FEDERAL COURT OF AUSTRALIA BANKRUPTCY LAW Ð whether sequestration order should be made Ð whether debtor solvent Ð whether debtor able to pay debts BANKRUPTCY LAW Ð formal defect or irregularity in creditorÕs petition and verifying affidavit Ð whether debtor could have been misled Bankruptcy Act 1966 (Cth) ss 306(1), 52(1),182, 160 Deputy Commissioner of Taxation (Vic) v Boxshall (1988) 19 FCR 435 Appl Sandell v Porter (1966) 115 CLR 666 Appl Trojan v Corporation of Hindmarsh (1987) 16 FCR 37 Appl Re Kostezky; ex parte Milder Elfman Szmerling Krycer Pty (1996) 67 FCR 101 Refd Re Capel; ex parte Caram Finance Australia Ltd (Finn J, 9 April 1998, unreported) Refd Aluma-Lite Products v Robert Thomas Adcock QG 7499 of 1997 Kiefel J Brisbane 3 December 1998 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QG7499 of 1997 BETWEEN: ALUMA-LITE PRODUCTS PTY LTD Applicant AND: ROBERT THOMAS ADCOCK Respondent JUDGE: KIEFEL J DATE OF ORDER: 3 December 1998 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The estate of Robert Thomas Adcock be sequestrated. 2. David Lewis Clout be appointed trustee. 3. The petitioning creditorÕs costs of these proceedings, including reserved costs, be paid out of the estate. 4. The costs of those creditors who appeared on any hearing in connexion with the petition be paid out of the estate. 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 QG7499 of 1997 BETWEEN: ALUMA-LITE PRODUCTS PTY LTD Applicant AND: ROBERT THOMAS ADCOCK Respondent JUDGE: KIEFEL J DATE: 3 December 1998 PLACE: BRISBANE REASONS FOR JUDGMENT In March 1997 judgment was entered against Mr Adcock in the Supreme Court of Queensland in the sum of $250,000 together with interest and costs. Mr AdcockÕs liability arose out of his guarantee of the debts of a company in which he had an interest, Property Australia Pty Ltd (formerly ÒPropex Pty LtdÓ). Following his failure to comply with the bankruptcy notice, which was served on 12 May 1997, a petition issued on 26 August 1997. It referred to an amount due of $288,747.82. On 22 September 1997 Mr Adcock filed an application to set aside or adjourn the petition. There were two bases referred to in the material. Mr Adcock contended that he was solvent, although it was said his affairs were complex and it would take some weeks for him to prepare an affidavit to that effect. Mr Adcock is an accountant and a trustee in bankruptcy. The other ground for an adjournment was that Mr Adcock, or the company he had guaranteed, was then attempting to sell a property at Worongary. The material referred to a contract of sale for the sum of $575,000 which was due to settle on 30 September 1997. The petitioning creditorÕs solicitors resisted any adjournment, on the basis that there had been a previous promise of sale in August 1997 which had not come to fruition and winding up proceedings were on foot against the company Propex Pty Ltd. It was also asserted that the value of the land was only some $160,000, the price which had been paid for the land the year before. The value of that land remains in contention. Later material filed by Mr Adcock asserted the value to be $635,000 and explained that two contracts had been presented to the petitioning creditor, as mortgagee in possession, in Òthe last few monthsÓ, that they had been conditional, but that the current contract was now due to settle on 17 October 1997. The land was not sold. An affidavit as to solvency was later filed. It has, however, been overtaken by more recent affidavits. The matter was adjourned on a number of occasions in late 1997 and on 17 December 1997 directions were given to facilitate a hearing. After some unsuccessful attempts to list the matter for hearing, it was set down for 13 August 1998. Shortly prior to that time the solicitors for Mr Adcock withdrew. When the matter came on for hearing an adjournment was requested by Mr Adcock but I refused it. I then indicated my difficulty in accepting that his legal representatives could not have prepared the matter. It seemed to me that they had proceeded upon some assumption that an adjournment would again be granted upon request. An adjournment was however found to be necessary at a point in those proceedings and the matter was stood over to 18 August 1998 with further directions for materials and outlines of argument. In the result, however, further oral evidence was necessary in an attempt to cure deficiencies in the material, particularly the material filed on behalf of Mr Adcock. The matter was again further adjourned and at the time of that adjournment I expressed my concern that there still remained gaps in Mr AdcockÕs explanation as to the monies which might be made available to him from his company and in particular from Propex Pty Ltd. The giving of further evidence and argument took place on 24 and 26 August 1998 and the matter was listed for judgment on 28 August 1998. It is necessary to refer to the state of the evidence and contentions at that point, before dealing with the matters which are now sought to be raised. Save for another later sale of the Worongary land, a matter now in issue, there is nothing to suggest any change to those facts. A preliminary point taken by Mr Adcock was that the petition was a nullity, because the affidavit verifying paragraphs 1, 2 and 3 of it was sworn the day before the petition was presented to the Court. It was also suggested that the affidavit, said to have been sworn on 25 August 1997, must have been factually incorrect, because the petition attached to it was marked as having been filed in Court the next day. It must follow, it was submitted, that there was no petition actually attached when the affidavit was sworn. In way it was put, the submission implied impropriety. It appears however from the affidavit of the petitioning creditorÕs solicitor that such was not the case. The affidavit sworn on 25 August 1997 was received by the solicitors on 26 August 1997, the date when it was presented for issue. The only doubt which could be entertained about the matter arises because the affidavit did not address the circumstances prevailing at the time the petition was filed, but later affidavits confirm that there was, in any event, no change in position. The full debt remained owing at all times. In these circumstances it is impossible to conclude that the debtor could in any way have been misled. It follows that there was no more than a defect or irregularity in the process within the meaning of s 306(1) Bankruptcy Act 1966 (Cth): Deputy Commissioner of Taxation (Vic) v Boxshall (1988) 19 FCR 435, 440 I turn then to what was the real question in the proceedings, whether Mr Adcock can be said to be solvent. There was no doubt that he was himself unable to pay the sum outstanding and that remains the case. His affidavit material relied on sales of property by other companies with which he is associated and over which he exercised control. Although the material filed on Mr AdcockÕs behalf strongly implied that he might also have available to him profits from his new accountancy partnership, that is not now apparently correct. In oral evidence his partner explained that Mr Adcock receives only a salary of $2000 per week and has no entitlement to any profits. I am obliged to observe that the material filed by Mr Adcock was misleading and does not reflect well upon his credit. No explanation as to how it came to be filed was offered. Mr AdcockÕs list of assets and liabilities also discloses a sum of $250,000 which was said to have been made available by him to the partnership and implying, but not stating, that those monies might be repaid to him. On examination however it appeared that a company associated with him had advanced those sums. This approach was consistent with that by which other ÒassetsÓ listed by Mr Adcock failed to distinguish between assets owned by other entities, including trusts. The only possibility that the first mentioned sum might be made available to Mr Adcock would be if the equipment and items of fitout were leased and the monies received paid to him, but I was not told if and when that was to take place. On the state of the evidence I was and remain unable to accept that $250,000 is likely to be made available to Mr Adcock from this source and I am confirmed in that view by the lack of reliance placed upon this item in the conduct of his case. As to the smaller items of property, even were I to accept that their stated value was accurate and they were capable of realisation, their sale would not resolve Mr AdcockÕs problems. The question then turned upon the larger items of real estate. The test of a personÕs solvency is whether they are able to pay their debts by sale, or by mortgage or pledge of assets, within a relatively short time, a time which is assessed by taking into account other relevant factors: Sandell v Porter (1966) 115 CLR 666, 670. Where however the assets pointed to as capable of producing the necessary funds are owned by other entities, it needs be shown that they will be made available to the debtor: Trojan v Corporation of Hindmarsh (1987) 16 FCR 37, 47. Proof of these matters rests with Mr Adcock. It is of some significance, I consider, that in this case Mr Adcock has not been able to reorganise his affairs to do so since the petition was filed, despite what appear to be continuing attempts to do so. The house property at Anstead, in which Mr Adcock resides, was owned by a company as trustee of a discretionary trust. It was not explained how the trust could make the proceeds available to Mr Adcock or indeed that it would. There was no suggestion that the trust might sell the property. There was, in any event, no valuation evidence of that property nor the property at Palm Beach which was owned by another company, not a trust company, which might be under Mr AdcockÕs control. In the end result, whether Mr Adcock is able to establish that monies might be forthcoming in the near future, depended upon a sale of the Worongary land. Earlier attempts to sell it in 1997 were not successful. The petitioning creditor submitted that these sales ought to be viewed as shams and as attempts to delay sequestration. The property at Worongary was put to auction by the petitioning creditor earlier this year. It was advertised for sale by auction by it as mortgagee in possession, with the advertisement being conducted over some five weeks. Mr Adcock relied upon the reference to the mortgagee in the advertisements as showing that the offer which was received, which was close to the value of $160,000 for which the petitioning creditor contended, was not realistic. It may be that there has been some effect upon the price offered but it did not seem to me that the question of its true value fell to be resolved simply by reference to what a purchaser offered at the auction. On the other hand there did not appear to be much support for the prospect of a sale at the figure for which Mr Adcock contended. The valuation upon which Mr Adcock relied, at $635,000, was prepared by Mr Jackson, a licensed valuer. The valuation was prepared for mortgage purposes and was expressed to be at 31 September 1997. With respect to comparative sales, the valuation itself did not explain how comparisons were to be drawn with lands which were in different town planning zones and which may well be of different typography, and it was likely that at least one of them, in the zone Òpark residentialÓ, referred to a high quality house property which could hardly be regarded as comparable. The land in question was unimproved land, zoned ÒruralÓ and would require other approvals to enable a higher yield on sale. The sales referred to for direct comparison did not have a real property description which enabled one to assess where they were situated and whether they were within the category of Òimmediately surroundingÓ land, which was regarded as directly comparable to that in question. In any event the basis for the valuation appears to be subdivision of the land into three lots. In this respect the valuer for the petitioning creditor noted the existence of a large number of easements through the property, which were not referred to in Mr JacksonÕs report, and the grade of the land as steeper than that which would enable a subdivision to be carried out under the requirements of the relevant local authority. The value for which the petitioning creditor contends was also supported by another valuation prepared for another of Mr AdcockÕs companies, Lexvale Pty Ltd, which came to hand recently. At the completion of the hearing however a contract for the purchase of the property had been signed by a Mr Simpson for $430,000, another purchaser apparently brought forward by Mr Adcock. It was not clear to me why the property was considered by him to be worth that sum. To reinforce my doubts generally about the matter, Mr Simpson did not have available the sum of $43,000 as deposit monies and this was apparently paid by Mr Adcock, or one of his companies. Nevertheless Mr Simpson swore an affidavit that he was in a position to pay the purchase monies in the time offered, which had then been extended to sixty days, in the event that the sale was approved. He swore that he, or an entity he controls, viewed it as an investment and the transaction was not connected with Mr Adcock or his companies. At this point the matter came before me for judgment on 28 August 1998. It seemed to me that, even with the receipt of $430,000, it was not possible to conclude that Mr Adcock was able to pay his debts. Nevertheless, the petitioning creditor advised the Court that it would, as mortgagee in possession, accept the offer and asked for the matter to be stood over to enable possible completion of the sale and, if that point were reached consideration could then be given by other creditors as to their position. The debts owed by Mr Adcock and disclosed to the Court at that time included the petitioning creditorÕs, which was said to stand at $405,000, and this was not disputed; that of the American Express Company, on a judgment but in respect of which Mr Adcock said there remained only a small amount owing; $80,000 to Methams Motors Pty Ltd for whom Power & Power appeared; $1500 for legal costs to a former solicitor, which he has never paid; and a liability for the sum of at least $1.6M as guarantor under another deed of loan. It was suggested that it might be expected that the lastmentioned creditor might realise other secured property before turning to Mr Adcock, but there was in evidence a letter of demand to Mr Adcock, in respect of the sum mentioned, dated 16 March 1998. This list does not take account of the debts which Mr Adcock says he disputes. The matter came before me for further hearing on 2 December 1998. It was then shown that Mr Simpson had advised the petitioning creditor on 1 September 1998, very shortly after the matter had been adjourned, that he withdrew his offer to purchase the lands on the basis that it had not communicated acceptance of his previous offer. This sequence of events causes me some concern particularly given the history of other ÒcontractsÓ which have come to nought. This is, however, a separate matter and I shall put it to one side in considering the question whether Mr AdcockÕs estate ought to be sequestrated and the issues now sought to be raised in that connexion. The land has now finally been sold to a third party by the petitioning creditor and settlement was effected recently, for the sum of $120,000. Mr Adcock has instructed the solicitors now on record for him and spoken to Counsel only in the last few days. A further adjournment was sought, on the basis that neither Mr Adcock nor his legal representatives had known of the proposed sale until 1 December 1998. I declined that request on the basis that there was nothing to suggest an adjournment would alter the outcome. The allegation, which Mr Adcock sought further to advance, was that the land had been sold at an undervalue by the petitioning creditor and that the Court ought therefore be satisfied that there was Òother sufficient causeÓ why a sequestration order ought not be made. In this respect Counsel for Mr Adcock relied upon a claim for damages which I would take to be for breach of duty, or statutory duty, arising from a sale at gross undervalue, which would be brought against the petitioning creditor and which would exceed the amount due to it. It was not put forward as enabling a conclusion that Mr Adcock would then be able to pay his debts. Mr Adcock also sought to establish that the property was now worth even more, some $745,000, but the basis for it was little more than Mr JacksonÕs bare opinion contained in a letter and it does not take the matter any further than the evidence formerly before the Court. Mr Adcock is not able to point to any wrongful conduct of the petitioning creditor in connexion with the sale, although it must be observed that the circumstances surrounding the sale which ultimately resulted are not known to him. There was however nothing, apart from allegations about the price itself, which suggested anything untoward had occurred. Prior to that attempts had been made to sell the property at Worongary for over a year and it had been advertised prior to auction for a substantial period. His submission, that the petition be dismissed, depended upon an acceptance of the value he and his valuer had put forward and upon that proving sufficient to show breach of duty. It is not necessary for me to deal with the latter proposition. In satisfying the Court that a sequestration order should not be made, Mr Adcock must show that his claim is such as to warrant the dismissal of the petition or an adjournment of it so as to enable the claim to be litigated. What will suffice in a given case will vary according to the circumstances: (see eg Re Kostezky; ex parte Milder Elfman Szmerling Krycer Pty (1996) 67 FCR 101, 106 and Re Capel; ex parte Caram Finance Australia Ltd, (Finn J, 9 April 1998, unreported)). In the present case it is necessary to consider the claim sought to be put forward and the evidence relied upon in support of it, a process earlier undertaken. The conclusion I have reached is that there has not been shown any substantial basis for Mr AdcockÕs claims with respect to the high valuation. The report of Mr Jackson is insufficiently explained. The principal bases put forward for his opinion do not appear credible. There are important matters which may affect value which have never been addressed by him. Overall, it stands as little more than an assertion to value. It must also be recalled that the value for which the petitioning creditor contends was not only that realised, but approximated that in fact paid by Mr AdcockÕs company. This further weighs against Mr JacksonÕs view. The history of other potential purchasers whom Mr Adcock has put forward now, I consider, substantially detracts from the likelihood that the figure pointed to is one referrable to the market. It is not necessary, for present purposes, for me to make further comments upon that evidence. There has not been shown sufficient evidence, in my view, to warrant either dismissal of the petition or a further adjournment. It has not been necessary to deal with the other matter which would weigh against the exercise of any discretion in Mr AdcockÕs favour, namely that, in any event, he is unable to pay his debts. Counsel for Mr Adcock also foreshadowed applications which would require a postponement of a sequestration order. He pointed out that were a sequestration order to be made Mr AdcockÕs registration as a trustee in bankruptcy would be cancelled (s 182) and as a result the position of trustee he holds in various bankrupt estates would be vacated (by force of s 160). A similar position would arise with respect to his position concerning corporations. In these circumstances Mr Adcock seeks to have a partner of his firm substituted as trustee. This would prevent a vacancy and the need for an official trustee to be appointed. The benefit to the practice for which he works is obvious. There was however said also to be a benefit to those involved in the estates in that the firm would not charge fees for the time taken by the partner to acquaint himself with the files. There is no material prepared in this connexion, despite the matter having last been adjourned for some three months. The views of those concerned have not been ascertained. It is sought to further delay the petitioning creditor in realisation of assets and enquiries to that end and there may be other outcomes produced by the delay of which it cannot be aware. I am not in any event convinced that what the debtor seeks to put in place provides any valid basis for postponing a sequestration order which ought otherwise be made. There is in my view no ground shown why a sequestration order ought not to be made under s 52(1). I order accordingly. I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel Associate: Dated: 3 December 1998 Counsel for the Applicant: Mr T Sullivan Solicitor for the Applicant: Ellison Moschella Counsel for the Respondent: Mr H Fong (13, 18, 24, 26 and 28 August 1998) Solicitor for the Respondent: HCF Lawyers (13, 18, 24, 26 and 28 August 1998) Counsel for the Respondent: Mr P McQuade (2 December 1998) Solicitor for the Respondent: Cleary Hoare (2 December 1998) Solicitor for creditors: Power & Power Lawyers Methams Motors Pty Ltd and PJN Brooke Creditor I Galton: In Person Date of Hearing: 13, 18, 24, 26, 28 August 1998 and 2 December 1998 Date of Judgment: 3 December 1998