Augustyn v Putnin

[1988] FCA 611

Re: MICHEAL EDWARD AUGUSTYN
And: BERNARD PUTNIN the trustee of the property of BRONISLAW (BRUNO) AUGUSTYN
and RICHARD FELIX AUGUSTYN
No. WAG111 of 1988
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Jenkinson(1), Spender(2) and French(3) JJ.

CATCHWORDS

Bankruptcy - deed of assignment - declaration that deed void - sequestration order - existence of grounds for declaration - exercise of discretion - interests of creditors - nature of interests - real possibility of financial benefit sufficient.

Bankruptcy Act 1966 s.188, s.81

Re Williamson: Ex parte Wearne (1930) 43 FLR 305

Re Levy; Ex parte Scholefield Goodman & Sons Limited (1980) 50 FLR 99

Re Beames; Ex parte Beneficial Finance Corporation Ltd (1985) 7 FCR 216

Re Doukidis Ex parte: Consolidated Constructions (unrep. 26/6/85, Toohey J.)

Re Brown; Ex parte Humes Limited (1987) 74 ALR 611

Re Moulton; Ex parte Beneficial Financial Corporation Ltd (unrep. 20/12/84)

HEARING

PERTH

#DATE 21:10:1988

Counsel for the Appellant: Mr R. Cullen

Solicitors for the Appellant: McManus Cullen and Clements

Counsel for the Respondent: Mr A.J. Templeman QC with Mr J.M. Robertson

Solicitors for the Respondent: J.N. Robertson

ORDER

The appeal be dismissed.

The appellant pay the respondent's costs of the appeal.

Note: Settlement and entry of orders is dealt with in

Order 36 of the Federal Court Rules.

JUDGE1

I have had the advantage of reading the reasons for judgment prepared by French J. I agree in the orders his Honour proposes and I am in substantial agreement with those reasons. I would not be disposed to limit by construction the meaning of the phrase "in the interests of the creditors" in sub-section 222(5) to those interests which consist in the economic advantage of creditors or in the prospect of such an advantage. No doubt the case would be rare in which interests of another kind would be shown to be advanced by a declaration grounded upon sub-section 222(4). And this is not such a case, so that the point of construction need not be pursued. In a case such as this the satisfaction required by sub-section 222(5) is in my opinion not limited to satisfaction that the making of the declaration will afford an economic advantage to the creditors. The words of the sub-section are apt in my opinion to comprehend satisfaction that the making of the declaration will afford a prospect or possibility of economic advantage to creditors sufficient to justify the conclusion that it is in their interests to make the declaration. That was the satisfaction which the learned trial judge attained.

JUDGE2

I have had the benefit of reading in draft form the reasons for judgement of French J.. I agree with those reasons and with his conclusion that the appeal should be dismissed with costs.

JUDGE3

On 8 April 1987 Michael Edward Augustyn, with his father, Bruno, and brother, Richard, signed an authority under s.188 of the Bankruptcy Act 1966 authorising Bernard Putnin to call a meeting of their creditors under Pt X of the Act and to take over control of their property in accordance with that Part.

1. At a meeting of the Augustyns' joint and separate creditors held on 1 May 1987, special resolutions were passed requiring the execution of joint and separate deeds of assignment by each of the debtors in accordance with s.204(1)(b) of the Act.

2. On 14 October 1987 Mr Putnin filed an application in the Court seeking orders that the deed of assignment of the separate estate of Michael Edward Augustyn be declared void and that a sequestration order be made against the estate. On 8 July 1988 Lee J. made the orders requested and directed that Putnin be appointed trustee of the bankrupt estate. The substantial ground upon which the order was made was that provided for under s.222(4) of the Act namely, that Augustyn had omitted a material particular from the statement of his affairs under s.195.

3. Augustyn now appeals against that decision, principally on the ground that his Honour ought to have found that it was not in the interests of the creditors to declare the assignment void. Before turning to the facts of the case, it is convenient to set out the relevant statutory provisions.
   Statutory Framework

4. The process leading to the convening of a meeting of creditors under Pt X is initiated by the debtor signing an authority under s.188 which authorises a registered trustee to call a meeting of his creditors and to take over control of his property (s.188(1)(e)). The meeting, which must be called within twenty eight days of the signing of the authority (s.194(1)), is an act of bankruptcy (s.40(1)(j)) and at the meeting the creditors may, by special resolution, adopt any one of a number of options, the relevant option for present purposes being to require the debtor to execute a deed of assignment or a deed of arrangement under Pt X of the Act (s.204(1)(b)). Other options available to the creditors at such meetings are; to accept a composition (s.204(1)(c)), or to require the debtor to present a debtors petition within seven days from the date of passing the resolution (s.204(1)(d)), or to resolve that the debtor's property be no longer subject to control under the Act (s.204(1)(a)). Whereas in this case a deed of assignment is entered into in accordance with Pt X it is, upon being duly executed by the debtor and the trustee, binding on all the creditors of the debtor (s.228(1)).

5. Section 81 of the Bankruptcy Act, which provides for examination of bankrupts or other persons who may be able to give information concerning the bankrupt or his trade dealings, property or affairs, applies in relation to a debtor who has executed a deed of assignment that has become binding on his or her creditors and so applies as if the debtor were a bankrupt and the trustee of the deed were the trustee in the debtor's bankruptcy (s.231(1)).

6. Section 69, which provides for the public examination of bankrupts and excludes the privilege against self-incrimination, is not applied to deeds of assignment.

7. The principal provision for present purposes is s.222 of the Act which deals with the power of the Court to declare a deed of assignment or arrangement or a composition void. The relevant provisions of the section are sub-ss.222(4) and (5), in the following terms:
   

"(4) Where the Court, on the application of the trustee or a creditor, is satisfied that the debtor -

(a) has given false or misleading information in answer to a question put to him with respect to his conduct, trade dealings, property or affairs at the meeting of creditors at which the resolution requiring him to execute the deed or accepting the composition was passed; or

(b) has omitted a material particular from the statement of his affairs under section 195 or included an incorrect and material particular in that statement,

The Court may make an order declaring the deed or composition to be void, or declaring any provision of the deed or composition to be void.

(5) 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.

(6) The Court shall not make an order under sub-section

(2) or (4) unless the application for the order is made-

(a) in relation to a deed of assignment - before the final dividend has been paid under the deed; .

.

.

(7) The Trustee or a creditor may include in an application under sub-section (1) or (4) an application for a sequestration order against the estate of the debtor and if the Court, on the first-mentioned application, makes an order under sub-section (2) or (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought."

The Grounds for Avoidance

1. The application before the Learned Trial Judge succeeded on the basis that the appellant in his statement of affairs, failed to disclose his beneficial ownership of the house in which he resided at Lot 107 Meares Drive, Point Samson. It appears, as his Honour found, that before the meeting of creditors the trustee travelled to Roebourne and Point Samson to inspect properties owned by the appellant and his partners. As a result of that inspection the respondent made further enquiries about the ownership of Lot 107 which was registered in the name of the appellant's sister, Christine. On or about 31 May 1987 he interviewed the appellant who acknowledged that certain monies had been paid by him towards construction costs but that the remainder of those costs had been met by his sister. However, after the respondent told the appellant that he proposed to conduct an examination of the appellant's sister under s.81 of the Act, the appellant telephoned the respondent and told him that it was "all my money" that had been invested in the property and that his sister would be prepared to execute a transfer of it to the respondent. This was done on or about 3 July 1987. His Honour found, and there is no challenge to the finding, that at all material times the property was beneficially owned by the appellant.

2. On the basis of the non-disclosure in the statement of affairs, his Honour held that grounds existed for the exercise of the discretionary power to declare the deed of assignment void under sub-s.222(4) of the Act. However, as he observed, that power may not be exercised unless the Court is satisfied that it would be in the interests of the creditors to do so (sub-s.222(5)). In considering those interests his Honour said:
   

"In the present case, it is significant that the debtor was not prepared to volunteer the existence of his interest at the meeting of the creditors and only acknowledged this substantial item of his property when confronted by the applicant.

Furthermore, the nature of the undisclosed property was significant in that it was an interest in property cloaked by a bare trust and may have remained undetected but for the diligent work of the applicant. Such organisation of his affairs by a debtor may properly alert a creditor to the prospect that other undisclosed interests may exist. If creditors were denied knowledge of the fact that the debtor held such an interest and had failed to disclose it, it may be appropriate to relieve the creditors of their commitment to a deed of assignment and to allow them to move for sequestration with the concomitant right to further examine the debtor as a bankrupt pursuant to s.81, the provisions of which are not applicable to a deed of assignment pursuant to s.231 of the Act.

In addition, the creditors now wish to challenge the respondent's assertions concerning his ability to contribute to his estate from his regular income. If a sequestration order were made, the trustee in bankruptcy may obtain an order pursuant to sub-s.131(2) of the Act requiring the bankrupt to make contribution to his estate from his income. It is not necessary for this Court to assess the prospect of such an order being made. It is a matter to be considered along with other relevant matters."

The reference to the inapplicability of s.81 appears to be erroneous as s.231 of the Act specifically provides that it does apply to a debtor who has executed a deed of assignment that has become binding on his or her creditors. It is s.69 which does not appear to be applicable.

1. His Honour also took into account the fact that a sequestration order would bring into Augustyn's estate property acquired by him after the execution of the deed of assignment and in particular his land and residence at Lot 3 Roe Street in Roebourne which he acquired as co-owner with his de facto wife late in 1987. In addition to meeting the mortgage commitment, the appellant maintains himself and his de facto from his earnings which amount to approximately $530 per week net.
   The Grounds of Appeal

2. As set out in the notice of appeal the grounds are:
   

"The said judgment contained an error of : a) Fact in finding that the respondent's beneficial interest in the property at Lot 107 Meares Drive, Point Samson ("Lot 107") was not sought to be corrected at the meeting of creditors called by the respondent;

b) Law in finding that grounds existed for the exercise of the discretionary power to declare the deed of assignment void under Sub-Section 222(4) of The Bankrupt Act 1966;

c) Law in finding that it was in the interests of the creditors to declare the deed of assignment void under Sub-Section 222(5) of the Act."

The first ground as formulated does not make sense. However, its intended thrust was revealed in counsel's contention that his Honour, having found non-disclosure by the appellant of his beneficial interest in Lot 107, should have adverted to the statement made by the trustee at the creditors' meeting that the property might be an asset of the joint estate. In my opinion this does not disclose any error of fact or law and certainly none which goes to the existence of the grounds for the exercise of the discretionary power under sub-s.222(4). And as to that matter which is covered by the second ground of appeal, it is quite clear that there was an omission and an omission in a material particular from the statement of affairs and that the condition for the exercise of the power existed.

1. The third ground of appeal, which was said by counsel for the appellant to be the principal ground relied upon, depended upon the contention that the house property in question now having been sold and the proceeds made available to the estate and the appellant not being in a position to contribute out of his income pursuant to s.131 of the Act, there was no way in which the interests of the creditors would be served by the declaration sought.

2. The trustee gave evidence, on affidavit, that the house now occupied by the appellant in Roebourne, which was purchased late in 1987, "may rise in value and become a significant after acquired asset to assist in paying out the creditors". It was the appellant's evidence that he purchased the home in question for $25,000 as half owner with his de facto wife, Ms. Flemming. To do that, he said, he borrowed $22,000 from the ANZ Bank and as at 7 April 1988 there was a balance due of $21,148.78. If the property were now to be sold for $25,000 the yield after estimated sale costs of $2,000 would be $1,851.22. The appellant went on to say in his affidavit evidence, that he was unsure that the house could now be sold for $25,000 because activity in the Roebourne area was winding down. This he attributed to the ending of the construction phase for the North West Gas Platform at nearby Burrup Peninsula. The property was, it appears, purchased at auction. However, according to the respondent, it was purchased at an undervalue. He exhibited to an affidavit which was before the learned trial judge, a report from a licensed valuer putting the value of the property at about $60,000. The report is short on detail beyond a description of the property and the bald statement that "market evidence in the locality indicates that it would enjoy a market value in the order of $60,000." No detail of the market evidence is given.

3. As to living expenses, the appellant deposed to a gross weekly income of $800, with a net after tax of $531. His expenditure was detailed as follows:
   

Mortgage repayment $130.00 Food (Ms Flemming and myself)$200.00 Electricity (including

airconditioning) $ 45.00 Water rates $ 5.00 Land Rates $ 5.00 Telephone $ 25.00 Petrol $ 40.00 Entertainment $ 45.00 Medical Health Insurance $ 10.00 Clothing & Other Expenditure $ 30.00 Maintenance of House $ 20.00 $555.00 per week

1. As to the cost of administering the estate in bankruptcy, the respondent deposed that a sequestration order, if made, would only require the submission of a new statement of affairs and a meeting of creditors to be held. This, he said, would cost about $1,000. There would be no further or additional costs involved other than those which would be incurred in the administration of the deed of assignment in any event. Although a s.69 examination would take place if a sequestration order were made, the alternative, according to the respondent, is the less effective s.81 examination. Accordingly, he contended that an additional $2,000 only would have to be found in the appellant's estate or contributed by him before a financial benefit would accrue to creditors.

2. It is perhaps regrettable that there was no cross-examination on either side before his Honour. His Honour's ability to form any concluded view as to the probability of a financial return to the creditors was limited. He did note the possibility that upon a sequestration order being made the respondent could seek an order under s.131, but did not find it necessary to assess the prospect of such an order being made. And while recognising that a sequestration order would bring into the estate after acquired property, including the land at 3 Roe Street, Roebourne, he found it unnecessary to speculate as to the value of the property thus made available.

3. The essence of his Honour's decision on the interests of the creditors for the purposes of sub-s.222(5) is expressed in the following passage in his judgment:
   

"I am satisfied that it would be in the interests of creditors to declare the deed of assignment to be void to provide the creditors with the opportunity of probing the respondent's affairs and of assessing his ability to make contribution to his estate from his income."

In my opinion, the conflicting and untested material before his Honour was not sufficient to enable him to form any concluded view as to what, if any, financial return the creditors would receive in the event of the sequestration. The evidence in the case suggests that an inquiry of the kind permitted by s.69 into the appellant's assets, and an assessment of his ability to make contributions, might result in the creditors being better off. It is of some significance in that respect that the appellant is bearing the full burden of mortgage payments on a house property of which Ms. Flemming is co-owner and the period over which the mortgage is to be repaid is 5 years.

1. Where the Court is able to form the clear view that no financial benefit will accrue, that may be a basis upon which the Court will fail to be satisfied that avoidance is in the interests of the creditors. In Re Williamson: Ex parte Wearne (1980) 43 FLR 305, Lockhart J. was satisfied that there was nothing to be gained from a s.69 examination, the debtors having given true explanations in relation to the acquisition of certain assets after execution of the deed. And the evidence before him establishing that the debtors had no money remaining after paying their living expenses, there was no more than a theoretical possibility that their income might be made available to creditors by an order under s.131 of the Act. His Honour came to the "firm view" that if he were to avoid the deeds and make some sequestration orders what little might be available for the unsecured creditors would be spent in more legal and administrative costs "without any benefit to them or the public". It was against that background of positive findings that no benefit would accrue from the orders sought that his Honour said at 313:
   

"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."

1. In Re Levy; Ex parte Scholefield Goodman & Sons Limited (1980) 50 FLR 99, the assets to be administered under the deed amounted to $1,690 in total. There was no benefit to the creditors from the deed, yet its continuation would bar them from further recovery. In deciding to declare the deed void Bowen CJ said at 116:
   

"If the deed be set aside creditors will not, as a result, lose access to any assets, but at least their claims will not be barred and the debts will not be released.

In the result I conclude it would be in the interests of creditors to declare the deeds void."

1. Re Beames; Ex parte Beneficial Finance Corporation Ltd (1985) 7 FCR 216 was a case in which the debtors under three deeds of assignment had failed to disclose the existence of a debt to the applicant in excess of half a million dollars. The applicant was not notified of the meeting. The debtors had disputed the existence of the debt and the issue was resolved against them by Pincus J. on an application to set aside the deeds of assignment. Having decided that there had been non-disclosure of material particulars under s.222(4), His Honour moved to consider the interests of the creditors under s.222(5). As to that he said:
   

"...There must be some positive proof; it is not enough to be able to say that it is not shown that setting aside would hurt the creditors." (at 229)

And after referring to Re Williamson (supra), His Honour went on to observe at 230 that:

"To comply with s.222(5) it is not necessary that the facts show that the creditors will or might get any large benefit from the setting aside of the deed; at the least, however, it must appear that in some respect the creditors may be better off if the deed is voided."

On the facts of that case, his Honour however found that it would be contrary to s.222(5) to set the deed aside. He did so on the basis, as he expressed it at 232, that:

"So far from attaining any degree of satisfaction that it would be "in the interests of the creditors to do so" I am fairly confident that the creditors would gain nothing by my following that course."

And further:

"...the mere holding of another meeting, to discuss the matters disclosed in these proceedings, would not be in itself of advantage to the creditors; the interests spoken of in s.222(5) must be, directly or otherwise, the obtaining of money."

1. Nothing in that judgment would support the view that a positive financial benefit to creditors must be shown in order to satisfy the requirements of s.222(5). And although in Re Doukidis Ex parte: Consolidated Constructions (unrep. 26/6/85, Toohey J.), Toohey J. said that "it is enough if the evidence justifies an inference that there are likely to have been assets and that the creditors may be better off if the composition is set aside" (a dictum repeated in Re Brown; Ex parte Humes Limited (1987) 74 ALR 611, 619 per Pincus J.), it does not follow that the Court must be satisfied on the balance of probabilities that there will be a financial benefit to creditors from an order avoiding or setting aside a deed. The breadth of the interests to be considered under s.222(5) is reflected in the judgment of Neaves J. in Re Moulton; Ex parte Beneficial Financial Corporation Ltd (unrep. 20/12/84) where his Honour said:
   

"Although it cannot, on the material before the Court, be postulated that the creditors will necessarily be financially better off if the debtor's affairs are administered in bankruptcy, the material before the Court as to the debtor's property, trade dealings and affairs makes plain that it would be in the interests of the creditors that there be a full investigation of the debtor's affairs which the making of a sequestration order will facilitate."

1. In my opinion, his Honour the trial judge in the present case was entitled to form the view that the orders sought would provide the creditors with an opportunity to further investigate the appellant's position and that it was in their interests to do so. The interests of the creditors as that term is used in s.222(5) do not have to have an immediate cash value attributed to them. It is sufficient that there be a real possibility of a financial benefit. In my opinion, on the third ground, as on the others, no error has been shown in the reasoning of the trial judge and the appeal must be dismissed.