Deputy Commissioner of Taxation v Eykamp [2009] FMCA 989 (8 October 2009)

Last Updated: 25 February 2010

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DEPUTY COMMISSIONER OF TAXATION v EYKAMP

[2009] FMCA 989

BANKRUPTCY – Opposition to Petition – where debtor has interest in farming properties – where debtor claims assets exceed liabilities – where debtor seeking dismissal of petition so that funds can be made available through a scheme proposed by her son – whether evidence of son’s proposals is sufficient to satisfy the court – whether debtor’s assets can be sold within a reasonable time – effect on consideration of reasonable time of the lapsing of the petition after all possible extensions granted.

Taxation Administration Act 1953 (Cth), ss.8AAC, 8AAZF Civil Procedure Act (NSW) 2005 Bankruptcy Act 1966 (Cth), ss.52(2)(a), 52(4), 153A, 154

Re: Poulson; Ex parte: Hempenstall Bros Limited (No 2) (1929) 1 ABC 54 Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 International Alpaca Management Pty Limited v Ensor [1999] FCA 72 Stankiewicz v Plata [2000] FCA 1185 Nye v Slater (1999) FCA 89 Re Noye; Ex parte Deputy Federal Commissioner of Taxation (1956) ABC 77 Re Sarena; Ex parte Wollondilly Shire Council [1980] FCA 138; (1980) 32 ALR 596

Applicant:

DEPUTY COMMISSIONER OF TAXATION

Respondent:

JANET LOUISE EYKAMP

File Number:

SYG 3217 of 2007

Judgment of:

Raphael FM

Hearing date:

30 September 2009

Date of Last Submission:

30 September 2009

Delivered at:

Sydney

Delivered on:

8 October 2009

REPRESENTATION

Counsel for the Applicant:

Mr S Golledge

Solicitors for the Applicant:

ATO Legal

Counsel for the Respondent:

Mr R Tregenza

ORDERS

(1) A Sequestration Order be made against the estate of Janet Louise Eykamp.
(2) The applicant creditor’s costs, including reserved costs if any, be taxed and paid from the estate of the Respondent Debtor in accordance with the Act.
(3) Under the Bankruptcy Regulations a copy of this Sequestration Order shall be given to the Official Receiver in Sydney within two days.

THE COURT NOTES:

(i) The date of act of bankruptcy is 13 August 2007.
(ii) A Consent to Act as Trustee has been signed by Steven Nicholls and has been lodged with the Official Receiver in Sydney.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY

SYG 3217 of 2007

DEPUTY COMMISSIONER OF TAXATION

Applicant

And

JANET LOUISE EYKAMP

Respondent

REASONS FOR JUDGMENT

1. On 23 December 2004 the Deputy Commissioner of Taxation (the “Commissioner”) obtained judgment against Janet Louise Eykamp (“Ms Eykamp, the debtor”) for the sum of $628,673.97 in respect of tax owed for prior years of assessment. I have not been advised that there is any dispute about the assessments but have been informed that they were not paid because of the existence of matrimonial proceedings between Ms Eykamp and her husband (now a bankrupt and substantial creditor of the Commissioner) in which the Commissioner sought to intervene. As a result, by the time the petition, which was heard on 30 September 2009, was presented on 16 October 2007, the debt to the Commissioner had grown to $669,617.01 after taking into account certain credits. The affidavit of debt filed on 30 September 2009 and sworn by Jennifer Ann Crump alleges a total current debt of $1,005,285.11. Ms Eykamp disputes this amount because she says it is calculated taking into account the general interest charge leviable under ss.8AAC and 8AAZF of the Taxation Administration Act 1953 (Cth). Ms Eykamp argues that the Commissioner’s debt merged with the judgment of the District Court and thereafter the Commissioner was only entitled to interest calculated in accordance with the provisions of Civil Procedure Act (NSW) 2005. However, even if this calculation is used the amount said to be owed by Ms Eykamp is approximately $900,000.00.
2. A bankruptcy petition has a life of one year following presentation, s.52(4) Bankruptcy Act 1966 (the “Act”), the court is permitted to grant an extension of a further year, s.52(5). On 8 October 2008 Registrar Tesoriero ordered that the period at the expiration of which the petition will lapse will be a period of twenty-four months commencing on the date of the presentation of the petition. The petition will therefore lapse on 16 October 2009, some five years after the judgment.
3. Ms Eykamp, her former husband and her son were, and to some extent still are, involved in farming activity in the Tamworth/New England area of New South Wales. There are three rural properties which are of relevance in these proceedings. The first is “Ambervale” in Quipolly. This property is owned by Ms Eykamp and is unencumbered. The second property is “Nibiru”. This property is owned by Ms Eykamp and the bankruptcy trustee of her husband as tenants in common in equal shares. The third property is “Barega” in Quirindi in New South Wales on which Ms Eykamp’s former husband lives and which is worked by her son. Ms Eykamp has no interest in that property. Ms Eykamp claims, and it is not seriously disputed, that the value of her interest in Ambervale and her half interest in Nibiru exceed the amount of the debt owing to the Commissioner and her only other known creditor being the debit on a Westpac credit card of approximately $15,000.00. Ms Eykamp filed a Notice of Opposition to the Petition on 26 August 2009 stating that she was solvent.
4. Section 52 provides for proceedings and orders on a creditor’s petition:
   • “Proceedings and order on creditor's petition
   • (1) At the hearing of a creditor's petition, the Court shall require proof of:
     • (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);
     • (b) service of the petition; and
   • (c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing;
     • and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor.
     • (1A) If the Court makes a sequestration order, the creditor who obtained the order must give a copy of it to the Official Receiver for the District in which the order was made.

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

• (3) The Court may, if it thinks fit, upon such terms and conditions as it thinks proper, stay all proceedings under a sequestration order for a period not exceeding 21 days.”

5. The wording of the Act makes it clear that the onus of establishing solvency falls upon the debtor Re: Poulson; Ex parte: Hempenstall Bros Limited (No 2) (1929) 1 ABC 54.
6. The seminal utterance on solvency in a bankruptcy situation was made by Barwick CJ in Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 at [15]:
   • “An essential step in making out that a payment is a preference within s 95 is to establish by evidence to the satisfaction of the Court that the payer was at the time of the payment insolvent. Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time — relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.”

Since that decision the relevant section of the Act has changed so that in s.52 the wording is as per 52(2)(a). In the definition section of the Act there is reference to solvency:

“5(2) A person is solvent if and only if the person is able to pay all the person’s debts as and when they become due and payable.
(3) A person who is not solvent is insolvent”

7. Ms Eykamp and her son Nicholas gave evidence. Ms Eykamp agreed with counsel for the Commissioner that she had placed Ambervale on the market approximately eighteen months ago but it had been taken off the market in April of this year when she suffered a very serious and distressing accident and put back on the market about two months ago. In that time she has received no offers for the property. Ms Eykamp also agreed with counsel for the Commissioner that any sale of Nibiru was being held up because her ex husband’s bankruptcy trustee was not prepared to commit to a sale until after the outcome of a s.73 application that had been made on behalf of her former husband was known. Thus there is no prospect of the release of funds from the sale of these properties in the reasonably foreseeable future.

8. The availability of funds through which Ms Eykamp is to pay the Commissioner comes from a scheme promoted by Nicholas Eykamp which, if successful, would see his father out of bankruptcy pursuant to the s.73 proposal and repayment of his mother’s indebtedness. My understanding of the evidence is that the scheme that is proposed would be as follows.

Ms Eykamp would charge Ambervale to a Mr Porter. Mr Porter would loan Nicholas Eykamp the sum of $650,000.00. This money is to be added to a sum of approximately $1,310,000.00 held by a firm of solicitors on his behalf. To these two sums are to be added approximately $350,000.00 from the sale of primary machinery and bullion. The total sum which would be approximately $2,427,458.00 will be used to make payment to Mr Eykamp’s creditors under the s.73 scheme. When the s.73 scheme is approved the bankruptcy trustee will transfer his interest in Nibiru to Mr Nicholas Eykamp. Mr Eykamp has produced a sales advice note dated 28 September 2009 pursuant to which Nibiru is to be sold to a CR & SJ Charters also of Quirindi for the sum of $1,600,000.00. The intending purchasers did not give evidence. The sale is said to be subject to finance and no deposit has been paid to the real estate agents and no contract has been signed. After the sale Ms Eykamp will have approximately $780,000.00 towards to the tax debt. The mortgage on Ambervale from Mr Porter will be transferred to Barega. Mr Eykamp has produced a letter of offer from Acute Mortgage Corporation Pty Limited offering him finance of $1,730,268.00 secured by a mortgage over Barega and Nibiru. He would propose to use that facility to finance the balance of the amount owing to the Commissioner by his mother.

9. Nicholas Eykamp gave evidence. He was questioned about the moneys in the solicitor’s trust account which made up a substantial proportion of the money intended to be used in the s.73 scheme. For a person who was going to assume responsibility for the repayment of such a large sum he knew surprisingly little about it. He told the court that the funds had been put together by a Mr Stinchcombe, an associate of his fathers. He had committed some $500,000.00 and that the balance of $800,000.00 came from borrowings from overseas by himself to which he had earmarked Barega as security but he had signed no documents, he did not know how long the loan was being provided for, he did not know what interest rate was payable or when interest was due and he had never met the lenders. All he knew was that the funds came from overseas. He also told about the loan from Mr Porter. He accepted that Mr Porter’s loan was for an amount in excess of the value of Ambervale. He told that Mr Porter was happy for him to do this because he was an old family friend, indeed Mr Porter was originally quite happy to lend the money unsecured but had been advised that he should take security. However, he had not signed any loan documents with Mr Porter, nor had any money been received. He claimed that the mortgage to Mr Porter would be completed on 1 October. In regard to the sales of machinery and bullion he told that he had sold some machinery for $15,000.00 and that he hoped that a loader was going to be sold for $35,000.00. The bullion that he had proposed to sell consisted of 53 platinum coins worth approximately $1,500.00 each and 100 gold kangaroo coins worth approximately $1,030.00 each. He provided no evidence of his ownership of those coins. The court notes that the sale of all these items would only realise $232,500.00 and not the $350,000.00 - $360,000.00 deposed to in his affidavit. The complexities of the proposal are illustrated by an extract from Mr Eykamp’s affidavit:
   • “[14] To summarise, the funding I have available other than from Acute is as follows:
   • (i) Funds held in trust by Worcester & Co $1,310,000.00
   • (ii) Other investments to be realised by me, say $355,000.00
   • (iii) Advance from Douglas Porter $650,000.00
   • Total $2,315,000.00
     • [15] In order to satisfy both the composition and what I estimate to be my mother’s liability to the ATO, I require a further $1,002,000.00 approximately, calculated as follows:
   • Amount required by the composition $2,427,458.00
   • Estimate of my mother’s liability to the ATO $1,000,000.00
   • Subtotal $3,427,458.00
   • Less funding set out above other than from Acute $2,315,000.00
   • Balance required from Acute $1,112,458.00
   • [16] Davidson & Cameron’s commission on the sale of Nibiru will be $48,400.00.
     • [17] Once Nibiru is sold the proceeds of sale of approximately $1,551,600.00 will be available to discharge the borrowing from Acute, and the surplus will be available to discharge part of the borrowing form Mr Porter.
     • [18] Funding from Acute is repayable in 12 months. I am confident I will have no difficulty achieving this, in effect by the sale of Nibiru.
     • [19] Once I have effective control of Barega I will be able to generate net taxable income from various farming activities which from experience I estimate would be not less than about $150,000.00 per annum from which I would make progressive payments to Mr Porter.”
10. There are a number of things to note about Mr Eykamp’s evidence and proposals. The first is that the money to be provided to his mother to repay the Commissioner is contingent upon the success of the s.73 scheme. The second is that the money is not the debtor’s money, it is her sons and he has assumed responsibility for its repayment. The third is that if the arrangement goes ahead one of Ms Eykamp’s major assets, Ambervale, will be charged to an amount in excess of its value. The fourth is that there are a number of contingencies upon the production of sufficient funds; the money coming in from Mr Porter, the sale of Nibiru being completed and the mortgage to Acute proceeding. Finally, the rather unsatisfactory nature of the evidence concerning the money in the solicitor’s trust account and the shortfall moneys being made up from the sale of the bullion and farm machinery. In International Alpaca Management Pty Limited v Ensor [1999] FCA 72 Katz J considered what the debtor was required to do to satisfy the court under s.52(2)(a). At [8] his Honour notes that the words used in that sub-section differ from other words used in related phrases in the Act. He refers to the definition of solvency at [9] and at [12] says:
    • “12 Yet other provisions of the Act (see, for example, par 124(3)(a)) speak of a person's having been unable to pay that person's debts as they became due from that person's own money. That formulation is different again from those already mentioned, because it expresses the idea of the (in)ability of a person to pay that person's debts as they become due (which, in the context, seems plainly to mean payable, as I have already pointed out in connection with the similar Queensland provisions under consideration in the Bank of Australasia Case) from that person's own money.”

At [14] his Honour notes that the notion of one’s own money does not extend to money borrowed without security (as this is merely replacing one debt with another). He then goes on to consider whether what he describes as the expansive notion of a person’s own money was intended to be applicable only in the case of debtors who were traders before saying:

“[17] In spite of the legislature's failure to include, in terms, in par 52(2)(a) of the Act the language either of "when those debts become payable" or of "from the debtor's own money", the debtor nevertheless treated the paragraph before me as requiring that he prove an ability to pay, from his own money, his debts when they become payable. He did so by submitting: first, that, at the time of the hearing, he was required to and did satisfy the test of solvency set out in subs 5(2) of the Act; and, secondly, that the test of solvency set out in subs 5(2) of the Act "simply adopts the earlier test in Sandell v Porter".
[18] For the purpose of determining the present petition, I propose to act upon that construction of par 52(2)(a) of the Act upon which the debtor proceeded before me. I do so, not only because of the debtor's approach, but also because two other Judges of this Court have also relied, in whole or in part, upon that construction and I have found no authority which is opposed to that construction. (The two other Judges of this Court to whom I am referring are Cooper J (see Re McVey; Ex parte Carswell and Company, unreported, 22 May 1996, at p 11; Re Eather; Ex parte Palada, unreported, 30 May 1996, at p 19) and Finn J (see Re Capel; Ex parte Caram Finance Australia Ltd, unreported, 9 April 1998, at p 8).)
[19] (I add, however, that even if par 52(2)(a) of the Act were to be construed as only requiring the debtor to prove an ability to pay his debts presently payable and that from any money, whether his own or other people's, it is clear that proof of the matter set out in par 52(2)(a) of the Act does not entitle the debtor to the dismissal of the petition; it only enlivens the Court's discretion under subs 52(2) of the Act to dismiss the petition: Sarina v Wollondilly SC [1980] FCA 138; (1980) 48 FLR 372 at 376-77 (Bowen CJ and CA Sweeney and Lockhart JJ). On the narrower construction of par 52(2)(a) of the Act which I am hypothesising in this paragraph of my reasons, relevant considerations in the exercise of the discretion under subs 52(2) of the Act would, in my view, nevertheless be whether the debtor also has the ability to pay debts becoming payable in the reasonably immediate future and whether the debtor has the ability to pay the debtor's debts from the debtor's own money. That being so, the two matters which I have just mentioned would remain of importance in the determination of the present petition, even on a narrow construction of par 52(2)(a) of the Act. I will make further reference to the topic of this paragraph in par 31 below.)”

11. I do not think it is necessary to become too exercised about whether the money that will be used to pay the Commissioner’s debt following the implementation of the s.73 scheme is Ms Eykamp’s or her son’s because I am unable to be satisfied that this money is likely to be forthcoming. At the time I am required to make this decision there are too many contingencies and unknowns. There is an additional concern which I raised in connection with my consideration of those assets that are clearly Ms Eykamp’s and that is the timing. Any money that would come through Nicholas Eykamp will come only after the s.73 agreement has been made. At the present time the s.73 meeting has been put off until November although there is provision for an earlier date to be set. There will then be a period thereafter whilst the sale of Nibiru goes through before any payment can be made to the Commissioner. The reality would seem to be that payment is unlikely to be made before the end of the year even if all the events upon which the payment of these moneys is contingent occur.
12. Ms Eykamp does have two substantial assets in Ambervale and her one half share of Nibiru. In Stankiewicz v Plata [2000] FCA 1185 the Full Court Drummond, Sackville and Dowsett JJ said at [30]:
    • “[30] In order to satisfy the Court that he or she is "able to pay his or her debts", it is not necessary for the debtor to show that he or she has cash resources immediately available for this purpose. But the debtor must be able to realise assets, sufficient to pay the debt, within a relatively short time. As Barwick CJ said in Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666, at 670, the resources to be considered
      • "extend to moneys which [the debtor] can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time –“

In Nye v Slater (1999) FCA 89 Ryan J quoted from Re Noye; Ex parte Deputy Federal Commissioner of Taxation (1956) ABC 77 at [78] per Clyne J:

“[11] In Re Noye; Ex parte Deputy Federal Commissioner of Taxation (1956) ABC 77 at 78, Clyne J said:

• "In my opinion if it appears upon the hearing of a petition that the debtor is not then able to pay his debts to the petitioning creditor and to his other creditors the Court cannot be satisfied that the debtor is able to pay his debts though he has assets which exceed in value the amount of his debts and, if given time to realise his assets, will be in a position to pay his debts. A distinction must be drawn between a debtor who is able to pay his debts and a debtor who will be able to pay his debts at some future date."

his Honour went on to say at [17]:

“[17] I will only add that given my conclusion the debtor gains no assistance from Re Sarena; Ex parte Wollondilly Shire Council [1980] FCA 138; (1980) 32 ALR 596. Mr Finkelstein submitted that the debtor was unable to pay his debts, had been unwilling to do so, but was now willing to realise assets to pay those debts. Re Sarena is authority that there is no policy underlying the Bankruptcy Act that a debtor should be made a bankrupt if he is able to pay his debts but is unwilling to do so. It is authority that creditors of a recalcitrant debtor may resort to remedies otherwise afforded by the law such as execution against property and garnishee proceedings. It has no place in a case where the debtor has failed to satisfy the Court in terms of s 52(2)(a) and, even if the debtor had discharged that onus, Re Sarena is also authority that the power conferred upon the Court by s 52(2) is permissive not mandatory.

I make reference to the above because counsel for Ms Eykamp has suggested that this is a Re Sarena case.

13. What is a reasonable time has not been authoratively determined. Counsel appearing in this case indicated that they accepted that a determination of such time would take into account the nature of the assets proposed to be sold and the current position in relation to any disposal e.g. the existence of an offer or a contract for sale. To this I would add the circumstances of the debtor. There was clearly a time in the course of this matter following the debtor’s serious accident that she could not be expected to be making arrangements for the sale of assets. But if one looks at the length of time the debt has been outstanding and not disputed the debtor’s inaction must be taken into consideration. This is particularly the case when, as here, the life of a petition has been extended and is about to expire. What might be a reasonable time to arrange the sale of a farming property when a petition is fresh would not necessarily be reasonable when efforts to effect such a sale had only just commenced or have previously proved fruitless and the petition is about to expire. The debtor has no independent income. There is little doubt that she would have found it very difficult to obtain a mortgage on the properties given that the purpose of the funds was to pay tax and one of the properties was held jointly with the bankruptcy trustee. The evidence concerning the sale of Nibiru to the Charters is scant but it is accepted that the debtor’s tenant in common will not be acceding to the sale for some time.
14. In many cases it would have been open to the court to adjourn the matter so that the sale processes could work themselves through. If a contract did not materialise within a reasonable time the matter could be brought back to court. This is not possible because, notwithstanding her long part ownership of the property, the debtor has not taken steps to dispose of it previously. Thus the petition must either be dismissed or the sequestration order made. In regard to the other property, Ambervale, there is no sale on the horizon and none has been since it was first placed on the market almost eighteen months ago. It would be difficult for a court to hold that a sale of this property was likely in a reasonable time. I also have a concern that if the Commissioner is right that his debt is increasing by virtue of the continuation of the general interest charge the value of the debtor’s assets will shortly no longer be in excess of her debts. She would not even reach the starting point for consideration of solvency.
15. Like the court in Nye I do not think that submissions made to me by counsel for Ms Eykamp in relation to Re Sarena have any relevance because this is a case where the debtor has failed to satisfy me in the terms of s.52(2)(a) that she is solvent.
16. No court will place a person into bankruptcy lightly. But Ms Eykamp has burdened herself with a very significant public debt which she has effectively ignored for the best part of five years. The amount she owes has inexorably risen. It is said that she does not wish to have placed upon her the stigma of a bankrupt with its attendant quasi criminal connotations and affects. She has recently suffered a serious and debilitating accident in respect of which she has the sympathy of the court, but in all the circumstances I would not be prepared to exercise any residual discretion not to make a sequestration order against her. I reminded Ms Eykamp, through her counsel, that if after a sequestration order has been made the sale of Nibiru proceeds and sufficient other funds are found for her by her son an application can be made to annul the bankruptcy under s.153A of the Act and, subject to the provisions of s.154, it will be as if she had not been made bankrupt.
17. At the commencement of the hearing the applicant creditor filed affidavits of final debt and final search. I am satisfied that the debtor committed the act of bankruptcy alleged in the petition. I am satisfied with the proof of the other matters required by s.52 of the Bankruptcy Act 1966. I make a sequestration order against the estate of Janet Louise Eykamp. I order that the applicant creditor’s costs, including reserved costs if any, be taxed and paid from the estate of the respondent debtor in accordance with the Act. Under the Bankruptcy Regulations a copy of this sequestration order shall be given to the Official Receiver in Sydney within two days. The court notes that the date of act of bankruptcy is 13 August 2007. The court notes that a Consent to Act as Trustee has been signed by Steven Nicholls and has been lodged with the Official Receiver in Sydney.

I certify that the preceding seventeen (17) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate:

Date: 8 October 2009