Should the sequestration order be set aside because new evidence establishes that Dr Ghosh was solvent?
115 I accept Dr Ghosh's submission that it is not the purpose of sequestration under the Bankruptcy Act to force solvent debtors to pay debts they are unwilling, rather than unable, to pay. Dr Ghosh contends (and it is not contested) that on 29 January 2017 she paid the debt claimed by Baycorp in its creditor's petition. Dr Ghosh also claims that she tendered payment to Mr Miller of the amounts claimed in the further amended creditor's petition but that tender was refused: that issue is contested.
116 An act of bankruptcy having occurred, the onus is on Dr Ghosh to satisfy the Court that she was solvent at the time the petition was heard, albeit that the evidence is likely to be relevantly the same in this case as at the time the sequestration order was made.
117 Dr Ghosh relied on the evidence of her financial circumstances as at 30 September 2016 submitted in support of the application to stay the sequestration order included in the appeal book. In her Honour's reasons ([2016] FCA 1293) published on 2 November 2016, Markovic J summarised that evidence at [9]-[14] as follows:
THE FACTS
9 Dr Ghosh's amended interlocutory application is supported by an affidavit affirmed by her on 18 October 2016. She was also examined and cross examined at the hearing. Relevantly her evidence is that:
(1) she is separated from her husband, although not divorced. There is one child of the marriage who is 11 years old, is autistic and is cared for by and resides with her;
(2) in 2013 her husband commenced a proceeding in the Family Court of Australia for property orders in respect of their marriage (the Family Court Proceeding). That proceeding is dormant. No orders have been made in it and it has not been listed for hearing;
(3) Dr Ghosh and her husband are the registered proprietors as joint tenants of two properties: one at 167 Lytton St, East Brisbane, Queensland (the East Brisbane Property) and the other at 56 Antoine St, Rydalmere, New South Wales (the Rydalmere Property). The East Brisbane Property is currently vacant and is managed by Dr Ghosh's husband. The Rydalmere Property is occupied by Dr Ghosh's husband. The East Brisbane Property and Rydalmere Property are subject to mortgages in favour of the Commonwealth Bank securing an amount of $488,000. A comparative market analysis prepared for the East Brisbane Property dated 21 October 2016 values it at between $900,000 to $1.2 m and a marketing appraisal dated 21 October 2016 for the Rydalmere Property says that its potential sale price is in the range of $940,000 to $1 m;
(4) in response to a question about her options for realising her share in the East Brisbane Property Dr Ghosh said that prior to the making of the sequestration order she had a loan approved by the Commonwealth Bank, that was pending from June to September 2016, to increase her debt by $250,000. Its purpose was to pay off her debts. Dr Ghosh would rather not sell that property but she indicated that sale was a possibility and that the property could be sold readily. She also said that she could sell her half share in the property to her husband and that he would be more likely to agree to that than an outright sale;
(5) Dr Ghosh understands that when the Family Court Proceeding is finally concluded she is likely to receive more than 50% of the matrimonial property because she has the primary care of their son;
(6) Dr Ghosh is a medical practitioner employed by Ghoband Pty Ltd (Ghoband) trading as Charlestown Surgery. In the financial year ended 30 June 2016, Dr Ghosh received approximately $80,000 from her employment. She holds one of the two issued shares in Ghoband with the other being held by her husband. As at 30 June 2016 Ghoband had negative equity of $346.78;
(7) on 6 August 2013 Dr Ghosh commenced the Defamation Proceeding in the District Court of New South Wales (the District Court). On 21 March 2016, on Dr Ghosh's application, the Defamation Proceeding was transferred to the Supreme Court because Dr Ghosh's claim for damages exceeds the jurisdictional limit of the District Court;
(8) in the Defamation Proceeding and in related proceedings in the District Court and the Local Court of New South Wales (the Local Court) there have been a number of costs orders made at various times both against and in favour of Dr Ghosh in relation to Mr Miller and the other defendants in the Defamation Proceeding. Some of those costs orders have been assessed and are the subject of judgments and some of those costs orders and/or judgments in respect thereof are subject to appeal. The largest of these is an order for costs made against Dr Ghosh by Fagan J in the Supreme Court for $12,000;
(9) the Defamation Proceeding is next listed before Rothman J on 28 October 2016 at which time Dr Ghosh understands his Honour will likely deliver his reserved judgment in relation to various strike out applications heard by him on 12 August 2016. Dependent upon his Honour's orders it is possible that the Defamation Proceeding may then be set down for hearing;
(10) Dr Ghosh believes that she is able to pay her debts, that her assets exceed her liabilities and that she is solvent.
Dr Ghosh's statement of affairs
10 Dr Ghosh has prepared a statement of affairs which she has provided to the Trustee. In it Dr Ghosh discloses that:
• she received gross income of $80,000 for the financial year ended 30 June 2016;
• her expected income for the current financial year is $100,000;
• she jointly owns with her husband the East Brisbane Property which is security for a loan of $488,000. She also has a half share in the Rydalmere Property which is currently in her husband's possession;
• she holds one share valued at $1.00 in Ghoband;
• she has three debtors, including Mr Miller, who owe her a total of $27,628.40 all of which she says is recoverable;
• since 2014 she has sold three properties for a total of $3,176,054.65;
• there is a superannuation policy in the name of Ghoband Pty Ltd Superannuation;
• in January 2016 she paid $11,265 to Baycorp Collections PDL (Australia) Pty Ltd (Baycorp);
• she has another asset, the Defamation Proceeding, which she values at $750,000;
• the combined estimated resale of the East Brisbane Property and the Rydalmere Property is $2.4 m;
• she has two unsecured creditors, the first, collectively NineMSN Pty Limited, NBN Limited and Katie Gregory (the NBN Parties), and the second, Mr Miller, who have costs orders in their favour for $16,000 and $12,000 respectively.
11 The Trustee has sworn an affidavit in which he provides his observations, having considered the statement of affairs. In relation to the assets disclosed by Dr Ghosh in her statement of affairs, the Trustee notes that:
(1) Dr Ghosh disclosed a superannuation policy in the name of Ghoband Pty Limited Superannuation but provided no balance of the funds in the policy. He further notes that, subject to certain exceptions, superannuation is generally an excluded asset from a bankrupt estate;
(2) the Trustee has not yet engaged valuers to value the East Brisbane Property and the Rydalmere Property, of which Dr Ghosh is a joint owner, nor has he, in accordance with his usual practice, lodged caveats over those properties to secure the bankrupt estate's interest in any equity in them. He notes that the Commonwealth Bank has confirmed that the amount owing to it that is secured over the properties is $488,066.83 and that the loan is not in default;
(3) given the existence of the Family Court Proceeding, the East Brisbane Property and the Rydalmere Property may become subject to that proceeding which may affect the ability to sell them in the short to medium term and/or may lead to an amendment in the ownership interests in those properties;
(4) Dr Ghosh disclosed that she holds one share in Ghoband. The Trustee understands that Ghoband may act as trustee of Dr Ghosh's superannuation fund. The Trustee is aware through searches that he has undertaken that Ghoband is the registered owner of an unencumbered property located at 49 Patricia Avenue, Charlestown, NSW (the Charlestown Property) although he was unable to ascertain from the search whether Ghoband owns the Charlestown Property in its capacity as trustee of the Ghoband Pty Ltd Superannuation Fund or whether it is beneficially owned by Ghoband in its own right. He notes that the Charlestown property does not appear in the balance sheet of Ghoband;
(5) there are three debtors disclosed in the statement of affairs, one of whom is Mr Miller for the sum of $3,300 arising from a fixed sum costs order in District Court proceedings 2014/247046. The Trustee understands that an order was also made that a certificate pursuant to the Suitors' Fund Act 1951 (NSW) be issued and that, despite the Department of Justice's advice that the certificate should not have been issued, that Department agreed to an ex gratia payment of $3,300 to Mr Miller of which $1,980 was to be paid to Dr Ghosh. Accordingly, the Trustee expects that the sum of $1,980 would be recoverable. However, on the basis that the creditor's petition was based on total debts owed by Dr Ghosh to Mr Miller of $15,234.32 and further costs orders are now claimed by Mr Miller against the estate, the Trustee is of the opinion that Mr Miller would appear to be a net creditor of the estate and, as such, no further amounts are likely to be recoverable from him. The Trustee is not in possession of any documentation evidencing the two other debtors' financial ability to pay the debts owing to Dr Ghosh;
(6) based on his review of Ghoband's profit and loss statement for the financial year ended 30 June 2016, of the $80,000 in income received by Dr Ghosh, $70,000 appears to be in the form of superannuation and $10,000 in the form of wages and salaries. He also notes that the profit and loss statement provides, as comparative figures, a profit and loss statement for the year ended 30 June 2015 and that this shows that Dr Ghosh was paid $71,027.71 in superannuation and $45,761.38 in wages and salaries in that financial year.
12 The Trustee identified the following discrepancies in the statement of affairs:
(1) in question 9 of part A of the statement of affairs, which requires the disclosure of a summary of income for the past 12 months, Dr Ghosh failed to record any income received from rent payable by tenants of her two known investment properties. The Trustee believes that these properties are currently vacant but, from his review of bank statements for an account held jointly in Dr Ghosh's name with her former husband, it appears that she received regular rental income deposits from real estate property managers;
(2) in question 12 of part A of the statement of affairs, which requires disclosure of current employment, the trustee notes that an amount of $7,600 is paid annually by Dr Ghosh's employer in superannuation. However Dr Ghosh has responded to question 15, which asks whether any party makes a superannuation contribution on behalf of the bankrupt, in the negative;
(3) Dr Ghosh has not listed any bank accounts in response to question 23 which asks the bankrupt to list all accounts held, including any joint or overdrawn accounts, with any banks, building societies, credit unions or other financial institutions in the last 12 months. However, the Trustee has been provided with statements of account by the Newcastle Permanent Building Society for an account in the name of Dr Ghosh and her husband as trustee for the Bandy Family Trust for the period 30 September 2015 to 11 October 2016;
(4) in response to question 33, which asks the bankrupt whether he or she has sold transferred or given away any assets worth more than $1,000 in the last five years, Dr Ghosh lists three properties but does not include the transfer by her of a 1% share in the Charlestown Property to her husband on 15 October 2014 nor the transfer of that property on 8 December 2014 to Ghoband for nil consideration.
13 The Trustee also set out his understanding of Dr Ghosh's creditors, none of which he has verified. They are:
(1) Baycorp in the sum of $68,840.24 for various judgments and costs orders. In addition, Baycorp has provided an estimate of $25,000 for costs that are yet to be assessed;
(2) Blue Ribbon Legal in the sum of $2,915 plus interest for work performed as a costs assessor;
(3) jointly with her husband, the Commonwealth Bank in the sum of $488,066.83. That debt is secured by way of first registered mortgages over the East Brisbane Property and the Rydalmere Property;
(4) Mr Miller in the sum of $54,317.87 for costs, including interest and enforcement costs, that have either been assessed or were gross sum orders and a further sum of $135,448.63 for costs orders in respect of which quantum has not been assessed or agreed;
(5) The NBN Parties in the sum of $20,934.59 for judgments in their favour. There are also other outstanding costs orders in favour of the NBN parties which have not been the subject of an assessment. Their solicitors estimate that those costs are in the range of $80,000 to $100,000.
14 It is clear based on the Trustee's evidence and Dr Ghosh's evidence in cross examination that she has not included all of her creditors or the full amount for which those listed are creditors in her statement of affairs. Dr Ghosh agreed in cross examination that she is also known by another name, Ros Bandi, a matter not disclosed in her statement of affairs.
118 Ms Nolan described Dr Ghosh's affidavit dated 26 April 2017 as an attempt to bring together Dr Ghosh's evidence submitted on the stay application and that it "putties up" some gaps without going beyond the evidence otherwise before the Court.
119 The best evidence before the Court of the value of the two properties in which Dr Ghosh and her husband have an interest (the Properties) are "desktop" valuations. In relation to the East Brisbane Property, the "valuation" is from "Onthehouse.com.au" and reads:
House Claim Last sold 14 years ago. Full history Suggest an edit Low $981k $1,226,703 High $1.4m Low accuracy Last updated 05 SEP 2016 Disagree with estimate? On the house.com.au is one of the leading providers of residential property data for banks and the general public. The Calculated Estimate is mathematically calculated based on publically available property data and past sales histories sourced from state governments, property owners, real estate agents and other third party data sources. Calculated Estimates and Estimate Range, can vary depending on data available. Accuracy can be improved if homeowners add to, and correct, the property data so we can mathematically calculate the likely market value.
…
Land Size 1,222 m2
Property History Sold : $658,500 08 APR 2002: Source: Government Sold : $215,000 03 MAY 1991 Source: Government
120 In her affidavit of 18 October 2016, Dr Ghosh said that the East Brisbane Property was then untenanted and that it was managed by her husband. There is no evidence that it was tenanted as 30 September 2016. It is hard to explain the $2,000 in monthly rent which Dr Ghosh says she was receiving as at 30 September 2016 (see below).
121 The estimates for the Rydalmere Property are also from "Onthehouse.com.au", with a "low" of $823,000, a median price of $1,029,350 and a "high" of $1.2 million. These estimates are subject to the same qualification as that applied to the East Brisbane property.
122 Ms Nolan invited the Court to infer the likely value of the Properties (having regard to current activity as reported in the Sydney property market) was at the higher end of the range. There are a number of problems with that proposition. First, the estimates provided by "Onthehouse.com.au" are clearly not expert valuations. There are a number of factors which can affect valuation which are not in evidence, for instance, the state of maintenance of the Properties. Second, even if it be accepted that Dr Ghosh's valuation of $2.2 million for the Properties is correct, Dr Ghosh and her husband are involved in Family Court proceedings. All things being equal, Dr Ghosh may well be entitled to more than half of the value of the Properties in those proceedings. However, there is nothing in evidence which indicates what the partners' respective contributions to the purchase price of the Properties were, whether any improvements have been made to the Properties and who paid for them or who has made mortgage payments, all matters which might affect the shares to which they may each ultimately be entitled. All of this adds uncertainty as to the timeliness of the sale of either Property. Dr Ghosh suggests that her husband would be more willing to buy her share than to allow the sale of one of the properties. Even if it be accepted that Dr Ghosh's husband was prepared to buy out her share, there is no evidence of on what terms, that the terms would be acceptable to Dr Ghosh or how long it would take them to come to a suitable arrangement.
123 Dr Ghosh also provided a statement of financial position as at 30 September 2016 which was on a form bearing the Commonwealth Bank's logo (Statement). Dr Ghosh's evidence is that she was provided with the form by the Bank and she completed it with information provided by her bank manager. It is not, however, a form which was completed and issued by the Bank.
124 The Statement indicates that Dr Ghosh's monthly income in the year to 30 September 2016 was $5,000, comprising wages or drawings from her business as $3,000 per month and rental income of $2,000 per month. The Statement indicates that she values her share of the Properties at $1.1 million, that she did not have a bank account and her furniture and personal effects are worth $10,000. She says that she is responsible for half the outstanding Commonwealth Bank loan of $489,774.66 in respect of which she paid $1,700 per month. Her credit card payments are $2,000 per month.
125 It is easy to accept that the Statement is incomplete and deals only with things which might relate to the Commonwealth Bank as suggested by the form. However, it is not a balance sheet or cash flow statement which would be necessary to support Dr Ghosh's current assertion that she is solvent.
126 Further, in cross examination, Dr Ghosh said that the amount of $5,000 (or $60,000 per annum) is not her gross income which she said is $400,000 per annum. She says the figure of $5,000 per month takes into account legal costs which she paid in the period and the impact of two "geared" properties being untenanted. The difficulty with this is that the draft profit and loss statement for Ghoband Pty Ltd does not support the contention that Dr Ghosh's gross salary was $400,000 in either of the last two years. Nor does her statement of affairs which suggested that her income was $100,000. Inferring that she was the recipient of superannuation salary and wages recorded on the profit and loss statement, which appears to be the contention, the draft profit and loss statement suggests that she was paid $71,027.71 in superannuation and $45,761.38 in wages in the year to 30 June 2015. It appears that, in the year to 30 June 2016, $70,000 was paid by way of superannuation and $10,000 was paid as wages. The total income for Ghoband Pty Ltd in 2015 was $94,340.78 and in 2016 it was $84,819.91. It is extremely difficult to see how, from an accounting viewpoint, legal costs incurred in the sort of litigation referred to in these reasons can be deducted before the statement of gross income. On any basis, if Ghoband Pty Ltd is Dr Ghosh's employer, then she did not earn a gross income from her practice as a general practitioner of $400,000 (or $100,000) in either of the last two years. If she earns income as a general practitioner from any other source, she has not identified it. Further, the superannuation funds would not be available to meet Dr Ghosh's living expenses and ordinary creditors.
127 In relation to rent, Dr Ghosh provided a statement from First National Real Estate at Parramatta that a tenant was vacating the Rydalmere Property on 15 July 2016 and that tenant paid rent of $350 per week ($1,400 per month). In cross-examination, Dr Ghosh said that a previous tenant had paid $1,000 per week. She also said that after the tenant left the property (which I take to be on 15 July 2016) "my husband occupied the property. And I think he was looking at subdividing and subleasing, but I don't know if he got around to that". I therefore infer that as at 30 September 2016, the Rydalmere Property was untenanted and that before that, the gross rent was $1,400 a month. At best, Dr Ghosh's share of rent was $700 per month. Dr Ghosh has not account for any rent (if any), on the East Brisbane Property. Her evidence would suggest that it was untenanted, although the trustee in bankruptcy's evidence would suggest that her bank accounts did receive rental income from the two Properties at times during the period.
128 Ms Nolan, correctly, submitted that to be solvent, a person does not have to be able to pay his or her debts from their own property. A person is solvent if they are able to raise funds with which to meet their debts. Annexure A to Dr Ghosh's affidavit is an email dated 9 November 2016 and addressed to "Ratna and Bhaskar". The email advises that the Commonwealth Bank had made a "conditionally eligible decision" in relation to a loan application. Approval of that loan would be granted conditionally on "proof of rent on Rydalmere investment property of $1800 per month. A lease agreement, rental statement or Rental appraisal is required to confirm this". The amount of the loan application is unstated and the loan application is not in evidence. However, in the email, the "manager premier banking" indicated that she had gone back to her credit team to see if she could increase the loan figure "from $680k to $760k" and that that would include "refinancing your current loan for $488k". The offer of finance was withdrawn when the Bank became aware that the sequestration order had been made.
129 There are two things to note: first, this email is dated November 2016, it is not clear that this funding was available on 30 September 2016. However, even if that hurdle could be overcome, Dr Ghosh was not able to satisfy the condition of the loan, since on her own evidence, the last lessee of the Rydalmere Property had paid only $1,400 per month and thereafter her husband occupied the premises. Under cross examination, Dr Ghosh said that her current income would make up for the $300 per week difference. The Court does not know what information Dr Ghosh provided to the Commonwealth Bank in support of her loan application, but it is not clear from the Statement that she completed as at 30 September 2016 that she would have been able to satisfy the Commonwealth Bank of that position or that her statement that she earned $2,000 in rent could have been sustained in light of her evidence as to her husband's plans.
130 It is perhaps surprising that the Statement indicates that Dr Ghosh has no bank account. That is contrary to the trustee in bankruptcy's evidence and the transaction details of an account with Newcastle Permanent Building Society in the name of Dr Ghosh and her husband "ATF" Bandy Family Trust. It appears that rent payments from the Properties were paid to this account. That would suggest - albeit that it is not determinative - that the Properties may also be held on behalf of the Bandy Family Trust. If that be the case, it may be that Dr Ghosh would not have free access to the proceeds of sale of the Properties. Although this observation derives from the evidence, the terms of any trust deed constituting the Bandy Family Trust were not in evidence and this issue was not the subject of argument so I will take it no further.
131 Dr Ghosh is not a convincing witness. In my observation of her at the hearing of the appeal and in her approach to its preparation, she is evasive and her evidence is often self-serving. She has not discharged her onus of proof that she was solvent as at 20 July or 30 September 2016. It may well be that she has access to assets and income through trust arrangements or otherwise. However, she has provided insufficient and inconsistent evidence of her true financial position. The evidence she has provided does not support a finding that she could meet (in a timely way) the crystallised debts identified by the trustee in bankruptcy as they fell due either from her own assets or with borrowed funds. I do not accept that the sequestration order should be set aside.