FEDERAL COURT OF AUSTRALIA BANKRUPTCY - Sequestration - ability to pay debts - whether alleged ability to borrow against other causes of action makes debtor solvent - whether sufficient validity in claims - whether real claims with any likelihood of success- debtor refusing to so borrow in any event BANKRUPTCY - Sequestration - Whether other sufficient cause to dismiss petition within meaning of s52 (2) (b) - whether claim against the creditor of sufficient validity to justify dismissal or adjournment of petition Bankruptcy Act 1966 (Cth) s 52(1) & (2) Trojan v Corporation of Hindmarsh (1987) 16 FCR 37 (Applied) Re Stubberfield; Ex parte Paradise Grove Pty Ltd (1995) 134 ALR 169 (Applied) Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14(Applied) Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 (Applied) Re Sarina; Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163 (Considered) Re Kostezky; Ex parte Milder Elfman Szmerling Krycer Pty Ltd (1996) 67 FCR 101(Applied) Sandell v Porter (1966) 115 CLR 666 (Applied) Cain v Whyte (1933) 48 CLR 639 (Applied) RE ELWYN JOHN CAPEL (Debtor): Ex parte CARAM FINANCE AUSTRALIA LIMITED (FORMERLY CALLED MARAC FINANCE AUSTRALIA LIMITED) ACN 000 098 402 (Creditor) QG 7299 of 1997 FINN J BRISBANE 9 APRIL 1998 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QG 7299 of 1997 re: ELWYN JOHN CAPEL DEBTOR EX PARTE: CARAM FINANCE AUSTRALIA LIMITED (Formerly called MARAC FINANCE AUSTRALIA LIMITED) ACN 000 098 402 CREDITOR JUDGE: FINN J DATE OF ORDER: 9 APRIL 1998 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The estate of the debtor be sequestrated. 2. The Petitioning Creditor's costs, including any reserved costs be taxed and paid in accordance with the Bankruptcy Act 1966. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QG 7299 of 1997 re: ELWYN JOHN CAPEL DEBTOR ex parte: CARAM FINANCE AUSTRALIA LIMITED (Formerly called MARAC FINANCE AUSTRALIA LIMITED) ACN 000 098 402 CREDITOR JUDGE: FINN J DATE: 9 APRIL 1998 PLACE: BRISBANE REASONS FOR JUDGMENT The path of resistance taken by the judgment debtor, Elwyn John Capel, to the petition of Caram Finance Australia Ltd ("Caram") for a sequestration order, can at best be described as surprising. Mr Capel has conceded that the requirements of s 52(1) of the Bankruptcy Act, 1966 (Cth) ("the Act") are satisfied. He nonetheless contends that I should dismiss the petition under s 52(2) of the Act because "he ... is able to pay his ... debts" and/or because "for other sufficient cause a sequestration order ought not to be made". I should add that Mr Capel has conducted his own defence of this proceeding. For the sake of completeness I should also add that I gave leave to Ms Heather Langston, a creditor of Mr Capel who shares accommodation and is in a relationship with him, to appear in opposition to the making of a sequestration order. Counsel for Ms Langston, in the event, sought only to have the petition adjourned for reasons given below. Factual Setting It is unnecessary to give a detailed account of the long history of the unfortunate relationship between Caram and Mr Capel. I merely note the following. (1) In May 1985, Mr Capel executed a mortgage in favour of Caram to secure a loan of $40,000. A default in repayment led to litigation over 1985 and 1986 resulting in summary judgment for Caram and an order for costs. (2) In September 1986 Caram served a bankruptcy notice on Mr Capel. A creditor's petition later being presented, a sequestration order was made against Mr Capel's estate on 11 November 1988. (3) Mr Capel applied to have that order annulled in May 1989. That application was dismissed. Mr Capel's trustee in bankruptcy later assigned to him such claims as he, Mr Capel, had against Caram. On 4 April 1991 Mr Capel initiated proceedings for damages in the Supreme Court of Queensland. I will refer to this proceeding as action 589 of 1991. It will be necessary to examine it in a little detail below. (4) In May of 1991 Mr Capel was discharged from bankruptcy. (5) Mr Capel's statement of claim in action 589 of 1991 was challenged successfully in strike out proceedings in September 1995 by Caram. It has gone through a number of subsequent iterations that have been challenged in turn. It is the case, as both counsel for Caram and for Ms Langston acknowledge (though Mr Capel does not), that as a result of various interlocutory orders that have been made, there is no live statement of claim at the moment. These interlocutory proceedings (including appeals) resulted in some number of costs awards against Mr Capel. (6) The bankruptcy notice in this matter was founded on the costs order made against Mr Capel in the September 1995 strike-out proceedings. The debt relied upon in the creditor's petition simply adds some number of additional costs orders plus interest to that referred to in the bankruptcy notice and was in the sum of $38,317.94. Mr Capel's Assets and Liabilities Mr Capel has conceded that, were a sequestration order to be made now, his creditors would receive nothing by way of dividend. To the extent that he claims to have any assets at all (other than causes of action to which I will refer), these seem slight indeed, amounting to little more than a small amount in a bank account. While he has in an affidavit of 12 February 1998 made reference to possible assets and trusts in Great Britain, if he ever had any interest in these it is the case that they vested and remain vested in the trustee in bankruptcy of his 1988 bankruptcy. Those alleged assets are of no present relevance. Mr Capel is currently unemployed and is in receipt of social security benefits. It manifestly is the case that he does not possess assets against which execution could be levied: see Trojan v Corporation of Hindmarsh (1987) 16 FCR 37 at 47-48; see also Re Stubberfield; Ex parte Paradise Grove Pty Ltd (1995) 134 ALR 169 at 172. The judgment creditor's debt apart, Mr Capel's debts are small in number and amount, save for that of Ms Langston which is put at $3971.20. Ms Langston is not pressing for payment. But this said and disregarding Mr Capel's claimed causes of action, he clearly is unable to pay his debts once account is taken of that of Caram. Mr Capel's claim of solvency is based upon the value he attributes to his various causes of action and of his capacity (were he so minded) to borrow against them: I have made the comment in parenthesis because Mr Capel has made it unmistakably plain that he has no intention of borrowing any sum to pay Caram's debt. It is necessary then to refer in turn to his various actions. While their principal relevance is to the "other sufficient cause" limb of s 52(2)(b) - cf eg Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14 - one at least of them is put forward as, in effect, available security for any borrowing Mr Capel wished to make to pay his debts. (a) The claim against the judgment creditor I earlier referred to the successful application made by Caram in 1995 to strike out Mr Capel's statement of claim in action 589 of 1991. Mr Justice Thomas of the Supreme Court of Queensland in making the strike out order indicated in his reasons that the statement of claim challenged was in large measure "an attempt to relitigate his [Mr Capel's] obligation to repay the loan" he took with Caram in 1985. Nonetheless, his Honour concluded that there were two claims not precluded by res judicata or Anshun estoppel - see Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 - in relation to which Mr Capel ought be given leave to deliver a statement of claim. These related to - "(a) a claim for damages for breach of an alleged agreement made between the plaintiff [Mr Capel] and defendant [Caram] on or about 25 March 1985 for the sale to the plaintiff by the defendant of display kitchens for the sum of $13,000.00; and (b) an alternative claim for damages for an alleged conversion by the defendant between 5 and 7 April 1985 of display kitchens (or, alternatively, a display kitchen)." I would note that Thomas J did not express any view upon the prospects of either claim. In the Court of Appeal of the Supreme Court, Thomas J's orders were varied (if such was necessary) to allow a claim for fraudulent misrepresentation in respect of the display kitchen agreement. Again no comment was made on the prospects or otherwise of this claim. On 23 October 1995 Mr Capel delivered a new statement of claim. It provoked a summons from Caram in February 1996 seeking strike out orders again which in turn elicited a cross-summons from Mr Capel seeking leave to amend. On 16 April 1996 Mr Capel delivered a proposed further amended statement of claim and on 18 April 1996 on the return of the summonses he agreed to deliver a fully particularised statement of claim. This he did not do. On 4 October 1996 Caram filed yet another summons seeking (inter alia) a stay of proceedings until previous costs orders had been met or that it be struck out as vexatious, oppressive or unreasonable. Mr Capel undertaking to the court to make payment of designated costs orders - and I emphasise this undertaking - Helman J of the Supreme Court of Queensland ordered by consent on 31 October 1996 that (insofar as presently relevant) - "1. The action be stayed until further order save that the Plaintiff be at liberty: ... b) to deliver a consolidated particularised amended Statement of Claim." No such pleading has since been delivered and no further step taken by Mr Capel to prosecute his claim although on 10 July 1997 he was unsuccessful in proceedings in the Supreme Court in his application to be relieved of his undertaking to the court to pay the costs, given on 31 October 1996. Mr Capel claims that I have, in effect, the substance of his pleading before me - he says all he needs do is to aggregate his further amended statement of claim of 16 April 1996 (apparently settled by counsel) with further and better particulars (apparently prepared by Mr Capel) provided on 21 February 1996 to produce the pleading envisaged by the consent order. The respondent disputes this. It claims that not only did it reject such a "fusion" of these two documents as constituting a proper and unobjectionable pleading as early as 19 April 1996, but also it still does not, in a forensic sense, know the shape of the case being made against it. What is certain is that I do not actually have any live pleading upon which to base some evaluation of the claims made by Mr Capel. Moreover the two documents that Mr Capel says are to be aggregated do not happily sit together. In this I agree with the respondent's objection to them. I would note, furthermore, that I do not consider that I have such affidavit material properly before me as would enable me to express anything other than an entirely speculative view on whether the claims made are real ones with any likelihood of success: cf Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 116. Further Mr Capel has so acted since the consent orders as to preclude the petitioning creditor from either pleading to, or taking some other available course in relation to any pleading of, the claims. What equally seems clear is that Mr Capel has felt no sense of urgency in prosecuting this action, though initiated in 1991 and relating to events of 1985. His espoused reason for dilatoriness is that, as he stated in a letter to Caram's solicitor of 19 February 1997, while success in the action would achieve some of his "objectives it would not achieve my primary objective". He was, in consequence, reluctant to invest time and money in pursuing this action. The pursuit of "objectives" seems to play no little part in Mr Capel's decision making. The final observation I would here make on this action is this. Mr Capel places quite some stock on the quantum of the pecuniary relief he is seeking. His principal claims as made in his further and better particulars are, in the alternative (or so I understand) for $42,000, $100,000 or for loss of profits of $120,000 per annum for 10 years. I refrain from comment on any of this, other than to say that these arise out of a contract for the sale of goods the consideration for which was $13,000. (b) The personal injury claim In 1994 Mr Capel was involved in a motor vehicle accident and in 1996 ceased working as a taxi driver because of severe pain resulting from the aggravation of the injury received in that accident. I have no evidence at all concerning the accident or the circumstances of aggravation of the injury said to have been then sustained. Mr Capel has, apparently, initiated proceedings in the District Court in relation to the accident. He is claiming damages in excess of $200,000.00. Again I have not been provided with any pleadings, though, nonetheless Mr Capel asserts that the insurer of the first defendant in that proceeding has admitted liability. I note in passing that there is no evidence that satisfies me that such is the case. As with the claims against Caram, I here have assertion but not evidence upon which I could properly make a finding that this claim was a real one and probably of likely significant value. As I note below, it is this claim in particular on which Mr Capel relies to establish his solvency. He says he could borrow against it to pay the petitioning creditor. Ms Langston has given evidence of her preparedness to make a loan to him for this purpose secured in some way by the personal injuries claim, though, as I have indicated, Mr Capel has made plain that he would not borrow for this purpose. (c) Other claims Mr Capel has, it would seem, made a number of claims for professional negligence against persons or firms who have previously advised him in a range of matters. The evidence concerning these is negligible. Whether they are real or fanciful actions I know not although I note that in his lengthy affidavits Mr Capel is not at all hesitant in making allegations of impropriety or negligence against others whose actions he considers may have affected him adversely. For present purposes I am not prepared to attribute any significance to the professional negligence claims and Mr Capel has not sought to rely upon them in any significant way for the purposes at least of demonstrating his ability to pay his debts. Is Mr Capel Able to Pay his Debts? Given the state of the evidence before me and bearing in mind that the onus of proof of the matter lies on Mr Capel, the answer to the question must be in the negative. Apart from his various causes of action he conceded at the hearing he does not have assets to pay his debts. Those causes of action and his capacity to borrow against at least the personal injuries claim makes him solvent in his view. And that he is thus solvent, even if unwilling to borrow to satisfy Caram's debt, is sufficient to preclude the making of a sequestration order. For this conclusion he relies upon the decision at first instance in Re Sarina; Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163 (on appeal see (1980) 48 FLR 372) and Re Stubberfield; Ex parte Paradise Grove Pty Ltd, above. I would note that in this submission he relies upon Ms Langston's evidence to demonstrate his ability to borrow to pay Caram. I would also note that while counsel for Ms Langston did not retract her offer to lend, he did concede that there is no evidence of the validity of the personal injuries claim before me. Even assuming that Ms Langston would lend to Mr Capel to pay Caram if so requested I am not satisfied that he is for that reason able to pay his debts. As I have already indicated I am not satisfied that there is "sufficient validity" - cf Re Kostezky; Ex parte Milder Elfman Szmerling Krycer Pty Ltd (1996) 67 FCR 101 at 106 - in the personal injuries claim (or for that matter in the claim against Caram) as to be able to regard either as assets capable of sourcing moneys, for example, "by sale or by mortgage or pledge ... within a relatively short time": see Sandell v Porter (1966) 115 CLR 666 at 670. To be able to demonstrate that a debt can be discharged by substituting another debt for it but without also demonstrating a capacity to pay for, to secure, or otherwise satisfy the latter debt, does not discharge the onus that the debtor is able to pay his debts: cf Trojan's case, above, at 47. For this reason alone I would conclude that Mr Capel has failed to satisfy me that the requirements of s 52(2)(a) of the Act have been made out. Additionally, though, I consider this to be one of those probably very rare cases in which, even if I was satisfied that the personal injuries claim was such an asset as could be borrowed against and as would justify finding Mr Capel was able to pay his debts, I would nonetheless still exercise my discretion in favour of making a sequestration order. Given that Mr Capel has not assets or income that can be reached by execution or garnishment, and given his intransigent refusal to borrow to pay Caram's debt, Caram is left without any appropriate alternative remedy. As the Full Court observed in Trojan's case, above, at 48 - "Section 52(2)(a) envisages a situation which will probably bear fruit in payment". At best on the assumption I have made, that fruit is being withheld from Caram at Mr Capel's pleasure. "Other Sufficient Cause" As I understand it, Mr Capel's submission is that in action 589 of 1991 he has a claim against Caram which has not as yet been finalised; the quantum claimed in which exceeds the amount of Caram's debt, and the prosecution of which would be prejudiced by a sequestration order. Further the making of such an order would prejudice his other creditors in that they would receive no dividend in the event of his bankruptcy. Counsel for Ms Langston has made submissions generally in support of the above. Mr Capel, further, asserts that the creditor's petition itself is an abuse of process because he can pay his debts. My previous finding is sufficient to dispose of the last of these without further comment. Ms Langston's counsel has conceded for the purposes of his submission that there is no evidence of the prospects of the claim against Caram. Mr Capel, for his part, does not concede this. I have said sufficient of the claim already. I am not satisfied, as I have indicated, that it is probably a "real claim" which is "likely to succeed": cf Re Schmidt, above, at 116; that it has "sufficient validity ... to justify a dismissal or adjournment of the petition": cf Re Kostezky, above, at 106. And, as the Full Court indicated in Ling v Enrobook Pty Ltd (1997) 143 ALR 396 at 402 it is not the case that "it is in the public interest to allow insolvent debtors to prosecute litigation generally". This conclusion would be sufficient to justify rejection of Mr Capel's submissions to the extent they are based upon his claim against Caram. I would, though, go further in any event. Even if I was satisfied that there was some prospect of success in that claim, I would still exercise my discretion in favour of making a sequestration order. That claim has not even reached the point of pleadings being delivered notwithstanding that the writ was issued in 1991. Given Mr Capel's conduct of that proceeding there is no reason to believe it will now be prosecuted with any expedition at all. On the contrary. Mr Capel has refused to honour his undertaking to the court to pay Caram's debt; he refuses to take steps to ensure its payment; and there is no reasonable prospect of Caram being paid. Mr Capel seems quite content to keep Caram at his mercy in relation to the debt. In such circumstances his claim against Caram would not provide sufficient cause to override the rights of an individual creditor to get its debt paid when it is now long overdue: cf Cain v Whyte (1933) 48 CLR 639 at 646. Finally I should indicate that I do not consider the prospect of a derisory dividend and the consequential fate of Mr Capel's creditors as being of any particular moment. It may be the case that at some future date one or other of his litigations could produce funds for the payment of his debts. But having no reasonable basis for concluding there is sufficient prospect of this occurring and in such a reasonable time as would justify adjourning the petition, I do not consider that the size of any prospective dividend provides cause for preventing Caram from prosecuting its petition and from now seeking a sequestration order. Conclusion Because I am satisfied with the proof of the matters referred to in s 52(1) of the Act, but being unsatisfied with the proof advanced by Mr Capel of any of the matters referred to in s 52(2), I will order that a sequestration order be made. I should add that during the hearing I raised with Mr Capel the possibility of staying proceedings under that order for up to 21 days (cf s 52(3)) to allow him to consider an alternate resolution of this matter. He declined that opportunity. I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn. Associate: Dated: 8 April 1998 Counsel for the Applicant: R Bain QC Solicitor for the Applicant: Clayton Utz Counsel for the Opposing Creditor: G Beacham Solicitor for the Opposing Creditor: Ellison Moschella & Co Respondent: Appeared in person Date of Hearing: 23, 24 March 1998 Date of Judgment: 9 April 1998