Hill, in the matter of Fisher and Paykel Australia Pty Ltd v Hill

[2001] FCA 800

FEDERAL COURT OF AUSTRALIA

Hill, in the matter of Fisher & Paykel Australia Pty Ltd v Hill [2001] FCA 800

BANKRUPTCY – application to terminate Part X Deed of Arrangement – whether debtors have failed to carry out or comply with a provision of the Deed under s 236(1)(a) of Bankruptcy Act 1966 (Cth) – failure to transfer valueless shares to the Trustee and failure to transfer equity in property do not justify exercise of Court’s discretion to terminate deed – whether continuation of Deed would cause injustice or undue delay to creditors under s 236(1)(b) – where there is no chance that debts will be discharged by continuation of the Deed it cannot be proceeded with without injustice and undue delay – Deed of Arrangement terminated and a sequestration order made

WORDS & PHRASES – meaning of “upon final payment”, “injustice”

Khera v National Australia Bank [1996] 1050 FCA 1 referred to
Heuir; Ex parte Benedeich [1998] 641 FCA distinguished

Bankruptcy Act 1966 (Cth) ss 236, 234(1), 116, 187, 222, 232, 237A, 204
Corporations Law ss 446A, 493(2)

IN THE MATTER OF GAIL VALMA HILL AND DAVID RONALD HILL

FISHER & PAYKEL AUSTRALIA PTY LTD AND EMAIL LTD v GAIL VALMA HILL, DAVID RONALD HILL AND GEOFFREY DAVID McDONALD

N 7163 OF 2001

HELY J
27 JUNE 2001
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 7163 OF 2001

BETWEEN:

FISHER & PAYKEL AUSTRALIA PTY LTD
FIRST APPLICANT

EMAIL LTD
SECOND APPLICANT

AND:

GAIL VALMA HILL
FIRST RESPONDENT

DAVID RONALD HILL
SECOND RESPONDENT

GEOFFREY DAVID McDONALD
THIRD RESPONDENT

JUDGE:

HELY J

DATE OF ORDER:

27 JUNE 2001

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1.The Deed of Arrangement entered into by the first and second respondents on 21 April 1999 be terminated.

2.A sequestration order be made against the estates of the first and second respondents.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 7163 OF 2001

BETWEEN:

FISHER & PAYKEL AUSTRALIA PTY LTD
FIRST APPLICANT

EMAIL LTD
SECOND APPLICANT

AND:

GAIL VALMA HILL
FIRST RESPONDENT

DAVID RONALD HILL
SECOND RESPONDENT

GEOFFREY DAVID McDONALD
THIRD RESPONDENT

JUDGE:	HELY J
DATE:	27 JUNE 2001
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. I have before me an application under s 236 of the Bankruptcy Act 1966 (Cth) (“the Act”) in which the applicants, each of whom is a creditor of the first and second respondent, (“the debtors”) claim:

   -an order that a Deed of Arrangement entered into on 21 April 1999 by the debtors with Geoffrey David McDonald be terminated;

   -an order that the estates of the debtors be sequestrated;

   -an order that Geoffrey David McDonald be appointed Trustee of the estates of the debtors.

2. When the matter was called on for hearing, I was informed that Email Limited (“Email”) supported the making of an order that the Deed of Arrangement entered into by the debtors on 21 April 1999 be terminated, but it no longer sought an order that the estates of the debtors be sequestrated.  Email neither supports nor opposes the making of a sequestration order.  By consent I granted leave to Email to discontinue the present proceedings.  The debtors did not seek an order for costs against Email.

3. I was also informed that Geoffrey David McDonald, who had lodged a submitting appearance, declined to accept appointment as Trustee of the estates of the debtors in the event that I made a sequestration order.  Accordingly, the applicants proposed that Paul Gidley be appointed as Trustee.

4. The application proceeded upon the basis that Fisher & Paykel Australia Pty Limited (“Fisher & Paykel”) was the sole applicant.  It became common ground that Fisher & Paykel is a creditor of the debtors in a sum which is not materially less than its claimed indebtedness of $58,864.14.

5. The debtors were the proprietors of a business partnership known as “David Hill Betta Electrical and Gas” and were also directors of David Hill Electrical Discounts Pty Ltd (“DHED”).  DHED conducted an electrical business from premises situated at 14 Northcott Drive, Kotara in NSW.  In 1993 an informal arrangement was reached between DHED and its major creditors for payment of outstanding debts upon the basis that future trading would be through a partnership structure involving David Hill and Gail Hill personally, rather than DHED.  Thereafter, both the company and the partnership continued to trade, and it was not always clear whether the claim of a particular creditor was a claim against the company, or against the partnership, or, perhaps, against both.

6. On 25 February 1999 DHED appointed Mr de Vries to be the Administrator of DHED. On the same day the debtors signed an authority under s 188 of the Act authorising Geoffrey McDonald to call a meeting of their creditors for the purposes of Part X of the Act to take control of their property in accordance with the Act.

7. On 11 March 1999 each of the debtors executed a statement indicating how the debtor proposed that the debtor’s affairs be dealt with under Part X.  The two statements were in identical terms.  The proposal was that a Deed of Arrangement be entered into pursuant to Part X, which should provide as follows:

   -an assignment of the debtors’ property to a Registered Trustee, excluding interest in the house located at 15 John Street, Wallsend NSW and other non-divisible property pursuant to s 116 of the Act;

   -the retail partnership will cease trading and the business will be transferred to David Hill Electrical Pty Limited.  This will only occur should the company’s creditors agree on a Deed of Company Arrangement;

   -contributions of approximately $1,400,000 to be sourced from the sale of the residential property located at 3 Ridgeway Road, New Lambton Heights, NSW and the future profits from the continued trading of the electrical retail store at 14 Northcott Drive, Kotara, NSW;

   -the contributions will be made as follows:

   (a)the first contribution to come from the sale of the residential property located at 3 Ridgeway Road, New Lambton Heights, NSW.  This is estimated to generate $130,000;

   (b)secondly, a contribution will be made from profits realised from the continued trading of the electrical retail store at Kotara by David Hill Electrical Pty Ltd.  This contribution is to allow for consideration of the transfer of assets from the partnership to the company.  This is estimated at $25,000;

   (c)thirdly, contributions will be made from time to time from the continued trading of the retail store.  These contributions are to allow a return to creditors of 100 cents in the dollar.  Those funds will be distributed pari passu amongst creditors of this deed and creditors of the company’s Deed of Arrangement.

   -The period of the deed is to run for a maximum of five years with or without the payment to creditors of 100 cents in the dollar.

8. The proposal did not contain any reference to whether or in what circumstances the debtors would be released from the creditors’ claims. Section 234(1) of the Act provides that except insofar as the deed provides for the release of the debtor from his or her debts, a Deed of Arrangement does not operate to release the debtor from any of his or her debts.

9. On 19 March 1999 Geoffrey McDonald circulated a report to creditors.  Schedules to the report estimated a dividend to creditors from a bankruptcy scenario of 9.92 cents in the dollar, or 100 cents in the dollar from the proposed Part X Deed of Arrangement.  It was clear from those schedules that the estimated return of 100 cents in the dollar was dependent on estimated future contributions from trading profits of the electrical retail store.  In the body of the report it was specifically stated that creditors should note from the relevant annexure that under the proposed deed “they might” receive a dividend of 100 cents in the dollar.  Creditors totalled $1,250,000.  On 18 March 1999 Mr de Vries circulated a report to creditors of DHED.  In that report the projected return of 100 cents in the dollar over five years was described as “optimistic”, but the creditors’ position would not be jeopardised by continued trading, as a nil return was likely to be derived from liquidation of DHED.

10. Mr McDonald’s report outlined the terms of the debtors’ proposal in substantially the same terms as the statements of 11 March 1999 referred to above.  It was made clear that the Part X proposal was conditional upon the acceptance of a Deed of Company Arrangement by the creditors of DHED.  The report included a statement that “creditors release the debtor from all debts, liabilities and claims if the obligations under (a), (b) and (c) are met”.  Obligations (a), (b) and (c) are the contributions designated by reference to those letters in par 7 above.

11. The report contrasted the position if a Part X Deed were entered into with the bankruptcy alternative: “bankruptcy provides for the realisation of after acquired property and income contributions during the three year period of a normal bankruptcy”.  The proposal did not contain any specific provision in relation to these matters, and at least inferentially the proposal differed from the regime which would apply on bankruptcy in those respects.

12. The property located at 15 John Street, Wallsend was excluded from the proposal.  The report contained a statement by Mr McDonald that from his investigations if this property were to be sold there would be insufficient funds to enable any return for creditors.

13. On 31 March 1999 there was a meeting of creditors of DHED, and a meeting of creditors of the debtors.  It was resolved that DHED and the debtors should each execute a Deed of Arrangement.  The resolution specified the matters for which the deed should cater substantially in terms of the proposal in the statements of 11 March 1999, although there was an alteration to par (c) as described in par 46 hereunder.  There was no reference in the resolution to the matter of releases.

14. On 21 April 1999 DHED and Mr de Vries entered into a Deed of Company Arrangement.  The deed provided for the profit from the trading activity of the company during the term of the deed to be paid into an Administrator’s fund at quarterly intervals.  The fund was to be distributed by the Administrator in the priorities specified in clause 9.1 of the deed.  $25,000 was to be paid to the Trustee in consideration for the purchase of the assets of the partnership.  Clause 9.1.6 provided for the distribution of the fund after prior ranking claims as follows:

    “9.1.6       Pari passu between the following claims:

    (i)the sum total of Participating Creditors: and

    (ii)the sum total of the Bankruptcy Creditors under the Deed of Arrangement;

    until such time, if at all, that those claims are paid in full.”

15. Clause 10.1 of the deed provided:

    “... all Creditors whose claims are admissible under clause 8 of this Deed must accept the terms of this Deed and their entitlements in full and final satisfaction of all Claims so that upon the declaration of a final dividend to Participating Creditors, all such Claims are discharged and extinguished.  If this Deed terminates before payment of a final dividend then all the creditors shall be entitled to claim as creditors in any liquidation of the Company for the whole amount of their Claims except that they shall give a credit to the Company for any amounts received under this Deed or to the extent that their claim against the Company has been discharged in full or in part from other sources.”

16. On 21 April 1999 the debtors entered into a Part X Deed of Arrangement with Geoffrey David McDonald.  Clause 2 and Schedule A provided as follows:

    “2.The Debtors convey and assign to the Trustee all of the property more particularly described in Schedule A UPON TRUST to deal with the same in accordance with this Deed.  The Trustee accepts appointment as Trustee of this Deed and the conveyance and assignments of the property upon the trusts herein after set out.”

    “SCHEDULE A

    1.All divisible property of the Debtors within the meaning of section 116 of the Act, with the exception of the following:

    (a)their interest in the property and improvements known as 15 John Street, Wallsend.

    (b)(i)        a payment to the Company for payment of the fees and expenses, including legal costs of the voluntary administrator; and

    (iii)an amount of $10,000 to be retained by the Debtors,

    both of which are to be allowed by the Trustee from the proceeds of sale of the property and improvements known as 3 Ridgeway Road, New Lambton Heights.”

17. The deed differs from the proposal of 11 March 1999 and the resolution of 31 March 1999 in that it introduces the notion that “all divisible property of the debtors within the meaning of section 116 of the Act” is to be assigned subject to specified exceptions.

18. Clause 3 of the deed provides as follows:

    “The Debtors covenant with the Trustee that they shall pay or cause the Company to pay to the Trustee a sum of money being that proportion of the company’s net profit from future trading as the sum of the Admitted Claims bears to the combined sum of those claims and the Admitted Claims under the Deed of Company Arrangement.”

    The company’s net profit from future trading was defined so as to mean profit from the trading activity of DHED during the term of Company Arrangement as calculated by the Administrator of that deed.

19. Clause 7 of the deed provides as follows:

    “Subject to clause 12, this Deed shall terminate upon the first of the following events occurring:

    (a)the Trustee issuing a certificate to the Debtors pursuant to section 237A of the Act and sending a copy of the said certificate to all creditors;

    (b)a special resolution being passed by creditors terminating the Deed at a meeting of creditors called for that purpose pursuant to clause 12 of this Deed;

    (c)the lapse of 5 years from the Commencement Date;

    (d)an order being made by the Federal Court terminating this arrangement.”

20. Clause 8 of the deed provides as follows:

    “Upon final payment by the Debtors (including any payment to be made by the Company) pursuant to paragraph 3 of this Deed and receipt by the Trustee of the property described in Schedule A, the Debtors are released from all provable debts.”

    The deed does not elaborate on the notion of “final payment by the debtors” or indicate when or by reference to what matters this will be taken to have occurred. I have already observed that neither the proposals nor the resolutions of 31 March 1999 contained any provision for releases. However, the applicant’s counsel eschewed any suggestion that this divergence was itself of legal significance, and accepted that whether or when debts are released is a matter to be determined on the proper construction of Clause 8 of the deed. In counsel’s submission, the fact that there is no reference to a release in the debtors’ proposals or the creditors’ resolutions supports the view that Clause 8, on its proper construction, does not operate to release the debtors until payment in full. In my view, counsel’s approach was correct, as s 236 presupposes that the deed is valid and effective: Khera v National Australia Bank Ltd (1996) 71 FCR 133.

21. Clause 12 of the deed provides as follows:

    “In the event that the Debtors fail to make any payment due pursuant to this Deed or breach any covenant herein, the Trustee shall give notice to the Debtors of such default and the Debtors shall rectify the default.  If the Debtors fail to rectify that default within 7 days after service of any Notice of Default from the Trustee, the Trustee shall, if he considers it in the interest of the creditors to do so, convene a meeting of the creditors to consider the termination of this Deed or to consider further or other resolutions which the Trustee or the creditors may deem appropriate given the circumstances.”

22. During 1999 the following monies were paid to Mr McDonald in consequence of the operation of cl 2 of the Deed of Arrangement:

    -$103,793.71 from the sale of the New Lambton Heights property;

    -$25,000 from the sale to DHED of the assets of the debtors’ electrical business at Kotara.

    In his report dated 28 March 2001 Mr McDonald advised creditors that he then held funds under the Deed of Arrangement of $63,523.57.  Admitted claims of creditors under the Deed of Arrangement total $1,017,631.09 with further unproven claims of $469,347.31.

23. Between 21 April 1999 and 19 February 2001 DHED carried on trading.  During this period no amount was paid by Mr de Vries to Mr McDonald pursuant to cl 3 of the Deed of Arrangement.

24. The Wallsend property which was excluded from the Deed of Arrangement was sold in 1999 and the debtors received a sum of about $20,000 as the net proceeds of sale.  It was not suggested that the emergence of this surplus impeached Mr McDonald’s estimation of the expected position in his report of 19 March 1999.  The sum of $20,000, together with the debtors’ weekly earnings, were used to purchase a block of land at 52 Condor Circuit, Lambton in late 1999 and thereafter the debtors built a three bedroom home on that property.  The debtors estimate that their net equity in that property is of the order of $50,000-$60,000.  Counsel for the applicants conceded that Mr McDonald has never sought the transfer to him of the debtors’ equity in this property, nor has he ever claimed that cl 2 of the deed applied to this property.  Mr McDonald administered the deed on the basis that after acquired property was not caught by cl 2.

25. On 26 February 2001 a meeting of creditors of DHED was held.  At that meeting it was resolved that the Deed of Company Arrangement entered into by the company on 21 April 1999 be terminated and that the company be wound up and that Antony de Vries be appointed liquidator (see Corporations Law: s 446A). It is common ground that Mr Hill is dissatisfied with Mr de Vries’ administration of DHED and believes that he may have a claim against him for damages. On 9 April 2001 Santow J removed Mr de Vries as liquidator of DHED.

26. A meeting of creditors of the debtors was held on 24 April 2001.  At that meeting the following was put forward:

    “That creditors express the view that they are in favour of the Federal Court of Australia terminating the Part X Arrangements of David and Gail Hill and the Federal Court of Australia making a sequestration order against the estates of Mr and Mrs Hill.”

    Eleven creditors whose debts totalled $256,064.66 voted against the motion.  Some of those creditors were relatives or employees of the debtors.  Three creditors whose debts totalled $560,222.12 voted in favour of the matter put forward.  Those creditors were Fisher & Paykel ($58,864.14), Email Ltd ($480,678.98) and Sony Australia ($20,679).  As earlier indicated, Email now neither supports nor opposes the making of a sequestration order against the estates of Mr and Mrs Hill.  Its present attitude is one of indifference as to whether or not such orders are made.

27. The Part X Deed is a “Deed of Arrangement”, as distinct from a Composition or Deed of Assignment: Act, s 187(1). The definition of “divisible property” in s 187 has no direct application in relation to the deed, as the definition is only expressed to apply in relation to a Deed of Assignment.

28. Section 222 of the Act empowers the Court, in specified circumstances, to declare a Deed of Assignment, a Deed of Arrangement or a Composition to be void. Section 236 empowers the Court, to make an order terminating the deed in specified circumstances. Orders under s 232 operate retrospectively to avoid or set aside the Deed or Composition from its inception so that it never was valid. Section 236 presupposes the existence of a valid and effective deed, which is terminated so far as the future is concerned, generally by reason of facts and circumstances that come into existence or which arise after the execution of the Deed of Arrangement: Khera (supra).

1. The debtors’ position in relation to the application to terminate the deed shifted during the course of the hearing.  Originally, their position was that the Part X Deed should be terminated by the Court, but only after the Trustee completed his functions and distributed the funds which he holds.  The application was said to be misconceived insofar as it seeks a sequestration order against the debtors’ estates because the claims of creditors interested in the Part X arrangement have been discharged and released.

2. Later in the hearing the debtors contended that the Part X Deed should not be terminated by the Court. Rather the Trustee should furnish a certificate under s 237A of the Act that the provisions of the deed have been carried out, which would result in the termination of the deed pursuant to cl 7(a).

   Section 236(1)(a)

3. The operation of s 236(1)(a) is enlivened, in the circumstances of the present case, if the debtors have failed to carry out or comply with a provision of the Deed of Arrangement. If that is established the Court may make an order terminating the deed, (s 236(1)) and may, if it thinks fit, forthwith make a sequestration order: (s 236(3)). The Court may not make an order terminating a deed under s 236(1)(a) unless it is satisfied that it would be in the interests of creditors to do so: s 236(2). The power to terminate the deed is discretionary, as is the power to proceed forthwith to make a sequestration order. Those discretions are to be exercised having regard to all relevant matters including the interests of the creditors and of the debtors as well as the public interest: Heuir; Ex parte Benedeich (Cooper J, 10 June 1998, unreported).

4. It is said that the debtors have failed to carry out or comply with the provisions of cl 2 of the Deed of Arrangement inasmuch as:

   -the debtors have not conveyed and assigned their shareholding in DHED to Mr McDonald, the shareholding being divisible property;

   -the debtors have not conveyed and assigned their equity in the house at 52 Condor Circuit, Lambton to Mr McDonald.  Although this property was acquired after the execution of the Part X Deed, it is divisible property and thus within cl 2.

   Shares in DHED

5. I find that the debtors’ shareholding in DHED was valueless. I accept Mr Hill’s evidence that no request was ever made to him by the Trustee for the assignment of those shares, and that if such a request had been made, he would have complied with it. Notice of default in this respect has not been given to the debtors in accordance with Clause 12 of the deed. The issue was raised for the first time in the course of the applicant’s written submissions, delivered on the eve of the hearing. A share transfer has since been executed and delivered to the Trustee. A submission that this transfer was avoided by the operation of s 493(2) of the Corporations Law was not persisted with.

6. The original proposal, accepted at the creditors’ meeting, was for the assignment of the debtors’ property to the Trustee, subject to specified exclusions. The Part X Deed provided for all divisible property of the debtors within the meaning of s 116 of the Act, with specified exceptions, to be transferred to the Trustee. Whether after acquired property is caught by those provisions is a matter to which it will be necessary for me to return. However, the provisions of the deed at least catch property of the debtors held as at the date of the Part X Deed which is not within the exceptions. The shares held by DHED satisfy that description, hence cl 2 operates in relation to those shares.

7. Clause 2 purports to “convey or assign” to the Trustee the property to which the clause applies, including the shares.  It effects an immediate equitable assignment of the property to the Trustee.  No more was required to be done on the part of the debtors in order to create a valid equitable assignment of the property the subject of cl 2.  The deed does not contain any other express provision in relation to the assignment of the property the subject of cl 2.

8. The transfer of legal title to the shares would require co-operation between the parties, as the Trustee could not be required to become a member of DHED without his consent.  The Part X Deed probably contains an implied term to the effect that the debtors would co-operate in bringing about a transfer of legal title to the shares if so requested by the Trustee.

9. As cl 2 is self-executing, there has not been a failure to carry out or comply with the provisions of cl 2 by reason of the failure to transfer legal title to the shares to the Trustee until during the course of the hearing.  Nor has there been a failure to carry out or comply with any implied term of the Part X Deed, because any such term would not rise above a duty to co-operate in bringing about a transfer of legal title if the Trustee desired it.  The Trustee had not evinced any such desire.  Accordingly, the applicant has not made out its case that the debtors failed to comply with their obligations under cl 2 of the Part X Deed in relation to the DHED shares.

10. If I were wrong in that conclusion, I would not make an order in the exercise of my discretion under s 236(1)(a) terminating the deed by reason of a failure on the part of the debtors to carry out or comply with the provisions of the deed in relation to the DHED shares. The failure was technical in character, and devoid of practical consequences. The transfer of valueless shares is an empty formality which was overlooked both by the debtors and the Trustee. As soon as the matter was raised, the debtors executed and delivered the requisite transfer to the Trustee. No legitimate interest of any affected party ─ debtor, creditor or public – would be served by termination of the deed in those circumstances. The requirements of s 236(1) are not satisfied.

    Equity in Condor Circuit, Lambton

11. The provisions of cl 2 and Schedule A to the deed are ambiguous, since on any literal reading, in the absence of a sequestration order, there is no “divisible property ... within the meaning of s 116 of the Act”. It is therefore permissible to resort to surrounding circumstances, including the aim or object of the Part X Deed in order to determine the meaning or legal effect of the words used.

12. The creditors’ resolution passed at the meeting of 31 March 1999 required the debtors to execute a Deed of Assignment, and it specified the matters which should be catered for by the deed (cf Act s 204(1)(b); s 204(2)). The first of those matters was expressed in the following terms:

    “An assignment of the debtors’ property, excluding interest in the house located at 15 John Street, Wallsend, NSW and other non-divisible property pursuant to Section 116 of the Act.”

    Prior to the meeting the Trustee had circulated to creditors the report required by s 189A of the Act. In this respect, the Trustee contrasted the scheme of the deed with the position which would apply on bankruptcy. The report stated:

    “The alternative for creditors is for the debtors to declare themselves bankrupt, which provides for the realisation of after acquired property and income contributions during the three year period of a normal bankruptcy...”.

13. One of the objects of the Part X Deed was to carry the creditors’ resolution into effect.  When regard is had to the terms of the resolution and to the Trustee’s report, it is clear that the debtors’ proposal did not include after acquired property.  The proposal does not refer to after acquired property, and the Trustee’s report makes it plain that this omission was deliberate.  The description of the property to be assigned suggests that the subject matter of the assignment is property existing at the date of the deed.  That is reinforced by the fact that the debtors were allowed to have the benefit of their interest in the property at Wallsend and $10,000.  It cannot have been intended that upon conversion into other assets, the benefit of the retained assets would revert to the Trustee.

14. Accordingly, the reference to divisible property of the debtors in Schedule A should be read as property of the debtors as at the date of the deed.

15. Even if I were wrong in that conclusion it would not follow that there had been a failure to carry out or comply with a provision of the deed.  For the reasons earlier given, cl 2 is self-executing and the Trustee has never made any request of the debtors in relation to the transfer of the equity in the Lambton property.

    Section 236(1)(b)

16. The operation of s 236(1)(b) is enlivened if the Court is satisfied that the Deed of Arrangement cannot be proceeded with without injustice or undue delay to the creditors. The debtors commit an act of bankruptcy if the Deed of Arrangement is terminated by the Court under s 236: Act s 40(1)(m). A creditor’s petition could be presented on the basis of that act of bankruptcy (s 44) or the Court may, in the present proceedings, make the sequestration order sought by the applicant forthwith (s 236(3)).

    The effect of Clause 8

17. The debtors contend that the application is misconceived insofar as it seeks a sequestration order against the debtors’ estates, as the debtors have been released by cl 8 of the deed.  The applicant contends that the cl 8 release is not operative until creditors have received 100 cents in the dollar with respect to their claims.  Alternatively, the applicant contends that the “final payment” is the last payment made pursuant to cl 3 prior to the termination of the deed.  On this alternative approach, the “final payment” may not be recognisable as such at the time when it is made – it may only be recognisable as such once the deed in fact terminates.  The debtors contend that “upon final payment” means “on performance of the cl 3 obligations insofar as they remain capable of performance”, such that once it emerges that no payments can be made pursuant to cl 3, the expression is satisfied.

18. The expression “upon final payment” is ambiguous such as to justify reference to relevant surrounding circumstances.  The following circumstances are relevant.  First, neither the debtors’ proposal nor the creditors’ resolution contains any provision for a release, suggesting that exoneration from liability with respect to claims was dependent upon payment (cf Act s 234).  Second, the Trustee’s statutory report referred to a release “if the obligations under (a), (b) and (c) above” are met.  As earlier indicated, obligation (c) was described in the proposal and in the report in these terms:

    “(c)Thirdly, contributions will be made from time to time from the continued trading of the retail store.  These contributions are to allow a return to creditors of 100 cents in the dollar.  These funds will be distributed pari passu amongst creditors of this deed and creditors of the company’s Deed of Company Arrangement.”

    (In the creditors’ resolution, the words which I have emphasised were omitted, and a new sentence substituted.  That sentence was: “These contributions will be to a maximum of total provable debtors claims.”)  Third, there was an evident intention flowing from the proposals and the terms of the creditors’ resolutions that DHED creditors and Part X creditors would be treated in like manner.  Under the Deed of Company Arrangement, if the deed terminates before payment of a “final dividend”, then creditors can prove in the liquidation of DHED for the amount of their claims subject to giving credit for amounts received.  This suggests that the parties regarded a “final dividend” as being the payment which results in payment of the claim in full and that the expression “final payment” has a similar signification.

19. For these reasons, cl 8 only operates on payment to the Trustee of a sum sufficient to allow a return to creditors of 100 cents in the dollar.  On this view, a release is only given in circumstances where, as a practical matter, a release may be unnecessary.  That is an argument against the construction which I favour.  But I am unable to construe the expression “upon final payment ... pursuant to paragraph 3 ...” as triggered by the occurrence of circumstances which demonstrate that no payment pursuant to cl 3 will ever be made.

    Proceeding with the deed

20. If the deed is proceeded with, the following consequences will ensue:

    ·    If I am right in my view that cl 2 applies only to property in existence as at the date of the deed, then no further benefit will accrue to creditors pursuant to cl 2.  If I am wrong in that view there may be a further $50,000-$60,000 flowing from the debtors’ equity in the Lambton property, subject to the realisation costs.  There may also be a claim against Mr de Vries, but whether there is a viable claim, and the value of any such claim, are essentially matters of speculation.

    ·    No funds have been received pursuant to cl 3 although DHED carried on business for almost two years.  It was not submitted that this failure was due to any default on the part of the debtors or of DHED.  In the light of the termination of the Deed of Company Arrangement, Part X creditors cannot now gain any benefit from DHED.  DHED is in liquidation and has ceased to carry on its business.  Even if it were possible for DHED to resume its business activities, any profits from those activities would not be “net profit from future trading”, for the purposes of cl 3, because only trading activity of DHED during the term of the Deed of Company Arrangement satisfies that description.

    ·    The sum of $63,523.67 would be applied by the Trustee in the priority specified in cl 4 of the deed.

    ·Unless terminated pursuant to cl 7(a) or (b) the deed will continue until 21 April 2004, during which time there is effectively a moratorium on creditors’ claims by virtue of s 233 of the Act.

    These consequences will ensue because the deed is “proceeded with” if it continues to regulate the relationship between the parties.  In the present context the deed is “proceeded with” if it is not terminated.

21. In his report of 28 March 2001 the Trustee advised of difficulties which had been encountered in declaring a dividend by reason of “confusion and dispute” as to whether certain claimants were creditors of the partnership or of DHED.  However, the Trustee stated that it was his intention to declare a dividend to creditors, from which I infer that, at least in his own mind, the confusion and dispute as to who is entitled to a payment has been resolved.

22. The injustice or undue delay on which the applicant relies in support of its contention that the deed should be terminated is that if the deed is proceeded with, creditors will be prevented from enforcing their claims until 21 April 2004, yet the payments referred to in cl 3 have not been made and will not be made in the future.

23. The debtors contend that loss of the prospective return under cl 3 is not a proper foundation for an order on the basis of injustice.  As any return under cl 3 was obviously dependent on DHED’s future trading performance, a nil return under cl 3 was always a possibility.  Nor can the termination of the Deed of Company Arrangement, and the liquidation of DHED be regarded as giving rise to “injustice”, because it was readily foreseeable that if DHED’s trading performance was unsatisfactory, termination of the Deed of Company Arrangement and liquidation of DHED were always likely outcomes.

24. The debtors submit that the present case is analogous to Re Heuir (supra).  There, the applicant contended that a Deed of Arrangement should be terminated, because it was entered into in the expectation that the sole asset of the debtors was worth $275,000, whereas it realised only $200,000 on sale.

25. Cooper J refused to terminate the deed, which was capable of being carried into final effect.  The debtors entered into the deed in order to avoid bankruptcy and had done what was required of them under the deed, and so far as they are concerned, the matter has been completed.  The only circumstances which arose after the meeting of creditors is that creditors realised that their expectation of receiving 100 cents in the dollar would not be met.  Their expectation that it would be met was not reasonably based.  The creditors made a commercial judgment on the material available to them.  There was no suggestion that the debtors had done anything which frustrated or may have frustrated the deed or prevented it being administered in accordance with its terms or engaged in any conduct which thwarted unsecured creditors’ expectations.

26. Re Heuir is a decision on its own facts.  With respect, I do not disagree with the decision to which Cooper J came, but the case does not lay down any principle of general application, except insofar as it confirms that the interests of the debtors is a relevant consideration to be taken into account in deciding whether or not to terminate the deed.

27. Individual prejudice or detriment is not of itself “injustice”.  The mere fact that creditors’ expectations are disappointed is similarly, and of itself, insufficient to constitute “injustice”.  “Injustice” requires at least that there should be some unfairness in proceeding with the Deed of Arrangement.  Alternatively it must be established that the deed cannot be proceeded with without undue delay.

28. The scheme of the Part X Deed was to impose a moratorium on creditors’ claims for a period of five years so as to enable progressive satisfaction of those claims from the trading activities of DHED with a view to their payment in full, even though payment in full was not assured.  Once the Deed of Company Arrangement came to an end, that scheme was frustrated, in the sense that it became incapable of achievement, there having been no achievement up to that point.  The rationale for the moratorium - viz to provide an opportunity for payment of debts from the trading activities of DHED – ceased to be operative.  In those circumstances, subject to one possible qualification, I think it is unfair that creditors should be held to a moratorium when the purpose behind the moratorium is no longer capable of achievement.  That is so even though the failure is not shown to be due to any fault on the part of the debtors, and even though the Trustee was paid $25,000 by DHED to acquire the partnership business, which has now failed.  The $25,000 was in the nature of a nominal payment to support the transfer of the business.  It was not the measure of the expected return from the business.  The present case is distinguishable from Re Heuir on its facts as, in that case, there was merely a shortfall against expectations unreasonably held, rather than a substantial frustration of the scheme.  Here there is now no chance that Part X debts will be discharged in whole or in part from trading activities on the part of DHED, and was the rationale for the scheme of arrangement, and the moratorium effected by it was to allow the opportunity for this to occur.  In those circumstances, subject to the possible qualification earlier referred to, the Deed of Arrangement cannot be proceeded with without injustice and undue delay to creditors.

29. The possible qualification to which I referred in the preceding paragraph is the ability of creditors, by special resolution, to terminate the deed.  Clause 7(b) of the deed has no relevant operation, as it only operates in the circumstances specified in cl 12.  It has not been contended that the debtors have failed to make a payment due pursuant to the deed, and in the view which I take, it has not been shown that the debtors are in breach of the deed.

30. However, s 235 provides that a Deed of Arrangement is terminated by:

    “(b)the passing of a special resolution to that effect by a meeting of creditors called for the purpose;

    (c)        an order of the Court to that effect under s 236; or

    (d)the occurrence of any circumstances or event on the occurrence of which the deed provides that it is to terminate.”

    Under s 235(b) creditors may by special resolution bring about a termination of the deed whether or not the debtors are in breach of its terms.

1. Paragraphs (b), (c) and (d) of s 235 are alternative bases on which a deed may be terminated. The existence of the power of creditors to terminate under par (b) does not detract from or qualify the power of the Court under par (c). A court may still find, as a matter of fact, that the Deed of Arrangement cannot be proceeded with without injustice or delay even though there are other means by which the deed may be brought to an end. Thus my conclusion that the Deed of Arrangement cannot be proceeded with without injustice or undue delay to the creditors does not require qualification simply because the deed may be terminated by a special resolution of creditors under s 235(b).

2. The present application was filed on 30 March 2001. On 28 March 2001 the Trustee convened a creditors’ meeting to be held on 10 April 2001 to discuss the Trustee’s report of 28 March 2001, and to determine by special resolution whether to terminate the Deed of Arrangement pursuant to s 235(b) of the Act. That meeting was adjourned until 24 April 2001. On that occasion for some reason which does not appear from the minutes, the Trustee gave it as his opinion that the matter was “not one which could be passed as a resolution under the Bankruptcy Act”, and the expression of view referred to in par 26 above was voted on by those present at the meeting.

3. The debtors ultimately submitted that the Court should not order the termination of the deed. It should dismiss the application, and allow the Trustee to distribute the funds which he holds, whereupon the Trustee should furnish the debtors with a certificate pursuant to s 237A of the Act that the provisions of the deed have been carried out. On the furnishing of that certificate, and a copy being sent to all creditors, the deed would come to an end in accordance with cl 7(a) thereof. Termination of the deed in that way would not give rise to an act of bankruptcy, and in any event, the claims of Part X creditors would be released pursuant to cl 8.

4. There are a number of problems with this submission. First, it is by no means clear to me that the Trustee would be entitled, in these circumstances, to certify that the provisions of the deed have been carried out. In the view which I take, the provisions of the deed have been rendered incapable of achievement by the failure of DHED to earn profits, and by the termination of the Deed of Company Arrangement. Section 237A applies where the provisions of the deed have been achieved; it does not apply when they have become incapable of achievement (cf s 232(1)). Second, the enquiry for which s 236(1)(b) provides is whether or not the deed can be proceeded with in all its elements without injustice, not merely whether the next step in the administration of the deed can be undertaken without injustice, (although this may be a factor relevant to the exercise of the discretion). Third, for the reasons earlier given, cl 8 does not operate as a release of the claims of Part X creditors.

5. Neither party submitted that I should adjourn this application pending a distribution by the Trustee of the monies which he holds.  The ultimate contest was between dismissing the application and making sequestration orders.  It seems to me that this reflects the reality of the situation because it would be unsatisfactory to terminate the deed, unless I were prepared to make a sequestration order.  If the deed were simply terminated the monies held by the Trustee could not be distributed by him to creditors, and there would be delay and expense in taking the matter further without substantial benefit to anyone.

6. The following factors might militate against the making of a sequestration order.  First, the making of such an order would deny the debtors the opportunity of proposing another Part X arrangement.  Second, a number of creditors are opposed to the making of an order, and Email no longer presses for a sequestration order to be made.  Third, the debtors’ equity in the Lambton property, derived from funds outside the Part X arrangement, would vest in the Trustee in bankruptcy.  Fourth, appointment of a new Trustee may involve additional expense beyond that likely to be incurred if Mr McDonald effectively completed his administration by distributing the funds which he holds.

7. As to the first, the debtors have not put forward in these proceedings some other type of administration outside bankruptcy which they wish to put to creditors.  Rather, their stance was that the claims of Part X creditors have been released, yet they failed to make good that contention.  As to the second, all that appears is the terms of the resolution, and the votes cast for and against, without any indication of why creditors who voted against the motion considered it appropriate that the Deed of Arrangement continue.  Although creditors were notified of the hearing pursuant to Order 77 rule 57, no creditor sought to take part in the proceedings.  As to the third, it was inherent in the Part X proposal that if the deed were prematurely terminated by the Court, or by resolution of the creditors, that property otherwise outside the operation of the deed would be at risk.  As to the fourth, that may or may not be so.  Some criticism was advanced of Mr McDonald’s administration of the Part X Deed, and the possibility that his resignation might be sought was foreshadowed by the applicant.  Mr McDonald lodged a submitting appearance, and it would not be appropriate for me to make findings critical of his administration, without affording him an opportunity of defending himself.  It is sufficient for me to say that an enquiry as to whether funds held could be more cheaply distributed by Mr McDonald than by a trustee in bankruptcy, whilst relevant to the ultimate question of whether the deed should be terminated and a sequestration order made, represents only a very small part of that question.

8. I conclude that the applicant has made out its case that the Deed of Arrangement cannot be proceeded with without injustice and undue delay to creditors because creditors’ claims have not been extinguished by the deed, and because the payments expected to flow from the continued trading of DHED have not been made, and will not be made.  In these circumstances it is unjust that the creditors should suffer a moratorium on their claims until 2004 when the purpose sought to be achieved by the moratorium has not been achieved and is incapable of achievement.  There would also be undue delay to the creditors in terms of their ability to enforce their claims if the deed were proceeded with.

I certify that the preceding sixty-six (66) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely.

Associate:

Dated:             27 June 2001

Counsel for the Applicant:	P A Fury
Solicitor for the Applicant:	Cutler Hughes & Harris
Counsel for the Respondent:	J E Thomson
Solicitor for the Respondent:	Gordon & Johnstone
Date of Hearing:	13, 14 June 2001
Date of Judgment:	27 June 2001