Khera v National Australia Bank Ltd
[1996] FCA 1050
•3 DECEMBER 1996
CATCHWORDS
BANKRUPTCY - deeds of arrangement - sequestration - principles governing exercise of jurisdiction to avoid or terminate a deed of arrangement - Bankruptcy Act 1966, ss. 222, 236, 239 and 242 - whether a transaction giving rise to a debt was a sham - whether omission of material particular from statement of debtor's affairs - whether incorrect and material particular in statement of affairs - whether deed of arrangement created injustice to creditors - distinction in Bankruptcy Act between powers of Court to declare void, set aside, or terminate an arrangement or composition - consideration of factors leading to different treatment under s. 222 and s. 236 - avoidance generally under s. 222 determined by circumstances in existence before deed or composition entered into; termination may depend upon facts existing before or after the execution of a deed of arrangement.
JASWANT KHERA v NATIONAL AUSTRALIA BANK LIMITED
NG 498 OF 1996
LOCKHART, HILL and TAMBERLIN JJ.
3 DECEMBER 1996
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 498 of 1996
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:JASWANT KHERA
Appellant
AND:NATIONAL AUSTRALIA BANK LIMITED
Respondent
COURT: LOCKHART, HILL and TAMBERLIN JJ.
DATE: 3 DECEMBER 1996
PLACE:SYDNEY
MINUTE OF ORDER
THE COURT ORDERS THAT:
The appeal be dismissed.
The appellant pay the costs of the respondent of the appeal.
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 ) No. NG 498 of 1996
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:JASWANT KHERA
Appellant
AND:NATIONAL AUSTRALIA BANK LIMITED
Respondent
COURT: LOCKHART, HILL and TAMBERLIN JJ.
DATE: 3 DECEMBER 1996
PLACE:SYDNEY
REASONS FOR JUDGMENT
LOCKHART and HILL JJ.
This appeal concerns the interpretation of sections of the Bankruptcy Act 1966 ('the Act') which empower the Court to avoid deeds of assignment, deeds of arrangement and compositions entered into under Part X of the Act (s. 222), or to terminate deeds of arrangement (s. 236). Directly, this case is concerned with ss. 222 and 236. However, the proper interpretation of those provisions also involves considering the related provisions concerning the setting aside and termination of compositions (ss. 239 and 242).
The appeal is from the judgment of a judge of the Court (Kiefel J.) who heard an application by the respondent, National Australia Bank Limited ('the respondent'), a creditor of the appellant, Jaswant Khera ('the appellant'), seeking orders that a deed of arrangement, executed following the passing of a special resolution of the appellant's creditors on 7 February 1996, be declared void under s. 222(4) of the Act, or that it be terminated under s. 236(1)(b) or (c). The respondent also sought consequential orders that the appellant's estate be sequestrated pursuant to s. 222(7) or s. 236, whichever be the applicable provision.
Creditors may, at a meeting called by special resolution pursuant to an authority under s. 118 require the debtor to execute a deed of arrangement under Part X (s. 204(1)(b)). A special resolution means a resolution passed by a majority in number and at least three fourths in value of the creditors present personally, by attorney or by proxy, at a meeting of creditors and voting on the resolution (s. 5(1), the interpretation section of the Act).
Her Honour ordered that the deed of arrangement be terminated, that the appellant's estate be sequestrated and that a trustee of his estate be appointed.
We shall set out the relevant sections of the Act at this stage so that the facts and her Honour's findings may be properly understood. The sections are lengthy and rather tedious to read; but their construction and interrelation are central to the case.
Sections 222, 236, 239 and 242 are in the following terms:
'222(1)Where there is a doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204, the Inspector-General, a person authorised in writing by the Inspector-General, the Registrar, the trustee, a creditor or the debtor may apply to the Court for an order under subsection (2).
222(2)Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order:
(a)declaring that the deed or composition is void, or that it is not void, on the ground specified in the application; or
(b)declaring that a provision of the deed is void, or is not void, on the ground specified in the application.
222(3)The Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this Part if the deed complies substantially with those requirements.
222(4)Where the Court, on the application of the Inspector-General, a person authorised in writing by the Inspector-General, the trustee or a creditor, is satisfied that the debtor:
(a)has given false or misleading information in answer to a question put to him with respect to any of his conduct or examinable affairs at the meeting of creditors at which the resolution requiring him to execute the deed or accepting the composition was passed; or
(b)has omitted a material particular from the statement of the debtor's affairs given under subsection 188(2) or included an incorrect and material particular in that statement;
the Court may make an order declaring the deed or composition to be void or declaring any provision of the deed or composition to be void.
222(5)The Court shall not make an order declaring a deed or composition, or a provision of a deed or composition, to be void on a ground specified in subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so.
222(6)The Court shall not make an order under subsection (2) or (4) unless the application for the order is made:
(a)in relation to a deed of assignment - before the final dividend has been paid under the deed;
(b)in relation to a deed of arrangement - before the terms of the deed have been carried out; or
(c)in relation to a composition - before the final payment has been made under the composition.
222(7)The trustee or a creditor may include in an application under subsection (1) or (4) an application for a sequestration order against the estate of the debtor and if the Court, on the first-mentioned application, makes an order under subsection (2) or (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.
222(8)The Court may, if it thinks fit, dispense with service on the debtor of notice of an application by the trustee or a creditor under this section, either unconditionally or subject to conditions.
222(9)The making of an application by the trustee or a creditor for a sequestration order under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.
222(10)Where in the course of proceedings before the Court (other than proceedings by way of an application under subsection (1)), the Court becomes of the opinion that there is a doubt, on a particular ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204, and that it is desirable that the doubt be resolved, the Court may direct the Registrar to apply to the Court under subsection (1) for an order under subsection (2) in relation to the matter.
...
236(1)The Court may, upon application by the trustee, a creditor or the debtor, or, if the debtor has died, the person administering the estate of the debtor, if it is satisfied -
(a)that the debtor, or, if the debtor has died, the debtor or the person administering the estate of the debtor, has failed to carry out or comply with a provision of the deed of arrangement;
(b)that the deed of arrangement cannot be proceeded with without injustice or undue delay to the creditors, the debtor or, if the debtor has died, the estate of the debtor; or
(c)that for any other reason the deed of arrangement ought to be terminated;
make an order terminating the deed.
236(2)The Court shall not make an order terminating a deed on the ground specified in paragraph (1)(a) or (c) unless it is satisfied that it would be in the interests of the creditors to do so.
236(3)The trustee or a creditor may include in an application under subsection
(1) and application for a sequestration order against the estate of the debtor and, if the Court makes an order on the first-mentioned application terminating the deed of arrangement, it may, if it thinks fit, forthwith make the sequestration order sought.
236(4)The Court may, if it thinks fit, dispense with service on the debtor of notice of an application by the trustee or a creditor under this section, either unconditionally or subject to conditions.
236(5)The making of an application by the trustee or a creditor for a sequestration order under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.
...
239(1)A creditor may, within 21 days from the date on which the special resolution accepting a composition under this Part was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor.
239(2)If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought.
239(3)The Court may, if it thinks fit, dispense with service on the debtor of notice of an application under this section, either unconditionally or subject to conditions.
239(4)The making of an application for a sequestration order against the estate of a debtor under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.
...
242(1)The Court may, upon application by the trustee, a creditor or the debtor, or, if the debtor has died, the person administering the estate of the debtor, if it is satisfied:
(a)that the debtor, or, if the debtor has died, the debtor or the person administering the estate of the debtor, has failed to carry out or comply with a term of the composition;
(b)that the composition cannot be proceeded with without injustice or undue delay to the creditors, the debtor or, if the debtor has died, the estate of the debtor; or
(c)that for any other reason the composition ought to be terminated;
make an order terminating the composition.
242(2)The Court shall not make an order terminating a composition on the ground specified in paragraph (1)(a) or (c) unless it is satisfied that it would be in the interests of the creditors to do so.
242(3)The trustee or a creditor may include in an application under subsection (1) an application for a sequestration order against the estate of the debtor and if the Court makes an order on the first-mentioned application terminating the composition, it may, if it thinks fit, forthwith make the sequestration order sought.
242(4)The Court may, if it thinks fit, dispense with service on the debtor of notice of an application by the trustee or a creditor under this section, either unconditionally or subject to conditions.
242(5)The making of an application by the trustee or a creditor for a sequestration order under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.'
The relevant facts may be briefly stated, and we take them primarily from the judgment of her Honour.
On 14 December 1995 the appellant signed an authority pursuant to s. 118 of the Act to convene a meeting of his creditors. The meeting was held in late January 1996, but adjourned to February 1996.
At the meeting held on 7 February 1996 a special resolution was carried on the vote of a majority in number and more than three fourths in value of the creditors, consisting of companies or firms with whom the appellant was associated and, in addition, fifteen persons who were either relatives or friends of his family. One of the fifteen persons was Mr V H Patel, apparently a resident of India, who voted by his proxy, and whose debt is claimed to be $779,406. This debt is challenged by the respondent and was the focus of the application before the learned primary Judge. The appellant maintains that Mr Patel advanced monies to Mr Govind, the appellant's uncle, to assist his business. The appellant further maintains that he guaranteed to Mr Patel repayment of the monies advanced by Mr Patel to Mr Govind from time to time.
The respondent contended before her Honour that the conclusion should be drawn that there was no such debt due from the appellant to Mr Patel, and, inferentially, that a document said to have been signed by the appellant and Mr Patel, which might be taken to confirm the existence of a transaction giving rise to that debt, was a sham.
Fourteen creditors who voted in favour of the special resolution claim small debts ranging from $1,000 to $3,000 which were said to have been loans to the appellant. Eleven of those loans were made at the same time, namely, in January 1993.
The creditors who voted against the resolution were mostly banks or legal practitioners to whom monies were owed, and they include the respondent. A number of those creditors supported the respondent in its application to the Court.
By the time of the Part X meeting the appellant had unsecured creditors to whom he owed approximately $1.5 million. The value of his assets was only $2,510. The primary Judge noted that, taking into account the amount by
which the appellant's secured debts exceeded the value of the securities, the total sum owed to unsecured creditors was about $1.76 million. Her Honour said that there were two factors which might, in part, explain this large discrepancy, namely: the appellant's assets had been realized in recent times; and the appellant had incurred a substantial liability to Mr Patel.
By late 1995 the appellant, who is a solicitor, had been involved in two partnership disputes which had led to litigation which was continuing. The appellant contended that he was likely to succeed in a claim for damages against his most recent partner in the sum of $100,000, but the claim is unquantified. The only other substantial asset which he asserted he had (apart from what he described as a 'family inheritance') was his house, and this had been sold and the proceeds applied towards repayment of a mortgage to MLC Life Building Society ('the building society'). The appellant included as assets in his statement of affairs $135,000 as fees rendered or work in progress, and $20,000 which he said represented the goodwill of his legal practice. The only other substantial asset which he asserted to be his property is $250,000 described as 'a loan to my brother in the USA', but which had the following note appended to it in the statement of affairs: 'Part of family inheritance which will not be available for repayment until 6/95'.
Her Honour said that further explanation was required of various features of the transactions relied on by the appellant as supporting the guarantee said to have been given by him to Mr Patel. Her Honour then referred to them.
Mr Patel was apparently a friend of the family of the appellant who, in 1993, was prepared to advance monies to assist the business of Mr Govind. To this end, the appellant was prepared to guarantee repayment to Mr Patel of whatever was advanced from time to time. The appellant made no record of this; however, he said in evidence before her Honour that his brother-in-law made and kept a memorandum evidencing the guarantee. This had never been suggested by the appellant before, and, when pressed to explain the memorandum, he added that it had not been signed by the parties and that he had not kept a copy. The memorandum was not tendered in evidence. Her Honour said that if the appellant's assets and income were not substantial, it was difficult to understand why he would agree to give an 'open-ended' guarantee of Mr Govind's debts and, indeed, why he would be accepted by Mr Patel as a guarantor. To this the appellant said that in fact he had asked for a ceiling of $1 million to be placed upon his liability. Her Honour then observed: first, that it was not clear how he could have hoped to repay that sum; and secondly, that a document of January 1995, the only signed record of the transaction, made no mention of that limit.
The document of January 1995 was entitled 'Deed of Confirmation of Debt'; it recited that there had been an oral agreement to provide a guarantee in January 1993 and that monies had been advanced on the basis of the agreement. The deed then proceeded as follows:
'In pursuance of the premises and in consideration of Khera having entered into an Agreement to provide Guarantee made on or about 13 January 1993 between Khera and Patel, Khera hereby covenants with Patel that Khera will pay to Patel the sum of Australian Seven Hundred and Seventy Nine thousand Four Hundred and Six dollars ($A779,406.00) which is due and payable under the said Agreement to provide guarantee together with interest at the rate of 10 per centum (10%) per annum commencing on this day 25 January 1995.'
The document was said to have been signed in New Zealand on the date it bears. Consistently with that assertion, the copy shows New Zealand stamp duty as having been paid in January 1995.
The appellant did not disclose any liability to Mr Patel in the statement provided by him to the building society, nor did he disclose any of the borrowings by the relatives and friends. Together, those liabilities amounted to a significant sum. In explanation, the appellant said that he was not aware in January 1994 that the amount advanced by Mr Patel was of any great magnitude and that most of the advances to Mr Govind took place later that year - a year when the
appellant was, on his own account, unwell and had a limited ability to work following the collapse of his partnership.
Mr Govind was apparently a fairly well to do businessman when the alleged agreement was entered into between the appellant and Mr Patel, but no security was sought from him and the appellant did not suggest that Mr Govind had been approached when demands were made upon the appellant by Mr Patel or when the document of January 1995 was executed, at a time when her Honour assumed that Mr Govind was still 'enjoying freedom' (this is a reference to the fact that since late 1995 Mr Govind has, according to the appellant, been held as a political prisoner in Uganda).
In addition to the monies now said to be due under the guarantee, Mr Govind is said to owe the appellant $250,000, being the monies held by the appellant's brother to which reference has been made, but which were paid by the brother to Mr Govind. How the brother came to be in possession of the appellant's inheritance was the subject of evidence in other proceedings. Her Honour said that it was difficult to follow why the appellant would decide later to permit the inheritance monies to be paid to someone who already owed Mr Patel a large amount of money. And her Honour observed that, '[a]ccepting notions of family loyalty', the appellant had no other substantial assets with which to meet his own potential liability to Mr Patel. Whether there was any explanation was
not a matter which was gone into in detail in evidence before her Honour.
Her Honour expressed grave doubts about the existence and the nature of any transaction between the appellant and Mr Patel. She had even stronger doubts about the veracity of the story concerning the $250,000; although she noted that this was not relied upon in the proceeding as the basis for an order under s. 222(4). But her Honour then said that, notwithstanding both the disquiet which she felt and the fact that she had formed the view that aspects of the story put forward by the appellant were improbable, it did not follow that the debt of the appellant to Mr Patel did not exist. She said that it was incumbent upon the respondent to establish that the transaction did not exist, since it asked the Court to conclude that the appellant had given false and misleading information or had included an incorrect particular concerning an alleged creditor in his statement of affairs. Her Honour said that, even though she had formed the view that the appellant was a witness who was prepared to add or elaborate upon matters to suit his purposes, this did not establish that everything he had said, including the facts set out in the document apparently signed by Mr Patel, were false. Her Honour said that she was unable, on the state of the evidence, to make the finding that there was no such transaction between the appellant and Mr Patel. Her Honour concluded that she did not have the requisite degree of satisfaction to make the
orders sought under s. 222.
Before turning to the alternative course of orders terminating the arrangement under s. 236, her Honour stated that it was appropriate to deal with a requirement common to both s. 222 and s. 236, the satisfaction of which was challenged by the appellant: both provisions require an order bringing an arrangement to an end to be in the interests of the creditors (ss. 222(5) and 236(2)). Indeed, those subsections prohibit the making of such an order unless the Court is so satisfied. Her Honour said, with reference to certain of the decided cases, that 'interests' of creditors in the context of bringing an arrangement to an end does not require that the Court be satisfied that there will be an immediate financial return or even a certain financial return to the creditors; it is sufficient that there be a real possibility.
Turning to s. 236, the primary Judge rejected the argument of counsel for the appellant that the words 'for any other reason' in paragraph (c) of s. 236(1) should not be given a wide meaning and that the power to terminate a deed of arrangement under that section is limited to circumstances where the arrangement could not be carried into final effect. It did not extend to the situation, so it was contended before her Honour, where, as in the present case, the Court may have some doubt about the matter but it had not been established
that there was some misconduct or misinformation as required by s. 222(4) before an order setting aside an arrangement is made.
Her Honour referred to a number of cases including Re Doukidis; Ex parte Consolidated Constructions Pty Limited, Toohey J., unreported, 26 June 1985; Re Tripodi; Ex parte Col Johnson Pty Limited, Burchett J., unreported, 22 January 1987; and Musolino v Sidiropolous, a judgment of the Full Court of this Court reported at (1991) 101 ALR 235, especially at 246. Her Honour distinguished those cases and said that the terms of ss. 236 and 242 do not themselves suggest a limitation with respect to the reasons necessary to warrant termination, other than that the Court be satisfied that it is in the interests of creditors to do so. Her Honour said that it was also necessary to show that a termination was necessary or desirable to have the discretion conferred by the section (s. 236) exercised in favour of the making of an order of termination. Her Honour said that 'terminated' in s. 236 (as in s. 235) simply means bringing an arrangement to an end before it is carried out. She said that there are a number of instances where it may be not only necessary but desirable to do so, notwithstanding that grounds for avoidance under s. 222, namely, non-compliance or matters affecting the knowledge and belief of creditors voting at the meeting, could not be satisfied. Her Honour said that there were likely to be many situations which fall between the grounds of avoidance
in s. 222 and impossibility of performance in s. 236.
Her Honour referred to other judgments of Full Courts of this Court in support of her view that s. 236 confers a wide power on the Court to terminate under s. 236: Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527; and Paton v Campbell Capital Limited (1993) 46 FCR 30. Her Honour concluded that where the circumstances of the case call for bringing a deed of arrangement to an early end and making a sequestration order against the debtor's estate; where circumstances establish that the special resolution is 'at least shadowy'; and where there is a real need for proper enquiry into the debtor's affairs, and it is in the interests of creditors to make such enquiry, then the proper course to take is to terminate the deed and to make a sequestration order.
Counsel for the appellant submitted that her Honour erred in relying on s. 236(1)(c) of the Act to terminate the deed of arrangement. It was contended that her Honour's judgment was contrary to the judgment of the Full Court in Musolino, and to the authorities there cited, and contrary also to the judgment in Re Brown (WT); Ex parte Humes Limited (1987) 74 ALR 611 at 614. Counsel argued that s. 236 on its face assumes a valid deed, that in paragraphs (a) and (b) it refers to matters occurring after the execution of the deed, and that paragraph (c) should also be read in that light, notwithstanding its
wide language. It was argued that ss. 235 and 236 were introduced into the Act, not to create a general discretion in the Court to review deeds of arrangement, but to provide certainty in determining when a deed of arrangement ends.
Counsel for the respondent relied essentially on the reasoning of her Honour: he distinguished the cases of Musolino; Doukidis and Tripodi and supported the finding of her Honour by reliance upon Paton and Chiragakis.
The respondent also relied on its notice of contention which challenged what was said to be the failure of her Honour to find that Mr Patel was not a creditor of the appellant and not entitled to vote on the appellant's deed of arrangement; and the further failure to find that the Court had jurisdiction to consider whether Mr Patel was a creditor of the appellant and that no onus lay upon the respondent to establish that Mr Patel was not entitled to vote on the deed of arrangement.
It was argued on behalf of the respondent that the Court has jurisdiction to determine the question of who is a creditor and hence entitled to vote at a meeting to consider a deed of arrangement; reliance in this regard was placed upon Forshaw v Thompson (1992) 106 ALR 633. It was accepted by counsel for the respondent that good reason must be shown to exercise the discretion to consider this question; but
sufficient reason to intervene was said to have been demonstrated in this case by, particularly, the substantial amount of Mr Patel's claim, the suspicion surrounding its validity, and the consequences for all creditors (having regard to the lack of real benefits provided by the deed of arrangement).
Doubtless it is desirable, assuming it be possible, to achieve an interpretation of the relevant statutory provisions with mutual consistency. However, it must be remembered that those sections reflect a divergent history, to which we shall briefly refer.
In earlier times, arrangements, be they deeds of arrangement or arrangements achieved by some less formal method, tended to be left by bankruptcy law to the law of contract. Nevertheless, arrangements between creditors and debtors outside bankruptcy have been in use for a long time. The concept takes its roots in the Roman law of cessio bonorum, introduced during the time of Julius Caesar, and entitling a debtor to discharge from debt on giving up everything to his creditors. Such arrangements came to exist partly as a convenient method for making a settlement of the financial difficulties of debtors, and partly to enable debtors to avoid the more stringent provisions of bankruptcy (Clyne Committee Report 1962, para. 271).
Great difficulties formerly existed in effecting private arrangements. An assignment of all a debtor's property for the benefit of his creditors was an act of bankruptcy and available to a subsequent trustee in bankruptcy; by reason of the doctrine of relation back the trustee could avoid all alienations and dispositions of property made by the debtor after the time of assignment. Also, an arrangement of this sort bound only those creditors who assented to it and was consequently liable to be superseded by a dissenting creditor instituting proceedings in bankruptcy against the debtor. Further, creditors were often compelled to accede to deeds of arrangement without having sufficient opportunity to investigate the debtor's affairs and without notice of the deed until it was too late to impeach it (para. 271 of the Clyne Committee Report).
With a view to obviating these difficulties statutory provisions were enacted from time to time in England. Deeds of arrangement were introduced by the Bankrupts, England, Act 1825. Later the English Bankruptcy Act 1869 gave statutory sanction to 'liquidations by arrangement' between the debtor and his creditors. And ultimately, the Deeds of Arrangement Act was passed in 1887, designed to ensure that publicity was given to private arrangements and to provide better protection for the creditors. The law in England relating to those arrangements later became the Deeds of Arrangement Act 1914.
Until 1924 in Australia, matters relating to bankruptcy were administered in accordance with legislation enacted by the respective Australian States. These State laws, while substantially similar, were not uniform and differed in particular in the extent to which, and the manner in which, they provided statutory recognition of, and control over, arrangements entered into by debtors and creditors outside the conventional bankruptcy procedure.
In South Australia, the South Australian Insolvency Act 1886 enacted a system of compositions whereby a debtor who had called his creditors together and was prepared to act in accordance with their wishes could avoid the stigma of bankruptcy, yet the creditors could compel him to assign his property for their benefit and could control the administration of his assets. A similar system with certain amendments was adopted in 1898 in Western Australia.
Otherwise, for a history of the State legislative treatment of arrangements outside bankruptcy before 1924, see the Clyne Report, paras. 273 to 278; Insolvency Law of Victoria by W H Lewis, 1899, especially Chs IX and X; and see G P Hargreaves and D P Davies, Deeds of Arrangement, 1921.
The framers of the 1924 Bankruptcy Act incorporated into Part XI the provisions of the South Australian and Western Australian Acts, and into Part XII the Victorian legislation
concerning deeds of arrangement. In turn, the former Acts were similar to Parts VI and VII of the English Bankruptcy Act 1869; and the latter legislation was based on the English Deeds of Arrangement Act. The objects of the two Parts XI and XII of the Bankruptcy Act 1924 are the same, namely, to sanction arrangements between a debtor and his creditors outside bankruptcy and to protect the debtor from the stigma of bankruptcy as long as he remains amenable to the direction of his creditors.
At first sight the provisions of the two Parts of the 1924 Act may appear to overlap, since a composition or a deed of assignment under Part XI is as much an arrangement as are the instruments which are enumerated as deeds of arrangement in s. 190(3) of Part XII. The legislature recognized this apparent overlap and provided against it; ss. 158 and 191 described Parts XI and XII as mutually exclusive.
Section 201 of the 1924 Act empowered the Court on the application of a creditor to declare a deed of arrangement void or to cancel the appointment of the trustee and substitute some other qualified person to act as trustee, in each case where the trustee under the deed failed to give security when required to do so in pursuance of the Act. The deed of arrangement under Part XII was void automatically unless registered within the time specified (s. 193). It was also void if either it was not registered as prescribed by
sub-section (1) of s. 193 or it was not assented to by the requisite majority of creditors. Thus, under the 1924 Act there was no general provision for terminating any of the relevant deeds or compositions. The 1924 Act made provision for deeds of arrangement or compositions to be declared void on narrow grounds which essentially were fraud or wilful or material error or omission in schedules annexed to the deed or non-compliance with the provisions of Part XI in the case of deeds of assignment and compositions.
The Clyne Committee recommended in para. 291 of its report that for the 1966 Act there should be one part - Part X - to replace Parts XI and XII of the 1924 Act, but providing for three distinct procedures that may be used for arranging the affairs of insolvent debtors as an alternative to bankruptcy, namely, deeds of assignment, deeds of arrangement and compositions.
A deed of assignment is a deed by which a person who is insolvent assigns all his divisible property (ie. his property that would be available to creditors if he had become a bankrupt, other than property acquired after the execution of the deed) for the benefit of his creditors. A deed of arrangement is a deed (not being a deed of assignment or a deed in respect of a composition) providing for the arrangement of the affairs of a person who is insolvent with a view to the payment in whole or in part of his debts. A
composition is an arrangement by which the creditors of a person who is insolvent (a) agree to accept payment of the debts due to them by instalments or (b) agree to accept in full satisfaction of the debts due to them less than the full amount of those debts, whether in the form of money or other property and whether by instalments or otherwise (Clyne Committee Report, paras 291-295).
Light is thrown on the power to declare deeds or compositions void under s. 222 by paras 317 and 318 of the Clyne Committee Report which read as follows:
'317.The Committee recommends that the trustee, a creditor or the debtor should be able to apply to the Court for an order declaring that a deed or composition is void, or that it is not void on a particular ground. The purpose of this is to enable the Court to resolve doubts whether a deed was entered into in accordance with the proposed new Part or complies with the requirements of that Part or whether a composition has been duly accepted by a special resolution of a meeting of creditors under that Part.
318.The Committee also thinks that the Court should have power to declare a deed or composition void, on the application of the trustee or of a creditor, where it is satisfied that the debtor has given false or misleading information in answer to questions put to him at the meeting of his creditors or in a statement of his affairs submitted to the creditors. The Committee considers, however, that the Court should not be empowered to make an order declaring a deed or composition to be void in such circumstances unless it is satisfied that it would be in the interests of the creditors to do so.'
Sections 222(1) and (4) of the Act were deliberately structured in relation to sub-s. (4) to impose the requirement that an order of the Court declaring a deed or composition void cannot be made unless the Court is satisfied that it would be in the interest of creditors to do so.
The Clyne Committee said the following concerning what became s. 224 of the Act:
'The Committee proposes that if a deed or composition is declared to be void, or a deed or composition is terminated by the Court or by the creditors, any payments made, acts and things done and transactions entered into in good faith under, or for the purposes of, the deed or composition by the trustee or any other person before he had notice of the order or of the termination should be valid and effectual and not liable to be set aside by the trustee of a subsequent deed or in a subsequent bankruptcy. In particular, this will assure to the trustee of a deed or composition proper protection for acts and things done by him in good faith.'
(The Clyne Committee Report is silent on the reason for the inclusion of s. 236 save for paras 332 and 333. See also paras 338 and 339).
With this background one approaches the construction of the sections. The first striking feature is that the Act draws a distinction between the powers of the Court to declare something void or set it aside or terminate it. Under s. 222
the Court may declare a deed of assignment, a deed of arrangement or a composition void; or it may declare that a provision of the relevant deed is void or not void as the case may be. Under s. 236 a Court may also terminate a deed of arrangement. Pursuant to s. 239 a Court may set aside a composition; under s. 242 a composition may be terminated.
This feature is of importance. It is a useful pointer to the proper construction of the sections. To set a deed of assignment or arrangement or a composition aside, or to declare it void, suggests, when one examines the subject matter of ss. 222 and 239, that the orders operate retrospectively to avoid or set aside the deed or composition from its inception, so that it never was valid. This view is supported by s. 224 which validates everything done in good faith by the trustee under or for the purposes of the deed of assignment or deed of arrangement or composition before notice of the relevant order of the Court. No such provision exists with respect to s. 236, under which the Court may terminate a deed of arrangement.
Section 222 is directed to the case where there has been some non-compliance with the requirements of Part X concerning whether a deed of assignment or deed of arrangement was entered into in accordance with that Part, or whether it complied with the requirements of Part X, or whether a composition had been accepted by special resolution of the
creditors under s. 204. Also, under s. 222(4) the Court may avoid a deed of assignment, deed of arrangement or composition, or any provision where the debtor has given false or misleading information in answer to questions put to him at the meeting of creditors at which the special resolution was passed requiring him to execute the deed or accept the composition, or where the debtor has omitted a material particular from his statement of affairs furnished under s. 188(2), or included an incorrect and material particular in that statement. These are all matters which go to the validity of a deed of assignment or arrangement or of a composition, matters that relate to the setting up or establishment of the deed or composition. It is in the case of defects of this kind that the Court is empowered to declare the deed or composition void. In each such case, all the relevant facts would have occurred at or before the passing of the requisite special resolution of creditors, though some of the relevant facts may not come to light until later. For example, doubt about whether a deed was entered into in accordance with Part X or a composition was accepted by special resolution, though based on facts that were in existence before the special resolution was passed, may not come to light till later.
Similarly, so far as s. 222(4) is concerned, the fact of there being false or misleading information or omission of material particulars or the inclusion of incorrect and
material particulars in the statement of affairs by the debtor may not come to light until later, notwithstanding that the facts which establish the false or misleading information or omission from or inclusion in the statement of affairs of material particulars were facts in existence at the time of the passing of the special resolution.
No provision other than s. 222 exists for the avoidance, setting aside or termination of a deed of assignment. So far as deeds of arrangement are concerned, in addition to s. 222, there is s. 236 which, as can be seen from the terms of the section previously set out, empowers the Court to terminate the deed of arrangement if the debtor has failed to carry out or comply with a provision of the deed of arrangement; or, upon the debtor's death, if the person administering his estate has failed to do so (s. 236(1)(a)); or if the deed cannot be proceeded with without injustice or undue delay to the creditors (s. 236(1b), s. 236(1)(b)); or if, for any other reason, the deed of arrangement ought to be terminated (s. 236(1c)).
Grounds on which the Court may terminate a deed of arrangement under s. 236(1) generally would concern facts and circumstances that came into existence or arose after the execution of the deed of arrangement. Certainly ground (a) would do so, but in the case of grounds (b) and (c), the relevant facts may have existed before or after the execution
of the deed or both (but may not have come to light until after the deed was executed).
The grounds referred to in paragraphs (a), (b) and (c) of s. 236(1) are expressed in the disjunctive. Notwithstanding the width of the language of (c) - 'that for any other reason the deed of arrangement ought to be terminated' - the presence of the word 'other' establishes that ground (c) is not available if the facts support a finding that may ground termination under paragraph (a) or (b). It is only if the facts do not fall within paragraphs (a) or (b) that the Court may rely on paragraph (c).
Notwithstanding the generality of the language of paragraph (c) of s. 236(1), in our view if the facts lead to the application of s. 222(4) (grounds for declaring the deed void under s. 222(2)), s. 236 cannot be relied on. In other words, matters which bear on the validity of the meeting of creditors and which would lead to the deed being avoided, are encompassed solely by s. 222 and not by s. 236. This view is supported by the final three paragraphs of the judgment of Toohey J. in Doukidis, by Musolino at 246, and by Hill J. in Gye and Perkes; Ex parte McIntyre (1989) 89 ALR 460 at 475‑477.
Turning to s. 239 concerning compositions. Although at first sight the grounds on which the Court may set aside a
composition under s. 239(2) are wide, upon closer examination they relate in my opinion to matters that concern the terms of the composition itself, that is to say facts which were in existence (whether known or not) at the time of the passing of the special resolution of creditors to accept the composition under Part X. The Court may set aside the composition if it considers 'that the terms of the composition are unreasonable'. This plainly centres attention upon the terms of the composition itself. The Court may set aside a composition if the terms of the composition 'are not calculated to benefit creditors generally'. Again attention is centred upon the terms of the composition.
Then follows the third ground 'for any other reason the composition ought to be set aside'. In our opinion this ground, despite the width of its language, is confined to circumstances which relate to the terms of the composition itself or the circumstances in which the composition came to be accepted by special resolution of the creditors. To an extent these grounds may overlap with the grounds on which the Court may declare a composition void under s. 222. That does not militate against the construction of s. 239(2) which appeals to us.
Our view is reinforced by consideration of s. 242 which empowers the Court to terminate a composition if satisfied of the three matters set out (in the disjunctive) in sub-s. (1).
Those grounds mirror the grounds upon which a Court may terminate a deed of arrangement under s. 236. In our view the construction to be given to s. 242(1) is substantially the same as that to be given to s. 236(1). We need not repeat what we said about it. See generally the judgment of Hill J. in Gye and Perkes concerning ss. 232, 239 and 242.
In the present case the evidence before the primary Judge revealed a state of affairs which caused her Honour considerable disquiet. The matters which gave rise to the disquiet are a combination of facts that were in existence before the deed of arrangement was entered into and facts that arose thereafter, although more the former than the latter. Nevertheless, the revelation of most of the earlier facts did not become apparent until after the execution of the deed. Indeed, in some instances they were not apparent until evidence was given before her Honour. Although it is plainly arguable that much of the material could fall within s. 222(4) as being false or misleading information given by the appellant to the creditors at the relevant meeting, certain material matters arose thereafter. In our view her Honour was correct in approaching the matter under s. 236. In our opinion the deed provides no real benefit to creditors. The income contribution to be made by the appellant is minimal. If there is value in the litigation against the appellant's former partner, the creditors get less under the deed than they otherwise would on bankruptcy, namely, 75%; and there is
no obligation on the appellant to pursue that litigation. Indeed, the evidence does not suggest that he has means to pursue it. Because the deed is one of arrangement, transactions such as voluntary settlements (s. 120), fraudulent dispositions (s. 121), and preferences (s. 122), cannot be pursued. Also, the $250,000 transaction involving the appellant and his brother cannot effectively be investigated under the deed of arrangement; nor can there be any investigation into what the appellant may have done with assets which would have explained the value Mr Patel is alleged to have seen in the appellant's guarantee.
It has not been established that the facts found by her Honour were incorrectly found or that they do not support the conclusion reached by her Honour that the deed should be terminated and a sequestration order made.
However, the facts as found by her Honour seem to us to fall more appropriately under paragraph (b) of s. 236(1) than under paragraph (c). Those facts support the conclusion that the deed cannot be proceeded with without injustice to the creditors. Hence s. 236(1)(b) applies, and one does not reach s. 236(1)(c). Her Honour correctly concluded, in our opinion, that it would be in the interests of the creditors to terminate the deed (s. 236(2)).
Whether one approaches the matter under s. 236(1)(b) or (c), the answer is the same. Accordingly, her Honour was entitled, in our opinion, to take the course she did - terminating the deed and making a sequestration order.
It is unnecessary to consider the other questions argued on the appeal, including the matters raised by the notice of contention.
We would dismiss the appeal with costs and confirm the order of the primary Judge.
I certify that this and the preceding thirty-two (32) pages are a true copy of the reasons for judgment herein of the Honourable Justice Lockhart and the Honourable Justice Hill.
Associate
Dated: 3 December 1996
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 498 OF 1996 GENERAL DIVISION )
ON APPEAL FROM A JUDGE
OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: JASWANT KHERA
Appellant
AND: NATIONAL AUSTRALIA
BANK LIMITED
Respondent
CORAM: LOCKHART, HILL, and TAMBERLIN JJ
PLACE: SYDNEY
DATED: 3 DECEMBER 1996
REASONS FOR JUDGMENT
TAMBERLIN J:
I am in agreement with the reasons for judgment delivered by Lockhart and Hill JJ in this matter.
However, I have some brief observations to make with respect to the construction of the relevant sections.
Section 236(1) of the Bankruptcy Act 1996 (Cth) ("the Act") is concerned with an order which terminates the Deed of Arrangement and not with an order declaring the deed void or setting it aside. The word "terminated" presupposes the existence of a valid and effective deed.
Section 236 is found in Division 5 of Part X of the Act, dealing with "Special Provisions applicable to Deeds of Arrangement".
Two of the other sections referred to in argument, namely ss239 and 242 are in Division 6 of that Part which is concerned with "Special Provisions applicable to Compositions".
The decision in Re: Doukidis; Ex parte: Consolidated Constructions Pty Limited, Toohey J, unreported, 26 June 1985, indicates that s242(1)(c) is to be interpreted in the light of s239 which provides for an application to set aside a composition being made within 21 days from the date on which the special resolution, accepting a composition under Part X, was passed. The existence of the limitation period in s239 indicates that s242 should not be read to cover the same ground, because in s242 there is no time limit specified. Accordingly, the interpretation of s242 must be determined by reference to the existence of s239.
The first two grounds set out in s239(2), namely that the terms of the composition are unreasonable or not calculated to benefit the creditors generally, involve a consideration of the deed itself and the circumstances existing at the time the deed was entered. The third ground, which refers to "any other reason" is to be considered in the light of matters which affect the making of the deed and would warrant it being set aside. This means that it is appropriate that s242(1)(c) should be read down so as not to cover circumstances which enliven s239(2). Subsection (1)(c) contemplates that the composition has operated and that such operation may be "terminated".
Although s236 is in identical terms with s242, except that it deals with deeds of arrangement and not with compositions, I do not consider that s236 is to be read down due to the inclusion of s239 in Division 6.
The only constraints appropriate to s236(1)(c), in my view, are that it should not be interpreted so as to operate where circumstances or reasons exist which are covered by s222 of the Act or where the circumstances are covered by the provisions of paras(a) and (b) of s236(1). In particular, I do not consider that it should be limited to circumstances or reasons which have arisen since execution, although such reasons or circumstances will usually be those which attract the operation of the paragraph.
Section 222 is concerned with declaring deeds of assignment and arrangement, or compositions void. It deals with the effect of non-compliance by a deed with the requirements of Part X and the validity of the acceptance of the composition. It is specifically directed to circumstances leading up to the execution of the deed or acceptance of the composition and with the question as to whether the deeds comply. Similarly, s222(4) is concerned with misleading information given at the meeting of creditors and whether there has been any omission from the statement of affairs. I consider that where those circumstances are present, s236 does not operate.
However, where the grounds referred to in s222 are not made out, I consider that s236(1)(c) is sufficiently wide to be available as a ground when the Court is considering whether it should make an order terminating the deed.
I do not think it is appropriate to import into s236(1)(c) a limitation to the effect it is to be read so as to cover only circumstances similar to those enumerated in paras(a) and (b) of that subsection nor as being subject to a constraint that it cannot cover a case which does not satisfy the requirements of s222. The power should be read as conferring a broad power to be exercised judicially.
Section 236(1)(c), in my view, is sufficiently wide to include the circumstances of the present case which, I agree with her Honour, Kiefel J, demonstrate the need for proper investigation of the debtor's affairs in the interests of creditors.
I agree with Lockhart and Hill JJ that the circumstances outlined by her Honour are also sufficient to enliven s236(1)(b) which applies where the Court is satisfied that the deed cannot be proceeded with without injustice. The "injustice" stems from the continued existence of the deed in circumstances which gave rise to significant disquiet. Cf Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 at 534-535. As Lockhart and Hill JJ point out in the present case the deed provides no significant benefit to creditors. The appellant's contribution is minimal. The contemplated litigation would produce less under the deed on bankruptcy and there is no obligation to pursue the litigation.
For the above reasons, I consider that her Honour's reasoning does not disclose any error. I agree that the appeal should be dismissed with costs.
I certify that this and
the preceding four (4)
pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Tamberlin.
Associate:
Date: 3 December 1996
Counsel for Applicant: Mr M R Aldridge
Solicitor for Applicant: Shaw Lewis & Co
Counsel for Respondent: Mr A J L Bannon
Solicitor for Respondent: Dibbs Crowther & Osborne
Date of Hearing: 26 July 1996
Date Judgment Delivered: 3 December 1996
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