Re Peter Di Giannantonio and Frances Mary Di Giannantonio Ex Parte: Peter Di Giannantonio and Frances Mary Di Giannantonio v Alan Richard Taylor [1992] FCA 269 (5 June 1992)

FEDERAL COURT OF AUSTRALIA

Re: PETER DI GIANNANTONIO and FRANCES MARY DI GIANNANTONIO
Ex Parte: PETER DI GIANNANTONIO and FRANCES MARY DI GIANNANTONIO
And: ALAN RICHARD TAYLOR
No. 873 of 1990
FED No. 426 Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
O'Loughlin J.(1)

CATCHWORDS

Bankruptcy - Application for discharge - contracting debts without reasonable expectation of ability to pay - matters considered - commercial morality and public accountability.

Bankruptcy Act 1966 (Cth) ss.150(5), (6)(c)

HEARING

BRISBANE
5:6:1992

Counsel for the Applicants: Mr J.A. Logan

Solicitors for the Applicants: Murrell Stephenson

Counsel for the Respondents: Mr K. Howe

Solicitors for the Respondents: Kenny and Loel O'Sullivan, Neil and

Rowell

ORDER

THE COURT ORDERS THAT:
1. The applications be dismissed.

2. The applicants pay the costs of the opposing creditors.

Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

DECISION

Applications pursuant to sub-s.150(1) of the Bankruptcy Act 1966 (Cth) ("the Act") for orders for discharge from bankruptcy.

2. The applicants, Peter and Frances Mary Di Giannantonio are husband and wife. On 10 July 1990 this Court ordered that a sequestration order be made against their estates based on acts of bankruptcy that occurred on 20 September 1989 when they failed to comply with bankruptcy notices previously served on them.

3. In his affidavit filed on 20 December 1991 in support of their applications for an early discharge from bankruptcy, Mr Di Giannantonio gave a short history of his and his wife's business and financial background. That background, which has been filled out with information in other affidavits from other deponents can be briefly stated; Regent Homes Pty. Ltd, a family company operated by the applicants, carried on business as a house builder from about September or October 1987 till its liquidation in June 1989. Each applicant was a director of the company. In that time the company entered into 123 building contracts.

4. The applicants guaranteed most, if not all of their company's debts and their inability to meet their obligations under those guarantees led to their ultimate bankruptcies. The report of their trustee states that their only debts are those of the company that they have guaranteed; the papers that have been filed indicate that those debts relate to 16 creditors who have lodged proofs of debt totalling $670,427.84 and another 24 who have not yet proved and whose debts are expected to total another $259,405.90. The liquidator of the company, a Mr O'Brien, in a report dated 28 August 1989, considered it unlikely that any dividend would exceed 10c in the dollar. This report was exhibited to Mr O'Brien's affidavit that was filed in these proceedings on 3 April 1992; no later report is presumably available. It would appear that a first dividend has been paid by the liquidator, although not expressly stated, it would seem that this dividend was about 2c in the dollar.

5. The report of the trustee in bankruptcy dated 10 March 1992 stated that assets of the bankrupt to the value of $9,885.37 have been realised. This amount includes $2,500, being 5 calendar monthly contributions each of $500 from the applicants for the months of October 1991 to February 1992 and $5,950, a dividend from the company. Mr Di Giannantonio explained in his affidavit that he and his wife sold their matrimonial home and lent the net proceeds of the sale, about $300,000, to the company. The exact date of this loan was not stated but having regard to the contents of Mr O'Brien's report it would seem that it was made in about March 1989. In view of the fact that their applications had been opposed on grounds that include an allegation that they contracted debts provable in their bankruptcy without having at that time any reasonable or probable grounds of expectation of being able to pay them, it is sufficiently important to quote paragraphs 8, 9 and 10 of Mr Di Giannantonio's affidavit:

"8. In early 1989 the Company commenced to have financial
difficulties as a result of substantial unpaid debtors
and as a result of the Company being unable to pursue
projects undertaken due to extraordinarily wet
conditions in south east Queensland during February to
May, 1989. In order to assist the Company to satisfy
its creditors and its requirements for working capital
my wife and I decided to sell our matrimonial home,
our only substantial asset, apart from our interest in
the Company and apply the net proceeds of that sale to
the needs of the Company.
9. The net proceeds of the sale, a sum of about $300,000
was paid into the Company's bank account and was used
in part to satisfy the Company's overdraft with the
bank, to satisfy demands of creditors and to provide
working capital for the further operations of the
Company.
10. By about May of 1989 it became apparent to me that the
Company was unable to successfully trade out of its
difficulties notwithstanding the use of the proceeds
of the sale of the matrimonial home and ultimately the
members of the Company resolved that an application be
made to the Supreme Court to wind up the Company."

6. The applicants seek their early release for a variety of reasons. First they claimed that the company's insolvency "occurred by (sic) matters outside their control"; I take that to mean the bad debts and wet conditions that are referred to in paragraph 8 of Mr Di Giannantonio's affidavit. Next, so he claimed, the company's insolvency was not "brought about as a result of improvident management". The validity of these two claims must be seriously questioned having regard to various sections of the liquidator's report. In paragraphs 7 to 9 (inclusive), for example, the liquidator reported:

"7. Financial accounts to June 30, 1988 were prepared by
accountants from information supplied by the
Directors.
A first draft of these, in computerised trail
balance form, dated May 4, 1989, disclosed a net
loss for the period of $121,129.
The print out of the final accounts is undated,
but discloses a net profit of $78,870.
8. Examination of the two sets of accounts discloses that
the variation of $200,000 results from a re estimation
of the value work in progress, at June 30, 1988, by
transferring $200,000 to the fixed asset 'Land and
Homes, Construction Costs'.
9. The company's records, as recovered, do not contain
any work in progress files, cards, or estimates which
would support how the Directors have arrived at any
value whatever for work in progress. Their appears to
be no factual basis for the calculation of the work in
progress so that the accuracy of the accounts must be
very doubtful indeed."

7. If the company did not maintain work in progress files one wonders how the officers of the company would be able to justify a variation as large as $200,000 in value. The liquidator further reported that he made a random examination of 12 contracts. These disclosed that:

"(a) None of the files contained any details of the
calculation of the quoted contract price. This matter
was discussed briefly with the Director Peter Di
Giannantonio who indicated that no formal costings, as
such, were prepared (mainly due to the time required
and the Directors apparent lack of experience in
costing). Basically it has been suggested that the
number of square metres in a proposed construction
would be calculated, which would then be multiplied by
a dollar figure per M2. The resultant figure was
"rounded off" and a tender/quote was submitted.
(b) Cost cards were maintained for all contract jobs.
However, all were incomplete and none were recorded
beyond October, 1988 at which time it was proposed to
transfer costings to the computer. None of the costs
cards contained any allowance for overhead expense.
The cost cards would not have given any indication of
the profitability or otherwise of a particular job, if
they had been examined by a Director. It seemed that
the main purpose was to determine if certain works or
materials had been supplied to a job so that it could
proceed to the next stage."

8. Finally, the liquidator's report contained calculations suggesting that for the period 1 July 1988 to 19 May 1989, the date of provisional liquidation, the company's estimated losses were about $1.18M.

9. Boral Bricks (Qld) Limited, Reosteel (Qld) Pty. Limited, (formerly Boral Steel (Qld) Pty Limited) and Boral Resources (Qld) Pty. Limited were each creditors of the company whose debts had been guaranteed by the applicants. Each company opposed the application for discharge and the credit manageress of each company filed an affidavit setting out the trading history of her company with the applicants' company. The affidavits disclose a history of slow payments concluding with the incurring of unpaid debts in the months of March, April and May 1989 totalling in excess of $73,000. One of the affidavits - that of Ms Dunham - also listed in paragraph 2(f) the results of her inquiries from seven other creditors whose debts amounted to about $150,000; those debts had been incurred by the company and guaranteed by the applicants in the first five months of 1989.

10. Ms Dunham's affidavit was filed on 27 March 1992. Although the information dealing with the seven other creditors is hearsay the affidavit complies with the strictures of rule 141A; the deponent has set out the sources of her information. The applicants have had sufficient notice to challenge the factual accuracy of the hearsay information but have chosen not to do so. I therefore admit into evidence and take notice of the contents of paragraph 2(f) of Ms Dunham's affidavit. This means at the least that in the period of January to May 1989, debts in excess of $223,000 were incurred and remained unpaid at the date of provisional liquidation notwithstanding the injection of $300,000 from the sale of the house.

11. Subsection 150(5) of the Act states:-

"The Court shall, if any of the matters specified in
subsection (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."

12. Subsection 150(6) then lists the matters "upon the establishment of which the Court may exercise the powers specified in subsection (5)" one of those is as follows:

"(c) that the bankrupt has contracted a debt provable in
the bankruptcy without having at the time of
contracting it any reasonable or probable grounds of
expectation (proof of which lies on him) of being able
to pay it after taking into consideration his other
liabilities at the time."

13. I regard the information that is contained in the three affidavits from each credit manageress in respect of the debt owing to her company as sufficient to establish that the applicants had contracted those debts and that each such debt was a debt provable in their bankruptcy. I am further satisfied that each such debt was sufficiently particularised to give to the applicants every opportunity to meet the case that was being mounted against them; they carried the onus of proving on the balance of probabilities that there were reasonable or probable grounds of expectation of them being able to pay those debts after taking into consideration their other liabilities at the time. They have failed to do this. They have made no attempt to justify their continuation of the business of their company in the first 5 months of 1989.

14. The Builders' Registration Board of Queensland, another substantial creditor also filed a notice of opposition to the applications. It raised a variety of grounds, most of which encompassed those raised by the Boral Group. However during argument another matter arose as a result of certain allegations that were set out in affidavits from officers of the Board. Mr Di Giannantonio had said that he wanted a discharge so that he could apply for registration as a builder and thereby earn more money; the rejoinder was that it was not likely that he would obtain that registration. Counsel for the applicants complained that this amounted to a prejudgment by the Board; that may be so. On reflection, I do not think that it is necessary to express a concluded view on that complaint. However it is fair to say that those views were expressed because of the stated intention of Mr Di Giannantonio to seek registration as a builder. I do not consider that his proposals for his personal betterment in the future should affect my deliberations on this present application unless there is (or may be) some benefit to the applicants in their capacity as undischarged bankrupts or to the administration of their estates for the benefit of their creditors. No such likely benefit is apparent. I therefore disregard his proposal for future registration as a builder and the Board's reaction to it.

15. On 15 October 1991, the applicants commenced making payments to their trustee in bankruptcy for the benefit of their estate in the sum of $500 per calendar month. Mr Di Giannantonio claimed that they proposed, irrespective of the outcome of this present application to continue such payments for a period of two years at least. He said in paragraph 17 that prior to October he and his wife "were unable to make a significant contribution to our trustee for the benefit of our estate". Such a statement is of little or no value. There will often be circumstances when a bankrupt is unable to make any contributions: unemployment and ill-health are common examples. If such a factor was the cause, one would expect it to be stated. A bald statement of inability without an explanation creates an adverse reaction.

16. In the particular facts of this application there is another matter which raises one's suspicions. Mr Di Giannantonio explained that he was previously a builder but that he had lost his registration and would not regain it whilst he remained an undischarged bankrupt. He also commented that he and his wife could not be appointed directors of or be involved in the management of a company whilst they remained undischarged bankrupts. In paragraph 16 of his first affidavit he said:

"I am presently an employee of a building company and my
wife is also employed by that company and carries out
clerical and administrative duties."

He concluded his affidavit by explaining his plans for the future if he and his wife obtained their discharges:

"21. The purpose of our bringing the Application is that if
I were to be discharged from bankruptcy I am likely to
be able to regain my registration as a general builder
and as a home builder and as a consequence will be
able more readily to earn a living. I will be
permitted as well to be concerned in the management of
a company in order to pursue my trade as a builder.
So far as my wife is concerned, she will be able to be
employed in the management side of a building company
which I would propose to operate if the Application is
allowed."

17. This suggests proposals for the future that would only be implemented upon him obtaining his registration as a builder. But in paragraph 3 of his second affidavit sworn on 9 April 1992 he said:

"I wish to be released from my bankruptcy so that I can
engage in the management of my employer, Regency
Constructions Pty. Limited..."

18. This second affidavit does not disclose what relationship (if any) he and his wife have with this company; in particular, one is left to wonder why he should feel that he would be invited to (or have a right to) engage in the management of his employer. There may be some innocent explanation but if there is, it has not been advanced.

19. I have concluded without difficulty that these applications should be dismissed. I am not satisfied with the information that has been placed before the Court; why did contributions commence in October 1991 but not before? Who is Regency Constructions Pty. Limited and what is its relationship to the bankrupts? These questions were apparent from a first reading of the papers. They called out for explanations but they were not forthcoming.

20. The bankrupts had the onus of satisfying me that the incurring of the debts to the Boral Group did not infringe s.150(6)(c) Re Shepherd (1985) 4 FCR 258. They did not address that issue; the details of the other debts that were incurred in those early months of 1989 is also most disturbing and weighs heavily against the exercise of any discretionary relief in favour of the applicants.

21. The size of their deficiency is very large and occurred within a very short period. Although that is not a decisive factor, it is one that is to be weighed in the balance against them.

22. I accept the evidence that the Builders' Registration Board has received 37 claims relating to non completion of work or defective work; this means dissatisfaction in one out of every three contracts. Furthermore I accept that some of the claims paid out by the Board represent the maximum insurance entitlement such that the claiming house-owner would still remain out of pocket. This squarely raises questions of commercial morality and public accountability. Persons such as the applicants should not be seen to be treated leniently unless there are special circumstances justifying such treatment. None have been made out in this application. I refer, in this regard to the remarks of Lockhart J. in Re Harding [1981] FCA 178; (1981) 57 FLR 320 at 332 and to the authorities upon which his Honour relied.

23. Further, it was correctly pointed out that the applicants' trustee in bankruptcy has not filed an adverse report. Indeed, the report was quite neutral. However there is an obvious explanation for this fact. The investigations into the background of the financial and business affairs of Mr and Mrs Di Giannantonio have been conducted by the liquidator of their company. His report is in evidence and, as is apparent from the sections that I have quoted, it is very critical of the way in which the affairs of the business were conducted. The bankrupts must bear the brunt of this criticism even though it may not have found its way into their trustee's report.

24. I turn finally to the question of costs. Based on the conclusions that I have reached, I am compelled to classify these applications as being without merit. This is not a case where the bankrupt estates should bear the costs. I order that the unsuccessful applicants pay the costs of their opposing creditors.