FEDERAL COURT OF AUSTRALIA Abignano; in the matter of Abignano v Wenkart [1999] FCA 1695 BANKRUPTCY – application by debtor to adjourn hearing of creditors' petition in order to initiate Part X proceedings – whether Part X proceedings bona fide IN THE MATTER OF GENNARO ABIGNANO & GENALLCO PTY LTD GENNARO ABIGNANO & GENALLCO PTY LTD v THOMAS RICHARD WENKART NG 8467 of 1998 MADGWICK J 29 OCTOBER 1999 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 8467 OF 1998 IN THE MATTER OF GENNARO ABIGNANO & GENALLCO PTY LTD BETWEEN: GENNARO ABIGNANO First Applicant GENALLCO PTY LTD Second Applicant AND: THOMAS RICHARD WENKART Respondent JUDGE: MADGWICK J DATE OF ORDER: 28 OCTOBER 1999 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application, brought by the Respondent, to adjourn the hearing of the creditor's petition be dismissed. 2. The respondent is to pay the applicants' costs. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 8467 OF 1998 IN THE MATTER OF GENNARO ABIGNANO & GENALLCO PTY LTD BETWEEN: GENNARO ABIGNANO First Applicant GENALLCO PTY LTD Second Applicant AND: THOMAS RICHARD WENKART Respondent JUDGE: MADGWICK J DATE: 29 OCTOBER 1999 PLACE: SYDNEY REASONS FOR JUDGMENT (revised from transcript) HIS HONOUR: 1 Yesterday there was an application by the respondent debtor for the adjournment of the hearing of a creditor's petition seeking his bankruptcy. I refused the application and indicated I would give my reasons for such refusal today. These are those reasons. 2 The application for an adjournment was based on the fact that the debtor had, on the eve of the date of the application for the adjournment, initiated steps to have his apparent insolvency dealt with under Part X of the Bankruptcy Act 1966 (Cth) ("the Act"). On the day before the adjournment application he had executed an authority under s 188 of the Act to put his property under the control of a controlling trustee. 3 The principles which should govern an application of this kind are not in doubt. The Court has a general discretion to adjourn the hearing of a petition; if authority is needed, that is to be found in Re Martyn and Martyn; Ex parte Capes (1929) 1 ABC 176. The Court will often view favourably an adjournment of the hearing of a bankruptcy petition on the application of a debtor in order to enable the creditors to consider "a fair and bona fide Part X proposal" as Merkel J put it in Re Bendel; Ex parte Lippman [1996] FCA 262. The reasons why that is so are obvious enough. The infliction of the status of bankruptcy on a person is a sufficiently serious step that the Court will strongly lean to avoiding it if that is reasonably and fairly possible. Factual background 4 In order to put the circumstances of this case in some perspective it is necessary to refer very briefly to but a few aspects of what has been long, tortuous, expensive and grimly fought litigation between the parties. The judgment debt, amounting to over $1.3 million, originated from a judgment of Hunter J of the New South Wales Supreme Court given in September 1997 and from the assignment of rights, the subject of one of the judgments ultimately pronounced by his Honour, to the petitioning creditors. Appeals were brought from that judgment by the debtor to the New South Wales Court of Appeal. 5 Ultimately a bankruptcy notice was served on the debtor on 5 March 1998. On 28 August 1998 Hill J extended time in this Court for compliance with the bankruptcy notice until thirty days after delivery of judgment by the Court of Appeal in the relevant appeals. The Court of Appeal delivered its judgments on 6 October 1998 so that the time for compliance with the bankruptcy notice expired on 5 November 1998 and an act of bankruptcy was thereby and then committed by the debtor. 6 The creditor's petition was issued on 30 December 1998 and served on 15 January of this year. It came on for hearing before me on 5 May 1998 when, by agreement between the parties, certain attacks on the petition having to do with its form were debated. It appeared in the course of argument that there were defects in the petition of a formal character. 7 The debtor submitted that the defects were such that they were not curable and, there being no petition, there could be no amendment of it or, alternatively, that the application made by counsel for the petitioning creditors to amend the petition should not in the exercise of the Court's discretion be granted. By this time an application for special leave to appeal to the High Court against the decisions of the New South Wales Court of Appeal had been made. 8 I held against the debtor on both scores and granted leave to the petitioning creditors to amend the petition which was then and there done. That leave was granted upon the basis that the further hearing of the petition, as to a substantive matter in opposition to the petition that had been foreshadowed, would be adjourned to enable the parties to know the outcome of the application for special leave in the High Court. 9 I may interpolate that after I had refused the application for an adjournment no such substantive matter was argued on the further hearing of the petition itself although of course I did not know that that would be so when I declined the application for the adjournment. Bona fides of Part X proceedings 10 On 6 August 1998 the judgment debtor failed in his application for special leave to appeal to the High Court. Nothing was done to invoke Part X of the Act until the day before yesterday. The debtor did not adduce evidence, either from himself or any other source, to explain the delay in initiating the Part X proceedings. There was for example no evidence of some change of circumstances which would make the Part X application appear other than just a device to stave off bankruptcy. No actual proposal that would or could be put to the creditor's meeting, was put before me. There was nothing establishing the debtor's bone fides which could be judged. Nor was there any explanation for the absence of any evidence of these kinds. 11 The debtor nevertheless argued, through his counsel, Mr Skinner, who presented such case as he had with clarity and elan, that he should nevertheless be given a chance to escape the status of bankruptcy because any prejudice to petitioning creditors from what would be his ultimate proposal to the creditor's meeting under Part X, or otherwise arising from the initiation of Part X proceedings, could be dealt with by an application to the Court. 12 It is not, I agree, to be doubted that the Court has ample jurisdiction to deal with such matters. However, the petitioning creditors have been long delayed, and not entirely through their own fault, and they are doing no more than pursuing and exercising their legal rights. In my view their petition should not be set aside because they might have some other legal right that may arise if the debtor's proposal were acceded to. 13 More fundamentally, the creditors challenged the bone fides of the initiation of the processes of Part X of the Act. They point to firstly, the unexplained delays and the other factors to which I have referred and the unexplained absence of the debtor from the witness box; secondly, serious findings were made by Hunter J that on their face show that the debtor has been prepared to go to extreme lengths to thwart the exercise by others, of their legal rights, and has concealed his involvement in commercial transactions in which he was vitally interested, by the use of other persons and/or corporations as "fronts" and; thirdly, the judgment indicates that the debtor has been guilty of dishonesty. 14 The next matter pointed to was raised in the course of proceedings in an action between the petitioning creditors (and/or persons in the same interest as they are) and the debtor, heard in the Supreme Court by Cohen J, in respect of which he gave judgment on 27 November 1998. The petitioning creditor's interests, as I shall call them, were seeking orders that a mortgage of certain land executed by the debtor, was voidable under s 37A of the Conveyancing Act 1919 (NSW) as an alienation of property with intent to defraud creditors. The plaintiffs failed, but they failed for technical legal reasons. His Honour found in substance, that the debtor had a dishonest intent to defeat the petitioning creditor's interest in what he had done. 15 Next, I was taken to a judgment of Emmett J in this Court, given on 29 October 1998, involving the taxation liability of one or more corporations with which the debtor was intimately, if indirectly, associated. The matter is on appeal and nothing I say, of course, should be taken as reflective of any concluded view of the facts about that litigation. But on its face Emmett J's judgment does show, as was submitted, that the debtor was closely associated with a very sophisticated offshore tax planning arrangement. This, in itself, may only show that he shares the opposition of a great proportion of the Australian public to paying more tax than they need to. But, it shows also that he had the capacity to have funds passed between various entities in a sophisticated manner with a view to minimising his liabilities and further that the debtor has and had the capacity to create substantial indebtedness by himself or entities in which he was concerned, to others by way of dealings which were not at arms length. 16 Next, the petitioning creditors showed that there was an artificial and prima facie dishonest attempt by the debtor to frustrate the anticipated issuing he might have of a bankruptcy notice against him after Hunter J had delivered his reasons on 25 September 1997. The matters before his Honour were extremely complex and, his Honour having delivered lengthy reasons on that date, it was left for the parties to bring in minutes of appropriate orders. On the day of delivery of his Honour's reasons the debtor executed a deed whereby certain debts of the petitioning creditors were purportedly assigned by another entity to the debtor. The deed was drafted so that that assignment would take effect immediately prior to the making of formal orders by his Honour. The material before me shows that this was, as I have said, an artificial and prima facie dishonest method of defeating a likely bankruptcy notice and there was no evidentiary or other effort by the debtor to cast a different light on the matter. I draw that inference against him. 17 Finally, in proceedings in the Supreme Court of New South Wales for the execution of a judgement, the debtor in recent months claimed to have no property of any value. In these circumstances counsel for the petitioning creditors submit the resort to Part X is an empty gesture: there will presumably be nothing to be distributed if the debtor told the truth when he was examined in the Supreme Court. Therefore the inference arises that any proposal that might be put up would be neither reasonable nor bona fide in the sense of justifying the rescue of the debtor from the possible infliction of the status of bankruptcy upon him. 18 Mr Skinner, on the debtor's behalf, replied that s 50 of the Act, giving the Court power to put property in the control of the Court before the hearing of a petition, would provide the answer to many of the petitioning creditor's fears. It is by no means clear to me that all that the petitioning creditors might reasonably fear could be dealt with by s 50. That section is little used in this court although, as Mr Skinner says, it may simply be that its existence is not widely appreciated. The outcome of any resort by the petitioning creditors to that section would be uncertain and I do not see that there is any sufficient merit otherwise in the position of the debtor which would justify delaying the petitioning creditor's right to have this petition heard, for the sake of its possibly commencing yet other proceedings for a mere interlocutory remedy. 19 For these reasons I refused the adjournment application. Disposition 20 I formally note that the date of bankruptcy was 6 November 1998. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Madgwick. Associate: Dated: 29 October 1999 Counsel for the Applicant: R Conti QC with A Ogborne Solicitor for the Applicant: Bruce & Stewart Counsel for the Respondent: B Skinner Solicitor for the Respondent: Gadens Lawyers Date of Hearing: 28 October 1999 Date of Judgment: 29 October 1999