Hayes, A.C. v H W Thompson Building Pty Ltd

[1990] FCA 366

IN THE FEDERAL COURT OF AUSTRALIA	)
)
NEW SOUTH WALES DISTRICT REGISTRY )	No. NX 76 of 1989

1

GENERAL DIVISION )

RE: ALAN CAMPBELL HAYES AND

PAMELA MARIEANNE HAYES

Respondents

EX PARTE: H W THOMPSON BUILDING PTY

LIMITED

Applicant

CORAM :	WILCOX J
PLACE:	SYDNEY
DATE :	26 JUNE 1990

MINUTES OF ORDER

THE COURT ORDERS THAT:

1.        The deed of arrangement executed by the respondents and dated 29 nay 1989 be terminated. -

AUSTRALIA PRINCIPAL

2.        A sequestration order be made against the estates of each of the respondents.

3 .        The costs of the applicant be taxed and paid out of

estates of the respondents in accordance with the

2 7 JUL1990

FEDERAL COURT OF

Bankruptcy Act 1966.

THE COURT DIRECTS THAT:

1.        A draft of this order be brought in within seven days.

Note:	Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. [See also Order 37
rule  2 ( 3 ) 1 .

, .

I r

IN THE FEDERAL COURT OF AUSTRALIA	)	l
)	!-.,

NEW SOUTH WALES DISTRICT REGISTRY ) NO. NX 76 of 1989

)

GENERAL DIVISION 1

RE: ALAN CAMPBELL HAYES AND

PAMELA IURIEANNE HAYES

Respondents	,	-
I

EX PARTE: H W THOMPSON BUILDING PTY

LIMITED

- Applicant

i

f

CORAM:	WILCOX J
PLACE :	SYDNEY
DATE :	26 JUNE 1990

EXTEMPORE REASONS FOR JUDGMENT

WILCOX J:

i ) \ , ,

This application arises out of the execution of a I I

deed of arrangement on 29 May 1989 by the respondents, Alan

Campbell Hayes and Pamela Marieanne Hayes. The applicant, H W

Thompson Building Pty Limited, seeks an order under ss.222(2)

or (4) of the Bankruptcy Act 1966 that the deed of arrangement

be declared void; alternatively an order under 236(1) of the	I_..
i

Act terminating the deed.	The applicant also seeks an order	t
b.
.. ,
I

for sequestration against the estates of the debtors.

I do not think that any case has been made out under S. 222. The real basis of the application must be s.236 and, in particular, s.236(l)(c). Section 236 relevantly provides:

11236(1) The Court may, upon application by the trustee, a creditor or the debtor, or, if the debtor has died, the person administering the estate of the debtor, if it is satisfied -

(a)	that the debtor, or, if the debtor has died, the debtor or the person administering the estate of the
debtor, has failed to carry out or comply with the provision of the deed of arrangement;
(b)	that the deed of arrangement cannot be proceeded with without injustice or undue delay to the creditors, the
debtor or, if the debtor has died, the estate of the debtor; or

(C) that for any other reason the deed

of arrangement ought to be

terminated,

make an order terminating the deed."

Subsection ( 3 ) provides:

"The trustee or a creditor may include in

an application under subsection (1) an
application for a sequestration order
against the estate of the debtor and, if
the Court makes an order on the
first-mentioned application terminating
the deed of arrangement, it may, if it
thinks fit, forthwith make the
sequestration order sought."

Section 40(l)(m) of the Act makes it an act of bankruptcy:

"if a deed of assignment or a deed of
arrangement executed by him under Part X of a
composition accepted by a meeting of his
creditors under that Part is declared to be
void by the Court or is terminated by the
court or the creditors under that part or such
a composition is set aside by the court under

that Part; or ..."

The applicant company has, as one of its directors,

Charles Henry Thompson. PIr Thompson is the brother of one of

the respondents, Mrs Hayes.	she is the wife of the other
respondent.

It appears that some time in 1981 the applicant

company made a loan of $50,000 to Mr and Mrs Hayes. At about

that same time it also made a loan of $30,000 to a company,

Baroo Pty Limited, in which they had interests. It was agreed

at that time that the loan would bear interest at the current
rate of interest charged by Westpac Bank on overdraft
accounts, which Mr Thompson recalls as being about 18.5 per

cent.

Over the years some payments were made in respect of

the loan. But it appears to be his contention that the
payments did not reduce the principal sum owed by the
respondents and Baroo.

There was apparently discussion about repayment of

the money late in 1986. Mr Thompson had a conversation with
Mr A C Hayes, the first respondent. Mr Hayes told him of hls
future plans and handed him a piece of paper setting out notes
of his proposals for rearranging his affairs. These proposals
involved the gift to him of certain assets owned by his
father. I gather that these proposals did not reach fruition
and a further meeting was held on 23 March 1987. This meeting
was attended by Mr A C Hayes, his brother, Mr Bill Hayes, and
Mr Thompson. The meeting focused on the steps that needed to
be taken to put in order the affairs of Mr and Mrs Hayes, so
that payment could be made to Mr Thompson's company. Notes of
the meeting were kept, written in the handwriting of Mr A C
Hayes. He handed a copy of this document to Mr Thompson at

the end of the meeting.

Mr A C Hayes promised that he would remove his two

chlldren from their boarding schools in Sydney, thls
apparently being agreed in order to reduce the family's
expenses. It was also agreed that Mr Bill Hayes should

monitor the income and expenditure of dr A C Hayes and should

keep Mr Thompson informed of the position.

The note records that Mr Thompson was to remove

"second mortgage over Glenallan". The reference to Glenallan is to a rural property owned by a company, Glenallan Pastoral CO Pty Limited, the shares of which were held by various

members of the Hayes family. Accordingly to Mr Thompson's

evidence, there was not, in fact, a second mortgage. He says

that he had guaranteed a loan of $20,000 by the National
Australia Bank to Mr and Mrs Hayes. The National Australia
Bank had told him that it would lodge a caveat in order to
protect this loan. I gather that the purpose of the caveat
was to protect the bank's interests, rather than Mr Thompsonrs
interests; but, of course, as he was a guarantor, the caveat
would indirectly protect his interests. During the discussion
Mr A C Hayes indicated that the dealing, which he referred to
as a second mortgage but which,was really the caveat, was an
embarrassment to him. So Mr Thompson promised to take steps
to remove it.

According to a photocopy of the Certificate of Title,

which has been tendered in evidence, there was never a second
mortgage or caveat registered on the title. But it does not
follow that Mr Thompson should not be believed in his account
of the conversation. The bank, rather than he, had the
carriage of the matter. His evidence of some such reference

is corroborated by Mr A C Hayesf own note.	The main relevance
of this meeting, so far as I am concerned, is that it

demonstrates that, at 23 March 1987, there was a real concern,

shared by Mr A C Hayes himself, about his financial position.

On 5 May 1987, some six weeks later, a series of

transactions was effected. Prior to that date, Mr A C Hayes

had held 7517 "C" class shares in Glenallan Pastoral CO Pty
Limited, The remaining shares were held by other members of

his famlly. These were shares with a par value of $1.00.	On
5 May Mr A C Hayes sold his shares to his aunt, Mrs A B Harrington, for $1.00 each.

The financial accounts of Glenallan Pastoral CO Pty

Limited for the year ended 30 June 1987 are in evidence. They also show the comparable figures for the preceding financial year. Both as at 30 June 1986 and 30 June 1987, the freehold land and buildings of the company were shown in the balance

sheet at $129,031.80. I do not know whether this is a figure

taken from the cost of acquiring the freehold land and

buildings; or, if so, when the acquisition took place. For

all I know, this figure could be an historic cost representing
a purchase made many years earlier. I do not know whether
this figure is taken from some valuation, or, if so, the date
of that valuation. However, it is interesting to compare the
figure with the company's total issued capital of $37,502,
this being made up of 37,500 "C" class shares of $1.00 each

and one " A ' class and one "B" class share of $1.00 each.

Leaving aside the other assets and liabilities, which are all

loans to and from members of the family, the freehold value
was some four times the par value of the shares. In other
words, the freehold land and buildings, even on this basls,

represented about $4.00 per share.

When one looks at the current assets and current

liabilities the apparent value of the shares does not
diminish; indeed, the contrary is shown. Current assets,

which are made up of loan accounts, came to $560,203.46 as at

30 June 1986 and $531,837.72 as at 30 June 1987. Liabilities,

which are almost entirely debts to members of the family, were

respectively $201,994.64 and $173,635.36. In the result, the

excess of assets over liabilities, as at 30 June 1986, was

$487,509.62 and, as at 30 June 1987, $487,503.16. This

represents an asset backing of about $12.00 per share.

Under the circumstances, a question naturally arises as to why Mr A C Hayes sold his shares to his aunt for $1.00

each. It is true that amongst the assets of the company were debts of both the present respondents. Those debts were

reorganised as at 5 May 1987.	Prior to that date they had not
owed any money to the company.	Indeed, as I have already
said, Mr A C Hayes was a creditor.	But, on that same day, a

debt of $560,203.46, which was owed by a partnership,

Glenallan Livestock, was discharged. At the same time Mr A C

Hayes took on a debt of $405,327.20 and Mrs Pamela Hayes,

$69,931.04. The evidence does not indicate why this change

occurred. The evidence does indicate that Mr A C Hayes had a

40 per cent interest in the partnership, Glenallan Livestock,

and his wife had a further 15 per cent. This makes a total of

55 per cent. If one applies that percentage to the Glenallan

Livestock debt of $560,203.46, their share of that debt would have been about $300,000. However, after the events of 5 May

1987 their debt was of the order of $475,000.	In other words,
thezr liabilities increased at that time by $175,000.	The

transactions of 5 May 1987 have not been explained. Neither
of the debtors swore an affidavit in response to this

application. Consequently, they were not cross-examined.

On 23 December 1987 a deed was executed. The parties

to that deed were the present applicant, H W Thompson Building
pty Limited, the present respondents, and Baroo. The deed
recited the loans made in 1981:, with a reference to the rate
of interest equalling that charged by Westpac on overdraft
facilities for equivalent amounts. It further recited the
demand by H W Thompson Building Pty Limited for repayment, a
demand said to have been made on 13 July 1987, and the fact
that the parties had subsequently disagreed as to the amount
of the debt; but that they had agreed to resolve the

differences between themselves subject to the deed.

The deed contained a number of covenants. In the

first of them, H W Thompson Building Pty Limited agreed to

accept the sum of $76,000 as the total debt owed to it by both

Mr and Mrs Hayes and Baroo as at the date thereof. The respondents covenanted to pay this debt in three annual instalments, the first of which was to be made by 1 December

1988. Interest was to be paid, but it was further agreed that
there would be no liability for interest if the whole of the
debt was paid by 1 December 1988.

In fact, nothing was paid pursuant to the deed. In

due course, H W Thompson Building Pty Limited instituted
proceedings for recovery of the debt in the District Court of
New South Wales. On 27 June 1989 judgment was entered in the

total sum of $92,189.12, this comprising the agreed debt of

$76,000 with accrued interest thereon.

Shortly before that date Mr and Mrs Hayes took steps to enter into a Part 10 arrangement. They arranged for Mr

Richard Gagie, of Messrs Gagie,& Nichols, chartered
accountants of Wagga Wagga, to become involved in the matter.
Notices were sent to the creditors in relation to a meeting, a
Part 10 deed was executed and the meeting approved the Part 10

arrangement.

The present applicant voted by proxy against approval

of the Part 10 arrangement. But it was out-voted by the other

creditors. A statement of affairs was produced by the

respondents. This showed that, apart from a few small debts

to outsiders not exceeding about $5,000, the debts of the

respondents consist of the debt to H W Thompson Building Pty

Limited, debts to members of the Hayes family and a debt of

$475,000 to Glenallan Pastoral Company Pty Limited. The

latter debt represents a large proportion of the total
liabilities shown in the statement of affairs: $624,175.

The deed of arrangement involved an undertaking by mr

and Mrs Hayes to pay to the trustee the sum of $10,000 for
distribution amongst the creditors. In addition, Mr and Mrs
Hayes were to pay the trustees' expenses. If the deed is
allowed to stand the total amount available for the creditors
will be $10,000. This represents a dividend of about 1.5
cents in the dollar.

The application for termination of the deed has been

put upon two bases. Firstly, it is said that the amount

payable under the deed is quite inadequate. Secondly, it is
said that the circumstances call for a full independent
investigation of the debtors' affairs and in particular the

transactions in 1987 to which I have made reference.

As to the first matter, it is asserted by the

solicitor for the respondents - who appeared on their behalf
at the hearing of this application - that they have no more
money available than the $10,000 which they have offered and
that a bankruptcy would achieve nothing more for the

creditors. Indeed, it is said that, under bankruptcy, they

would not be obliged even to find the $10,000 which they have

been prepared to make available to the Part 10 trustee.

I find it difficult to predict whether the creditors

as a whole will be better off if sequestration orders are
made. A dividend of 1.5 cents in the dollar, paid by people
who have recently had substantial assets, excltes some

scepticism. This scepticism is heightened by consideration

of thelr taxation returns, coples of which have been tendered
in evidence, and the fact that notwithstanding the promise
which was made in March 1987 about savlng money by taking
their children away from their boarding schools, this has not
occurred. I really have no idea as to the true assets and
incomes of these respondents. I merely say that, particularly
in the absence of any evidence from them, it is impossible to
be affirmatively satisfied that no other moneys are available

to them, or would be availablejto a trustee in bankruptcy.

However, the matter goes further because of the

events of May 1987. I have already outlined them. I have
sought elucidation of these transactions from the solicitor
for the respondents during the course of his submissions. He

was unable to explain the reason for the transactions. His

problem was the same as mine. There is no evidence as to the

background of those transactions. It should have been easy to
explain them through the evidence of one or both of the

respondents, who were involved; but this has not happened.

The transactions of May 1987 were highlighted in the

affidavits filed on behalf of the applicant as long ago as
last July. So there was ample opportunity for the
transactions to be considered and appropriate evidence put

forward.

I do not have any affirmative view that the

transactions were likely to give rise to a successful
application by a trustee under ss.120 or 121 of the Bankruptcy

~ c t . But I do have a strong view that the transactions call

out for proper investigation. There IS, at least, a
possibility of a successful claim belng made under one or
other of those sections.

It is true, as the solicitor for the respondents has said, that the present Part 10 trustee could examine the

respondents under s.81 of the Bankruptcy Act. But I think

that one has to be realistic about that possibility. The
trustee is dependent on the respondents themselves for his

fees. He is unlikely to incur any expenditure which will not

be recouped by him. It is most unlikely that either of the

respondents will put up money for their own examination.
Moreover, and without making any imputation at all against Mr
Gagie, I bear in mind that he is an accountant in a country
town in the district where the respondents and members of
their family reside. It would be invidious for Mr Gagie to

carry out the independent and rigorous investigation which

would appear to be necessary. It is much better for a

trustee, who is a stranger to the partles, to come into the

matter. The fact that thls dispute occurs within a family

relationship reinforces the desirability of the trustee being
a person who does not know any of the individuals concerned.
I think that the more satisfactory course would be for the
Official Receiver in bankruptcy to take charge of the matter,
to investigate the transactions to which I have referred and,
if necessary, to carry out examinations under elther or both
of ss.69 and s.81 of the Bankruptcy Act. These investigations
may lead the Official Receiver to the view that an application
can be made which will increase the amount available for
creditors. They may only demonstrate that nothing untoward
has occurred. But that result in itself would be a benefit to
all concerned, including the creditors.

In considering whethet or not to exercise power under

s.236 the Court has a very wide discretion. It should take
into account not only the interests of the creditors but also
the interests of the respondents. However, I can see no
legitimate interest in the respondents having the
administration of their estates under Part 10, as distinct
from pursuant to the making of sequestration orders. Nothing
has been put before me to indicate that the result of a
sequestration order would be deleterious to their employment
or business affairs. As I say, there is no evidence at all
from either of the respondents.

So far as the creditors are concerned, it may be that

action under ss.120 or 121 will adversely affect one or more
of the persons who happen to be creditors, but as a person who
took benefits to which those sections refer. Nonetheless, to
the extent that any such action is successful in swelling the
fund available for distribution to creditors, such an action
would have to be regarded as one for the benefit of the
creditors, as such.

In reaching the conclusion whlch I have, I have borne in mind the comments made by Lockhart J, with whom Fisher and Davies JJ agreed, in Chiragakis v Commlssloner of Taxation

(1986) ALR 527 at p.535. His Honour there referred to the
public interest which is involved in a proper inquiry as to

the affairs of a debtor. I appreciate that those comments do

not apply to every case, but I~think that they apply to the

present case. Accordingly, I propose to exercise the

discretion of the Court by accedlng to the application.

I make the following orders:  I order that the deed

of arrangement executed by the respondents and dated 29 May
1989 be terminated. I make sequestration orders against the
estates of each of the respondents. I order that the costs of
the applicant be taxed and paid out of the estates of the

respondents in accordance with the Bankruptcy Act.

I direct that a draft of this order be brought in

within seven days.
I certify the fourteen
preceding pages to be a true copy of
the Reasons for Judgment of
his Honour Justice Wilcox.

associate: flyyfl- ,

I

.X /

Date:  June 1990 V

APPEARANCES

Counsel for the Applicant:  Mr C Lonergan

Solicitors for the Applicant: , Atkinson & Vinden

Counsel for the Respondent:	Mr P Fordyce
Solicitors for the Respondent:	P A Somerset & CO
Date(s) of hearing:	26 June 1990