Frost v Bunnings Forest Products Pty Limited

[1995] HCATrans 111

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P40 of 1994

B e t w e e n -

DAVID JOHN FROST

Applicant

and

BUNNINGS FOREST PRODUCTS PTY LIMITED

Respondent

Application for special leave to appeal

BRENNAN CJ
DAWSON J
TOOHEY J

TRANSCRIPT OF PROCEEDINGS

FROM PERTH BY VIDEO LINK TO CANBERRA

ON FRIDAY, 5 MAY 1995, AT 11.21 AM

Copyright in the High Court of Australia

MR G.J. O’HARA:   May it please your Honours, I appear for the applicant in this matter.   (instructed by Kott Gunning)

MR K.L. CHRISTENSEN:   May it please your Honours, I appear for the respondent.   (instructed by Phillips Fox)

BRENNAN CJ:   Yes, Mr O’Hara?

MR O’HARA:   Your Honour, this is an application for special leave to appeal against a decision of the Full Court of the Federal Court given last year in which it made a declaration declaring void a deed of arrangement entered into in July of last year between the applicant, who was the trustee of that deed, and the debtors.  The matter initially came before Mr Justice French who dismissed the application to have the deed declared void.

Your Honours, the deed of arrangement provided for a return to the creditors which was significantly higher than any return which the creditors would have received in the event of sequestration orders having been made.  The deed having been declared void, the respondent has relisted its bankruptcy petition against the debtors and that petition has been adjourned pending the outcome of this application.

Your Honours, one of the most significant consequences upon third parties which will flow from the making of sequestration orders against these debtors is that there will be a reduced dividend, or probably no dividend at all, payable to those creditors.  The only way in which there will be any return to creditors at all at present is if this Court decides to intervene. 

Your Honours, this what we would say has been a most unusual result comes about for two reasons:  firstly, because the Full Court having found that the provisions of Part X had not been complied with in that the debtors’ proposal which was finally accepted had been preceded by the creditors’ rejection of earlier, but less favourable proposals; and, secondly, because the Full Court, upon finding that there had been this lack of compliance with Part X, declared the deed void simply upon the basis of the lack of compliance without exercising a discretion.

In relation to the first question as to which the applicant seeks special leave - that is, whether there had in fact been compliance with Part X - I think it is clear that the Act itself does not specifically speak to the matter.  What the Full Court did was to infer as a result of various provisions that Part X had not been complied with, but there is no express provision dealing with the matter.  That being the case, your Honours, we would say that the question as to whether there has been compliance should be resolved by reference to general principles; they being whether the interest of the creditors, the public and the debtor are best served and accommodated by an interpretation which would permit the creditors to accept a proposal which is more favourable to them, notwithstanding the fact that they have earlier rejected a less favourable proposal.

TOOHEY J:   Is that crucial to your argument, Mr O’Hara:  the fact that on a later occasion a proposal that will serve the creditors better is made?  In other words, if the proposal remained the same at the subsequent meeting, would your argument be the same?

MR O’HARA:   Yes.  Our argument would remain the same in relation to the first point on which we seek special leave.  But, of course, the fact that the offer was improving as time went by is particularly significant in relation to how the discretion should be exercised if the Court reaches the threshold requirement of finding that there is doubt as to whether the deed complies with Part X.

BRENNAN CJ:   What is the special leave point that would justify this Court removing the matter once the Full Court of the Federal Court has given its interpretation of the Act?

MR O’HARA:   Starting with the facts of the instant case, there are approximately 200 creditors.  At present, the trustee estimates, that they will not receive any dividend at all; contrasted with a dividend ‑ ‑ ‑

DAWSON J:   That is not a special leave point, is it?

MR O’HARA:   I suppose the special leave point - moving aside from the facts of the instant case - is that we would say that it is a question of public importance as to whether the position of creditors can be improved after a debtor signs an authority under section 188 and calls a meeting of creditors.  We would say there is an important question as to whether a proposal can be put once only, or whether, over a period of time, it is possible for a more favourable proposal to be put which is obviously advantageous to creditors, avoids the adverse ‑ ‑ ‑

DAWSON J:   At an adjourned meeting?

MR O’HARA:   Indeed, at an adjourned meeting, yes.

DAWSON J:   But as the court below said if that were possible it would be possible to use the process as a bargaining process or a war of attrition and that, obviously, is not intended.

MR O’HARA:   Your Honour, as to that we would say this:  there was not any suggestion at all that that is the manner in which the meetings ‑ ‑ ‑

BRENNAN CJ:   That is not the point.  The point is whether or not the construction placed upon the section by the Federal Court is attended with sufficient doubt to justify this Court intervening.

DAWSON J:   And one has to bear in mind that a resolution for an adjournment can be carried by a simple majority, unlike the special resolution which was rejected.

MR O’HARA:   Your Honours, I would say that the more significant point which the applicant says justifies the grant of special leave is the second point.  To a certain extent it is tied up with the first point.

BRENNAN CJ:   What is the second point?

MR O’HARA:   Well the second point is this, your Honours:  the Full Court decided that there was doubt as to whether Part X had been complied with, and you will see at page 54 of the application book they express their conclusion at the second last paragraph in these terms:

Therefore, the deed executed by the debtors and the trustee was not grounded upon a valid resolution.  It follows that the deed has not been entered into in accordance with Part X, and pursuant to sub‑s.213(1) of the Act, is void.

Now, your Honours, there is no reference there to the exercise of a discretion as to whether the deed should be declared void.  There is no reference to the sorts of factors which might be relevant in relation to the exercise of the discretion.

DAWSON J:   But they did not have any doubt, did they?

MR O’HARA:   As to what, your Honour?

DAWSON J:   As to the fact that the deed was not grounded on a valid resolution and was therefore void.

MR O’HARA:   Well I think that is the very point of the second question in relation to which we seek special leave.

DAWSON J:   Well if they were right in the construction of the Act, that must follow, must it not?

MR O’HARA:   Your Honour, that is not the way the matter has previously been interpreted.

BRENNAN CJ:   Look at section 213(1):

a deed.....executed by a debtor after the commencement of this Act is void unless -

where do you spell a discretion out of that? 

MR O’HARA:   Your Honour, that is said to be subject to this part.

BRENNAN CJ:   Yes.

MR O’HARA:   And then section 222(2) says that:

Upon the hearing of an application made under subsection (1), the Court may.....

(a)  declare that the deed or composition is void.

DAWSON J:   Yes, but you have to read subsection(1) as well:

Where there is a doubt, on a specific ground -

there was no doubt here.

MR O’HARA:   Your Honour, it is clear from other Full Court authorities that there is a general discretion to be exercised and I refer particularly to the cases of Re Williamson and Musolino v Sidiropolous in which the court makes it plain that a declaration of invalidity does not simply follow as a matter of course because it is found there is doubt as to whether Part X is being complied with.

DAWSON J:   How does section 222 enter into this picture.  What is the doubt which enlivens section 222?

MR O’HARA:   Your Honours, in our view, the court must exercise a discretion whether it simply has a doubt as to whether has been compliance with Part X or whether it is, in fact, quite certain that there has not been compliance.

DAWSON J:   How do you reconcile that with the language of section 222?

MR O’HARA:   Your Honour, in our submission, section 222 does not empower the court to deal with the matter any differently simply because the court may have a higher degree of certainty that there has been a lack of compliance with Part X.  At the end of the day, it is our submission, your Honour, that what is important here is matters of substance over form. 

TOOHEY J:   But is not section 222 there to meet the situation where, perhaps, the facts leave the court in doubt as to whether there has been compliance or not.  I mean, you seem to be wanting to use section 222 as some sort of overriding provision even where it is clear that the Act has not been complied with.

MR O’HARA:   Your Honour, that is the way previous decisions of the Full Court of the Federal Court have dealt with the matter.

BRENNAN CJ:   What is the best illustration of that that you have?

MR O’HARA:I think probably Musolino v Sidiropolous.

BRENNAN CJ:   Can you quote us the relevant passage?

MR O’HARA:   At page 245, your Honours, half-way down the page their Honours said this:

In our view, these circumstances do indicate that, looked at late in 1990 when his Honour dealt with the matter, and even more strongly as at the present time, it would not appear to be in the interests of creditors as a whole, or in the public interest for the court to intervene at this stage and set the deeds aside.  There is a balancing process involved here, but we agree with the judge that it is better not now to disturb the status quo.

And at the bottom, or a paragraph down:

In our opinion, the court has a judicial discretion in acting under s 222(2) to make, or not make, a declaration.  For the reasons given, we would exercise that discretion by refusing the declaration.

BRENNAN CJ:   But this assumes that 222 was applicable.

MR O’HARA:   It was applicable on the facts of that case, your Honour.  In fact, if I could just refer you to the headnote, you will see in the second sentence:

The purported special resolution was found not to comply with the majority in value required by the Act,

so, in fact, it was a situation where the Full Court was dealing with a set of facts upon which not simply did they entertain a doubt as to whether the resolution ground in the deed was valid, they seem to be fairly satisfied that it was not valid, but nevertheless ‑ ‑ ‑

BRENNAN CJ:   Look at the words at the top of page 244.  The court finds that here there was a doubt.

MR O’HARA:   Indeed, they did, your Honours, but in our submission, your Honours, all they are doing is setting out the relevant provisions of section 222 which is used in those terms.

BRENNAN CJ:   Yes.

MR O’HARA:   In fact, your Honour, although this point has not been raised in the submissions which have been filed, there is authority in which the Full Court says that section 222 and the general discretion which is embodied there remains, notwithstanding that the court is able to move from a position of doubt as to whether there has been lack of compliance to a position of certainty.

BRENNAN CJ:   What is that authority?

MR O’HARA:   Your Honours, from memory I think it may be a case of Augustyn v Putnin, but it has not featured in the list of authorities of either side because the point you are now putting to me has not been raised by the other side.

BRENNAN CJ:   It is at the heart of your submission though.

MR O’HARA:   Your Honours, in our view the general discretion which we say is applicable, even though the court may have a real certainty that there has been a lack of compliance with Part X, is also recognised in the case of Re Burlock.

TOOHEY J:   But once you move from your first question to your second question you have moved into the area of discretion and that makes the case an even less attractive prospect as a special leave point.

MR O’HARA:   Your Honour, the special leave point which we would seek to advance in that regard is not as to how the discretion was exercised;  the point is that it was not exercised at all.  The point on which we would seek special leave is that, whilst there are other authorities in the Federal Court making it apparent that a proper disposition under that section calls for the exercise of a discretion, in this particular case what the Full Court did was to say that it follows, because of lack of compliance, that therefore the deed should be declared void.

DAWSON J:   That is because they had moved from what may have been, at one stage, a position of doubt to a position of certainty.  They found that there was no compliance and section 213 then comes into operation.

MR O’HARA:   Your Honours, all I can say is that, in our submission, that proposition is fundamentally inconsistent with the other decisions of the Full Court in this area and in our view, also, it is a position which does not do anything at all to advantage the position of creditors, the position of the debtor or, indeed, the public.  In our submission, that interpretation is not compelled, as is quite evident from the facts of this particular case where the result of the declaration of the Full Court is that there will not be any dividend payable to creditors and it appears almost inevitable that sequestration orders will be made against the debtors.

BRENNAN CJ:   Yes.  Have you anything to add, Mr O’Hara?

MR O’HARA:   I do not, thank you, your Honour.

BRENNAN CJ:   Thank you.  We need not trouble you, Mr Christensen.

The questions on which the applicant seeks to appeal are not of sufficient public importance to warrant the bringing up of an issue from the Federal Court which, generally speaking, should be regarded as the Court charged with the responsibility of administering the Bankruptcy Act.  In any event, the decision of the Full Court of the Federal Court is not attended with sufficient doubt to warrant a grant of special leave.  For these reasons, special leave is refused.

MR CHRISTENSEN:   Your Honours, if I could move for an order accordingly and also that the applicant pay the respondent’s costs of the application.

BRENNAN CJ:   Yes.  Have you anything to say to that, Mr O’Hara?

MR O’HARA:   Your Honours, we would suggest that it is quite inappropriate for a costs order to be made against the applicant, he being the person who is charged with the responsibility of ensuring that the interests of creditors is looked after.  We would suggest that in those circumstances it is not appropriate for a costs order to be made against him when he is seeking to defend a deed which ‑ and this is uncontradicted ‑ will result in a greater return to creditors than in the event of sequestration orders being made.

BRENNAN CJ:   Special leave will be refused with costs.

AT 11.42 AM THE MATTER WAS CONCLUDED