FEDERAL COURT OF AUSTRALIA St George Bank Ltd v Helfenbaum [1999] FCA 1337 BANKRUPTCY – Creditor's petition – Grounds for refusal of sequestration order – Sufficient cause – Whether set‑off or cross claim sufficient cause – Whether real claim likely to succeed – Whether debtor able to pay debts – Meaning of "able to pay debts" – Whether "able" means "willing and able". Bankruptcy Act 1966 s 52(2) Ling v Enrobook Pty Ltd (1997) 74 FCR 19 applied Cain v Whyte (1933) 48 CLR 639 applied Re Player (1962) 19 ABC 277 applied Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 applied Commonwealth Bank v McDonald [1999] FCA 984 applied Re Rivett; Ex parte Edward Fay Ltd (1932) 5 ABC 182 applied Re Douglas Griggs Engineering Ltd [1963] 1 Ch 19 cited Vogwell v Vogwell (1939) 11 ABC 83 cited Bank of Australasia v Hall (1907) 4 CLR 1514 considered Re Jones; Ex parte Clutterbuck Bros (Adelaide) Ltd (1930) 2 ABC 89 applied Re Noye; Ex parte Deputy Commissioner of Taxation (1958) 18 ABC 77 applied Sandell v Porter (1966) 115 CLR 666 applied Re Eather; Ex parte Polada (unreported, 30 May 1996, Cooper J) cited Re McVey; Ex parte Carswell & Co (unreported 22 May 1996, Cooper J) cited International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 cited Re Sarina; Ex parte Wollondilly Shire Council (1980) 32 ALR 596 applied Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 applied ST GEORGE BANK LIMITED v JEFFREY LEON HELFENBAUM VG 7911 OF 1998 SUNDBERG J 24 SEPTEMBER 1999 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 7911 OF 1998 BETWEEN: ST GEORGE BANK LIMITED (ACN 005 513 070) Applicant AND: JEFFREY LEON HELFENBAUM Respondent JUDGE: SUNDBERG J DATE OF ORDER: 24 SEPTEMBER 1999 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs 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 VICTORIA DISTRICT REGISTRY VG 7911 OF 1998 BETWEEN: ST GEORGE BANK LIMITED (ACN 005 513 070) Applicant AND: JEFFREY LEON HELFENBAUM Respondent JUDGE: SUNDBERG J DATE: 24 SEPTEMBER 1999 PLACE: MELBOURNE REASONS FOR JUDGMENT BACKGROUND 1 On 17 February 1998 the applicant's predecessor, Advance Bank of Australia, obtained judgment against the respondent in the Magistrates' Court at Melbourne for $21,117.20 for money owing under a loan contract. It is not necessary to distinguish between the applicant and its predecessor, and I will refer to each of them as "the Bank". The respondent was granted a three months stay of the judgment. The stay expired on or about 17 May 1998. On 13 July 1998 a bankruptcy notice was served on the respondent. The notice was based on his failure to pay the amount of the judgment. On 30 July the respondent applied for a further stay of the judgment, which was refused. On 31 July he sought to have the notice set aside on the ground that he had a counterclaim against the Bank for over $300,000 "which is currently being pursued". On 30 September the application was dismissed on the ground that his claim against the Bank could have been set up in the proceedings in which judgment had been obtained against him. Cf ss 41(7) and 40(1)(g) of the Bankruptcy Act 1966 ("the Act"). On 30 November the Bank served a creditor's petition on the respondent relying on the act of bankruptcy which occurred on the dismissal of the application to set aside the bankruptcy notice. On 9 February 1999 the respondent filed a notice of intention to oppose the petition which is in part as follows: "1. I am able to pay my debts, as I have readily realisable assets exceeding the value of the debt. 2. These readily realisable assets are, however, essential for my work and home, being chiefly manufacturing and computer equipment (tools of trade) and furniture and personal items. 3. I have lodged an Application for an Instalment Order with the Registrar of the Magistrates Court of Victoria …. If approved, this will result in the Applicant's debt being paid over time." The petition and the notice of opposition are the matters that are before me. THE EVIDENCE 2 The notice of intention to oppose was supported by an affidavit in which the respondent deposed that he had lodged an instalment application with the Magistrates' Court on 8 February 1999, a copy of which was an exhibit to the affidavit. In the application the respondent applied to pay the judgment debt by forty‑eight monthly instalments of $504.05. He gave as his reason for seeking an order that "the debtor does not have the funds to pay the judgment debt in one lump sum and is unable to borrow sufficient funds". In an accompanying Statement of Affairs the respondent disclosed a weekly income of $1,385, assets of $54,400, weekly expenses of $548 and other debts of $10,000. 3 On 24 February the respondent filed an affidavit purportedly in support of an application to set aside the bankruptcy notice. He said his application for an instalment order had not yet been heard. He claimed to have average weekly earnings of $1,385, average weekly expenses of $757, net disposable weekly income of $628, assets of $54,400 and liabilities of $30,000 (ie net assets of $24,400), and said – "I believe I am not insolvent and that I have the financial capacity to fulfil the terms of the instalment arrangement applied for …". On the first return of the petition on 10 February 1999 a Registrar acceded to the respondent's request for an adjournment until after the hearing of the instalment application. On 15 February the Magistrates' Court made an order that the debt be paid by forty‑eight instalments of $504.05. On 5 March, on the Bank's application, the instalment order was cancelled on the ground that the respondent had failed to make full and frank disclosure of his debts, in that he had not mentioned that he owed his former solicitors, Herbert Geer & Rundle, $4,459.29. 4 On 26 March 1999 the respondent filed another affidavit in which he said he had made a further application for an instalment order in which he disclosed "the disputed debt" to Herbert Geer & Rundle. He had not included that debt in his first application because he had not heard from the solicitors for many months and assumed they had written off the debt. He disputed the debt because the solicitors had not acted in accordance with his instructions in relation to the matters in respect of which they had charged him the fees the subject of the claimed debt. He then updated his assets and liabilities: assets of $86,100 and liabilities of $38,654.18 (ie net assets of $47,445.82). He said his net assets were readily realisable and exceeded the debt claimed by the applicant by $25,498.34. However, he needed to retain his principal assets in order to earn his income and defray his living expenses. He asserted a cross‑claim against the applicant, and exhibited an application he had filed that day in this Court supported by an affidavit to which he exhibited a complaint he had made to the Banking Ombudsman on 21 October 1997. I will call this application "the cross‑claim application". He said he was able to pay his debts, and submitted that the petition should be dismissed or adjourned so as to allow him to continue to improve his financial position. 5 The claims made in the complaint to the Ombudsman can be summarised as follows. In January 1995 the respondent purchased a house in Elsternwick as an investment. The purchase price of $270,000 was entirely funded by the Bank. The respondent intended to demolish the house and build four units on the land. He put tenants in the house, and used the rent to pay part of the interest on the loan. The difference between the interest and the rental, approximately $1,600 per month, was paid from his other income. In March 1995 the respondent fell behind in his instalments. An officer of the Bank, Kylie Ritossa, told him the Bank would capitalise the missed payments and as a consequence would not thereafter charge penalty interest. On 5 July 1995 the Bank served a notice to pay on the respondent in respect of the loan. By letter of 6 July the Bank proposed that the respondent maintain regular monthly payments of $2,290 in reduction of the arrears. He accepted the proposal and made payments of $2,290 for at least the next twelve months. Thereafter the respondent received a number of letters from the Bank, none of which referred to a penalty interest rate being applied or to the fact that the Bank "had failed to capitalize the arrears as per its letter of the 6th July". In the period after the letter of 6 July the Bank charged interest of as much as $500 per month more than the payments the respondent was making. He was not told this was being done, and did not discover it until September 1996 when, in consequence of a dispute with his architect, he sought Bank statements. Thus, notwithstanding his regular payments, he became progressively more indebted to the Bank. 6 In mid 1995 the respondent obtained town planning approval for construction of the units. In June 1996, as a result of non‑payment of a debt owed to the respondent, he fell behind in his payments to the Bank. Until then he believed he was up to date. He spoke to Ms Ritossa and Mark Richards of the Bank, and was told he would have to pay the arrears or the Bank would take possession of the land and sell it. In September the Bank took possession of the land, which had been vacant since the tenant left in January. In October 1996 Mr Edwards told the respondent that if he paid the amount owing on his Visa card (the indebtedness the subject of the judgment) and the housing loan arrears, the Bank would return the property to him. In another conversation in early October 1996 Wayne Russell, Senior Collections Manager, told the respondent the Bank only required the arrears on the mortgage to be repaid before it was prepared to give the property back. In November the respondent made arrangements to refinance the loan. The Bank wanted $355,000 and the refinancing of $360,000 from Goldstein Partners was enough to cover this. The Bank then refused the refinancing offer, and in December sold the land for $316,000. 7 The respondent says the amount owing to the Bank on the loan was approximately $337,000. This included penalty interest to which, he says, the Bank was not entitled. He believes he could have comfortably refinanced the package, including interest that was properly payable, and then proceeded with the construction of the units. If the penalty interest were deducted from the $337,000, the sale proceeds would approximately equal the loan amount. The respondent says that in addition to interest expenses, he has incurred other expenses arising out of the ownership of the property: architect's fees ($12,000), planning approval costs ($2,800), engineering fees ($2,500), Council payments ($2,500), stamp duty ($15,000), solicitor's fees ($6,000), subdivision costs ($500) and lost profits on the proposal ($120,000 - $180,000). 8 Paragraphs 4 and 5 of the respondent's affidavit in support of the cross‑claim application are as follows: "4. I believe that [the facts contained in the complaint to the Ombudsman] evidence both a loan agreement with the Respondent ('the Loan Agreement') and a later collateral agreement ('the Collateral Agreement') to the effect that the Respondent would not exercise its power of sale in consideration of the refinancing arrangements offered by both FAI and Goldstein Partners. Further, I believe that they disclose the following: (a) breach of the Loan Agreement by the Respondent in that the Respondent overcharged interest and penalty interest to the Loan Agreement, which resulted in me being in arrears in payments on that account when I would not have been in arrears if those interest overcharges had not occurred. This in turn led to the Respondent exercising its power of sale as mortgagee; (b) negligence on the part of the Respondent in effecting those interest overcharges and consequently the sale of the property; (c) misleading and deceptive conduct in that the Respondent: (i) stated, by its employee Kylie Ritossa on or about 5 July 1995, that it would capitalise the loans and then refused to do so; and (ii) stated, by its employees Mark Edwards and Wayne Russell in or about October 1996, that it would accept the proposed refinancing by each of FAI and Goldstein Partners and return possession of the property to me, and then refused to do so; (d) breach of a collateral contract based on the matters set out in sub‑paragraph (c)(ii) above. 5. As a result of these matters I have suffered losses including some approximately $63,000 shortfall on the respondent's mortgagee sale of the property (the details of which appear in a letter from the respondent's solicitors to my father's solicitors which is now produced and shown to me marked 'JLH-2'), consequential losses of some approximately $50,000 as particularised in paragraph 34 of exhibit 'JH1', and lost net profit on the development project which I conservatively estimated at between $120,000 and $180,000 as set out in that paragraph. Based on further research as to the market conditions in September 1997 I believe a more accurate [estimate] of the lost profit is between $200,000‑$260,000 (a total estimated loss of between $313,000 and $373,000 plus interest). I based my initial estimate on a projected sale of $280,000‑$300,000 for each of the four units. I now believe that the market in September 1997 was such that the units would have sold for approximately $320,000 each (based on sale prices of comparable units in the same and neighbouring streets). The project was in a position to be commenced at the time of the mortgagee sale and completed within approximately 9 months thereafter." In the cross‑claim application he claims damages for misleading and deceptive conduct, breach of the loan agreement, breach of the collateral agreement and negligent misrepresentation. 9 In response to the respondent's cross‑claim material the Bank filed an affidavit sworn by its solicitor, Bryan Thomas, in which the chronology of the respondent's pursuit of his cross‑claim is set out. On the basis of this chronology, the greater part of which is recorded earlier in these reasons, Mr Thomas concludes: "I note that the Respondent has been aware of this matter since 29 January 1997. Although the Respondent has raised the issue of a counterclaim or cross‑claim on several occasions since then it has taken him over two years to finally issue and serve one. Furthermore, the Respondent was given a stay in the Magistrates' Court in order to pursue his counterclaim but failed to issue his claim during that time. By reason of the foregoing, I submit that the Respondent has had ample opportunity to bring his claim and that there has never been any impediment to him bringing his claim before now. Furthermore, the Respondent's alleged claim is not bona fide and has only been alleged as a tactic to avoid a sequestration order being made against him." Mr Thomas then drew attention to the absence from the respondent's list of liabilities in his 26 March 1999 affidavit of a judgment debt for $4,688.25 obtained by BMW Australia Finance Ltd. 10 An affidavit in response to the claims made in the respondent's complaint to the Ombudsman was sworn by Thea McNamara, the applicant's Collections Officer. She produced the Bank's files. The contents of the affidavit can be summarised as follows: · A file note made by Ms Ritossa of a telephone conversation with the respondent on 6 July 1995 records her telling the respondent that if he paid the arrears, legal action would be discontinued. The file note does not record her saying that the Bank would capitalise the arrears and as a consequence would not charge penalty interest from the date of the capitalisation. · Ms Ritossa's letter to the respondent of 6 July accords with the file note. She told him the Bank was prepared to allow him to maintain regular monthly payments of $2,290 in reduction of his outstanding arrears balance. If default were made in respect of those payments the Bank was to be at liberty to proceed with its existing action for possession of the land without further notice, and to take such other steps as it thought fit to recover the money outstanding. The respondent was invited to contact Ms Ritossa on a given telephone number if he had "any problems". The letter makes no mention of capitalising the arrears. · A file note made by Mr Edwards of a telephone conversation with the respondent on 28 June 1996 records him informing the respondent that if he did not make payments on the loan, the balance would increase as would the amount of interest payable on the increasing balance. · A file note of a conversation on 3 October 1996 between the respondent and initially Mr Edwards, and later Mr Russell, records that the respondent was informed that if he paid the amounts owing on the Visa card, which was in default and in excess of its limit, and the arrears on the property loan, the Bank would "consider" returning the property to him. The outstanding amount totalled $34,400. · On 21 January 1998 the Bank wrote to the respondent about his letter to the Ombudsman. The letter contains this passage: "Advance Bank was at all times prepared to return the property to you upon clearance of the arrears on both accounts, alternatively if refinance occurred then it would have been the Bank's intention to secure the Visa debt by including the same in the payment figure. No indication was ever given that arrears would be capitalised as arrangements were constantly broken. The Bank's arrears letters confirm that a higher rate of interest is applicable until the loan is brought back into order. Both higher interest charges and legal enforcement expenses affect the balance of the loan, and do not increase the arrears." · On 15 June 1998 the Ombudsman wrote to the Bank saying he had been trying to contact the respondent to examine his case for some time. Since the respondent had not responded to the Ombudsman's requests, the file had been provisionally closed. The file would be discontinued if the Ombudsman did not hear from the respondent by 17 July 1998. 11 The respondent filed a further affidavit on 30 July 1999. In it he updated his financial position, claiming net income of $108,880, average weekly earnings of $2,094, net disposable income of $1,337, assets of $100,442 and liabilities of $35,394 (ie net assets of $65,047). He asserted that his net assets were readily realisable and exceeded the amount of the Bank's debt by $43,099. However he repeated that having regard to their nature, he could not do without them. He said he has not paid the applicant, BMW or Herbert Geer & Rundle because he does not believe he is liable to them. He then produced an amended application and statement of claim in the cross‑claim application. The allegations in the statement of claim are the same as those in the complaint to the Ombudsman, though they are cast in more legalistic language. In his affidavit he asserted that his claim is bona fide, and that if successful it may realise damages of approximately $200,000 - $260,000. He said he had not included the BMW debt in his statement of liabilities because he was not aware of it until late May 1999. He disputed the debt, notwithstanding that his application for a rehearing had been dismissed. He was considering whether to appeal from that decision. He took issue with those parts of Ms McNamara's affidavit in which she had said that Mr Russell had requested the amount owing on the Visa card to be repaid. He accepted that Mr Edwards had required that amount and the arrears on the mortgage to be repaid. In a final affidavit filed on the morning of the hearing of the petition the respondent updated his financial position, claiming net realisable assets of $74,947. 12 Other evidence before the Court included a certified extract of the order of the Magistrates' Court by which judgment had been entered for BMW for $4,687. No part of that amount has been paid. BMW appeared to support the applicant's petition. An affidavit was filed on behalf of Herbert Geer & Rundle in which the work carried out by the firm for the respondent was detailed. The respondent had failed to pay for the services rendered, and for this reason the firm had ceased to do further work for him. On four occasions he had promised to remit funds in part payment of outstanding amounts (ranging from $600 to $2,000), but had never paid up. Until his present complaints about the firm's conduct, he had not complained to the firm about the manner in which it had acted for him in respect of the Bank's claim or the complaint to the Ombudsman. The deponent denied that the firm had been instructed to bring a counterclaim in the Bank's proceeding. 13 In March 1999 the Bank served on the respondent a notice to produce his income tax returns for the years ended 30 June 1997 and 30 June 1998. No returns had in fact been filed for those years. However draft returns dated 13 September (the day of the hearing) were produced for those years and for the year ended 30 June 1999. They disclosed taxable incomes of $52,732 (1997), $55,945 (1998) and $108,888 (1999). CROSS‑CLAIM Section 52(1) of the Act requires the creditor to prove the matters stated in the petition, service of the petition, and that the debt on which the creditor relies is still owing. On proof of those matters the Court "may make a sequestration order". Sub‑section (2) provides: "If the Court is not satisfied with the proof of any of these matters, or is satisfied by the debtor: (a) that he or she is able to pay his or her debts; or (b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition." The existence of a cross‑claim may be a "sufficient cause" within s 52(2)(b) for declining to make a sequestration order: Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 25. It is for the debtor to establish the existence of "sufficient cause": Cain v Whyte (1933) 48 CLR 639 at 645‑646; Ling at 24. He must establish that he has a real claim against the creditor that is likely to succeed. If the Court is satisfied that there is such a claim, and that its quantum is likely to equal or exceed the creditor's claim, it will not make a sequestration order. If the claim is likely to be less than the creditor's claim, the Court will require the debtor, if he is to avoid a sequestration order, to pay the difference between the judgment debt and the amount he is likely to recover on his claim. See Re Player (1962) 19 ABC 277 at 282; Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115‑116; Ling at 25‑26; Commonwealth Bank v McDonald [1999] FCA 984. A debtor does not establish a real claim that is likely to succeed merely by producing a statement of claim in an action against the creditor: Re Rivett; Ex parte Edward Fay Ltd (1932) 5 ABC 182; Player at 282, or by pointing to the existence of current litigation against the creditor: cf Re Douglas Griggs Engineering Ltd [1963] 1 Ch 19 at 23. While the Court does not try the cross‑claim in advance, the debtor must adduce sufficient evidence to show that it is a real claim which is likely to succeed: cf Vogwell v Vogwell (1939) 11 ABC 83 at 88; Player at 282. 14 The respondent's notice of opposition did not refer to the cross‑claim, but in the course of the hearing he was permitted to amend so as to add it as a ground of opposition. The evidence in support of the cross‑claim is presented in an unsatisfactory form. The respondent does not directly depose to the facts he relies upon to support it. Rather he produces his letter to the Ombudsman which he says contains the material facts, and states what he believes those facts disclose by way of causes of action against the Bank. He does not verify the allegations contained in his statement of claim, but merely states that he believes his claim is bona fide. In the course of his oral evidence there was ample opportunity for him to affirm the truth of the matters pleaded, but he did not do so. 15 The basis of the cross‑claim is the respondent's contention that the Bank agreed not to charge penalty interest, but in fact did so, thus causing him to become in default. See paragraphs 4, 8, 9, 31 and 33 of the complaint, and paragraphs 8, 9, 11, 12, 14, 15, 16, 24 and 33 of the statement of claim. I do not accept that Ms Ritossa said the Bank would capitalise the overdue payments and would not charge penalty interest from the time of the capitalisation. The file note of 6 July 1995 does not record those matters. The Bank's letter of the same day does not record them. Although on the respondent's account the letter does not record two important parts of the telephone conversation, he did not at the time complain about it, despite Ms Ritossa's invitation to contact her if he had "any problems". Further, without producing it, he represented to the Ombudsman that in the letter the Bank had agreed to capitalise the arrears. In fact the letter makes no reference to capitalisation. The Bank's evidence was that higher interest charges affect the balance of the loan and do not increase the arrears. 16 In his affidavit in support of the cross‑claim application, after referring to the facts contained in his complaint, the respondent asserts that they disclose: · breach of the loan agreement in that the Bank overcharged interest and penalty interest which resulted in the respondent being in arrears in payment when he would not have been in arrears if the overcharging had not occurred, and this led to the applicant exercising its power of sale as mortgagee · negligence in overcharging interest "and consequently the sale of the property" · misleading and deceptive conduct in that Ms Ritossa said the Bank would capitalise the arrears, and then refused to do so. It follows from my rejection of the respondent's account of the capitalisation/penalty interest conversation with Ms Ritossa that he does not have a real claim which is likely to succeed in respect of the three causes of action described above. 17 The other causes of action relate to the refinancing by FAI and Goldstein Partners. Conversations between the respondent and Messrs Edwards and Russell in October 1996 are said to have constituted an agreement by the Bank to accept the proposed refinancing and return possession of the property to the respondent. Its failure to do so was misleading and deceptive conduct, and breach of the loan agreement and a collateral contract. The evidence that the respondent has a case against the Bank in respect of the FAI refinancing amounts to this: · In late October a loan from FAI with which to pay out the Bank had been arranged "in principle" · Mr Edwards told the respondent the property would be returned to him if he cleared the arrears and the amount that was in excess of the agreed limit on the Visa card · Mr Edwards said the Bank would require a letter in principle from the new lender stating that it would pay out the Bank upon appropriate documentation being put in place · FAI refused to refinance because it had been contacted by Caulfield CIB about allegations of fraud against the respondent. On those facts the respondent has not established that he has a real case against the Bank which is likely to succeed arising out of the FAI refinancing. 18 The evidence in respect of the Goldstein Partners refinancing is as follows: · In a letter to the respondent in late November 1996, which was not in evidence, Goldstein Partners offered to refinance in the sum of $360,000 · The respondent gave the Bank a copy of the letter · The respondent and the Bank agreed that the amount required to pay out the Bank was $355,000 · On 29 November the respondent telephoned the Bank to enquire whether it had "accepted my offer" and was told "the offer had been rejected". The foregoing does not establish a real case which is likely to succeed that the Bank had agreed that in consideration of the Goldstein refinancing arrangements it would not exercise its power of sale, or that Messrs Edwards and Russell stated that the Bank would accept that refinancing and return the property to the respondent. All it discloses to is that the respondent made an offer to the Bank to refinance, and when he enquired whether the offer had been accepted, he was told it had not been. 19 The respondent has not made out the cross‑claim he alleges, and accordingly has not shown a "sufficient cause" within s 52(2)(b). SOLVENCY 20 Under s 52(2)(a) the respondent must satisfy me that he is "able to pay his … debts". The word "debt" includes "liability": s 5(1). In Bank of Australasia v Hall (1907) 4 CLR 1514 at 1527‑1528 Griffith CJ, with whom Barton J agreed, said of the words "unable to pay his debts as they become due from his own moneys" in the Insolvency Act 1874 (Q): "It was argued that only debts then actually payable and the amounts of which were then actually ascertained should be taken into consideration. One answer to this argument is that the matter for determination is the ability of the debtor, which is a state or condition that cannot be determined without having regard to all the facts. Another answer is that the debts referred to are not his debts 'then' payable, but his debts 'as they become due' – a phrase which looks to the future. No doubt, only the reasonably immediate future is to be looked to …. … The words 'as they become due' require, as already pointed out, that some consideration shall be given to the immediate future; and, if it appears that the debtor will not be able to pay a debt which will certainly become due in, say, a month … by reason of an obligation already existing, and which may before that day exhaust all his available resources, how can it be said that he is able to pay his debts 'as they become due', out of his own moneys?" 21 A debtor does not establish solvency merely by demonstrating an excess of assets over liabilities: Re Jones; Ex parte Clutterbuck Bros (Adelaide) Ltd (1930) 2 ABC 89; Re Noye; Ex parte Deputy Commissioner of Taxation (1958) 18 ABC 77. The test of ability to pay debts is stated in Sandell v Porter (1966) 115 CLR 666 at 670 where Barwick CJ, with whom McTiernan and Windeyer JJ agreed, said of the words in s 95 of the Bankruptcy Act 1924 – "unable to pay his debts as they become due from his own money": "Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency." 22 Although the words "as they become due from his own moneys" do not appear in s 52(2)(a), the approach adopted in Hall and in Sandell v Porter has been applied to the words "unable to pay his or her debts" in that provision. See Re Eather; Ex parte Polada (unreported, 30 May 1996, Cooper J), Re McVey; Ex parte Carswell & Co (unreported 22 May 1996, Cooper J) and International Alpaca Management Pty Ltd v Ensor [1999] FCA 72. In Ensor Katz J said: "even if par 52(2)(a) of the Act were to be construed as only requiring the debtor to prove an ability to pay his debts presently payable and that from any money, whether his own or other people's, it is clear that proof of the matter set out in par 52(2)(a) of the Act does not entitle the debtor to the dismissal of the petition; it only enlivens the Court's discretion under sub‑s 52(2) of the Act to dismiss the petition …. On the narrower construction of par 52(2)(a) of the Act which I am hypothesising …, relevant considerations in the exercise of the discretion under sub‑s 52(2) of the Act would, in my view, nevertheless be whether the debtor also has the ability to pay debts becoming payable in the reasonably immediate future and whether the debtor has the ability to pay the debtor's debts from the debtor's own money. That being so, the two matters which I have just mentioned would remain of importance in the determination of the present petition, even on a narrow construction of par 52(2)(a) of the Act." 23 The words "able to pay" in s 52(2)(a) do not mean "willing and able to pay". If a debtor is able to pay his debts but is recalcitrant, his creditors may resort to pay remedies such as execution against his property and garnishee proceedings, but not to sequestration. Bankruptcy is not a proceeding designed for the recovery of debts. See Re Sarina; Ex parte Wollondilly Shire Council (1980) 32 ALR 596 at 599. 24 The respondent deposes to an excess of assets over liabilities of $74,947. The liabilities include the amounts claimed by the Bank, Herbert Geer & Rundle and BMW (which total $30,000), even though the respondent contests those amounts on the ground that he has cross‑claims against each creditor: against the Bank for the reasons I have described, against the solicitors for not carrying out his instructions properly, and against BMW for selling a repossessed car at an undervalue. Because he has these grievances, whether sustainable or not, he is not prepared to pay the claimants, though he says he is able to do so. Further, while his assets are readily realisable, he is not prepared to convert them into cash because he is dependent on his business equipment to continue to earn his income and defray his living expenses. He is, in my view, a recalcitrant debtor rather than an insolvent one. Cf Re Sarina. 25 The applicant contends that the respondent's tax obligations should be taken into account in determining his ability to pay his debts, and that when that is done, his insolvency becomes clear. On the basis of the taxable incomes appearing in the draft returns for 1997 to 1999, and by resort to the tables appearing in the Australian Tax Handbook 1999 published by the Taxation Institution of Australia, the applicant calculates that tax of $15,300 will be payable for 1997, $16,870 for 1998 and $41,780 for 1999. If the word "debts" in the phrase "able to pay his or her debts" means amounts that are now payable, these three amounts are not debts for want of assessments by the Commissioner. Income tax is due when it is assessed and notice is served of that assessment. The tax does not become payable before the date fixed by s 204 of the Income Tax Assessment Act 1936. See Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 17 per Mason J, with whom Aickin and Wilson JJ agreed. If the view favoured by Katz J in Ensor be applied, so that "debts" include amounts that will be payable in the "reasonably immediate future", the tax that will become payable in respect of the 1997 and 1998 years may qualify as debts, though the tax that will become payable in respect of the 1999 year is too remote to qualify. If the amounts that will become payable in respect of the 1997 and 1998 years are "debts", I find that those amounts are likely to be considerably less than the applicant's estimates, because of the respondent's earlier year losses when he was studying on a part‑time basis in Hobart. I am satisfied that the respondent will be able to pay the reduced amounts when they become payable. I have had regard to the possibility that penalties will be imposed for the respondent's failure to lodge returns for the 1997 and 1998 years. I accept his evidence that he was unable to lodge returns because the police had confiscated his financial records as part of an investigation into his dealings. This may militate against the imposition of significant penalties. For these reasons I am satisfied that the respondent is able to pay his debts, and in the exercise of my discretion I will dismiss the petition. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg. Associate: Dated: 24 September 1999 Counsel for the Applicant: S P Gardiner Solicitors for the Applicant: Rigby Cooke Counsel for the Respondent: M Rinaldi Solicitors for the Respondent: Zolis Counsel for the supporting creditor: A Ellis Solicitors for the supporting creditor: Mills Oakley Date of Hearing: 13 September 1999