FEDERAL COURT OF AUSTRALIA BANKRUPTCY - Application for sequestration order - Whether sufficient cause to refrain from making sequestration order - Public interest - Potential claim against former solicitors - Whether claim against former solicitors will mean that the debtors are likely to remain insolvent for only a short period - Whether majority of creditors do not desire that the debtors be made bankrupt - Resistance of the Court to informal arrangements to avoid the bankruptcy laws - Attendance at meeting of Ministers of State to raise grievances Bankruptcy Act 1966 (Cth) s 52 Ling v Enro Book Pty Ltd (1997) 143 ALR 396 applied Maddestra v Penfolds Wines (1993) 44 FCR 303 cited COMMONWEALTH BANK OF AUSTRALIA v CHAPMAN & ANOR NO VG 7221 OF 1997 JUDGE: NORTH J PLACE: MELBOURNE DATE: 18 AUGUST 1997 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 7221 of 1997 BETWEEN: COMMONWEALTH BANK OF AUSTRALIA Applicant AND: IAN DAVID CHAPMAN First Respondent DENISE BERNADETTE CHAPMAN Second Respondent JUDGE(S): NORTH J DATE OF ORDER: 18 AUGUST 1997 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: (1) That a sequestration order be made against the estates of Ian David Chapman and Denise Bernadette Chapman. (2) That the costs of the applicant creditor, Commonwealth Bank of Australia, of and incidental to the petition, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth). Date of Bankruptcy: Ian David Chapman 30 January 1997 Denise Bernadette Chapman 13 February 1997 Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 7221 of 1997 BETWEEN: COMMONWEALTH BANK OF AUSTRALIA Applicant AND: IAN DAVID CHAPMAN First Respondent DENISE BERNADETTE CHAPMAN Second Respondent JUDGE(S): NORTH J DATE: 18 AUGUST 1997 PLACE: MELBOURNE EX TEMPORE REASONS FOR JUDGMENT HIS HONOUR: On 4 March 1993, the Commonwealth Bank of Australia (the Bank) issued a writ out of the Supreme Court of Victoria claiming $222,048.13 against Ian David Chapman and Denise Bernadette Chapman. On 31 March 1995, a default judgment was entered in that action for $223,173.13. On the basis of that judgment, the Bank issued a bankruptcy notice on 12 December 1996, which was served on Mr Chapman on 9 January 1997 and on Mrs Chapman on 23 January 1997. Mr and Mrs Chapman failed to comply with the requirements of the bankruptcy notice and, on 8 April 1997, the Bank issued a petition seeking a sequestration order against Mr and Mrs Chapman. The petition was served on Mr Chapman on 12 May 1997 and on Mrs Chapman on 18 May 1997. The matter then came before the Court on four separate occasions before today. On 22 May 1997, the petition came before Registrar Seccombe and was adjourned to 3 June. On 3 June, again before Registrar Seccombe, the matter was adjourned to 11 July to allow Mr and Mrs Chapman to file a statement of their financial position. The matter then came on on 8 July, somewhat earlier than the adjourned date, before Registrar Efthim. I am told that the hearing on that occasion was lengthy. As a consequence, orders were made for the service by Mr and Mrs Chapman of notices of opposition and affidavits in opposition to the petition. The matter next came on before the Court on 6 August 1997, before Registrar Agnew. Apparently, the affidavits required to be served and the notices required to be served as a result of the hearing on 8 July had not been so served. Consequently, on 6 August 1997, Registrar Agnew made further directions to allow Mr and Mrs Chapman to serve notices of opposition and affidavits in opposition by 14 August 1997. In compliance with the directions of Registrar Agnew, Mr and Mrs Chapman did cause to be filed, on 14 August 1997, a notice of intention to appear and grounds of opposition to the petition, together with an affidavit in opposition to the making of a sequestration order. The Bank has complied with the requirements of s 52 of the Bankruptcy Act 1966 (Cth) (the Act) as certified by the Registrar. I gave leave today for the Bank to file in Court an affidavit of search of Elaine Frances Coverdale and an affidavit of liability of Peter Groves Crawford. These affidavits shows that there is a balance of debt outstanding to the Bank by Mr and Mrs Chapman of $181,173.13. Mr and Mrs Chapman, in essence, raise three matters under s 52(2)(b) of the Act which they allege amount to sufficient cause for the Court to refrain from making a sequestration order today. The first reason advanced by Mr and Mrs Chapman is that it is not in the public interest to make a sequestration order, having regard to the fact that the debt arose out of the conduct of a charitable enterprise by a company operated by Mr and Mrs Chapman called Go Tell Nominees Pty Ltd. This company operated a camp for children without parental support. The charitable activities of this company are not specified in any detail. It has not been made clear that the making of a sequestration order would curtail the conduct of such charitable purposes. Indeed, there is much to be said for the submission on behalf of the Bank that the evidence of charitable purpose is, at best, weak. A search of the company which was received in evidence shows its principal activity as trustee for a family trust, and not for any charitable purpose. In any event, I am not satisfied that the charitable enterprise of the company, if any, is relevant to the position of Mr and Mrs Chapman, who are the subject of this petition. A more substantial argument in opposition to the making of a sequestration order relates to the claim by Mr and Mrs Chapman that they have complaints against their former solicitors in relation to the compulsory acquisition of land owned by Go Tell Nominees Pty Ltd. In essence, as I understand the proposed claim, they allege that the previous solicitors advised that they had a good claim for $11.5 million, comprising $5 million for the value of the land in question and $6.5 million for alluvial gold and quarrying operations conducted on the land. In the event, Parks Victoria paid the company $2.05 million for the land, together with $250,000 costs. Because of a pressing creditor, an administrator was appointed to Go Tell Nominees Pty Ltd and a meeting of creditors called by the administrator approved the settlement on 12 December 1996. The amount of the claim against the former solicitors has not been estimated. Mr and Mrs Chapman have not indicated their financial position. The material does show that, in addition to the liability to the Bank of $181,173.13, an amount of $2.68 million is owed to other creditors. It is therefore unclear, even if the claim against the solicitors was successful, what impact that would have on the financial position of Mr and Mrs Chapman. Quite apart from these reasons, it seems to me that the potential claim against the solicitors does not provide a sufficient ground for refusing to make the sequestration order in this case. The claim against the solicitors is at least eight months old. There is no evidence that any steps have been taken to make such a claim until very recently. There is no evidence that a letter of demand was sent, for example, at or about the time at which the settlement of the compensation claim occurred in December 1996. No proceedings have yet been issued. In Ling v Enro Book Pty Ltd (1997) 143 ALR 396, at 401-402, the Full Court said: "The above authorities do not, in our view, support the appellants contention that the courts recognise a public interest in allowing a debtor to prosecute litigation commenced by the debtor. The public interest recognised by such authorities is that which, in broad terms, is reflected also in s 40(1)(g) of the Act; that is, that a sequestration order ought only to be made on the basis of an indebtedness which is not counterbalanced by a claim by the debtor against the petitioning creditor. Such authorities provide no comfort to a debtor who asserts a claim, not against his or her creditor, but against a third party. The authorities also show that satisfaction that the debtor is well advanced with litigation likely to result in the debtor being in a position to pay his or her debts may well provide a basis for a finding that there is a 'sufficient cause' for a sequestration order not to be made: see, for example, Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303. But the authorities do not suggest that it is in the public interest to allow insolvent debtors to prosecute litigation generally. They only recognise that it is not in the public interest for a debtor to be forced into bankruptcy by reason of a state of insolvency likely to be of only short duration." I cannot be satisfied that this case is one in which the prosecution of a claim against the former solicitors will mean that Mr and Mrs Chapman are likely to remain insolvent for only a short period. The next basis upon which Mr and Mrs Chapman assert a sufficient cause is that a majority of their creditors do not desire that they be made bankrupt. There are at least two answers to this argument. The first is that the material before the Court as to the overall financial position of Mr and Mrs Chapman does not enable the Court to determine that the creditors who are said to have this view constitute a majority of the creditors. As I have suggested earlier, Mr and Mrs Chapman have not set out their financial position in such a way as to enable the full extent of their assets and liabilities to be determined. Second, the evidence on this matter is not compelling. It is contained in one paragraph of the affidavit of Mr Chapman which asserts: "I believe that by reason of my discussions with each of those creditors that they do not want to see my wife or myself placed in bankruptcy." The evidence may have been more compelling if the creditors themselves had sworn affidavits to that effect. But, even if they had, there is a real doubt whether the evidence would amount to a sufficient cause against making a sequestration order. That is because of the Court's resistance to informal arrangements made by persons to escape the operation of the bankruptcy laws: see Maddestra v Penfolds Wines (1993) 44 FCR 303, at 310. The final basis upon which Mr and Mrs Chapman asserted that a sufficient cause against making a sequestration order had been shown was that Mr Chapman was to attend a meeting tomorrow with a number of Ministers for the State of Victoria where he would raise his grievances relating to the inadequacy and delay in resolving the compensation issues concerning the acquisition of the land from Go Tell Nominees Pty Ltd. The evidence of this meeting does not provide sufficient reason to refrain from making a sequestration order. The meeting appears to be no more than a visit by some State Ministers to the local area. There is no expectation expressed in the evidence as to any possible outcome in favour of Mr and Mrs Chapman. For those reasons I reject the arguments of Mr and Mrs Chapman that sufficient cause has been shown against the making of sequestration orders. The order of the Court will be: (1) That a sequestration order be made against the estates of Ian David Chapman and Denise Bernadette Chapman. (2) That the costs of the applicant creditor, Commonwealth Bank of Australia, of and incidental to the petition, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act. I indicate that the dates of commission of the acts of Bankruptcy were, in the case of Ian David Chapman, 30 January 1997 and, in the case of Denise Bernadette Chapman, 13 February 1997. I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice North Associate: Dated: 21 October 1997 Counsel for the Applicant: Mr B. Netto Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: Mr B. A. McMahon Solicitor for the Respondent: McMahon & Associates Date of Hearing: 18 August 1997 Date of Judgment: 18 August 1997