Re Miloslav Anthony Kolomy [1981] FCA 149; (1981) 56 FLR; 157 (2 October 1981)

FEDERAL COURT OF AUSTRALIA

Re: MILOSLAV ANTHONY KOLOMY [1981] FCA 149; (1981) 56 FLR 157
No. 309 of 1980
Bankruptcy Act 1966

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
McGregor J.(1)

CATCHWORDS

Bankruptcy Act 1966 - Application for discharge - s.150(1) - Objections - Bankruptcy adverse commercial record - s.150(6)(h), s.150(9) - application premature.

Bankruptcy - Application for discharge - Objections to discharge - Disastrous trading record of bankrupt - Fraud - Bankruptcy Act 1966 (Cth), s. 150 (1), (6) (h), (9). On 14th April, 1980, a sequestration order was made against the bankrupt. His statement of affairs disclosed unsecured creditors of over $118,000. His assets amounted to two dollars, and twenty dollars had been credited to the estate. His wife was prepared to contribute the sum of $1,300 to his estate if his application for discharge were granted. On an application for discharge pursuant to s. 150 of the Bankruptcy Act 1966 the Corporate Affairs Commission, which had been the petitioning creditor, and three other creditors all opposed the application.

The bankrupt had a disastrous trading record. Between 1960 and the date of the sequestration three companies of which he had been director were wound up with deficiencies ranging from $35,000 to $100,000. In March 1976 the bankrupt had been convicted of an offence under s. 374c (2) of the Companies Act, 1961 (N.S.W.) and subsequently he was declared to be personally responsible for the payment to one of the companies of which he had been director, of the amount required to satisfy the trade debts of the company of which proof had been admitted by the liquidator, namely $97,357.10. In 1978 and 1979 in separate sets of proceedings brought pursuant to s. 88F of the Industrial Arbitration Act, 1940 (N.S.W.) the Industrial Commission of New South Wales declared certain contracts with a company of which the bankrupt had been a director to be void ab initio and the bankrupt and a co-director were ordered to repay substantial sums to persons who, as a result, now claimed to be creditors of the bankrupt. In the 1979 proceedings the trial judge categorized the activities of the bankrupt and his co-director as "a pattern of confidence trickery". In July 1979 the bankrupt was convicted of an offence contrary to s. 5A of the Business Names Act, 1962 (N.S.W.) in relation to the carrying on of business by him under another firm name.

Held: (1) The discreditable record of a bankrupt in commercial proceedings is relevant to granting or withholding of a discharge from bankruptcy.

Re Badcock; Ex parte Badcock (1886), 3 Morr 138; Re Cooke; Ex parte Cook (1889), 6 Morr 224; Re Haines (1937), 10 ABC 83; Re Trautwein (1950), 15 ABC 119; Re Gray (1960), 19 ABC 29; Re Mallan (1975), 25 FLR 20; Re Moss (1962), 19 ABC 153; Re Prince; Ex parte The Bankrupt (1961), 19 ABC 39; Re Reilly; Ex parte The Debtor [1979] FCA 2; (1979), 36 FLR 268, referred to.

(2) "Fraud" within s. 150 (6) (h) of the Bankruptcy Act 1966 need not be directly concerned with or arise out of the events leading to the making of the sequestration order. It is sufficient if it is fraud perpetrated by the bankrupt in his previous commercial activities such that it reflects on his present quality or potential.

(3) In the present circumstances fraud within s. 150 (6) (h) had been established.

(4) Even if fraud had not been established the court would refuse to grant a discharge pursuant to the discretion contained in s. 150 (9) of the Bankruptcy Act 1966.

Application refused.

HEARING

Sydney, 1981, September 29; October 2. 2:10:1981
APPLICATION.

Application by the bankrupt for a discharge pursuant to s. 150 of the Bankruptcy Act 1966.

T. F. A. Pelbart (solicitor), for the applicant.

J. Swan (solicitor), for the New South Wales Corporate Affairs Commission.

B. F. Williams (solicitor), for the official receiver.

P. Mulroney (solicitor), for the creditors Skillen and Brown.

Cur. adv. vult.

ORDER

The application for discharge is refused. Application dismissed.

DECISION

MILOSLAV ANTHONY KOLOMY (Bankrupt) sometimes referred to as MILO ANTHONY COLOMY has made an application for discharge from bankruptcy pursuant to s.150 of the Bankruptcy Act 1966 (the Act).

Notices of intention to oppose application for order of discharge pursuant to Rule 55 of the Bankruptcy Rules have been filed on behalf of DOUGLAS REID SKILLEN (Skillen) TERENCE EDWARD BROWN (Brown) MAHEL INVESTMENTS PTY: LIMITED (Mahel) and THE CORPORATE AFFAIRS COMMISSION (The Commission). The Senior Assistant Official Receiver, Mr. B.F. Williams, appeared on behalf of the Official Receiver. However, on announcing his appearance by Skillen and Brown, Counsel said that the latter's debt had not been proved; and later that no proof of debt had been lodged "at this stage" for Brown, that it was in preparation. But no separate submissions were offered on Brown's behalf; in fact Counsel eventually confined himself to supporting submissions made by Counsel for the Commission and Mahel with some added comments.

It appears that on 14 April 1980 a Sequestration Order was made against the estate of the bankrupt upon the petition of the Commission. In his Statement of Affairs the only asset disclosed by the bankrupt was cash in hand of $2.00; the only monies brought to the credit of the Estate has been a deposit on the petition of $20.00 though, in submissions made, I am informed that the wife of the bankrupt is prepared to contribute the sum of $1,300.00 to the Estate upon the basis (I understand) that the bankrupt is granted a discharge. This no doubt relates to what is said in the Official Receiver's Report, viz. an amount of $1300.00 is required to pay petitioning creditor's costs plus costs of administration. Further, the bankrupt disclosed five unsecured creditors in his Statement of Affairs amounting to $118,983.00 of which one creditor, Skillen, (at least) has lodged a claim which has been admitted to rank for dividend for $5,456.00.

The public examination of the bankrupt was held on 26 June 1980, adjourned generally, and in respect of it the Official Receiver states that he has no objection to the examination being concluded.

Further, from the report of the Official Receiver dated 15 July 1981, it appears that the bankrupt is a married man aged 60 years, without dependants, unemployed, and in receipt of social services benefits. His own evidence states that the benefits were $51.00 and later $53.00 per week.

The bankrupt gave evidence in which he said, amongst other things, that he had been unemployed for 3 and a half years, existing on a "subsistence", finds it difficult to make a living on this and, though trying very hard to obtain a job, has been unsuccessful because of his age. He stated that the fact that he is a bankrupt is affecting him mentally and he feels he is not enjoying full citizen's rights because he is under the control of the Official Receiver and the creditors. In the event that he would be discharged, he stated that he had the idea he would buy a lawnmower and mow lawns on a contract basis for home owners and so he would earn a bit more than he is able to obtain now from social services payments. For such a business he stated that he would probably need one or two lawnmowers and an old utility or van. He said further that he was unable to buy this equipment now because he has just not got the money and cannot borrow; that he is not allowed to incur credit.

Though he is registered with the Commonwealth Employment Service Bureau, Campsie Branch, he has not received any offers of a job from them nor has his efforts in following advertisements in the daily press enabled him to be employed and this because of his age. He has not attempted to borrow a lawnmower from a friend or neighbour to earn money because -

". . . . this . . . . would amount to me getting into business, which I am not allowed to do."
He says that this was his own view and that he had not had advice on that. He agreed that he had gone through "University courses", that he is an electrical engineer and had obtained a certificate issued by the "Technical College in Prague." The effect of his evidence is that he could not do the work associated with electrical engineering because he is not familiar with new circuitry and has not practised as an electrical engineer since about 1960 or so; that he would find it most difficult to repair a friend's television set now. He has made enquiries about doing work of a gardening nature but nobody wants to employ him though he feels he could do that work. However, he said that if he went perhaps as a contractor and tried to obtain such work, he was sure he could get some but -

". . . . . then again, I would be involved in business which I am not allowed to do."
This statement seems an inaccurate paraphrase of s.269 of the Act.

Evidence has been given of certain events involving the bankrupt to which I should make reference. The bankrupt and Mary Kolomy were directors of a company called Elektra Pty. Limited (Elektra) from 18 July 1960 until 13 April 1964; and, further, were managers of the said company from 31 December 1962 until 13 April 1964.

The bankrupt was the Secretary of the said company from 31 December 1962 until 13 April 1964. Upon the petition of Malleys Limited, a creditor of the company, Elektra, it was ordered, by the Supreme Court of New South Wales in Equity, that Elektra be wound up under the provisions of the Companies Act 1961. Its liabilities, upon the Statement of Affairs were $91,606.00 and its assets $36,690.00, leaving a deficiency of $54,916.00; though the liabilities include contingent liabilities in the sum of $40,366.00; and the total of proofs admitted for unsecured creditors was $51,719.87.

It appears further, from the evidence, that a company, New Era Productions Pty. Limited (New Era) was incorporated on 21 July 1966. The bankrupt was a director and the secretary of the said company from 21 July 1966 to 4 March 1968. On 4 March 1968, the said company was by the Supreme Court of New South Wales, ordered to be wound up upon the petition of Dunn Air Conditioning (N.S.W.) Pty. Limited. Further, it appears from the evidence, that the liabilities of that company at winding up were at least $36,716.00 and its assets were nil.

On 31 August 1967 Mahel was incorporated. The bankrupt was a director of that company which was formed to conduct furniture and electrical goods retail and wholesale business in Burwood. On 21 April 1969 John Edward Walker was appointed liquidator of Mahel. On 8 March 1976, the bankrupt, at a sitting of the District Court of New South Wales at Sydney was convicted of the offence that contrary to s.374C(2) of the Companies Act No. 71 of 1961 he was, between the 4th day of December 1967 and 21 April 1969, a Director of Mahel, had care, control and management of that company which traded under the name and style of Bargain Furniture Store at Burwood and that between those dates at Burwood and elsewhere he was -

"knowingly a party to the carrying on of the said business of the said company with intent to defraud the creditors thereof."
The Certificate of Conviction states that he pleaded guilty to this offence on 8 March 1976. His Counsel from the bar table stated that this plea was arrived at after a process of plea bargaining. For that offence the bankrupt was fined the sum of $2,000.00. His Counsel informed me that fine had been paid.

Mahel was wound up by an order of the Supreme Court of New South Wales in its Equity Division on 21 April 1969. On 13 March 1979 the Commission in that Court proceeded against the bankrupt for a declaration that he should be liable to pay to Mahel the amount required to satisfy all of its debts. In that proceeding there was no appearance on behalf of the bankrupt. Waddell J. made the following declaration - (See Re Mahel Investments Pty. Ltd. and the Companies Act 1979 1 NSWLR 110.) -

"I declare, pursuant to s.374D(1)(b) of the Companies Act, that the defendant, having been convicted on 8th March, 1976, of an offence under s.374C(2) of the said Act, is personally responsible without any limitation of liability for the payment to Mahel Investments Pty. Ltd. of the amount required to satisfy the trade debts of the company, the subject of proofs admitted by the liquidator, namely the sum of $97,357.10."
In those proceedings, the bankrupt was ordered to pay the costs of the Commission. It was upon this debt for costs that the Sequestration Order to which I have referred earlier was made against the Bankrupt.

In January 1974, a firm named "Dynamic International" (Dynamic) was registered, the propretor thereof being Mastertouch T.V. Services Pty. Ltd. (Mastertouch). The bankrupt was employed to manage the business which was initially to sell and service electrical equipment but later it changed the nature of the business to sell export agencies. The bankrupt and Robert Bruce Van Vogt, were the directors and shareholders of Mastertouch. In January 1976 that company sold to Skillen and Brown for $3,600.00 each. Payments were made by those persons to Mastertouch. The said Skillen and Brown made application pursuant to the terms of s.88F of the Industrial Arbitration Act 1940 to the Industrial Commission of New South Wales to have the said contracts declared void ab initio and for consequential orders against the company, Van Vogt and the bankrupt.

On 3 August 1978 it was ordered by Mr. Justice Macken that the said contracts between the company and Skillen and Brown were void in whole and ab initio. Orders were made by Macken J. that Mastertouch, Van Vogt and the bankrupt were jointly and severally liable to pay to Skillen various sums of money totalling some $5,456.00 the details of which appear in his Honour's judgment but need not be separately itemised here. In respect of Brown, his Honour made a similar order in the sum of $5,440.00.

On 30 July 1979 the bankrupt was convicted by a Stipendiary Magistrate for that -

"Being a person convicted at Sydney in the State of New South Wales on 8th March 1976, . . . . of an offence involving fraud or dishonesty punishable on conviction with imprisonment for three months or more did on or about 3rd March 1978, a date within the period of five years next succeeding the occasion of the conviction aforesaid carry on business at Petersham and elsewhere within the State under the business name Dycom Electronics without the leave of the District Court contrary to Section 5A of the Business Names Act, 1962."
For this offence the bankrupt was fined $300.00 and ordered to pay costs in the sum of $212.00.

Certain other proceedings were brought pursuant to s.88F of the Industrial Arbitration Act 1940 in respect of which the bankrupt was one of the respondents. The matter was before the Industrial Commission of New South Wales (McClelland J.) on a number of occasions, the first time being on 9 August 1978, thereafter on 31 May 1979, 25 July 1979, 29 August 1979, and 7 November 1979.

On 23 November 1979, the learned Judge ordered that a contract and arrangements made by and between a certain Manfred August Ludwig and all or each of the respondents on or about the 28 February 1978 and subsequent occasions are unfair, harsh and unconscionable and against the public interest and declared them to be void in whole and ab initio with certain exceptions stated in the said judgment not necessary to relate. Further, he ordered that the bankrupt and Robert Bruce Van Vogt pay to the said Ludwig $6,000.00 which had been paid by Ludwig to the respondents and that for the said payment the bankrupt and Van Vogt were to be jointly and severally liable.

Additionally, he ordered that the said bankrupt and Van Vogt were to pay further sums of $450.00, $180.00 and $1,500.00, the last being for costs. In his Judgment, his Honour said -

"On 3 August 1978 this Commission (Macken J.) made orders against the aptly named Mastertouch T.V. Services Pty. Limited and its Directors Robert Bruce Van Vogt and Mil Anthony Colomy declaring void certain contracts relating to a different but similar field of deception to that involved in the present case. The pattern of confidence trickery employed by Van Vogt and Colomy in the cases dealt with by Macken J. bears a remarkable resemblance to that which succeeded in hoodwinking Mr. Ludwig. Until their activities came under the scrutiny of the Corporate Affairs Commission the guiding principle, if it could be dignified as such, of Van Vogt and Colomy seems to have been that there is one born every minute."
The respondents did not defend the application.

The discreditable record of the bankrupt in commercial proceedings is relevant to the granting or withholding of an application for discharge. Section 150 of the Act is as follows -

"150(1) A person who becomes, or has before the commencement of this sub-section become, a bankrupt may apply to the Court for an order of discharge at any time after -

(a) his public examination has been concluded;

(b) the Court or the Registrar has directed that a public examination shall not be held in his case or the Registrar has dispensed with a public examination in his case; or

(c) the expiration of the period of 12 months commencing on the date of the bankruptcy.

(2) . . . . .

(3) . . . . .

(4) . . . . .

(5) The Court shall, if any of the matters specified in sub-section (6) is established -

(a) refuse to make an order of discharge; or

(b) make an order of discharge but suspend the operation of the order as the Court thinks proper, either unconditionally or subject to conditions.

(6) The matters upon the establishment of which the Court may exercise the powers specified in sub-section (5) are as follows -

(a) to (g) . . . . . .

(h) that the bankrupt has been guilty of fraud or fraudulent breach of trust;

(i) . . . . .

(7) The Court shall not, under sub-section (5) suspend the operation of an order of discharge subject to conditions that require, or have the effect of requiring, the bankrupt to make payments from his income at any time after the expiration of the period of 5 years commencing on the date of the bankruptcy.

(8) . . . . . .

(9) Were none of the matters specified in sub-section (6) is established, the Court may -

(a) refuse to make an order of discharge;

(b) make an order of discharge; or

(c) make an order of discharge but suspend the operation of the order as the Court thinks proper, either unconditionally or subject to conditions.

(10) . . . . .

(11) . . . . .

(12) . . . . ."

Counsel for the Commission and Mahel has referred me to certain authorities which he claims are of assistance in this matter. They include In re Badcock Ex parte Badcock (1886) III Mor. 138 where Cave J. said at p.144 -

"In considering this case we are bound to have regard not to the interests of the bankrupt or of the creditors alone, but also the interests of the public. We are bound to consider the interests of commercial morality . . ."

Referring to the particular circumstances of that case, his Honour said at page 145 -

"The whole thing discloses a method of trading inconsistent with trading morality and it ought to be stopped."

He also referred to In re Cook ex Parte Cook (1889) Vl Mor. 224. In that case and referring to its particular circumstances, Cave J. said at p.234 in relation to the bankrupt -

"He has shown an utter inability to comprehend the first elements of commercial morality, and it is clear he is quite unfit to be allowed to trade again . . . . ."

Re Haines 10 A.B.C. at p.83 contains similar statements by Haslam A.J. at page 87 -

"In considering the question of a bankrupt's discharge, the court is bound to have regard not merely to the interests of the bankrupt or of the creditors, but also to the interests of the public and of commercial morality.

After discharge, a bankrupt is free to engage in business without restriction, but an undischarged bankrupt has to give information regarding his financial condition before engaging in trade. He is regarded as being one about whom the public is entitled to be warned."

In Re Trautwein 15 A.B.C. 119 Clyne J. said at p. 126 in considering the application for discharge there made -

"While the court cannot disregard the interests of the bankrupt and his creditors, it has also to consider the interests of the public and, as has been often said, the interests of commercial morality.

The words "commercial morality" cannot be defined with precision, but no doubt they have some reference to a standard of honest dealing generally recognized by that section of the community engaged in commerce; a standard not always reflected in the conduct of some of the individuals comprising it.

In my opinion, commercial morality simply means common honesty.

In the present case it is not easy to reconcile the interests of the bankrupt and his creditors and of the community.
. . . . . .

According to the evidence the bankrupt is well over 80 years of age and it is not likely that he will ever become engaged in trade again and become a menace to the trading world or to the State.

If the bankrupt had been a younger man and capable of carrying on any trade or business I should have had no hesitation in refusing this application."

In that case discharge was granted, suspended for a period of 12 months.

In Re John Maxwell Gray 19 A.B.C. 29 at 31 Clyne J. said -

"I will deal first with the application for discharge. Upon such an application, the court has a wide discretion. It may grant an unconditional discharge. In certan events it may either refuse or suspend a discharge. "After all, the overriding intention of the Legislature in all Bankruptcy Acts is that the debtor on giving up the whole of his property shall be a free man again, able to earn his livelihood, and having the ordinary inducements to industry. Sometimes it is not right that the bankrupt should be free immediately; he must pass through a period of probation; and theoretically there may be cases in which he ought not be free at all" (In re Gaskell, (1904) 2 K.B. 478, at p.482). Some cases are plainly not theoretical. Whether a bankrupt should receive a discharge is a question which affects the interests of the public and regard must be had to these interests and to what has repeatedly been described as the interests of commercial morality."

In that case it appeared that the bankrupt had paid sufficient money to the trustee of his estate to enable him to pay his creditors 20/- in the pound.

In Re Mallan 25 F.L.R. 20 at p. 23 White J. who was concerned with an application by a bankrupt aged 75 years was commenting upon the application of the Act, passed in 1966 and its effect upon applications for discharge. He said -

"Removal of the statutory guideline merely widens the court's discretion, leaving the proportionate contribution entirely to the court's estimate of what is fair in all of the circumstances. The other retained "facts" all concern the bankrupt's commercial probity and suitability to be in business, from which I infer that the continuing policy of the Act is one of protection of the public from possible further depredations by persons unsuited to be in business."

To these authorities I would add a reference to re Moss 19 A.B.C. 153 at p.154.

On behalf of the Official Receiver I was also referred to Re David Howard Prince Ex parte The Bankrupt 19 A.B.C. 39. That was a case in which the applicant was aged 75 years but in respect of the application Clyne J. said that it was "premature". See page 42. To these authorities I would add Re Reilly; Ex parte The Debtor, [1979] FCA 2; 36 F.L.R. 268 at p.276 per Lockhart J.

I have been concerned to consider whether the fraud which is referred to in sub-s.6(h) of s.150 is one which has been shown to have been committed by the bankrupt here; particularly having regard to the conviction for breach of the Companies Act s.374C(2) on 8 March 1976 and the conviction on 30 July 1979 pursuant to the Business Names Act s.5A.

Must the "fraud" referred to in the Act have to be one concerned with the making of the Sequestration Order or the events which led to it; or may it be fraud not so related? The fraud which was made out in Re Freeman; Ex parte Freeman (1890) 62 L.T. 367 (Freeman) was a fraudulent preference, i.e. associated with the bankruptcy with which the Court was concerned. See page 369 (ibid). On the general question I express the view that it is such fraud perpetrated in the bankrupt's commercial activities as reflects his present quality or potential, even if not intimately related to the making of the Sequestration Order and consequent bankruptcy from which the discharge is sought. See also Re Moss 19 A.B.C. 153.

The opposition to the grant of discharge on behalf of the Commission and Mahel is, by inference from the cross examination, the evidence produced and the submissions made, generally to be related to what has been described as the bankrupt's "disastrous commercial record", not omitting references to fraud in the cases to which reference is made above. Here the reference to fraud is to be found in Court decisions and not a finding which this Court has to make (cf. Re Mascherin 22 C.B.R.(N.S.) 263).

The bankrupt states in respect of his company transactions he had no financial benefits, other people owed him money which he could not recover, that he acquired no assets whatsoever and that since his bankruptcy he has been living 'very low'. Submissions on his behalf included that to delay discharge will not lead to substantial monetary advantage to the creditors; and further that the Act was a Statute intended to help the debtor perhaps more than the creditor. I do not agree that the intention of the Act is correctly so stated.

In my view the application is, to say the least, premature. It would be inappropriate to grant a discharge to this applicant having regard to his commercial history, recent and otherwise which my attention has been drawn to and the nature of offences and comments which have been made, e.g. by McClelland J. in the Industrial Commission concerning his conduct. He is not, at this time anyway, "a proper person . . . . . . to be allowed to trade." (Per Cave J. in Freeman at p.367). My decision would be the same if having regard to the meaning of "fraud" in s.150(6)(h) it could be said that "none of the matters specified in sub-s.(6) is established." See s.150(9). I consider that fraud within the meaning of s.150(6)(h) has been established.

For these reasons the application is refused.