Australia and New Zealand Banking Group Limited v Shilton
[2015] FCCA 1783
•1 July 2015
FEDERAL CIRCUIT COURT OF AUSTRALIA
| AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED v SHILTON & ANOR | [2015] FCCA 1783 |
| Catchwords: BANKRUPTCY – Composition passed at Meeting of Creditors – application to set aside – no notice given to the creditor Applicant – sections 222 and 76B of the Bankruptcy Act 1966 (Cth) – exercise of discretion – orders sought in Application granted. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.5(1), 30(1), 55, 64A, 64A(1)(b), 73, 73(1), 74(5), 76B, 86, 222, 222(1)(d), 222(2) |
| Hingston v Westpac Banking Corporation (2012) 200 FCR 493 Marshall & Anor v Clarke & Ors [2003] FMCA 473 New Age Constructions (NSW) Pty Ltd v Etlis [2013] FCA 884 Re Emmett [1991] FCA 632 |
| Applicant: | AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED |
| First Respondent: | GREGORY SHILTON |
| Second Respondent: | ADRIAN PATRICK LIDDELL |
| File Number: | MLG 2571 of 2014 |
| Judgment of: | Judge Hartnett |
| Hearing date: | 13 May 2015 |
| Delivered at: | Melbourne |
| Delivered on: | 1 July 2015 |
REPRESENTATION
| Counsel for the Applicant: | Mr Agardy |
| Solicitors for the Applicant: | HWL Ebsworth Lawyers |
| Counsel for the Second Respondent: | Mr Evans |
| Solicitors for the Second Respondent: | Mansour Lawyers |
ORDERS
Pursuant to the provisions of the Bankruptcy Act 1966 (Cth) and, in particular, s.222 of that Act as applied by s.76B of that Act, the composition made between Adrian Patrick Liddell (‘Liddell’) and his creditors at the Meeting of Creditors on 14 August 2014 be set aside.
Pursuant to ss.222 and 30(1) of the Bankruptcy Act 1966 (Cth) and consequent upon order 1 of these Orders, Liddell and the creditors of Liddell are restored to the positions they were in before the making by Liddell, and subsequent acceptance by his creditors by special resolution on 14 August 2014, of Liddell’s composition proposal under s.73 of the Act, such that Liddell, on the one hand, is and has been bankrupt on and from 2 July 2014 pursuant to the acceptance by the Official Receiver under s.55 of the Act on 2 July 2014 of Liddell’s debtor’s petition presented under s.55 of the Act, and the creditors of Liddell, on the other hand, are and have been on and from 2 July 2014 creditors of the bankrupt estate of Liddell.
The Applicant’s costs, including reserved costs, be taxed and paid from the estate of Liddell in accordance with the Bankruptcy Act 1966 (Cth).
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 2571 of 2014
| AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED |
Applicant
And
| GREGORY SHILTON |
First Respondent
| ADRIAN PATRICK LIDDELL |
Second Respondent
REASONS FOR JUDGMENT
On 18 December 2014, the Applicant made application for the following orders:-
“1. The Composition passed at the Meeting of Creditors on 14 August 2014 be set aside pursuant to Sections 222 and 76B of the Bankruptcy Act 1966 (Cth).
2. A sequestration order be made against the estate of the second respondent, Adrian Patrick Liddell.
3. The Applicant's costs, including reserved costs, be taxed and paid from the estate of Adrian Patrick Liddell in accordance with the Bankruptcy Act 1966 (Cth).
4. Any other or further orders as this Honourable Court sees fit.”[1]
[1] Applicant’s Application filed on 18 December 2014.
The Applicant raised two grounds for its application to set aside the composition:-
a)firstly, that had it been notified of the Meeting of Creditors, it would have attended the meeting. Further, it would (or at least, should) have been admitted as a creditor entitled to vote for an amount representing more than 25 per cent by value of the total claims of creditors admitted to vote at the meeting, with the consequence that the resolution in favour of the Second Respondent’s composition would have failed; and
b)secondly, the terms of the composition are unreasonable or are not calculated to benefit the creditors generally.
These grounds are as set out in s.222(2) of the Bankruptcy Act 1966 (Cth) (‘the Act’) (non-compliance with the Act) and s.222(1)(d) of the Act.
The Applicant relied upon the affidavits of:-
a)Anne Young affirmed on 16 December 2014, dealing with documents received by the Applicant;
b)Ellen Moore affirmed on 15 December 2014. This is the principal Affidavit in support of the application;
c)Jessica Rae Cullin affirmed on 17 December 2014, confirming matters within her knowledge;
d)Ellen Moore affirmed on 31 March 2015, responding to the allegations in the Affidavit of the Second Respondent sworn on 4 March 2015 relating to the margin scheme and goods and services tax;
e)Collin Michael Almond affirmed on 11 May 2015 as to correspondence with the First Respondent; and
f)Jessica Rae Cullen affirmed on 12 May 2015 giving notice of the additional ground proposed by the Applicant.
The Applicant filed Written Submissions on 28 April 2015. Further oral submissions were made to the Court.
The First Respondent swore an Affidavit on 27 February 2015. Thereafter, he did not continue to participate in the proceedings. He was not available for cross-examination by either of the other parties. The First Respondent agreed to be bound by any and all orders of the Court.
The Second Respondent relied upon affidavits sworn by him on 4 March and 11 May 2015. He opposed the Applicant’s application. The Second Respondent filed Written Submissions on 11 May 2015. He too made further oral submissions to the Court.
The Applicant sought, on the hearing of this matter, to add a further ground relied upon, namely that the Court should make the orders sought, that is the setting aside of the composition, in the public interest. That was opposed by the Second Respondent. The Applicant, in a limited way, cross-examined the Second Respondent and then determined to abandon seeking to proceed on that additional ground. Both parties conceded however that the Court has a discretion at large to grant relief in this type of application. Such discretion needs to be exercised in accordance with procedural fairness being given to the parties.
Following the hearing on 13 May 2015, Mr Evans of Counsel sent an email to the Court on 15 May 2015, which said relevantly the following:-
“Dear Associate,
At the conclusion of the hearing of this matter before Her Honour Judge Hartnett on 13 May 2015, counsel for both Mr Liddell and ANZ made brief submissions to Her Honour regarding what further orders should be made by the Court, if Her Honour determined to set aside Mr Liddell’s composition with his creditors.
Following further discussions, counsel are agreed that if the composition is set aside, then in accordance with the reasoning of the Full Court of the Federal Court in Hingston v Westpac Banking Corporation (2012) 200 FCR 493, that the Court should not make a sequestration order against Mr Liddell, but rather an order in the following terms (adapted from Hingston at [130], as explained at [129]):
Consequent upon paragraph 1, Adrian Patrick Liddell (“Liddell”) and the creditors of Liddell are restored to the positions they were in before the making by Liddell, and subsequent acceptance by his creditors by special resolution on 14 August 2014 of Liddell’s composition proposal under section 73 of the Bankruptcy Act, such that Liddell, on the one hand, is and has been bankrupt on and from 2 July 2014 pursuant to the acceptance by the Official Receiver under section 55 of the Bankruptcy Act on 2 July 2014 of Liddell’s debtor’s petition presented under section 55 of that Act, and the creditors of Liddell, on the other hand, are and have been on and from 2 July 2014 creditors of the bankrupt estate of Liddell.
We would ask that you draw the contents of this email to Her Honour’s attention.
Mr Agardy has informed me that he agrees with the above.
Yours sincerely,
Jonathan Evans”
By email of 15 May 2015, Mr Argy, Counsel for the Applicant, confirmed his agreement with the contents of the email referred to in the preceding paragraph.
Legislation
The proceedings are an application to set aside a composition proposed by the Second Respondent, and accepted by those of his creditors present at the Meeting of Creditors on 14 August 2014, under s.73 of the Act. The application is brought under s.222 of the Act. That section provides that a court may set aside a personal insolvency agreement under Part X of the Act. Pursuant to s.76B of the Act, s.222 applies with such modifications (if any) as are prescribed by the Regulations, in relation to a composition or scheme of arrangement. A composition can be set aside on the application of a creditor. The Applicant here is such a creditor. The Applicant bears the onus of proof in establishing facts, on the balance of probabilities, to satisfy the Court that its discretion to set aside the Second Respondent’s composition is enlivened.[2]
[2] See Re Emmett [1991] FCA 632 at [24] per O’Loughlin J.
Section 73(1) of the Act is relevantly as follows:-
“(1) Where a bankrupt desires to make a proposal to his or her creditors for:
(a) a composition in satisfaction of his or her debts; or
(b) a scheme of arrangement of his or her affairs;
he or she may lodge with the trustee a proposal in writing signed by him or her setting out the terms of the proposed composition or scheme of arrangement and particulars of any sureties or securities forming part of the proposal.”
Section 5(1) of the Act is relevantly as follows:-
““special resolution” means a resolution passed by a majority in number and at least three-fourths in value of the creditors present personally, by telephone, by attorney or by proxy at a meeting of creditors and voting on the resolution.”
Section 222 of the Act is relevantly as follows:-
“(1) If a personal insolvency agreement is in force, the Court may, on application by:
(a) the Inspector-General; or
(b) the trustee; or
(c) a creditor;
make an order setting the agreement aside if the Court is satisfied that:
(d) the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally; or
(e) for any other reason, the agreement ought to be set aside.
Setting aside on grounds of non-compliance with this Part etc.
(2) If a personal insolvency agreement is in force, the Court may, on application by:
(a) the Inspector-General; or
(b) the trustee; or
(c) a creditor; or
(d) the debtor;
make an order setting the agreement aside if the Court is satisfied that:
(e) the agreement was not entered into in accordance with this Part; or
(f) the agreement does not comply with the requirements of this Part.
…
Ancillary orders
(8) If the Court makes an order under subsection (1), (2) or (5), the Court may make such other orders as the Court thinks fit.
…”
In the decision of the Full Court of the Federal Court in Hingston v Westpac Banking Corporation (2012) 200 FCR 493 (‘Hingston’), Greenwood, McKerracher and Nicholas JJ upheld the decision of the primary judge setting aside a composition accepted by creditors under s.74(5) of the Act. The Westpac Bank had failed through inadvertence to attend the Meeting of Creditors.
The Full Court in Hingston set out the guiding principles in the Court’s exercise of discretion in an application of this type at paragraphs 90 to 93. These were, in summary, and as set out by the Applicant in its submissions, and accepted by the Second Respondent in his submissions, as follows:-
a)there is a need to inform creditors of relevant matters and then allow them to make up their own minds as to what they wish to do;
b)a composition might be set aside where its terms are unreasonable;
c)the court should review the relevant procedures from the perspective of all creditors;
d)a calculus of factors must be taken into account. The matters to be taken into account include those that follow;
i)is substantial further investigation required of a particular transaction or the affairs of the debtor more generally?
ii)did some particular creditors dominate the vote where there may be questions about their relationship with the debtor?
iii)is the composition proposal properly regarded as trivial, resulting in a negligible distribution to unsecured creditors? and
iv)what is the relativity between a distribution under a bankruptcy and a distribution under the composition?
The Full Court in Hingston also observed, at paragraph 92, that the vote of the creditors is not paramount in an absolute sense. In other words, it is not simply a matter of arithmetic. The court has an overriding discretion to set aside a composition.
History
In this proceeding, the parties were content to rely upon the evidence as contained in their respective affidavit material. In summary and as set out in the Submissions of the Applicant and the first Affidavit of Ellen Moore affirmed on 15 December 2014 and as not disputed by the Second Respondent, the relevant factual background is as follows:-
a)the Applicant lent over $8,000,000 to Areaworks Pty Ltd (‘the company’) in respect of a property development in Moffat Street South Yarra, Victoria. The property was owned by the Second Respondent and the development site and construction work on the property was owned by the company;
b)the Second Respondent guaranteed the obligations of the company to the Applicant;
c)the Applicant appointed receivers and the six units in the property being developed (units) were sold in 2013;
d)the proceeds of sale were sufficient to cover the debt but not the interest and costs, and there remains a shortfall of in excess of $700,000;
e)the Applicant had commenced recovery proceedings in the Supreme Court of Victoria on 25 July 2013, which the Second Respondent was defending. The Second Respondent had filed a Defence on 17 December 2013 and subsequently, after obtaining legal representation, a second Defence on 7 April 2014. There has been no judgment obtained;
f)the Second Respondent became bankrupt on 2 July 2014 on his own petition. His solicitor advised the Applicant’s solicitor acting in the Supreme Court proceedings, and these proceedings throughout, of that fact by email of 3 July 2014. The First Respondent, Mr Shilton, was appointed trustee;
g)the Second Respondent disclosed claims by creditors totalling $3,903,078. The Second Respondent disclosed admitted debts totalling $3,303,078. The difference between these figures is $600,000, being the amount noted as “ANZ Bank …(disputed)”;
h)the Second Respondent disclosed minimal assets, totalling less than $10,000;
i)according to the minutes of a Meeting of Creditors held on 14 August 2014, the creditors present and voting unanimously resolved by special resolution to accept a proposal for the composition, involving $50,000 to be paid by the family of the Second Respondent;
j)seven creditors totalling $1,808,990 voted in favour of the composition, which was expected to yield a dividend of about 1 cent in the dollar;
k)the proposal for the composition had been recommended by the First Respondent on the basis that in a bankruptcy there would be no dividend;
l)the Applicant did not attend the Meeting of Creditors because it did not receive notice of the meeting (this is not conceded by the First Respondent);
m)despite communications between the First Respondent and the solicitors for the Applicant before the Meeting of Creditors, the First Respondent did not provide to those solicitors notice of the meeting;
n)if the Applicant had received notice of the Meeting of Creditors it would have attended, and it would have voted against the composition; and
o)the minutes of the Meeting of Creditors reveal, amongst other things, that the Second Respondent had failed to disclose a number of properties which he had owned within five years before his bankruptcy, and that he was living rent free in property rented by Kerry Wood, who was one of the creditors who voted at the meeting.
Notice
The First Respondent is a registered trustee and was appointed the trustee in bankruptcy of the Second Respondent on 3 July 2014. In annexure “GS2” to the Affidavit of the First Respondent sworn on 27 February 2015, the First Respondent provided postage details for the Applicant, being Level 14, 100 Queen Street Melbourne Victoria 3000 (‘Queen Street Address’) and being the address to which the Notice of Creditors’ Meeting to Consider a Bankrupt’s Proposal for a Composition of 14 August 2014 was forwarded. That address, the First Respondent deposed, was obtained by Ms Norman of his office, through a Google search.
The Queen Street Address is an office of the Applicant and was the Applicant’s registered office from 17 April 2008 to 21 March 2010. However, it is not presently the Applicant’s registered office or proper address for service. Since 22 March 2010, the Applicant’s registered office has been ANZ Centre Melbourne, Level 9, 833 Collins Street, Docklands VIC 3008. 833 Collins Street, Docklands VIC 3008 is also the Applicant’s proper address for service as advertised on its website.
The Applicant was made aware of the Second Respondent’s bankruptcy of 2 July 2014 by email forwarded by his solicitor on 3 July 2014. The Applicant and Second Respondent concur that as at the date of bankruptcy (2 July 2014) the debt owed by the Second Respondent to the Applicant was $749,078.38.
As deposed to in the affidavits of Ms Ellen Moore affirmed on 15 December 2014 and Ms Cullin affirmed on 17 December 2014, the following then occurred:-
a)on or about 7 July 2014, Ms Cullin, solicitor for the Applicant, left a telephone message for the First Respondent to call her regarding the Second Respondent’s estate;
b)on or about 9 July 2014, Ms Cullin spoke with the First Respondent on the telephone regarding relevantly the Second Respondent’s estate. The First Respondent told her, among other things:-
i)the Second Respondent reported the Applicant’s debt as $600,000; and
ii)he did not expect any dividends to be paid;
c)on 23 July 2014, the solicitors for the Applicant wrote to the First Respondent enclosing a copy of the Supreme Court of Victoria Writ, Statement of Claim dated 25 July 2013 and Discovery Notice and requesting the First Respondent confirm by 1 August 2014:-
i)whether his investigations had uncovered any assets for realisation;
ii)what further investigations he planned to undertake;
iii)whether he excepted any dividends to paid;
iv)if so, when such dividends were expected to be paid; and
v)whether he consented to the Applicant striking out the Defence filed on 7 April 2014 and entering judgment against the Second Respondent;
d)on 30 July 2014, the solicitors for the Applicant received a letter from the First Respondent dated 23 July 2014. In the letter the First Respondent said, among other things:-
i)the only asset disclosed in the Second Respondent’s statement of affairs was funds of $7,000 and he had not discovered any additional assets;
ii)enquiries were continuing but no matters had arisen to suggest other assets might be available;
iii)he did not expect a dividend;
iv)the Second Respondent was proposing a composition under s.73 of the Act and, if accepted, he expected a dividend in the order of 1 cent in the dollar;
v)if the composition was accepted he expected the dividend would be paid shortly thereafter subject to lodgement of tax returns;
vi)the statement of affairs discloses the Applicant as a creditor with a claim of $600,000 but recorded the liability as nil; and
vii)he anticipated a full report to creditors (‘the Report’) in approximately one week;
e)on 19 August 2014, the solicitors for the Applicant wrote to the First Respondent and, among other things, confirmed receipt of the First Respondent’s letter dated 23 July 2014 but noted it did not answer the solicitors of the Applicant’s questions regarding the proceeding and requested the Respondent answer these questions by 21 August 2014. The letter also stated that the solicitors of the Applicant looked forward to receipt of the Report;
f)on 20 August 2014, the solicitors for the Applicant received a letter from the First Respondent incorrectly dated 23 July 2014 which should have been dated 19 August 2014. It referred to a facsimile “of today’s date”. Among other things the First Respondent confirmed:-
i)a Meeting of Creditors was held on 14 August 2014 and the composition proposed by the Second Respondent had been unanimously passed;
ii)he would not consent to the Applicant striking out the Defence; and
iii)the Applicant’s debt should be dealt with via the proof of debt process;
g)on 20 August 2014, Ms Cullin and Mr Ben Thrift, employees of the solicitors of the Applicant, telephoned the First Respondent. During that conversation, Mr Thrift told the First Respondent this was the first the solicitors of the Applicant had heard of the Meeting of Creditors and asked why the First Respondent had not notified the solicitors of the Applicant of the meeting or provided a copy of the Report, given the First Respondent knew HWL Ebsworth Lawyers was acting for the Applicant in the matter. The First Respondent said he had instead notified the Applicant directly and provided it with a copy of the Report. The address to which the trustee had sent the Notice of the Meeting of Creditors of 14 August 2014 was “ANZ Bank, Level 14, 100 Queen Street, Melbourne Vic 3000”. This was an incorrect address; and
h)on 29 October 2014, the solicitors for the Applicant wrote to the First Respondent enclosing the completed Proof of Debt Form, together with a copy of the Letter of Offer dated 31 July 2012 wherein the Applicant agreed to provide, and provided, a Progress Draw Facility numbered 8361 71336 with a facility limit of $8,270,000 to the company, and the Guarantee and Indemnity dated 25 June 2012 granted to the Second Respondent, limited to $8,320,000 plus all amounts not in the nature of principle including interest, fees, costs, charges, expenses and amounts payable by way of indemnity. Among other things, in the letter the solicitors for the Applicant informed the First Respondent:-
i)they did not believe the Applicant had been properly notified of the Meeting of Creditors;
ii)the composition is de minimus;
iii)some of the voting creditors may have connections with the Second Respondent which were not properly disclosed;
iv)the Applicant intended to apply to set aside the composition under s.222 of the Act; and
v)it would be improper for the First Respondent to pay any dividends under the composition until the application is determined.
The Applicant was a creditor of the Second Respondent. It should have received notice of the Meeting of Creditors as set out in s.64A of the Act. It is conceded by the Second Respondent that the Applicant was not notified due to error on the part of the First Respondent. The First Respondent does not admit this critical fact, but the Court finds on the balance of probabilities that the Applicant was not given notice of the Meeting of Creditors. Despite having solicitors acting on its behalf, with whom the trustee had dealt, as described in the preceding paragraphs, the trustee failed to properly notify the Applicant of the Meeting of Creditors. He made no proper attempt to ascertain the correct address of the Applicant for the giving of notice, nor did he make any enquiries of the Applicant’s solicitors, including seeking to notify the Applicant through his solicitors and by any means as set out in s.64A(1)(b) of the Act, given the trustee was aware of one or more of their details as described in s.64A(1)(b) of the Act. Had the Applicant received Notice of the Meeting of Creditors it would have attended that meeting and voted against the resolution for a composition. The Second Respondent accepts this. The Applicant argues this was fatal to the Meeting of Creditors. The Second Respondent does not agree. He argues that the critical issue is in what amount should the Applicant have been admitted as a creditor, at the Meeting of Creditors on 14 August 2014.
Being satisfied that the Applicant did not receive notice of the Meeting of Creditors, and as acknowledged by the Second Respondent, the question, is that fatal to the Meeting of Creditors and composition arising out of the Meeting of Creditors such that the composition should be set aside, requires determination. The Court was referred to the decision of McInnis FM in Marshall & Anor v Clarke & Ors [2003] FMCA 473 at paragraph 78 wherein His Honour found that a lack of notice was fatal to the meeting and composition. In my view, it must be. It is a clear breach of the provisions of the Act. Further, it denied the Applicant an opportunity to attended the Meeting of Creditors and to inform other creditors of relevant matters, and itself be so informed, in particular, as to whether and what further investigations were required. The Applicant was also denied an opportunity to explore particular creditor’s relationships with the debtor and to challenge proofs of debt proposed for voting purposes. On this basis alone, the composition must be set aside. That is an end to this application.
However, if I am wrong about my approach to the matter, I turn now to the Court’s findings as to value. For the reasons which follow, I find the Applicant did have the necessary value to outvote the other creditors and was denied that opportunity. On this basis also, the composition must be set aside.
According to the minutes of the Meeting of Creditors, seven creditors voted in favour of the composition and no creditor voted against it. The proofs of debt allowed by the First Respondent for voting purposes totalled $1,808,990. The Applicant subsequently lodged a proof of debt for $767,746.57. That sum, it is agreed, should be $749,078.38. If the Applicant had attended the Meeting of Creditors and voted for the full amount of its debt, the total creditors would have been $2,558,068.38. As the Applicant would have voted against the composition, the resolution for the composition would not have been passed, the combined voting rights of 25 per cent of $2,558,068.38, being $639,517.10.
The Applicant would not have voted in favour of the composition because the composition is de minimus (creditors will receive 0.9 to 1 cent in the dollar) and because it believed further investigation into the Second Respondent’s estate was warranted, the composition being passed only six weeks after the Second Respondent became bankrupt by his own petition.
The Second Respondent submitted however, that the correct approach for the Court in respect of this part of the application was to consider and determine:-
a)the amount which the First Respondent should have considered the Applicant to have established as its provable debt, as at the date of the Meeting of Creditors; and
b)any amount which should have been allowed as a set off against that claim, pursuant to s.86 of the Act.
That argument ignored that the vote of the creditors was relevant but not paramount.
The Second Respondent’s affidavit evidence goes toward the issue of the application of the goods and services tax margin scheme to the sale of the properties by the Applicant as mortgagee in possession. The Second Respondent argued the Applicant owed duties owed by a mortgagee to a mortgagor in respect of the exercise of the power of sale, and that the Applicant should have applied the margin scheme in selling the properties as mortgagee. Had it done so, it was argued, it would have obtained a reduction in the amount of goods and services tax which it would have been required to remit to the Australian Taxation Office of $287,727.18. Thus, the Second Respondent argues he has a claim against the Applicant for breach of its duty to him in that amount. The Second Respondent bears the onus of proof in this regard, both as to the set-off claim and the goods and services tax margin scheme argument. In respect of the breach of duty argument there is no evidence to establish the Applicant was fraudulent, reckless and/or wilful in its dealings with the properties of the Second Respondent. The Second Respondent further argues that sum of $287,727.18 should be “set off” against the provable debt of the Applicant, resulting in the Applicant having less than 25 per cent in value had it attend the Meeting of Creditors. The Second Respondent argued that the Applicant’s provable debt of $749,078.38 should be reduced by the sum of $287,727.18, leaving a provable debt of $461,351.20. In that value, the special resolution would have been carried by the remaining creditors who would have the majority in numbers and 75 per cent in value. This argument was made on the basis that the failure to provide notice of itself, was not fatal. The “set off” claim, as now proposed, was not argued by the Second Respondent in his amended Defence in the Supreme Court of Victoria proceedings in 2014. The unit properties at that time had all been sold. This is therefore a matter of recent concern to the Second Respondent and argued in the context of these proceedings.
It is not disputed that the supplies under the contracts of sale were taxable supplies and that goods and services tax was payable by the Applicant to the Australian Taxation Office in connection with the supplies pursuant to the legislation, being A New Tax System (Goods and Services Tax) Act 1999 (‘GST Law’). What is disputed is whether the Applicant should have paid goods and services tax on the supplies at the usual rate (which it did) or pursuant to the margin scheme.
Several conditions must be satisfied before a vendor is entitled to apply the margin scheme. One of the threshold conditions is that the vendor and the purchaser must have agreed in writing that the margin scheme is to apply (s.75-5(1) of the GST Law).
The contracts of sale of the units do not contain any agreement in writing that the margin scheme applied to the supply of the units. The threshold conditions for applying the margin scheme were not satisfied. Further, there is no evidence that the Australian Taxation Office has made any private binding ruling in relation to the application of the margin scheme to the Acquisition Contracts or to the Contracts. In the absence of a private binding ruling from the Australian Taxation Office, and without having all the necessary information to verify the goods and services tax position, the Court accepts the evidence that the Applicant was exposed to significant risk of underpayment of goods and services tax if it had attempted to apply the margin scheme to the Contracts. The Applicant was also not obliged to apply the margin scheme and required agreement from the purchasers to do so under the GST Law. Therefore, the Applicant paid goods and services tax to the Australian Taxation Office at the usual rate. The Court is not satisfied that it incorrectly did so on the evidence as put before it by the Second Respondent.
Ground 2
I consider this second ground for completeness sake.
The implementation of the composition as proposed by the trustee is through a proof of debt procedure. The dividend to be declared to be distributed to each creditor was anticipated by the trustee to be .09 to 1 cent in the dollar. This included the trustee’s fees which were to be paid in the sum of $16,500 approximately out of the $50,000 to be paid to the Second Respondent in satisfaction of the outstanding debts of his estate. Counsel for the Applicant submitted that the dividend that unsecured creditors can expect to receive under the composition is trivial. Given the total debt amount as described in paragraph 15(g) of these Reasons, the amount proposed to be distributed is indeed token, and less than might be realised should the bankrupt estate continue to be administered in bankruptcy. Further investigations by the trustee in bankruptcy need to be conducted in the general interests of the creditors. This has not been able to occur in the absence of the Applicant’s participation which would have better informed the Meeting of Creditors. The payment proposed to discharge the Second Respondent’s obligations created by the composition is a sufficient cost to the creditors, it being a token dividend, but of course of great benefit to the Second Respondent.
In New Age Constructions (NSW) Pty Ltd v Etlis [2013] FCA 884, Yates J stated that:-
“[57] A more recent example of this approach to the question of reasonableness is seen in Osborne v Gangemi (2011) 9 ABC(NS) 257 in which Bromberg J said (at [47]):
The authorities … demonstrate that a composition is likely to be set aside where the amount available for distribution is trivial or negligible when compared to the debtor’s total debts. That will be particularly so where the debtor’s affairs call for further investigation and insufficient information was available to creditors for them to have made an informed decision that a more advantageous outcome may not be achieved through the bankruptcy of the debtor. The closeness of the vote of creditors will be relevant and particularly so where the result may have been influenced by creditors who were not at arm’s length from the debtor or whose interests coincide with the debtor’s interest in avoiding bankruptcy, rather than the interests of creditors generally. The extent to which a composition has already been implemented, is a countervailing factor.”
The above sets out matters to be explored. There is insufficient information available to creditors where the Applicant is not notified of the Meeting of Creditors and thereby unable to participate. The Applicant was unable to determine, or participate in a determination as to what was in the interests of the creditors generally, in particular where there is a trivial amount available for distribution. Matters to be canvassed in the presence of all creditors, including the Applicant, included a consideration of the nature of the relationship between the debtor and those creditors who voted in favor of the composition. Whilst the Applicant was not given the opportunity to attend the Meeting of Creditors, the monies owing to it were of not inconsiderable value. All these matters impact upon this Court’s assessment of what is in the interest of creditors generally in the composition.
Whilst the wishes of the creditors in exercising their vote at the Meeting of Creditor’s are taken into account by the Court, in a meeting where the Minutes appear to document a properly run meeting, it is highly relevant that the Applicant was not at the meeting. How, in those circumstances, could all the creditors be informed of all the relevant matters so as to enable them to make a properly informed decision?
As a matter of discretionary judgment, the Court finds the terms of the composition are unreasonable and not calculated to benefit creditors generally.
In the circumstance of this case, the Court finds compelling reasons to exercise its discretion to set aside the composition. Costs shall follow the event.
I certify that the preceding thirty-six (36) paragraphs are a true copy of the reasons for judgment of Judge Hartnett
Associate:
Date: 1 July 2015
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