Boral Johns Perry Industries Pty Ltd v Piccardi, K. & G.
[1989] FCA 346
•23 JUNE 1989
Re: BORAL JOHNS PERRY INDUSTRIES PTY LIMITED
And: KURT AND GERLINDE PICCARDI; DICK & DONS PTY LIMITED; FIRE FIGHTING
SPRINKLER CO LIMITED and GEORGE GREGORY GRIVAS
No. G40 of 1989
FED No. 346
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Wilcox(1), Burchett(1) and Hill(1) JJ.
CATCHWORDS
Bankruptcy - Appeal against order for annulment of bankruptcy - sequestration order issued upon petition of judgment creditor - Part X meeting of creditors held after sequestration order signed and sealed - finding of trial judge that debt of petitioning creditor was not real debt - existence of debt not challenged upon hearing of petition - no attempt thereafter to have judgment set aside - whether sequestration order ought not to have been made - power of Court exercising bankruptcy jurisdiction to go behind default judgment to determine whether real debt existed - whether in exercise of discretion to annul bankruptcy trial Judge's discretion miscarried - need for equal consideration to be given to interests of creditors and public in exercising discretion under s.154 - distinction between proposals for composition under Part X and under s.73 discussed.
Bankruptcy Act 1966: ss.37, 73, 74(5), 149(12), 150, 154, 188
Bankruptcy Rules: 20
HEARING
SYDNEY
#DATE 23:6:1989
Counsel and Solicitors B Skinner instructed by for Appellant Lobban McNally & Harney
Counsel and Solicitors G Masterman QC and C M for the First Respondents Harvey instructed by B M
Salmon Layton & Co as agents for Michael Gianacas Argiris & Co
ORDER
The appeal be allowed.
The orders made by Einfeld J. on 3 August 1988 be set aside and in lieu thereof it be ordered that the applications made on 18 November 1986, 5 June 1987 and 23 July 1987 be dismissed with costs.
The first respondents in the appeal pay the costs of the appellants of the appeal.
Note: Settlement and entry of orders dealt with in Order 36 of the Federal Court Rules.
JUDGE1
The appellant, Boral Johns Perry Industries Pty Limited, appeals against a decision of Einfeld J whereby his Honour annulled the bankruptcy of Kurt and Gerlinde Piccardi, the first respondents. The appellant is a creditor of each of the respondents. The second respondents, Dick & Dons Pty Limited and Fire Fighting Sprinkler Co Limited, other creditors in the bankruptcy, have apparently settled their dispute with the first respondents. Neither they nor the third respondent, George Gregory Grivas, who was the petitioning creditor, have participated in the appeal. Hereafter, we shall refer to the first respondents as "the respondents."
On 18 November 1986, the petition of the third respondent came before Neaves J for hearing. The ground expressed in that petition was the non compliance by the respondents with the requirements of a bankruptcy notice based upon a judgment obtained by the petitioning creditor. The judgment was a default judgment obtained in the New South Wales District Court. No defence was filed in that court in respect of the claim made by Mr Grivas for $26,615.57 plus interest. No notice of opposition to the petition as provided for in Rule 20 of the Bankruptcy Rules was filed or served.
At the hearing of the petition an application was made to Neaves J by the respondents for an adjournment to enable the holding of a meeting of creditors under Part X of the Bankruptcy Act 1966 ("The Act"). It seems that in Newcastle on the day of the hearing the respondents executed an authority under s.188 of the Act appointing a controlling trustee of their estate and requiring him to call a meeting of creditors. In fact no meeting was called for some considerable time thereafter. The meeting purporting to be called pursuant to the authority was not held until 25 May 1987. His Honour refused to grant the adjournment and proceeded to make the sequestration order on the petition. Thereafter, and consequentially upon the making of the sequestration order, a creditors' petition of Dick & Dons Pty Limited grounded upon failure to comply with a bankruptcy notice in respect of a judgment debt of $67,073.25 was dismissed by Neaves J.
The appellant obtained judgment against the respondents on 18 June 1986 for $23,387.25; but, at the date of the sequestration order, it had not filed a creditors' petition. After the date of the sequestration order judgments were entered against the respondents by other creditors, Linsid Pty Limited for $150,869.70 and Ries Plumbing Pty Limited in the sum of $30,875.10, presumably in ignorance of the sequestration order made by Neaves J.
Immediately after the sequestration order was pronounced the respondents made application to the court seeking rescission or suspension of the sequestration order to allow the Part X meeting of creditors to be called. Despite a request by the solicitors for the respondents to the registry that the sequestration order not be signed or sealed and an apparent undertaking by the registry to that effect, the order was in fact signed and sealed, unknown to the respondents, on 27 January, 1987.
We do not pause to consider under what authority a court officer could give an undertaking that would impede the coming into effect of an order made by a Judge of this Court. If an undertaking were given and breached, this is highly regrettable and the Court should take what steps it can, within the law, to ensure that the respondents are not thereby prejudiced. In fact, as will appear, we do not think that any relevant prejudice arises. We add that if, as was suggested, there existed at that time a practice of the registry that undertakings of such a kind would be given, and court files marked with a note that orders were not to be signed and sealed, that practice no longer applies.
On 5 March 1987 a creditors' meeting was called by the trustee who was appointed at the time the sequestration order was pronounced. By that date a statement of affairs had been prepared by the respondents, although it had not then been filed, revealing 65 unsecured creditors who were owed a total of $1,832,917.54, and assets of $10,181. The amount owed to secured creditors was said to be unknown. At the meeting the trustee put to a vote a resolution that the creditors support the respondents' rescission application. In the result, 24 creditors, with debts amounting to $1,164,109.05, supported the resolution and 9 creditors, with debts totalling $419,214, were opposed to it.
On 13 April 1987, Einfeld J, presumably in ignorance of the signing and sealing of the sequestration order, made an order by consent of the parties appearing that day, by which the operation of the sequestration order was "suspended" to permit the purported meeting under Part X of the Act to take place. A proposal was placed before that meeting involving the discharge of a mortgage by the ANZ Bank over a particular property, the obtaining of a sum of $85,000 from a group of people to pay out the bank, the lodging of a development application, the obtaining of approval for finance and the ultimate sale of the property with development application and finance approved. The proposal was estimated to produce some $400,000 profit which would be available to creditors. However the proposal was subject to two conditions, both onerous to creditors, which were described by the learned trial Judge as follows:
"(a) that in the event that the redevelopment does not proceed for any reason or no funds become available at the end of the development, then the creditors will be precluded from taking further bankruptcy action against the applicants;
(b) that the applicants' secured creditors must agree not to participate in the distribution of surplus funds for the successful completion of the proposal to make up for any shortfall that they might suffer in realising or otherwise dealing with their securities."
The resolution that the deed of arrangement be executed achieved, in the case of Mrs Piccardi, the support of 18 creditors (64.28%), being in value $8,952,667.11 (95.42%). It was opposed by 10 creditors (35.71%), being in value $429,427.14. Similar support was forthcoming in respect of the resolution that Mr Piccardi execute the deed.
After it was discovered that the sequestration order had been signed and sealed prior to the "suspension" of the sequestration order, an application was filed by the present respondents seeking an order that the signing and sealing of the sequestration order on 27 January 1987 be set aside. Application was subsequently made for an annulment of the bankruptcy under s.154 of the Act on the ground that the sequestration order ought not to have been made.
Accordingly there were three applications before Einfeld J: an application to rescind the sequestration order, an application to set aside the signing and sealing of the sequestration order and an application for the annulment of the bankruptcy. Since his Honour held that the bankruptcy should be annulled it was unnecessary for him to deal with the other two applications.
Evidence was adduced before his Honour of the circumstances of the debt of the petitioning creditor. It seems that Mr Grivas was a partner with the respondents and a Mr Evans in a property venture. On 21 November 1978 the partners agreed that Mr Grivas would receive a refund of his capital from the proceeds of a refinancing operation, which refinancing was not to take place until the renovation of the premises. On 5 March 1980 the partners agreed that, in order to assist the financing of the renovation work, Mr Grivas would leave $50,000 in the partnership account with interest being paid to him monthly. The capital amount was to be repaid from a refinancing of the premises when the premises were redeveloped and fully tenanted. In these circumstances the respondents argued that the debt claimed by the petitioning creditor had never become payable.
Einfeld J, after hearing evidence on this matter, concluded that the debt of the petitioning creditor - including, apparently, the interest - would only become due and owing if the property were redeveloped, when the partnership came to an end or when the refinancing occurred. In his Honour's view, despite the obtaining of a judgment by the petitioning creditor, and the fact that no application had been made to set aside that judgment, there was no debt. As a result, his Honour was of the view that the sequestration order ought not to have been made.
The appellant does not seek in these proceedings to challenge his Honour's conclusion that the debt of the petitioning creditor was not, as at the date of the pronouncing of the sequestration order, due and owing.
Having concluded that the sequestration order ought not to have been made, as the debt of the petitioning creditor was not a real debt, his Honour proceeded to consider whether, in the exercise of the Court's discretion, the bankruptcy should be annulled, cf. Re Williams (1968) 13 FLR 10, 23; Re Deriu (1970) 16 FLR 420, 420-1. His Honour referred to a number of submissions by the appellant as to why annulment should be refused upon discretionary grounds. He rejected these submissions. In doing so his Honour did not expressly state whether he considered the matters to be relevant or irrelevant to the exercise of discretion or whether he had relied upon any one or more of them but found them of little weight.
The submissions put to his Honour, and repeated before us, included that:
* Dick & Dons Pty Limited had pending before the Court a petition, upon which a sequestration order could have been made if, at the time of hearing of the petition, Mr Grivas' debt had been shown to be not a real debt. * The respondents were clearly insolvent. * The signing of the s.188 authority was itself an act of bankruptcy.
* The continuation of the bankruptcy would give the trustee the opportunity to investigate transactions which might possibly be set aside. There was evidence of a transaction involving a Mr Hill where property appeared to have been transferred for $1. This transaction was said to warrant further investigation. (Mr Hill was shown as a substantial creditor in the respondents' statement of affairs, the amount owing to him being stated to be $814,143.23. He had voted in favour of both the rescission application and the Part X deeds.)
* There was a need for a public examination of the affairs of the applicants, particularly in view of the amount of their indebtedness which extended to a figure of many millions of dollars if secured creditors were taken into account.
* No reasons had been put to Neaves J on 18 November 1986 why a sequestration order ought not then to be made. * The Part X meeting had no force in law, having regard to the signing and sealing of the sequestration order prior to the meeting having been convened. * The proposed deed of arrangement was contrary to the public interest because it would involve the respondents borrowing further funds. It was also speculative. * The respondents had not made a full disclosure in their statement of affairs.
A key to his Honour's reasons for rejecting the above submissions, among others, is to be found in the following passage from his Honour's judgment:
"In my view it would not only be in the interest of creditors, which are paramount, to grant an annulment but also in the interests of the public."
Einfeld J was of the view that the annulment was in the interests of the creditors and in the interest of the commercial community of Newcastle. His Honour considered that the respondents had an impressive reputation, that they were truthful witnesses and that they had the support of the creditors. Their bankruptcy was not brought about through lack of industry or recklessness. Rather it arose from borrowings in overseas currencies and a downturn in the property market in Newcastle. Further his Honour found that the respondents had withheld nothing of substance from their creditors. In his Honour's view, if the Part X scheme were successful, creditors would obtain more than from the bankruptcy. Finally, his Honour said:
"Perhaps most persuasively of all, the justice or injustice of the matter must take account of the fact that the overwhelming majority of creditors believe that their best interests lie in the Part X deed taking effect and the proposal proceeding. As it happens, I share this view with these creditors, but the Court should be cautious in substituting its own judgment for that of the creditors who are involved and have financial interest at stake."
Counsel for the appellant submitted to us that his Honour erred in holding that the sequestration order ought not to have been made, in a situation where the respondents had not at the hearing of the petition contested the debt nor at any time sought to have the judgment of the petitioning creditor set aside. Alternatively, it was submitted that his Honour erred in the exercise of his discretion, by applying wrong principles and failing to take into account relevant matters. It was also submitted that rescission was not an appropriate remedy, if annulment of the bankruptcy were not ordered. Finally, it was submitted that his Honour had erred in law in ordering the dissenting creditors to pay the costs, in the application before him, of the respondents to this appeal.
For the respondents it was submitted that his Honour had seen the witnesses, and that he had concluded that the debt of the petitioning creditor was not a true debt. Accordingly, it was said, his Honour's finding that the sequestration order ought not to have been made should not be reversed on appeal. Further, it was said that his Honour had properly exercised his discretion in annulling the bankruptcy and that this exercise of discretion should not, on ordinary principles, be interfered with. It was submitted, in the alternative, that rescission was an appropriate remedy and that the making of an order rescinding the sequestration order was a matter of unlimited discretion for the trial judge, who had indicated that if he had not granted an annulment of the bankruptcy he would have set aside the signing and sealing of the sequestration order and then rescinded the sequestration order.
There was some discussion, during the argument on behalf of the respondents, as to the circumstances under which it might be appropriate for the Court to rescind the sequestration order, under s.37 of the Act, rather than to annul it under s.154. The application for rescission immediately encounters the difficulty that s.37(2) precludes rescission after the signing and sealing of the sequestration order; and, whatever the circumstances, the present order had been signed and sealed. Unless the signing and sealing could be set aside in some way, rescission would not be available.
Although counsel pressed the claim for rescission, it was conceded that, if there was a case for the Court to interfere with the sequestration order, the proper course would be to use s.154. We think that this concession was correct.
Even apart from the provisions of s.37(2), there would be a difficulty about merely rescinding the sequestration order. As Gibbs J (as his Honour then was) pointed out in re Deriu (supra), a rescission of the sequestration order would not put an end to the bankruptcy. See, also, Cameron v. Cole (1944) 68 CLR 571 per Williams J at 610. Re Deriu was subsequently approved by the full High Court in Clyne v. Deputy Commissioner of Taxation (No.3) 154 CLR 589 at p 594, where it was said that the proper course, where it was alleged that a sequestration order ought not to have been made, was to annul the bankruptcy rather than to rescind or set aside the sequestration order. Re Anasis (1985) 11 FCR 127 is not inconsistent with these authorities. In that case Burchett J set aside the sequestration order, the debtor not having received notice of the adjourned hearing date of the petition. In so doing, he acted under the inherent jurisdiction of the Court. But, in ordering a rehearing of the petition, his Honour also ordered that the bankruptcy be annulled under s.154 of the Act.
It is not necessary for the disposition of the present case for us to consider whether the Court has jurisdiction to set aside the signing and sealing of the sequestration order. The issues that must arise in considering whether the sequestration order should be rescinded are no different from those that arise under s.154 of the Act. In either case it would be necessary to consider whether the sequestration order ought not to have been made. In either case there would be a residual discretion, the exercise of which would require consideration of the same factors. Accordingly we propose to consider the present case by reference to s.154 of the Act.
The first issue which arises under s.154 of the Act is whether, on the facts of the present case, the sequestration order ought not to have been made.
It is well established that a court exercising bankruptcy jurisdiction has power to go behind a default judgment, and will do so, in a case where a reason is shown for questioning whether - behind the judgment, or, as it is sometimes said, as the consideration for it - there was really a debt: Petrie v. Redmond (1942) 13 ABC 44; Corney v. Brien (1951) 84 CLR 343; Wren v. Mahony (1971-2) 126 CLR 212. While no doubt there may be practical difficulties, the enquiry into whether there is a real debt might be undertaken, in an appropriate case, at the time the judgment creditor comes to prove his debt: ex parte Revell; In re Tollemache (1884) 13 QBD 720. In re Deriu, Gibbs J, in proceedings for annulment, went behind a judgment debt of a petitioning creditor and ascertained that it was a debt of a company and not of the applicant. Hence we are content to accept, for the purposes of this case, that the Court can, on an application for annulment under s.154 and where good reason is shown, go behind that judgment to determine whether there was a real debt owed to the petitioning creditor.
Notwithstanding our acceptance of that principle, we doubt that the present was an appropriate case for going behind the judgment debt in annulment proceedings. The existence of the debt had not previously been challenged, by filing a defence in the District Court proceeding or upon the hearing of the petition in this Court, and no excuse had been offered for this omission. Moreover, the respondents apparently accepted that a real debt existed when the matter was before Neaves J, they merely seeking an adjournment to enable the Part X meeting to proceed. Furthermore, there was at the time another petition pending in the Court, apparently based on a real debt, which, had the order of sequestration not been made, would presumably have proceeded and resulted in the making of a sequestration order. This was a case where the respondents' liability to be made bankrupt was not dependent upon their indebtedness to Mr Grivas.
However, even if it be accepted that the sequestration order ought not to have been made, it seems to us that his Honour's exercise of discretion under s.154 of the Act miscarried. It is trite law that an appellate court will only interfere with an exercise of discretion if it appears that some error has been made in exercising the discretion. Such an error may be shown if:
"the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, (or) if he does not take into account some material consideration".
See House v. The King (1936) 55 CLR 499, 505; Birkett v. James (1978) AC 297, 317.
If such an error be shown and the appellate court has the necessary materials before it, that court may exercise its own discretion in substitution for that of the trial judge. The present is such a case.
In our opinion, his Honour erred in a number of respects. First, his Honour acted upon the view that, as between the interests of the creditors and the interests of the public, the interests of the creditors were paramount. That is not the correct principle. The court has a wide discretion under s.154, but in deciding whether to exercise it, the court must have regard both to the interests of the various parties (the bankrupt and the creditors) and to the interests of the public. Neither is paramount over the other: cf. Re Dolman (1967) 10 FLR 384, 391; Re Galvin (1952) 16 ABC 38; Re Williams (1968) 13 FLR 10, 24. Were it otherwise, the court would be bound by the consent of the creditors to grant an annulment. In re Hester (1889) 22 QBD 632, Lord Esher MR said:
"The Court has gone still further, and I think rightly so, and has said, that under the present Bankruptcy Act it will consider, not only whether what is proposed is for the benefit of the creditors, but also whether it is conducive or detrimental to commercial morality, and to the interests of the public at large . . ."
In the same case Fry L.J. said:
"It is an idle notion that the Court is bound by the consents of the creditors. The Court has far larger and more important duties to perform than merely to consider whether the creditors have consented to the rescinding of the order. We are bound in the exercise of our discretion in such a matter, and I think I might almost say in all matters under this Act, to take a wider view. We are not only bound to regard the interests of the creditors themselves, who are sometimes careless of their best interests, but we have a duty with regard to the commercial morality of the country."
See too, In re Flatau, ex parte Official Receiver (1893) 2 QB 223, 224.
The passage cited from the judgment of Fry L.J. in re Hester was referred to by Needham J in Re Buildmat (Australia) Ltd (1983) 1 NSWLR 291, 295-6 where his Honour declined to make an order under the Companies (New South Wales) Code for the calling of a meeting of creditors to consider a proposed compromise or arrangement. See too in this Court, Re Zdeneck Weiss; ex parte Official Trustee in Bankruptcy per Burchett J. (unreported 29 August 1986).
Once an act of bankruptcy has been committed and the proceedings of the court have been put into motion "the case is thereafter affected with the interests of other creditors and the public": re Quinn; ex parte Deputy Commissioner of Taxation (1970) 17 FLR 136.
The policy of the bankruptcy legislation is that an adjudication of bankruptcy will relieve a debtor from his debts, thus enabling him to make a fresh start and ensuring that the assets of the bankrupt are distributed rateably among his creditors. In order to ensure this rateable distribution, the Act provides inter alia for the public examination of the bankrupt. That examination is not limited to ascertaining the extent of the property of the bankrupt which is available for distribution. It extends to the examination on oath or on affirmation of the bankrupt as to his conduct, trade dealings and affairs. The object of the public examination is not merely the full and complete disclosure of assets; it includes the protection of the public. For that reason, a bankrupt, from the time a sequestration order has been made until discharge or annulment, is subject to the ultimate supervision of the court. As Lord Hanworth MR said in re Paget (1927) 2 Ch 85, 87-8:
"To concentrate attention upon the mere debt collecting and distribution of assets is to fail to appreciate one very important side of bankruptcy proceedings and law."
While the bankruptcy law now permits automatic discharge, subject to objection, the combined effect of s.149(12) and s.150 is to ensure a continuing role for the court in supervising discharges. In proceedings under s.150 the court is directed to take into account a report of the trustee as to the bankrupt's conduct and affairs, both in respect of the period before and after the bankruptcy.
The wishes of creditors are, of course, a relevant consideration in determining whether a bankruptcy should be annulled. But it cannot be said, in the present case, that the most persuasive factor is that the overwhelming majority of creditors believe that their best interests lie in the so called Part X deeds taking effect. The Part X deeds have no validity, the meeting approving them having been called and held after the sequestration order had taken effect. This was not the appropriate procedure for the respondents, after bankruptcy, to compose their affairs with their creditors. Where a sequestration order has been made, it is open to a bankrupt to tender to his creditors a proposal for a composition or arrangement under s.73 of the Act. In such a case, not only does the proposal require a "special resolution" to become effective, that is to say a vote of a majority in number and of at least three quarters in value of the creditors present personally or represented at a meeting of creditors; the Act also confers upon the Court a discretion to approve or disapprove the scheme after considering a report of the trustee on the terms of the composition or scheme and the bankrupt's conduct and affairs as well as on objections to the scheme. Under s.74(5), the Court, if it approves the scheme or composition may make an order annulling the bankruptcy. The distinction between proceeding under s.73 and under Part X is one of substance, not of form. The s.73 procedure upholds the policy of the legislation that, once a sequestration order has been made, the Court retains control over any composition or arrangement; so ensuring that the public interest is considered, as well as the interests of the bankrupt and of the creditors. We think that it was an error of principle for Einfeld J, in the present case, to overlook this important distinction and to treat Part X as providing an acceptable procedure whereby the respondents could compose their debts.
Further, to the extent that his Honour regarded as irrelevant to the exercise of his discretion under s.154, those matters referred to as submissions, which we have set out earlier in this judgment, we are of the view that his Honour was in error in so doing.
It thus becomes incumbent upon this Court to consider afresh the question whether, assuming the present to be a case where a sequestration order ought not have been made, the applicants' bankruptcy should be annulled. In our view it should not. In so saying, we have considered the interests of the bankrupts and the interests of the creditors, so far as they can be gleaned from the resolutions passed at the meeting called to consider the so called Part X deeds. We have taken into account, in favour of the respondents, the circumstances of their insolvency and that it did not come about by any lack of industry or recklessness on their part. However, as against those matters, the following factors lead us to the conclusion that the bankruptcy should not be annulled:
* No defence was filed in the District Court to the claim by Mr Grivas, nor was any notice of opposition filed in this Court to the making of the sequestration order. * Had the question of whether Mr Grivas' debt was a real debt been agitated before Neaves J, there was at least one other creditor with a petition pending who could have proceeded to obtain a sequestration order. * The respondents were, at the time of the hearing before Neaves J, and still are, hopelessly insolvent. * There has, no doubt as a result of the present proceedings, been no investigation conducted by the trustee into the conduct, trade dealings and affairs of the respondents. In particular, no public examination has been held. It is no answer, in our opinion, to suggest, as his Honour does in his reasons for judgment, that such an examination would lead to little benefit to the creditors in revealing further assets. This cannot be safely predicted, having regard to the complexity of the respondents' affairs. Furthermore, regard must be had to the policy involved in the conduct of public examinations, to which we have already referred. The trustee should have the opportunity of investigating transactions which were entered into during the relation back period or which might constitute a preference, or which might otherwise be set aside.
* In particular, we note that there would seem to be good reasons for the trustee to investigate the transfer of properties to Mr Hill in May 1986 for the sum of $1 on the dissolution of a partnership with him, although there may be other consideration for the transfer. We do not presently suggest that this transaction is liable to be set aside; but we emphasise the need for the trustee to scrutinise this transaction, particularly as the act of bankruptcy upon which the petition of Mr Grivas relied occurred on 28 August 1986. * It is, in our view, in the public interest that the bankruptcy remain for the present under the supervision of the Court.
If there is to be any composition with creditors, resort ought to be had to the procedure provided by s.73 of the Act. If any such composition is approved by a special resolution of the creditors it can then come before this Court for approval.
The appeal should be allowed and the orders made by Einfeld J. should be set aside. In lieu of those orders it should be ordered that the applications made to his Honour be dismissed with costs. The respondents must pay the costs of the appeal.
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