Ruhe (Trustee), in the matter of Babuc (Bankrupt) v Babuc

Introduction 1 By an application filed 30 November 2021, the applicant, Alice Fay Ruhe (the Trustee), who is the trustee of the bankrupt estate of Kim Maree Babuc (Ms Babuc), seeks a declaration in relation to the beneficial ownership of certain property and orders relating to the winding up of a partnership known as "A & KM Babuc", which traded under the name "Turkish Magic" (the Partnership). The members of the Partnership were Ms Babuc and her husband, the respondent (Mr Babuc). 2 The Trustee relies on the following affidavits: (a) an affidavit of the Trustee sworn 26 November 2020; (b) an affidavit of Adrian Roca, a chartered accountant in the full-time employ of SMB Advisory sworn 13 April 2021; and (c) an affidavit of Ms Babuc sworn 6 July 2021. 3 The originating application and supporting affidavits in this proceeding have been served on Mr Babuc pursuant to orders for substituted service. To date, Mr Babuc has had no active involvement in this proceeding (although he has been in email contact with my chambers from time to time). Mr Babuc has not filed any affidavit material opposing the orders being sought. Mr Babuc has not appeared at the hearing today. He confirmed by email that he would not be appearing.

Background 4 The relevant facts can be summarised as follows: (a) In 2001, Ms Babuc married Mr Babuc. (b) In or around 2002, Ms Babuc and Mr Babuc began carrying on a business called "Turkish Magic" (the Business). The Business sold Turkish gifts, antiques and homewares. The Business was carried on by the Partnership. There does not appear to be any written partnership agreement. It may be inferred that the partnership interests of Ms Babuc and Mr Babuc were equal. (c) From 2007, the Business operated from premises situated at 33 Tyers Street, Stratford, Victoria. In July 2019, the Business also commenced operating from premises in Yarragon, Victoria. (d) In July 2019, Ms Babuc and Mr Babuc, together with their three children, visited Turkey. (e) In late August 2019, Ms Babuc and her children returned to Australia without Mr Babuc. Mr Babuc remained in Turkey. Ms Babuc continued to operate the Business upon her return to Australia. (f) By October 2019, Ms Babuc decided that she could no longer continue to operate the Business. Ms Babuc deposes to having a conversation with Mr Babuc in which she suggested that the Business be closed down and Mr Babuc saying words to the effect that she should do what she thought was best. (g) On 25 October 2019, the Business ceased trading at the Yarragon premises. (h) In December 2019, Mr Babuc returned to Australia. A conversation took place between Ms Babuc and Mr Babuc as deposed to in her affidavit. Mr Babuc returned to Turkey in February 2020. (i) While in Australia between December 2019 and February 2020, Mr Babuc withdrew money from the Business's bank account on a number of occasions. Ms Babuc does not know what happened with the funds. (j) On 22 June 2020, Ms Babuc received an email from a creditor in Turkey. It appears that Mr Babuc had supplied Ms Babuc's details to the creditor and advised the creditor to contact her. (k) On 23 June 2020, Mr Babuc withdrew money from a PayPal account connected to the Turkish Magic online store and transferred the money to his personal bank account. (l) On 28 June 2020, the Business ceased trading. (m) On 29 June 2020, Mr Babuc again withdrew money from a PayPal account connected to the Turkish Magic online store and transferred the money to his personal bank account. (n) On 30 June 2020, Mr Babuc sent Ms Babuc a message demanding that she continue trading and not close the Business as he would return from Turkey to run the Business. Ms Babuc deposes that she believes that Mr Babuc has no intention of returning to Australia. (o) On 4 August 2020, Ms Babuc completed a Bankruptcy Form (previously referred to as the Statement of Affairs). This was subsequently lodged with the Australian Financial Security Authority (AFSA) on 10 August 2020. (p) On 11 August 2020, the Trustee was appointed as sole trustee of the bankrupt estate of Ms Babuc, pursuant to a debtor's petition filed by Ms Babuc. (q) In the course of the Trustee's appointment, the Trustee has identified the following property that she believes is Partnership property: (i) the amount of $92,501.92 held in Ms Babuc's personal bank account with Westpac (BSB/Account 733 253 623 255), which the Trustee believes represent net sale proceeds from the Business; (ii) 2009 Mercedes Benz Sprinter Van LWB High Roof registration number ZQK959 (VIN: WDB9066332S376693); (iii) 2006 Ford Territory TX motor vehicle registration number ULE690 (VIN: 6FPAAAJGAT6A47143); (iv) inventory consisting of rugs, antiques, ceramics, jewellery and lamps; (v) rugs allegedly supplied on consignment by a Turkish company (Koyuncu Hali Turizm Ins. San. & Tic. LTD. STI trading as Topkapi Rugs); (vi) trade debtors of $7,573.79, which the Trustee believes are unlikely to be recoverable; (vii) GST credits of $6,724.00; (viii) shop fittings, plant and equipment including display stands and shelving; (ix) vacant residential land situated at and known as 12A Dixon Street, Stratford, Victoria, more particularly described in Certificate of Title Volume 11099 Folio 936 (the Stratford Property); and (x) two shipping containers located at the Stratford Property. 5 In relation to the Stratford Property, I note the following facts and matters. The joint registered proprietors of the property are Mr and Ms Babuc; the property was purchased in 2008 and is subject to a loan of $25,500 owing to Ms Babuc's father; the property is adjacent to 33 Tyers Street, from which the Business operated; while the property is not recorded in the financial statements of the Partnership as an asset of the Partnership, the initial deposit for the property and repayments on the mortgage were paid from Business funds. 6 Mr Babuc is currently residing overseas and has provided no indication as to when he intends to return to Australia (if at all).

Issues 7 Two issues arise on the present application: (a) Is the property listed in [4(q)] above property of the Partnership? (b) Should the Court appoint the Trustee as receiver and manager of the Partnership to realise the assets of the Partnership, discharge the liabilities of the Partnership, and distribute any surplus?

Applicable principles 8 I am satisfied that the Court has the power to make the orders sought pursuant to s 30 of the Bankruptcy Act 1966 (Cth). 9 The following provisions are of the Partnership Act 1958 (Vic) are relevant to the present application. 10 Section 37 of the Partnership Act provides: 37 Dissolution by death or bankruptcy or charge (1) Subject to any agreement between the partners every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner. (2) A partnership may at the option of the other partners be dissolved if any partner suffers his share of the partnership property to be charged under this Act for his separate debt. 11 Section 43 of the Partnership Act provides: 43 Rights of partners as to application of partnership property On the dissolution of a partnership every partner is entitled as against the other partners in the firm and all persons claiming through them in respect of their interests as partners to have the property of the partnership applied in payment of the debts and liabilities of the firm and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm, and for that purpose any partner or his representatives may on the termination of the partnership apply to the court to wind up the business and affairs of the firm. 12 Section 48 of the Partnership Act provides: 48 Rule for distribution of assets on final settlement of accounts In settling accounts between the partners after a dissolution of partnership the following rules shall subject to any agreement be observed - (a) losses including losses and deficiencies of capital shall be paid first out of profits next out of capital and lastly if necessary by the partners individually in the proportion in which they were entitled to share profits; (b) the assets of the firm including the sums (if any) contributed by the partners to make up losses or deficiencies of capital shall be applied in the following manner and order - (i) in paying the debts and liabilities of the firm to persons who are not partners therein; (ii) in paying to each partner rateably what is due from the firm to him for advances as distinguished from capital; (iii) in paying to each partner rateably what is due from the firm to him in respect of capital; (iv) the ultimate residue (if any) shall be divided among the partners in the proportion in which profits are divisible. 13 The Court will permit a trustee of a bankrupt partner to wind up a partnership where a solvent partner is unable or unwilling to administer the winding up of a partnership: see Re Wilson; Ex parte Official Receiver; Hancock (1936) 9 ABC 192; Re Parker; Ex parte Official Receiver (1950) 15 ABC 177; Re Penning; Ex parte State Bank of South Australia (1989) 23 FCR 588 (Re Penning) at 605-606 per von Doussa J. In Re Penning, von Doussa J stated at 605-606: Next, the application seeks an order that Mrs Penning's trustee be appointed receiver of the partnership to collect, get in and receive the "debts" - this should read "assets" - of the partnership and to ascertain the liabilities. This Court, exercising jurisdiction in bankruptcy, has power to make such an order: Re Wilson; Ex parte Official Receiver; Hancock (1936) 9 ABC 192; Re Parker; Ex parte Official Receiver (1950) 15 ABC 177. … Mr Penning however argues that he is still a solvent partner, and is entitled to have the carriage of the winding up; and he objects to the appointment of a receiver. As a general rule where the partnership is dissolved by the bankruptcy of one partner, the solvent partner is the proper person to conduct the winding up: Re Parker; Ex parte Official Receiver (supra). In N Lindley, Law of Partnership (15th ed, 1984), pp 837-838 it is said that the power of the solvent partners to wind up the affairs of the partnership arises from the confidence which was originally placed in them by the bankrupt, and which is continued to be placed in them by the court so long as there is no reason to the contrary. Where the court considers there is reason which requires a departure from the general rule, the court has power to appoint a non-partner to be receiver. … (Emphasis added.)

Consideration 14 In relation to the property issue, I am satisfied on the basis of the uncontradicted affidavit evidence filed by the Trustee that the property listed in [4(q)] above, other than the rugs allegedly supplied on consignment, is property of the Partnership. In relation to the rugs allegedly supplied on consignment, it does not appear that the present application has been served on the supplier. The affidavit material suggests that there may be a dispute as to the ownership of these rugs. In these circumstances, I do not consider it appropriate to reach a conclusion on the ownership of those rugs. This matter can be raised later, if necessary. I will reserve liberty to apply to enable this matter to be raised. 15 I consider it appropriate to make a declaration to the effect that the property listed in [4(q)] above (other than the rugs allegedly supplied on consignment) is property of the Partnership. There may have been some doubt about the ownership of the property; a declaration will clarify the matter and thus assist the Trustee in the administration of the bankrupt estate of Ms Babuc and in the receivership of the Partnership (pursuant to the orders discussed below). 16 I turn now to the other orders sought by the Trustee. As a result of the bankruptcy, and in the absence of any evidence of any agreement to the contrary, the Partnership has been dissolved pursuant to s 37 of the Partnership Act. It is appropriate in the circumstances to make an order that the business and affairs of the Partnership be wound up. On the basis of the facts and matters set out above, I infer that Mr Babuc is unable or unwilling to administer the winding up of the Partnership. In these circumstances, I consider it appropriate to appoint the Trustee as receiver and manager of the Partnership to realise the assets of the Partnership, discharge the liabilities of the Partnership, and distribute any surplus. It is convenient in the circumstances for the role to be performed by the Trustee, and she is willing and able to perform this role.

Conclusion 17 Accordingly, I will make orders to the effect indicated above. I will also make a costs order as proposed by the Trustee, namely that the costs of this proceeding be payable out of the funds realised from the property of the Partnership. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Moshinsky.