Lancaster, R.l. v NZI Capital Corporation Ltd

[1991] FCA 609

Re: ROGER LONSDALE LANCASTER
And: NZI CAPITAL CORPORATION LIMITED and THE OFFICIAL TRUSTEE IN BANKRUPTCY
No. N G555 of 1991
FED No. 609
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart(1), Beaumont(1) and Gummow(1) JJ.

CATCHWORDS

Bankruptcy - creditor's petition - proposal for composition - substantial deficiency - application by debtor for adjournment - adjournment refused and sequestration order made - whether appellate court should interfere with exercise of discretion.

HEARING

SYDNEY

#DATE 11:10:1991

Counsel and Solicitors appellant: The appellant appeared

in person

Counsel and Solicitors for the first respondent: B.A. Coles with

C.R. Newlinds instructed by Kemp Strange Chippendall

Solicitor for the second respondent: Australian Government

Solicitor

ORDER

Leave to appeal against the order of Sheppard J. refusing the appellant's application for adjournment is refused.

The appeal against the making of the sequestration order by Sheppard J. is dismissed.

The appellant shall pay the costs of the first respondent of the appeal and the costs of the second respondent as a submitting respondent.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

In order to understand the nature of this appeal, it is necessary to refer to the history of the matter as follows.

1. By its creditor's petition ("the petition") dated 26 October 1990 NZI Capital Corporation Limited, the first respondent ("NZI"), petitioned the Court under the provisions of the Bankruptcy Act 1966 ("the Act") for an order that the estate of Mr Lancaster be sequestrated. In the petition NZI alleged that Mr Lancaster was indebted to it in the sum of $1,089,153.70, being a judgment debt of $1,053,982.58, together with interest, arising under a judgment obtained in the Supreme Court of New South Wales on 22 June 1990. NZI also alleged in its petition that Mr Lancaster had committed an act of bankruptcy on 20 August 1990 as a consequence of the service of a bankruptcy notice on him on 4 August 1990. The petition was made returnable before the Court on 12 February 1991.

2. Prior to the return date for the petition, Mr Lancaster called a meeting of creditors pursuant to Part X of the Act, the meeting to be held on 11 February 1991. The meeting was adjourned to 15 February. On that date Mr Lancaster's creditors accepted a composition, ("the composition"). On 12 February 1991 the hearing of the petition was adjourned. NZI then applied to the Court for orders setting aside the composition. On 26 July 1991 Foster J. ordered that the composition be set aside pursuant to the provisions of s.239(2) of the Act on the grounds, shortly stated, that the terms of the composition were demonstrably unreasonable having regard to the negligible amount available for distribution among unsecured creditors. Foster J. then gave leave to NZI to seek a hearing date for its petition. (At the same time, Foster J. also set aside a composition accepted by the creditors of Mr Lancaster. We are not here concerned with this matter.)

3. On 3 September 1991, no appeal having been brought from the decision of Foster J., the petition came before Sheppard J. Mr Lancaster applied for a further adjournment of the petition to enable his creditors to consider another proposed composition. Sheppard J. refused the adjournment and subsequently made a sequestration order. Mr Lancaster now seeks to appeal from the order refusing the adjournment and from the sequestration order.
   The grounds of the appeal

4. Mr Lancaster, who appeared before Sheppard J. and before us in person, put two main contentions in support of the appeal. First, he submitted, for reasons to be explained later, that Sheppard J. fell into error in stating the amount likely to be received by a secured creditor of Mr Lancaster. Secondly, Mr Lancaster argued that Sheppard J. failed to take into account the relevant policy considerations underlying Part X of the Act. He relied, in particular, on the observations made in the Report of the Committee appointed by the Attorney-General to review the Bankruptcy Law of the Commonwealth (1962) to the effect that arrangements between creditors and debtors outside bankruptcy in the strict sense have been in use for a long time, partly as a convenient method of making a settlement of the financial difficulties of debtors and partly to enable debtors to avoid the more stringent provisions of a bankruptcy (see para. 271 of the report).

5. Mr Lancaster has lodged an appeal as of right in this matter, but it was pointed out to Mr Lancaster in argument that, although he could appeal as of right from the sequestration order, being a final order, any appeal from the refusal of the adjournment could only lie by leave since that order was interlocutory (see, e.g., Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 at 150).
   The reasons of Foster J. for setting aside the composition

6. In order to understand some of the questions that arise in the appeal, it is necessary to refer to the relevant reasoning of Foster J. in setting aside the composition as follows.

7. His Honour found that, at the meeting held on 11 February, Equiticorp Finance Limited, claiming to be a creditor of Mr Lancaster in the sum of approximately $800,000, sought to vote at the meeting. The existence of its debt was disputed by Mr Lancaster on the ground that the claim had been compromised. The meeting of creditors was adjourned until 15 February with a view to resolving this question. On 15 February, the chairman of the meeting ruled that Equiticorp Finance could not vote. A resolution to accept the composition proposed by Mr Lancaster was then carried by the requisite majority of creditors. NZI voted against the resolution but all other creditors at the meeting voted in favour of the resolution. The terms of the composition were that Mr Lancaster pay the sum of $5,000 to a trustee within 30 days of the date of the meeting and that these funds be distributed by the trustee to Mr Lancaster's creditors. Foster J. found that Mr Lancaster had no assets and that the sum of $5,000 was to be provided by his father.

8. Foster J. found that Mr Lancaster's insolvency arose from his liability under guarantees of loans made to a family company which had suffered substantial losses in the stock market crash in 1987. The family company's largest creditor was Westpac Banking Corporation which was owed $3.5 million. This debt was secured by a mortgage over the family home and by guarantees by Mr and Mrs Lancaster. Mr Lancaster also owed Westpac $560,000 on a personal bill facility secured on certain shares which were sold by Westpac for $21,253.33. Westpac voted in favour of the composition. Foster J. found that, without this vote, the resolution would not have been carried.

9. Foster J. rejected several of the grounds relied on by NZI in attacking the composition, including the chairman's rejection of the claim by Equiticorp Finance of its right to vote.

10. In upholding the challenge to the composition on other grounds, Foster J. said:
    

"...having regard to the likely costs of the administration of the composition, the amount available to unsecured creditors would be, as was submitted, somewhere between nothing and one-fiftieth of a cent in the dollar. So far as I have been able to ascertain, this would seem to be the smallest amount offered by way of payment to creditors in a composition in any of the decided cases under s 239."

1. As has been noted, Westpac, which held a mortgage over the Lancaster's family home, was the major creditor without whose favourable vote the composition would not have been accepted. Foster J. found that, before the meeting of creditors, Mr Lancaster and Westpac had arrived at "a broad understanding" that in consideration of the sum of $325,000, to be provided by Mrs Lancaster's mother, Westpac would discharge its mortgage over the family home and would vote in favour of the composition. Foster J. found that Westpac had obtained a recent valuation of the property in the sum of $250,000, i.e. $75,000 less than Mr Lancaster's mother-in-law was proposing to pay to Westpac. The judge said:
   

"...at the time of the meeting, there was, I am satisfied, a clear understanding that the bank would support the composition and thereafter discharge the security upon receiving a payment of $325,000. The effect of all this would be that it would receive up to $75,000 more than the value of its security which would go towards payment of the unsecured portion of its debt over and above its share of whatever amount was left of the $5,000 composition payment after the deduction of administration expenses. Although, relative to the size of its unsecured debt, it would be getting very little, it would still be getting substantially more than the other unsecured creditors. In return Mr and Mrs Lancaster would retain their home, free of the mortgage and free of any claims from the other creditors."

1. Foster J. further found that the meeting of creditors was not informed of the "broad understanding" between Mr Lancaster and Westpac and that the question of Westpac receiving an additional advantage over other creditors was not ventilated at the meeting. The judge applied the principle, considered in Re Milner; Ex parte Milner (1885) 15 QBD 605, at 615 that:
   

"If there is any private agreement that one of the creditors is not to be dealt with upon this equal footing, but is to receive a preference, that is a breach of faith, and if the debtor is aware of it, it strikes at the root of the deed, and entitles any creditor who has been thus deceived to treat it as void."

1. Having set the composition aside, Foster J. said that he could see "little or no likelihood of there being any ultimate advantage to creditors" if either Mr or Mrs Lancaster were to be made bankrupt. His Honour added:
   

"The question of whether I should proceed to make sequestration orders against these two debtors if the compositions were set aside was discussed during the hearing. I have decided not to take that step immediately but merely grant leave to the applicant petitioning creditors to seek a hearing date for those petitions. I do so in the hope that, there having been a not inconsiderable canvassing of the financial positions of these two people in these proceedings, it may still be possible for arrangements to be made which will avoid the consequence of their being made bankrupt."

The proceedings before Sheppard J.

1. In support of his application for an adjournment of the hearing of the petition, Mr Lancaster referred to a proposal that his mother-in-law might advance the sum of $15,000 to a trustee under a composition with creditors, the sum of $5,000 to be made available to the trustee within seven days and the balance prior to the date on which the trustee makes the first and final distribution to creditors. (At one stage, Mr Lancaster had hoped that, with the co-operation of Westpac, the sum of $50,000 might have been made available for this purpose.)

2. In seeking the adjournment, Mr Lancaster said that he did not wish to become a bankrupt because he desired to resume business as a stockbroker and it was a requirement of the Corporations Law for this purpose that he not be "an insolvent under administration".

3. Before Sheppard J., Mr Lancaster relied on his statement of affairs dated 30 August 1991 which disclosed liabilities as follows:
   

1. Amount owing to unsecured creditors according to Part II of the statement - $1,496,240

In Part II, the major unsecured creditors disclosed were NZI in the sum of $1,260,000 and Equiticorp in the sum of $170,000.

2. Amount by which the secured debts

due to creditors exceed the value

of the securities according to Part III - $4,000,000

In Part III, Westpac was shown as a secured creditor for $4,250,000 and the estimated value of its security was $250,000.

1. In respect of assets, the statement referred only to property specified in Part V which was said to be "exempt". In Part V, household furniture and effects were shown as exempt.
   The reasons of Sheppard J.

2. In his reasons, Sheppard J. said:
   

"One of the problems which confronts the debtor is the position revealed by the statement of affairs which was filed in Court this morning in relation to the new proposed composition and his application for an adjournment. It shows a total indebtedness of 5.496 million dollars, that amount including 1.496 million dollars said to be owing to secured (sc. unsecured) creditors. No assets are brought to account so that not even the secured creditors, on the face of the statement of affairs, would receive l cent. In other words the deficiency is the total amount of indebtedness, namely, 5.496 million dollars." (Emphasis added)

Sheppard J. went on to say:

"... in the absence of complete agreement by creditors, and the petitioning creditor which is owed a substantial sum does not agree, there is something which, if not shocking, is at least something which takes one aback about a suggestion that somebody who owes almost 5.5 million dollars can offer $15,000 and walk away without there being any appropriate investigation of his affairs. An examination of the relevant provisions of Part X shows that if a deed of composition is entered into neither the provisions of s.69 of the Act which provides for the public examination of bankrupts, nor the provisions of s.81 thereof, which gives trustees in bankruptcy wide powers to examine other persons and to compel the production of documents, will apply."

1. The adjournment was accordingly refused.
   Should leave be granted to appeal against the refusal of the
   adjournment?

2. We have come to the conclusion that leave to appeal should not be granted.

3. The general principles in this area were stated by a Full Federal Court in Ahern's Case above, at 146 as follows:
   

"The decision whether or not to adjourn the hearing of the petition was within the discretion of the primary judge. It is well established that an appellate court will rarely interfere with a trial judge's exercise of discretion upon an application for adjournment However, the refusal to grant an adjournment may in some cases prevent the party seeking it from presenting his case or defence and in some circumstances this may result in injustice of such kind or magnitude as to warrant interference on appeal."

1. In the present case, there is no special point of law or principle involved in this aspect of the matter which would warrant the grant of leave.

2. Nor, in our view, is there any basis for a suggestion of an injustice to Mr Lancaster by the refusal of the adjournment. Mr Lancaster had full opportunity to present his case for an adjournment to Sheppard J. Moreover, Mr Lancaster had ample time since the service of the bankruptcy notice upon him, to come forward with an appropriate and satisfactory proposal to avoid the severe consequences of bankruptcy.

3. As has been said, Mr Lancaster has submitted that Sheppard J. made an error of fact in his findings. It will be recalled that, in his reasons, Sheppard J. stated that "not even the secured creditors, on the face of the statement of affairs would receive 1 cent." Mr Lancaster says that his statement of affairs indicates that Westpac, as a secured creditor, would receive $250,000 if its security were realised.

4. In our opinion, the point raised by Mr Lancaster is without substance. When viewed in their proper context, his Honour's remarks are clearly directed, and properly directed to the deficiency arising on the assumption that Westpac had realised its security. On that basis, it was accurate to say that, in respect of its shortfall, Westpac would receive nothing.

5. As has been noted, Mr Lancaster has also contended that Sheppard J. failed to take into account the relevant policy considerations which underlie Part X of the Act. We cannot accept this argument. His Honour had a discretion to grant or refuse the adjournment. He referred to the possibility that Part X could be availed of in an appropriate case but concluded, for the reasons he gave, that the present case did not justify an adjournment of the petition for the purpose of pursuing the proposal for another composition. This was clearly within the judge's discretion and no satisfactory basis for interference with that discretion has, in our view, been made out.

6. Leave to appeal against the refusal of the adjournment is refused.
   The appeal against the sequestration order

7. As has been mentioned, an appeal lies as of right from this final order. No question arises as to the proof of the formal material to support the making of the order. By s.52(2)(b) of the Act, it is provided that if the Court is not satisfied with the proof of those matters, or is satisfied by the debtor (a) that he is able to pay his debts; or (b) that "for other sufficient cause", a sequestration order ought not to be made, it may dismiss the petition. It follows that, for present purposes, the question is whether Sheppard J. erred in not, in his discretion, dismissing the petition "for other sufficient cause".

8. In Cain v Whyte (1932) 48 CLR 639, Henchman J. (whose judgment was approved by the High Court (at 648)) said (at 645-6):
   

"I can well conceive that 'other sufficient cause' might arise in connection with any particular case. To my mind, it is the duty of the Bankruptcy Judge to examine in each case, if the question is raised, whether there is other sufficient cause than the

fact that the debtor is able to pay his debts in full, for refusing to make an order.

I rule then that I am fully entitled to examine the contention put forward by Mr Philp on behalf of the debtor that there is, in the present case, other sufficient cause sufficient to justify the dismissal of this petition. I approach that question with the full appreciation that, prima facie, on proof of the matters mentioned in sec.56(2), the Court will proceed to make an order for sequestration, and that it is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order."

1. In the present case, in our view, no error has been shown in his Honour's conclusion that the discretion to dismiss the petition should not be exercised in favour of Mr Lancaster. In this regard, we think that it was open to his Honour to take into account the substantial size of the deficiency and the significant public interest in the bankruptcy of insolvent debtors. The only possible matter that might conceivably have been relied on by a debtor in the position of Mr Lancaster would be the existence of a satisfactory proposal under Part X. But, in our opinion, the judge was entitled to take the view that Mr Lancaster's fresh proposal in this regard was not a satisfactory alternative to bankruptcy (see Re Dolman; Ex parte Elder Smith Goldsborough Mort Ltd. (1967) 10 FLR 111).

2. The appeal will be dismissed with costs.