Re David Richard Mcdonald Ex Parte: David Richard Mcdonald [1992] FCA 309 (30 June 1992)

FEDERAL COURT OF AUSTRALIA

Re: DAVID RICHARD McDONALD
Ex Parte: DAVID RICHARD McDONALD
No. 333 of 1991
FED No. 472
Bankruptcy

COURT

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

CATCHWORDS

Bankruptcy - application for discharge - opposition to dicharge - unsecured debts in dispute - exercise of discretion - consideration of interest of creditors, public interest and commercial morality - no attempt to make contribution to estate - application dismissed.

Bankruptcy Act 1966 s.150

Bankruptcy Amendment Act 1991 s.27

Re Zion; Ex parte The Bankrupt (unreported Smithers J. 26/9/86)

HEARING

PERTH
30:6:1992

Counsel for the Bankrupt: Mr K. Dundo

Solicitors for the Bankrupt: Clayton Utz

Mr F. Carles appeared for the Deputy Commissioner of Taxation

Ms C. Stabb appeared for the Official Trustee.

Counsel for Broadlands Ltd: Mr N. Billington

Solicitors for Broadlands Ltd: Claudio Shaw

ORDER

THE COURT ORDERS THAT:
The application will be dismissed.
Note: Settlement and entry of Orders is dealt with in Rule 124 of the Bankruptcy Rules.

DECISION

David Richard McDonald became a bankrupt on his own petition on 1 March 1991. He now applies to the Court for a discharge from that bankruptcy. His application is opposed by the Official Trustee, the Commissioner of Taxation and Broadlands Ltd.

2. Mr McDonald has been a qualified accountant since 1967 and until he became bankrupt was a member of the Australian Society of Certified Practising Accountants. His bankruptcy, while not preventing him from carrying on practice as an accountant, did disqualify him from membership of the Society. That disqualification is a disadvantage. A current qualification as either a certified practising accountant or a chartered accountant is a mark of a person's acceptance as having requisite competence and standing to carry on practice as an accountant.

3. He seeks discharge upon the ground, stated in his affidavit, that his disqualification from membership of the Society has curtailed his ability to earn a livelihood as an accountant. He also says that the nature of his present work is such that he finds it necessary to be a registered tax agent. He was a tax agent until 1978 when his registration lapsed. He cannot regain registration unless he is discharged.

4. The application is brought pursuant to s.150 of the Bankruptcy Act 1966. That section is to be repealed by operation of s.27 of the Bankruptcy Amendment Act 1991 which comes into effect on 1 July 1992 pursuant to a proclamation made on 23 June 1992. Under the amended Act applications for early discharge are henceforth to be dealt with administratively by the relevant trustee with rights of review by the Inspector-General and the Administrative Appeals Tribunal. Section 55 of the amending legislation provides, with respect to pending applications, as follows:

"55. Any application made to the Court under section
150 of the Principal Act that did not result before
the repeal of that section in the making of an order
for the unconditional discharge of the bankrupt, and
any order made on such an application, lapse upon the
repeal of that section."

5. The application was served on creditors by pre-paid post on 10 and 11 June 1992. A copy of a supporting affidavit of Mr McDonald was sent to them on 12 June 1992 and to a creditor resident in England on 15 June 1992. The Official Receiver was served on 9 June. Rule 52(3) of the Bankruptcy Rules requires that after the filing of an application for discharge and the receipt of a signed stamped and endorsed application from the Registrar, the bankrupt must not less than 28 days before the date fixed by the Registrar as the date, time and place at which the bankrupt may appear before the court for the hearing, give a copy of the application to the Trustee and the Official Receiver. The bankrupt is also required, not less than 14 days before that date, to give a copy of the application to each creditor specified in the list attached to the application.

6. When the matter came on for hearing on 22 June 1992 it was adjourned to 29 June. On 22 and 23 June the solicitor acting for the bankrupt sent by a facsimile transmission notice of the adjournment of the hearing to various creditors set out in an affidavit sworn by the solicitor. A letter forwarded by pre-paid post to all creditors advising of the adjournment and the adjourned hearing date was sent on 22 June. A copy was served directly on one Michael Lewis, a creditor of the bankrupt at his office on 22 June. The Official Receiver, the Commissioner of Taxation and Broadlands Ltd all appeared at the adjourned hearing to oppose the application for discharge but did not object to the abridgment of the time required by the rules to the extent that it was necessary to allow the hearing to proceed. In the circumstances I am satisfied that creditors have had reasonable notice of the application and that the appropriate abridgment of time ought to be ordered. Against that background it is necessary to turn to the facts of the case.

7. In 1985, Mr McDonald became the Managing Director of a company which he floated called McDonald Brushware Ltd for which he wrote a prospectus and raised $2,500,000. Subsequently, the company raised a further $4 million or more in equity and borrowings. Mr McDonald described McDonald Brushware Ltd as the largest industrial brushware manufacturer in Australia. It achieved a gross turnover of the order of $6 million and employed about 60 staff. He and his wife held some 3 million 25 cent shares in the company, 1.5 million of which were partly paid to a value of 5 cents each. This exposed them to calls totalling $375,000. He had funded the purchase of these shares partly by borrowing from Broadlands Ltd and partly by converting into shares moneys he said were owed to him in relation to the preparation of the prospectus for the company. This was an amount which he fixed at $60,000 representing the costs of preparing and printing the prospectus and overseas travelling in connection with the development of associations with major European brushmakers.

8. A dispute about the control of that company took place between its directors and in 1989 Mr McDonald was subjected to a call in relation his partly paid shareholding which, under the terms of the Articles, he had 90 days to satisfy. In order to pay the call Mr McDonald entered into finance arrangements with Mr Ray James. He had had an association with Mr James through a company called Georges Securities Ltd which was listed on the Second Board of the Sydney Stock Exchange. He had been involved in a takeover of that company in 1987 or 1988 with a view to using it as a vehicle to acquire control of McDonald Brushware Ltd. With James' assistance he acquired almost 90% of its shares for about $140,000 and subsequently retained a 51% interest, selling the balance to Mr James for $38,000. Thereafter he owed James about $72,000. He said in his affidavit evidence that 24 hours prior to the date upon which the call was to be made, BLE Finance, without any prior warning, advised that the money would not be advanced unless he gave BLE Finance an option to acquire his entire shareholding at 2 cents per share. The then current price of the shares was said to be about 11 cents. Given the short notice of this requirement, Mr McDonald said he had no choice but to comply with it.

9. Subsequently, according to his evidence, Mr James defaulted on the loan agreement with BLE Finance as a result of which the option was exercised in or about January 1990. Upon the exercise of the option, Mr McDonald's shareholding in McDonald Brushware Ltd was transferred to BLE Finance. Any income and potential for income derived from the shareholding was lost so far as he was concerned. He says he was deprived of a major asset and could no longer continue to meet payments of outstanding debts. He was therefore left with no choice ultimately but to file his petition in bankruptcy.

10. In the period between the exercise of the option and the filing of his petition, Mr McDonald explored with the accountants, Melsom Robson, ways of putting together a Part X arrangement which might be acceptable to his creditors. In the event no compromise was reached. It is not clear from the evidence whether he was required to file his petition by a resolution of creditors. According to Mr McDonald's affidavit, the "sole reason" for his bankruptcy stemmed from the one dealing with BLE Finance. In his oral evidence he said that with James he had approached BLE Finance and they had agreed "on a number of occasions in writing to support our mission to acquire control of Georges Securities, which would in turn would (sic) acquire these businesses and the shares that were in my name and my wife's name in McDonald Brushware Ltd. And there was never any mention of any option but I was given about 24 hours to sign that option agreement. Shortly thereafter that option agreement was exercised against me and my wife."

11. According to the report of the Official Trustee, Mr McDonald's statement of affairs disclosed 52 unsecured creditors for a total of $1,116,911. The list of creditors making up this total was said to have been prepared about six months prior to bankruptcy and creditors amounting to $9,285 paid. In his oral evidence Mr McDonald maintained that a significant number of the unsecured debts listed were in fact disputed. He was vague about some of them. For example, the list included a credit card debt of $9,000 due to BarclayCard in 1985. Of that debt he said:

"Well it is disputed and it goes back I think about 10
years and I really don't have a lot to say about that
one. I'm not too sure whether its of that amount -
anything like that amount."

In relation to an amount of $400 relating to purchases from David Jones, he said:

"I can't shed any light on David Jones except to say
that we had a credit card years ago and that must have
been an amount outstanding at the time of the
bankruptcy."

The list also contained an entry of $164.47 for Elders Pastoral in 1989 and the designation "Software". Of that he said:

"I don't even know why it is there."

Asked whether he had prepared the list he said:

"Well I did prepare the list but I can't remember where
Elders Pastoral came from."

12. The list of unsecured creditors was attached to the statement of affairs in response to the requirement in Part IV to:

"List all others to whom you owe money including
contingent liabilities."

No distinction was made in the list between disputed and undisputed debts. In any event, without going through each of the debts said to be disputed, debts admitted by Mr McDonald considerably exceed $450,000. Assets disclosed in the statement of affairs amounted to $15,000. Realisations in the estate have yielded $1,000 from the sale of 13,599 ordinary fully paid shares in McDonald Brushware Ltd and the registered business name McDonald Partners.

13. There is an alleged unrealised asset. Mr McDonald contends that a firm called Blackburne and Dixon Mortgage Investments received $37,598.30 from the sale of a house property formerly owned by him at 29 Robinson Street, Subiaco. He claims that this firm had previously been paid in full and was not entitled to retain that portion of the proceeds. The Official Trustee is presently investigating that contention. Subject to the possibility of recovery from Blackburne and Dixon there are no funds presently available to enable payment of any dividend and insufficient funds to pay the full costs of administration and official fees.

14. Mr McDonald presently occupies, with his wife and children, a house property at 29 Robinson Street, Subiaco. This and another house at 33 Robinson Street, both of which he had owned, had been mortgaged to secure share purchases in McDonald Brushware Ltd. His mother-in-law acquired the property at 29 Robinson Street from the mortgagee and has allowed Mr McDonald and his family to remain there rent free. Mrs McDonald, his wife, is the beneficiary of a family trust which Mr McDonald says is on her side of the family. She receives "significant sums of money from time to time" through that trust. She purchased from the Trustee the right to use the business name McDonald Partners and she employs Mr McDonald in that business as an accountant. She meets monthly payments of $684 on a Saab motor vehicle in Mr McDonald's name which is used as a family car.

15. Since about July 1990 Mr McDonald has done what amounts to seasonal tax work for a firm called Taxese which is evidently operated by a registered tax agent. He was paid on a percentage of fees billed to or recovered from the clients of Taxese whose work he did. That work was effectively limited to a few months after 1 July 1990. It fell away dramatically in the financial year commencing 1 July 1991. At the peak of his activity at that firm he was earning about $300 per week. He commenced working for his wife in McDonald Partners in mid-1991. He was not paid any fixed amount but received sums which depended upon the work done and fees earned by that business. He said he was averaging about $250 per week. He accepted that his involvement with this business was his attempt to revive his accountancy practice. He is the only accountant employed by it. There is one full time employee and some time ago there was another parttime worker there. He described the accountancy services provided as "general accounts, profit and loss balance sheet" (sic). Tax work done through McDonald Partners was vetted and "signed off" by Taxese. Although Mr McDonald's evidence was not altogether clear on the point, it appears that it is intended that the business of McDonald Partners will be sold to IPS Holdings Pty Ltd of which Mr Wovodich is a director. That company will then employ Mr McDonald.

16. Mr McDonald is also company secretary of a public company called "Tempest Aqua Pura Ltd". Its business is the distribution of water purifiers. His wife, Graham Wovodich and one Charles Peaty are the directors of the company. Mr McDonald is not presently in receipt of any payment for the services he provides as company secretary. His wife has about an 83% shareholding in the company. He denied that this involvement amounted in substance to a kind of commercial venture between himself and Mr Wovodich. I do not regard his denial as particularly convincing. His wife has no business experience or qualifications of a commercial or accounting kind. She is an occupational therapist.

17. The financial benefits accruing to Mr McDonald from his wife included a six week round the world trip with his daughter in December 1991 at a cost of about $15,000. His wife did not accompany him on that trip.

18. Other evidence was given relating to matters including the alleged failure of Broadlands to realise a reasonable price for a painting which it held by way of security for its advances to Mr McDonald. The latter complaint was not made out and on the evidence I accept that Broadlands is a creditor for sums outstanding under two commercial bill facilities provided in June 1988. As at 31 December 1990 these are said to have stood at $229,599.49 and $7,610.03 respectively. I make no findings as to the precise amount of those debts at that time.

19. In the present case I am not satisfied that any of the conduct alleged under sub-s.150(6) has been made out. The Official Trustee was not able to offer any firm submissions in that regard. There are letters from creditors supportive of the application and opposed to it which are in evidence and on the file. In the end, however, it is not necessary, nor do I think it desirable, to have regard to those expressions of view. The case is adequately determined by a consideration of the principal factors affecting the exercise of the discretion I have under s.150 of the Act.

20. That discretion requires a consideration of the interests of the creditors, the public interest and considerations of commercial morality as well as the interests of the bankrupt. In Re Zion; Ex parte The Bankrupt (unreported Smithers J. 26/9/86) Smithers J. said at p 3 of his reasons for judgment:

"In my view it is the policy of the law that bankruptcy
should in most cases come to an end at 3 years and
when there is an objection at the end of 5 years from
the decree for sequestration of the estate, but that
in a case where public interest so requires the
discharge may be delayed or made conditional according
to the requirements of the public interest in the
circumstances of the case. Public interest will
require that a discharge be delayed or made
conditional if the conduct revealed or the character
of the bankrupt indicates that the return of the
bankrupt to the commercial world in full freedom might
involve unacceptable risk to persons likely to be
engaged in commercial relations with him in the
future. In other words, it is for the applicant to
show that balancing the policy of the law in favour of
the return to commercial life of a bankrupt against
the dangers that might accrue to the public from full
commercial capacity of the applicant, it is
appropriate that the discharge be granted."

21. His Honour cited the following passage from the judgment of Woodward J. in Re Maher (1985) 61 ALR 592 at 598:

"An application for discharge is never treated lightly
by the Court. As with the granting of a sequestration
order, an application for discharge involves looking
beyond the interests of the applicant and his or her
creditors to considering both the interests of the
public and commercial morality."

22. In this case the amount of the debts incurred at the time of bankruptcy was, on any view, most substantial against the realisable assets. What Mr McDonald called the "treachery" of BLE Finance was the exercise of a contractual option right conferred upon it by him. And whatever its moral quality, he has not established that the conduct of BLE Finance in this regard was, as alleged, the sole cause of his bankruptcy. He was already in serious financial difficulty at that time. Generally, Mr McDonald's testimony was vague and at times careless and I do not feel that I can rely upon it as the expression of careful recollection of the facts in relation to the conduct of BLE Finance. His casual approach to the listing of his debts and the vague explanations given of alleged disputed amounts included in the list heightened that reservation.

23. What is clear, is that there has been no attempt to make any contribution to his estate despite the significant financial benefits he has received and continues to receive from his wife and her family. He seeks discharge in order to once again engage in self employed professional and other commercial activities. In my opinion he has not made a case deserving of discharge and it would be contrary to the public interest and the common sense of commercial morality to accede to the application.

24. For these reasons the application will be dismissed.