Welch, Re R.A. & Anor Knight, Ex Parte D.W. [1986] FCA 301

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RESTRICTED DISTRIBUTION

IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) ) )

BANKRUPTCY DISTRICT OF THE SOUTHERN Nos. X55 & x56 of 1985

DISTRICT OF THE STATE OF QUEENSLAND

ROBERT ALLEN WELCH and : DENISE WELCH

Debtors

EX PARTE:

DESMOND WILLIAM KNIGHT as trustee of the estates of ROBERT

ALLEN WELCH and DENISE

WELCH

Applicant

DATE: 2 July 1986

EX-TEMPORE REASONS FOR JUDGMENT

BURCHETT J.

These are applications by a trustee under s.222(4)(b) of

the Bankruptcy Act 1966 for a declaration that a deed of

assignment by each of a husband and his wife is void, and for a

sequestration order against each of the husband and the wife.

Basically the same evidence was relied on in each case,

though from several points of view the case is stronger in respect of the husband; therefore I shall consider his case

first, and if the case fails against him, I shall reject both.

Before discussing the basis upon which the case has been

put, I think I should draw attention to what was said by Toohey

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dg. in Re Doukidis, an unreported decision delivered on 26 June

1986. His Honour said of the evidentiary situation in that case:

"In support of the application to set aside the composition, there was filed an affidavit by the applicant's solicitor. The affidavit makes a number of assertions of which the solicitor cannot have first hand knowledge and it makes a number of other assertions on the basis of information and belief without disclosing the source of that information. I deprecate this practice, particularly where allegations are made concerning the conduct of another. Counsel for Mr. Doukidis rightly took exception to much of the affidavit and I received it in evidence on the clear understanding that I would attach no importance to matters of hearsay. Quite serious allegations were made of failure by Mr. Doukidis to disclose the full extent of his assets to the creditors' meeting. Those allegations should have been supported by affidavits of persons in a position to speak to relevant matters or by the oral evidence of such persons or by a combination of both."

In the present case, affidavit evidence was put before me that the total of amounts for which proofs of debt had been lodged very greatly exceeded the total shown in the Statement of Affairs, but it was conceded that the larger part of all proofs of debt had not been accepted. There was no attempt, in the affidavit that was filed in the applicant's case, to prove any particular debts not disclosed or understated. It seems to me that if the case is presented on that basis, the Court should have put before it admissible evidence showing that in fact the relevant debts were owing, which totalled the undisclosed amount

which is alleged.

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However, the debtor gave evidence in which he frankly conceded that he believed he had understated the total of the debts he owed. While he did not concede any particular figure, I think I should in the context of this case and his answers generally, understand the concession as intended to refer to a

substantial amount.

Having conceded this, the debtor explained that he had found his business as a builder of houses on the coast was in difficulties, which were beyond his understanding of accounting, and had placed his affairs in the hands of accountants. He had relied on them in the compilation of the Statement of Affairs, and he had also relied on answers received to requests for

details of amounts owing, which had been sent to his creditors.

He was, aS one would expect, cross-examined to test the veracity of this explanation, and in argument it was put that he had said he was not in financial trouble a mere 12 months earlier. The suggestion was that so large an indebtedness - the Statement of Affairs set out unsecured creditors in excess of $280,000, which after payment of secured creditors there are no assets to meet - together with a substantial additional amount of indebtedness now conceded, should not be accepted as explicable

in such a business over such a period.

However, I did not understand the assertion of the

debtor to be that his business was financially healthy 12 months

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before; but rather that he had not realized its true state, which

was probably in fact very sick indeed.

The other matter relied on relates to the fact that Part IIL of the Statement of Affairs shows an estimated surplus of assets, after allowing for secured creditors. Two houses are shown in a column headed ""eStimated value of security", with against them sums respectively of $230,000 and $225,000, totalled at $455,000. A column headed "amount of debt" shows $236,000 plus $6,000 interest plus $2,000 owed to a second secured creditor, totalled at $244,000; and a column headed "estimated

surplus" is completed at $211,000.

It is important to note the figure is an estimate only, and that at the meeting creditors were told, as the minutes show,

that much lower values had been estimated by another valuer.

However, I think, on the authorities, if the Statement of Affairs is materially inaccurate, the relevant sub-section is satisfied, notwithstanding what was said at the meeting. The question is, what was disclosed in the statement of affairs? not, what was disclosed at the meeting? though, of course, the fact of further disclosure at the meeting is relevant to the exercise of

the Court's discretion.

The first inaccuracy alleged in respect of this aspect

of the case is that the amount of interest is understated by

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$9000. This fact was conceded by the debtor in evidence. The second matter is that no selling expenses were taken into account in the calculation of the estimated surplus, although the debtor said that he would have expected, and of course he had some experience, that the selling of the securities would cost a total of about $10,000. However, he also said he was told not to take that into account, and it seems to me that the form, in clear terms, provides merely for the amount of the debt to be subtracted from the value of the security, in order to show an estimated surplus, or in the case of an estimated deficiency, for

the reverse calculation to be performed.

The question, therefore, 1s whether a _ substantial understatement of the total, which is very large, of unsecured creditors, and an omission of $9000 interest 1n relation to a secured indebtedness of $244,000, are, or either of them is,

material within the meaning of the subsection.

"I think they are material, applying the tests stated in Re Morris, 48 F.L.R. 341. If I had not accepted that they are Material, it would have been necessary to consider also the question whether the estimate of the value of the security could have satisfied the provision, on the evidence, given that it was an estimate only, which was supported by a real estate agent and the debtor's own expertise in respect of such properties, but was contradicted by other views, and not ultimately borne out upon

sale. Of course, the ultimate sales were mortgagee sales, and

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the evidence threw no reliable light on movements in the market

over a substantial period before they were effected.

But materiality of an omission or misstatement does not

end the matter. Section 222(5) provides:

"The Court shall not make an order declaring a deed or composition or a provision of a deed or composition to be void on a_= ground specified in sub-section(4) unless it is satisfied that it would be in the interests of the creditors to do so."

In Re Williamson, 43 FLR 305, at 312, Lockhart J. said:

"Plainly the discrepancy -

that is the discrepancy with which he was dealing in that case —-

was substantial: a disclosure in the statement of affairs of twenty-five creditors owed $22,051 when in fact there were sixty-four creditors owed $72,000 or $79,000. If these were the only relevant facts, the applicants' case would be formidable."

But he also said, at 313:

"The evidence suggests that the debtors were foolish, rather than dishonest, in the way they handled their financial affairs, culminating in the execution of the deeds of assignment.

If I were to accede to the submissions of counsel for the applicants and avoid the deeds and then either make summary sequestration orders or leave it to the creditors to decide whether fresh deeds should be executed, I have the firm view that, at the end of the day, what little there may be available now for unsecured creditors will be spent in more legal and administration costs, whittling away even further what remains for unsecured creditors,

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without any benefit to them or the public. I must take a practical view and not indulge in speculation as to theoretical possibilities of other assets emerging or other creditors possibly coming to light if the debtors are made bankrupt. There is nothing to suggest that either possibility would become a reality.

The present position is understandably unwelcome to the applicants; but in my opinion the correct course to take is to

allow things to remain as they are and for the deeds to continue in existence."

It was put in the present case that it is important that the debtors should be examined, and further, that in bankruptcy an order could be made under s.131. As to the latter point, I think the possibility 1s remote, having regard to the position of the

debtors on the evidence, which I accept.

As to the former point, it is, in my view, Significant that the male debtor gave evidence before me which, though he was cross-examined on a number of aspects, appeared credible (and indeed, I think I should say I was generally impressed by him as a witness, having had that opportunity to observe him), and it was not suggested that he had been fraudulent, either in any aspect of his business or in respect of any inaccuracies shown in his Statement of Affairs. I think some regard might be had to the notorious difficulties which have occurred in the building industry at various times over recent years, and particularly in some localities. Had there been any real suggestion that the evidence indicated a deliberate attempt at concealment of his

true position, or any basis for my taking the view that there was

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a real possibility that that had occurred, I would regard such

matters as serious matters to be taken into account.

Several particular matters which it was suggested might be investigated, if a sequestration order were made, were the subject of cross-examination before me, and I saw no reason to doubt the answers that were given in respect of those matters. It was urged that there might be further information obtainable under the procedures that would apply 1f a sequestration order were made, but I regard the prospect as quite remote. It was argued that a resolution of creditors showed that they thought that a sequestration order would be in their interests, and that

regard should be had to their judgment.

I have taken all the matters which were urged into account, but having done so, I am not satisfied that it would be in the interests of the creditors to make the order that is

sought in either of the applications.

Accordingly, the applications are dismissed, but in all the circumstances, which include the responsibility of the respondents for their Statements of Affairs, and the need that such issues as were raised in these applications should be brought before the Court in a case that does genuinely raise the questions that were raised here, I think it is proper to make no order as to costs. So I dismiss the applications, but make no

order as to costs.

I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Burchett.

Ok. Atala

—Sso0ciate

Dated: 2 July 1986.

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