St George Bank Ltd v Helfenbaum

[1999] FCA 1337

Federal Court of Australia|1996-05-30|Before: Cooper J, Sundberg J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

1996-05-30

Before

Cooper J, Sundberg J

Source

Original judgment source is linked above.

Judgment (65 paragraphs)

[1]

BACKGROUND 1 On 17 February 1998 the applicant's predecessor, Advance Bank of Australia, obtained judgment against the respondent in the Magistrates' Court at Melbourne for $21,117.20 for money owing under a loan contract. It is not necessary to distinguish between the applicant and its predecessor, and I will refer to each of them as "the Bank". The respondent was granted a three months stay of the judgment. The stay expired on or about 17 May 1998. On 13 July 1998 a bankruptcy notice was served on the respondent. The notice was based on his failure to pay the amount of the judgment. On 30 July the respondent applied for a further stay of the judgment, which was refused. On 31 July he sought to have the notice set aside on the ground that he had a counterclaim against the Bank for over $300,000 "which is currently being pursued". On 30 September the application was dismissed on the ground that his claim against the Bank could have been set up in the proceedings in which judgment had been obtained against him. Cf ss 41(7) and 40(1)(g) of the Bankruptcy Act 1966 ("the Act"). On 30 November the Bank served a creditor's petition on the respondent relying on the act of bankruptcy which occurred on the dismissal of the application to set aside the bankruptcy notice. On 9 February 1999 the respondent filed a notice of intention to oppose the petition which is in part as follows:

[2]

"1. I am able to pay my debts, as I have readily realisable assets exceeding the value of the debt.

[6]

THE EVIDENCE 2 The notice of intention to oppose was supported by an affidavit in which the respondent deposed that he had lodged an instalment application with the Magistrates' Court on 8 February 1999, a copy of which was an exhibit to the affidavit. In the application the respondent applied to pay the judgment debt by forty‑eight monthly instalments of $504.05. He gave as his reason for seeking an order that "the debtor does not have the funds to pay the judgment debt in one lump sum and is unable to borrow sufficient funds". In an accompanying Statement of Affairs the respondent disclosed a weekly income of $1,385, assets of $54,400, weekly expenses of $548 and other debts of $10,000. 3 On 24 February the respondent filed an affidavit purportedly in support of an application to set aside the bankruptcy notice. He said his application for an instalment order had not yet been heard. He claimed to have average weekly earnings of $1,385, average weekly expenses of $757, net disposable weekly income of $628, assets of $54,400 and liabilities of $30,000 (ie net assets of $24,400), and said - "I believe I am not insolvent and that I have the financial capacity to fulfil the terms of the instalment arrangement applied for …". On the first return of the petition on 10 February 1999 a Registrar acceded to the respondent's request for an adjournment until after the hearing of the instalment application. On 15 February the Magistrates' Court made an order that the debt be paid by forty‑eight instalments of $504.05. On 5 March, on the Bank's application, the instalment order was cancelled on the ground that the respondent had failed to make full and frank disclosure of his debts, in that he had not mentioned that he owed his former solicitors, Herbert Geer & Rundle, $4,459.29. 4 On 26 March 1999 the respondent filed another affidavit in which he said he had made a further application for an instalment order in which he disclosed "the disputed debt" to Herbert Geer & Rundle. He had not included that debt in his first application because he had not heard from the solicitors for many months and assumed they had written off the debt. He disputed the debt because the solicitors had not acted in accordance with his instructions in relation to the matters in respect of which they had charged him the fees the subject of the claimed debt. He then updated his assets and liabilities: assets of $86,100 and liabilities of $38,654.18 (ie net assets of $47,445.82). He said his net assets were readily realisable and exceeded the debt claimed by the applicant by $25,498.34. However, he needed to retain his principal assets in order to earn his income and defray his living expenses. He asserted a cross‑claim against the applicant, and exhibited an application he had filed that day in this Court supported by an affidavit to which he exhibited a complaint he had made to the Banking Ombudsman on 21 October 1997. I will call this application "the cross‑claim application". He said he was able to pay his debts, and submitted that the petition should be dismissed or adjourned so as to allow him to continue to improve his financial position. 5 The claims made in the complaint to the Ombudsman can be summarised as follows. In January 1995 the respondent purchased a house in Elsternwick as an investment. The purchase price of $270,000 was entirely funded by the Bank. The respondent intended to demolish the house and build four units on the land. He put tenants in the house, and used the rent to pay part of the interest on the loan. The difference between the interest and the rental, approximately $1,600 per month, was paid from his other income. In March 1995 the respondent fell behind in his instalments. An officer of the Bank, Kylie Ritossa, told him the Bank would capitalise the missed payments and as a consequence would not thereafter charge penalty interest. On 5 July 1995 the Bank served a notice to pay on the respondent in respect of the loan. By letter of 6 July the Bank proposed that the respondent maintain regular monthly payments of $2,290 in reduction of the arrears. He accepted the proposal and made payments of $2,290 for at least the next twelve months. Thereafter the respondent received a number of letters from the Bank, none of which referred to a penalty interest rate being applied or to the fact that the Bank "had failed to capitalize the arrears as per its letter of the 6th July". In the period after the letter of 6 July the Bank charged interest of as much as $500 per month more than the payments the respondent was making. He was not told this was being done, and did not discover it until September 1996 when, in consequence of a dispute with his architect, he sought Bank statements. Thus, notwithstanding his regular payments, he became progressively more indebted to the Bank. 6 In mid 1995 the respondent obtained town planning approval for construction of the units. In June 1996, as a result of non‑payment of a debt owed to the respondent, he fell behind in his payments to the Bank. Until then he believed he was up to date. He spoke to Ms Ritossa and Mark Richards of the Bank, and was told he would have to pay the arrears or the Bank would take possession of the land and sell it. In September the Bank took possession of the land, which had been vacant since the tenant left in January. In October 1996 Mr Edwards told the respondent that if he paid the amount owing on his Visa card (the indebtedness the subject of the judgment) and the housing loan arrears, the Bank would return the property to him. In another conversation in early October 1996 Wayne Russell, Senior Collections Manager, told the respondent the Bank only required the arrears on the mortgage to be repaid before it was prepared to give the property back. In November the respondent made arrangements to refinance the loan. The Bank wanted $355,000 and the refinancing of $360,000 from Goldstein Partners was enough to cover this. The Bank then refused the refinancing offer, and in December sold the land for $316,000. 7 The respondent says the amount owing to the Bank on the loan was approximately $337,000. This included penalty interest to which, he says, the Bank was not entitled. He believes he could have comfortably refinanced the package, including interest that was properly payable, and then proceeded with the construction of the units. If the penalty interest were deducted from the $337,000, the sale proceeds would approximately equal the loan amount. The respondent says that in addition to interest expenses, he has incurred other expenses arising out of the ownership of the property: architect's fees ($12,000), planning approval costs ($2,800), engineering fees ($2,500), Council payments ($2,500), stamp duty ($15,000), solicitor's fees ($6,000), subdivision costs ($500) and lost profits on the proposal ($120,000 - $180,000). 8 Paragraphs 4 and 5 of the respondent's affidavit in support of the cross‑claim application are as follows:

[28]

11 The respondent filed a further affidavit on 30 July 1999. In it he updated his financial position, claiming net income of $108,880, average weekly earnings of $2,094, net disposable income of $1,337, assets of $100,442 and liabilities of $35,394 (ie net assets of $65,047). He asserted that his net assets were readily realisable and exceeded the amount of the Bank's debt by $43,099. However he repeated that having regard to their nature, he could not do without them. He said he has not paid the applicant, BMW or Herbert Geer & Rundle because he does not believe he is liable to them. He then produced an amended application and statement of claim in the cross‑claim application. The allegations in the statement of claim are the same as those in the complaint to the Ombudsman, though they are cast in more legalistic language. In his affidavit he asserted that his claim is bona fide, and that if successful it may realise damages of approximately $200,000 - $260,000. He said he had not included the BMW debt in his statement of liabilities because he was not aware of it until late May 1999. He disputed the debt, notwithstanding that his application for a rehearing had been dismissed. He was considering whether to appeal from that decision. He took issue with those parts of Ms McNamara's affidavit in which she had said that Mr Russell had requested the amount owing on the Visa card to be repaid. He accepted that Mr Edwards had required that amount and the arrears on the mortgage to be repaid. In a final affidavit filed on the morning of the hearing of the petition the respondent updated his financial position, claiming net realisable assets of $74,947. 12 Other evidence before the Court included a certified extract of the order of the Magistrates' Court by which judgment had been entered for BMW for $4,687. No part of that amount has been paid. BMW appeared to support the applicant's petition. An affidavit was filed on behalf of Herbert Geer & Rundle in which the work carried out by the firm for the respondent was detailed. The respondent had failed to pay for the services rendered, and for this reason the firm had ceased to do further work for him. On four occasions he had promised to remit funds in part payment of outstanding amounts (ranging from $600 to $2,000), but had never paid up. Until his present complaints about the firm's conduct, he had not complained to the firm about the manner in which it had acted for him in respect of the Bank's claim or the complaint to the Ombudsman. The deponent denied that the firm had been instructed to bring a counterclaim in the Bank's proceeding. 13 In March 1999 the Bank served on the respondent a notice to produce his income tax returns for the years ended 30 June 1997 and 30 June 1998. No returns had in fact been filed for those years. However draft returns dated 13 September (the day of the hearing) were produced for those years and for the year ended 30 June 1999. They disclosed taxable incomes of $52,732 (1997), $55,945 (1998) and $108,888 (1999).

[34]

14 The respondent's notice of opposition did not refer to the cross‑claim, but in the course of the hearing he was permitted to amend so as to add it as a ground of opposition. The evidence in support of the cross‑claim is presented in an unsatisfactory form. The respondent does not directly depose to the facts he relies upon to support it. Rather he produces his letter to the Ombudsman which he says contains the material facts, and states what he believes those facts disclose by way of causes of action against the Bank. He does not verify the allegations contained in his statement of claim, but merely states that he believes his claim is bona fide. In the course of his oral evidence there was ample opportunity for him to affirm the truth of the matters pleaded, but he did not do so. 15 The basis of the cross‑claim is the respondent's contention that the Bank agreed not to charge penalty interest, but in fact did so, thus causing him to become in default. See paragraphs 4, 8, 9, 31 and 33 of the complaint, and paragraphs 8, 9, 11, 12, 14, 15, 16, 24 and 33 of the statement of claim. I do not accept that Ms Ritossa said the Bank would capitalise the overdue payments and would not charge penalty interest from the time of the capitalisation. The file note of 6 July 1995 does not record those matters. The Bank's letter of the same day does not record them. Although on the respondent's account the letter does not record two important parts of the telephone conversation, he did not at the time complain about it, despite Ms Ritossa's invitation to contact her if he had "any problems". Further, without producing it, he represented to the Ombudsman that in the letter the Bank had agreed to capitalise the arrears. In fact the letter makes no reference to capitalisation. The Bank's evidence was that higher interest charges affect the balance of the loan and do not increase the arrears. 16 In his affidavit in support of the cross‑claim application, after referring to the facts contained in his complaint, the respondent asserts that they disclose:

[59]

23 The words "able to pay" in s 52(2)(a) do not mean "willing and able to pay". If a debtor is able to pay his debts but is recalcitrant, his creditors may resort to pay remedies such as execution against his property and garnishee proceedings, but not to sequestration. Bankruptcy is not a proceeding designed for the recovery of debts. See Re Sarina; Ex parte Wollondilly Shire Council (1980) 32 ALR 596 at 599. 24 The respondent deposes to an excess of assets over liabilities of $74,947. The liabilities include the amounts claimed by the Bank, Herbert Geer & Rundle and BMW (which total $30,000), even though the respondent contests those amounts on the ground that he has cross‑claims against each creditor: against the Bank for the reasons I have described, against the solicitors for not carrying out his instructions properly, and against BMW for selling a repossessed car at an undervalue. Because he has these grievances, whether sustainable or not, he is not prepared to pay the claimants, though he says he is able to do so. Further, while his assets are readily realisable, he is not prepared to convert them into cash because he is dependent on his business equipment to continue to earn his income and defray his living expenses. He is, in my view, a recalcitrant debtor rather than an insolvent one. Cf Re Sarina. 25 The applicant contends that the respondent's tax obligations should be taken into account in determining his ability to pay his debts, and that when that is done, his insolvency becomes clear. On the basis of the taxable incomes appearing in the draft returns for 1997 to 1999, and by resort to the tables appearing in the Australian Tax Handbook 1999 published by the Taxation Institution of Australia, the applicant calculates that tax of $15,300 will be payable for 1997, $16,870 for 1998 and $41,780 for 1999. If the word "debts" in the phrase "able to pay his or her debts" means amounts that are now payable, these three amounts are not debts for want of assessments by the Commissioner. Income tax is due when it is assessed and notice is served of that assessment. The tax does not become payable before the date fixed by s 204 of the Income Tax Assessment Act 1936. See Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 17 per Mason J, with whom Aickin and Wilson JJ agreed. If the view favoured by Katz J in Ensor be applied, so that "debts" include amounts that will be payable in the "reasonably immediate future", the tax that will become payable in respect of the 1997 and 1998 years may qualify as debts, though the tax that will become payable in respect of the 1999 year is too remote to qualify. If the amounts that will become payable in respect of the 1997 and 1998 years are "debts", I find that those amounts are likely to be considerably less than the applicant's estimates, because of the respondent's earlier year losses when he was studying on a part‑time basis in Hobart. I am satisfied that the respondent will be able to pay the reduced amounts when they become payable. I have had regard to the possibility that penalties will be imposed for the respondent's failure to lodge returns for the 1997 and 1998 years. I accept his evidence that he was unable to lodge returns because the police had confiscated his financial records as part of an investigation into his dealings. This may militate against the imposition of significant penalties.