Hill v Fisher & Paykel Australia Pty Limited
[2001] FCA 1880
•21 DECEMBER 2001
FEDERAL COURT OF AUSTRALIA
Hill v Fisher & Paykel Australia Pty Limited [2001] FCA 1880
BANKRUPTCY – Deed of Arrangement under Part X of the Bankruptcy Act 1966 (Cth) – whether Part X Deed of Arrangement provided for release of debtors – whether primary judge erred in construction of Part X Deed – whether primary judge erred in terminating Deed – reference to surrounding circumstances in construction of Part X Deed – whether primary judge erred in making sequestration orders
Bankruptcy Act 1966 (Cth) s 189A, s 236(1)(b), s 236(3), Part X
Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1WLR 989 referred to
Chitty on Contracts 28th ed. 1999 Vol 1 par 12-064
GAIL VALMA HILL & ANOR v FISHER & PAYKEL AUSTRALIA PTY LIMITED & ANOR
N 1028 of 2001CARR, CONTI & STONE JJ
21 DECEMBER 2001
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N 1028 OF 2001
BETWEEN:
GAIL VALMA HILL
FIRST APPELLANTDAVID RONALD HILL
SECOND APPELLANTAND:
FISHER & PAYKEL AUSTRALIA PTY LIMITED
FIRST RESPONDENTGEOFFREY DAVID McDONALD
SECOND RESPONDENTJUDGE:
CARR, CONTI & STONE JJ
DATE OF ORDER:
21 DECEMBER 2001
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.The orders made by the primary judge on 27 June 2001 in proceeding N 7163 of 2001 be set aside.
3.In lieu thereof the application in proceeding N 7163 of 2001 be dismissed.
4.The first respondent pay the appellants’ costs of the proceedings at first instance and of the appeal, including any reserved costs.
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 1028 OF 2001
BETWEEN:
GAIL VALMA HILL
FIRST APPELLANTDAVID RONALD HILL
SECOND APPELLANTAND:
FISHER & PAYKEL AUSTRALIA PTY LIMITED
FIRST RESPONDENTGEOFFREY DAVID McDONALD
SECOND RESPONDENT
JUDGE:
CARR, CONTI & STONE JJ
DATE:
21 DECEMBER 2001
PLACE:
SYDNEY
REASONS FOR JUDGMENT
THE COURT:
Introduction
This is an appeal from the orders made by of a judge of this Court on 27 June 2001 made first, pursuant to s 236(1)(b) of the Bankruptcy Act 1966 (Cth) (“the Act”), that the Deed of Arrangement under Part X of the Act, entered into on 21 April 1999 between the first and second appellants as debtors, and the second respondent as trustee, be terminated, and made secondly, pursuant to s 236(3) of the Act, that sequestration orders be made against the estates of the first and second appellants.
Factual and documentary background
The following narrative of the factual and procedural background to the disputes is taken largely from the reasons for judgment of the learned primary judge. Some of the matters hereafter recorded have no final bearing upon the issues arising on the appeal, but they assist to provide some insight contextually into what might otherwise seem to require explanation or elaboration.
The appellants were partners in a business known as “David Hill Betta Electrical and Gas” and were also the corporators of David Hill Electrical Discounts Pty Ltd (“DHED”). DHED conducted for many years prior to 1993 an electrical goods retail business at Kotara near Newcastle in the State of New South Wales. In 1993 an informal arrangement was reached between DHED and its major creditors, being suppliers of electrical goods, for payment of outstanding debts, upon the basis that future trading would be undertaken through a partnership structure involving the appellants personally, rather than DHED. Those debts were subsequently paid in full pursuant to that informal arrangement, though both DHED and the partnership commenced to trade in tandem, without the regulation of any formal ownership structure. It was not always apparent whether the claim of a particular creditor was properly to be made against DHED, or against the partnership of the appellants, or, perhaps against all of them.
On 25 February 1999 DHED appointed Antony de Vries, Chartered Accountant, to be the administrator of DHED under Part 5.3A of the Corporations Law. That step (and the choice of Mr de Vries instead of an accountant recommended by the appellants’ solicitor) was undertaken at the insistence of the first respondent, one of the suppliers to the business. On the same day the appellants, under s 188 of the Act, authorised the second respondent, a registered trustee, to call a meeting of their creditors, to take control of their property pursuant to Part X of the Act.
On 11 March 1999 each of the appellants executed a statement for the information of their creditors indicating how they proposed that their affairs be dealt with under Part X of the Act. The two statements were in identical terms. These proposals were subsequently incorporated into a report dated 19 March 1999 prepared by the second respondent pursuant to s 189A of the Act (“s 189A report”). As set out in sub-paragraphs of paragraph 5 of that report, the appellants proposed that a Deed of Arrangement under Part X of the Act should contain the following terms:
“(1)An assignment of the Debtors’ property to a Registered Trustee, excluding interest in a house located at 15 John Street, Wallsend, NSW and other non-divisible property pursuant to section 116 of the Act.
(2)The retail partnership will cease trading and the business will be transferred to David Hill Electrical Pty Ltd. This will only occur should the company’s creditors agree on a Deed of Company Arrangement.
(3)Contributions of approximately $1,400,000 to be sourced from the sale of the residual (sic) property located at 3 Ridgeway Road, New Lambton Heights and the future profits from the continued trading of the electrical store located at 14 Northcott Drive, Kotara, NSW.
(4)Those 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 $130,000.00.
(b)Secondly, a contribution will be made from the 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 $25,000.00.
(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.
Note: Due to point (c) the Part X proposal is conditioned upon the acceptance of a Deed of Company Arrangement by the Creditors of the Company.
(5)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.
(6)Creditors release the debtor from all debts, liabilities and claims if the obligations under (a), (b) and (c) above are met.”
The only material difference between the s 189A report, and the statements of the appellants made on 11 March 1999 was the addition of sub-paragraph (6) extracted above.
In annexures to the s 189A report it was estimated that the likely dividend to creditors if the appellants were made bankrupt would be 9.92 cents in the dollar, or 100 cents in the dollar if the proposed Part X Deed of Arrangement were implemented. It was apparent from those annexures that the latter estimate of 100 cents in the dollar was substantially dependent on estimated trading profits from the electrical retail store over the ensuing five years. In the body of the report however, it was stated that creditors should note from the relevant annexure that under the proposed deed, “they might [emphasis added] receive a dividend of 100 cents in the dollar”. The disclosed indebtedness (totalling $1,280,000.00) was all unsecured and was not capable of accurate division between the appellants and DHED.
On the previous day, namely 18 March 1999, Mr de Vries had circulated a report to creditors of DHED. In that report the projected return of 100 cents in the dollar over 5 years was described as “optimistic”, but Mr de Vries expressed the belief nevertheless that the creditors’ position would not be jeopardised by continued trading, as a nil return was likely to be derived from the liquidation of DHED. The second respondent, in his s 189A report, expressed the opinion that,
“… if the Debtors were to be declared bankrupt, there is little likelihood of any additional funds being available for creditors that would be more beneficial to creditors than the Part X proposal”.
On 31 March 1999 a contemporaneous meeting of creditors of DHED and of the appellants was convened. According to certificates signed on 13 April 1999 by Mr de Vries and Mr Meissel as minutes secretary, it was resolved by special resolution that the appellants should each execute a deed of arrangement pursuant to Part X of the Act. The resolution of the appellants’ creditors specified the matters for which the deed should make provision. The resolutions substantially adopted the terms of the s 189A report of 19 March 1999 set out in [5] above, except for two matters of potential significance. The first was that the wording of sub-paragraph (4)(c) of paragraph 5 was changed so that it read as follows:
“(c)Thirdly, contributions will be made from time to time from the continued trading of the retail store. These contributions will be to a maximum of total provable creditors claims. These funds will be distributed pari passu amongst creditors of this Deed and creditors of the company’s Deed of Company Arrangement.”
The words underlined were inserted in substitution for “These contributions are to allow a return to creditors of 100 cents in the dollar”. The second potentially significant change from the terms of the s 189A report was the omission of sub-paragraph 6 relating to the matter of releases. It appears that a resolution was also passed at the same meeting that DHED should enter into a “mirror” form of Deed of Company Arrangement, though the text of such resolution has not (apparently) been reproduced in the Appeal Book.
On 21 April 1999, DHED and Mr de Vries entered into a Deed of Company Arrangement, pursuant to the Corporations Law (Part 5.1). The Deed provided for the net profit from the trading activities of DHED during the term of the Deed to be paid into the “Administrator’s Fund” at quarterly intervals. The Administrator’s Fund was to be distributed by the Administrator in the order of priority specified in Clause 9.1 of the Deed. Clause 9.1.4 concerned a sum of $25,000.00 to be paid to the second respondent as trustee under the appellants’ Part X Deed of Arrangement (see [11] below) for the purchase by DHED of the assets of the appellants’ partnership. Clause 9.1.6 provided for the distribution of the Administrator’s Fund, after prior ranking claims, as follows:
“pari passu between the following claims:
(i) the sum total of Participating Creditors: and
(ii)the sum total of Bankruptcy Creditors under the Deed of Arrangement;
until such time, if at all, that those claims are paid in full.”
Clause 10.1 of the Deed of Company Arrangement 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 of 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.”
Clauses 14.1 and 14.2 of the Deed of Company Arrangement further provided:
“14.1 This Deed terminates upon the earliest of any of the following:
14.1.1The Administrator receives all of the payments required by clause 7 of this Deed and finally distributes the Administrator’s Fund in accordance with clause 9 of this Deed. The Administrator must certify to that effect in writing and must within 28 days lodge with the Commission a notice of termination of this Deed in the following form:
David Hill Electrical Discounts Pty Limited
(Subject to a Deed of Company Arrangement)I, Antony de Vries, as Administrator of the Deed of Company Arrangement executed on < >, CERTIFY that the Deed has been wholly performed and the execution of the notice terminates this Deed.
14.1.2On the passing of a resolution for termination of this Deed at a meeting of creditors convened for that purpose.
14.1.3At the expiration of 5 years from the Commencement Date.
14.2On this Deed terminating pursuant to sub clause 14.1.2 of this Deed then in those circumstances the Company shall be deemed to have passed a resolution under section 491 of the Law that it be wound up voluntarily and the Administrator be appointed as liquidator of the Company and the Administrator accepts such appointment as liquidator of the Company.”
Also on 21 April 1999, the appellants entered into a Deed of Arrangement under Part X of the Act (“Part X Deed”) in favour of the second respondent as trustee. Recital A was in the following terms, which reflect a measure of consistency with sub-paragraph 5(6) of the s 189A report extracted in [5] above, and seemingly also explain the omission to which we have referred in [8] above:
“The Debtors [appellants] are unable to pay their creditors in full and have made an offer to enter into a Deed of Arrangement pursuant to the Act in full satisfaction of the debts owing by them.”
Clause 2 and Schedule A of the Part X Deed 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
(ii)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.”
We observe in passing, as did the primary judge, that the Part X Deed thus purported to stipulate that “all divisible property of the debtors within the meaning of section 116 of the Act” was to be assigned by the appellants subject to specified exceptions. This is despite the statutory definition of “divisible property”, contained in s 187 of the Act, relates only to a deed of assignment, and not a deed of arrangement.
Clause 3 of the Part X Deed provided as follows:
“
3.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 expression “Admitted Claim” was defined by Clause 1 to mean “… a debt or claim admitted by the Trustee for payment of a dividend under this Deed”.
Clause 7 of the Part X Deed provided:
“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.”
Clause 8 of the Part X Deed provided:
“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.”
We interpolate here to mention in the above context s 234(1) of the Act, which is in the following terms:
“Except in so far 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.”
Clause 12 of the Part X Deed provided:
“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.”
During 1999 the following monies were paid to the second respondent in consequence of the operation of Clause 2 of the Part X Deed:
· $103,793.71 from the sale of the New Lambton Property;
· $25,000 from the sale to DHED of the assets of the appellants’ electrical business at Kotara.
In his report dated 28 March 2001, the second respondent advised the appellants’ creditors that he then held funds under the Part X Deed of $63,523.57. Admitted claims of creditors under the Part X Deed were said to total $1,017,631.09, with further unproven claims said to be $469,347.31.
Between 21 April 1999 and 19 February 2001, DHED carried on trading as a retailer of electrical goods. During this period, no amount was paid by Mr de Vries to the second respondent pursuant to Clause 3 of the Part X Deed (see again [13] above).
The Wallsend property of the appellants, which was excluded from the Part X Deed, was sold in 1999, and the appellants received a sum of about $20,000 as the net proceeds of sale. The primary judge observed that there had been no suggestion that the emergence of this surplus impeached the second respondent’s previous estimate of the expected financial position set out in his s 189A report (see [5] above). The sum of $20,000, together with the appellants’ weekly earnings, was used by the appellants in late 1999 to purchase a residential parcel of land at 52 Condor Circuit, Lambton. Thereafter the appellants built a three bedroom home on that property. The appellants estimated that their net “equity” in their Lambton home was of the order of $50,000-$60,000. The first respondent conceded to the primary judge that the second respondent had never sought the transfer of the appellants’ equity in this property, nor had the second respondent ever claimed that Clause 2 of the Part X Deed applied to this property. The second respondent administered that Deed on the basis that acquired property did not fall within Clause 2.
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 DHED on 21 April 1999 be terminated, that DHED be wound up and that Mr de Vries be appointed liquidator (see s 446A of the Corporations Law).
It was common ground at first instance that the second appellant, Mr Hill, was dissatisfied with Mr de Vries’ administration of DHED, and believed that he may have a claim against him for damages for professional negligence. On 9 April 2001 Santow J of the Supreme Court of New South Wales removed Mr de Vries as liquidator of DHED.
A meeting of the appellants’ creditors was held on 24 April 2001. At that meeting the following motion was put:
“That creditors express the view that they are in favour of the Federal Court of Australia terminating the Part X Arrangements of David & 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 appellants. Three creditors whose debts totalled $560,222.12 voted in favour of the motion. Those creditors were the first respondent ($58,864.14), Email Ltd ($480,678.98) and Sony Australia ($20,679).
At the commencement of the hearing before the learned primary judge, Email announced that although it supported the termination of the Part X Deed at the meeting on 24 April 2001, it neither supported nor opposed the making of sequestration orders against the estates of the appellants. It was granted leave for its part to discontinue the proceedings. The second respondent filed a submitting appearance. In the result, the first respondent alone pressed for the sequestration of the estates of the appellants.
The course of the proceedings at first instance, and the reasons for decision of the Primary Judge
As his Honour recorded, the appellants’ position in relation to the termination or otherwise of the Part X Deed changed during the course of the hearing before him. Originally, their position was that the Deed should be terminated by the Court, but only after the second respondent completed his functions and distributed any funds which he held. Later in the hearing before the primary judge, the appellants contended that the Part X Deed should not be terminated by the Court, but that the second respondent should furnish a certificate under s 237A of the Act to the effect that the provisions of the Deed had been carried out, resulting in the termination of the Deed pursuant to Clause 7(a) thereof. The appellants contended in any event that the present application was misconceived, in so far as it sought sequestration orders against their respective estates, because the claims of creditors falling within the scope of the Part X Deed had been discharged and released.
His Honour found, for reasons which he outlined and which need not be repeated, that the appellants had not failed to carry out or comply with a provision of the Part X Deed, as was asserted by the first respondent. Accordingly he held that s 236(1)(a) of the Act was not enlivened, and consequently an order for termination of the Part X Deed should not be made on that basis. The first respondent does not seek to challenge that conclusion.
His Honour then addressed the operation of s 236(1)(b) of the Act, for the purpose of considering whether he was satisfied that the Part X Deed could not proceed without injustice or undue delay to the creditors, thereby justifying an order for termination on that alternative basis. As part of this enquiry, his Honour addressed the appellants’ contention that the application of the first respondent before him was misconceived, in so far as it sought a sequestration order against their estates, because in the events which had happened, they had been released by the operation of Clause 8 of the Deed, which is set out at [15] above. In essence, the appellants contended that the expression “upon final payment” in Clause 8 meant “on performance of the Clause 3 obligations in so far as they remain capable of performance”, such that once it emerged that no payments were capable of being made pursuant to Clause 3 of the Deed, that expression was satisfied. It is that contention which is the focus of debate on the present appeal, it being mutually accepted that no such payments could hereafter be made because of the permanent cessation of the trading contemplated by the Part X Deed.
The primary judge held that the Clause 8 expression “upon final payment” was ambiguous, thus justifying reference to any surrounding circumstances of relevance. These circumstances were identified by his Honour as follows:
· the fact that neither the appellants’ proposal nor the creditors’ resolution contained any provision for a release. This suggested that exoneration from liability with respect to claims was dependent on payment, and in that regard, his Honour referred to s 234(1) of the Act extracted in [15] above);
· the s 189A report referred to a release “if the obligations under (a), (b) and (c) above” were met, referring thereby to sub-paragraphs (a), (b) and (c) of paragraph 4 of the s 189A report; see [5] above;
· there was an evident intention flowing from the proposals advanced by and on behalf of the appellants and the terms of the creditors’ resolutions that DHED’s creditors and the appellants’ creditors would be treated in like manner. The Deed of Company Arrangement provided that if it were terminated before payment of a “final dividend” DHED’s creditors could prove in the liquidation of DHED for the amount of their claims, subject to giving credit for amounts received (see Clause 10.1 of that Deed extracted in [9] above). It therefore should follow, contrary to the appellants’ argument, that the appellants’ creditors could do likewise under the auspices of the Part X Deed. It followed, in his Honour’s view, that the parties would have regarded the term, “final payment” in Clause 8 of the Part X Deed, as having a similar signification to “final dividend” in the Deed of Company Arrangement, being the payment which would have resulted in satisfaction of the claims in full.
For these three reasons, his Honour concluded that Clause 8 of the Part X Deed only operated upon payment to the second respondent of a sum sufficient to allow a return to the appellants’ creditors of 100 cents in the dollar. His Honour acknowledged it to tend against this construction that a release would only occur or be given in circumstances where, as a practical matter, a release might be unnecessary. Nevertheless his Honour found himself unable to construe the Clause 8 expression “upon final payment … pursuant to paragraph 3…” as triggered by the occurrence of circumstances which demonstrated that no payment pursuant to such Clause 3 of the Part X Deed would ever be made.
The primary judge then considered the consequences of the Part X Deed continuing in operation for the residue of the five year term, that is until 2004. (As we have already indicated, for the reason explained in [28] above, such consequences are essentially academic. Nevertheless we think it appropriate to record reference to his Honour’s views on such consequences, as they are not entirely divorced from the issue as to whether the estates of the appellants should be sequestrated, being the critical issue arising on the on appeal). Those consequences were indicated by his Honour to be as follows:
· if correct in his view that Clause 2 of the Part X Deed applied only to property in existence as at the date of that Deed (see [12] above) then no further benefit would accrue to creditors pursuant to that Clause. If that view were to be incorrect, there might be a further $50,000-$60,000 flowing from the appellants’ equity in the Lambton property; there might also be a claim for damages against Mr de Vries (see [22] above), but his Honour considered that this was essentially a matter of speculation;
· no funds had been received pursuant to Clause 3 of the Part X Deed (extracted at [13] above), although DHED had carried on business for almost two years. In the light of the termination of the Deed of Company Arrangement, the Part X creditors could no longer gain any benefit from DHED, which was in liquidation and had ceased to carry on 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” within Clause 3 of the Part X Deed. Only trading activity of DHED during the term of the Deed of Company Arrangement satisfied that description;
· the sum of $63,523.57 referred to in [18] above should be applied by the second respondent in the priority specified in Clause 4 of the Part X Deed (we have not reproduced such Clause 4, which merely indicated the order of priority of application by the second respondent of funds coming into his hands, concerning which there is no controversy);
· unless terminated pursuant to sub-clauses 7(a) or (b) of the Part X Deed (extracted in [14] above) the Deed would continue in operation until 21 April 2004, during which time there would effectively be a moratorium on creditors’ claims by virtue of s 233 of the Act.
We respectfully accept and adopt each of the findings and consequences so postulated by his Honour. The injustice or undue delay upon which the first respondent relied in support of its contention for the Part X Deed to be terminated forthwith, and sequestration orders to be made, was that creditors would be otherwise prevented from enforcing their claims until 21 April 2004, yet the payments referred to in Clause 3 had not been made, nor would be made in the future. Had we come to a different view on the issue as to whether the estates of the Applicants should have been made the subject of orders for sequestration, we would have adopted the approach of the primary judge as to termination of the Part X Deed by order of the Court.
His Honour next determined that 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. He had earlier in his reasons made the point that the mere fact that creditors’ expectations, in the events which happened, had been disappointed, was not of itself sufficient to constitute “injustice” within s 236(1)(b) of the Act. The notion of “injustice”, in that context, so his Honour held, required that there should be at least some unfairness involved in allowing the Part X Deed to enure for its full term of five years. We would respectively agree with that view of the operation of the legislation.
His Honour thereafter observed that the rationale for the moratorium conferred by the two deeds of arrangement in favour of the appellants and DHED respectively, namely to provide an opportunity for payment of debts accrued and outstanding from the prior trading activities of DHED, had ceased to be operative. In those circumstances, subject to one possible qualification, his Honour considered that it was unfair that creditors should be held to any further moratorium provided for by the deeds, in circumstances where the purpose underpinning the moratorium was no longer capable of achievement. This was so, even though such circumstances had not been shown to be due to any relevant default on the part of the appellants, and in particular, any default under the Part X Deed. Moreover there was no longer any prospect that the debts to which the Part X Deed applied would be discharged in whole or in part from future trading activities of DHED. In those circumstances, subject to the possible qualification which he next addressed, his Honour held that the Part X Deed could not be allowed to proceed until 21 April 2004, without injustice and undue delay to creditors. We would agree in principle with these observations of the primary judge, in so far as injustice might be occasioned to creditors by any ongoing cost which they might have had to meet for keeping the administration of the Part X Deed on foot.
His Honour then considered the possible qualification that the creditors were empowered by special resolution to terminate the Part X Deed under Clause 7(b), or under the provisions of s 235 of the Act. His Honour considered however that Clause 7(b) had no relevant operation, because it had not been contended by the first respondent that the appellants had failed to make any payment due pursuant to the Part X Deed and, on his view, it had not been shown that the appellants were otherwise in breach of the deed. Once again, we consider that observation to have been correct in principle.
His Honour also rejected the appellants’ submission that he should dismiss the application and allow the second respondent to distribute the funds which he held, and then furnish the appellants with a certificate pursuant to s 237A of the Act (see [26] above). He held that s 237A applied where the requirements of a deed of arrangement had been in fact achieved, and not where they had become incapable of achievement. Furthermore, so his Honour held, the inquiry for which s 236(1)(b) provided was whether or not performance of the Deed could proceed, in all its elements without injustice, and not merely whether the next step in the administration of the Deed could be undertaken without injustice. His Honour nevertheless acknowledged that the former circumstance might be a factor relevant to the exercise of the discretion. Again, we consider that observation to have been correct in principle. Finally however in the present context, his Honour referred again to his conclusion that Clause 8 of the Part X Deed did not operate, in the events which had happened (or more precisely, had not happened), as a release of the claims of the creditors. So much involves the critical issue presented to us on appeal, and in relation to which, as we will shortly explain, we are unable to accept.
His Honour concluded the issue as to whether the Part X Deed should be allowed to run its full course of five years as follows:
“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.”
We would emphasise the expressions “and will not be made” and “is incapable of achievement” where appearing in this passage. As already indicated, if the appellants are to succeed in their appeal to set aside the sequestration orders made by the primary judge against them, it would follow that the appellants would not be troubled or prejudiced in principle by the Part X Deed coming to an end. Hence the issue which was the focus of the appeal was whether the primary judge was justified in making such sequestration orders.
The appeal
An initial issue arising on appeal related to the primary judge’s rejection of certain affidavit evidence provided by the second appellant, Mr Hill, and in particular, evidence to the following effect:
(i)that he did not obtain legal advice in connection with the appointment of Mr de Vries in February 1989 as administrator of DHED;
(ii)that in the course of dialogue between himself and Mr de Vries which occurred prior to completion of the Deed of Company Arrangement and the Part X Deed, Mr de Vries assured him that the Part X arrangement would protect him against bankruptcy; Mr Hill thereafter conveyed that representation to his wife.
Having regard to the conclusions which we have reached in relation to the true construction of the Part X Deed of Arrangement, it is unnecessary for us to make any determination in relation to the appellants’ complaints as to rejection of this affidavit evidence. We are at least doubtful whether such testimony was admissible or in any event material. We observe that no application was made by the appellants to rectify the Part X Deed upon the basis of the dialogue with Mr de Vries, and of course it is Mr McDonald (the second respondent) and not Mr de Vries who is the trustee of the Part X Deed.
The critical issue debated on appeal was therefore whether the primary judge erred in his construction of Clause 8 of the Part X Deed to the effect that it was only capable of operating in favour of the appellants upon payment to the second respondent of a sum sufficient to allow a return to creditors of 100 cents in the dollar. Clause 8 has been already set out in [15] above. Resolution of that issue in favour of the appellants would carry the consequence that the sequestration orders made against their respective estates would be set aside.
Resolution of the appeal
The first matter bearing upon the critical construction issue, to which we would refer, is sub-paragraph 5(6) of the s 189A report, which is included in what has been extracted in [5] above. The content of this report was a potentially relevant surrounding circumstance, consistently with his Honour’s finding as to ambiguity referred to in [29] above. Put another way, the s 189A report was part of the “factual matrix” in which the parties were placed at the time of their execution of the Part X Deed, to adopt the description of Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 997. Sub-paragraph 5(6) picks up reference to sub-paragraph 5(4), and clause (c) thereof in particular (also extracted in [5] above), which contains inter alia the sentence “These contributions are to allow a return to creditors of 100 cents in the dollar”. With respect to the contrary view of the primary judge, we think that this stipulation of the s 189A report supports the construction of the Part X Deed advanced by the appellants. The word “allow” is there used in its normal sense of “enable” or “permit”, rather than in any sense of condition precedent to the “Creditors release” envisaged by the ensuing sub-paragraph 5(6). Moreover sub-paragraph 5(5) of the s 189A report infers or implies that a return of 100 cents in the dollar to creditors was not to be a condition precedent to avoidance of any subsequent bankruptcy of the appellants. Thus by way of example, albeit perhaps a somewhat extreme one in order to illustrate the point, we would not construe the s 189A report as implicitly reserving the rights of creditors to sequestrate the estate of the appellants in the event that contributions would allow a return to creditors of, for instance, 95 cents in the dollar.
The next matter bearing upon the critical construction issues arising is recital A to the Part X Deed (set out in [11] above), in relation to which there is no discussion in the judgment below. The opening words of recital A “The Debtors are unable to pay their creditors in full…” are neutral as to the construction issues arising. The inability of the appellants to pay their creditors was mutually accepted. The essence of the arrangements contemplated by the Part X Deed was that the major contribution of funds to the scheme it established would emanate from the net profits of the future trading of DHED over the ensuing five years (see again Clause 3 of the Part X Deed extracted in [13] above). There could not sensibly have been any certainty of subsequent profit from that source. The significance of recital A thus resided in the concluding words “… in full satisfaction of the debts owing by them”. In the absence therefore of non-fulfilment of any condition precedent or subsequent thereafter set forth in the Part X Deed, or breach of any contractual obligation on the part of the appellants therein contained, it would follow that the appellants would be released from “the debts owing by them” (to adopt the recital A expression). Nevertheless we bear in mind that in the construction of an instrument, recitals are subordinate to the operative parts, so that where the operative parts are clear, they are treated as expressing the contractual intention (see Chitty On Contracts 28th ed. 1999 Vol 1 para 12-064 and the authorities there cited). We will later address the operative parts of the Part X Deed which have not yet been discussed.
A further factor potentially weighing in favour of the appellants on the construction issue is the contrast between Clause 8 of the Part X Deed (see [15] above), and Clause 10.1 of the contemporaneous Deed of Company Arrangement, which we have reproduced in [9] above. Whereas the latter spelt out explicitly the entitlement of the creditors of DHED to claim in any liquidation thereof for the whole amount of their respective claims, subject to giving credit to DHED for any amounts received from DHED or from any other source, no corresponding provision to such effect was made in the Part X Deed in favour of the creditors of the appellants.
A further factor in favour of the appellants on the construction issue is to be found within the terms of the critical Clause 8 of the Part X Deed. As the primary judge duly recognised, the concluding words of Clause 8 “… the Debtors are released from all provable debts” presented an argument against the construction which he favoured. Particularly when these concluding words are read with recital A to the Part X Deed, to which reference has been made in [39] above, they assist materially to resolve the competing construction issues in favour of the appellants.
The matter of pre-eminent concern which led the primary judge to conclude the construction issue adversely to the appellants was the text of the opening words to Clause 8 of the Part X Deed, namely, “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…” (see again the full text of Clause 8 extracted in [15] above). To quote his Honour’s opinion in that regard, “… 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 Clause 3 will ever be made”. It is common ground that no payment has been made by the appellants or by DHED pursuant to Clause 3 of the Part X Deed, extracted in [13] above. Nor, as matters have transpired, will any such payment be made within the remainder of the five year term of that Deed or at all, having regard to the events which had befallen DHED prior to the hearing below. However we have reached the conclusion that his Honour’s concluding opinion cannot be sustained, by reason of the following factors appearing below. The source of payments required to be made pursuant to Clause 3 of the Part X Deed was explicitly confined to net profits of DHED to be derived from future trading, irrespective of whether such payments might be effected by the appellants or by DHED at their behest. The “final payment” the subject of Clause 8 of the Part X Deed was expressed to be made pursuant to Clause 3 of that Deed alone. It follows that if in the events which might have happened, no net profit from future trading would emerge without any default on the part of the appellants under the Part X Deed, no payment would have been required to have been made by the appellants thereunder pursuant to Clause 3. There was additionally a discrete obligation imposed by Clause 2 of the Part X Deed upon the appellants to convey and assign all of their divisible property within the meaning of s 116 of the Act, subject to the exceptions appearing in Schedule A of the Part X Deed. As we have indicated in [33] above, however, his Honour recorded the absence of any default on the part of the appellants having been established by the first respondent under the Part X Deed as to its entirety.
It follows, in our opinion, that the reference to “final payment” in Clause 8 of the Part X Deed cannot mean “payment to the Trustee of a sum sufficient to allow a return to creditors of 100 cents in the dollar”. We think that the expression “final payment” merely reflected the expectation of the parties to the Part X Deed that at least some payments would be made by the appellants pursuant to Clause 3 thereof. Clause 8 did not use an opening expression such as “Upon payment by the Debtors in full…”. Had it done so, the stipulation of Clause 8 as to the Debtors being “released from all provable debts”, a difficulty which his Honour recognised to exist in relation to his preferred construction, would have produced an internal inconsistency of a fundamental nature. Such provision for release was moreover consistent with Recital A, to which we have already referred in [40] above. It could hardly have been the mutual intention of the parties, to take a somewhat extreme example, that a return to creditors of say 90 cents in the dollar, but no more, could nevertheless have led potentially to the loss of the appellants’ home the subject of the exception stipulated by Clause 2 of the Deed.
In the result, we are unable to agree with the conclusions of the primary judge set out in [30] above. We would uphold the appeal and set aside the orders of the primary judge made on 27 June 2001 in proceeding N 7163 of 2001. In lieu thereof we would order that the application in proceeding N 7163 of 2001 be dismissed and that the first respondent pay the appellants’ costs of the proceedings at first instance and the appeal, including any reserved costs.
I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court. Associate:
Dated: 21 December 2001
Counsel for the First and Second Appellant: Mr J E Thomson with Mr C D Wood Solicitor for the First and Second Appellant: Gordon & Johnstone Counsel for the First Respondent: Mr S D Robb QC with Mr P A Fury Solicitor for the First Respondent: Cutler Hughes & Harris Date of Hearing: 7 November 2001 Date of Judgment: 21 December 2001
0
0
0