Ammerance Groom Ex Parte The Bankrupt

[1977] FCA 57

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IW TXE	FEDER&L	COURT OF AUSTXALIA )
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) No. V i 78 of 1975

GENENlL DIVISION 1

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Re: AME4ERANCX GROOH (A Bankrupt)

EX P a r t e : THE BANKRUPT

ORDER

JUDGE Ni4KING ORDER:	RILEY J.
DATE OF ORDER:	7 September 1977
WHERE MADE:	SYDNEY
THE COURT ORDERS THAT:

1. The composi t ion the proposal for which was

accepted by the bankrupt ’s c red i tors on

21 December 1976 is hereby approved.

2 . The bankruptcy be and is hereby annul led

3 . No o rde r as t o costs.

I

0 .

Re Groom (No. 21

CATCHW0ON)S

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Bankruptcy Act 1966, S. 74 - Income Tax Assessment Act 1936, , a

S. 221P - Application for approval of composition and €or

annulment of bankruptcy - Money advanced on conditions -

Condition that bankruptcy be annulled - Money held 13~7

' :

Official Receiver on trust - Money not vested in Officja.1

Receiver - Section 221P not applicable - Composition appxoved -

Bankruptcy annulled.

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REASONS FOR JUDGMENT

Th i s i s a n a p p l i c a t i o n by t h e bankrupt PIS kmmerance

Groom under S. 74 of the Bankruptcy Act 1966 for an order

approving a composi t ion the proposa l for which was accepted

by h e r c r e d i t o r s on 21 December 1976 and a n o r d e r a n n u l l i n g h e r

bankruptcy.

I a m satisfied t h a t t h e p r o p o s a l was accepted by the

c r e d i t o r s i n a c c o r d a n c e w i t h S . 73 of t h e Act. The a p p l i c a t i o n

is opposed by t h e Deputy Commissioner of Taxation on the grounds

tha t the composi t ion i s (1) unreasonable , ( 2 ) n o t b e n e f i c i a l

t o him, and (3) against publ ic pol icy. A t t h e h e a r i n g boch the

appl icant and the Deputy Commissioner were rep resen ted by

counsel ; and the act ing Official Receiver, who is t h e t r u s t e e of

t h e h a n k r n p t ' s	estate,	appeared	in	person	and	took	a	n e u t r a l
a t t i t u d e .

The Off ic ia l Receiver appl ied l a s t yea r fo r approva l of

a similar composition t o which I s h a l l refer i n a moment. I

d i s m i s s e d h i s a p p l i c a t i o n . I n my reasons for judgment (delivered

on 30 November 1976 and now repor t ed i n (j.976), 1 3 A.L.R. 529)

I s a i d (a t 530) :

"The bankruptcy, which occurred on t h e d e b t o r Is

own p e t i t i o n on 5 March 1975, was t h e r e s u l t of h e r

hav ing en te red in to the bus iness of i n t e r i o r d e c o r a t l o n

and des ign in pa r tne r sh ip wi th a man named (when it

s u i t e d him) S c o t t , who was working fox her husband

and i n whom she had complete f a i t h b u t who l e f t h e r

w i t h t h e r e s p o n s i b i l i t y f u r t h e d e b t s of t h e p a r t n e r s h i p .

Unfor tuna te ly she d id not know t h a t h e was no t on ly an

undischarged bankrupt both here and in Nev7 Zealand

b u t a l s o a rogue. She played only a non-adminis t ra t ive,

par t - t ime and nommal role i n t h e p a r t n e r s h i p , and t h e

magnitude of S c o t t ' s b e t r a y a l of h e r t r u s t i n hlm is

i n d i c a t e d by t h e facts t h a t the a s s e t s i n h e r e s t a t e

amounted t o $2,585.83 and that 6 6 c red i to r s have

proved for a t o t a l of $135,238. Her drawings from

t h e p a r t n e r s h l p b u s i n e s s amounted i n a l l t o $2 ,880 .

S c o t t seems to have deprived her of j ewe l l e ry and

debentures worth more than $35,000. The O f f i c i a l

Receiver reports under S 74 ( 3 ) (a) h i s o p i n i o n t h a t

' the conduct and co-operat ion of the bankrupt towards

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t he admin i s t r a t ion of h e r e s t a t e t h r o u g h o u t t h e

bankrcptcy has been exemplary'".

I added. t h a t the Deputy Commissioner had lodged a proof of debt

for $17,079.53, the whole or' which amount represented tax

I ! instalment deduct ions made from s a l a r i e s and wages of employees

' f I f o r which tax s tamps had not been bougkt and a f f i x e d a s r e q u l r e d

by t h e preference under Income T a x Assessment A c t 1936, and t h a t h e c l a i n e d

S. 221P of t h a t A c t f o r t h e whole amount, which

had s ince been reduced by the credi t of a refund of income t a x t o

$15,771.53.

The assets i n t h e estate now amount t o $2,732.83 and t h e

t o t a l of proved debts is now $136,534. Otherwise t h e p o s i t i o n

i s s u b s t a n t i a l l y t h e same a s t h a t v h i c h I have r e c i t e d .

The ban1:rupt's earl ier p roposa l fo r a composition was

t o t h e e f f e c t t h a t s h e would provide xhe Of I i c i a l Rece ive r

with a sum s u f f i c i e n t t o pay a l l p roved c red i to r s o the r t han

t h e Deputy Commissioner a dividend of 2 . 6 c e n t s i n t h e d o l l a r ,

l e a v i n g t h e n e t amount r ea l i s ed f rom her a s s e t s by t h e O f f i c i a l

Receiver w h o l l y a v a i l a b l e t o t h e Deputy Commissioner. The moneys

so t o be provided would be moneys advanced t o t h e b a n k r u p t by

he r husband sub jec t t o the p roposa l be ing accep ted by h e r

c r e d i t o r s and the composition being approved by the Cour t . The

proposal was accepted by specFa l r e so lu t ion , t he Deputy Commissione

a lone d i s sen t ing .	As	I	have	sa id ,	I dec l ined	to	approve	the
composition.

Ny reasons for do ing so were t w o f o l d , F i r s t , it d i d n o t

seem t o me t l a t the proposa l was such as is descr ibed i n S. 73(1) (a

of the Bankruptcy A c t , because it s p e c i f i c a l l y e x c l u d e d the

Deputy Commissioner, i r r e s p e c t i v e o f h i s consent, from sharing

i n the amount to be p rov ided and the re fo re was a proposal for a

compos i t ion no t i n sa t i s f ac t ion o f t he bankrup t ' s deb t s bu t i n

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s a t i s f a c t i o n o n l y o f h e r d e b t s t o c r e d i t o r s o t h e r t h a n t h e

Deputy Commissloner. Secondly, I though t t ha t t he p roposa l was

in tended to , and would, d e f e a t t h e Deputy Commissioner 's priority

under S. 221P o f t he Income Tax Assessment A c t and t h a t f o r t h a t

reason a (1951-1952), 1 6 A.B.C. lso the conposl t ion should not be approved: cf . R e Boyley

3 3 . As will appear , I am now of opinion

t h a t I was wrong a s to the second r eason .

The proposal with which I am now concerned was m t h e

following terms :

"I, llmmerance Groom, hereby submit a f u r t h e r

p roposa l fo r a c o m p o s i t i o n i n s a t i s f a c t i o n of m y

d e b t s as fo~lov7s:-

1. I he reby unde r t ake t o p rov ide t he Of f i c l a l

Receiver wi th the sum of $4,130.00 t o e n a b l e

a l l p r o v e d c r e d i t o r s i n my e s t a t e t o b e p a i d

a dividend of approximately 2 .6 c e n t s i n t h e

d o l l a r , s u c h d i v i d e n d t o be i n a d d i t i o n t o che

p r o p e r t y o f t h e e s t a t e p a y a b l e d i r e c t l y t o t h e

Deputy Commissioner of Taxacion by v i r t u e o f

Sec t ion 2 2 1 ( P ) o f the Income Tax Assessment

A c t and a f t e r payment of t h e a p p r o p r i a t e

I	propor t ions of a l l p roper cos ts , charges and expenses of and inc identa l to the proceedings
and a l l f e e s and pe rcen tages payab le to the
O f f i c i a l Receiver.
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2. The s a i d sum of $4,130.00 will be moneys advanced

t o m e by my husband Mr. C. Groom s u b j e c t t o

acceptance by the c red i tors and approval of the

composition and annulment of my bankruptcy by

the Cour t .

3 .	I make t h i s new p r o p o s a l i n view of t h e r e j e c t l o n
of my previous proposal by the Court upon t h e
a p p l i c a t l o n o f t h e Deputy Commissioner of Taxation
who had previously been excluded by m e i n r e s p e c t
of t he compos i t ion d iv idend because o f h i s p r io r i ty
r i g h t t o t he proper ty of the estate."

The amount of $4,130 referred to has a l ready been advanced, and

i s i n t h e h a n d s o f t h e O f f i c i a l Receiver.

It will be observed that this proposal overcomes

t h e f i r s t d i f f i c i l l t y which i n my opinion s tood i n t h e way of

approval of the ear l ie r proposa l . The Deputy Commissioner i s n o t

exc luded f rom shar ing in the money t o be provided, but i s t o

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receive from it a dividend a t t h e same rate as t h e o t h e r c r e d i t o r s .

The bankrupt was not represenced by counsel or? t h e

hear ing of the fo rmer app l i ca t ion bu t appea red in pe r son and ,

understandably enough, submitted no legal argument . On t h e

hear ing of t h e p r e s e n t a p p l i c a t i o n s h e was represented by

M r . Urquhart of couw.el, who for t h e f i r s t time made submissions

which have persuaded me tha t t he second r eason I gave for

d e c l i n i n g t o approve the ea r l i e r compos i t ion was wrong.

There were two s t e p s i n Mr. U-rquhart' S argument.

F i r s t , he submi t ted tha t S. 221P g i v e s t h e Deputy Commissioner

p r i o r i t y i n r e s p e c t o n l y of property of the bankrupt which has

v e s t e d i n much, i n my opinion, is clear from the t h e O f f i c i a l Receiver o r pas sed unde r h i s con t ro l . So

judgments in Commissloner of

Taxation v. Card (19631, 109 C.L.R. 177.

Secondly, i t was s u b m i t t e d t h a t t h e money advanced

by the bankrupt 's husband m v e r v e s t e d i n t h e O f f i c i a l Receiver

o r pas sed unde r h i s con t ro l . Sec t ion 58 ( i ) (b ) o f t he Bankrup tcy

A c t , so f a r as it is r e l e v a n t t o t h i s case, p r o v i d e s t h a t vhere

a debtor becomes a bankrupt af ter-acquired property of t h e

bankrupt vests , a s soon as it is acquired by or devolves on t h e

bankrup t , i n t he Of f i c i a l Rece ive r . Sec t ion 5 8 ( 6 ) d e f i n e s

"af ter-acquired property" as meaning i n S . 58 proper ty tha t is

acquired by, or devo lves on , t he bankrup t a f t e r t he da t e o f t he

bankruptcy , be ing proper ty tha t j-s d i v i s i b l e amongst the

c red i to r s o f t he bankrup t . Sec t ion 1 1 6 ( 2 ) (a) excepts f rom property

so d i v i s i b l e " p r o p e r t y h e l d by the bankrup t i n t r u s t f o r a n o t h e r

person". It was s u b m i t t e d t h a t t h e money t o be advanced bj7 t h e

bankrupt 's hcsband was proper ty so held . Therefore it was no t

"af ter-acquired property" and did n o t v e s t i n t h e O f f i c i a l

' Receiver, nor d id it pass under h is cont ro l , and so t h e Deputy

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C o + m i s s i o n e r ' s p r i o r i t y d i d n o t a f f e c t it.

It is n o t d i s p u t e d t h a t t h c tcrms on whlch t h e sum

of $4,130 was advanced are t o be found stated or impl ied i n

the bankrupt ' s p roposa l da ted 2 December 1 9 7 6 addressed to , and

lodged under S . 73(1 ) (a) wi th , t he Of f i c i a l Rece ive r - who

accordingl-y had nocice of t hose terms. Looking a t the p roposa l ,

I th ink it c a n a c c u r a t e l y b e s a i d t h a r t h e money was advanced

exc lus ive ly for the purpose of paying a dividend of approximately

2.6 c e n t s i n t h e d o l l a r t o a l l p roved c red l to r s of the bankrupt

and on condi t ion tha t (a ) the c red l tors accepted the proposa l ,

(b) the Court apprcved the composition, and (c) the bankruptcy

were a n n u l h d . It is I t h i n k also c l e a r t h a t t h e money was

i n t e n d e d t o h e r e t u r n e d t o t h e l e n d e r , and n o t t o become p a r t o f

t h e b a n k r u p t ' s e s t a t e , u n l e s s a l l t h r e e o f t h o s e c o n d i t i o n s	were
f u l f i l l e d .

Some comment needs t o be made on cond i t ion ( c ) . Though

c r e d i t o r s may have accepted a proposal for composition i n

accordance with S. 73 and the Court may have approved the

composition under S. 7 4 ( 4 ) , never the less the Cour t may e x e r c i s e

t h e d i s c r e t i o n which S . 74(5 ) confe r s on it by re fus ing an order

annul l ing the bankruptcy: R e Sul l ivan and Hughes ( 1 9 0 4 1 ,

2 0 T.L.R. 393. If t h a t were t o happen i n t h i s c a s e , c o n d i t i o n

(c) would r e q u i r e t h a t t h e money b e r e t u r n e d t o t h e l e n d e r a n d

n o t be a v a i l a b l e for t h e c r e d i t o r s , so tha t t he Cour t ' s app rova l ..

of the composi t ion would be s tul t i f ied. Condi t ion (c) might well

be regarded as a n a t t e m p t t o i n f l u e n c e t h e C o u r t ' s e x e r c i s e o f

i t s d i s c r e t i o n u n d e r S. 74(5 ) by in effec t impos ing a cond i t lon

t h a t t h e money l e n t w i l l no t be ava i l ab le for t h e c r e d i t o r s

u n l e s s t h e btialcruptcy i s annul led. It is m my opinion

ob jec t ionab le : c f . I n re Beer, (1903) 1 K.B. 628 , esp. e t 6 3 1

where Cozens-Hardy L . J . s a i d "I p r o t e s t mos t s t rongly aga lns t

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, i

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t he no t ion . . . t h a t (a bankrupz) can ma.ke a ba rga in wi th h i s

c r ed i to r s fo r t he annu lmen t of h i s bankruptcy on t h e payment of

a cer ta in sum of money"; and I do not see how the Court can

properly approve under S. 74 ( 4 ) a composition which it knows v111

n o t i n f a c t b e e f f e c t e d u n l e s s	it	goes fu r the r	and	annuls	the
bankruptcy.

Therefore, though a t f i r s t I a c c e d e d t o t h e unopposed

r eques t made on behal f of t h e b a n k r u p t t h a t I shou ld ad jown the

hear ing of t h e a p p l i c a t i o n f o r a n n u l m e n t u n t i l a f t e r I had disposed

o f t he app l i ca t ion f o r approval , on f u r t h e r c o n s i d e r a t i o n I

requi red tha t bo th appl ica t ions should be heard toge ther .

Notwithstanding the criticism t o which cond i t ion (c) is

open, I am of opin ion tha t the advaacc of the $4 ,130 in accordance

with and on t h e terms of the proposal of which condi t ion (c)

forms p a r r g i v e s rise t o a r e l a t i o n s h i p o f a f i d u c i a r y c h a r a c t e r

o r t r u s t (of which the Off ic ia l Rece iver had not ice) in favour , as

a pr imary t rus t , o f t he c red i to r s , and secondar i ly , i f t h e

p r i m a r y t r u s t f a i l s , o f t h e l e n d e r : B a r c l a y ' s Bank Limited v.

Quis tc lose Inves tments L i r t i t ed , (1970) A.C. 567. Therefore in my -

o p i n i o n t h a t sum 1s by S. llG ( 2 ) (a) excepted from property

d i v i s i b l e	amongst	the	c red i to r s o f	t he bankrup t ,	and	by	reason of	'
I . .

S. 58 ( G ) i s consequently not "after-acquired property" which 1s

ves ted i n t h e O f f i c i a l Receiver by force of S. 58 (1) (b) , and though

it is i n h i s c u s t o d y it has not passed under h is cont ro l wl th ln

I

t h e meaning of S. 221P o f t h e Income Tax Assessment A c t .

Accordingly the Deputy Commissioner has no p r i o r i t y i n r e s p e c t o f

it under tha t s ec t ion .

The same r e a s o n i n g a p p l i e s i n r e l a t i o n t o t h e money

advanced under the proposal whlch I d e c l i n e d t o a p p r o v e f o r t h e

r easons s t a t ed a t (1976), 1 3 A.L.R. 529 , though there the advance

was n o t made subjec t to annulment be ing ordered . I t h e r e f o r e thi~::<,

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t h a t , i n s o f a r as it was based on t h e Deputy Commissioner having

a p r i o r i t y unde.: S. 221P, r?y judgment i n t ha t case c7as wrong.

Leaving aside for a moment rhe ques t ion of approval

of the composi t ion, I now t u r n t o consider whether , i f I approve

the composition, I may proper ly annul the bankruptcy . In do ing

so I sha l l have no regard t o t h e f a c t t h a t u n l e s s t h e b a n k r u p t c y

is annul led condition (c) will prevent the proposed composi t ion

from becoming effective.

It was submit ted on behalf of t h e Deputy Commissioner

t h a t t o grant annulment would be a g a i n s t p u b l i c p o l i c y f o r two

reasons. Tne first was t h a t t h e scheme h a s t h e e€fect of

d e f e a t i n g h i s p r i o r i t y u n d e r S . 221P. To what I have a l ready

said I t h i n k I need add only tha t the scheme will no t dep r ive

t h e Deputy Commissioner of anything that the legis la ture has

seen f i t t o give him i n p r e f e r e n c e t o o t h e r c r e d i t o r s : h e w i l l

t a k e t h e whole of t h e b a n k r u p t ' s p r o p e r t y t h a t h a s v e s t e d I n ,

or p a s s e d u n d e r t h e c o n t r o l o f , t h e Off ic ia l Receiver.

The second submission v7as t o t h e effect t h a t i f t h e

bankrup tcy does no t con t inue fo r t he pe r iod o f f ive yea r s

contemplated by S. 1 4 9 ( 1 ) of the Bankruptcy A c t 1 9 6 6 b u t IS

terminated now, when b a r e l y h a l f o f t h a t p e r i o d h a s r u n , t h e

Deputy Commissioner wiil be deprived of any chance of benefi t ing

by any access ion to the bankrup t ' s estate t h a t may occur.

However, no r e s t r i c t i o n o f time is p u t on t h e C o u r t ' s power t o

annul under S. 74(5) , and indeed S. 150 contempla tes an order of

d i scha rge be ing made a t any time af ter t h e b a n k r u p t ' s p u b l i c

examinat ion has been concluded or dispensed with.

The only ques t ion for m e , I t h i n k , is whe the r i n a l l

khe circumstaces ennulment would be proper . This i s a c a s e i n

which, i f t h e scheme is approved, the Deputy Commissionex will

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~ -_ . - . . _... ,__._ ~ _ _ - _ _ _ _ _ _

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receive something less t h a n 1 3 c e n t s i n t h e d o l l a r b y v i r t u e of

S. 221P, and a l l c r e d i t o r s ( I n c l u d i n g the Deputy Commlssloner)

will receirre o n l y 2 . 6 c e n t s i n t h e d o l l a r by v i r t u e of the scheme.

There are s i x t y s i x c r e d i t o r s o t h e r t h a n t h e Deputy

Commissioner. Their debts ainount t o $120,762. The proposa l was

a c t i v e l y a s s e n t e d to by s i x t e e n of them, whose d e b t s t o t a l l e d

$73,025. The proposed composition satlsfies them notwi ths tanding

the smal lness of the i r p rospec t ive d lv idends . The re i s no

i n d i c a t i o n t h a t t h e y might have done bet ter by d e c l i n i n g t o a c c e p t

t he p roposa l or might do better i f t h e C o u r t r e f u s e s t o approve

the composi t ion. The Deputy Commissioner dissented from the

proposal and vas the on ly d i s sen t i en t , bu t t he compos i t ion will

bind him i f it i s approved.	It is c l e a r l y	i n	t h e	i n t e r e s t s o f
the bankrupt .

However, as w l t h a n a p p l i c a t i o n f o r d i s c h a r g e , I have , -

t o c o n s i d e r n o t o n l y t h e i n t e r e s t s o f t h e c r e d i t o r s a n d of t-he

bankrup t bu t a l so the i n t e r e s t s of t h e p u b l i c and of commerclal

morali ty, which simply means common hones ty , and t ake in to accoun t ,

snch conduct and af fa i r s as h a v e r e l a t i o n t o the bankruptcy:

cf .	Re Trau twe in	(19501,	15 A.B.C.	1 1 9 , 126:	Re P r ince	(1961),
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19 A.B.C. 39, 41-42. The e v l d e n c e r e l e v a n t t o t h e s e matters 1s

a l l i n f avour of the bankrupt . The facts which I have s e t o u t

above shov t h a t t h e b a n k r u p t c y was i n no way c o n t r i b u t e d t o by

d ishones ty on h e r p a r t : t h e o n l y f a u l t of which she could he

accused is h e r h a v m g t r u s t e d h e r p a r t n e r t o o much. She personal-ly

ga ined no th ing , and on the con t r a ry lo s t heav i ly , by doing so.

Her conduct as a bankrupt has been I r reproachable . In my opinion '

nothing is t o be gained for h e r c r e d i t o r s or f o r t h e p u b l i c

i n t e r e s t by prolonging her bankruptcy.

Accordingly I approve the composi t ion the proposa l for ,

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wh’ich v7as accepted by the c red i tors on 2 1 December 1 9 7 6 , and o rde r ’

t h a t the bankruptcy be annul led. I shall hear counsel on the

ques t ion of costs.

,