Henderson and Ball v Spackman
[2003] FMCA 466
•31 October 2003
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| HENDERSON & BALL v SPACKMAN | [2003] FMCA 466 |
| BANKRUPTCY – application to annul composition under s.75(4) of the Bankruptcy Act 1966 – whether it is desirable that former bankrupt’s financial affairs be further investigated, or administered under the Bankruptcy Act 1966 – whether it is likely that creditors will receive a greater dividend if the former bankrupt is again made a bankrupt – no, or no effective attack on voting against rights of creditors – likelihood that similar composition will be accepted even if present composition annulled. |
Bankruptcy Act 1966 (Cth) s.3, s.73(4), ss.75(4)(b)(iii) and (iv), s.120(1),
In the matter of Pruzanski [2000] FCA 151
Sweeney v Lind (2000) FMCA 11
| Applicant: | HENDERSON & BALL (a firm) |
| Respondent: | STAN SPACKMAN |
| File No: | MZ 459 of 2002 |
| Delivered on: | 31 October 2003 |
| Delivered at: | Melbourne |
| Hearing Date: | 5 June 2002 |
| Judgment of: | Walters FM |
REPRESENTATION
| Counsel for the Applicant: | Mr Stark |
| Solicitors for the Applicant: | Henderson & Ball Solicitors |
| Counsel for the Respondent: | Mr Galvin |
| Solicitors for the Respondent: | Hutchinson Legal |
ORDERS
The application filed 23 January 2002 be dismissed.
There be no order as to costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MZ459 of 2002
| HENDERSON & BALL (a firm) |
Applicant
And
| STAN SPACKMAN |
Respondent
REASONS FOR JUDGMENT
Introduction
Henderson & Ball (“H&B”) is a firm of solicitors. Mr Spackman used to be a client of the firm.
Mr Spackman owed H&B over $16,000 in respect of outstanding professional fees. Because he did not pay this amount, H&B applied to bankrupt him.
A sequestration order was made against Mr Spackman in April 1998. H&B was the petitioning creditor, but there were other creditors as well.
Mr Spackman’s bankruptcy ended in January 2002 – following a meeting at which creditors cast the requisite votes in favour of accepting a composition put forward on Mr Spackman’s behalf. H&B voted against the composition, and the firm now applies to this Court for orders annulling it.
This Court has power to annul the composition. It has a discretion whether or not to do so.[1] The relevant provision is section 75 of the Bankruptcy Act, 1966, and the only grounds relied upon by H&B are those contained in sections 75(4)(b)(iii) and (iv). The issues for determination, therefore, are as follows:
a)whether it is desirable that Mr Spackman’s financial affairs be investigated and administered under the Bankruptcy Act; and/or
b)whether it is likely that Mr Spackman’s creditors will receive a greater dividend if he is again made bankrupt.
[1] See Sweeney v Lind (2000) FMCA 11
For the reasons that are set out in this Judgment, I have concluded that it is neither desirable nor necessary to further investigate Mr Spackman’s financial affairs. Further, and even if another investigation were to occur, it is unlikely that his creditors (including H&B) would be any better off.
Short History
A sequestration order was made against Mr Spackman’s estate on
15 April 1988. The order was made by a Registrar of the Federal Court of Australia in Melbourne. H&B was the applicant.
Peter Andrew Goodin was appointed the Trustee in Bankruptcy of Mr Spackman’s estate.
It appears that H&B offered its services to Mr Goodin. According to Mr Burgess, who is a principal of H&B, Mr Goodin “engaged (Mr Burgess) to assist him in making enquiries as to (Mr Spackman’s) assets”.
Counsel for Mr Spackman (Mr Galvin) was highly critical of H&B for having accepted instructions to act for Mr Goodin in connection with matters relating to Mr Spackman’s bankrupt estate. Not only had the firm previously acted for Mr Spackman, but it was also the petitioning creditor. In my opinion, there is much to Mr Galvin’s submission in this regard. There was a clear conflict of interest between the firm’s duty to assist Mr Goodin to impartially determine the validity of claims made against Mr Spackman’s bankrupt estate and its position as one of Mr Spackman’s creditors. Indeed, it is arguable that, as a creditor, H&B was motivated to defeat (or, at least minimise) the claims of certain of Mr Spackman’s other creditors.[2]
[2] See In the matter of Pruzanski [2000] FCA 151
On 12 December 2001, Mr Goodin advised a Federal Magistrate of this Court that he had terminated H&B’s retainer in connection with matters relating to Mr Spackman’s bankrupt estate.
It is apparent, however, that H&B acted for Mr Goodin from 1998 until 12 December 2001. In my opinion, and bearing in mind that H&B:
a)had previously acted for Mr Spackman (including in relation to the very matter which had generated the legal fees that Mr Spackman had not paid and which had been the genesis of the application for the sequestration order); and
b)had itself been the petitioning creditor,
H&B should not have acted for Mr Goodin at any time.
In or about October 1998, Mr Spackman provided a statement of his affairs to Mr Goodin. The statement of affairs disclosed no realisable assets. The creditors were as follows:
Hughes Forbes & Associates
$1,960.00
H&B
(approx.) $16,000.00
SS Appliances Pty Ltd
$50,635.38
The Spackman Family Trust
$17,438.90
ANZ Bank
$20.00
Total
$86,054.28
In percentage terms, H&B’s claim appeared to account for 18.6 percent of the total amount owing by Mr Spackman. It was vulnerable, therefore, to the acceptance by the other creditors of any proposal that Mr Spackman may have been minded to make for a composition in satisfaction of his debts (or a scheme of arrangement of his affairs). Such a proposal can be accepted by creditors upon the passing of a “special resolution” – which requires acceptance of the proposal by a majority number and at least three quarters in value of the creditors properly voting on the resolution.[3]
[3] See definition of “Special Resolution” in s. 5 of the Bankruptcy Act 1966, and s.73(4) of the Bankruptcy Act 1966.
Supreme Court Action
In July 2000, Mr Goodin (on behalf of Mr Spackman’s bankrupt estate) commenced proceedings against Mr Spackman’s wife, her two children and the Registrar of Titles. The proceedings were commenced in the Supreme Court of Victoria, and related to the ownership of a residential property in North Balwyn.
It was asserted in the Statement of Claim that Mrs Spackman was the sole registered proprietor of the property and that at all relevant times until December 1982 she held the legal interest in the property upon trust as to a half share for herself and a quarter share for each of her two children – but it was also alleged that Mr Spackman had acquired a beneficial interest in the property as a result of payments made in discharge of a mortgage encumbering the property in 1982 and as a result of a payment to his stepson (Mrs Spackman’s son) in or about 1988. The allegation was that Mr Spackman acquired:
a)one half of his wife’s beneficial interest in the property (by the payment and discharge of the mortgage in 1982); and
b)the whole of his stepson’s beneficial interest in the property (by Mr Spackman’s direct payment to him in or about 1988).
The Statement of Claim asserted that Mr Spackman’s wife now holds her legal interest in the property on trust for Mr Spackman (as to a one half share), her daughter (as to a one quarter share) and herself (as to the remaining quarter share).
In relation to the second of the two payments allegedly made by Mr Spackman (being the payment to his stepson in 1988), reference was made during the course of the proceedings before me to a transfer which had been signed by all relevant parties (Mr Spackman, Mrs Spackman and Mrs Spackman’s two children) in 1988. The transfer describes Mrs Spackman as the transferor of the North Balwyn property, and describes the transferees as:
a)Mr Spackman (“as to one equal undivided half part or share”);
b)Mrs Spackman (“as to three quarter parts or shares”); and
c)Mrs Spackman’s daughter (being Mr Spackman’s stepdaughter) (“as to one quarter part or share”).
The consideration for the transfer is expressed to include:
a)the marriage between Mr and Mrs Spackman; and
b)the sum of $36,000.00 paid by Mr Spackman to his stepson (“for his equity in the land”).
Mr Spackman’s stepson denied that there had ever been an agreement to the effect that Mr Spackman was to acquire his (the stepson’s) interest in the property. Leaving aside various other objections, the stepson pointed out[4] that:
“…the purported agreement alleged to be constituted by an executed transfer of land (which is not admitted but specifically denied) is invalid for uncertainty by reason of the fact that the alleged interests of the transferees of the property total more than 100 percent”.
As convoluted as the drafting of this passage may be, its basic premise is obviously correct.
[4] In his Defence to the plaintiff’s Further Amended Statement of Claim
Mr Spackman gave evidence at some length as to the circumstances surrounding the execution of the transfer. Amongst other things, he said that he was “mentally ill” at the time, and that he then believed that there was a conspiracy against him involving his wife and his immediate family. Mr Spackman said that he:
“wanted to have a claim to some property or an entitlement to some property in the event of a divorce”.
I do not accept Mr Spackman’s evidence regarding the circumstances giving rise to the execution of the transfer. The fact of the matter is, however, that the transfer was never registered. Nor, in my opinion, could it ever have been registered. The percentage shares of the purported transferees in the North Balwyn property total more than 100 percent.
It is clear that the Supreme Court proceedings commenced by Mr Goodin were and would have continued to be strenuously opposed by the defendants. Their evidence would not have served to assist Mr Goodin’s claim. Obviously, Mr Spackman’s evidence would not have assisted Mr Goodin either. Notwithstanding Mr Spackman’s lack of candour in relation to the transfer and the payments made by him, the strong likelihood is that Mr Goodin’s action would have failed – even if it had been pressed to trial. Although the Supreme Court may have found – as I do – that Mr Spackman’s evidence in relation to the transfer is vague, inconsistent and probably deliberately false, such findings would not necessarily have assisted Mr Goodin.
In any event, the Supreme Court proceedings commenced by Mr Goodin were either dismissed or struck out in April 2002. They are no longer on foot.
In the chronology filed on its behalf, H&B confirms that the Supreme Court dismissed Mr Goodin’s action (“without adjudication on the merits”), and with costs reserved.
Earlier Federal Magistrates Court Proceedings
In September 2001, Mr Goodin commenced proceedings – in this Court – against 37 Myrtle Street Pty Ltd (as Trustee of the Spackman Family Trust). He sought a declaration that a payment of $205,000 by Mr Spackman to the Spackman Family Trust in or about 1993 should be voided as against him (in his capacity as Trustee of Mr Spackman’s bankrupt estate). He also sought that the defendant repay the amount of $205,000. Documents relating to these proceedings are referred to in paragraph 16 of the affidavit of Mr Burgess sworn 18 January 2002, and comprise annexure ATB5 to the affidavit.
These proceedings were never dealt with at trial. Following the creditors’ meeting in January 2002, they died a natural death.
The Purpose of the Two Actions
Clearly, the purpose of the two actions to which I have referred (being the Supreme Court action and the action in this Court) was to recover from the respondents to those actions assets or resources of significant value. H&B asserted before me that, should Mr Goodin succeed in either proceeding, a sufficient amount would be realised to pay all Mr Spackman’s creditors in full.
Discussion
H&B relies upon the provisions of sections 75(4)(b)(iii) and (iv) of the Bankruptcy Act. It argues that it is desirable that Mr Spackman’s financial affairs be investigated and administered under the provisions of the Bankruptcy Act, and that it is likely that the creditors will receive a greater dividend if Mr Spackman is again made bankrupt.
H&B does not suggest that Mr Goodin accorded creditors anything other than their proper voting entitlements. The material presented to the Court on behalf of H&B reveals that Mr Goodin investigated the claims of all the creditors, and reached his own conclusions as to the amounts in relation to which they should be permitted to vote. Mr Goodin gave evidence, and I am satisfied that he approached and discharged his obligations as trustee properly and in good faith.[5]
[5] See Mr Goodin’s affidavit sworn 23 November 2001 — being part of annexure ATB5 to the affidavit of Mr Burgess sworn 18 January 2002.
In the proceedings before me there was no – or no effective – attack on the manner in which the meetings arranged by Mr Goodin were convened or conducted.
H&B is always likely to be out voted
In my opinion, and as I observed during the course of the trial, even if the composition were to be set aside, it is highly likely that another meeting of creditors would pass a similar resolution. There is no evidence that the proportionate voting rights of the creditors are likely to alter in any way, and H&B – to put it bluntly – is always likely to be out voted.
Mr Stark (for H&B) argued that there is no evidence as to how Mr Spackman’s creditors might vote if another proposal were to be put and that – in the absence of evidence – this Court should not speculate upon such a matter. I disagree. This Court has a discretion as to whether or not it should annul the composition. In the exercise of that discretion, it is proper to have regard to the fact that H&B’s voting rights will remain unchanged and that the entities SS Appliances Pty Ltd (in liquidation) and 37 Myrtle Street Pty Ltd are closely related to Mr Spackman or his family. Even if those entities can be regarded as totally independent, the reality is that they could not be persuaded at the earlier meeting (in January 2002) to reject the compromise pending the successful completion of at least one of the then current court proceedings.
Effect of the Supreme Court and Federal Magistrates Court Actions
I am not unaware that Mr Goodin carefully investigated the merits of the Supreme Court and Federal Magistrates Court actions before commencing them. I am satisfied that he believed that they had some prospect of success.
In my opinion, and for the reasons I have expressed earlier, the Supreme Court action was unlikely to succeed.
The Federal Magistrates Court action was based on section 120(1) of the Bankruptcy Act. I accept the submissions of Mr Galvin (for Mr Spackman) to the effect that the success of the action was dependant upon the subject transaction having taken place within 5 years of the deemed commencement of Mr Spackman’s bankruptcy, and upon it being demonstrated that Mr Spackman was insolvent at the time of the transaction.
The evidence reveals that Mr Spackam paid the Spackman Family Trust the amount of $205,000.00 approximately four and a half years before the sequestration order was made. The payment was described as “an unsolicited gift” from Mr Spackman.
A perusal of the documents comprising annexure ATB5 to the affidavit of Mr Burgess sworn on 18 January 2002 reveals that the Federal Magistrates Court action, as well, was and would have continued to be strenuously opposed by Mr Spackman and various members of his family. In my opinion, it was possible, although not likely, that the action would have been successful from Mr Goodin’s point of view.
Further Factors
In addition to the factors already discussed in these Reasons, Mr Galvin argued that this Court ought to take into consideration the fact that no other creditor has supported H&B’s application. Mr Galvin observed that that fact may not be suprising in circumstances where the other creditors are related to the bankrupt (as it were) – but in this case it is important to note that the major creditor is a company in liquidation. The liquidator of the company is an independent officer of the Court, with no inappropriate allegiance with Mr Spackman. Mr Galvin submitted, and I accept, that there is no suggestion – and no basis for suggesting – that the liquidator voted in favour of the composition otherwise than in the proper execution of his duties.
Mr Galvin also argued that H&B’s position, “is compromised and its motives questionable”, and made reference to the conflict of interest described earlier in these Reasons. I reject Mr Galvin’s submission in this regard. In my opinion, H&B is entitled to pursue its claim against Mr Spackman with as much energy as it can muster. Save for the possible exception of its use of the copy transfer of the North Balwyn property (in relation to which I make no findings, and about which I do not propose to comment), it is apparent that H&B has not misused its position.
In addition, Mr Galvin argued that Mr Spackman was made bankrupt in April 1998 and that he was not released from that status until January 2002. It was submitted – and I accept – that Mr Spackman has “done his time”.
Section 75(4)(b) states that the Court “…may, if it thinks fit…” annul the composition or scheme of arrangement if “…it is made to appear to the Court that…” one of the considerations relied upon by the applicant adheres. Notwithstanding my findings regarding Mr Spackman’s credibility, I conclude that neither of the considerations relied upon by the applicant has been made to “appear” to my satisfaction.
In my opinion, it cannot be desirable that Mr Spackman’s affairs be investigated and administered under the provisions of the Bankruptcy Act if those steps have already occurred, and if it is likely that a further meeting of creditors would reach a very similar decision to that reached at the meeting held in January 2002. Further, the status of the two court actions is such that it is most unlikely that the creditors will receive a greater dividend if Mr Spackman is again made a bankrupt.
Even if I am wrong in my conclusions, I would not exercise my discretion in favour of annulling the composition. That is so because, in my opinion, Mr Spackman has indeed “done his time”. The annulling of the composition – which is not supported by any other creditor – would cause all parties (and Mr Spackman’s family) to be plunged into a further round of stressful, expensive and uncertain litigation. The fact of the matter is that Mr Goodin carefully investigated the claims of the various creditors prior to allowing them to vote at the meeting held in January 2002. When the vote was held, the creditors were well aware of the existence of the two actions, and of the overall effect of their decision to accept Mr Spackman’s proposal. Given that there has been no attack (or no effective attack) upon the manner in which that meeting was conducted, or upon the voting rights accorded the various creditors, it seems to me that the decision reached on that day should not be interfered with.
I certify that the preceding forty-four (44) paragraphs are a true copy of the reasons for judgment of Walters FM
Associate: O’Halloran P
Date: 30 October 2003
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