HP Mercantile Pty Limited v Victor Turco; HP Mercantile Pty Limited v Marinelli; HP Mercantile Pty Limited v Mario Turco
[2010] FMCA 114
•25 February 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| HP MERCANTILE PTY LIMITED v VICTOR TURCO; HP MERCANTILE PTY LIMITED v MARINELLI; HP MERCANTILE PTY LIMITED v MARIO TURCO | [2010] FMCA 114 |
| BANKRUPTCY – Creditor’s petitions – authorities under s.188 of the Bankruptcy Act – meetings of creditors adjourned – applications for adjournment of the hearing of creditor’s petitions. |
| Bankruptcy Act 1966 (Cth), ss.64ZB, 122, 188, 189, 189AAA, 189A |
| Abignano; in the matter of Abignano v Wenkart [1999] FCA 1695 Body Corporate for Araucaria GTP 1790 v Massey [2009] FMCA 598 Commonwealth Bank of Australia v Toma [2009] FMCA 846 Field v Commercial Banking Company of Sydney Ltd (1978) 37 FLR 341; [1978] FCA 46 Kantfield Pty Ltd v Lockwood [2004] FMCA 309 Lock & Anor v Grandine [2005] FMCA 807 Munro & Anor v McLeod [2006] FMCA 388 Re David Bendel Ex Parte: Lowe Lippmann (A Firm) [1996] FCA 1400 |
| Applicant: | HP MERCANTILE PTY LIMITED (ACN 097 362 877) |
| Respondent: | VICTOR TURCO AKA VITORIO VINCENZO TURCO |
| File Number: | SYG 1387 of 2009 |
| Applicant: | HP MERCANTILE PTY LIMITED (ACN 097 362 877) |
| Respondent: | DOMINIC MARINELLI |
| File Number: | SYG 1388 of 2009 |
| Applicant: | HP MERCANTILE PTY LIMITED (ACN 097 362 877) |
| Respondent: | MARIO TURCO |
| File Number: | SYG 1389 of 2009 |
| Judgment of: | Barnes FM |
| Hearing date: | 9 February 2010 |
| Delivered at: | Sydney |
| Delivered on: | 25 February 2010 |
REPRESENTATION
| Counsel for the Applicant: | Mr S Golledge |
| Solicitors for the Applicant: | Versace McKenzie Lawyers |
| Solicitors for the Respondents: | Sally Nash & Co Lawyers |
ORDERS
SYG1387 of 2009
The application for adjournment of the hearing of the creditor’s petition for a period of ten weeks be refused.
SYG1388 of 2009
The application for adjournment of the hearing of the creditor’s petition for a period of ten weeks be refused.
SYG1389 of 2009
The application for adjournment of the hearing of the creditor’s petition for a period of ten weeks be refused.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1387 of 2009
| HP MERCANTILE PTY LIMITED (ACN 097 362 877) |
Applicant
And
| VICTOR TURCO AKA VITORIO VINCENZO TURCO |
Respondent
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG1388 of 2009
| HP MERCANTILE PTY LIMITED (ACN 097 362 877) |
Applicant
And
| DOMINIC MARINELLI |
Respondent
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG1389 of 2009
| HP MERCANTILE PTY LIMITED (ACN 097 362 877) |
Applicant
And
| MARIO TURCO |
Respondent
REASONS FOR JUDGMENT
The respondents, Victor (aka Vitorio Vincenzo) Turco and Mario Turco (who are brothers) and Dominic Marinelli (their brother-in-law) each seek adjournment of the hearing of a creditor’s petition presented by HP Mercantile Pty Ltd (HPM). The parties agreed that the adjournment applications should be heard and determined together. Except as specified below, it was not in dispute that common factors arose in each case.
On 10 June 2009 HPM filed and presented separate creditor’s petitions in relation to each of Victor Turco, Mario Turco and Dominic Marinelli which in each case asserted that the debtor owed the creditor an amount due under a judgment/order obtained in the District Court of New South Wales at Sydney on 21 July 2008. The amount claimed in relation to Mario Turco was $550,795.42, being the amount of the judgment in case number 5593 of 2002 together with interest. The same amount was claimed in relation to Victor Turco consisting of the amount of the judgment in case number 5594 of 2002 together with interest. The sum of $232,713.76 was said to be due from Mr Marinelli being the amount of the judgment in case number 4413 of 2002 together with interest. In each case the creditor relied on a failure by the debtor to comply with the requirements of a bankruptcy notice.
On or about 21 October 2008 the respondent debtors each filed a notice of appeal in the New South Wales Court of Appeal against the District Court judgment on which each bankruptcy notice was based. On 4 November 2008 the debtors filed applications to set aside each bankruptcy notice in this court. On 2 April 2009 the debtors filed an application in the Court of Appeal for a stay of proceedings pending the hearing of the appeals. The stay applications were dismissed on 28 April 2009. On 1 May 2009 the applications to set aside the bankruptcy notices were dismissed by this court. On 20 July 2009 the appeals against the District Court judgments were dismissed by the New South Wales Court of Appeal.
The creditor’s petitions have been before a registrar of this court on a number of occasions. On or about 15 December 2009 each of the respondents signed an authority under s.188 of the Bankruptcy Act 1966 (Cth) (the Act) appointing George Lopez as a Controlling Trustee. It is not in dispute that in each case a stay of proceedings relating to each creditor’s petition came into effect pursuant to s.189AAA of the Act until the earlier of the conclusion of the first meeting of creditors called under the s.188 authority or the adjournment of the meeting. On 22 December 2009 each matter was adjourned until 9 February 2010 in light of the s.189AAA stay.
In their draft personal insolvency agreements (PIA) Mario and Victor Turco each proposed that none of their property or income would be available to pay creditors, but that in each case “funds of $25,000 obtained from [undisclosed] 3rd party sources” would be applied to the combined total creditors. Dominic Marinelli proposed that none of his property or income would be available to pay creditors, but that “funds” of $100,000 paid to HPM on 11 August 2009 and $7,500 paid on 18 November 2009 “be reclaimed by my trustee and applied to the creditors of my estate”. Each of these proposals was said to be dependent on an acceptance of the proposals of the other two debtors in these proceedings.
On 19 January 2010 Mr Lopez submitted reports to creditors of each debtor pursuant to s.189A of the Act. In relation to Mario Turco, who is an accountant, Mr Lopez estimated, based on his statement of affairs, a deficiency of over $10 million. This estimate was based on disclosure of a secured creditor (with an estimated deficiency of over $4.3 million) and 27 unsecured ordinary creditors (with an estimated deficiency of over $5.66 million). Mario Turco disclosed assets of $25,310 (with an estimated realisable value of $1,061). In his s.189A report the Controlling Trustee observed that while the debtor indicated that one creditor for $1,517,500 (Antonio Turco) was a related entity, Suellen Turco, also shown as a creditor for $2,033,000 in respect of a divorce property settlement, would also be a related party. Further, while Dominic Marinelli was shown as a creditor for $54,704 the Controlling Trustee observed that he was not listed as a related party.
Mr Lopez pointed out that Mario Turco had indicated in one section of his statement of affairs that he did not own any shares, but stated he had involvement in numerous companies (and shareholding) in another section, and placed no value on these shares (including his share in the company that appears to operate the accounting firm of which he and Victor Turco are the directors and shareholders). Mario Turco also stated that he was not and had not been a beneficiary of a trust in the last five years, but the Controlling Trustee observed that a creditor (who it now appears was HPM) had advised that documentation provided by Mario Turco to the creditor indicated that Mario Turco was a beneficiary or had a beneficial interest in six trusts and was a potential beneficiary in five other entities. No financial statements were attached to Mario Turco’s statement of affairs. In his report Mr Lopez observed that: “The requirement of total disclosure had been strongly emphasised to the Debtor.”
Mr Lopez addressed the possibility that certain interests (in particular as a shareholder and beneficiary of trusts) had not been disclosed by Mario Turco in his statement of affairs and suggested further investigation was necessary to clarify the position.
The report also noted the need to receive further information from the debtor before an assessment could be made as to potential contributions in the event of bankruptcy. Mario Turco had disclosed income of $8,000 from a company, but provided no verification of income earned, income tax returns or financial statements. Other matters (including the presentation of a creditor’s petition by HPM) were described and an estimate of Controlling Trustee and Trustee fees of $12,800 was provided. The report noted that a number of matters had been raised by HPM in a letter received on 15 January 2010 which warranted further investigation.
The Controlling Trustee addressed Mario Turco’s proposal in light of his comments as follows: “the Debtor’s PIA as it currently stands potentially offers a lower return than may arise from Bankruptcy”.
However Mr Lopez concluded that it was recommended that the creditors’ meeting set down for 1 February 2010 should be adjourned for up to ten weeks as “further investigations into the Debtor’s financial affairs [was] warranted”; a “determination of all creditors’ claims (related or otherwise) [was] required”; and “the Debtor’s draft PIA require[d] review/amendment for creditors’ consideration”.
Similar matters (and shortcomings) were addressed in the Controlling Trustee’s report on Victor Turco. In his statement of affairs Victor Turco, who is also an accountant, disclosed an estimated deficiency of over $9.6 million, including an estimated deficiency of over $3.89 million to a secured creditor and over $5.73 million to 29 unsecured ordinary creditors. He disclosed assets of $24,360 (with an estimated realisable value of $5,360).
Mr Lopez noted that (as was the case in relation to the statement of affairs of Mario Turco) Victor Turco had indicated that Antonio Turco was a related party (again for a loan of $1,517,500), that Dominic Marinelli was a creditor for $54,704, but not a related party, and that Suellen Turco was shown as a related party creditor for $2,033,000. Mr Lopez stated that the nature of the Suellen Turco claim required clarification as this debt was shown in Mario Turco’s statement of affairs as a divorce settlement.
The report on Victor Turco described possible undisclosed interests (in particular as a shareholder and beneficiary of trusts) and stated that further investigation would be necessary to clarify the position as was concluded in the report on Mario Turco. Again, no financial statements had been provided (including in relation to the company said to be the source of an income of $8,000). Mr Lopez referred to having emphasised the requirement of total disclosure to the debtor and the need to receive further information before an assessment could be made as to potential contributions in the event of bankruptcy. Mr Lopez disclosed a Controlling Trustee/Trustee fee estimate of $12,200.
Based on his comments, the Controlling Trustee expressed the same view of Victor Turco’s PIA proposal as he had expressed in relation to that of Mario Turco, that is, that as it currently stood it potentially offered “a lower return than may arise from Bankruptcy”. However, for the same reasons given in relation to Mario Turco, the Controlling Trustee recommended adjournment of the creditors’ meeting in relation to Victor Turco.
The Controlling Trustee’s report in relation to Dominic Marinelli described an estimated deficiency of over $1.4 million based on Mr Marinelli’s disclosure in his statement of affairs of 20 unsecured ordinary creditors in an amount of over $1.569 million and assets of $209,500 (with an estimated realisable value of $133,000). Again, the Controlling Trustee stated that there were issues about disclosure of the value of shareholdings and interests as a unit holder or beneficiary of a trust and that “further investigation [would] be necessary to clarify the position”.
Mr Lopez remarked on the fact that while Mr Marinelli indicated that no money was owed to him, he was shown as a creditor by each of Mario and Victor Turco (for $54,704 in each case).
Mr Lopez stated:
The Debtor’s draft Personal Insolvency Agreement (“PIA”) proposes that amount/s paid to a creditor prior to signing the Section 188 Authority (referred to as “antecedent transactions”) be recovered and made available to creditors.
The recoverability of these payments under Section 122 of the Bankruptcy Act is unknown and it is most likely that legal advice would need to be obtained to determine the position.
Creditors should note that whilst the Bankruptcy Act provides that a PIA can include antecedent transactions, such would be available to a Trustee in Bankruptcy so in effect, the Debtor’s draft PIA does not offer any better return to creditors than would be available in Bankruptcy.
Preferences or antecedent transactions involve transfer of property in the Relation Back period (in this instance, being 6 months prior to the presentation of a Creditor’s petition on 1 May, 2009).
Further investigations would be required into all payments by the Debtor in this period.
The requirement of total disclosure had been strongly emphasised to the Debtor.
Again, the report described investigations and outstanding information and issues (including matters raised in the HPM letter). The Controlling Trustee/Trustee fee estimate in this instance was $11,000. The Controlling Trustee expressed the view that Mr Marinelli’s PIA as it stood “potentially offers no better return than Bankruptcy”. Adjournment of the creditors’ meeting was recommended for the same reasons as those given in relation to each of the Turcos.
On 1 February 2010 creditors’ meetings were held in relation to each debtor. In each case resolutions were passed to adjourn the creditors’ meeting for a period of 10 weeks or such lesser period as the Controlling Trustee “in his absolute discretion determines”.
The resolution in relation to Mario Turco was passed by 16 votes to 2 (the majority representing creditors to the value of $4,721,811.86 or 80.5% according to the Controlling Trustee’s calculations and the minority representing creditors to the value of $1,141,411.37 or 19.5%). In the case of Victor Turco the vote was 15 for ($4,699,162.85 or 80.9% of creditors by value) and 1 against ($1,111,812.00 or 19.1% of creditors by value) and in the case of Dominic Marinelli the vote was 14 for ($1,241,275.35 or 65.8% of creditors by value) and 2 against ($645,700.61 or 34.29% of creditors by value). In each case the s.189AAA stay ceased when the creditors’ meeting was adjourned.
In circulars to creditors the office of the Controlling Trustee advised in each case that reasons in support of the adjournment included the fact that “matters ha[d] been raised by a creditor [apparently HPM] as to the assets and liabilities revealed by the Debtor in his Statement of Affairs” that “require substantial further investigation and may affect the relative asset and liability balances and hence, the potential return to creditors”. In each case the circular continued: “The outcome of the investigations may suggest that the current proposal before creditors provides an inadequate return when compared to the potential returns from bankruptcy in which case, the Debtor has agreed that he is prepared to consider a revised offer to creditors”.
On 8 February 2010 each debtor filed a notice stating grounds of opposition to the creditor’s petition. Each debtor also seeks that the hearing of the creditor’s petition be adjourned to enable the adjourned meeting of creditors under Part X of the Bankruptcy Act to be concluded. The debtors rely on an affidavit sworn by Mr Lopez, the Controlling Trustee, on 8 February 2010. There is no evidence from the debtors themselves before the court.
When the matters came before me the parties agreed that the question of the adjournments should be determined as a preliminary matter in each case. The three matters were argued together. In each case the creditor opposed the grant of any adjournment.
The debtors accepted that there was no longer a s.189AAA stay in effect (see Munro & Anor v McLeod [2006] FMCA 388; Body Corporate for Araucaria GTP 1790 v Massey [2009] FMCA 598; and Commonwealth Bank of Australia v Toma [2009] FMCA 846) although Ms Nash for the debtors pointed out that the control of the property of each debtor by the Controlling Trustee under Part X of the Bankruptcy Act remained in effect, as there was no suggestion that any of the events in s.189(1A) of the Act had happened. Hence under s.189(2) of the Act the debtors could “not remove, dispose of or deal with any of [their] property except with the consent of the controlling trustee”.
It was submitted that it was apparent from the affidavit of Mr Lopez that the adjournments of the creditors’ meetings had occurred in circumstances where there was in each case a genuine issue for the Controlling Trustee to consider, that the petitioning creditor was in the minority in each case and that the interests of the other creditors needed to be considered.
Mr Lopez’s affidavit evidence in relation to the adjournment was as follows:
I was aware prior to the meeting that the petitioning creditors debt arose out of an assignment but the petitioning creditor did not give notice of this prior to the meeting. The petitioning creditor also did not reveal what consideration was paid for the debt(s) prior to the meeting, when I sought this information from the petitioning creditor prior to the meeting. The meeting was adjourned in order for me to consider and take legal advice on the value to be given to the petitioning creditor’s vote. (Emphasis added).
Mr Lopez also stated (without elaboration):
The next meeting of creditors will be held on or before 12 April 2010 to consider the merits of the Respondents proposal. The petitioning creditor is in the minority and I believe it to be in the interest of creditors for the petitions to be adjourned until after the next meeting.
The solicitor for the debtors referred to s.64ZB(8) of the Act in support of the proposition that the question of the value of HPM’s vote was a genuine issue for the Controlling Trustee to consider. Under s.64ZB(8): “[f]or the purposes of determining whether a motion proposed at [a creditors’] meeting is resolved, the value of a creditor” who “has been assigned a debt” and is “voting on the motion” is “to be worked out by taking the value of the assigned debt to be equal to the value of the consideration that the creditor gave for the assignment of the debt”.
Reference was also made in the circulars to creditors from the Controlling Trustee in relation to each Part X estate, advising of the adjournment of the creditors’ meeting “for a period of 10 weeks or for such lesser period as the Controlling Trustee, in his absolute discretion, determines”. Each circular suggested that it was arguable that part of each debt claimed by HPM was a debt that had been assigned (so that s.64ZB(8) may apply), but observed that the creditor had “not revealed the sum paid” and in each case “dispute[d] that the debt should be treated as an assigned debt”. The circulars also referred to initial advice to the Controlling Trustee that “the matter should be adjourned to seek the directions of the Court” and further advice that directions were not necessary “should the adjudication of the vote not affect the outcome of the meeting”. It was said that this could not be determined until further investigation by the Controlling Trustee into matters raised by a creditor (apparently HPM) as to the assets and liabilities of each of the debtors as revealed in their statements of affairs. It was also stated in each case that these matters may affect the relative assets and liabilities balances and hence the potential return to creditors and that the investigation may suggest that current proposals provided an inadequate return compared to the potential returns from bankruptcy in each case. The circulars stated that in such a case each debtor “has agreed that he is prepared to consider a revised offer to creditors”.
The Controlling Trustee’s circulars also addressed information provided by each debtor “which suggests that there is a possibility that the [unsuccessful] appeal [to the New South Wales Court of Appeal in relation to the HPM matter] may be re-opened and the judgement (sic) stayed”. The Controlling Trustee observed that if this were to occur “it would have significant impact to the claims in the Estate and would affect the final outcome”. In each case it was said that there was a suggestion that “if the HPM claim [could] be eliminated, the Debtor may be able to seek release from control and to deal informally with his creditors”. The circulars indicated that while the Controlling Trustee was “not in a position to determine the merits or otherwise of the additional information the Debtor claim[ed] to possess”, he believed that “given the significant effect of a PIA or bankruptcy” it was in the interests of justice that the debtor “be given the opportunity to have the matter heard by the Courts”. It was said to be incumbent on each debtor to “ensure that the matter [was] heard and adjudicated by the Court” of Appeal within a ten week period. Each circular advised that a further supplementary Controlling Trustee’s report would be prepared before the next meeting of creditors. The debtors did not put any evidence before the court in relation to any current proceedings in the Court of Appeal.
The solicitor for the debtors contended that, relevant to the bona fides of the adjournment applications, this material indicated that there were genuine issues for the Controlling Trustee to consider giving rise to the adjournment of the meeting in each case.
The debtors placed reliance on remarks of Smith FM in Commonwealth Bank of Australia v Toma [2009] FMCA 846 (at [45]) as follows:
In my mind, the determining consideration in relation to the present adjournment application, and the consideration which addresses the general interest of creditors, is the policy reflected in s.189AAA, that creditors of an insolvent person such as Mr Toma should be allowed at least one real opportunity to vote upon the various alternatives that are opened up to them under s.204. I accept that the statutory policy is intended to be satisfied at the first appointed meeting, and that the statutory stay does not operate beyond that time, whatever the reasons for an adjournment. However, in my mind it would be fully consistent with the policies of the Act to allow a further adjournment, where the debtor and the creditors were denied at the first appointed meeting a real opportunity to address a proposed Pt.X agreement, where this was the result of circumstances beyond the control of the debtor and his trustee, and where no prejudice to creditors generally is apparent from the Court holding its hand until a satisfactorily convened meeting has been held.
Notwithstanding that in his reports to creditors the Controlling Trustee stated that the proposals by each Mr Turco as they currently stand potentially offered a “lower return than may arise from Bankruptcy” and that Mr Marinelli’s proposal as it currently stands potentially offered “no better return than Bankruptcy”, the respondents contended that their proposals were properly matters to be determined by all the creditors of each debtor at the respective adjourned creditors’ meetings, although there was no explanation in relation to whether the proposals were to the advantage of creditors. It was contended that the Controlling Trustee believed an adjournment was in the interests of creditors and that the creditors ought to be allowed to consider the merits of each respondent’s proposal (see Lock & Anor v Grandine [2005] FMCA 807). It was pointed out that in each case the majority (by both number and value of creditors) had voted in favour of the adjournment. This was said to be a reason in favour of the adjournment, having regard to the policy of the Act that creditors be treated equally and the weight that should be given to the interests of all creditors.
HPM opposed the grant of an adjournment in each case. Mr Golledge, counsel for HPM, drew the attention of the court to a letter dated 15 January 2010 sent by the solicitors for HPM to the Controlling Trustee which, among other things, took issue with the extent of the disclosure by each debtor in specific respects in each statement of affairs. Some aspects of these concerns were referred to in the s.189A reports on each debtor. In that letter it was submitted to the Controlling Trustee that the statements of affairs did “not accurately reflect the true financial position of the Debtors and that significant information ha[d] been omitted”. Attention was also drawn to the significant difference between the disclosure in each statement of affairs and the estimated value of assets and liabilities of each debtor in documents said to have been provided to HPM by Mario Turco as a statement of position of each of the debtors. In that document Mario Turco was said to have assets of $1.422 million and liabilities of $1.998 million; Victor Turco was said to have assets of $2,277,500 and liabilities of $2,012,000 and Dominic Marinelli was said to have assets of $130,000 and liabilities of $11,000. HPM’s solicitors also suggested to the Controlling Trustee that there was an issue about the extent of disclosure of the value of shares owned by the debtors and their interests in properties (as compared to the previous disclosure of the value of properties to HPM by Mario Turco). It was pointed out that in documents given to HPM in November 2009, Mario Turco had valued Turco & Co Pty Ltd (the accounting firm of which Victor and Mario Turco are the only shareholders and directors) at $1.3 million, while no value was placed on the shares of this company in the statements of affairs. Issues were also raised in relation to whether certain creditors listed as unsecured creditors were in fact bona fide creditors of the debtors, for the amounts stated and as to whether or not it was correct for the debtors to state that they were not beneficiaries or unit holders in any trust. It was noted that no financial statements had been attached to the statements of affairs.
Counsel for HPM submitted that the proposals of Victor and Mario Turco were manifestly unreasonable and not for the benefit of creditors generally.
It was pointed out that the amount of $25,000 (from an identified third party) available for creditors would be reduced in each case by the trustee’s estimated fees. As Mr Golledge submitted, all other assets would be excluded under the PIA proposals. On this basis, it was submitted that each of the Turco proposals must necessarily offer less than would be available on a bankruptcy. It is of significance that these proposals were made in circumstances where the debtor’s liabilities were estimated to be over $9.6 million in the case of Victor Turco and over $10 million in the case of Mario Turco.
It was submitted that the proposal of Dominic Marinelli was not a proper offer, that it involved recovery of $107,500 from HPM as a preference payment and that any such action would be strenuously defended. Counsel for HPM pointed to the absence of any explanation as to how $107,500 paid to HPM would be “reclaimed”. In his report Mr Lopez does refer to s.122 of the Act and the likely need for legal advice in relation to the recoverability of these payments but there appears to be no provision for the costs of funding defended legal proceedings in the estimate of fees. As Mr Golledge observed, it appears that the Marinelli proposal suggests that only one particular antecedent transaction claim that may be available on bankruptcy would be pursued.
In essence HPM’s submission is that as the debtor’s proposals were not bona fide or genuine the court should exercise its discretion to refuse the application for ten week adjournments to enable the adjourned creditors’ meetings to be held.
As submitted for HPM, the issue before the court is not a review of the recommendation of the Controlling Trustee or the decision to adjourn the creditors’ meeting. Rather, the issue is whether each debtor has satisfied the court that “the circumstances are such that it is fair, appropriate, proper or in the interests of justice that [the court] postpone, displace or adjourn the prima facie entitlement of the judgment creditor to have a sequestration order made” (see Kantfield Pty Ltd v Lockwood [2004] FMCA 309 at [21] – [23] referring to the approach taken by Merkel J in Re David Bendel Ex Parte: Lowe Lippmann (A Firm) [1996] FCA 1400 at [33]).
It is not in dispute that in determining whether to exercise the discretion to adjourn the hearing of a creditor’s petition in circumstances where a s.189AAA stay is no longer in effect, the court may have regard to factors such as those outlined by Sweeney J (with whom Franki J agreed) in Field v Commercial Banking Company of Sydney Ltd (1978) 37 FLR 341; [1978] FCA 46 (and see Lock v Grandine). Counsel for HPM submitted that in each case these factors were not such as to support any adjournment application.
In Field Sweeney J set out circumstances that may be relevant in considering whether to adjourn the hearing of a creditor’s petition where a s.188 authority had been executed. His Honour stated (at [42]):
It would be unwise to attempt to draw up an exhaustive catalogue of the circumstances to which the court should pay regard in considering an application for an adjournment of a creditor's petition. However, to illustrate the point that the one circumstance of the execution of an authority should be looked at in the general context of each individual case, one may usefully refer to some other relevant circumstances in such a case, as for example: 1. the course of dealings between the parties, from the time when the obligation to the petitioning creditor is said to have arisen to the date of the hearing; 2. the attitude to the application of the petitioning creditor, as prima facie, on proof of the matters mentioned in s. 52(1) of the Bankruptcy Act 1966, the court will proceed to make an order for sequestration (see Rozenbes v. Kronhill [1956] HCA 65; (1956) 95 CLR 407 ); 3. the general financial position of the debtor; 4. the relation between the debt of the petitioning creditor and the total liabilities of the debtor, as it may be seen, for example, that the petitioning creditor's opposition would be sufficient to defeat any special resolution proposed at a creditors' meeting; 5. any attitude to the application disclosed by other creditors; 6. any evidence bearing upon the question whether it would be for the advantage of the creditors that the debtor's affairs be administered under Pt X of the Act; 7. the likelihood that the debtor would be able to place before a meeting of creditors a particular proposal, or evidence of his general circumstances, calculated to persuade them to vote for the administration of his affairs under Pt X. It will at once be obvious that many of these circumstances will be within the knowledge of the debtor, rather than of the petitioning creditor, and it will be for the former to give evidence of them. Such evidence should, where practicable, be in affidavit form.
The non-exhaustive list of factors suggested by Sweeney J in Field provides a starting point for factors to be taken into account in circumstances such as those presently before the court as part of all the relevant circumstances. I note that in Field Sweeney J rejected any proposition that it was the practice of bankruptcy courts to “almost invariably” adjourn a creditor’s petition to allow a Part X creditors’ meeting to be held and regarded the execution of an authority as one relevant circumstance among many (at [41] – [42]). At the time of the decision in Field there was no automatic stay of proceedings. Section 189AAA was inserted in the Act in 2004. Hence it is necessary to bear in mind that the issue in these proceedings is whether there should be an adjournment to allow adjourned creditors’ meetings to be held.
As Smith FM suggested in Munro & Anor v McLeod [2006] FMCA 388 (at [25]) it is a “foundation proposition” that “the Court should not adjourn a petition to allow consideration of a Part X agreement unless it considers such an adjournment would be for the general benefit of the creditors, and that the considerations in favour of the adjournment outweigh the prima facie entitlement of the petitioning creditor to proceed on its petition”. More generally, I note that in exercising the discretion to grant an adjournment of a creditor’s petition due weight must be given not only to the prima facie right of a petitioning creditor to obtain a sequestration order but also to the importance of avoiding or minimising delay once bankruptcy proceedings have been instituted (see Abignano; in the matter of Abignano v Wenkart [1999] FCA 1695).
The need to be satisfied that an adjournment would be for the general benefit of the creditors of each debtor involves a consideration of the merits of each debtor’s proposal (and see Lock v Grandine), insofar as that is possible on the material before the court.
I have taken into account all the material before the court in relation to each adjournment application including (but not limited to) the considerations suggested in Field. While there are considerations both ways, on balance the debtors have not satisfied me that the adjournments sought should be granted.
First, insofar as it is relevant to have regard to the course of dealings between the parties from the time the obligation to the petitioning creditor is said to have arisen, the petition in each case is based on a judgment obtained in the District Court of New South Wales on 21 July 2008. It appears from the limited information before the court and the submissions for the parties that HPM acquired certain debts prior to this time and then had to sue for them. While the relevance of any assignment is a matter said to be of significance to the value of HPM’s debt for voting purposes and was the reason given in Mr Lopez’s affidavit for adjournment of the creditors’ meeting, I note that none of the grounds in the notices of opposition take issue with the existence of debts to HPM. The creditor’s petitions rely on judgment debts based on contested District Court proceedings which in each case formed the basis for a bankruptcy notice. The debtors unsuccessfully sought to set aside the bankruptcy notices. As counsel for HPM pointed out, nineteen months have passed since this judgment. Applications for stay and appeals to the Court of Appeal were dismissed by 20 July 2009. No payments have been made since that time.
While the Controlling Trustee’s circulars to creditors refers to information from each debtor suggesting a possibility that the appeal may be re-opened and the judgment in favour of HPM stayed (and that this could be done within a ten week period), the debtors have put no evidence in this respect before this court. There is no evidence that the debtors have brought any proceedings to have the Court of Appeal judgment re-opened (as the Controlling Trustee understood they sought to do and contemplated would occur). These matters do not support the adjournment applications.
The creditor’s petitions were each presented on 10 June 2009. Insofar as it was suggested by counsel for the creditor that thereafter there was delay by the debtors, while the creditor’s petitions have been before a registrar of the court on a number of occasions, it appears that adjournments were granted by consent. However from 16 December 2009 they related to the execution of the s.188 authorities lodged on 15 December 2009. In Field the s.188 authority was belatedly executed the day before the hearing of the creditor’s petition. There was also evidence in that case to support an inference that the debtor had been evading service of the creditor’s petition. There is no such suggestion in this case.
As Smith FM pointed out in Toma at [29], in Field the adjournment application was made before the enactment of the s.189AAA statutory stay and there was an absence of sufficient evidence to explain the debtor’s delay in execution of the authority and in relation to any proposal. In this case there is no evidence from the debtors personally in relation to the execution of the authorities or in relation to the possible revision of their proposals foreshadowed by Mr Lopez. Each debtor has had the benefit of a s.189AAA stay of proceedings relating to the creditor’s petition until the adjournment of the first creditors’ meeting.
I accept that the attitude of the petitioning creditor is that it now wishes to proceed with the hearings of the creditor’s petitions in accordance with its prima facie entitlement.
In relation to the general financial position of each debtor, on their own statements of affairs, the debtors are insolvent. In particular, each of Mario and Victor Turco disclose a substantial level of insolvency. According to the s.189A reports, each debtor asserted that the main cause of his difficulties was “adverse legal action and the resultant Creditor’s Petition”, but there is no evidence from any of the debtors to clarify this claim in light of the respective levels of insolvency disclosed (particularly in relation to Victor and Mario Turco). The debtors’ apparent insolvency (based on their statements of affairs) would support the making of sequestration orders (if all requirements are met). This does not mean that it is “punitive” to recognise the prima facie right of a petitioning creditor to proceed. I accept that, as the Controlling Trustee’s reports and circulars indicate, the precise extent of such insolvency cannot be determined without further investigation into each debtor’s affairs. It is of concern that the issues canvassed by the Controlling Trustee raise the possibility that the debtors have not made a full disclosure of the value and extent of their assets and liabilities. It is difficult on the evidence before the court to assess the merits of the PIA proposals given the lack of certainty about the debtors’ financial circumstances. In fact it appears that the Controlling Trustee contemplates that further information may mean that the return offered is less advantageous in each case than the present proposals. I accept the submissions for the creditor as to the deficiencies in the present proposals. Indeed, it would appear on the information presently before the court as to the debtors’ financial circumstances that neither the present proposals nor any undisclosed revised proposal would be to the advantage of the creditors generally.
The precise relationship between each of the petitioning creditor’s debts and each debtor’s total liabilities and whether the petitioning creditor’s opposition would be sufficient to defeat any special resolution proposed at a creditors’ meeting is not clear. It is not possible to make findings as to the relationship between the HPM debt and each debtor’s total liability, given the issues raised by HPM which cannot be resolved on the material before the court in these proceedings. However, even on present material the petitioning creditor’s debt is in each case a substantial debt.
There is an issue as to the value to be given to the petitioning creditor’s vote. As the creditors currently stand, the petitioning creditor is in the minority according to the view of the Controlling Trustee. On the other hand, if the assets and liabilities of the debtors were as disclosed to HPM by Mario Turco, HPM contends that it would be likely that HPM would in fact have a right to veto any special resolution proposed at an adjourned creditors’ meeting. This cannot be determined on the material before the court. I note however that according to Merkel J in Re Bendel, even a petitioning creditor owed a relatively small debt has a prima facie right to have its petition heard and determined. Moreover Merkel J also suggested, (at [12] and [20] – [23]), that the court is entitled to take into account possible prejudice to the petitioning creditor caused by an adjournment of this nature, especially where other creditors who will vote on any proposed Part X arrangement appear to be related or “friendly” creditors. In each case there are related creditors, in relation to some of whom there are unresolved issues. The bona fides of the other creditors cannot be determined in these proceedings.
More generally, as the Controlling Trustee acknowledged in his circulars to creditors, the matters raised by HPM as to the assets and liabilities revealed by each debtor in his statement of affairs may affect not only the asset and liability balances but also the potential return to creditors. As indicated, it was acknowledged by the Controlling Trustee that the outcome of investigations may suggest that the current proposals before the creditors provide an inadequate return when compared to the potential returns from bankruptcy. While it was also foreshadowed that the debtors may modify their PIA proposals, there is no evidence of any alternative proposals before the court. These matters do not support the adjournment application.
There is no direct evidence as to the attitude of any other creditors to this application. However the majority of creditors both in number and value (as it appears to the Controlling Trustee at this stage) supported the adjournment of the creditors’ meeting as did the Controlling Trustee (albeit HPM takes issue with the bona fides of some creditors as well as the proportionate value of its debt). While on its face the support of creditors would be an argument in favour of an adjournment, on balance I am of the view that it is outweighed by other factors, particularly the absence of evidence that the proposals are genuine proposals that would be to the advantage of the creditors generally.
In relation to whether it would be to the advantage of the creditors generally that the affairs of each debtor be administered under Part X of the Act, the Controlling Trustee’s view on the information available at the time of preparation of his reports (19 January 2010) in relation to each of Mario and Victor Turco was that each PIA proposal as it currently stood potentially offered a lower return than may arise in bankruptcy. This is a factor that weighs strongly against any adjournment. In relation to Dominic Marinelli, the Controlling Trustee was of the view that the debtor’s PIA as it currently stood potentially offered no better return than bankruptcy. I accept that, as submitted for HPM, the precise basis for this view is not clear, but in any event it has not been established that the Part X proposal would be to the advantage of creditors generally.
The evidence about further investigation into each of the debtor’s affairs and the possibility of modified proposals is not such as to support a conclusion that it would be to the general advantage of creditors that any of the debtors’ affairs be administered under Part X of the Act as distinct from in bankruptcy in the absence of information as to the nature and extent of any such revised proposal. That is despite the fact that, as Sweeney J observed in Field, many of the circumstances relevant to a consideration of whether it is in the interests of justice to adjourn the hearing of a creditor’s petition are matters within the knowledge of the debtor rather than the petitioning creditor.
The absence of information that is within the knowledge of the debtors is a factor against the adjournments they each seek. There must be some doubt as to whether each debtor will place before any adjourned meeting of creditors complete evidence of his financial circumstances and a proposal calculated to persuade them to vote for the administration of his affairs under Part X, given the level of disclosure in the statements of affairs described by the Controlling Trustee. I note that there is no information as to the third party said to be the potential source of funds in relation to the proposals of Mario and Victor Turco and that there are significant shortcomings to Dominic Marinelli’s proposal as contended by counsel for HPM. As mentioned above, given this and the negligible level of assets disclosed by each debtor, it is difficult to see how any revised proposals would be to the advantage of creditors, notwithstanding Mr Lopez’s belief that adjournment is in the interests of creditors.
As part of all the circumstances, I have also had regard to whether the reasons given by the Controlling Trustee for adjournment of the creditors’ meetings (and matters relied on by the debtors) are factors in support of the adjournment application.
The possibility that further investigation might suggest that the current proposals may provide an inadequate return when compared with the potential returns from bankruptcy is not a factor that supports any adjournment, particularly given the absence of evidence of any basis for any alternative proposal.
The issues raised about the need to investigate HPM’s standing as a creditor could be of significance if HPM’s opposition was likely to be sufficient to defeat any special resolution proposed. However even if the “value” of HPM’s vote was to be decreased (and no evidence is before the court to support the concerns of the Controlling Trustee), as mentioned above, even a petitioning creditor owed a relatively small debt has a prima facie right to have its petition heard and determined. The assessment of the “value” of a creditor under s.64ZB for the purposes of determining whether a motion is proposed is not to the point in this context (even if it provided a reason for the Controlling Trustee to recommend an adjournment). As indicated, there is no suggestion in these proceedings that HPM does not satisfy the statutory requirements to present a creditor’s petition because of the basis of the debt on which it relies in each case.
The fact that the Controlling Trustee had a legitimate reason to adjourn the creditors’ meeting and that there is no suggestion that he acted improperly is not determinative. This is not a review of that decision.
Further, the reason given in Mr Lopez’s affidavit for adjournment, relating to the value of HPM’s debt, does not bear on whether the debtors’ proposals are bona fide and offer any advantage over bankruptcy to creditors generally.
In relation to whether the debtors should have the opportunity to seek to have the Court of Appeal judgment re-opened, the Court of Appeal judgment was delivered in July 2009. There is no explanation for the debtors’ failure to take any action thereafter and no evidence that any action has been taken to date.
I have had regard to the views expressed by Smith FM in Toma (at [45]) that were relied on by the debtors. However the matters raised by the Controlling Trustee (and those relied on by the debtors in these proceedings) are not such as to satisfy me that it is in the interests of justice to grant the adjournment sought. Given the apparently incomplete disclosure in the statements of affairs and the absence of action to have the Court of Appeal judgment re-opened, it cannot be said that those possible reasons for adjournment were the result of circumstances beyond the control of the debtors. The s.64ZB(8) issue, while legitimate from the perspective of the Controlling Trustee, is not such as to overcome the weight of the factors in Field, the inadequate nature of the present proposals and the absence of any evidence as to possible revised proposals. It has not been established that the PIA proposals are bona fide proposals in the interests of creditors generally.
In conclusion, on the evidence before the court I am not satisfied that the circumstances are such that it is fair, appropriate, proper or in the interests of justice to grant the adjournments sought by any of the debtors.
Counsel for the creditor indicated that if the adjournments were not granted the creditor would seek to proceed with the hearing of the creditor’s petitions shortly thereafter. I will hear the parties in this respect.
I certify that the preceding sixty-eight (68) paragraphs are a true copy of the reasons for judgment of Barnes FM
Associate:
Date: 25 February 2010
2
8
1