Borck v Williamson

[1994] FCA 141

GEOFFREY BORCK AND GAYLE ELIZABETH BORCK v. CHRISTOPHER WILLIAMSON (FORMER
CONTROLLING TRUSTEE)
No. WAG121 of 1993
FED No. 141/94
Number of pages - 9
Bankruptcy
(1994) 49 FCR 16

COURT

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WILCOX, FOSTER AND LEE JJ

CATCHWORDS

Bankruptcy - Application for sequestration order consequentially upon failure of debtors to file debtors' petitions as required by a resolution of creditors called to consider a Part X proposal - Application made by former controlling trustee of debtors' estates - Whether applicant had standing to make the application - No standing as controlling trustee - Whether applicant had standing as creditor of debtors - After resolution to terminate control of estates creditors fixed trustee's remuneration - Whether resolution valid - Whether debtors indebted to trustee for fees and expenses independently of resolution - Possible effect of different basis of indebtedness on exercise of primary Judge's discretion - Remittal to primary Judge.

Bankruptcy Act 1966, ss. 161B, 162(1), 187, 189, 193(1) and 221.

HEARING

PERTH, 21 March 1994
#DATE 25:3:1994

Counsel for the Appellant: M J Bateman

Solicitors for the Appellant: Malcolm J Bateman and Co

Counsel for the Respondent: G J O'Hara

Solicitors for the Respondent: Kott Gunning

ORDER

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The orders made by the primary Judge be set aside.

3. The application be remitted to the primary Judge for further hearing and determination.

4. The respondent pay the appellants' costs of the appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

WILCOX, FOSTER AND LEE JJ This is an appeal against a decision of a Judge of the Court making a sequestration order against the estates of Geoffrey Borck and Gayle Elizabeth Borck, the appellants. The respondent to the appeal is Christopher Michael Williamson, a person who was for a time the controlling trustee of their estates under Part X of the Bankruptcy Act 1966.

1. The relevant facts are within a narrow compass and, with one exception, clear. It seems that Mr and Mrs Borck got into financial difficulties because of business losses. They sought advice from a firm called National Assist. They were advised to seek to have their affairs dealt with under Part X. They prepared Statements of Affairs. Mr Borck's Statement of Affairs showed liabilities of $9,380.30 and no assets and Mrs Borck's liabilities of $5,000 and assets of $280. Their joint Statement of Affairs disclosed liabilities of $46,229.37 and a surplus of value of securities over secured debts of $3,582.32. The stated liabilities included a personal loan of $8,491.95 owing to Outlook Credit Union. That organisation was also shown as a secured creditor in the amount of $14,568.68, the security being a second mortgage over the appellants' home at Wanneroo. There was a first mortgage in favour of the Commonwealth Bank of Australia in the sum of $73,849. Mr and Mrs Borck estimated the value of the property at $92,000.

2. Mr and Mrs Borck contacted Hall Chadwick, a firm of chartered accountants practising in Perth. On 25 March 1993, they both signed an authority authorising Mr Williamson, a member of that firm, "to call a meeting of our creditors for the purpose of Part X of that Act and to take over control of our property in accordance with that Part". Mr Williamson consented to exercise the powers conferred on him by the authority. He summoned a meeting of creditors for 28 April but this was adjourned until 19 May.

3. At the meeting on 19 May, Mr Williamson was represented by Mr K Strickland of his firm. Mr Strickland was elected as President of the meeting. Also present was Mr J Powell of Hall Chadwick, representing a small creditor, Belmont Finance Limited; and representatives of two other creditors. Mr Strickland held a number of proxies, including from Outlook Credit Union. According to the minutes of the meeting, prepared by Mr Powell, after various formalities Mr Strickland tabled the Statements of Affairs. He noted the value of $92,000 attributed to the house by Mr and Mrs Borck. The minutes proceed:
   

"The Controlling Trustee subsequently had an appraisal performed which stated that the house would realise in the region of $112,000. Land Title searches reveal that there is no second mortgage on the property. Therefore after selling costs the equity in the house would be in the region of $30,000."

Mr Strickland reported that the debtors proposed that the creditors accept the sum of $10,000, paid over three years, in satisfaction of their debts. This proposal was rejected. Three resolutions were passed. In the minutes, the first of them was expressed in this way:

"THAT the debtors property be longer subject to control under division two of Part X of the Bankruptcy Act, 1966, and that the debtors file their petition in Bankruptcy within seven (7) days of the date of this meeting."

There is an obvious omission in the first line of this resolution. The parties have argued the case on the basis that the word "no" should be treated as appearing between "be" and "longer". The resolution was supported by four creditors whose claimed debts amounted to $37,438.91. The supporting creditors included three creditors on whose behalf Mr Strickland held proxies. One of them was Outlook Credit Union, admitted to vote in the sum of $22,764.32. Two creditors, whose claimed debts totalled $10,442.00, opposed the resolution.

1. Mr Strickland then tabled Mr Williamson's summary of receipts and payments. The creditors approved it. The meeting then resolved:
   

"THAT the Controlling Trustees fees be fixed in the sum of $4,264.40 together with out of pocket expenses."

1. The appellants did not file petitions within seven days, as required by the first resolution. On 28 July 1993 Mr Williamson filed an Application in which he sought the following relief:
   

"1. A sequestration order be made against the estates of GEOFFREY BORCK and GAYLE ELIZABETH BORCK both residing at 31 Bamboore Crescent, Wanneroo in the State of Western Australia ('the Debtors').

2. The Petitioning Creditor's costs, including reserved costs, be taxed and paid out of the estate of the Debtors in accordance with the Bankruptcy Act 1966."

In a supporting affidavit, Mr Williamson referred to the third resolution passed at the meeting, quoted above, and said "I am a creditor of the Respondents for the sum of $4,946.70". He set out details of this claim, from which it appears that it comprises the sum of $4,264.10 approved at the meeting of 19 May and disbursements of $682.60 (including $200 for using his firm's meeting room for the half hour meeting and $226.40 for photocopying). In a supporting affidavit, Mr Strickland verified the creditors' resolutions.

1. In his affidavit, Mr Williamson referred to the property at Wanneroo, saying "the Respondents did verify that there was a second mortgage owing on it". It is not clear what he meant by this; that is, whether he was saying that the respondents satisfied him that there was a second mortgage or merely that they claimed there was one. In his affidavit he went on to say that searches at the Land Titles Office "reveal that no second mortgage existed at the time at which the Respondents filed their joint Statement of Affairs"; but this does not necessarily mean that the property was unencumbered.

2. Mr Williamson's application was made under s.221(1)(b) of the Bankruptcy Act. Section 221 provides:
   

"221.(1) Where -

(a) a debtor has failed, without sufficient cause, to attend a meeting of creditors called under an authority signed by him or her under section 188;

(aa) a debtor has contravened subsection 189(2);

(b) a debtor, having been required by a special resolution of a meeting of creditors called in pursuance of such an authority to execute a deed of assignment or a deed of arrangement or to present a debtor's petition, has failed, without sufficient cause, to execute the deed within the time prescribed by this Act or to present the debtor's petition within the time required by the special resolution; or

(c) a meeting of creditors called in pursuance of such an authority has not, within 4 months from the date for which the meeting was called, passed one of the special resolutions referred to in subsection 204(1),

the Court may, if it thinks fit, on the application of the Inspector-General, a person authorised in writing by the Inspector-General, a creditor or the controlling trustee, forthwith make a sequestration order against the estate of the debtor.

(2) The Court may, if it thinks fit, dispense with service on the debtor of notice of an application under this section, either unconditionally or subject to conditions.

(3) Subject to subsection (4), the making of an application under this section in respect of a debtor shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor.

(4) The provisions of subsection 43(1), section 44 and 47, subsections 52(1) and (2) and Part IXA do not apply in relation to an application under this section, but, on the hearing of such an application, the Court shall require proof (which may be given by affidavit) of the matters stated in the application and, unless service has been dispensed with by the Court, of service of the application on the debtor."

1. It will be noted that subs.(1) limits the operation of the section to cases where the application is made by the Inspector-General, a person authorised by the Inspector-General, a creditor or the controlling trustee. Mr Williamson made the application on the basis that he was controlling trustee of the two estates. But the learned primary Judge doubted that he had standing as a controlling trustee to bring the application. He said that:
   

"(u)pon the passing of the special resolution that the debtors' property be no longer subject to control, the property ceased to be under control. The definition of 'controlling trustee' in s.187(1) only operates in relation to a debtor whose property is subject to control under Division 2" (original emphasis).

With respect, his Honour was plainly right. The term "the controlling trustee" is defined for the purposes of Part X, subject to any apparent contrary intention, by s.187:

"'the controlling trustee', in relation to a debtor whose property is subject to control under Division 2, means -

(a) the registered trustee named in the authority signed by the debtor under section 188;

(b) if another registered trustee has, by virtue of section 192 become the controlling trustee in relation to the debtor, that other registered trustee; or

(c) if the Official Trustee is acting as the controlling trustee by virtue of sub-section 192(3), the Official Trustee;"

1. Section 189, which is in Division 2, explains the notion of property being subject to control:
   

"189(1) Where a debtor has given an effective authority to a registered trustee under section 188, the property of the debtor becomes subject to control under this Division and continues to be so subject until -

(a) the creditors resolve at a meeting called under this Part that the debtor's property to be no longer subject to control under this Division;

(b) a deed of assignment or a deed of arrangement is executed by the debtor and the trustee of the deed in pursuance of a special resolution of his creditors under this Division;

(c) the creditors accept a composition under this Division;

(d) the Court, under section 208, releases the debtor's property from control under this Division;

(e) the debtor becomes a bankrupt; or

(f) the debtor dies,

whichever first happens.

(2) A debtor whose property is subject to control under this Division -

(a) shall not remove, dispose of or deal with any of his property except with the consent of the controlling trustee;

(b) shall furnish to the controlling trustee such information with respect to any of the debtor's examinable affairs as the controlling trustee requires; and

(c) shall comply with any direction given to him by the controlling trustee with respect to his property or affairs.

(3) A disposal of, or dealing with, property by a debtor in contravention of subsection (2) is not invalid by reason only of that contravention."

1. The estates ceased to be subject to control under Division 2 when the creditors passed their first resolution on 19 May 1993. Its terms were such as to make it immediately operative. Accordingly para.(a) of the definition of "the controlling trustee" (on which Mr Williamson relied) ceased to apply to the property of Mr and Mrs Borck. Upon the adoption of the resolution, Mr Williamson ceased to be their controlling trustee.

2. However, the primary Judge held that Mr Williamson had standing to make an application under s.221 as a creditor of Mr and Mrs Borck. He did so on the basis of Mr Strickland's evidence of the creditors' resolutions, though he also noted in passing Re Reynolds; Ex parte Horlock v Evans (1976) 12 ALR 439, a case in which Lavan J of the Western Australian Supreme Court examined the relationship between a person who signed an authority under s.188 of the Bankruptcy Act and the person who was thereby appointed controlling trustee of the person's estate. Lavan J held that "the trustee acted by virtue of an appointment by the debtor and not by reason of a resolution of the creditors, and in consequence acted solely as the agent for the debtor". Although Lavan J did not say so, the corollary of this is that a debtor is liable to pay the reasonable fees and disbursements incurred by a trustee in connection with a Part X proposal not accepted by the creditors.

3. On the hearing of the appeal, counsel for the appellants argued that the primary Judge erred in treating Mr Williamson as a creditor with standing to make an application under s.221. He advanced two alternative arguments. One of them may be disposed of immediately; it is plainly untenable. This argument is that Mr Williamson had no right to apply under s.221 because a creditor who petitions for a sequestration order must be a creditor, in respect of a liquidated sum, before the date of the relevant act of bankruptcy; and Mr Williamson's debt arose at the meeting, on 19 May, whereas the relevant acts of bankruptcy occurred on 25 March when the debtors executed their s.188 authority: see s.40(1)(i) of the Act. As authority for his basic proposition, counsel cited In re Debtors (1927) 1 Ch 19.

4. We need not determine whether that decision applies under the 1966 Australian statute. It is clear that s.221 does not depend upon the provisions of Part IV of the Act. Section 221 contains special provisions, permitting short-cut procedures in the cases to which it applies. Subsection (4) specifically excludes the application of s.43(1) (which empowers the Court to make a sequestration order on a creditor's petition where the debtor has committed an act of bankruptcy and has a specified nexus with Australia), s.44 (which specifies conditions germane to a petition), s.47 (which deals with the form of a petition and its service) and s.52 (dealing with the matters that must be proved on the hearing of a petition). These matters are excluded because s.221 makes its own rules. The only relevant question under s.221, as it seems to us, is whether the application is made by a person who was a creditor when it was made.

5. As we have said, Mr Williamson based his claim to be a creditor on the creditors' resolution fixing his remuneration. Counsel's second submission is that this resolution is invalid. Counsel for Mr Williamson argued that s.193 conferred authority on the creditors to fix his client's remuneration. Section 193(1) reads:
   

"193.(1) Sections 162 to 167 (inclusive) apply, with the prescribed modifications (if any), in relation to the controlling trustee as if the debtor who gave the authority under section 188 were a bankrupt and the controlling trustee were the trustee in his bankruptcy.

Section 162(1) provides:

"162.(1) Subject to section 161B, the remuneration of the trustee of the estate of a bankrupt may be fixed, from time to time, by resolution of the creditors or, if the creditors so resolve, by the committee of inspection."

1. The reference to s.161B is important. It both provides a basic level of remuneration ($1,000) and makes that remuneration recoverable by action at law. Section 304A provides for the indexation of money sums, including the sum fixed by s.161B, by reference to the Consumer Price Index.

2. The problem about the argument put by counsel for Mr Williamson is that, when the creditors passed the resolution fixing his remuneration, he was no longer the controlling trustee of the appellants' estates. He lost that status at the moment that the creditors decided that the debtors' property be no longer subject to control under Division 2; that is, when they passed the first resolution. The creditors could not thereafter validly exercise a power (under s.162) which depended in its application to this case on the relevant trustee being a controlling trustee. Accordingly, we are of the respectful opinion that the primary Judge erred in basing his conclusion that Mr Williamson was a creditor on the creditors' resolution.

3. It does not follow that Mr Williamson was not in fact a creditor of Mr and Mrs Borck at the date of his application. The conclusion reached in Re Reynolds seems to us, with respect, correct. It supports the view that Mr and Mrs Borck are liable to pay Mr Williamson his reasonable fees and expenses. In the absence of agreement, their quantum is a matter for evidence. They may or may not equal the sum allowed by the creditors. We cannot determine the quantum because the particulars supplied by Mr Williamson are so sparse. It is difficult for us to see how the necessary work could have occupied the number of hours that would be needed, at the stated hourly rates, to justify the claimed professional fee. But proper evidence may provide justification.

1. Mr and Mrs Borck, in an affidavit, contended that a reasonable fee for Hall Chadwick's services would be $2,000. They claimed to have paid $1,250. On this basis, they owe a further $750. Counsel for Mr Williamson argued that it followed that his client was a creditor of the appellants, at least in that sum, and consequently had standing under s.221. That argument is probably correct but it does not follow that we should allow the sequestration order to stand. The primary Judge made the order on the basis that the quantum of the debt had been definitively determined at $4,946.70. Section 221 confers a discretion on the Court, to be exercised in the light of all relevant facts. It is one thing to make a sequestration order on the application of someone who is owed almost $5,000. It may be another thing to do so on the application of a creditor owed only $750. Having taken the view that his Honour erred in identifying the basis of Mr Williamson's claim to be a creditor, we think it desirable that he be afforded an opportunity to reconsider the proper exercise of his discretion.

2. Two other considerations support this course. First, there is confusion about the position of Outlook Credit Union. As we have indicated, the debtors claimed that it was an unsecured creditor only to the extent of $8,491.95. They said it was a secured creditor in respect of a further $14,568.68 but claimed that this debt was fully covered by the security, their home at Wanneroo. Mr Williamson thought that the Wanneroo property would fetch a price comfortably exceeding the two disclosed mortgages. So, if there was a second mortgage, Outlook Credit Union was entitled to vote at the creditor's meeting only in the amount of $8,491.95. Yet, although Mr Williamson apparently accepted what the appellants said about Outlook Credit Union's security, Mr Strickland allowed it to vote in respect of $22,764.32. If its vote had been restricted to the lower figure, the first resolution would have been lost. If that event had occurred s.221(1)(b) would have had no application to the case. Under these circumstances, it seems to us important to clarify the position regarding the debt to Outlook Credit Union.

3. The other factor supporting our view that it would be desirable to remit the matter to the primary Judge is the effluxion of time. It is now twelve months since the appellants executed their authority. At that time Mr Borck was unemployed. That position may have changed. There is a suggestion in the evidence that the appellants put the house on the market. We do not know whether it has been sold or, if so, at what price. It may have appreciated since the authority was signed.

4. We propose to order that the appeal be allowed, the sequestration order set aside and the matter be remitted to the primary Judge for determination according to law and in the light of such additional evidence as he may see fit to allow. It is appropriate to leave to the primary Judge the task of determining what order for costs should be made in respect of the hearings before him; the original hearing as well as the rehearing ordered by us. But the respondent must pay the appellants' costs of appeal.