FEDERAL COURT OF AUSTRALIA Waterco Ltd v Green [1999] FCA 254 BANKRUPTCY – application to set aside summons for examination – no point of principle. Karounos v Official Trustee (1988) 19 FCR 330 cited IN THE BANKRUPT ESTATE OF THOMAS STANLEY GREEN WATERCO LIMITED v THOMAS GREEN NG 8397 OF 1998 MOORE J SYDNEY 17 MARCH 1999 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 8397 OF 1998 IN THE MATTER OF THE BANKRUPT ESTATE OF THOMAS STANLEY GREEN BETWEEN: WATERCO LIMITED Applicant AND: THOMAS GREEN Respondent JUDGE: MOORE J DATE OF ORDER: 17 MARCH 1999 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application of Ms Susan Stella Burton for an order to discharge the summons for her examination under s 81 of the Bankruptcy Act 1966 is dismissed. 2. Ms Burton pay the costs of Waterco Limited of the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 8397 OF 1998 IN THE MATTER OF THE BANKRUPT ESTATE OF THOMAS STANLEY GREEN BETWEEN: WATERCO LIMITED Applicant AND: THOMAS GREEN Respondent JUDGE: MOORE J DATE: 17 MARCH 1999 PLACE: SYDNEY REASONS FOR JUDGMENT 1 An application has been made by Ms Susan Burton under O 77 r 38 of the Federal Court Rules for an order discharging a summons for her examination in relation to the bankruptcy of Mr Thomas Green. Ms Burton and Mr Green live as a married couple. The summons was issued by a Registrar of this Court on the application of Waterco Limited ("Waterco") on 11 December 1998. The examination is to commence on 24 March 1999. A similar summons was issued on the application of Waterco directed to Mr Green. That summons is not in issue. 2 Mr Green's bankruptcy resulted from the lodgment by him of a debtor's petition on 24 June 1997. Mr Shirlaw ("the trustee") of Howarth Chartered Accountants was appointed trustee of Mr Green's estate. By December 1997 the trustee was investigating a number of real estate transactions in which Mr Green and Ms Burton had been involved. The first in time was the purchase in November 1993 of a property at 60 Douglas Street, Putney by Mr Green and Ms Burton for $330,000. The second was the sale of a property at 9 Stanley Street, Putney by Mr Green and Ms Burton in February 1994 for $400,000. The third was the sale of the property at 60 Douglas Street, Putney on 14 June 1995 for $364,000. The forth involved the purchase, in or about August 1995, by Mr Green and Ms Burton of a property at 37 Waterhouse Avenue, St Ives for $505,000. Their interests in that property were, at the time of purchase, 10% and 90% respectively. Mr Green's 10% interest in that property was assigned to Ms Burton in June 1997. The last transaction, at about the time the property in St Ives was purchased, involved the alteration of the interests that Mr Green and Ms Burton had in a property at 554 Pacific Highway, Killara by way of shares in a unit trust. 3 These events were occurring against a background in which a judgment had been obtained by Zane Solar Systems Australia Pty Ltd ("Zane") on 2 November 1995 in the sum of $8,443.33 against Mr Green. Zane is a company associated with Waterco. That judgment debt founded a bankruptcy notice issued on 21 December 1995 and served on 30 January 1996. The time for completion with the notice was extended to 6 March 1996 but the amount claimed was not paid. On 11 June 1996 a creditor's petition was presented by Zane and served on Mr Green on 17 July 1996. It was returnable on 22 July 1996. It is not clear from the material before me what was the fate of that creditor's petition. 4 The inquiries made by the trustee in December 1997 included a request for information in a letter dated 24 December 1997 sent to Mr Green. The trustee sought information about each of the real estate transactions referred to earlier. Brown & Partners, acting on behalf of Mr Green, responded to that letter. They asserted that there existed a mortgage dated 8 June 1990 pursuant to which Ms Burton advanced $60,000 to Mr Green. It was further asserted that that sum had been "secured" by a caveat over the property at 9 Stanley Street, Putney and Ms Burton received no money from the sale of that property. It was further asserted that the sum of $60,000 remained owing by Mr Green to Ms Burton at the time of the settlement of the sale of the property at 60 Douglas Street, Putney. The trustee replied to this letter on 26 February 1998 and, in relation to the mortgage adverted to in the earlier correspondence, requested a copy of the mortgage document and a copy of the caveat. Further correspondence followed and on 3 March 1998 Brown & Partners wrote to the trustee saying that they understood that a copy of the mortgage and the caveat had been provided earlier but a further copy of the caveat was enclosed. 5 By May 1998 the trustee had formed a preliminary view about some aspects of the property transactions in which Mr Green and Ms Burton had been involved. In a letter dated 4 May 1998 to Mr Green (a copy of which was sent to Brown & Partners) the trustee observed: The settlement sheet for (60 Douglas Street, Putney) lists Susan Burton as receiving $55,849.84 and yourself and Susan Burton receiving $28,041.78 from the proceeds of sale. Of this amount I am led to believe that an amount of $60,000 was distributed to Susan Burton from the sale of the property in lieu of her caveat lodged over 9 Stanley Street, Putney that was not discharged upon the sale of same. Accordingly, the amount of $60,000 is a voidable transaction pursuant to section 121 of the Bankruptcy Act and therefore voidable against the Trustee. 6 That amount and other amounts totalling $250,343.17 were identified by the trustee as transactions that may be voidable against the trustee and invited Mr Green either to submit a deed of composition proposal or an explanation relating to the transactions to prevent legal proceedings being instituted. Brown & Partners responded by letter dated 14 May 1998 and put in issue that the amount of $60,000 had been distributed to Ms Burton and that the unregistered mortgage had not been discharged. It was also asserted: At the time of the settlement of the sale, Mr Green owed the sum of at least $60,000 to Ms Burton, Mr Green was solvent and there can be no suggestion that the main purpose in making the payment was to prevent the property from becoming divisible amongst Mr Green's creditors. In such circumstances, s 121 of the bankruptcy Act can have no application. 7 It was further asserted that $32,057 of the $60,000 loan remained unpaid and that there was an additional sum of approximately $18,000 as interest due to Ms Burton. 8 In a response dated 4 June 1998 the trustee asserted in relation to the proceeds of the sale of 60 Douglas Street, Putney that even on the analysis propounded by Brown & Partners there had been a payment of approximately $28,000 to Ms Burton which was a voidable transaction. The trustee identified $184,924.92 as the revised total amount of the transactions thought to be voidable. These views were repeated in the trustee's report to creditors dated 5 June 1998 as was the view that there had been a voidable settlement arising from the reassignment of interests in the property at 554 Pacific Highway, Killara in mid 1995. 9 These and other matters were canvassed at the meeting of creditors on 25 and 26 June 1998. Ms Burton attended that meeting though most but not all of the questions directed to her were dealt with by Mr France, a solicitor in the employ of Brown & Partners who had been acting on behalf of Mr Green and Ms Burton in relation to the administration of Mr Green's estate. During a discussion of the position of Ms Burton as a creditor and her proof of debt, the trustee, as President of the meeting, asked Mr France whether he had been provided with a copy of the unregistered mortgage to which a debt claimed by Ms Burton related. Towards the conclusion of the meeting the President noted that: …he had received good co-operation to date from Mr Green and Ms Burton, albeit somewhat slow in terms of time, however, creditors will ultimately decide whether further examinations are required. 10 Ms Burton had lodged a proof of debt in the sum of $205,947. This amount included not only some of the principal said to be secured by the mortgage but interest as well. 11 In an affidavit sworn in these proceedings Ms Burton said that she had supplied the trustee with all documents and information requested from her and had attended the trustee's office and answered all questions put to her. She also said that since the meeting of 25 June 1998 no further information or documentation had been requested from her. Generally this was not challenged. However in brief cross-examination she said that in December 1998 Mr Green discovered a copy of the mortgage referred to earlier though it was later clarified that what had been discovered was an epitome of mortgage. 12 The summons to attend for examination directed to Ms Burton required not only her attendance but the production of records relating to the sale of the property at 60 Douglas Street, Putney and the caveat in relation to 9 Stanley Street, Putney. 13 Counsel for Ms Burton submitted that no good reason had been established for the examination of Ms Burton and that the evidence established she had, at all material times, co-operated with the trustee in his investigations of the financial affairs of Mr Green. Moreover, to the extent that the summons required the production of documents there had been a failure to identify in the affidavit accompanying the application for the summons details of inquiries made about the books and any refusal on Ms Burton's part to co-operate with the inquiry: see O 77 r 34(2)(c)(ii). 14 As to that last matter reference was made to the judgment of Pincus J in Re Huybrechts; Ex parte Huybrechts v Knight (1991) 31 FCR 394. That judgment concerned the bankruptcy rules in a form that is different to the present rules though the substance of both is the same at least in relation to the production of books. The rule considered by Pincus J required the affidavit supporting the application for a summons for examination to identify the enquiries that have been made concerning the subject matter of the proposed examination and the reason for requiring the production of any books. It was also necessary to identify what request had been made for information and the production of books and the circumstances in which the person had refused or failed to co-operate in complying with that request. The scope of O 77 r 35 is more limited in so far as it requires the affidavit to deal only with any request to produce books and any refusal to co-operate with their production. It no longer requires details of requests for information and any failure to provide it. However even the more limited requirement in the existing rule is likely to have limited application to a summons sought by a creditor rather than the trustee: see s 81(1). One would not ordinarily expect, as a practical matter, a creditor, as opposed to a trustee, to make any inquiries of a third party about the production of books. Moreover in the present case the evidence reveals that since at least December 1998 Ms Burton was aware of the existence of a document touching upon the asserted mortgage which had been the subject of discussion at the creditors' meeting and referred to in earlier correspondence. Notwithstanding the possible importance of the document as evidencing rights it is said to confer upon her as a creditor, the document has not been volunteered either by her or Mr Green since its discovery in December 1998. 15 While it may be accepted that it is not put in issue that Ms Burton has otherwise co-operated with the trustee (albeit slowly) that fact, in my opinion, does not of itself, warrant the discharge of the summons. It was common ground that the relevant principles governing the issue of such a summons are found in the judgment of the Full Court in Karounos v Official Trustee (1988) 19 FCR 330. The Full Court acknowledged (at 335) that the power conferred by s 81 to compel the attendance of persons for examination is an unusual and far reaching one which must be invoked and exercised with care. However the Full Court noted that: However the power is exercised in the interest of creditors, and those interests should not be defeated by an unduly technical or restrictive approach to the use of the power. The procedure is basically designed to establish what assets the bankrupt had, what has happened to those assets, and whether action should be begun (or continued) to recover them: see Re Price (No 4) (1948) 14 ABC 142 at 144; Re Andrews (1958) 18 ABC 181 at 184; Re Poulson [1976] 1 WLR 123 at 1032; [1976] 2 All ER 1020 at 1029. 16 In the present case the trustee has said in an affidavit that he supports the examination of Ms Burton and proffered the opinion that it "will assist my investigations into the bankrupt's affairs and possible realization of assets". This opinion was not challenged. Moreover as far as I can glean from the correspondence in evidence and the minutes of the creditors' meeting there is presently no entirely rational and comprehensive explanation proffered by Mr Green and Ms Burton about the property dealings identified in the trustee's report of 5 June 1998 and some uncertainty attends the rights Ms Burton asserts under the mortgage. The unsecured debt of Waterco is proportionally the most significant debt of the bankrupt and it is, in my opinion, proper for Waterco to investigate by the examination of Ms Burton whether there have been dealings in property involving Mr Green that would realize funds presently unavailable to the trustee to satisfy the bankrupt's debts. 17 Accordingly the application to discharge the summons to Ms Burton should be dismissed with costs. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore. Associate: Dated: 17 March 1999 Counsel for Ms Burton: P Walsh Solicitor for Ms Burton: Brown & Partners Counsel for Waterco Limited: J Johnson Solicitor for Waterco Limited: Michell Sillar Date of Hearing: 16 March 1999 Date of Judgment: 17 March 1999