Basedow v Duncan
[2015] FCCA 230
•6 February 2015
FEDERAL CIRCUIT COURT OF AUSTRALIA
| BASEDOW & ANOR v DUNCAN & ORS | [2015] FCCA 230 |
| Catchwords: BANKRUPTCY – Application to have personal insolvency agreement set aside – application made by liquidators company of which debtors were directors – debtors’ trustee pursuant to personal insolvency agreement has rejected proof of debt proffered by liquidators – trustee opposes application and seeks its dismissal on the basis of prejudice to other creditors of debtors concerned – matters to be considered. |
| Legislation: Bankruptcy Act 1966, ss.30; 102; 102A; 104, 188A, 222; Corporations Act 2001, ss.439A; 588G(2); 588M; |
| Re McLean; Ex parte Friends Provident Life (1992) 108 ALR 360 Vale v Sutherland (2009) 237 CLR 638 Jackamarra v Krakouer (1998) 195 CLR 516 Re Estate of Knight; Rocom International Pty Ltd v Prentice [2002] FCA 604 Moran v Robertson [2012] FCA 371 |
| Applicant: | MICHAEL OSCAR BASEDOW & LEIGH DEVERON PRIOR IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF EX ASSA PTY LTD (IN LIQUIDATION) |
| First Respondent: | STEPHEN JAMES DUNCAN |
| Second Respondents: | JAMES ANDREW CUNNINGHAM & JACQUELINE CUNNINGHAM |
| File Number: | ADG 364 of 2014 |
| Judgment of: | Judge Brown |
| Hearing date: | 19 November 2014 |
| Date of Last Submission: | 19 November 2014 |
| Delivered at: | Adelaide |
| Delivered on: | 6 February 2015 |
REPRESENTATION
| Counsel for the Applicant: | Ms G Walker |
| Solicitors for the Applicant: | Hunt & Hunt |
| Counsel for the First Respondent: | Mr S Williams |
| Solicitors for the First Respondent: | Norman Waterhouse |
| Counsel for the Second Respondents: | Mr B Doyle |
| Solicitors for the Second Respondents: | Cowell Clarke |
ORDERS
The application to dismiss the proceeding brought by the first respondent and supported by the second respondents is dismissed.
The respondents pay the applicant’s cost of the short hearing of 19 November 2014 it being noted that the question of whether those costs should be costs in the bankruptcy or be paid by the Trustee is reserved.
Further consideration of the matter is listed for directions on 23 February 2015 at 9:30am to fix for final hearing the substantive application as to whether the PIA in question should be set aside and to make any consequential directions for hearing.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT ADELAIDE |
ADG 364 of 2014
| MICHAEL OSCAR BASEDOW & LEIGH DEVERON PRIOR IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF EX ASSA PTY LTD (IN LIQUIDATION) |
Applicant
And
| STEPHEN JAMES DUNCAN |
First Respondent
| JAMES ANDREW CUNNINGHAM & JACQUELINE CUNNINGHAM |
Second Respondents
REASONS FOR JUDGMENT
Introduction
Leigh Deveron Prior and Michael Oscar Basedow are the liquidators of Ex Assa Pty Ltd “the company”. They are the applicants in these proceedings, which were commenced on 23 September 2014. They are chartered accountants at Pitcher Partners.
Initially, Mr Prior and Mr Basedow were appointed joint administrators of the company, by its directors, on 3 December 2013. Subsequently, on 22 March 2013, they were appointed the company’s liquidators.
At the time of Mr Prior and Mr Basedow’s appointment, the directors of the company were Paul Geoffrey Ruchs and the second respondents, James Andrew Cunningham and Jacqueline Cunningham “the Cunninghams”.
Mr Prior and Mr Basedow “the Liquidators” have applied to the court to set aside a personal insolvency agreement “the PIA” entered into between the Cunninghams and the first respondent, Stephen James Duncan. Mr Duncan is the trustee of the PIA and a chartered accountant at KordaMentha. The time limit prescribed by the relevant legislation is twenty-one days.
It is the position of both the Cunninghams and Mr Duncan “the Trustee” that the court should dismiss the Liquidators’ application on the basis that it is not in the interests of the creditors of the Cunninghams for such an order to be made.
The court’s authority, in respect of the PIA, is created by section 222 of the Bankruptcy Act 1966 (Cth) “the Act”. Pursuant to the section the court has a discretion to set aside personal insolvency agreements. However, pursuant to section 222(6), the court must not make such an order unless it is satisfied that it would be in the interests of the creditors to do so.
The Trustee and the Cunninghams rely on this section, in conjunction with the general powers of the court, in bankruptcy matters, as delineated in section 30 of the Act, to found their application to dismiss the Liquidators’ application.
The Liquidators oppose this application and wish the court to hear their application to set aside the PIA in question. The basis of their application turns on a decision, purportedly made by the Trustee on 2 September 2014 (or 26 August 2014, if other evidence is preferred), to reject a proof of debt lodged by the Liquidators on 21 August 2014.
The amount claimed in the proof of debt is the significant sum of $2,045,000.00.[1] The claim of debt is founded on sections 588G (2) & 588M of the Corporations Act 2001.
[1] See Annexure LDP 7 to the affidavit of Leigh Deveron Prior filed 23 September 2014
In general terms, pursuant to the former provision, the directors of a company are prohibited from allowing a company, of which they are directors, to incur debts, at any time during which they had reasonable grounds for suspecting that the company concerned was insolvent.
The latter provision authorises the liquidator of the company concerned to recover the amount of debt incurred, whilst the company was trading whilst insolvent, personally from the directors who allowed the debt in question to be incurred.
Essentially, in the present case, the Liquidators asserts that the Cunninghams, whilst directors of Ex Assa Pty Ltd, allowed that company to incur debts in excess of $2,000,000.00, whilst the company was insolvent. The company has now been placed into liquidation as a consequence of the non-payment of those debts.
In these circumstances, the Liquidators assert that the Cunninghams are personally liable for this debt, pursuant to the provisions of section 588M of the Corporations Act and wish to pursue them personally for the sum in question.
Broadly concurrently with the actions of the Liquidators, the Cunninghams themselves have sought the protection of a personal insolvency agreement, pursuant to which they have reached an accommodation with their various creditors.
The Cunninghams entered into the PIA on or around 14 July 2014, which was the date on which a meeting of the creditors of the Cunninghams was held. At this meeting, a report of the Trustee was presented, which disclosed that the Cunninghams had various unsecured creditors owed the sum of $739,294.57.[2]
[2] Ibid at Annexure LDP 6
The Trustee indicated, in this report, that he had been authorised to take control of the Cunninghams’ property and convene a meeting of their creditors pursuant to the provisions of section 188A of the Bankruptcy Act on 6 June 2014.
The Trustee further reported that the Cunninghams’ major creditors were the Australian Taxation Office ($18,204.00); Incitec Pivot Ltd ($107,254.40); the Trustee of the Deceased Estate of Lomond Luhurs ($70,000.00); and Superfert SA Donghu Pty Ltd ($542,542.97).
The final sum was said to relate to a personal guarantee, offered by the Cunninghams, for debts incurred by Agri Services Pty Ltd, which is the corporate predecessor of Ex Assa Pty Ltd. It was further asserted that the Cunninghams had apparently received advice that the claim was legally unenforceable and had therefore denied liability for it. A view impliedly shared by the Trustee.
The Cunninghams own a mixed farming property near Tintinara in South Australia. They moved into the distribution of fertiliser and other rural merchandise, through a business entitled J & J Cunningham Pty Ltd, of which they were both directors, in the mid 1990’s. This company became Agri Service SA Pty Ltd.
In December of 2012, the directors of Agri Services SA Pty Ltd appointed voluntary administrators of the company. In March of 2013, the creditors of the company voted for Agri Services SA Pty Ltd to be wound up. Subsequently the company changed its name to Ex Assa Pty Ltd. Again, as previously indicated, Messrs. Basedow and Prior were both the administrators and subsequently the liquidators of the company.
Mr Duncan has identified property and financial resources owned or controlled by the Cunninghams. These included a farming property and realty, crops, livestock and various motor vehicles. Significantly the Trustee also identified that the Cunninghams had accumulated superannuation of a value of approximately $500,000.00.
Under the PIA, the Cunninghams proposed utilising $165,000.00 of this superannuation to pay their personal creditors. The Trustee recommended to the creditors concerned that this proposal be accepted in preference to the Cunninghams becoming bankrupt.
The rationale of the recommendation essentially being that the Cunninghams’ superannuation entitlements would not be available to creditors, if they became bankrupt and that therefore the creditors would recoup a greater proportion of the monies owing to them through the agency of the PIA rather than through the bankruptcy of the Cunninghams.
As previously indicated, on 14 July 2014, the creditors, who attended the meeting convened by the Trustee, elected to accept Mr Duncan’s recommendation and, as a consequence, the PIA was accepted.[3] The major creditors, who voted in favour of the PIA were Incitec Pivot Ltd ($107,264.40); and the Estate of Lomond Luhrs ($100,000.00).
[3] Ibid at Annexure LDP 5
The Liquidators had also prepared a report of their investigation into the finances of the company, for its various creditors, in January 2013. The report was presented to a meeting of creditors on 17 January 2013. This meeting was adjourned until 22 March 2013, on which occasion the meeting resolved to wind up Ex Assa Pty Ltd.
The Liquidators reported that the company had unsecured creditors in an amount of approximately $2.3m at the date of their report. In this context, it was noted that the company’s liabilities had exceeded its assets in every financial year since 2008. As such, it was found that the company had had a current ratio or liquidity ratio of less than 1.0 in every financial year from 2008 onwards.
In addition, it was found that, from July of 2012, its creditor position had worsened, so that from having no creditors over ninety days, by November of 2012, 61% of its creditors were ninety days over-due. This led the Liquidators to the conclusion that the company had been trading, whilst insolvent, from at least August of 2012 onwards.
In a more recent affidavit, filed on behalf of the Liquidators on 7 November 2014,[4] Mr Prior deposed that, as at October 2012, the company’s credit had been stopped by a number of its suppliers, who were collectively owed the sum of around $742,000.00.
[4] See affidavit of Leigh Deveron Prior filed on 7 November 2014 at paragraph 6
It is further Mr Prior’s submission that the company had a working capital shortfall of in excess of $800,000.00, as at October of 2012; had a debt ratio of 1.4; and its trade creditors, outstanding in excess of sixty days, amounted to $1.4m. The company’s accounts indicate that its cheque account stood at $6,590.00 as at the end of October 2012. The Liquidators rely on this situation to support its claim of insolvent trading by the company.
The actions of the Liquidators
One of the responsibilities of an administrator is to convene a meeting of the creditors of the company concerned and report to those creditors the financial circumstances of the company [see Corporations Act at section 439A]. The Liquidators prepared a report, in respect of the affairs of Ex Assa Pty Ltd, in January of 2013. In this report the possibility of the company having traded, whilst insolvent, was specifically raised.
On 13 June 2014, Mr Prior deposes that Mr Gyss, a chartered accountant and director of KordaMenta telephoned him to advise that Mr Duncan had been appointed to be the Cunninghams’ trustee. At the same time, Mr Prior was given to understand that the Trustee had received a copy of the section 439A report and was aware of the claim of insolvent trading made by the Liquidators.
Mr Gyss has subsequently deposed that he has assisted the Trustee in the discharge of his statutory responsibilities in respect of the Cunninghams’ estate. It is Mr Prior’s position that, on 24 June 2014, in a further telephone call, Mr Gyss expressed to him his concern that the mooted PIA would fall over if the Liquidators pressed the insolvent trading claim.
As previously indicated, the formal meeting of creditors, at which the PIA was approved, was convened on 14 July 2014. It is clear from the minutes kept of that meeting that the Liquidators did not attend. It is the implication of Mr Prior’s affidavit material that he was not informed of the meeting nor provided with a copy of the Trustee’s report, which was formally tabled at the meeting and which had been completed on 4 July 2014 some few days prior to the meeting.
On 14 July 2014, at around 9.15 am, Mr Prior emailed Mr Gyss to enquire what was happening in respect of the Trustee’s report to creditors. It is Mr Prior’s evidence that he received no response to his electronic correspondence on the day on which it was sent, which was the day of the actual creditors’ meeting.
Mr Prior deposes that he enquired again of Mr Gyss, regarding the progress of the matter, on 28 July 2014. The following day he was informed that the meeting had, in fact, been held. The following day again, Mr Prior received a further email from Ms Little of KordaMenta, which included the minutes of the creditors’ meeting held on 14 July 2014 and the report of the Trustee dated 4 July 2014.
Thereafter, on 21 August 2014, the Liquidators lodged a proof of debt, in respect of the claim arising from insolvent trading, with the Trustee. An accounting analysis of the company’s situation was annexed to the proof of debt, which included information relating to its cash flow; working capital; and its position vis-à-vis its various creditors.
The Trustee ostensibly responded to the proof of debt on 2 September 2014.[5] In a Notice of Rejection of Formal Proof of Debt or Claim, bearing this date, the Trustee determined to disallow the debt on the basis that the claim the company had been trading whilst insolvent had not been proven.
[5] See Annexure LDP 8 to the affidavit of Leigh Deveron Prior filed 23 September 2014
The statutory duty placed upon the Trustee to consider any proof of debt provided to him and then consider any further information provided to him arises as a consequence of the provisions of section 102 of the Act, which reads as follows:
(1) The trustee shall examine each proof of debt and the grounds of the debt sought to be proved and, subject to the power of the Court to extend the time, shall, not later than 14 days after the expiration of the period specified in the notice of intention to declare a dividend as the period within which creditors may lodge their proofs of debt, either:
(a) admit the proof of debt in whole;
(b) admit it in part and reject it in part;
(c) reject it in whole; or
(d) require further evidence in support of it.
(2) Where the trustee rejects a proof of debt in whole or in part, he or she shall inform the creditor by whom it was lodged, in writing, of the grounds of the rejection.
In reaching the decision which he did, the Trustee placed reliance on legal advice provided by the Cunninghams’ solicitors. The thrust of this advice was that the Cunninghams denied having any knowledge of the management of the company because they had, at relevant times, relied on information provided to them by Mr Ruchs, the company’s general manager. As such, it was asserted that Mr Ruchs had incurred the various debts in question. The Cunninghams raised other criticisms of the conduct of Mr Ruchs.
There is some controversy about precisely when the decision to disallow the proof of debt was made. Mr Gyss has deposed that the decision was made on 26 August 2014, when he met with a colleague, Ms Little, to discuss the proof and later instructed her to prepare the necessary documentation to reject it.
This assertion is supported by a brief file note.[6] This issue has some relevance regarding the calculation of time limits applicable to the period in which any decision to challenge such a rejection is to be made to a court of appropriate jurisdiction.[7] The relevant time is 21 days.
[6] See Annexure NDG 1 to the affidavit of Nicholas Gyss filed 27 October 2014
[7] See Bankruptcy Act at section 104 (3)
At any rate, regardless of precisely when the decision was actually made, there is no dispute that the decision was conveyed to the Liquidators on 2 September 2014. Thereafter, on 10 September 2014, the Liquidators instructed their solicitors to write to the Trustee to provide particulars of his decision and give consideration to the revocation of it. Detailed submissions were provided as to the Trustee’s obligations and the circumstances of the Cunninghams vis-à-vis the Company and Mr Ruchs.
The Trustee formally responded to the Liquidators on 15 September 2014 and declined to revoke his decision concerning the proof of debt. In later correspondence, Mr Gyss advised that, if the Liquidators wished to challenge the decision to reject the proof of debt, pursuant to the provisions of section 104 of the Act, they would need to do so no later than 23 September 2014.
Section 104 reads as follows:
(1) A creditor, or the bankrupt, may apply to the Court for review of a decision of the trustee under subsection 102(1), (3) or (4) in respect of a proof of debt.
(2) The Court may, upon the application, confirm, reverse or vary the decision of the trustee.
(3) Subject to the power of the Court to extend the time, an application under this section to review a decision shall not be heard by the Court unless it was made within 21 days from the date on which the decision was made.
This led to the Liquidators commencing the current proceedings on 23 September 2014, which is 21 days after the decision to reject the proof of debt was conveyed to the Liquidators but which renders the application out of time if the decision is taken to have been made on 26 August 2014.
The orders sought by the Liquidators
The Liquidators seek the following orders:
i)The PIA be set aside;
ii)A sequestration order be made against the Cunninghams individually;
iii)The decision made by the Trustee, pursuant to section 102 of the Act, in relation to the proof of debt, be set aside;
iv)Any time limit to challenge the decision to reject the proof of debt be extended;
v)Costs.
The court’s authority to set aside a PIA resides in section 222 of the Act. The Liquidators rely on section 222(1) which provides standing to a creditor to apply to the court to order the setting aside of any personal insolvency agreement on the basis that the terms of the agreement in question are unreasonable; the terms of the agreement are not calculated to benefit the creditors generally; or there is any other reason to justify the setting aside of the agreement.
Necessarily, it is implicit in the Liquidators’ application that they have the necessary standing to bring the application as they are creditors of the Cunninghams, notwithstanding that this is not a view shared by the Trustee or the Cunninghams themselves.
Section 222(5) provides an exhaustive list of criteria, pursuant to which, the court may set aside a personal insolvency agreement on the basis of false and misleading information. Presumably the Liquidators assert that the potential debt of the Cunninghams, arising from the alleged insolvent trading of the company, should have been included in any report of the Trustee to the Cunninghams’ creditors.
The orders sought by the Trustee
The Trustees have not formally responded to the Liquidators’ application other than through the filing of a notice of address for service and the making of submissions, both orally and in writing. The rationale of this approach is pragmatic in nature and directed to the avoidance of costs. It being the Trustee’s position that it will be disadvantageous for the creditors of the Cunninghams, who have elected to endorse the PIA in question, if more costs are incurred.
Accordingly, the proceedings raise two major issues:
·Firstly, should the decision to reject the proof of debt be set aside;
·Secondly, should the PIA be set aside.
All parties agree that, depending on the outcome of these interlocutory proceedings, these issues should be adjudicated together. It is also agreed that it will be necessary for the court to make findings of fact following the taking of oral evidence.
This evidence will focus primarily on the allegation of insolvent trading and will require examination of the Cunninghams assertion that they had no knowledge of the company’s financial affairs at relevant times, as they relied on information provided to them by Mr Ruchs.
From the Trustee’s perspective, this litigation will be ruinously expensive and will necessarily render nugatory the PIA in question, as the monies injected into it, from the Cunninghams’ superannuation, will be consumed in legal fees, to the detriment of the creditors, who have ratified the agreement.
It is essentially on this basis that the Trustee seeks to have the Liquidators’ application dismissed. In these circumstances, it has been agreed that the Trustees and the Cunninghams should be regarded as dux litus in the present application.
The submissions of the Trustee
The Trustee submits that the relevant decision to reject the proof of debt was made on 26 August 2014. Therefore the current proceedings, brought pursuant to section 104 of the Act, are out of time. The Trustee opposes the granting of any extension of time.
This opposition is founded on the Trustee’s view of the overall circumstances of the case, particularly so far as the situation of the various creditors of the Cunninghams, who voted to accept the PIA, are concerned. They will be severely prejudiced if the extension is granted.
As previously indicated, pursuant to the section in question, only a defined number of persons are entitled to apply to the court to set aside a personal insolvency agreement. These include the relevant trustee; debtors; and significantly any creditors. It is submitted that, as the Trustee has rejected the proof of debt in question, the Liquidators are not creditors of the Cunninghams and so their interests are immaterial.
In his written submissions, Mr Williams, counsel for the Trustee submits as follows:
“The applicants have asserted that it is in the best interests of the creditors generally to have the PIA set aside. The applicants have not provided any reasoning or basis for that assertion, when it is clear that if the applicants proceed with the application, all of the creditors of the second respondents will, in fact, be significantly prejudiced.
The application, in its face, in fact provides no material benefit to any creditors of the second respondents. The application, arguably, would only provide benefits to the creditors of the company, which benefit is, in any event questionable, given the costs of the applicants in pursuing this application and in claiming in the resultant bankruptcy of the second respondent would be costs in the liquidation.”
Mr Williams relies on Re McLean; Ex parte Friends Provident Life,[8] a case dealing with section 222. He contends that the case is authority for the proposition that an applicant to set aside a PIA must establish that they are creditors of a party to the PIA in question, to the satisfaction of the court, before they have standing to be heard on their subsequent application.
[8] Re McLean; Ex parte Friends Provident Life (1992) 108 ALR 360
As I understand his argument, he would categorise the Liquidator as having only a contingent debt, which the Trustee was entitled to reject. He contends, I think, that the Liquidators have not established their debt but only have presented an argument that they have a debt. In these circumstances, the court is not able to look behind the Trustee’s decision.
It is the underpinning of the Trustee’s case that the Liquidators have not established that they are such creditors to the requisite degree as yet. It is not an issue to be determined on the basis of whether it can be established that they have an arguable case.
I am not persuaded that a close reading of the case supports this contention placed upon it by Mr Williams. In Re McLean, the chairman of a creditors’ meeting had declined to allow an individual, who purported to be a creditor, to vote on the adoption of a scheme of arrangement. He did so because there were proceedings on foot, between the debtor and the creditor concerned in another court. Accordingly, the chairman determined that it was a contingent debt, which did not give status to vote.
The creditor in question subsequently applied to have the scheme declared void. This was the issue being determined by the court in Re McLean. Accordingly, the case was, in my view, at a more advanced status than the current one, which is analogous to an application for summary dismissal by the Trustee of the Liquidators’ substantive application to have the PIA set aside.
In Re McLean issues arose as to how the court was to approach the impugned decision of the chairman concerned not to allow the purported creditor to vote. Necessarily, this concerned examining the evidence at two stages – the evidence available at the time of the meeting, which was applicable to the right to vote issue; and the evidence available at the time of the hearing before the court, which was applicable to the validity of the scheme of arrangement itself.
Heerey J held that it was appropriate for the court to make a finding as to the existence and extent of the debt in question and not merely whether there was an arguable case. His Honour said as follows:
“The Act confers a right to vote on creditors, not persons who have an arguable case that they are creditors. It may be that complex issues of fact and law are raised, but that is a matter to be dealt with by appropriate procedural directions and cannot be determinative of the jurisdiction conferred on the court.”[9]
[9] Ibid at 369
However, it was also held that the court is to look at the evidence presented to it, at the time of the application under section 222(1), not at the time of any creditors meeting. Essentially, as I understand it, the court retains jurisdiction to determine the validity of a debt at the time of hearing, having regard to all the facts in evidence before the court and not merely to the material, which was before the chairman at the time of meeting.
Ultimately Heerey J regarded the triable issue before him as being the nature of the debt in question, not the validity of the decision to disallow the creditor to vote. In determining the former issue, necessarily the court had to make a finding as to the existence and extent of the alleged debt and not merely whether that was an arguable case.
Mr Williams also relies on section 30(1) of the Act, which confers general powers on the court in bankruptcy matters. The section reads as follows:
(1) The Court:
(a)has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court; and
(b)may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.
I accept that the section must be construed generously, but not in a manner which would bring about a result which is “differs from that prescribed elsewhere in the Act.”[10] Section 222(1) confers general jurisdiction to set aside a PIA if it is unreasonable or not calculated to benefit creditors generally.
[10] See Vale v Sutherland (2009) 237 CLR 638 at 646 [19]
Section 222(5) of the Act confers specific jurisdiction on the court to set aside a PIA on a variety of bases, including the provision of false information or the omission of relevant information.
In my view, the jurisdiction conferred on the court pursuant to section 222 does not necessarily turn on the correctness or otherwise of the Trustee’s decision to reject the proof of debt. The validity of the debt in question here obviously entails complex issues of fact and law, to utilise Heerey J’s terminology. I acknowledge that these are issues for a final hearing.
The submissions of the Cunninghams
Counsel for the Cunninghams, Mr Doyle adopts the submissions of Mr Williams. Her clients wish to minimise the costs of any proceedings concerning them and strenuously deny the allegation of insolvent trading.
The submissions of the Liquidators
It is the submission of Ms Walker, counsel for the Liquidators, that the arguments of the Trustee are significantly misconceived. Essentially, it is for the court to determine whether the Liquidators have standing as creditors of the Cunninghams, not for the Trustee to determine that they are not creditors because he, the Trustee, says they are not.
Firstly, Ms Walker contends that the relevant decision to reject the proof of debt was made on 2 September 2014. This was the date on which the decision was conveyed to the Liquidators and is the date which the rejection notice bears.[11] As such, the relevant application is in time.
[11] See Annexure LDP 8 to the affidavit of Leigh Deveron Prior filed 23 September 2014
Even if the court determines the decision was made on 26 August 2014, the only evidence of which is that Mr Gyss says it was, given the circumstances and the shortness of the period, it is appropriate that the court exercise its discretion to extend time, which is implicit in section 104(3) of the Act.
The considerations relevant to an extension of time were listed by Kirby J in Jackamarra v Krakouer[12] and summarised as follows by Tamberlin J in Re Estate of Knight; Rocom International Pty Ltd v Prentice:[13]
[12] Jackamarra v Krakouer (1998) 195 CLR 516
[13] Re Estate of Knight; Rocom International Pty Ltd v Prentice [2002] FCA 604
·the discretion to grant an extension is broad and flexible;
·whether it is just in all the circumstances to grant an extension ;
·whether the time limits are of a substantive or procedural nature;
·whether the case is arguable;
·respective prejudice to the parties;
·length of delay;
·responsibility and reasons for the delay;
·whether the delay was intentional or the result of a bona fide mistake;
·whether the delay was caused by the litigant or legal advisers.
Ms Walker submits that, in its exercise of jurisdiction under the Act, it is for the court to determine who is or is not a creditor, under the provisions of section 222. Essentially, she contends that it would be a dereliction of the court’s responsibility to administer the Act, arising under section 30, if it was bound by any earlier decision made by a Trustee in this regard.
In this regard, Ms Walker relies on comments made by Flick J in Moran v Robertson[14] where His Honour observed that it was for the court to determine whether a person is, in fact, a creditor and this task is to be done on the material available to the court, not on the basis of what was available to the Trustee.
[14] Moran v Robertson [2012] FCA 371 at [11] – [12]
Ms Walker reiterates that this is not the hearing of her clients’ substantive claim, which she wishes to be listed for final hearing. She refutes any submission that the court has to resolve issues of standing as a preliminary matter. Rather she contends that Mr William’s application is an application for disposal by summary dismissal dressed up under another guise.
The matters to be considered, by the court, in an application for summary dismissal, are set out in Rule 13.10 of the Federal Circuit Court Rules 2001. The court must be satisfied that:
·the party prosecuting the proceedings has no reasonable prospects of success; or
·the proceedings themselves are frivolous or vexatious; or
·the proceedings concerned are an abuse of process.
Ms Walker contends, correctly I consider, that the rule in question provides a high bench mark and, as such, the court must be cautious in its exercise of the power for summary dismissal. It is her submission that, given the circumstances of the company, as outlined in the affidavit material of Mr Prior, it cannot be said that the Liquidators have no reasonable prospect of having the PIA in question set aside.
Mr Prior has deposed as to his view that the company was insolvent, whilst the Cunninghams were among its directors and are therefore indebted to its subsequently appointed liquidators. His view has not been challenged by any other evidence, either emanating with the Trustee or the Cunninghams themselves.
In these circumstances, Ms Walker contends that the court is obliged to set the application down for hearing regardless of the implications of this action for other creditors of the Cunninghams, who are sanguine about the terms of the applicable PIA and will only be prejudiced by the Trustee inevitably incurring further legal costs.
Essentially, Ms Walker contends that it is irrelevant to the court’s obligations under section 30 to decide any question of law and fact arising under the Bankruptcy Act that her clients’ action may ultimately cause the PIA in question to fall over.
Conclusions
At first blush, the factual circumstances surrounding the Cunningham’s vis-à-vis their relationship with the company, Mr Ruchs and their various personal creditors is likely to be both complex and overlapping, as is the situation of their personal insolvency and the insolvency of the company of which they have been directors.
Part X of the Bankruptcy Act is the part of the Act dealing with personal insolvency agreements. In general terms a personal insolvency agreement is a deed by which an insolvent debtor authorises a trustee to call a meeting of his or her creditors for the purpose of reaching an agreement with those creditors.
Part X also contains the provisions of the Act, which empower the court to set aside personal insolvency agreement. Section 30 specifically makes reference to Part X and provides the court with full power to decide all questions, whether of law or fact…in any matter under…Part X. This includes the authority to make any order.
At this stage, I have not conducted any detailed examination of the Cunninghams’ circumstances. I have before me an application to set aside the PIA, a matter falling within Part X of the Act. Neither the Cunninghams’ trustee nor the Cunninghams themselves have formally replied to that application.
Neither Mr Williams nor Mr Doyle can point to any specific power to dismiss the application, without an exhaustive hearing on its merits, other than that it is patently not in the interests of the established creditors of the Cunninghams nor of the Cunninghams themselves for the PIA to be set aside.
The Liquidators have set out the rationale on which they believe they are to be regarded as creditors of the Cunninghams. I do not consider that their claim can be considered to not have reasonable prospects of success or to be vexatious.
On the basis of Re McLean and Moran v Robertson it is clear that the court is not bound to accept the decision of the Trustee as to who is or is not a creditor of the Cunninghams. It is a triable issue for the court to be determined not on the basis of the material available to the Trustee at the time of the decision, but on the evidence available to the court at the time of decision.
I acknowledge the terms of section 222(6) of the Act, which provides an express prohibition on the court setting aside a PIA, unless it is in the interest of the creditors to do so. The Liquidators would categorise themselves as being creditors of the Cunninghams, who have been excluded unfair and peremptorily from their proper characterisation as such.
The Trustee would categorise the Liquidators as being, on the highest aspect of their case, contingent creditors and at its lowest not creditors at all. As such, the Trustee asks the court to dismiss the application because it is clearly not in the interests of established creditors, who have the potential to receive nothing because of the inevitability that the PIA will fall over.
The problem with this submission is that it requires the court to abrogate its responsibilities under section 222 and accept, without examination, the Trustee’s assertion that the Liquidators are not creditors. On any view, there is a dispute about the status of the Liquidators, which must have implications for the probity of the PIA in question. In my view, the court cannot ignore this dispute on the grounds of expediency, so far as the interests of the creditors, whom the Trustee currently recognises, are concerned.
An air of uncertainty surrounds the exact date on which the decision was made to reject the Liquidators’ proof of debt. The notice of rejection bears the date 2 September 2014. Mr Gyss asserts that the decision was made on 26 August 2014. What is clear was that it was conveyed to the Liquidators on 2 September 2014 and they wasted no time in first seeking further particulars from the Trustee and then commencing these proceedings.
In my view, if it is necessary to grant an extension of time to bring the proceedings, given the flexibility of that discretion, it is clearly just for it to be granted.
In all these circumstances, I will fix the substantive application, as to whether the PIA in question should be set aside, for hearing on a date which is convenient to the parties. I will list the matter for directions on 23 February 2015 at 9:30am to allocate this hearing date.
In my view it is also appropriate that the respondents pay the applicant’s cost of the short hearing of 19 November 2014. However whether those costs should be costs in the bankruptcy or be paid by the Trustee is reserved.
For all these reasons, the orders of the court will be as set out at the commencement of these reasons for judgment.
I certify that the preceding one hundred (100) paragraphs are a true copy of the reasons for judgment of Judge Brown
Associate:
Date: 6 February 2015
0
7
4