Custom Credit Corporation Limited v Langham

[1992] FCA 1083

C U S T O M	C R E D I T
Applicant

NORRIS WALTER LANGHAM AND SANDRA MAE LANGHAM

L ' ~espondenG

EX TEMPORE JUDGMENT

SYDNEY 15 JUNE 1992

This is an application by Custom Credit Corporation Limited (Custom Credit) primarily under section 222(2) of the Bankruptcy Act 1966 seeking an order declaring void a composition entered into on 17 March 1992 between the debtors and their creditors. The chairman of the meeting held on that date was Mr Peter Kelso who is the debtors' solicitor. At the meeting Mr Peter David Rodgers, an accountant, was

W	appointed trustee of the composition. The chairman rejected the proxy of Custom Credit, by far the largest creditor of the debtors, which is, according to the debtors* statement of affairs, owed $T3,400,935.75 of a total of $3,564,476.
The proxy of Custom Credit was rejected by the chairman on the ground, amongst others, that Custom Credit was a secured creditor and ought not to be admitted to vote. It had been intended that Custom Credit would vote against the adoption of the composition in which case it would not have been accepted
by the meeting.
Another reason given by the chairman for rejecting the proxy of Custom Credit was that the deed book in which the power of attorney apparently granted by Custom Credit was .evi"deficed was not produced and the instrument of proxy was qndated.

-

So far as I can see, there is nothing &n the Act which * L 8 ,

requires an instrument: of proxy to be dated in,,express terms.

Q *

The question for consideration is not so much thg date but whether there was a valid grant of a proxy. If there was any doubt about the matter, the meeting could have been adjourned in order to have any formality of this kind corrected or clarified.

The same can be said about the failure to produce the power of attorney deed book. Once again, it is not appropriate that meetings of creditors be conducted by way of some sort of ambush such as this. Rather they should properly reflect the views of the creditors in accordance with the Act. The evidence before me establishes that Custom Credit did in fact appoint a valid attorney to exercise its proxy and that the

instrument concerned.	failure to date the instrument in no way invalidated the
I am also satisfied on the evidence that Custom Credit was not a secured creditor of the debtors, though it was a secured creditor of a company with which the debtors were associated. These are quite different matters and there was no reason for rejecting the vote of Custom Credit on that ground.
Section 222(1) is premised on the existence of "a doubt, on a specific ground," as to whether a composition has been accepted by a special resolution of a meeting of creditors under the Act. In the event of such doubt, certain persons, including a creditor such as Custom Credit, may apply to the Court for an order under subsection (2) declaring that the composition is void "on the ground specified in the application". In other words, on a strict reading of these

L. subsections, the Court is empowered to make an order voiding the composition if the ground for the doubt referred to in subsection (1) is made out.

It does not seem on the face of it that the Court is required to uphold the actual doubt, that is, convert it from being a doubt into a certain ground for invalidity. However, the context is that the Court would clearly not make a discretionary voiding order unless there was a real basis for believing that the invalidity was established. This is not

1. least because subsection (3) provides that no order for voiding a deed of composition should be made if the deed

substantially complies with the Act's requirements.

Subsection (5) is also relevant in that the Court is not permitted to make an order voiding a composition unless satisfied that "it would be in the interests of the creditors to do SO".

Subsection (6) is not relevant here. It provides that no order to void a composition shall be made unless the application for the order is made before the final payment has been made under the composition. This application is within this time frame.

-

Subsection (7) provides that the creditor may include in an application of this nature an application for a sequestration order against the estate of the debtor. In this case if the Court makes the voiding order it may forthwith make the sequestration order. Custom Credit asks that this power also be exercised in this case.

Custom Credit put forward an alternative argument under section 239 of the Act but in the light of the conclusions to which I have come, it is not necessary to deal with that alternative.

The Court has jurisdiction to adjudicate upon the validity of a Part X composition by sections 30(1) and 31(l) (j). Thus

Credit have been established, except any evidence concerning

all the prerequisites to an order of the kind sought by Custom

the appropriateness of the proposed order to the interests of the creditors as mandated by section 222(5). To deal with this matter, I made an order on 26 May 1992 that the creditors be given notice of the application and be supplied with the argument which Custom Credit wished to advance. For some reason the trustee under the composition declined to give that notice to the debtors and Custom Credit itself did not do so.

As a consequence, the other creditors apparently do not know that this application is before the Court, still less the argument which is being put in support of it. I must confess to some unease that a person can accept appointment as a trustee under a composition but not respond to the Court's - directions that he carry out his duties to keep the other creditors informed as to their rights. It is also a matter of some concern that Custom Credit itself did not comply with the

L/	order made to notify the debtors. However, this case is not a large dispute and the litigation really should be brought to an end.
In the debtor's statement of affairs, it is revealed that there are four other sets of creditors apart from Custom Credit. The second largest creditors after Custom Credit are Mr and Mrs Corbett who are said to have given a personal loan to the debtors of $87,986.97. They are followed, in terms of size, by the Commonwealth Bank said to have lent the debtors $70,053.29, then by two other personal loans by Mr and Mrs Tindall in the sum of $3500 and Mr and Mrs Faux in the sum of
$2000.
The Commonwealth Bank did not attend the meeting of creditors to consider the deed of composition and did not appoint a proxy. As a consequence they did not vote. The other creditors did attend by proxy and voted for the resolution.

The proposed composition was that the debtors would pay a

total sum of $12,480 to their creditors over three years by

quarterly instalments, the first payment to be made three

months from the date of the creditors1 meeting. This unusual

sum is explained by counsel for Custom Credit as being the

-

total of payments of $80 a week over that three year period.

When the costs of administration are taken into account, the non-institutional creditors will clearly receive very little, if anything, from such a sum. In the circumstances, it can hardly be determined that it is against their interests for the composition to be voided. It is difficult to know what the interests of these creditors are, although it is obviously in their interests that the maximum amount of assets of the debtors be garnered so that they obtain as much of the amounts owing to them as is possible.

In view of the very small amount that they would receive under the deed of composition, it seems to me likely that bankruptcy

well result in more money being paid. It is therefore in the	would result in no less money being paid able to them and may
interests of the creditors that a trustee in bankruptcy look into the affairs of the debtors and conduct such examinations, inquiries or investigations as appear appropriate. Further, the trustee will recover as many of the debtors' assets and as much of their income and property as can be obtained so that the creditors recover the maximum possible proportion of the amounts owing to them.
No explanation is given to the Court, even informally, and none was given to the meeting of creditors so far as the minutes reveal, as to the source of the $80 a week that was to be supplied to creditors for three years under the composition, or what proportion of income and assets of the debtors was being applied to make those proposed payments.
In the nature of compositions of this kind, it is certainly not likely to be, and I should not necessarily conclude that

L/	it is, the maximum amount which the debtors could pay if their estates were administered in bankruptcy.
When the matter was before the Court on 26 May, I also directed that the debtors be advised of the situation and informed that they were entitled to appear and oppose the application if they wished. Subsequent to that hearing M r Kelso as the debtors' solicitor notified the Registrar of the Court by letter of 5 June that his clients would not be appearing at the resumed hearing today as they were unable to
U	afford legal representation. He said they were not consenting to the application but did not go on to say why or explain any of the matters to which I earlier referred, except for taking issue with a particular technical or legal matter.
No letter or statement from the debtors to explain their position was submitted.
In the circumstances it seems to me that the appropriate course to adopt is to make an order under section 222(2)(a) declaring that the composition is void on the grounds specified in the application. I direct that:
i) the order is not to be taken out for 14 days from today;
ii) by not later than 4.00 pm on Tuesday, 16 June 1992, the

other creditors are to be informed by Custom Credit that

an application for the voiding of the composition was

-

brought before the Court and dealt with today and that the application was first made returnable on 26 May on which date I ordered that the creditors be notified;

iii) because the creditors were not notified, they have up to

4.00 pm on Monday 29 June 1992 to file and serve a notice

challenging the making of the order declaring the
composition void; and

iv) the creditors are to be supplied with the application filed by Custom Credit, the affidavit of Robert Arthur Furey of 29 April 1992 in support and Custom Credit's outline of argument dated 29 May 1992.

In the event that such a notice is filed by any creditor, it

may be made returnable before me on Tuesday 30 June at 9.30

am. In the event that no such application is filed the order will take effect in the usual way when the rules are complied with. The declaration will carry an order that Custom Credit's costs of these proceedings be paid out of the estate of the debtors in accordance with section 109 and rule 40.

I make an order for sequestration of the estate of the debtors but suspend its operation until 4 .OO pm on 29 June 1992. If

any creditor moves to rescind the declaration of invalidity, the suspension of the sequestration order will continue until such time as the application(s) for rescission are finally dealt with. If no such applications are made, the sequestration order may take effect at that time.

1   d

!

! Doted: