign to the bankruptcy laws, and an abuse of process, for a debtor to present a petition for the purpose of making it impossible for a creditor to obtain a sequestration order on a pending petition and with the further purpose of shortening the period of relation back, possibly placing beyond the reach of the trustee property which would otherwise vest in him." In Edeisten the Full Court of the Federal Court held (at 261) that the ratio decidendi of Clyne "is that a petition will constitute an abuse of process if it is presented for a purpose, whatever that purpose may be, which is foreign to the bankruptcy laws". The burden of proof rests on the creditor to demonstrate such a ~g- purpose. This is the civil onus, although the Court will take into account the seriousness of the issue of fact to be determined: Edelsten at 263-264. It is not a purpose foreign to the bankruptcy laws merely to show that the debtor intends to prevent the creditor succeeding on its petition: Re Cornish: Ex parte English. In Edelsten the debtor gave evidence of his purpose in presenting the petition. His evidence was not accepted by the trial judge, who took into account detailed evidence concerning transactions in which the debtor participated prior to the presentation of his petition. The trial judge, whose findings were not disturbed by the Full Court of this Court, concluded that the debtor had the purpose of reducing the prospect that transactions entered into by him might be set aside. There was specific evidence of substantial transactions between the bankrupt and companies he controlled. These occurred more than six months before the presentation of the debtor's petition, but within six months of the date of the creditor's petition. The significance of this was that s.122(1) of the Act provides that certain transactions in favour of creditors, having the effect of a preference, are void as against the trustee in bankruptcy if they occur within six months of presentation of the petition on which the debtor became bankrupt. Even where there is no direct evidence of the debtor's purpose in presenting a petition, the court may draw inferences from other material. For example, evidence that the debtor disposed -9- of property outside the relation back period applicable to a bankruptcy on a debtor's petition (but within the period applicable to a bankruptcy on a creditor's petition) might justify an inference that the debtor intended to prevent scrutiny of the transactions: Re Cornish: Ex parte English, at 259. The court will be readier to draw the inference if a debtor, who has knowledge of both the transactions and of his or her own purpose in presenting a petition does not give evidence. The peculiar means of knowledge of the debtor does not relieve the creditor of the burden of adducing evidence, but slight evidence may suffice: wl: Ex parte Kleinwort Benson Ltd, at 41. Application of Principles In this case the debtors have neither given evidence nor themselves offered an explanation for having decided to present their own petition while the creditor's petition was on foot. This allows me to infer, as I do, that any evidence given by them would not be helpful to their case. Nonetheless, the burden rests on the creditor to show that the debtors had a purpose foreign to the bankruptcy laws in presenting their petition. If the relation back periods were different in this case, depending upon which petition was relied upon, there might be a basis for inferring that the debtors intended to avoid scrutiny by the trustee or the Court of the property transactions. But the relation back periods are identical in each case. There is no evidence whether the debtors were aware of that fact. While one may have suspicions about the motives of the debtors, in my opinion the evidence does not allow me to infer that they acted - 10 - on a mistaken belief that they would gain an advantage concerning the relation back period. The documentary evidence does not suggest that the sale of the land at Drummoyne in February 1994 was anything other than a bona fide transaction. On the contrary, the settlement sheet shows that almost all proceeds went to the Commonwealth Bank as secured creditor. This suggests that the debtors did not obtain an advantage by that transaction that would be unfair to the general body of creditors. Accordingly, the transaction does not found an inference that the purpose of the debtors' petition was to avoid the transaction receiving scrutiny. There may be stronger grounds for suspicion about the Ermington transaction. But there is nothing in the evidence sufficient to justify an inference that the debtors presented their petition with the intention of causing that transaction to escape scrutiny. As far as the relation back provisions are concerned, the sale of the land at Exrmington is in the same position, regardless of whether the debtors' bankruptcy results from their own petition or that of the creditor. I should mention two other matters briefly. I have not overlooked the apparent lack of frankness in the debtors' statement of affairs. Whatever doubts that may create about their credibility, their failure to disclose assets in their respective statements cannot overcome the lack of evidence to support a finding on the required standard of proof that they had a purpose in mind foreign to the bankruptcy laws. There are -11- circumstances in which a grossly untrue affidavit sworn by a debtor may show that a debtor's petition should not have been presented: Re cada; E arte Moncada (1986) 11 FCR 205, at 208. However, this case does not involve such circumstances. Nor have I overlooked the fact that the period of six months prescribed in s8.122(1) of the Act in relation to preferences would extend back to 29 January 1994 in the case of the creditor's petition (six months prior to presentation of the petition) and only to 30 April 1994 in the case of the debtors' petition. There is, however, no evidence of dealings with creditors of a kind that could give rise to claims that transactions were liable to be avoided as a preference against the trustee, pursuant to s.122(1) of the Act. The mere possibility that further examination may reveal such evidence is not enough, in my opinion, to justify an inference that the debtors had a purpose foreign to the bankruptcy laws. Furthermore, the period referred to in s.122(1)(a) would not in any event extend to the transfer registered on 6 January 1994, since this occurred more than six months before the presentation of the creditor's petition. Mr Appleton faintly suggested that the debtors may have filed their petition intending to avoid paying the costs of the creditor. However, a debtor's petition filed during the currency of the creditor's petition does not deprive the Court of power to make an appropriate order in respect of costs: Re Hankey: Ex parte Kratzmann (1986) 11 FCR 512, at 513. Nor is the fact that -12- the debtors have nominated a trustee a justifiable basis, in the absence of other evidence, to infer an improper purpose: Re Hankey, at 513. Indeed, in argument, Mr Nemes suggested (albeit without evidentiary support) that this may have been one of the reasons why the debtors presented their own petition. fe) sion For the reasons I have given, I direct the Registrar, pursuant to s.56(7AA) of the Bankruptcy Act 1966, to accept the debtors' petition. I order the creditor to pay the costs of the debtors. I certify that this and the preceding 10 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville. Associate: Z de pe. Dated: 28 November, 1994 Heard: 24 & 28 November, 1994 Place: Sydney Decision: 28 November, 1994 Appearances: Mr S. Nemes of Heaney, Richardson & Nemes, Solicitors, appeared for the debtors. Mr C. Appleton of Egisto & Romano, Solicitors, appeared for the creditor.