Re Joseph Paul De Fazio, A Bankrupt Ex Parte: the Official Trustee In Bankruptcy As Trustee of the Property of Joseph Paul De Fazio [1991] FCA 65 (7 March 1991)

FEDERAL COURT OF AUSTRALIA

Re: JOSEPH PAUL DE FAZIO, a bankrupt
Ex parte: THE OFFICIAL TRUSTEE IN BANKRUPTCY as trustee of the property of
Joseph Paul De Fazio
No. V B197 of 1986
FED No. 67
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
Olney J.(1)

CATCHWORDS

Bankruptcy - discharge by operation of s.149 - application by trustee for order that bankrupt be not discharged - notice pursuant to s.149(3)(c) entered and served in accordance with rules but not drawn to bankrupt's attention - bankrupt unaware that bankruptcy continued after 3 years - conduct of bankrupt both before and after the date of bankruptcy.

Bankruptcy Act 1966 - s.149

HEARING

MELBOURNE
7:3:1991

Counsel for applicant : Mr G. Bigmore, Solicitor

Counsel for respondent : Mr J. Catalano, Solicitor

Solicitors for applicant : J.M. Smith and Emmerton

Solicitor for respondent : Masons

DECISION

This is an application brought by the trustee of a bankrupt pursuant to section 149(12) of the Bankruptcy Act for an order directing that the bankrupt shall not be discharged from bankruptcy by virtue of section 149.

2. So far as it is relevant to the present application section 149 provides:
149. (1) Subject to this section, a person who becomes a

bankrupt after the commencement of this section is, by force
of this section, unless sooner discharged in accordance with
section 150, discharged from bankruptcy upon the expiration
of 3 years from the date of the bankruptcy.
(2) ..........
(3) A bankrupt is not discharged from bankruptcy by virtue
of this section if -
(a) ..........
(b) ..........
(c) the Registrar, the Inspector-General or the
trustee has entered, or a creditor has, with the
leave of the Court, entered, an objection, in
accordance with the prescribed form and in the
prescribed manner, to the discharge of the
bankrupt by force of this section and the
objection has not been withdrawn or lapsed
before the time when the bankrupt would have
been so discharged but for this sub-section; or
(d) an order of the Court under sub-section (12) is
in force in relation to the bankrupt.
(4) An objection shall not be entered under paragraph
(3)(c) otherwise than on one or more of the following grounds:
(a) that the bankrupt is able, or is likely within 5
years from the date of the bankruptcy to be able,
to make a significant contribution to his estate;
(b) that the discharge of the bankrupt by force of
this section would prejudice the administration
of his estate;
(c) that the bankrupt has failed to co-operate in
the administration of his estate;
(d) that the conduct of the bankrupt, either in
respect of the period before or the period after
the date of the bankruptcy, has been unsatisfactory.
(5) ..........
(6) ..........
(7) Subject to sub-section (11), an objection entered
under paragraph (3)(c) lapses at the expiration of -
(a) subject to paragraph (b), the period of 5 years
from the date of the bankruptcy; or
(b) if the Court makes an order under sub-section
(8) or (9) in relation to the bankrupt - the
period fixed by the order.
(8) The Court may, at any time before the expiration of 5
years from the date of the bankruptcy, on the application of
the Registrar, the Inspector-General, the trustee or a
creditor, order that the period at the expiration of which
an objection entered under paragraph (3)(c) will lapse be
such period, being a period exceeding 5 years, commencing on
the date of the bankruptcy as is specified in the order.
(9) The Court may, at any time before the expiration of 5
years from the date of the bankruptcy, on the application of
the bankrupt, order that the period at the expiration of
which an objection entered under paragraph (3)(c) will lapse
be such period, being a period exceeding 3 years but not
exceeding 5 years, commencing on the date of the bankruptcy
as is specified in the order.
(10) In deciding whether to make an order under sub-section
(8) or (9), the Court shall take into account such matters
(if any) as are prescribed for the purposes of this sub-section.
(11) An objection to the discharge of a bankrupt, unless
sooner withdrawn, lapses upon the discharge of the bankrupt
under section 150.
(12) The Court may, at any time before the discharge of a
bankrupt, on the application of the Registrar, the
Inspector-General, the trustee or a creditor, direct that
the bankrupt shall not be discharged from bankruptcy by
virtue of this section.
(13) In deciding whether to make an order under sub-section
(12), the Court shall take into account such matters (if
any) as are prescribed for the purposes of this sub-section.
(14) Where -
(a) an objection entered under paragraph (3)(c) is
withdrawn after the time when the bankrupt would
have been discharged but for sub-section (3) or
lapses otherwise than by virtue of sub-section (11);
(b) there is no other objection entered under
paragraph (3)(c) that has not been withdrawn or
has not lapsed; and
(c) the bankrupt's discharge is not prevented by
paragraph (3)(a), (b) or (d),
the bankrupt is, by force of this section, discharged from
bankruptcy upon the withdrawal or lapsing of the objection.

3. The bankrupt became bankrupt upon the making of a sequestration order on 24 March 1986. On 22 March 1989 the trustee entered an objection to the discharge of the bankrupt pursuant to section 149(3). The objection has not been withdrawn nor has it lapsed. It is not in contest that by virtue of the trustee's objection the bankrupt was not discharged from bankruptcy upon the expiration of 3 years from the date of the bankruptcy but will be discharged upon the expiration of 5 years, that is on 24 March 1991, unless the Court either makes an order pursuant to s.149(8) or a direction pursuant to s.149(12).

4. On 29 June 1990 the trustee filed an application seeking the following relief:
1. An Order pursuant to sub-section 149(12) of the Bankruptcy Act

1966 that the abovenamed bankrupt Joseph Paul De Fazio shall not
be discharged from bankruptcy by virtue of the provisions of
Section 149 of the said Act.

2. If necessary, an Order pursuant to sub-section 149(8) of the

Bankruptcy Act 1966 that the period at the expiration of which the
objection entered under paragraph 149(3)(c) of the said Act will
lapse be such period exceeding five years from the date of the
bankruptcy as will permit the completion of the Application
herein.

3. Such further or other orders, directions or relief as to this

Honourable Court may seem fit.

(At the trial the trustee did not pursue the second paragraph of the application).

5. Rule 51A of the Bankruptcy Rules prescribes the matters which the Court is required to take into account in deciding whether to make an order under subsection (8), (9) and (12) of section 149. The rule provides:

51A. The following matters are prescribed for the purposes
of sub-sections 149(1) and (13) of the Act:
(a) whether the bankrupt is able, or is likely
within 5 years from the date of the bankruptcy
to be able, to make a significant contribution
to his estate;
(b) whether the discharge of the bankruptcy would
prejudice the administration of his estate;
(c) whether the bankrupt has co-operated in the
administration of his estate;
(d) the conduct of the bankrupt, in respect of the period
both before and after the date of the bankruptcy;
(e) any matters arising out of the conduct of the
bankrupt as a bankrupt, being matters that are
the subject of an investigation that is not completed;
(f) the age and state of health of the bankrupt;
(g) any evidence adduced by the bankrupt, the
Inspector-General, the trustee, the Official
Receiver or a creditor relating to -
(i) the circumstances in which the debts of
the bankrupt were incurred, including the
bankrupt's experience in, and
understanding of, financial matters and of
the obligations imposed on the bankrupt as
a result of incurring the debts; and
(ii) the conduct of the bankrupt's creditors,
including the nature and extent of any
inquiries made by the creditors into the
bankrupt's ability to pay his debts and
whether the bankrupt was induced to incur
debts by conduct on the part of the
creditors that departed from the standards
of normal and reasonable commercial practice.

6. The application is supported by an affidavit of Alistair Ashley Page the Official Receiver for the Bankruptcy District of the State of Victoria.

7. In paragraph 4 of his affidavit Page details conduct in respect of the period after the date of bankruptcy which is said to have been unsatisfactory. The following is a summary of the allegations made under this heading:
(a) The bankrupt prevaricated during his Public Examination when asked

"Did you sign any documents relating to the purchase of an
interest in 29 Wimba Avenue, Kew?"

(b) The bankrupt has been concerned in the management of Fourth

Gozbarb Pty Ltd without the leave of the Court, contrary to the
provisions of section 227 of the Companies (Victoria) Code.

(c) Using the name "Joseph Fasio", the bankrupt sought and obtained a

loan from the State Bank of Victoria in the sum of $335,000.00 on
or about 9 August 1989, without disclosing the fact that he was an
undischarged bankrupt.

(d) The bankrupt borrowed the sum of $5,000.00 from Pacific Grange Pty

Ltd and gave security over personal property of the bankrupt not
disclosed in his statement of affairs or otherwise disclosed to
the applicant. Alternatively, the bankrupt has failed at his
public examination to give a sufficient explanation of the
existence of a document (copy marked for identification number 12
during the public examination) acknowledging such a transaction
occurred on or about 28 October 1988.

(e) The bankrupt has failed to notify in writing both the Registrar

and the Official Receiver of various changes of address.

(f) The bankrupt has failed to provide a satisfactory explanation of

his use of expensive motor vehicles.

(g) In a document (marked for identification numbers 15 and 15A during

the public examination) signed by the bankrupt on or about 7
August 1989, the bankrupt is described as having an aggregate
balance in State Bank accounts of $5,000.00, furniture worth
$40,000.00 and jewellery worth $45,000.00; but no adequate
explanation has been given for the existence of this document or
the failure of the bankrupt to account to the applicant in respect
of such property.

(h) The bankrupt has been involved directly or indirectly in the

following loans by the State Bank of Victoria:-
(i) $475,000.00 lent to Fourth Gozbarb Pty Ltd on or about
18 May 1989 on the security of 29 Wimba Avenue, Kew;
(ii) A further $270,000.00 lent to Fourth Gozbarb Pty Ltd
on or about 12 July 1989 on the security of 29 Wimba
Avenue, Kew;
(iii) $346,500.00 lent to Lynette Fairbairn on or about 23 June
1989 on the security of 7 Rose Street, Gardenvale;
(iv) $355,000.00 lent to the bankrupt himself on or about
10 August 1989 on the security of Lot 3
Frankston-Flinders Road, Shoreham;
(v) $270,000.00 lent to La Martine Pty Ltd on or about 12
July 1989 on the security of 151/333 Beaconsfield
Parade, St Kilda.

(i) However, although disclosed in documents lodged at the office of

the Commissioner for Corporate Affairs in Victoria as a
shareholder in La Martine Pty Ltd, the bankrupt has denied any
financial interest in that company or property at 151/333
Beaconsfield Parade, St Kilda.

8. Paragraph 5 of Page's affidavit asserts that the conduct of the bankrupt in respect of the period before the date of the bankruptcy was unsatisfactory in that, while an officer of Capitani Furniture Pty Ltd (which subsequently was ordered to be wound up by the Supreme Court of Victoria), he and others removed cash from the receipts of that company without adequate explanation or record.

9. In addition to the foregoing, it is said by Page that the discharge of the bankrupt would prejudice the administration of his estate (affidavit, paragraph 6); that the bankrupt has not co-operated in the administration of his estate (paragraph 7); that his dealings with the State Bank of Victoria in his own name and purportedly on behalf of Fourth Gozbarb Pty Ltd remain the subject of an investigation by the trustee which is not yet completed (paragraph 8); and that if discharged in March 1991 the trustee fears that the bankrupt will undertake financial dealings which may be detrimental to the commercial community (paragraph 8).

10. The affairs of the bankrupt have been the subject of considerable scrutiny. A public examination was held on 10 December 1986 and continued on 10 May 1990. The trustee relies upon the transcript of the public examination to support many of the issues raised in this application. In addition, an application was before the Court in December 1987 in which the trustee sought orders in relation to a property at 29 Wimba Avenue, Kew which is registered in the name of Fourth Gozbarb Pty Ltd. Evidence was taken over some 4 days in December 1987 and on 22 February 1988 Northrop J dismissed the trustee's application. A subsequent appeal was dismissed. These proceedings involved the trial judge in scrutinising the circumstances of the transaction involving the acquisition of the property in question and touched very considerably upon the matters raised in paragraph 5 of Page's affidavit.

11. Before dealing specifically with the issues raised against the bankrupt it is appropriate to comment upon a matter which is central to what is perhaps the major complaint against him. As indicated above the trustee's objection was filed in the Court on 22 March 1989 just 2 days before the third anniversary of the sequestration order. It seems to be common cause that the entering of the objection is sufficient to prevent the bankrupt being discharged automatically after the expiration of 3 years. However, the Bankruptcy Rules provide that a copy of the notice of objection is to be served on the bankrupt (Rule 49(2)(c)). Page's evidence is that a copy of the notice was posted to the bankrupt on or about 22 March 1989, and there is no doubt that the address to which it was sent, 19 St James Street Essendon, was the last address for the bankrupt notified to the trustee and the Registrar. As it happened, the bankrupt was no longer at the Essendon address and the notice was returned unclaimed. No other effort was made to serve the notice on the bankrupt despite the fact that he had been represented throughout by a solicitor and had shortly after (in an affidavit filed on 17 April 1989) given his address as 45 De Havilland Street Mordialloc. The bankrupt says that he had been informed by a former business associate who had become bankrupt at about the same time and in similar circumstances that he (the associate) had been automatically discharged after 3 years and believed that the same applied to himself. In the absence of any notification to the contrary this would be a reasonable assumption. In an affidavit filed on 17 October 1990 the bankrupt deposed to the fact that he had not become aware of the trustee's opposition to him being discharged until being served with the application currently before the Court on 15 July 1990. Although he was produced for cross-examination, the bankrupt was not seriously challenged on the question of whether he believed that he was automatically discharged after 3 years. I accept his evidence and find as a fact that he did not receive a copy of the notice of objection filed on 22 March 1989 and that at the time he dealt with the State Bank of Victoria in August 1989 he believed that he had been discharged. Although the trustee may well have complied with the letter of the rules in posting a copy of the notice of objection to the last officially notified address of the bankrupt, I am firmly of the view that he had an obligation, once the notice was returned unclaimed, to make some further effort to effect service. Failure to take what appears to be a sensible approach to comply with rule 49(2) has the potential, as has occurred in this case, to leave the bankrupt without a proper understanding of his legal status. I would have thought that in the particular circumstances of this case ordinary professional courtesy would have suggested that a copy be sent to the bankrupt's solicitor in any event.

12. In the following paragraphs I will deal with the specific grounds raised in paragraphs 4 to 8 of Page's affidavit.
1. Paragraph 4(a): There was some initial prevarication in the

bankrupt's evidence but viewed as a whole I do not think that a
false impression was created.

2. Paragraph 4(b): There is some evidence to indicate that the

bankrupt assisted his mother in her capacity as a director of the
company but in the circumstances, given that the mother was not
fluent in English, it is difficult to classify his assistance
seriously as being concerned in the management of the company. He
says, and I accept, that at the relevant times he acted merely as
his mother's agent. There is no evidence to suggest that the
bankrupt made any management decisions.

3. Paragraph 4(c): The bankrupt says that he signed documents in

the name of "Joseph Fasio" at the suggestion of the State Bank of
Victoria manager from whom he was borrowing $355,000. He admits
that he did not disclose he was an undischarged bankrupt and this
for the reason that he then believed he had been discharged. He
says he disclosed the fact of what he thought was his former
bankruptcy to the bank manager and it was for that reason the
manager suggested the use of a different name to assist with his
'credit rating'. There is no evidence to suggest that the bank or
any other person has suffered or is likely to suffer any loss as a
result of the failure to accurately advise the bank manager of his
then status nor from the use of an incorrect name.

4. Paragraph 4(d): The sum of $5,000 was borrowed in the bankrupt's

personal name from Pacific Grant Pty Ltd on or about October 1988.
The loan was fully secured and has since been repaid. There is no
evidence nor suggestion that the bankrupt failed to disclose his
status. Indeed, the contrary is so. The lender was not called to
give evidence. The bankrupt asserts that the property over which
security was given belonged to his parents and was not property
required to be disclosed in his statement of affairs. On the
basis of the evidence before me no contrary conclusion is open.
As indicated below I am of the opinion that no inference can be
drawn from the fact that documents MFI 12 and 15 both refer to
jewellery. The explanation given at the public examination and
since has not been shown to be incorrect. No attempt has been
made to adduce evidence which would lead to a contrary conclusion.

5. Paragraph 4(e): The bankrupt admits that he did not notify the

Registrar and the Official Receiver of his various changes of
address. However, the trustee was well aware at all times where
the bankrupt could be contacted, either through his solicitor or
at his place of employment. This objection is trivial in the
extreme.

6. Paragraph 4(f): The bankrupt said at his public examination that

the cars used by him were borrowed from friends and family
members. No contrary evidence has been adduced despite the fact
that several names of people who are said to have lent the cars
were given. In my view the bankrupt's explanation was
satisfactory.

7. Paragraph 4(g): The bankrupt says that he signed the document

MFI 15 in blank at the suggestion of the bank manager and that the
details were inserted later, by some other person. I am satisfied
that the writing on the document, other than the bankrupt's
signature, is not his. No evidence was called from the bank
manager, nor from any other source, to the contrary. The bankrupt
denies having owned the property described and thus has never
accounted for it. I cannot draw any inference from the facts that
the document MFI 15 refers to jewellery worth $45,000 and that
document MFI 12 refers to jewellery being deposited as security.

8. Paragraph 4(h): All the transactions referred to were entered

into after 3 years from the date of the bankruptcy when the
bankrupt believed (as I find) that he had been automatically
discharged. Apart from the loan to the bankrupt referred to in
paragraph 4(h)(iv), there is no cogent evidence that the bankrupt
personally was "involved" in the loans.

9. Paragraph 4(i): The trustee's case to support this assertion is

that the car which the bankrupt drove to his public examination on
10 May 1990 was once owned by La Martine Pty Ltd, a company in
which it is asserted the bankrupt is shown in the records of the
Commissioner of Corporate Affairs as being a shareholder. I am
unable to draw any adverse inference from those facts.

10. Paragraph 5: In his judgment given on 22 February 1988

Northrop J said in relation to the manner in which the affairs of
Capitani Furniture Pty Ltd were conducted (pp 11-12):
About the middle of the year 1981 the bankrupt together with
Peter Granato and Gino Giulino purchased a business known as
Capitani Furniture Pty Ltd ("Capitani") which carried on the
business of selling and manufacturing lounge room furniture.
In about April 1983 the bankrupt and Granato bought out
Giulino and thereafter carried on the Capitani business. In
1983, business was good and Capitani prospered. The
financial records of Capitani are not before the Court.
Capitani is in liquidation and the whereabouts of its
financial records are not known. It is a fair comment,
however, to say that it appears that the bankrupt and
Granato carried on the business as though Capitani was not a
corporation. They seemed to treat payments of account to
Capitani as payment to them in their personal capacity.
Capitani banked with the Richmond South Branch of Westpac
Banking Corporation, but not all cheques and cash payable to
Capitani were paid into that bank. Finance to conduct
Capitani was obtained from Westpac and security for advances
made were given by the parents of the bankrupt and of
Granato. In order to protect the interests of his parents,
discussions took place concerning the creation of the family
trust. These discussions led to the creation of the De
Fazio Family Trust No. 2 and the purchase of the land. It
was necessary for the bankrupt to obtain cash for the
purpose of purchasing the land. I have formed the opinion
that he was not an efficient businessman. He did not
understand the difference between a corporation and the
persons controlling that corporation. He entered into many
unusual business dealings with his parents and with business
associates using moneys supplied by them and transferring
those moneys for other uses not only for his benefit but for
the benefit of his parents and his business associates.
There are no written records of those transactions. Oral
evidence was given with respect to them but that evidence
was confusing and imperfect and I am unable to rely upon any
of it.
I think it is fair comment to say that the failure of the bankrupt
and his associates to keep proper records of the business affairs
of Capitani Furniture Pty Ltd was unsatisfactory.

11. Paragraph 6: The basis upon which the trustee asserts

that the administration of the estate would be prejudiced if the
bankrupt is discharged, is that it may well be necessary to
continue his public examination and whereas under s.69 of the Act,
as a bankrupt, he cannot refuse to answer questions, he would have
the right in an examination pursuant to s.81 (after discharge) to
decline to give self-incriminating answers. In this context it is
said that "the apparent involvement of the bankrupt in criminal
activities" makes such a course appropriate. The matters which
are particularised as "criminal activities" are the obtaining of
credit from Pacific Grange Pty Ltd and the State Bank of Victoria
without disclosing he was an undischarged bankrupt. These two
matters have been canvassed already and there is nothing in the
evidence to suggest that any further investigation is called for.
There has been adequate opportunity for all relevant inquiries to
have been made.

12. Paragraph 7: The basis of the trustee's complaint seems

to be that whereas the bankrupt admits to being merely an employee
(and a part-time one at that) of Decor Furniture Pty Ltd, he (the
trustee) suspects that the bankrupt has some proprietorial
interest in that company and others because they are controlled by
friends and relatives of his. I am unable to detect any
evidentiary basis for the trustee's suspicions.

13. Paragraph 8: Two matters are raised in this paragraph.

First, it is said that the bankrupt's dealings with the State Bank
of Victoria remain the subject of an investigation by the trustee
which is not yet complete. No further information or particulars
were supplied. It is now 18 months since the last of the
transactions involving the State Bank was finalised and there is
no evidence to suggest that any detriment has been suffered by any
person as a result of any of them. Second, there is the trustee's
fear that if discharged the bankrupt "will again undertake
financial dealings which may be detrimental to the commercial
community" (emphasis added). I understand this latter issue to be
raised in the context of the bankrupt's dealings with the State
Bank, and I do not think the affidavit can be read differently.
That being so the answer is that there is nothing before me to
suggest that the bankrupt's financial dealings with the bank (all
of which were undertaken at a time he believed he had been
discharged from his bankruptcy) were in any way detrimental to the
commercial community. In his final address counsel suggested that
the most important feature of the application was the use of a
false name in the mortgage documents executed in August 1989. It
was said that the bankrupt is the sort of person who would engage
in questionable commercial dealings and that his conduct
demonstrated that he would regard discharge as entitling him to
engage in questionable activities. In the absence of one
scintilla of evidence supporting these assertions I emphatically
reject them as being fanciful. The failure to produce any
evidence from the State Bank of Victoria to contradict the
bankrupt's version suggests that no contradictory evidence can be
obtained. In my view, the conduct of the bank manager would
appear to be a far greater risk both to the community and to the
banker's own employer than the discharge of the bankrupt.

13. The net result of the large number of grounds raised in opposition to the bankrupt being discharged amount to this:

a) he failed to keep the Official Receiver and the Registrar
advised of his various changes of address, but was
nevertheless at all times capable of being contacted without
difficulty. I have already classified this complaint as
trivial.
b) he borrowed money from the State Bank of Victoria whilst an
undischarged bankrupt without disclosing his status. I have
found that at the time he believed he had been discharged
and advised the bank manager to that effect.
c) prior to the bankruptcy, the bankrupt and his associates in
the company Capitani Pty Ltd failed to keep proper records
of the business affairs of that company.

14. I do not think that anything more substantial than the above has been proved against the bankrupt. In the circumstances, having regard to the matters referred to in Rule 51A and to the fact that his bankruptcy will have continued for 5 years, there is no basis upon which I should exercise my discretion under s.149(12) to continue it beyond that period.

15. The application will be dismissed.