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Russo v Private Funds Management Pty Ltd & Anor [2011] FMCA 8 (13 January 2011)

Last Updated: 3 May 2011

FEDERAL MAGISTRATES COURT OF AUSTRALIA

RUSSO v PRIVATE FUNDS MANAGEMENT PTY LTD & ANOR

BANKRUPTCY – Sequestration order – review of registrar’s decision – whether applicant able to pay his debts.


Harris v Caladine [1991] HCA 9
Australia & New Zealand Banking Group Pty Ltd v Foyster [2000] FCA 400
Vaucluse Hospital Pty Ltd v Phillips & Anor [2006] FMCA 44

Applicant:
ANGELO RUSSO

First Respondent:
PRIVATE FUNDS MANAGEMENT PTY LTD

Second Respondent:
ANNETTE JOY CONN

File Number:
ADG 154 of 2010

Judgment of:
Lindsay FM

Hearing dates:
2 & 20 December 2010

Date of Last Submission:
20 December 2010

Delivered at:
Adelaide

Delivered on:
13 January 2011

REPRESENTATION

Counsel for the Applicant:
Mr Ross-Smith and then the Applicant in person

Solicitors for the Applicant:
Starke Lawyers and then unrepresented

Counsel for the Respondents:
Mr Livesey QC with Mr Abbott

Solicitors for the Respondents:
Madsen Rowley

ORDERS

(1) The Application for Review filed by the applicant on 18 October 2010 is refused.
FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT ADELAIDE

ADG 154 of 2010

ANGELO RUSSO

Applicant


And


PRIVATE FUNDS MANAGEMENT PTY LTD

First Respondent

ANNETTE JOY CONN

Second Respondent


REASONS FOR JUDGMENT

  1. Registrar Christie, exercising the delegated jurisdiction of this Court, made a sequestration order against the applicant, Angelo Peter Russo, on 29 September 2010. She made that order in response to a petition filed by the respondents to these proceedings.
  2. On 18 October 2010 Mr Russo filed an application for review in relation to that order.
  3. He sought an order that the creditors’ petition, which was filed on 21 June 2010, be dismissed on the basis:
  4. Section 52 of the Bankruptcy Act 1966 (“the Act”) relevantly provides:

(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.
...
(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. ...
  1. It will be noted that even if the Court is not satisfied with proof of the matters referred to in subsection (1), or if it is satisfied that the debtor is able to pay his debts or that there is other sufficient cause why the sequestration order ought not to be made, it still retains a discretion as to whether the petition is dismissed or not.
  2. The Registrar in making the sequestration order was exercising a power which was delegated to her by Rules of Court made pursuant to s. 103 of the Federal Magistrates Act 1999.
  3. The review of the sequestration order is brought to this Court pursuant to s.104 (3) of the Federal Magistrates Act 1999.
  4. This review must be conducted as a hearing de novo. That requirement arises from the very ability of the Court to delegate the power to make the sequestration order to the Registrar. Such a delegation is only constitutionally sound if the Court exercising Commonwealth judicial power is seen to exercise the major responsibility for the exercise of judicial power (see the discussion of this issue in Harris v Caladine [1991] HCA 9 by Mason and Deane JJ (as their Honours then were) at [11]). The position was summarised by Riethmuller FM in Vaucluse Hospital Pty Ltd v Phillips & Anor [2006] FMCA 44 at [36]:
  5. Essentially, the hearing of the application for the sequestration order must be commenced afresh. That does not mean that the parties cannot agree to put before the Court in evidence material that was before the Registrar, whether in documentary form or otherwise.
  6. The applicant was legally represented when the hearing before me commenced but no closing submissions were filed on his behalf and he represented himself at the hearing which was provided to enable the parties to speak to their written submissions.
  7. An application to adjourn the hearing of the review came before me urgently on 26 November 2010 and I adjourned it to the commencement of the hearing of the review itself. The application for the adjournment was refused shortly after the commencement of the hearing on 2 December 2010.
  8. By agreement a number of affidavits filed on behalf of each of the parties before the Registrar were placed before me in evidence together with additional affidavits filed by or on behalf of the parties. Furthermore, I had the sworn testimony of the applicant given before me on 2 December 2010.
  9. The operation of the sequestration order has been suspended by me pending the determination of this review.
  10. If the review is unsuccessful the existing sequestration order will be taken to have remained in operation since it was made by the Registrar. The requirement of this hearing to be conducted de novo does not entail the Court having to make the sequestration order afresh. It is important to bear these matters in mind in determining whether or not the creditor has complied with the provisions of s.52(1) of the Act.
  11. Despite the contents of the application for review itself, the applicant did not pursue at the hearing before me any suggestion that the formal requirements for the hearing of the creditors’ petition set out in that subsection had not been complied with.
  12. As part of the affidavit material relied upon before me the respondents filed an affidavit of the second respondent (who is the sole director and secretary of the first respondent) as to the fact that the debt on which the petitioning creditors relied was still owing. Similarly, compliance with the Rules of this Court relating to the material that must be filed on behalf of the petitioning creditor before the sequestration order can be made which is set out in Rule 4.02 and 4.06(1) of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cwlth) were also filed. The way in which the requirements of s.52(1) are expressed and the way in which the Rules themselves are expressed arguably require these matters to be established at the review hearing. I express no final view about that because, as noted above, I did not hear argument in relation to it, as issues relating to compliance with s.52(1) were formally abandoned by the applicant at the hearing before me and no issue was agitated in relation to compliance with the Rules of Court.
  13. It is the same petition before me as was before the Registrar so no requirement arose as to further service of it.
  14. Similarly, at the hearing before me no issue was pressed as to s.52(2)(b). The sole issue before me on this review is whether or not the Court should be satisfied that Mr Russo is able to pay his debts.
  15. It should be noted that the language of the section indicates that the onus for satisfying the Court of the solvency of the debtor lies with the debtor.
  16. There was no challenge made to the adequacy or correctness of the Registrar’s summary of the law in relation to the question of an ability to pay debts (see [6] to [9] of the Registrar’s Reasons for Decision of 29 September 2010).
  17. The relevant legal principles relating to solvency in this context are conveniently set out by Hely J in Australia & New Zealand Banking Group Pty Ltd v Foyster [2000] FCA 400 at [17] to [19]:
  18. The Registrar’s Reasons indicated that the creditors’ petition in this case was founded upon an act of bankruptcy relating from failure to comply with a Bankruptcy Notice that issued in relation to an amount of $59,567 which represented the amount awarded in an interim allocatur of costs in the Supreme Court of South Australia in Action No. 1125 of 2004. The allocatur issued on 2 March 2010.
  19. The sum has not been paid to the judgment creditors or either of them and, save for the highly conditional offer referred to hereunder at [48], no payment has been proffered by Mr Russo.
  20. Since that interim allocatur issued there has been another interim allocatur issue in related proceedings, No. 1125 of 2004. I describe them as related proceedings because, amongst the defendants to that action, are the first and second respondents to this application. Another defendant was a Ms Elizabeth Ann Buck, formerly a trustee for Private Funds Management Pty Ltd who died on 30 October 2010.
  21. Execution of that interim allocatur has not been stayed. On 2 December 2010 I received as Exhibit 1 to these proceedings an interlocutory application by Mr Russo in which he sought the setting aside of that interim allocatur or its stay.
  22. As far as I can determine (and I am relying an Annexure “DAS-2” to the affidavit of Mr David Starke, the applicant’s solicitor for a time in these proceedings) that application was dismissed by Judge Lunn in the Supreme Court on 22 November 2010.
  23. The creditors’ petition was formally supported by the estate of Mrs Buck and by a creditor, namely one Robert Chrzaszcz, a solicitor.
  24. Despite the matter having been specifically raised by me on the return date of the review application, there is no evidence that Mr Russo has fulfilled his obligations pursuant to Rules 7.06 (3) and 7.06 (4) of the Federal Magistrates Court (Bankrupty) Rules 2006 (Cwlth) by notifying each of the creditors of the date and time of the review application. I proceeded to hear the application notwithstanding this default.
  25. My understanding of the asset and liability position of Mr Russo is to be gleaned from the various affidavits that have been filed in these proceedings and relied upon before the Registrar and those filed in the proceedings before me and from Mr Russo’s oral evidence and from matters that were put without objection from the bar table by a party.
  26. I was told via the affidavit of the respondents’ solicitor that the Australian Taxation Office had filed a proof of debt in Mr Russo’s bankruptcy in the amount of $11,596.68. That debt related to the year ended 30 June 2003 and the running balance account of BAS monies owing as at 28 September 2010.
  27. What, then, is the evidence before the Court as to Mr Russo’s income?
  28. The Registrar was told that he had a monthly income of $10,000. In the affidavit sworn on 2 December 2010 and handed up to me in Court on that day (paragraph 4) Mr Russo claimed a monthly income of $9,000 which he said was derived from “retaining walls and sale of prestige cars”. In his oral evidence, Mr Russo conceded that he had not filed a taxation return for approximately four years. I have no evidence of there having been a return filed since that which is referred to in the Australian Taxation Office proof of debt, i.e. year ended 30 June 2003. I am prepared to infer that he has not filed a taxation return since that time.
  29. Neither before the Registrar nor before me did Mr Russo provide any documents to corroborate the income he claimed he earned on a monthly basis and I was left simply with his assertions in this regard. The assertions took on a somewhat reckless quality during the course of his cross-examination when he estimated his income could be between $5,000 and $15,000 per month and that in recent years he had earned amounts of approximately $180,000 and $250,000.
  30. He was bound to accept in cross-examination that any such income earned during those years would be subject to the imposition of tax once a return was filed. That elicited from him a claim to be entitled to significant deductions from his income. In other words, I think at the end of his evidence he was claiming to have a gross income of those amounts for those recent financial years rather than a net income for those amounts and that his net income would be significantly less than that.
  31. This brief summary of the evidence as to his income illustrates, I hope, the vagueness of Mr Russo’s evidence in that regard.
  32. At the end of the evidence I simply had no way of ascertaining what his present income is, what it has been in recent years, or indeed, whether he has any income at all.
  33. This is not a state of affairs which is likely to assist him in establishing his solvency. I note that the Registrar in her Reasons indicated [14] that Mr Russo did not produce any independent evidence of his income at the hearing before her because he did not know it was necessary. He would certainly have been on notice of the way in which producing such independent evidence would have assisted his claim as to solvency in the hearing before me. He would have known that by reading the Registrar’s Reasons. Quite apart from that, he appeared to be a rational and intelligent person and the prudence of and benefit to him of producing some material corroborating his assertions as to income would have been manifest to him at a very early stage of the proceedings. The fact that it has not been produced at any point of the hearing of this creditors’ petition enables me, I find, to safely draw the inference either that his income is negligible, or that he simply has no clear idea as to how much he in fact earns.
  34. Turning to his asset position, it should be noted that Mr Russo before the Registrar claimed to be the registered proprietor of two properties of significant value. The first is situate at 189 The Esplanade, Aldinga Beach and was said by him, at the hearing before the Registrar, to be valued at $1.8m. The second was a property at 37 Waterfall Gully Road, Beaumont which was said to be valued at $1.5m.
  35. At the hearing before the Registrar, the petitioning creditors challenged the values of those properties asserted by Mr Russo and alleged, via affidavit material including kerbside valuations by licensed valuers, values of $900,000 and $920,000 respectively.
  36. The Registrar’s Reasons indicate that before her Mr Russo was proposing to sell the Aldinga Beach property and place it in on the market within two months. Before the Registrar, Mr Russo’s assertion as to the value of the Aldinga Beach property was supported by an appraisal from a real estate agent which was annexed to an affidavit introduced into the evidence.
  37. By the time he handed up his affidavit of 2 December 2010 to me, however, he was asserting that the property at Aldinga Beach was owned by a trust of which he was the trustee. This possibility was adumbrated in the affidavit filed by Mr Starke on 26 November 2010 when Mr Russo was in pursuit of an adjournment of the review application (see [18] of Mr Starke’s affidavit). Mr Russo is shown as the registered proprietor and fee simple of the Aldinga Beach property on the Land Titles Office title register search which was Annexure “DAS-1” to Mr Starke’s affidavit but, according to Mr Starke the position is more complicated than that. He deposes at [18] of his affidavit:
  38. By the close of the proceedings before me Mr Russo appeared to have adopted the contention that the property was held by him on behalf of a trust.
  39. As best I can understand the material put before me at the hearing the name of the trust is the Aldinga Beach Unit Trust of which Mr Russo is the trustee of which the Phoenix Trust is a unit holder. Mr Russo is the trustee of the Phoenix Trust.
  40. No information was put before the Court as to the ultimate beneficiaries of the Phoenix Trust.
  41. No information as to whether the ownership of the Aldinga Beach property by the Aldinga Beach Unit Trust curtailed in any practical sense Mr Russo’s ability to sell the property or to raise money upon it. Mr Russo seemed content to leave these matters unclarified. What was clear was that he had resiled from his intention as expressed to Registrar Christie to place the property upon the market and to use the proceeds to clear his debts. He pointed to what he claimed was his recently becoming aware of the existence of the trust as the explanation for his change of mind.
  42. In any event, the Aldinga Beach property is subject to significant mortgages and charges and I will come to those in a moment.
  43. No such ambiguities attend the ownership of the Waterfall Gully Road, Beaumont property which is held by Mr Russo but Mr Russo conceded in his oral evidence that his female companion, Gina, provided one-half of the funds for the purchase of the Beaumont home. She did not give evidence but that evidence of Mr Russo gives rise to a likelihood that she would assert an interest in the property in the event it was sold. Depending upon the nature of his relationship with this lady, such an interest could be asserted in proceedings in this Court or in a Court exercising a jurisdiction in equity.
  44. In his final closing remarks to me on 20 December Mr Russo told me that he had now resolved to sell the Beaumont property, that he had signed an agency agreement with a land agent and that he proposed to sell the property for between $2.2m and $2.35m and that the petitioning creditors’ debt would be paid, along with other debts from the proceeds.. That is significantly more than the value promoted by him before the Registrar. He said that he had signed a sales agency agreement with Peter F Burns Realty and that the property would be sold by auction on 26 February 2011 with a marketing program to start on 19 January of that year. He said that there was “a bit of work” that had to be finished on the property to enable it to achieve the best possible price.
  45. It will be recalled that Registrar Christie noted at [23] of her Reasons that Mr Russo informed her from the bar table that he was “in the process of refinancing the Beaumont property to pay the debt” (the reference to the debt is a reference to the amount owed in respect of the Buck mortgage).
  46. There was no explanation by Mr Russo during the course of the hearing as to why the sale of the Beaumont property had been so long delayed. It will be recalled that the interim allocatur which grounded the petition in this case was issued in March 2010.
  47. The Beaumont property is subject to a number of mortgages and charges, namely:
    1. a first mortgage to Perpetual Trustees Victoria Ltd in the amount of approximately $365,000;
    2. a second mortgage to Dean Henry Stone and Carole Julia Stone in the amount of approximately $240,000;
    1. a caveat lodged by Commercial & General Law (SA) Pty Ltd. This law firm was owed, according to Mr Russo’s affidavits before the Registrar, somewhere between $80,000 and $100,000. His affidavit of 2 December 2010 said that he had warned the caveat. In his final oral submissions on 20 December he told me that Mr Viscariello (the proprietor of this creditor law firm) had obtained an extension of time for the removal of caveat. He went on in those same submissions to tell me that he had in his possession receipts which total more than was being sought by Mr Viscariello but he could give no explanation as to why those receipts were not produced to Registrar Christie or to me other than to suggest that he had only recently located them at the Aldinga Beach property;
    1. an order of Court relating to some unpaid fines in the Magistrates Court totalling approximately $3,300. Mr Russo said in his affidavit of 2 December 2010 that that amount had been paid and he had written to the Court asking for the order to be discharged;
    2. a caveat lodged by one Wilfred Harry Hadeler. The amount secured by this caveat was approximately $4,000. In his affidavit of 2 December 2010 Mr Russo said that it had been paid and that he had warned the caveat;
    3. a caveat lodged by a Mr Fioraldo Taddeo. In the affidavit of 2 December 2010 Mr Russo said he had warned that caveat and he told me on 20 December that it had been removed. That did not enlighten me as to whether or not there was a debt owing to Mr Taddeo. A deed evidencing that debt was annexed to one of the petitioning creditors’ affidavits and was dated 22 July 1999. The deed acknowledges Mr Russo’s indebtedness to Mr Taddeo in the sum of $116,000. Mr Russo claimed in his affidavit of 9 September 2010 that the deed was “defective and faulty”. No further material relating to this assertion was provided;
    4. a caveat lodged by one Nathan Ronald Buttigieg. That caveat has been warned and I was told on 20 December by Mr Russo that it had been removed. Again, that may have removed the security but as far as the debt is concerned I only have Mr Russo’s assertion in an affidavit that was before Registrar Christie denying the debt and alleging that Mr Buttigieg owed him $575,000. An affidavit of the petitioning creditors’ solicitor annexed an email from a land broker claiming that the caveat secured loans approximately $50,000 to Mr Russo and Gina;
    5. a caveat lodged by the Commissioner of State Taxation (Land Tax). Mr Russo owes land tax in the amount of approximately $4,600 in respect of the Beaumont property.
  48. Whilst Mr Russo is no longer promoting the sale of the Aldinga Beach property (implicitly because of the complications relating to the ownership of the property by the trust) the debts secured over that property should also be noted. They are significant. Apart from security which is collateral to debts already secured over Beaumont (such as the Stone debt), there is a caveat lodged by one Frank Borg. Mr Russo says he currently owes Mr Borg $33,900. There is also a mortgage to the Hong Kong Bank in the amount of $73,000.
  49. Most significantly there is the mortgage to Eric Geoffrey Buck and Elizabeth Ann Buck (deceased). This is the mortgage which is the subject of proceedings in the Supreme Court and in which proceedings an interim allocatur issued in the sum of $110,000 on 26 October 2010. There is dispute as to the amount owing in respect of this mortgage. Mr Russo claims he owes $80,000. The Buck’s solicitor claims he owes an amount in excess of $1m.
  50. If the Beaumont property is worth what Mr Taormina the valuer says it is worth $920,00 and we deduct the following secured liabilities from it:

D & C Stone $240,000

F Borg $33,900

Hong Kong Bank $73,000

R Chrzaszcz $30,000

we are still left with equity.

But the Buck mortgage is said by the solicitor for the petitioning creditors to be worth $1m. This is disputed by Mr Russo. The dispute forms the basis of a Supreme Court action. I have no way of determining whether Mr Russo is correct in his assessment of its value. If the petitioning creditors are correct, the whole of the available equity will be consumed by it. Furthermore, as already noted his female companion “Gina” is said to have contributed one half of the purchase price and is likely to seek to claim or secure an interest in the property if it is sold.

  1. It will be recalled that Mr Robert Chrzaszcz is owed the sum of approximately $30,000 and that is secured by a caveat which Mr Russo acknowledged on 20 December had been extended by order of Court. Mr Russo disputes the debt.
  2. There are a number of unpaid Magistrates Court fines and sums payable to the City of Onkaparinga and the Adelaide City Council which have accrued between 2004 and 2006 which are also owing by Mr Russo.
  3. I should note that from the income he claims to make, Mr Russo acknowledges a monthly payment that needs to be paid to Perpetual Trustees in the amount of $2,900. In affidavit material before Registrar Christie he also claimed to be required to pay the Hong Kong Bank an amount of $700 a month but the liability to make that monthly payment in respect of the Hong Kong mortgage had disappeared, without explanation, by the time he filed his affidavit of 2 December 2010.
  4. Mr Russo alleged ownership of a number of other items of property. There were three motor vehicles worth a total of $77,000. There were jewellery and paintings worth $50,000. There were furniture and effects worth $50,000. No independent evidence of value was produced. No explanation as to why any of those items, which appear to be readily available for liquidation, had not been sold to meet the payment of the petitioning creditors’ debt.
  5. The first point to be noted about Mr Russo’s net asset position is that I am unable to find with any confidence whether it is positive or negative. Mr Russo himself has introduced uncertainty as to his ownership of the Aldinga Beach property, but the value of each of the real properties is not the subject of any clear evidence. The only professional evidence as to value is that obtained by the respondents, namely the opinion of Mr Lucas and Ms Portolesi that on a kerbside valuation the property at Aldinga Beach was worth $900,000 and the opinion of Mr Taormina that on the same basis the property at Beaumont was worth $920,000. The enormous disparity in the estimate of the parties of the amount owing in respect of the Buck mortgage is another matter which renders an attempt to calculate a net asset position futile.
  6. What is not in dispute is that the amount owing to the petitioning creditors in respect of the interim allocatur has been owing since March 2010 and is still not yet paid. The amount owing in respect of the interim allocatur in the related proceedings which issued in October 2010 in the amount of $110,000 is also unpaid.
  7. $65,000 has been paid into the Supreme Court by Mr Russo, to abide the event of one or other of the actions (it was not clear to me which, but nothing turns on that). It is not money that is ready to be had in any event. His ability to utilise it to pay his debts is contingent with the outcome of the action.
  8. There are sundry creditors with significant debts and I have described them above. Where a debt is disputed, I have not been provided by Mr Russo with any material that would enable me to disregard the debt. Some of them – Mr Viscariello’s debt and Mr Taddeo’s debt – are of longstanding. No explanation for the delay in payment is proffered. That is suggestive in itself of insolvency.
  9. Mr Russo’s proposal to sell Beaumont was made only on the very last day of hearing before me. That was the first occasion since the alloctur was issued, as far as I can identify, when such a proposal was made. There was no explanation from Mr Russo as to why he had been so late in coming to that decision. I suppose, inferentially, I can proceed upon the basis that he would claim that he has been obliged to consider such an option because of what he claims is the recent information that has come to his attention putting the ownership of Aldinga Beach in dispute. But I am not prepared to accept that it was only during the course of the proceedings before me that Mr Russo first became aware of the existence of the trust and of its interest in the Aldinga Beach property.
  10. Determinative of the application for me is the position the Court has been left in of having no material before it confirmatory or corroborative of Mr Russo’s assertions as to his income position. No taxation return has been filed by him since 30 June 2003. No books of account or receipts or invoices relating to the conduct of his business as a prestige car merchant or retaining wall builder was introduced into evidence at any stage. I do not think that Mr Russo has any idea of his income over these periods of time. He did not appear to have turned his mind as to whether his estimates of between $180,000 to $250,000 income in recent years was on a net or gross basis.
  11. It is surely fundamental in establishing solvency to produce to the Court some data evidencing one’s income. At the very least if that is not done some explanation for the unavailability of that data should be provided. That has simply not happened here. I am not satisfied that he can meet his debts from his income; nor am I satisfied that he could service further borrowings from his income (that strategy appeared to have been abandoned by him in any event).
  12. My analysis of his asset and liability position (passim) has not enabled me to be satisfied that the sale of Beaumont now being promoted by Mr Russo, would enable him to meet his debts. He no longer proposes a sale of Aldinga Beach. Even had he still done so, the said analysis has not satisfied me that an equity would be realised to enable him to extinguish his existing debt.
  13. Mr Russo has not satisfied me that he is solvent.
  14. The application is refused.

I certify that the preceding 68Error! Style not defined.!Syntax Error, !Error! Style not defined.Error! Style not defined.!Syntax Error, !sixty-eightsixty-eight (68) paragraphs are a true copy of the reasons for judgment of Lindsay FM


Date: 13 January 2011

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