Keith Douglas Hoffman v Mmi Workers Compensation (Nsw) Limited [1993] FCA 509 (21 October 1993)

FEDERAL COURT OF AUSTRALIA

KEITH DOUGLAS HOFFMAN v. MMI WORKERS COMPENSATION (NSW) LIMITED
No. NP864 of 1993
FED No. 758
Number of pages - 7
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
EINFELD J

CATCHWORDS

Bankruptcy - Creditor's petition - whether order that judgment debt be paid in instalments made after service of bankruptcy notice precluded the making of a sequestration order - act of bankruptcy - whether debtor able to pay his debts - whether sequestration order futile

Bankruptcy Act (Cth) 1966 ss 40(1)(g), 44(1), 52(2)

Local Court (Civil Claims) Rules Part 27 R 2(13)

Bayne v Blake [1909] HCA 61; (1909) 9 CLR 360

Pollack v Commissioner of Taxation (1991) 32 FCR 40

Re Padagas; Ex parte Courier Air Conditioning Pty Ltd (1977) 16 ALR 475

Re Schekeloff (1989) 86 ALR 645

Re Moss; Ex parte Tour Finance Ltd (1968) 13 FLR 101

Re Poulson; Ex parte Hempenstall Bros Ltd (No. 2) (1929) 1 ABC 54

Re Leonard Ex parte Leonard (1896) 1 QB 473

Re Betts (1897) 1 QB 50

Re a Debtor; Ex parte the Debtor (1908) 1 KB 344

Patrick Michael Darcey v the Pre-term Foundation Full Court of the Federal Court (Fox, Wilcox, French JJ) unreported, 23 May 1988

Nicholas Charles Luke Radich v Bank of New Zealand Full Court of the Federal Court (Einfeld, Foster, Drummond JJ) unreported, 10 September 1993

HEARING

SYDNEY, 3 August 1993
21:10:1993

Solicitor for the debtor Ms C. Cominos of Bovris Cominos

Solicitor for the Mr W Andrews of Marshall
petitioning creditor Marks Kennedy

DECISION

EINFELD J By a creditor's petition presented on 4 March 1993, MMI Workers Compensation (NSW) Limited (the petitioning creditor) petitioned the Court for a sequestration order against the estate of Keith Douglas Hoffman (the debtor). The petition was based upon a default judgment obtained in the Local Court at Redfern on 18 November 1992 for the sum of $21,482.24. On 24 November 1992 the petitioning creditor issued a 21 day bankruptcy notice. There appears to be some dispute in the evidence as to whether the actual date of service of the bankruptcy notice on the debtor was 17 or 19 December 1992 but for the purposes of these proceedings the petitioning creditor was prepared to make its submissions on the basis that it was served on 19 December 1992. On 11 January 1993 an order was made by Registrar Jurd extending time for compliance with the requirements of the bankruptcy notice to 2 February 1993.

2. On 28 January 1993 the Redfern Local Court ordered ex parte that the unpaid amount of the judgment debt be paid by instalments of $500 per month and the petitioning creditor was given 28 days to file a notice of objection to this order. On 2 February, time for compliance with the bankruptcy notice expired, and on 4 March 1993 the creditor presented a petition based upon the act of bankruptcy of failing to comply with the notice. On 10 February 1993 the petitioning creditor lodged a notice of objection to the instalment order made by the Redfern Local Court, and a hearing on this question was fixed for 17 March 1993. On that date the petitioning creditor failed to appear and the Court reaffirmed its previous order for payment by instalments of $500 per month. In purported compliance with this order, the debtor forwarded cheques of $500 to Marshall Marks and Kennedy, the solicitors for the petitioning creditor, on 28 June and 27 July 1993.

3. On 8 August 1993 the present case was brought before this Court as an opposed petition to sequestrate the debtor's estate. The debtor's submissions in opposition to sequestration were twofold, firstly that as a result of the Local Court instalment order the debtor did not commit an act of bankruptcy on 2 February 1993, and secondly that if an act of bankruptcy was committed, the Court should exercise its discretion under section 52(2) of the Bankruptcy Act 1966 (Cth) (the Act) not to make a sequestration order.

4. As to the first of these submissions, the debtor relied on the Local Court (Civil Claims) Rules Part 27 rule 2(13) which states:

Where the Court or the Registrar makes an Instalment Order
under this rule, the Order shall, while it remains in force,
operate as a stay of enforcement of the Judgment in respect
of which the Order was made, except enforcement by way of a
garnishee order to which section 48 of the Act applies made
before the Order under this Rule was made.

5. The debtor asserted that this provision stayed the bankruptcy notice on 28 January 1993, and that no act of bankruptcy could have occurred on 2 February 1993.

6. The starting point is section 40(1)(g) of the Act which provides:

A debtor commits an act of bankruptcy in each of the
following cases:
.....
(g) if a creditor who has obtained against the debtor a
final judgment or final order, being a judgment or
order the execution of which has not been stayed, has
served on the debtor in Australia or, by leave of the
Court, elsewhere, a bankruptcy notice under this Act
and the debtor does not:
(i) where the notice was served in Australia --
within the time fixed by the Registrar by whom
the notice was issued; or
.....

7. Extensive authority both here and in England has made abundantly clear that this section's application depends upon whether there was a stay as at the date of issue of the bankruptcy notice, or at the latest as at the date of its service on the debtor: In Re a Debtor; Ex parte the Debtor (1908) 1 KB 344 at 351 per Fletcher Moulton LJ; Re Moss; Ex parte Tour Finance Ltd (1968) 13 FLR 101 at 103 per Gibbs J; Re Padagas; Ex parte Courier Air Conditioning Pty Ltd (1977) 16 ALR 475 at 476 per Riley J.

8. The most recent treatise on this area of the law was written by Justice Burchett in Re Schekeloff (1989) 86 ALR 645, a case very similar to this one in that it involved instalment orders made by the District Court after service of the bankruptcy notice and operating as a stay of proceedings. After a comprehensive review of the law, his Honour concluded at 649:

In my view, this court should follow those statements of the
law. Therefore, I hold that the bankruptcy notices in the
present case are not liable to be set aside by reason of the
orders for payment by instalments, and staying execution,
which were not made until after service of the notices.

9. I respectfully defer to and follow his Honour's expertise. The Redfern Local Court's instalment order made on 28 January 1993, having occurred after service of the bankruptcy notice on 17 or 19 December 1992, did not prevent the commission of the act of bankruptcy on 2 February 1993.

10. The debtor further argued that in some way section 44(1) of the Act assists its submission that the debt had "not accrued" before the act of bankruptcy. That subsection provides:

A creditor's petition shall not be presented against a
debtor unless:
(a) there is owing by the debtor to the petitioning
creditor a debt that amounts to $1,500 or 2 or more
debts that amount in the aggregate to $1,500, or,
where 2 or more creditors join in the petition, there
is owning by the debtor to the several petitioning
creditors debts that amount in the aggregate to
$1,500;
(b) that debt, or each of those debts, as the case may be:
(i) is a liquidated sum due at law or in equity or partly at
law and partly in equity; and
(ii) is payable either immediately or at a certain future
time; and
(c) the act of bankruptcy on which the petition is founded
was committed within 6 months before the presentation
of the petition.

11. It is clear that these provisions have been satisfied by the petitioning creditor, and that the debt is payable at least "at a certain future time": Padagas at 477; Pollack v Commissioner of Taxation (1991) 32 FCR 40 at 56-7 per Gummow J. In other words, section 44(1) does not prevent the presentation of the petition, nor the making of a sequestration order based on the petition, in the presence of an instalment order.

12. The debtor's alternative submission is that this Court should dismiss the petition pursuant to section 52(2) of the Act which provides:

If the Court is not satisfied with the proof of any of those
matters, or is satisfied by the debtor:
(a) that he is able to pay his debts; or
(b) that for other sufficient case a sequestration
order ought not to be made;
it may dismiss the petition.

13. An affidavit of the debtor filed on 2 August 1993 disclosed that the debtor has an income of approximately $500.00 per week on which he supports himself, his wife and five children aged 12 years, 11 years, 10 years, 31/2 years and 8 months. The debtor has the following expenses:

$
a) Rent 150.00
b) Food 160.00
c) Telephone 20.00
d) Fares 25.00
e) School Expenses 20.00
TOTAL 375.00

14. Furthermore the debtor has no assets or liabilities other than some household items. It appears that earlier this year the Commonwealth Bank took possession of and sold his property at Lot 6 Cowra Road, Cowra in satisfaction of the debtor's liability to that institution.

15. The debtor submitted that this evidence, and the evidence that he made instalment payments on 28 June and 27 July 1993, illustrate that he is able to pay his debts within the meaning of section 52(2)(a). The onus of proving that his assets/income are sufficient to pay his debts lies on the debtor: Re Poulson Ex parte Hempenstall Bros Ltd (No. 2) (1929) 1 ABC 54. In the present case the debtor only just has the income to pay the $500 instalment order per month assuming that he has no unexpected expenses. However, he has no assets or savings from which to draw in an emergency. This is insufficient to meet the statutory requirement and I would not dismiss the bankruptcy petition on these grounds.

16. The debtor also argued that this Court should dismiss the petition under section 52(2)(b) on the ground of futility, namely that as he has no assets, a sequestration order in the present circumstances would be futile.

17. In Re Betts (1897) 1 QB 50, Lord Esher MR said at 52:

If the Court is clearly convinced, not merely by the
statement of the debtor, but from all the circumstances of
the case, that there cannot be any assets or any prospect of
any coming into existence, and that, if a receiving order is
made, the only effect will be a mere waste of money in
costs, then in such a case the Court has a discretion in the
matter, and will be justified in exercising that discretion
by refusing to make the order.

18. There has, however, been some reluctance in the courts to refuse a sequestration order on this discretionary ground as it may only be after sequestration, with a full investigation by a trustee in bankruptcy including a possible public examination of the bankrupt and other persons, that assets come to light: Re Leonard Ex parte Leonard (1896) 1 QB 473 at 475 approved in Bayne v Blake [1909] HCA 61; (1909) 9 CLR 360 at 364.

19. A number of authorities in this area are cited in Patrick Michael Darcey v The Pre-term Foundation, Full Court of the Federal Court (Fox, Wilcox, French JJ) unreported 23 May 1988, and Nicholas Charles Luke Radich v Bank of New Zealand, Full Court of the Federal Court (Einfeld, Foster, Drummond JJ) unreported 10 September 1993 and it is therefore not necessary for me to do so again here. These decisions establish that the evidence of no present assets and no reasonable prospect of future assets must be sufficiently strong to override what is in effect a prima facie right to a sequestration order when a petitioning creditor has proved a debt and an act of bankruptcy. In my opinion Re Betts should be distinguished from the present case in that the debtor there was an undischarged bankrupt and the petitioning creditor was a creditor in that bankruptcy. Any assets the debtor might have would go to the trustee in that bankruptcy. As Lord Esher said, if the petitioning creditor thought there were any assets, he could have put the trustee in funds to obtain the benefit of them.

20. It is impossible for this Court to know from the affidavit of the debtor sworn on 2 August 1993 what assets may become available to a trustee following a public examination of the debtor, or whether there is a possibility of future assets. Accordingly, assuming that the evidence presented on the sequestration order complies with the Act and the Rules, I shall decline the debtor's invitation to refuse the sequestration order on the grounds suggested. The costs of the opposition will be dealt with at the hearing of the creditor's petition.