Sherman v Lamb

LOGAN J: 1 Mr Sheldon Sherman has presented a creditor's petition by which he seeks the making of a sequestration order under s 52 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) against the estate of the respondent debtor, Ms Siobhan Patricia Lamb. The Court's power to make a sequestration order on a creditor's petition is found in s 43(2) of the Bankruptcy Act. Section 52 of that Act is directed to proceedings on a creditor's petition. Section 52(1) provides: 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. The presence of the word "may" in s 52(1) indicates that the power to make a sequestration order is discretionary. 2 The hearing of the petition was adjourned on a number of occasions by registrars after its initial presentation. On 30 November 2022, a registrar adjourned the petition for hearing on 8 February 2023. When the case came on before a registrar that day, the solicitors then acting for Ms Lamb signified that the application for sequestration was opposed. The solicitor concerned did so by reference to a notice in Form 85 specifying grounds of opposition, which had been lodged with the Court at 6.11 pm on 7 February 2023 in conjunction with an affidavit made that day by Ms Lamb. 3 The earlier interlocutory directions had required the filing of any notice of opposition many months earlier. In effect, at the time when it was filed or lodged, Ms Lamb required leave for the filing of a notice of opposition. It is a weakness in the Court's electronic filing system that there is no filtering by a registry officer or, on reference by a registrar, of documents which have been filed contrary to earlier court directions and which would require a grant of leave. As it transpired, the notice of intention to oppose having been drawn to the registrar's attention on 8 February 2023, the registrar, as it appears she was obliged so to do, referred the hearing of the petition listed that day to a judge. 4 All these events, in conjunction with the all too familiar unreliability of the means by which the solicitor came to appear that day, namely via Microsoft Teams, resulted in a referral to me as duty judge not being able to be heard until late in the day on 8 February. It was not at all possible, so late it was after yet further difficulties with the Microsoft Teams link, to hear the petition that day or, for that matter, to do other than grant a short adjournment. I should indicate that a longer adjournment was then sought by the solicitors for Ms Lamb. I adjourned the hearing of the petition to today. 5 When the petition was called on, counsel for Ms Lamb, by an interim application filed by leave, applied for an adjournment further of the hearing of the creditor's petition. Another affidavit of Ms Lamb was filed by leave in support of that application. As it happens, that particular affidavit, read in conjunction with the earlier affidavit made by her and the interlocutory history of the case, together with an affidavit of debt by Mr Sherman filed today, did not persuade me that there was occasion for an adjournment. 6 A registrar had, on 8 December 2022, dismissed an application by Ms Lamb to set aside the bankruptcy notice. It appears to me that, if not from 30 November 2022, most certainly on and from 8 December 2022, Ms Lamb has been alerted to the prospect that the creditor's petition would be heard on 8 February 2023. She deposed in her second affidavit to the experience of her solicitor proceeding on recreational leave for part of the period which transpired between 8 December 2022 and 8 February 2023. She also deposed, and I made a particular point in refusing this period of a further adjournment, and still do, of taking into account the dreadful circumstance of her experience over this period of advice given to her father of a particularly serious medical condition. I did not doubt, and still do not, that there were all too human, and so very understandable, distractions which that advice occasioned her. 7 Even so, the creditor's petition proceedings have been on foot since 16 June 2022. The contingency that she may have to show a reason why a sequestration order should not be made started at that time and was made crystal clear when the registrar dismissed the application to set aside the bankruptcy notice. In the ordinary course, petitions have a limited life, a limited currency. It is now past the halfway point in respect of the ordinary currency of a creditor's petition. Against the particular background of the history of the proceeding and also an assessment of the evidence, it did not appear to me that the case was one where there was sufficient cause for an adjournment beyond the very short adjournment that had already been granted. 8 It is necessary to approach a bankruptcy proceeding in circumstances where, as I am satisfied, an act of bankruptcy has been proved, against the background that there is a public interest in persons who have prima facie committed an act of bankruptcy being subject to insolvency administration. That bespeaks a very focused attention indeed by a respondent debtor on discharging, at an evidentiary level, why it is a sequestration order should not be made. I am quite satisfied that Ms Lamb has had sufficient time to do that. In terms of putting on evidence, whether that evidence persuades me is a subject to which I shall return shortly. For the present, I am satisfied, on the evidence, that she has failed to comply with a bankruptcy notice - in other words, that there is an act of bankruptcy committed. I am also satisfied that the petition has been served. I am further satisfied that the debt on which the petitioning creditor relies is still owing. That requires some further elaboration. 9 In his affidavit of debt this morning, Mr Sherman deposed to transfers having been made to the trust account of his solicitors. He stated that he had been advised by his solicitor and believed to be true that Ms Lamb had made payments into his solicitor's trust account of $100,000 on the evening of 9 February 2023 and $60,000 on 10 February 2023. He deposed to Ms Lamb's being indebted to him in the total sum of $301,694. 10 For her part, in her more recent affidavit, Ms Lamb deposed to having made transfers to the solicitor's trust account but put those transfers in a slightly higher amount. She stated that in total, and at the time of making the affidavit, she had made payments of $200,000 to Mr Sherman. She stated that she had made two separate transfers in amounts of $20,000 and $100,000 on 9 February. She also stated: These were the maximum transferable amounts I had until yesterday understood that the 64,000 - I interpolate that was the initial District Court cost debt. She stated she executed today further transfers in the amount of 20,000 and 60,000 dollars to the solicitor's trust account. 11 The difference between the account of Mr Sherman and Ms Lamb was not explored further by way of cross-examination of either, but it does not at all follow, in my view, that each is not giving a true and accurate position in their affidavits. It may very well be that there are just different snapshots in time as to when transfers have showed up, for example, in a solicitor's trust account and when Mr Sherman was given information by his solicitors about what was evident. I am quite prepared to and do act on Ms Lamb's account as to how much she has sought to transfer. It may just be that the transfers had not shown up at the time Mr Sherman was given advice by his solicitors with respect to the position prior to his deposing as to it. I do note that Ms Lamb has annexed particular banking records which support her account of transfers. 12 Mr Sherman, having mentioned in his affidavit the amounts transferred as he understood the position from his solicitors, also stated: I reject the respondent's transfer, as it does not wholly satisfy the debts owed to me by the respondent. I am also concerned that given the respondent's apparent insolvency, part or all of the sum paid might be recoverable from me by any trustee in bankruptcy appointed to the respondent's estate in the future. 13 It seems to me that this, in the circumstances as revealed by the earlier affidavit of Ms Lamb, and even taking into account her further affidavit, was a reasonable basis upon which to reject a tender made, as it was, on the very day upon which a creditor's petition would be heard and in circumstances where, at the very least, on the evidence, there was a basis for the concern as to solvency voiced by Mr Sherman. Further, I am satisfied that the debt to which he deposes is owing and that there has been, in any event, no tender of an amount which would either satisfy it in full or even bring it below a threshold by reference to which a bankruptcy notice and later creditor's petition might proceed in a court exercising Federal bankruptcy jurisdiction. 14 The overall position, then, is that I am satisfied that the formal proofs, in terms of the commission of an act of bankruptcy, service of the petition and that the debt is still owing, are made out by Mr Sherman. The real question is whether or not, as a matter of discretion, a sequestration order against Ms Lamb's estate should be made? 15 Mr Sherman conducted the hearing of the petition on the basis that it should be determined by reference to the notice of opposition. In other words, although it was highlighted that it had been filed out of time, it was accepted - as for that matter, so evidently it was on the outline filed on Mr Sherman's behalf on 8 February - that he should meet the grounds of opposition on the merits. I am quite satisfied that it is in the interests of justice to deal with the creditor's petition in that manner. Insofar as the same may be necessary, I grant leave to Ms Lamb to file the notice in Form 85 opposing the application. 16 After the initial formal reading of material in support of the creditor's petition, and after I had refused the application for an adjournment, Ms Lamb's counsel and solicitors sought leave to withdraw. Ms Lamb came then to act for herself and made submissions in support of the grounds as had been specified in the notice of opposition. 17 As first pleaded, those grounds were: 1. Pursuant to s 52(2)(a) of the Bankruptcy Act 1996 (the Act), the Applicant is solvent and is able to pay her debts; 2. The petition is defective as it incorrectly identifies the act of bankruptcy alleged to have been taken by the Respondent; 3. The filing of the petition by the Applicant is an abuse of process in circumstances where the Applicant was aware that the Respondent had filed a set aside notice in the Sydney Registry of the Federal Court of Australia; 4. The Respondent has a cross-claim on foot against the Applicant in the Australian Human Rights Commission; 5. The Applicant has a cross-claim against a third party in which judgement has been awarded in her favour; 6. The Court should exercise its discretion to go behind the judgement upon which the petition is based and consider whether the amount of the claimed debt as a whole is owed by the Respondent to the Applicant. 18 Not all of these were pressed after amendments. Some of those grounds may be dealt with in short order in any event. The petition is not inaccurate in relation to its identification of the act of bankruptcy. Further, I am quite satisfied from the court record that the petition was filed before an application to set aside the bankruptcy notice was made. Further, and in any event, that application has been dismissed. 19 The reference in [5] to a cross-claim against a third party is a subject best considered in the overall context of whether or not it is that she is solvent. It is not a cross-claim against Mr Sherman. Ms Lamb does allege in [4] that she has a cross-claim on foot against Mr Sherman in the Australian Human Rights Commission. Axiomatically, that is not a claim in a judicial proceeding, only a claim to an emanation of the executive government under statute. That particular claim has yet to be dealt with by the Australian Human Rights Commission. 20 I turn now to consider the subject of solvency. 21 Read together, and in conjunction with court documents in Mr Sherman's material which give further insight into proceedings in the Queensland Courts, Ms Lamb's affidavits raise as many questions as they answer in respect of solvency, in my view. 22 As to solvency, s 5(2) and (3) of the Bankruptcy Act provide: (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. 23 It has been said of the solvency test in the Act that it is a cash flow rather than a balance sheet test. A most helpful collection of pertinent authority in relation to the determination of solvency for the purposes of the Bankruptcy Act and the analogue, s 95A in the Corporations Act 2001 (Cth), is to be found in Murphy J's judgment in Tarwala v Amirbeaggi as trustee for bankruptcy [2022] FCA 1593, at [18] - [23]: 18 Section 95A of the Corporations Act 2001 (Cth) and ss 5(2) and (3) of the Act enshrine the cash flow test of insolvency: Keith Smith East West Transport Pty Ltd (in liq) v Australian Taxation Office [2002] NSWCA 264; 42 ACSR 501 at [33]. The test involves an assessment of an ability to meet any debts as and when they fall due, which focuses on liquidity and the viability of the person or business. That is appropriate because the words "as and when they become due and payable" requires looking into the future beyond the day on which the question of solvency or insolvency is to be determined: New Cap Reinsurance Corp Ltd (in liq) v Westpac Banking Corp (No 9) [2008] NSWSC 1015; 68 ACSR 176 at [44]. 19 Under the cash flow test the debtor's solvency will depend on whether he or she can pay the debts, not on whether the relevant balance-sheet shows a surplus of assets over liabilities: Bank of Australasia v Hall (1907) 4 CLR 1514 at 1521 (Isaacs J). In general, it will be no answer for a person or company which is unable to meet its debts to say that the person or company's assets exceed its liabilities overall, as doing so will not satisfy the test of being able to pay debts "as and when they become due and payable": Re Cube Footwear Pty Ltd [2013] 2 QSC 398; 2 Qd R 501 at [1] (Jackson J). 20 It is not necessary that the relevant person be able to pay all of his or her debts from his or her own moneys. If, having regard to commercial realities, the Court is satisfied that funds can be obtained from borrowings secured on assets, or unsecured borrowings, it may be that the person has funds to pay his or her debts as they fall due and will therefore be solvent: Lewis v Doran (2004) 184 FLR 454 at [116] (Palmer J); Lewis v Doran (2005) 219 ALR 555 at [109]-[112] (Giles JA with whom Hodgson and McColl J JA agreed). 21 Notwithstanding the availability of assets that may be converted into cash whether by sale, mortgage or pledge, they must be able to be realised within a relatively short period of time and be of a certain class in order to establish solvency: Francis v Eggleston Mitchell Lawyers Pty Ltd [2014] FCAFC 18 at [32]-[40] (Rares, Flick and Bromberg JJ). What is a "relatively short time" is not defined, but in Hall at 1543 Isaacs J held that the cash must be realisable "in time to meet the indebtedness as the claims mature". 22 It is not for the Court to guess when funds may become available. It is for the party bearing the relevant onus to adduce evidence as to the date upon which the funds are likely to become available so that the court may consider whether or not this is reasonable: Big River Group Pty Ltd v Visnic [2010] FMCA 276 at [9]. 23 A preponderance of assets over liabilities may not be material to the question of a person's solvency. While a person's balance-sheet position may be a useful indicator of solvency, the balance sheet test is only useful as a "rule of thumb": Quick v Stoland Pty Ltd [1998] FCA 1200; 87 FCR 371 at 380. 24 As has been said, the focus is on liquidity, and the words "as and when they become due and payable" in relation to debts requires looking to the future beyond the day on which the question of solvency or insolvency is to be determined. 25 Ms Lamb is not without assets. She deposed to, and it is not challenged, that she is the owner of two properties, one at Moonee Ponds in Victoria ("the Moonee Ponds property") the other at O'Sullivan Beach in South Australia ("the O'Sullivan Beach property"). Each of these is subject to a mortgage securing a loan. 26 Ms Lamb stated that the Moonee Ponds property "is estimated to be worth $2 million". There is no valuation evidence or even, for that matter, a market appraisal which is in evidence which would support that estimation. Ms Lamb stated that the Moonee Ponds property is subject to a mortgage with ING Bank. She stated that approximately $960,000 is owing on that mortgage, leaving an equity which she estimated to be in the order of $1 million. She stated that this property is currently tenanted and that she was receiving rent of $1200 per week for that property. That, I took to be gross rent. I have no evidence at all as to the net amount in respect of the letting of that property. In other words, I have no evidence which would give me an indication of the amount net of rates and maintenance in respect of the property, or, for that matter who is responsible for public utility charges in relation to that property. I do, though, assume in Ms Lamb's favour that in all likelihood, the tenant is responsible for bearing the public utility charges. 27 The same position obtains in relation to the O'Sullivan Beach property. It is, so Ms Lamb deposed, subject to a mortgage with Westpac Bank. It is said by her approximately $75,000 is outstanding on the mortgage and that she has $425,000 in equity. There is no supporting valuation or even market appraisal, for that matter, in evidence. It is said that it is currently tenanted and that she is receiving $380 per week by way of rent. Once again, I have no evidence as to whether this is gross or net, and I certainly have no evidence of expenses in respect of the property, be they rates or maintenance. 28 Neither do I have any evidence in terms of bank statements as to the amounts currently owing either to ING Bank or, as the case may be, Westpac Bank. 29 In her earlier affidavit, Ms Lamb deposed that she had savings of approximately $70,000. She annexed to that affidavit a redacted copy of her current savings account balance. She also offered the following tabulation of her current financial position: INCOME Average annual income from salary or wages $170,000 Social security benefits/pensions (include family payments etc): $ 0.00 All other income (eg self-employed income, interest, dividends, rent or trust distributions): $ 100,000 Total: $ 270,000 PROPERTY Moonee Ponds Property $ 2,000,000 O'Sullivan Beach Property $ 500,000 Funds in banks/financial institutions including finds in off-set accounts $ 70,000 Total Value of Property: $2,570,000 LIABILITIES Estimated weekly basic living expenses $1,000

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