Ex parte; Ex parte
[1993] FCA 277
•04 MAY 1993
Re: STEVE PATON and JOHN LOUIS PIDCOCK
Ex parte: CAMPBELL CAPITAL LIMITED
Nos. P295 and 504 of 1992
FED No. 277
Number of pages - 11
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
GENERAL DIVISION
Davies J(1)
CATCHWORDS
Bankruptcy - whether Part X scheme was a compromise or an arrangement - release of debtors - whether property or affairs to be managed - minimal anticipated dividend - agreement granting extraneous benefits to major creditor as consideration for vote in favour of scheme - whether compromise not fairly arrived at - schemes set aside or terminated and estates administered in bankruptcy.
Bankruptcy Act 1966 (Cth) - Part X, ss.187, 236, 242
Re Cook; Ex parte The Registrar of the Court of Bankruptcy (1931) 3 ABC 225 at 228
Gee v. Schmutter (1971) 123 CLR 503 at 511
Re Beames; Ex parte Beneficial Finance Corporation Ltd (1985) 7 FCR 216 at 227
Re Jacobs; Ex parte O'Connor (1984) 1 FCR 1
HEARING
SYDNEY, 25 February, 10 and 12 March 1993
#DATE 4:5:1993
Counsel for the petitioning creditor: M.R. Aldridge
Solicitor for the petitioning creditor: Baskin and Lewis
Counsel for the debtor (Mr Paton): Ms R. Sofroniou
Solicitor for the debtor (Mr Paton): Andrew Thorpe, Solicitors
Counsel for the debtor (Mr Pidcock): J.K. Chippindall
Solicitor for the debtor (Mr Pidcock): Holman Webb
Counsel for the creditor
(Goodacre Development Pty Ltd): I. Neil
Solicitor for the creditor: Minter Ellison Morris Fletcher
Solicitor for the creditor Mr P. Stone of
(Permanent Custodians Pty Ltd): Gye Perkes and Stone
ORDER
THE COURT ORDERS THAT:
Counsel bring in within 7 days, minutes of the orders which
they propose.
Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
DAVIES J In these proceedings, Campbell Capital Limited, a petitioning creditor, seeks orders terminating, setting aside or declaring void schemes under Part X of the Bankruptcy Act 1966 (Cth) ("the Act") into which the debtors, Mr S. Paton and Mr J.L. Pidcock, entered with their individual creditors. In each case, Mr M.C. Donnelly, a registered trustee under the Act, called meetings of creditors under Part X of the Act. The meetings were held conjointly, as many of the creditors were common in each case, although the sums owing differed to some extent. After the meetings, Mr Donnelly and each of the debtors signed deeds which were entitled "Deeds of Arrangement".
Mr Paton and Mr Pidcock are real estate agents and were, for many years, the principal persons in a real estate agency at Neutral Bay and Mosman, Sydney. Their financial problems appear to have arisen from a real estate development in which companies associated with Mr Paton and Mr Pidcock were involved. Some of the debts arose from guarantees given by the debtors.
A feature of the case is that the debtors, particularly Mr Pidcock, had taken steps over a period of time to divest themselves of personal assets. From the early 1980s. Mr Pidcock instituted a program whereby assets were to be held and business activities were to be conducted by discretionary or unit trusts or by companies, with a view to insulating both his assets and himself from debts which might arise in the course of business activities. One such step was the purchase of a new home in early 1984 by a trust of which, through poor planning, Mr Pidcock and his son Christopher were the Trustees. Mr Pidcock gave this evidence:-
"Now, did you have a reason for establishing a trust?---Yes. I have been for some time in the real estate business, both the agency and the development business. As we all know, it is a very hazardous position. I had previously had to sell my house in conjunction with a previous real estate development and it was decided that to insulate ourselves from such a situation we should put it in a trust, and that was on the advice that I received at that time."
The real estate agency is conducted by Denuka Management Pty Ltd ("Denuka"), on behalf of a unit trust which was established as part of this program. The debtors each retained a 5% interest in the business and carried on partnership with Denuka for several years until October 1992. However, in June 1992, each sold his 5% interest in the real estate agency to the company for $50. Mr Paton conceded in evidence that protection of the real estate agency from the claims which creditors had as against the debtors was the reason for this disposition. Mr Paton and Mr Pidcock continued to be the principal persons in the business until early 1993, when Mr Paton severed his connection with the business and took employment with another real estate agent.
The debtors, and particularly Mr Pidcock, notwithstanding their lack of personal assets, represented themselves over several years to be persons in possession of substantial personal equity. Thus, in 1988, Mr Pidcock's described his worth as follows:-
"JOHN LOUIS PIDCOCK
18 DAVID STREET
MOSMAN, N.S.W. 2088
ASSETS and LIABILITIES
DR. CR. HOUSE - 18 DAVID STREET 1,100,000 SHARES - THOS PIDCOCK and SONS P/L 350,000 50% INTEREST RICHARDSON and WRENCH REAL ESTATE FRANCHISES 300,000 HOUSEHOLD FURNITURE ETC 55,000 SUPERANNUATION POLICY 50,000 MORTGAGE - 18 DAVID STREET 170,000 BANK O/D 50,000 ------- --------- 220,000 1,855,000 NET WORTH 1,635,000"
The petitioning creditor, from such information supplied by the debtors, recorded the net personal worth of the debtors as follows:-
"Date Amount John Pidcock June 1988 $,635,000 June 1990 $2,425,000 Steve Paton June 1990 $450,000"
However, at the time when the meetings were called, the debtors had minimal personal assets available to the creditors, whilst associated with the debtors was a complicated structure of companies and trusts.
With this financial background, each of the debtors proposed the following scheme for the benefit of his creditors:-
"... that my affairs be dealt with pursuant to the provisions of a Deed of Arrangement to be executed by me and a registered trustee the terms and effect whereof are summarised as follows:-
1. Assignment of all my divisible property, as defined under Section 187(1) of the Bankruptcy Act, 1966, to the trustee.
2. In addition, payment to the trustee of the total sum of $108,000 (one hundred and eight thousand dollars) payable as follows:-
(i) 12 monthly instalments of $2,000 each;
(ii) 12 monthly instalments of $3,000 each; and
(iii) 12 monthly instalments of $4,000 each."
Mr Paton's statement of affairs disclosed no assets other than furniture valued at $5500 and it disclosed debts of $9,874,271. Mr Pidcock disclosed $2,000 cash in the bank, furniture of $10,500 and debts of $9,876,121. The $2,000 was spent by Mr Pidcock before his scheme of arrangement was executed.
The joint meetings were first held on 9 November 1992. They were adjourned for further consideration and resumed again on 23 November 1992. In each case, the following resolution was put and was passed as a special resolution:-
"That the debtor be required to execute a Deed of Arrangement whereby (the debtor) (1) assigns all his divisible assets as defined under s.187(1) of the Bankruptcy Act, 1966, and (2) he pays to the Trustee the sum of $108,000 by way of twelve monthly payments of $2,000 each, twelve monthly payments of $3,000 each and twelve monthly payments of $4,000 each."
The proxies in favour of the scheme all authorised a vote for an arrangement and against a compromise.
In Mr Paton's case, the voting was as follows:-
"For the motion:
$ No. % Goodacre Development $9,731,648 Nebiac Pty Ltd $ 300,000 John McAuley 4,450 David Pidcock 2,500 Permanent Custodians Ltd 4,141 Esplins 20,279 P. Straton $350 R. Williams $150 ----------- ---------- $10,063,509 877.25% ----------- ---------- Against the motion:
Campbell Capital $2,335,371 Bank of New Zealand $593,004 Barclays Bank $19,138 Westpac Banking Corpn. $7,572 Advance Bank $5,329 National Australia Bank $4,040 __________ ---------- $2,964,454 622.75% __________ __________ Totals $13,027,963 14 100%" ___________ __________
In Mr Pidcock's case, the voting was:-
"For the motion:
$ No. % Goodacre Development $9,731,648 Nebiac Pty Ltd $ 300,000 John McAuley 4,450 David Pidcock 2,500 Permanent Custodians Ltd 500,000 Esplins 20,270 ----------- ---------- $10,558,868 678.06% ----------- ---------- Against the motion:
Campbell Capital $2,335,371 Bank of New Zealand $593,004 Barclays Bank $32,772 Westpac Banking Corpn. $6,439 $2,967,586 421.94% Totals $13,526,454 10 100%"
Note the significance of the votes of Goodacre Development Pty Ltd ("Goodacre") and of Permanent Custodians Pty Ltd ("Permanent"). Save for their votes, the financiers who were independent of the debtors all voted against the arrangement.
In each case, the scheme of arrangement which was executed contained an assignment of all divisible assets excepting furniture, the debtor undertook to make the three payments totalling $108,000 and the deed contained a provision for the release of the debtor. The deeds read inter alia:-
"2. Payment by the Debtor
(a) The Debtor covenants with the Trustee that he shall pay to the Trustee the sum of $108,000 (one hundred and eight dollars (sic)) payable as follows: . 12 monthly instalments of $2,000.00 commencing 9 December 1992
. 12 monthly instalments of $3,000. . 12 monthly instalments of $4,000.
(b) Accept all directions of the Trustee relating to the financial affairs of the Debtor during the term of this Deed and do all things as directed by the Trustee to assist the Trustee in the performance of his duties hereunder.
3. Notwithstanding Clause 2(a) herein, the Debtor shall be entitled at any time to make a lump sum payment in discharge of his obligation to pay by instalments the said sum of $108,000.00 or the balance thereof due from time to time.
4. Assignment of Debtor's Property
(a) The Debtor hereby conveys and assigns to the Trustee the Divisible Property of the debtor as defined under Section 187(1) of the Bankruptcy Act, upon trust to deal with the same in accordance with the provisions of this Deed.
....
(c) Notwithstanding sub-clause (a) hereof the Debtor shall, subject only to the discharge of his obligations herein, be entitled to retain ownership of his household furniture and effects.
5. In the event that the Debtor fails to make any payment due hereunder or otherwise breaches any covenant herein, the Trustee shall give notice to the Debtor thereof and the Debtor shall thereupon rectify the default forthwith. If the Debtor fails to rectify the said default within seven
(7) days after service of the notice of default from the Trustee, the Trustee shall convene a meeting of the Creditors to consider the termination of this Deed or further or other resolution the Trustee or the Creditors may deem appropriate in the circumstance. ...
9. Termination of Deed
Subject to Clause 5, this Deed shall terminate upon a period of three (3) months from the date the Debtor satisfies the requirements of Clause 2(a) herein, or:
(a) If the Creditors, by special resolution, extend the time for payment, three (3) months after the expiration of that time; or
(b) If the Debtor pays the sum of $108,000.00 (one hundred and eight thousand dollars) before the expiration of 12 calendar months from the Commencement Date, three
(3) months after payment of the said sum.
10. Release of Debtor
Upon payment of the amount disclosed in Clause 2(a), and receipt by the Trustee of the Property specified in Clause 4(a), the Debtor shall be released from all provable debts."
The only provision in each deed which, in a practical sense, provided for the management of the affairs of the debtor was the clause in which the debtor covenanted to accept all directions of the Trustee.
Neither scheme as propounded by the debtors or as stated in the resolutions referred in terms to the release of the debtors. However, the explanatory statements which were issued by Mr Donnelly to the creditors contained a calculation in each case that, if the debtor paid the three instalments totalling $108,000 over the 3 year period as provided for, the creditors would receive approximately one cent in the dollar. A calculation to this effect was again stated during the course of the meetings. Perhaps it may be inferred that the creditors understood that the debtors would be released from further liability.
The first question which arises is whether the scheme, as set out in the deeds was a compromise or an arrangement. It was not a deed of assignment, see Chiragakis v. Deputy Commissioner of Taxation (1986) 68 ALR 527. Whereas the insolvency laws of the United Kingdom provide for the registration of deeds of arrangement including deeds of assignment and deeds of compromise under the Deeds of Arrangement Act 1914 (UK), the Australian legislation distinguishes between an assignment, an arrangement and a compromise. Section 187(1) of the Bankruptcy Act gives the following definitions:-
"'composition' means an arrangement (not being an arrangement entered into for the purpose of a proclaimed law) by which the creditors of a debtor -
(a) agree to accept payment of the debts due to them by instalments; or
(b) agree to accept, in full satisfaction of the debts due to them, less than the full amount of those debts, whether in the form of money or other property and whether by instalments or otherwise;" "'deed of arrangement' means a deed (not being a deed of assignment, a deed in respect of a composition or a deed executed for the purposes of a proclaimed law) providing for the arrangement of the affairs of a debtor with a view to the payment, in whole or in part, of his debts;" "'deed of assignment' means a deed by which a debtor assigns all his divisible property for the benefit of his creditors"
There are many common provisions relating to these three schemes. However, Division 4 contains special provisions applicable to deeds of assignment, Division 5 contains special provisions applicable to deeds of arrangement and Division 6 contains special provisions applicable to compositions. One feature of these special provisions is that s.234 stipulates that a deed of arrangement does not provide for the release of the debtor except insofar as the deed so provides. In relation to assignments and compositions, ss.230 and 240 provide for the release of the debtor from all provable debts and ss.228 and 238 preclude a creditor from enforcing any remedy against the personal property of the debtor in respect of a provable debt or commencing any legal proceedings in respect thereof. Section 233 empowers the Court to give leave to a creditor to enforce a remedy against the personal property of the debtor in respect of a provable debt and to commence legal proceedings in respect thereof. Divisions 4, 5 and 6 also specify what other provisions of the Act will apply to the scheme. Many provisions of the Act are applicable to an assignment, a lesser number to an arrangement and only a few provisions are applicable to a compromise. Section 243 provides that ss.82 to 107, which deal with proof of debts, and ss.140 to 147, which deal with distribution, shall apply to a compromise. Section 237, however, which applies to a deed of arrangement, makes other provisions of the Act applicable to a deed of arrangement, including s.81 which allows for the examination of persons with a view to ascertaining the extent of the debtor's property.
The special provisions and the terms of the definitions in s.187, particularly the fact that a "deed of arrangement" is defined as "a deed (not being a deed of assignment, a deed in respect of a composition ...)", show that the Act has laid down a statutory scheme which is to be given effect having regard to the terms and character of the scheme entered into, not merely to the name which the creditors may have ascribed to the deed. It is the character of the deed which determines which of Divisions 4, 5 and 6 will apply. Of course, the description adopted in the deed may be of import but it will not be determinative. In Chiragakis v. Deputy Commissioner of Taxation, the Court considered whether a deed, which described itself as a deed of assignment, was such a scheme. The Court concluded that the deed was in truth a deed of arrangement and ought to be terminated under s.236 rather than declared void under s.222.
The general distinctions between a compromise on the one hand and an arrangement on the other are well recognised. A compromise is a scheme under which the creditors agree to accept payment by instalments or under which they agree to accept payment in part and to release the debtor for the balance. As Paine J said in Re Cook; Ex parte The Registrar of the Court of Bankruptcy (1931) 3 ABC 225 at 228:-
"The term 'composition' has a definite signification, namely, the acceptance in full settlement and discharge of a debt of something other than prompt payment of the amount owed."
An example may be seen in In re Lee; Ex Parte Grunwaldt (1920) 2 KB 200 at 202-3, in which Sir Henry Lee entered into a deed with his creditors which contained the following provisions, inter alia:-
"That Mr C.M. Kemp, of the firm of Kemp, Son and Co., of 36 Walbrook, Accountants, be appointed to receive and distribute among the creditors the income agreed to be set aside and any other monies that may be received, and that Messrs Renshaw, Kekewich and Smith, of 2 Suffolk Lane, Cannon Street, do represent the creditors in connection with the carrying out of the arrangements come to. ...
That the sum of 700. a year be allowed to Sir Henry Austin Lee, and that subject to this all his present income be received by Mr. Kemp on behalf of the creditors. ...
Sir Henry Austin Lee to retain as his own property the furniture and other articles belonging to him in his apartments in Paris.
...
In consideration of the above arrangements being made by Sir Henry Austin Lee the creditors agree that all proceedings in bankruptcy or otherwise be stayed and to accept repayment of their debts by instalments in the manner hereinbefore provided, and to release Sir Henry Austin Lee from all further claims or demands in respect of such debts."
At 210, Horridge J described this as a deed of or agreement for a composition.
In Gee v. Schmutter (1971) 123 CLR 503, Barwick CJ said at 511:-
"It seems to me that a deed of arrangement which either provides for the release of the debtor or for the payment of only part of the amount due by him to his creditors as part of the arrangement it embodies is not for that reason a composition within the meaning of the Act. In my opinion, a deed of composition must itself contain an agreement to accept part-payment of the debts due in satisfaction."
The second of these sentences is difficult. On one reading, it may differentiate between, on the one hand, the inclusion in a deed of a provision for the release of the debtor and, on the other, the inclusion in the deed of an agreement to accept part-payment of the debts due in satisfaction thereof. However, I cannot think that the matter turns upon any such nicety of terminology. A composition is defined in s.187(1). That definition does not include a requirement that the deed express an agreement to accept part-payment of the debts due in satisfaction, as distinct from there being an arrangement by which the creditors agree to accept part-payment in full satisfaction of the debts. That is the effect of the release clause contained in the subject deeds which were executed by Mr Donnelly on the authority of the special resolution of the creditors. The deeds therefore contained an agreement of the type contemplated by Barwick CJ, who had before him a deed which contained no such provision.
As was pointed out in Gee v. Schmutter, a deed of arrangement may include an assignment of all or part of the divisible property and it may include a provision releasing the debtor from one or more of his debts. If the deed contains such a provision, s.234(2) of the Act provides that the release is binding on a creditor or creditors to whom that debt or those debts was or were owing. But there is nevertheless a fundamental requirement of a scheme which is the subject of a deed of arrangement, namely, that the arrangement be one 'of the affairs of a debtor with a view to the payment in whole or in part, of his debts'. As Paine J said in Re Cook at 228:-
"The term 'scheme of arrangement', and also the word 'arrangement' have the very widest signification, as a number of authorities show, and in fact either may even include a composition. But generally, 'scheme of arrangement' means a setting in order of the affairs of the person in question, and does not necessarily entail a settlement or satisfaction."
His Honour repeated those words in Re Wise; Parsons v. Wiltshire (1932) 4 ABC 235 at 238.
In the present case, had there been affairs of the debtors to arrange and manage, I would have held that the deeds were deeds of arrangement, as they purport to be. Each deed contains an assignment of all divisible property excepting furniture. Had there been property to get in, to manage, to dispose of and so on, the deeds would have achieved what is intended by a deed of arrangement, that is to say an arrangement of the debtor's affairs. But the debtors disclosed no divisible property other than their furniture and the $2,000 which Mr Pidcock had in his bank account. The furniture was excepted from the assignment and the $2,000 was spent before the deeds were executed. In any event, the $2,000 was not property which required arrangement and management.
A deed of assignment in respect of which it is not contemplated that there will be property to assign may be, for the purposes of the Act, void. In Re Beames; Ex parte Beneficial Finance Corporation Ltd (1985) 7 FCR 216 at 227, Pincus J said:-
"While a purported assignment of no property is not only a nullity under the general law but also cannot arguably be one 'for the benefit of creditors' I do not think any great benefit must be in contemplation to comply with the Statute. ...
Nor, in my view, is it necessary that, in the end, the creditors obtain anything at all from the assignment. Suppose a debtor executed an assignment, believing himself to have a substantial interest in leasehold property, if the lessor forfeited the lease immediately on the occurrence of the assignment, so that the creditors in fact got nothing, it would seem to me still possible to describe the deed as one 'for the benefit of creditors'. That is, it is not necessary that any benefit in fact be derived from the assignment, as long as some is within the contemplation of the assignor."
In Re Dart; Ex parte Registrar in Bankruptcy (Pincus J, unreported 26 November 1986), his Honour set aside a deed on the ground, inter alia, that "there was no desirable property on which it could operate."
In the present case, I am satisfied that the provisions in the deed relating to the assignment of divisible property were of no significance and that they were not expected to have any practical effect. The assignments would not comprehend after acquired property and, if there were a means by which funds could be transmitted to or for the benefit of Mr Paton and Mr Pidcock or applied for their benefit, which could well be the case, any moneys so transmitted would not be divisible property which passed to the Trustee under the deed. See Re Leask; Ex parte Melsom (1986) 66 ALR 487. No property passing to the Trustee under the provision for assignments has been identified or suggested in this case.
In this circumstance, the deeds will operate and were intended to operate as a straightforward compromise by which the creditors agreed to accept in full settlement of their debts the three instalments totalling $108,000 to be paid over 3 years and amounting to a dividend of approximately 1 cent in the dollar. When one considers the schemes, an important, if not the most important element was surely the release of the debtors. The approximate 1 cent in the dollar over 3 years can scarcely have been of any interest to the creditors other than perhaps Goodacre Developments, whose debt was admitted for over $9m.
Each scheme being a compromise and the release being the most significant aspect of the compromise, I am immediately troubled by the fact that neither the statements of the schemes propounded by the debtors nor the resolutions authorising the Trustee to enter into the schemes referred expressly to a compromise or to a release. Furthermore, the proxies which were voted in favour of the scheme in terms required a vote against a compromise.
Moreover, there are a number of factors which point in favour of an administration in bankruptcy. The first is that the dividend was only 1 cent in the dollar or less. As Jackson J said in Richards; Ex parte Beneficial Finance Corporation Ltd (unreported, 17 March 1986) at p 3:-
"The amount offered pursuant to the composition in settlement of the debts is so trivial when compared to the total of the debts that in the circumstances of the particular case I would regard that fact alone as a sufficient 'other reason' in terms of s.239(2) for setting the composition aside."
See also NZI Capital Corporation Ltd v. Lancaster (1991) 30 FCR 441.
Of course this is only one factor to be taken into account. On this point, see the careful analysis of the relevant authorities made by O'Loughlin J in Re Emmett; Ex parte Beneficial Finance Corporation Ltd (unreported, 16 December 1991).
There were matters in the history of the development of the debts which, from the creditors' point of view, were most unsatisfactory and which appear to call for administration in bankruptcy so that all proper inquiries may be made. The debtors both appear to have represented themselves as men of substance; yet they arranged their affairs so as to leave themselves without personal assets to which unsecured creditors might look for the recovery of debts.
In addition, there are special factors which affect the compositions. In each case, the debt for which Goodacre voted was $9,731,648. In Mr Paton's case, the debt due to Permanent was $500,000 and in Mr Pidcock's case, it was $4,141. The other creditors who voted in favour of the schemes were owed comparatively minor amounts. It was the votes of Goodacre and Permanent together which carried the 75% in monetary terms in favour of the schemes.
Yet, Goodacre had received and Permanent was anticipating the receipt of benefits outside the schemes of arrangement.
During 1992 there were negotiations between Messrs Paton and Pidcock on the one hand and certain of their creditors including the petitioning creditor and Goodacre. Those negotiations broke down. On 9 November 1992, just before the first meeting called by Mr Donnelly was held, Messrs Paton and Pidcock, certain companies with which they were associated and Goodacre executed an agreement under which it was agreed that the shareholding in one of the Paton and Pidcock companies, Thorstone Pty Ltd ("Thorstone") would be transferred as to 60% to Goodacre and as to 40% to the Australian Gas Light Company, with which company Goodacre is associated. It appears that Thorstone was valuable to Goodacre for several reasons, explained by Mr R.M. Gersbach in his affidavit sworn 11 February 1993, including the fact that Thorstone had substantial losses which Goodacre thought it might be able to take advantage of for tax purposes. The deed proposed that Goodacre would move the Supreme Court of New South Wales to have the winding up of Thorstone stayed. The benefit to pass to Goodacre under the agreement comprised the transfer of shares and the giving of releases to Goodacre, Thorstone and others. The benefit passing to Messrs Paton and Pidcock was set out in clause 2 which provided:-
"Goodacre agrees to vote in favour of the Proposal at the Meeting of Creditors."
The "proposal" referred to was the proposal to be put to the creditors of Messrs Paton and Pidcock at the meeting on 9 November.
Relevant authorities were discussed by Fisher J in Re Jacobs; Ex parte O'Connor (1984) 1 FCR 1, where his Honour said at 7-8:-
"The essence of a composition between the debtor and his creditors is that the creditors be offered equality of treatment (Re Milner; Ex parte Milner (1885) 15 QBD 605). As the Master of the Rolls said on p 612: 'In my opinion it is of the very essence of a composition of this nature that all the creditors who come in under it oblige themselves to each other, and the debtor obliges himself to every one of them, that, so far as he is concerned, all of them shall come in upon a footing of equality. This equality is implied by law from the very nature of the transaction ...' I have added the emphasis. However neither in this case nor the earlier decision of Dauglish v. Tennent (1866-1867) LR 2 QB 49 where, as was said in Ex parte Milner, the grounds of the principle were fully set out, was it suggested that it would be improper for the creditors to agree between themselves for something other than equality of treatment. So long as the creditors act in good faith towards each other and make no secret bargains with any other creditor or the debtor, there can be no complaint about such an agreement. Secrecy and lack of good faith are of the essence of any objection. As Mellor J said in Dauglish's case at 54. 'To put the case on a broad ground, it is an agreement between the debtor and each creditor that they are contracting on terms of equality as to each and all, and if by a secret bargain some creditors have an advantage over other creditors, it is a fraud upon those who must be presumed to have signed the deed upon the understanding that all the creditors should be placed on the same footing.'
The Master of the Rolls, when approving this statement in Milner's case at 613, added the following words in parenthesis after the words of Mellor J, 'that they are contracting' set out above, namely '(I will go further and say they are contracting with each other)'. Bowen LJ endorsed this approach when he said in Milner's case at 615: 'But in an ordinary case what does a simple composition with creditors mean? It means that each of the creditors agrees to forego a part of his debt, the consent of each creditor who comes in to arrangement being a consideration for the consent of the others. It follows that it is of the very essence of such a transaction that the creditors who take part in the scheme act upon the faith and understanding that they are all coming in upon terms of equality, and if a deed is prepared to carry out this equal distribution, every creditor who executes it does so on the faith that there is no private bargain with any of the other creditors which will destroy this equality. If there is any private agreement that one of the creditors is not to be dealt with upon this equal footing, but is to receive a preference, that is a breach of faith, and, if the debtor is aware of it, strikes at the root of the deed, and entitles any creditor who has been thus deceived to treat it as void.'
It is significant that each judge specifically refers to the preferential treatment of a creditor as a private or secret bargain or agreement. This emphasis suggests that there is no objection to such a bargain or agreement being made so long as it is not private or secret but fully disclosed to and agreed by other creditors. This approach to equality of treatment is referred to by Lukin J in Re Alam's Deed of Arrangement (1932) 4 ABC 98 at 115-116, particularly the latter page, when he adopts what Lord Shaw of Dunfermline said in Farmers Mart Ltd. v. Milne (1915) AC 106 at 118 when speaking of the general principle of equality of treatment 'Special preferences created under special contracts or by special circumstances there may be, but that is the general rule'."
In the present case, it was made known to the other creditors that an agreement had been reached whereby Goodacre would take over the shareholding in Thorstone. Nevertheless, the principle is that the composition should be fairly reached and in the interests of creditors generally. It is obvious that this cannot be so when a major creditor whose debt amounts to 72% or more of all debts has received a special benefit extraneous to the composition and, on receiving the benefit, the creditor has bound itself as to how it will vote at the meeting of creditors. In such a case, the result of the meeting will be likely to be determined not by discussion at the meeting as to the merits of the proposal but by the agreement reached extraneous to the meeting. As Goodacre had entered into an agreement with Messrs Paton and Pidcock binding it to vote in favour of their scheme, and had done so as consideration for receiving a benefit extraneous to the scheme, the creditors were no longer able to reach agreement at the meeting. The character of a composition, that is an agreement between the creditors fairly arrived at, could not be achieved.
Likewise, Permanent looked forward to extraneous benefits. At the time when the vote was taken, Messrs Paton and Pidcock were negotiating with Permanent to transfer to Permanent a share of the valuable rent roll held by Denuka. It was noted in the minutes of the meeting of 23 November 1992:
"Mr Cram (of the petitioning creditor) asked what benefit Permanent Custodians Ltd. were receiving. Mr. Lakis (of Permanent) replied that at this point in time they had not received any promise or any guarantee, or indeed anything from any other entity. He added that they proposed to enter into an arrangement with Denuka Management Limited where they would take a security over a rent roll. ...
In response Mr. Lakis replied that firstly Mr. Baskin asked if there was a benefit they were to receive and in response to that question he stated that negotiations were to take place later that day with Denuka Management Pty. Ltd. He added that Mr. Levey's firm had a draft copy of the Deed, unsigned, at that stage. He continued that it was anticipated that they would take a second ranking charge over the assets of Denuka Management Pty. Ltd. which was a rent roll for $380,000, plus assets of $125,000. Mr. Lakis advised that they had met with the debtors on the previous Saturday and it was anticipated that the deal would be formalised later that day, after the creditors meeting."
The reason why Permanent was being favoured was that it had lent moneys on the security of the Pidcock home. Both the trustees, Mr Pidcock and his son Christopher, were liable and Permanent had sued Christopher in the Supreme Court of New South Wales. Mr Pidcock did not wish his son to go bankrupt. Therefore Permanent could press Mr Pidcock to pay the debt. It was in Permanent's interests to tie the other creditors into the release of Mr Pidcock. Permanent could see that Mr Pidcock would continue to do all he could to pay off the moneys due to Permanent. Mr Paton and his wife were also assisting Permanent in the subdivision and development of their home property over which Permanent had security., Accordingly, in both cases, Permanent was looking to the receipt of benefits extraneous to the compromise and its position was improved by tying the other creditors into a release.
Therefore, the resolution in favour of the compromise did not reflect an agreement between the creditors fairly arrived at. As the voting discloses, all the independent banks and financiers voted against the schemes. The resolutions were carried principally by the votes of Goodacre and Permanent, though with assistance from other creditors friendly to Messrs Paton and Pidcock. The results did not reflect a fair vote of the creditors having regard to the benefits of the scheme. The results reflected the benefits which Goodacre and Permanent could see they would achieve extraneous to the scheme if they voted in favour of a release of Messrs Paton and Pidcock.
I need not discuss the position of each of the individual creditors who voted for the schemes. I would conclude that Messrs Paton and Pidcock, particularly the former, worked hard to obtain a majority in the number of the creditors. However, had there been no other problem with the schemes, I would accept Mr Donnelly's rulings on the existence of the debts and the quantum thereof. The evidence to the contrary is not sufficient to justify a finding that Mr Donnelly's rulings were not correct or that there were any procedural defects in the meetings or the resolutions.
Counsel for the petitioning creditor laid emphasis on the fact that the representative of Permanent, Mr Lakis, had changed his attitude between the first and second meetings. However, it was in Permanent's interests to vote in favour of the scheme, not because of the dividend it would receive thereunder but because the release of creditors would leave Permanent free to arrange with Messrs Paton and Pidcock for the payment of the moneys due to it. The fact that this was realised by Mr Lakis between the first and second meetings seems to be of little significance.
Counsel for the petitioning creditor also relied upon the point that the disclosures by Messrs Paton and Pidcock of their assets and liabilities were somewhat deficient. Some of the creditors were not listed and some of the debts were understated. A significant lapse was the failure of Mr Paton to disclose that he was liable in the sum of $350,000 to the trustees of the Pidcock Family Trust. However, these defects were trivial in the light of overall events. I would not make an order terminating or setting aside the deeds on this ground.
I take into account the position of the debtors as real estate agents and the fact that bankruptcy could adversely affect their licences and their livelihood. Counsel for the petitioning creditor sought to prove that bankruptcy would have no more detrimental effect on their licences than would the schemes into which they have entered. However, it seems to me that I should assume that bankruptcy may be considered to be a more serious matter than a compromise with creditors. I have taken this into account in considering the effect of the order on the debtors and also in assessing whether it is in the interests of the creditors that the order be made.
Finally, I should note, in case the parties should wonder as to why I have not relied upon a particular piece of evidence, that I considered much of Mr Pidcock's evidence to be improbable and unreliable. For example, when questioned as to the document set out above which listed his net assets as $1.6m, Mr Pidcock gave this evidence:-
"Do you not agree that that document purports to show, on its face, that you were the owner of those properties?---As I say, I'm not sure what use they wanted to put the document to. It could easily have been an indication of whether I had no commercial ability to acquire assets over a period of time, a very valuable consideration when going into a real estate development project."
That explanation was not believable. As to Mr Lakis, I thought that in his oral evidence he was more concerned to put a prepared story to the Court than to elucidate the truth. But, in any event, the main events as I have described them emerge from the documents rather than from the oral evidence of witnesses.
Counsel for the petitioning creditor relies upon ss.222, 236, 242 and 239 of the Act. In my opinion, it is in the interests of the creditors generally that the schemes, which obviously benefit Goodacre and Permanent in a special way, should be set aside or terminated and that the debtors' estates be administered in bankruptcy so as to ensure fair treatment for the creditors according to law. I cannot find that the creditors would be likely to obtain a better financial result from an administration in bankruptcy. There is no clear evidence that additional moneys would be obtained for creditors in a bankruptcy administration although provisions such as s.116 will apply. However, it is in the interest of the creditors as a whole that there be fair treatment for all and this will be achieved if the deeds are set aside or terminated. The benefit promised by each deed, less than 1 cent in the dollar paid over three years is so small that any loss resulting from the order will be negligible.
As the schemes were entered into as deeds of arrangement, but appear to be compositions, I think the appropriate course might be to order under s.236 or s.242 that the schemes be terminated for "other reason". However, I am prepared to hear submissions regarding this and the remaining issues in the proceedings. Counsel should bring in within 7 days minutes of the orders which they propose.
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