Coates, A.B. v J & L Fransen Builders Pty Ltd & Anor Coates, L.C. v J & L Fransen Builders Pty Ltd

[1993] FCA 396

ALAN BERNARD COATES and LYNETTE CAROL COATES v. J and L FRANSEN BUILDERS PTY
LIMITED and MAX CHRISTOPHER DONNELLY
No. NB372-373 of 1993
FED No. 396
Number of pages - 6
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
GENERAL DIVISION
Burchett J(1)

CATCHWORDS

Bankruptcy - application to avoid or terminate a deed of arrangement under Part X - failure to serve one respondent - circumstances in which the other respondent was unaware of the real basis of the case sought to be made out - amendment and fresh evidence at the hearing of which respondents were not notified - sequestration orders annulled and orders avoiding deeds rescinded and re-hearing ordered - reference to distinction between avoidance under s. 222 and termination under s. 236.

Bankruptcy Act 1966 (Cth), ss. 153B, 222 and 236

Taylor v. Taylor (1979) 143 CLR 1

Cameron v. Cole (1944) 68 CLR 571

Re Anasis; Ex parte Total Australia Ltd (1985) 11 FCR 127

Musolino v Sidiropolous (1991) 101 ALR 235

HEARING

SYDNEY, 7-8 June 1993

#DATE 11:6:1993

Counsel for the Applicants: Mr S.L. Walmsley

Solicitors for the Applicants: Messrs Blessington Judd

Freeman Lazarus

Counsel for the First Respondent: Mr J.K. Chippindall

Solicitors for the First Respondent: Messrs Colin Biggers

and Paisley

Counsel for the Second Respondent: Mr A.C. Hogg

Solicitors for the Second Respondent: Messrs Simon Beverley

and Associates

ORDER

THE COURT ORDERS THAT:

1. The bankruptcy be annulled.

2. Each of the orders other than the sequestration order made on 3 February 1993 be rescinded.

3. The application of J and L Fransen Builders Pty Limited be re-heard and for that purpose be listed for further directions on a date to be fixed.

4. All questions of costs of the hearing of 3 February 1993 be reserved to the re-hearing.

5. J and L Fransen Builders Pty Limited pay the costs of the applicant Alan Bernard Coates of this application.

Note: Settlement and entry of Orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

BURCHETT J These are separate applications by a Mr Coates and by his wife Mrs Coates for annulment, under s. 153B of the Bankruptcy Act 1966, of sequestration orders made against them. The sequestration orders were made on 3 February 1993, upon the Court declaring that deeds of arrangement between each of the debtors and Max Christopher Donnelly, a registered trustee who is the second respondent, were void, and in addition ordering that the deeds be terminated. Applications had been made to the Court for these orders, and for sequestration orders, by the first respondent, J and L Fransen Builders Pty Limited, under ss. 222 and 236. Section 222(7) would authorize the making of a sequestration order upon a deed of arrangement being declared void, and s. 236(3) would similarly authorize the making of a sequestration order upon a deed of arrangement being terminated. Since, as a matter of logic, there could have been nothing to terminate once the relevant deed was declared void, I think each sequestration order should be taken to have been made pursuant to s. 222(7). The making of a sequestration order under that provision is, by its terms, dependent upon the making of an order under s. 222(2) or (4) declaring the deed of arrangement void, and, in each of the present applications, there is sought, as further relief, the setting aside of the relevant order declaring the deed of arrangement void, as well as the further order purporting to terminate it.

1. In substance, the ground of each application is that, under the circumstances proved in evidence, each of the applicants was deprived, without any fault on the particular applicant's part, of any opportunity to dispute the case brought by the first respondent, or at least of any opportunity to dispute significant matters alleged in that case. On the authorities, this proposition, if made out, would attract the powers conferred on the Court by s. 153B, so far as the sequestration orders are concerned. The same authorities establish that the same circumstances would attract an inherent or implied power to set aside the other orders made under ss. 222 and 236. In its current form, following the amendments made in 1992, s. 37 enables the Court to rescind or discharge the orders, other than the sequestration orders, without reference to any implied or inherent power.

2. On 1 April 1992, each of Mr and Mrs Coates executed a deed of arrangement under Part X of the Act pursuant to a special resolution carried on the same day by a majority of 87% in number and 93% in value of creditors. J and L Fransen Builders Pty Limited then applied, by applications filed 22 April 1992, for declarations that the deeds were void and, in the alternative, orders that the deeds be terminated, and for sequestration orders. The applications referred to an "Affidavit of John Thomas Fransen intended to be filed in support hereof", and bore the endorsement: "On the hearing of this Application it is not intended to adduce oral evidence." It is common ground that the application in respect of Mr Coates was served on him, and that the application in respect of Mrs Coates was not served on her. Both Mr Coates and Mrs Coates have sworn that, at all times prior to the hearing of the applications, they were unaware of any application in respect of Mrs Coates. Each of them was carefully tested in cross-examination upon this matter. Having considered both their demeanour and the substance of their answers, I accept each of them as a witness of truth. Communications, which might have alerted Mr Coates to the existence of proceedings against his wife, were addressed to his office, but I am satisfied that in fact he did not appreciate there were proceedings on foot other than those against himself, and at all events no one told Mrs Coates.

3. It follows, at least prima facie, that Mrs Coates is entitled to the relief she seeks. Although both ss. 222(8) and 236(4) empower the Court to dispense with service on a debtor, there is no suggestion that either power was exercised in the present case, nor has any basis been suggested on which it would have been appropriate for a judge to have exercised either power. At the hearing, possibly because of the association of the matter involving Mrs Coates with that involving her husband, the question of service upon her seems simply to have been overlooked. I was informed, without objection, by counsel for the trustee that neither the name of Mrs Coates nor that of Mr Coates was called outside the Court at the commencement of the hearing, and there was no appearance for either of them.

4. The position of Mr Coates is a little more complicated. As I have said, it is agreed that he was served with the application. However, that document specified no ground under s. 222(1), suggested nothing under s. 222(4), and contained no reason under s. 236(1). It expressly told the recipient that there was no intention of adducing oral evidence against him. The affidavit filed following the institution of the proceeding did not go very far to alert any recipient of it to a serious case to be met. The issues which ultimately loomed large at the hearing were not mentioned in it at all. They were introduced by fresh evidence, some of it led orally.

5. It is Mr Coates's case that he received the application and subsequently the affidavit to which I have referred, and then spoke to the trustee. He swore that Mr Donnelly told him it would be "ridiculous to contend with this as it will not go anywhere". Mr Donnelly told him not to lose sleep over it. Mr Coates asked: "Would I be required to be involved, do I have to do anything Max?" Mr Donnelly replied: "Leave it to me, I am the trustee and I will arrange Solicitors to represent the case." For a number of reasons, I accept that Mr Donnelly did in fact, in substance, say these things to Mr Coates. First, as I have said, Mr Coates appeared to me to be a witness of truth. Secondly, I think it was in fact Mr Donnelly's opinion that the application was without merit. His own evidence supports that view. Thirdly, I think the application, as it was then framed, was inherently likely to have been regarded as lacking substance.

6. Mr Coates did leave the matter to Mr Donnelly, who did instruct solicitors. Those solicitors filed a Notice of Intention to Appear in the following terms:
   "TAKE NOTICE that Allan Burnard Coates (sic) and Max
   Christopher Donnell (sic) ... intends (sic) to appear at
   the hearing dated 26th May, 1992."
   It is significant that in the matter relating to Mrs Coates they filed a Notice of Intention to Appear only on behalf of Mr Donnelly.

7. Whether or not the inclusion of what purported to be Mr Coates's name in the Notice of Intention to Appear in his matter was due to a misunderstanding on the part of the solicitors, or on the part of whoever communicated Mr Donnelly's instructions to them, it is clear that the solicitors never in reality treated Mr Coates as their client. They did not keep him informed as to the progress of the matter, and they did not seek instructions from him. At the hearing, counsel instructed by them announced his appearance for Mr Donnelly alone. It is, of course, possible that the Court was misled, at the hearing, by the presence on the Court file of the Notice of Intention to Appear on behalf of Mr Coates as well as on behalf of Mr Donnelly.

8. Mr Coates gave evidence that he was never aware of the grounds on which the application in relation to the Part X deed was based, and that he was not informed of the date of the hearing. I have no doubt that his claim to have been unaware of the grounds of the application is correct. As regards the extent to which Mr Coates may have been made aware of the progress of the matter, there is some conflict in the evidence. It appears that some documents were sent to his office, and Mr Coates says himself that he made some enquiries from time to time of the trustee. Indeed, letters received by the trustee from him demonstrate his desire and intention to be involved. I have concluded that Mr Coates was not aware of the date of the hearing. I am influenced both by my impression of him and of the reliability of his evidence, and also by my impression that the trustee would not have been concerned to ensure Mr Coates was advised because of his own view that the application raised no issue requiring any answer from Mr Coates.

9. It should be said that the trustee was not entirely wrong. What falsified his understanding was a last minute amendment, and the filing of entirely fresh evidence. There is no doubt that nothing was done by the applicant for relief, or by the trustee, to notify Mr Coates of the complete change which came over the complexion of the matter. Although I have found that Mr Coates was not made aware of the date of the hearing, I think that in the final analysis this finding is not crucial. For he was entitled to regard the only claim of which he had been notified as insubstantial - although I do not think in fact he would have taken that attitude. But when the claim was fortified by new allegations, he was clearly entitled to an opportunity, which he never had, to meet those new allegations.

10. By an affidavit sworn 3 February 1993, that is, on the very day of the hearing, evidence was adduced for the first time indicating that Mr and Mrs Coates were the proprietors of a parcel of land in the county of Cook, being lot 8 in deposited plan 256516, which had not been referred to in Mr Coates's statement of affairs. The trustee had been unaware of the existence of any such parcel of land and Wilcox J, who heard the matter, treated this aspect of it as serious. Having held that the case against Mr Coates could not succeed under s. 222(1), his Honour turned to s. 222(4), and the omission of the parcel of land from the statement of affairs was the first adverse finding he made under that subsection. The only other adverse findings under s. 222(4) related to the inclusion of three small debts the exclusion of which, it was found, "would have made no difference to the fate of the resolution to approve the Part X deed". As to the relevance of this finding, see Peters v. NZI Securities Australia Limited (Northrop, Spender and Burchett JJ, unreported, 16 October 1992). Although his Honour said "it seems impossible to categorise them as immaterial", his judgment does not suggest they had the importance of the parcel of land. Two of them were not provable debts because owed to barristers. Apart from the smallness of the amounts, the inclusion of such debts of honour (which might in any event have been enforceable at the suit of the solicitors concerned) could hardly have been a factor significantly swaying his Honour's discretion against Mr Coates. As would be expected, the judgment puts the emphasis on the omission of the parcel of land. His Honour returned to the issue of the land when discussing the purely discretionary factors, in which he included aspects of the administration of the estates by the trustee. He treated the failure of the trustee to ascertain the facts about the land as bearing both upon his discretion under s. 222 and upon the question whether the deed should be terminated under s. 236.

11. Now that Mr Coates has had an opportunity to come before the Court to deal, so far as has been relevant to the present application, with the allegation about the extra parcel of land, its importance seems to have vanished. There was no dispute that there is not in fact an extra parcel of land at all; there is simply the not unusual case of an exchange of an unmade road adjoining land which was disclosed (but which contributed no value to the debtor's estate because of the size of a mortgage secured over it) for an equivalent strip of land forming part of the parcel subject to the mortgage. It seems almost certain that, at least in equity, the land received in exchange would be added to the security, so that Mr and Mrs Coates would have no realizable interest.

12. It is true that, in discussing the exercise of his discretion, his Honour drew attention to a number of other matters, and in particular, to the very small size of the dividend to be derived by creditors under the deed of arrangement and the absence of provision for contribution out of the earnings of the debtors. So far as the latter aspect is concerned, if either of the debtors had been present, evidence could have been given that they have four school age children, so that Mrs Coates is only able to earn part time. But the important thing to notice is that ss. 222 and 236 do not confer upon the Court a general power to set aside deeds of arrangement where the Court thinks bankruptcy more appropriate. The Act has adopted a deliberate policy of giving the choice, subject only to particular limitations, to the creditors. It was because he held grounds had been made out under ss. 222(4) and 236 that his Honour came to discuss the other considerations which he discussed in his judgment. The making out of a ground was, as I have already pointed out, largely dependent upon the new allegation about the land. For that matter, I can find no reference in the original application to the problem about barristers' fees, if this should be regarded as of any significance. The omission of the land from the statement of affairs was the major matter under s. 222; it also gave rise to a significant element in his Honour's criticisms of the trustee. Normally, a failure by a trustee might lead to his removal, but could hardly lead to the termination of the deed against the debtor in the absence of some default on his own part. This emphasizes the significance of the matter of the land, which did involve, on the facts as they appeared at the hearing in the absence of Mr and Mrs Coates, default on the part of each of the debtors; they should have disclosed the matter in their statements of affairs.

13. How limited was the part of the evidence which could have been applicable in this case to the s. 236 claim, as distinct from the s. 222 claim, and therefore how important for s. 236 was the issue relating to the land, is emphasized if regard is had to the adoption by the Full Court in Musolino v. Sidiropolous (1991) 101 ALR 235 at 246 of what Toohey J said in Re Doukidis; Ex parte Consolidated Constructions v. Melsom (26 June 1985, unreported) as applicable to s. 236. The joint judgment of Beaumont, Burchett and von Doussa JJ agrees with the proposition that the section is not concerned with setting aside an arrangement, but with bringing one to an end because it cannot be carried into final effect. It is not simply s. 222 in another guise.

14. Since the allegation about the land played a significant part in the decision, there was (had Mr Coates been there to raise it) a real question to be tried upon the claim to avoid or terminate his deed of arrangement. The authorities suggest that this means the orders which were made should now be set aside, and he should be given the opportunity to have that question tried. In Taylor v. Taylor (1979) 143 CLR 1 at 4, Gibbs J cited, as representing the law, the following statement by Jenkins LJ in Grimshaw v. Dunbar (1953) 1 QB 408 at 416:
    

"Be that as it may, a party to an action is prima facie entitled to have it heard in his presence; he is entitled to dispute his opponent's case and cross-examine his opponent's witnesses, and he is entitled to call his own witnesses and give his own evidence before the court. Prima facie that is his right, and if by some mischance or accident a party is shut out from that right and an order is made in his absence, then common justice demands, so far as it can be given effect to without injustice to other parties, that that litigant who is accidentally absent should be allowed to come to the court and present his case - no doubt on suitable terms as to costs, ..."

That passage, the decision in Taylor v. Taylor and the earlier decision of the High Court in Cameron v. Cole (1944) 68 CLR 571 assert a principle which I discussed at some length in my judgment in Re Anasis; Ex parte Total Australia Ltd (1985) 11 FCR 127. I do not think it is necessary to repeat this discussion here. I concluded that unless there is shown to be nothing genuinely in dispute, and a fortiori where there is a real question to be tried, a denial of natural justice is so fundamental a fault in the structure of a decision of a dispute that a party who has not been heard is entitled to a hearing. Even the fact that the failure to secure a hearing was attributable to the carelessness of a party's own solicitor is not a bar, as Taylor v. Taylor demonstrates.

1. In the circumstances of the present matter, Mr Coates ought to have the opportunity to be heard on the actual case made by J and L Fransen Builders Pty Limited. It goes without saying that Mrs Coates has the same right. The appropriate form of order, so far as each of the sequestration orders is concerned, is that the bankruptcy be annulled. The reasons why this is the appropriate order are set out in Re Anasis (at 133-134). So far as concerns the remaining orders made in each matter on 3 February 1993, they should be rescinded. I further order that each application be re-heard, and for that purpose be listed for further directions on a date to be fixed; that all questions of costs of the hearing of 3 February 1993 be reserved to the re-hearing; and that the costs of the applicants of these applications be paid by the respondent J and L Fransen Builders Pty Limited.