Kantfield Pty Ltd v Lockwood
[2004] FMCA 309
•17 May 2004
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| KANTFIELD PTY LTD v LOCKWOOD | [2004] FMCA 309 |
| BANKRUPTCY – Creditors petition – application for adjournment of petition pending meeting of creditors to consider Part X proposal. |
Bankruptcy Act 1966, ss.33(1)(a), 188
Corporations Act 2001, s.419
Field v Commercial Banking Co of Sydney Ltd (1978) 22 ALR 403
Re David Bendel ex parte Lowe Lippmann (a firm) Merkel J (Unreported 19 April 1996)
| Applicant: | KANTFIELD PTY LTD (ACN 006 073 418) |
| Respondent: | DAVID NEIL LOCKWOOD |
| File No: | MZ 409 of 2004 |
| Delivered on: | 17 May 2004 |
| Delivered at: | Melbourne |
| Hearing Date: | 10 May 2004 |
| Judgment of: | McInnis FM |
REPRESENTATION
| Counsel for the Applicant: | Mr K Baker |
| Solicitors for the Applicant: | Macpherson & Kelley |
| Counsel for the Respondent: | Mr G Bigmore QC, with Mr M Galvin |
| Solicitors for the Respondent: | Brand Partners |
| Counsel for the Supporting Creditor: | Mr S Gardiner |
| Solicitors for the Supporting Creditor: | Deputy Commissioner of Taxation | |
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE | ||
MZ 409 of 2003
| KANTFIELD PTY LTD (ACN 006 073 418) |
Applicant
and
| DAVID NEIL LOCKWOOD |
Respondent
REASONS FOR JUDGMENT
In this matter Kantfield Pty Ltd (the applicant creditor) filed a creditors petition on 31 March 2004 seeking a sequestration order against the estate of David Neil Lockwood (the respondent debtor). The creditors petition relies upon a bankruptcy notice issued on 24 February 2004. That notice claims that the respondent debtor owes the applicant creditor a debt of $506,061.82 arising from a judgment in the Supreme Court of Victoria on 28 May 2003. It is common ground that the judgment obtained was a summary judgment and liability was not disputed. Quantum had been disputed and it is alleged by the respondent debtor that the applicant creditor's claim was reduced by "approximately $60,000".
The creditors petition was supported by the usual affidavits in relation to service and searches. The respondent debtor filed a notice of appearance on 5 May 2004. On 6 May 2004 the petition was adjourned by consent to 10 May 2004.
On 30 April 2004 the respondent debtor gave an authority to Dennis Anthony Turner pursuant to s.188 of the Bankruptcy Act 1966 (the Bankruptcy Act) authorising him to call a meeting of the respondent's creditors with a view to proposing an arrangement under Part X of the Bankruptcy Act. It appears to be common ground that a meeting of the creditors of the respondent must be held by 4 June 2004.
By a notice of intention to oppose the application or petition filed 6 May 2004, the respondent debtor opposes the petition on the following grounds:-
“1.The convening of a meeting under Pt X of the Bankruptcy Act 1966 (Cth) for the purpose of entering into an agreement with creditors.”
Counsel for the respondent debtor has sought an adjournment of the petition to enable the proposed meeting of creditors to take place.
The respondent debtor has relied upon affidavits sworn by him on 5 May 2004 and 10 May 2004. He has further relied upon an affidavit of Brian Douglas Lawrence sworn 29 April 2004 on behalf of Abacus Corporate Consulting (the Lawrence affidavit), an affidavit of Raffaela Pisano sworn 4 April 2004 on behalf of Minter Ellison (the Pisano affidavit), an affidavit of Dominic Antonio Varrasso sworn 5 May 2004 on behalf of Dexta Corporation Ltd (the Varrasso affidavit) and an affidavit of Jeremy Rupert Slocombe Brand sworn 10 May 2004 (the Brand affidavit).
By way of background, it is noted that the respondent debtor is a chartered accountant and a registered liquidator. It is not in dispute that he has practised as a chartered accountant for a period in excess of 20 years and has practised for the whole of that period of time as an insolvency practitioner.
According to his affidavit, the respondent debtor formed a new partnership known as Sims Lockwood (Vic) (SLV) together with Michael Humphris, Kenneth Sellars and Lawrence Fitzgerald in or about October 2001. SLV operated as a specialist insolvency practice with each of the principals registered as liquidators and able to accept appointments to all forms of insolvency administration. The respondent debtor claims that on 1 January 2003 he joined Horwath Melbourne, chartered accountant, as a partner.
On 25 June 2001 a company Exelerate Funding Pty Ltd (Exelerate) in exercise of powers contained in a debenture dated 31 July 2000 appointed the respondent debtor as receiver and manager of the property of F and T Industries Pty Ltd (F and T). The respondent debtor claims that the F and T receivership was initially conducted through the national partnership of which he was a member from 25 June 2001 to 30 September 2001 and then through the SLV partnership from 1 October 2001. The respondent debtor claims to have obtained the usual indemnities from Exelerate and some of its associated entities.
F and T was a manufacturer of plastic products. It had approximately 80 employees and a gross turnover in excess of $12 million per annum. Following his appointment as receiver and manager of F and T, the respondent debtor conducted its business and claims that this was with a view to the company's reconstruction and refinance or sale of the business.
On 1 November 2001 Briga Pty Ltd ("Briga") took an assignment of Exelerate's secured debt over F and T and by further agreement Briga continued the respondent debtor's appointment as receiver and manager of F and T.
A voluntary administrator was appointed to Briga on 8 May 2003. F and T was placed into liquidation on 20 March 2003. The respondent debtor claims that from the time that Briga became a secured creditor of F and T, he sought and obtained additional security by way of indemnities and guarantees from Briga and the directors of Briga and F and T (the receivership indemnifiers). The respondent debtor claims that at all times during the course of the receivership, the director of F and T (and also Briga) Mr Frank Alessi worked in the F and T business.
It is claimed that by February 2003 it was apparent to the respondent debtor that he was not able to achieve a sale of F and T's business and that the business would need to be closed. During February and March 2003 the operations of F and T were wound down. As a result of the closure of F and T there were significant outstanding debts owing to F and T's creditors.
In December 2002 the respondent creditor asserts that he told the receivership indemnifiers that there would be a shortfall which they would be required to pay. Notices of demand were served on the receivership indemnifiers on 24 December 2002. Allegations were made against the respondent debtor that he had been negligent in the conduct of the business and that negligence entitled the receivership indemnifiers to avoid their indemnities. Proceedings were issued by the respondent debtor in the second half of 2003 against Redkins Pty Ltd, Forfabs Pty Ltd, Francesco Alessi and Filipa Alessi in the Supreme Court of Victoria (the indemnity proceeding). The Defence filed in the indemnity proceedings by the Alessis and associated companies does not assert negligence but rather asserts, amongst other matters, that the respondent debtor misled and deceived the receivership indemnifiers into providing indemnities and otherwise appears to raise on behalf of some of them an Amadeo defence. The court was advised that the indemnity proceedings had been set down for hearing in August 2004. That date had recently been vacated.
The respondent debtor claims that as a result of the refusal of the receivership indemnifiers to honour their indemnities, he made a call upon SLV's professional indemnity insurance. The insurer, Allianz Australia Insurance Ltd, denied the claim on the basis that the policy did not insure the respondent debtor against debts incurred by him as a receiver and manager. That position was challenged by the respondent debtor in the Supreme Court of Victoria proceedings and in November 2003 Byrne J found in favour of the insurer and dismissed the respondent debtor's claim. It is claimed that there is an appeal from that decision currently pending. The respondent debtor alleges that his fellow partners of SLV have asserted they are not liable to him for contribution under the partners' indemnities for any debts incurred in the course of the F and T receivership.
The judgment by the applicant creditor against the respondent debtor arises from circumstances where the applicant creditor was a supplier to F and T of solid plastic resins both prior to and after the appointment of the respondent debtor as receiver and manager.
After appointment of the respondent debtor as receiver and manager,
F and T entered into a number of contracts for the supply of various plastic moulded products and in turn entered into contracts for supply with a number of its own suppliers including the applicant creditor. Orders were placed by F and T with the applicant creditor and goods supplied. It is alleged that during the course of dealings between F and T and the applicant creditor, approximately $1.4 million was paid by F and T to the applicant creditor.
Ultimately there was a letter of demand for and on behalf of the applicant creditor with proceedings issued against the respondent debtor in the Supreme Court of Victoria leading to the summary judgment which is the basis of the debt owed referred to in the bankruptcy notice.
The applicant creditor opposes the application for adjournment by the respondent debtor. Before this court counsel claimed to appear for the Commissioner of Taxation and although there is a dispute as to the standing of the commissioner on the basis of a further dispute as to whether the commissioner is indeed a creditor of the respondent debtor, the court noted that in any event the commissioner did not oppose the application for adjournment.
Relevant Law
Legislation
Corporations Act 2001
“Section 419
Liability of controller
(1) A receiver, or any other authorised person, who, whether as agent for the corporation concerned or not, enters into possession or assumes control of any property of a corporation for the purpose of enforcing any charge is, notwithstanding any agreement to the contrary, but without prejudice to the person's rights against the corporation or any other person, liable for debts incurred by the person in the course of the receivership, possession or control for services rendered, goods purchased or property hired, leased, used or occupied.
(2) Subsection (1) does not constitute the person entitled to the charge a mortgagee in possession.
(3) Where:
(a) a person (in this subsection called the controller) enters into possession or assumes control of property of a corporation; and
(b)the controller purports to have been properly appointed as a receiver in respect of that property under a power contained in an instrument, but has not been properly so appointed; and
(c)civil proceedings in an Australian court arise out of an act alleged to have been done by the controller;
the court may, if it is satisfied that the controller believed on reasonable grounds that the controller had been properly so appointed, order that:
(d)the controller be relieved in whole or in part of a liability that the controller has incurred but would not have incurred if the controller had been properly so appointed; and
(e)a person who purported to appoint the controller as receiver be liable in respect of an act, matter or thing in so far as the controller has been relieved under paragraph (d) of liability in respect of that act, matter or thing.”
Case Law
In considering the issue of whether an adjournment should be granted of the hearing of the petition pending the meeting of creditors, both counsel referred to the decision of the Full Court of the Federal Court in Field v Commercial Banking Co of Sydney Ltd (1978) 22 ALR 403. The court in that case considered an appeal from a decision of a trial judge who had refused an adjournment pending a meeting of creditors arising from a Part X authority. It is useful to set out the decision of Sweeney J (with whom Franki J agreed) as follows:-
“This case has been faithfully noted to the appropriate section of the Act in successive editions of McDonald, Henry & Meek’s Australian Bankruptcy Law and Practice (see 5th ed. par 104). It supports the opinion I have expressed that the court has not adopted a practice that it would generally adjourn the hearing of a petition upon the mere evidence that the debtor has executed an authority under s.188.
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) 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 creditor’s 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 Part 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 court was further referred to the decision of Merkel J in Re David Bendel ex parte Lowe Lippmann (a firm) (Unreported 19 April 1996) where the court refused to exercise its powers to adjourn the creditors petition under s.33(1)(a) of the Bankruptcy Act where the adjournment had been sought pending a meeting of creditors to consider a Part X proposal. The court in that case acknowledged the fact that each case must be "decided on its own facts" but otherwise referred to those factors set out above in the Field decision. Reliance was placed upon this decision by the applicant creditor and it was submitted that there were similarities between that decision and the present case. Not surprisingly, counsel for the respondent debtor submitted that the case can be distinguished from the present facts and circumstances. In any event, both agreed that it was an example of a court exercising its discretion having regard to the principles set out in the Field decision.
It is appropriate to take into account the matters raised in the Field decision and to further have regard to the following paragraph from the decision of Merkel J in Bendel which provides a useful summary of the approach the court should take in a matter of this kind:-
“33.The debtor has not satisfied me that the circumstances are such that it is fair, appropriate, proper or in the interests of justice that I postpone, displace or adjourn the prima facie entitlement of the judgment creditor to have a sequestration order made if it has otherwise satisfied me that the statutory pre-conditions for such an order have been met.”
In the present case I simply adopt the reasoning of Merkel J in that paragraph to the extent that after considering all the relevant issues including those matters set out in the Field decision, it is necessary for the court to determine whether it is fair, appropriate, proper or in the interests of justice to adjourn the prima facie entitlement of a judgment creditor to have a sequestration order made. In the present case it is agreed between the parties that I should deal with the issue of the adjournment and not proceed to make a final decision that the material otherwise satisfies the court that the statutory preconditions for a sequestration order had been met save to note that relevant affidavits appear to be filed and served and that the notice of intention to oppose the petition relies upon only one ground. Of course the applicant creditor at the appropriate time will still need to satisfy the court that the statutory preconditions for a sequestration order have been met.
Submissions and Reasoning
Counsel for the respondent debtor relied upon the affidavits and in particular those affidavits of creditors. It was submitted that on a proper analysis of the material, the affidavit material provides some indication of the attitude of some of the creditors other than the petitioning creditor to not oppose the adjournment. Specifically it was noted that the Varrasso affidavit sworn for and on behalf of a creditor Dexta Corporation Ltd is significant given that the claimed indebtedness to that creditor is $1,148,122. In the Varrasso affidavit the deponent supports the respondent debtor's application for an adjournment of the petition "to enable the proposed meeting of his creditors under Part X to take place". The Lawrence affidavit sworn on behalf of Abacus Corporate Consulting likewise supports the application for an adjournment, though it is noted that the affidavit only refers to a debt for accounting services incurred in 2004 in the sum of $13,750. Likewise, a similarly modest amount of debt, namely, $11,280.85, is claimed by Minter Ellison in the Pisano affidavit.
The significance, however, of the affidavits relied upon by the respondent debtor is that those creditors have been prepared to swear affidavits. It is further significant, according to the respondent debtor's submissions, in the light of a report dated 29 April 2004 from Pattison Consulting Pty Ltd which purports to be a report based upon instructions given on 25 February 2004 for the preparation of a report in respect of the personal financial position of the respondent debtor. That detailed report analyses the financial circumstances of the respondent debtor and although conceding that the quantum of creditors' claims remains unknown at the date of the report, estimates that upon bankruptcy of the respondent debtor the creditors' claims would total and be provable "of at least $8,339,371 excluding compounding interest". The report further estimates that a return to creditors upon the bankruptcy of the respondent is likely to be 6.5 cents in the dollar. Reference is made to the capacity of the respondent debtor to earn income in the future. It was asserted that should he not be made bankrupt, his earning capacity "is likely to be in the vicinity of $500,000 p.a." In the event that the respondent debtor is made bankrupt, then the Pattison report estimates his income would be reduced to within the range of $150,000 to $200,000 assuming he is employed. A calculation is then made of the compulsory income contributions over a three‑year period based on an assumed income of $150,000, $175,000 and $200,000 respectively, leading to the total contribution of $120,848 over the three-year period. It was submitted that that income earning capacity is another factor which may be taken into account in the exercise of the court's discretion.
It was further submitted that the existence of the detailed analysis in the Pattison report is somewhat unusual in an application of this kind and should lead the court to a conclusion that this is not a last‑minute attempt to delay the making of a sequestration order but rather a genuine endeavour to rationalise what can only be described as somewhat complex financial circumstances at least to the point of presenting a Part X composition to a meeting of creditors which must be held by the first week of June 2004.
An attempt was made by both parties to analyse the total value of creditors and then determine the number of creditors and the value of debts where an indication has been given either supporting or opposing the adjournment application. During the course of submissions by both parties I indicated that an expression by a creditor of opposition to an adjournment does not necessarily mean that the same creditor would oppose the terms of any proposed composition under Part X of the Bankruptcy Act.
The respondent debtor relied upon exhibit DNL3 of his affidavit sworn 5 May 2004 and it is noted that that exhibit purports to set out the total liabilities of the debtor and the relationship between the petitioning creditor's debt and those total liabilities. It was asserted that the applicant creditor's percentage of debt to the total of all debts including disputed and contingent debts is 5.18 per cent. Whilst there was some further analysis of the debts and indeed an attack made upon the standing of the Commissioner of Taxation to appear on the basis that it was asserted that there is no debt, it is sufficient for present purposes to note that subject to all the disputes which have been raised, it would appear that the applicant creditor's percentage of debt to total debts not disputed is almost 10%.
A significant attack was made upon the claim by the Commissioner of Taxation for PAYG - GST tax in the sum of $1,050,241.66, and without deciding the matter it is sufficient for the present purposes to note that there is an arguable issue as to whether or not the respondent debtor in his capacity as receiver and manager of F and T is liable to pay those taxes. I have noted in forming the conclusion the detailed written submissions filed for and on behalf of the respondent debtor dated 7 May 2004. Of significance is the reliance upon liability of the respondent debtor arising from s.419 of the Corporations Act set out earlier in this judgment. I note that it is at least arguable that the Commissioner of Taxation claims may not be for services rendered, goods purchased or property hired, leased, used or occupied.
The applicant creditor submitted that there is an entitlement to proceed to a sequestration order and the adjournment application should be refused. Reliance was placed upon what are claimed to be communications from various other creditors opposing the adjournment. Again an attempt was made to determine the number of creditors opposed to the adjournment and to then assess the value of those creditors. Bearing in mind that if a Part X proposal is to succeed, then a special resolution is required to bind creditors.
The special resolution requires a majority in number and at least three-quarters in value of the creditors present. In the present case it was submitted, having regard to the number of creditors opposed to the adjournment, the court could infer that together with the petitioning creditor the prospects of the special resolution being passed would not be great. It was further submitted that a proper analysis of the financial circumstances of the respondent debtor has revealed a situation similar to that found in the Bendel decision where the court decided that on the debtor's own statement and evidence he is "hopelessly insolvent". Reference was made to the estimate of creditors in the Pattison report.
Further criticism was made of the respondent debtor's failure to actually formulate a Part X proposal and it was submitted there is a certain vagueness, an uncertainty arising from the material relied upon by the respondent debtor. It was argued that there is no substantive evidence as to whether or not the proposed causes of action contemplated by the respondent debtor have any substantial merit.
It was argued on behalf of the applicant creditor that there is insufficient evidence of any advantage to creditors in the circumstances of the matter being permitted to be dealt with at least by way of consideration by a Part X proposal at a creditors meeting. There is vagueness as to the capacity of the respondent debtor to borrow.
On the issue of the capacity of the respondent debtor's ability to borrow funds, it is noted that by way of reply counsel on his behalf submitted that the amount of borrowing would depend upon the amount required to discharge the obligations under any accepted Part X proposal.
In my view, it is appropriate to consider and apply the principles to which I have referred in the Field and Bendel cases.
It is not appropriate, nor indeed possible, for the court to undertake a detailed analysis of the extent and nature of the indebtedness, nor is it appropriate to do anything other than make some general assessment as to the number of creditors opposing or supporting the adjournment and the value of debts owed to each creditor. There is no doubt that there is at least evidence of substantial indebtedness which may lead to a conclusion that in this instance the respondent debtor appears hopelessly insolvent. However, it is clear that in considering the application for an adjournment, the court must have regard to the fact that the petitioning creditor who meets the statutory preconditions as a starting point has the right to proceed with the request for a sequestration order.
In considering the matters raised in relation to the application for an adjournment, it is my view that the execution of the authority pursuant to Part X of the Bankruptcy Act can only be one of the factors amongst many which this court has to consider. I am prepared to accept that in the present circumstances, given the detailed financial analysis in the Pattison report together with the affidavit evidence in support of the adjournment including at least one significant creditor said to be owed an amount of $1,148,122, that this is not a case where there is simply a collection of what might be described as "friendly" creditors or persons who have not otherwise pursued debts against the respondent debtor. I am further satisfied that unlike the facts and circumstances which were before the court in the Bendel matter, the petitioning creditor may not be described as a small one and indeed will have an active and significant role to play at a meeting of creditors to consider and, if thought necessary, challenge the Part X arrangement. It is also clear that other creditors sought to be relied upon by the applicant creditor in this matter in opposition to the adjournment application may at least potentially be likely to scrutinise and, if thought necessary, challenge the Part X arrangement. Although this does place some onus and expense upon those creditors seeking to scrutinise and perhaps challenge the Part X arrangement, I am not satisfied that there is sufficient prejudice in the circumstances which would lead me to conclude that overall there may not be some potential significant advantage to all creditors including the petitioning creditor requiring consideration of a genuine and bona fide Part X arrangement. That does not mean that on the material before me I am able to conclude that the requirements of a special resolution necessary to bind creditors will be met.
Accordingly, I am prepared to accept that one of the factors that are relevant in the consideration of the court's discretion on balance favours the granting of the adjournment, namely, that there is an advantage to creditors generally in permitting the Part X meeting of creditors to proceed.
Whilst it is clear that the applicant creditor has taken a consistent approach in seeking to pursue a sequestration order, it is my view that there is at least a countervailing attitude expressed by those creditors relied upon by the respondent debtor who are, as I have indicated, at least in one instance creditors of substance who to some extent at least balance the overall picture of those creditors relied upon by the applicant creditor. As I have indicated, I am further prepared to accept that there may be some advantage to the creditors considering a Part X proposal.
Although the petitioning creditor is a significant creditor, the relationship between the debtor of that creditor and the total liabilities of the debtor does not mean that a proposal will be automatically defeated at a meeting of creditors, but rather the proposal scrutinised and at least potentially the subject of a successful challenge.
The exercise of the court's discretion in a matter of this kind, having regard to the issues discussed, is not free of difficulty. Each case must be decided on its own facts having regard to those matters referred to in the Field decision. The court is certainly mindful of its obligations to permit a petitioning creditor to proceed to seek an order for sequestration. In the present case, however, despite the reservations I have concerning what prima facie may appear to be a hopelessly insolvent position of the respondent debtor, I am prepared to accept, having regard to the evidence produced including the detailed Pattison report and affidavits from creditors supporting the adjournment, that there is sufficient to persuade me to exercise my discretion in favour of an adjournment. Accordingly, I propose permitting the application for an adjournment to 10 June 2004 at 9.45 am.
I certify that the preceding forty-one (41) paragraphs are a true copy of the reasons for judgment of McInnis FM
Associate:
Date: 17 May 2004
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