Lasovase Pty Ltd v Byrne
[1999] FCA 223
•15 MARCH 1999
FEDERAL COURT OF AUSTRALIA
Lasovase Pty Ltd v Byrne [1999] FCA 223
BANKRUPTCY –Bankruptcy Act 1966 (Cth), s 242 – whether debtor failed to comply with terms of composition – whether terminating the composition would be in the interests of creditors – whether sequestration order should be made.
COSTS – creditor seeking costs order against trustee – whether trustee was responsible for recommending a composition that was doomed to failure – effect of trustee’s delay in filing a submitting appearance – form of costs order made in favour of the creditor against the debtor – direction made pursuant to Federal Court Rules, O 62 r 36(1)(b) – disallowance of costs improperly, unreasonably or negligently incurred.
WORDS AND PHRASES – “in the interests of the creditors”.
Bankruptcy Act 1966 (Cth), ss 40(1), 109(1), 188, 188A, 189A, 189B, 204(3), 222, 242.
Federal Court Rules, O 62, r 36(1).
Augustyn v Putnin (1988) 83 ALR 514, followed.
Re Morris; Ex parte Adams (1980) 48 FCR 341, followed.
Corney v Brien (1951) 84 CLR 343, cited.
Wren v Mahony (1972) 126 CLR 212, cited.
Kennedy v Australian Mutual Provident Society, 12 November 1996, Federal Court of Australia (Full Court), unreported, distinguished.LASOVASE PTY LIMITED v MICHAEL FRANCIS BYRNE & ANOR
NG 7466 OF 1998SACKVILLE J
SYDNEY15 MARCH 1999
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 7466 OF 1998
BETWEEN:
LASOVASE PTY LIMITED
ApplicantAND:
MICHAEL FRANCIS BYRNE
First RespondentJOHN DUNCAN GREEN
Second RespondentJUDGE:
SACKVILLE J
DATE OF ORDER:
15 MARCH 1999
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.Pursuant to s 242(1) of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”), the composition of the first respondent (“the debtor”), accepted at a meeting of creditors on 2 March 1998, be terminated.
2.Pursuant to s 242(3) of the Bankruptcy Act, the estate of the debtor be sequestrated.
3.Subject to Order 4, the debtor pay the costs of and incidental to the application, such costs to be taxed and paid out of the debtor’s estate.
4.Pursuant to Federal Court Rules, O 62, r 36(1)(b), the taxing officer examine the costs incurred by the applicant and disallow such costs as he or she shall find to have been improperly, unreasonably or negligently incurred.
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
NG 7466 OF 1998
BETWEEN:
LASOVASE PTY LIMITED
ApplicantAND:
MICHAEL FRANCIS BYRNE
First RespondentJOHN DUNCAN GREEN
Second Respondent
JUDGE:
SACKVILLE J
DATE:
15 MARCH 1999
PLACE:
SYDNEY
REASONS FOR JUDGMENT
The Proceedings
The applicant (“the creditor”) is a judgment creditor of the first respondent (“the debtor”). At a meeting of the debtor’s creditors held on 2 March 1998, a special resolution was passed in the following form:
“That a composition be accepted.”
The meeting also resolved that the second respondent (“the Trustee”) be appointed trustee of the debtor’s composition.
On 29 April 1998, the creditor applied for orders under s 222(2) and s 222(4) of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”) declaring the composition void. In the alternative, the creditor sought orders pursuant to s 242(1) terminating the composition. The creditor also sought a sequestration order against the estate of the debtor under s 222(7) or, alternatively, s 242(3) of the Bankruptcy Act.
On 4 June 1998, the Trustee filed an appearance. However, on 8 July 1998, the Trustee substituted a submitting appearance, by which he submitted to the orders of the Court save as to costs.
The debtor appeared at a number of directions hearings and, until shortly before the hearing itself, maintained his opposition to the orders sought by the creditor. However, on 8 March 1999, the debtor signed short minutes of order purporting to consent to the composition being declared void and to the making of a sequestration order against his estate.
When the matter was called for hearing, Mr Smallbone, counsel for the creditor, handed up the short minutes of order. I expressed doubts as to whether the orders sought by the creditor could simply be made by consent, but invited Mr Smallbone to address me on that question. He declined the invitation and stated that the creditor was content to make out its substantive case for relief under either s 222 or s 242 of the Bankruptcy Act.
The matter was also listed for the purpose of hearing submissions as to costs. The creditor, in addition to seeking the substantive orders to which I have referred and costs against the debtor, sought an order for costs against the Trustee, notwithstanding that the Trustee had filed a submitting appearance.
Background Facts
Although the creditor relied on a number of affidavits and a very substantial volume of documentary evidence, it is necessary only to refer briefly to the evidence.
On 10 February 1998, the debtor authorised the Trustee to call a meeting of his creditors (Bankruptcy Act, s 188). On 17 February 1998, the debtor gave the Trustee a statement of his affairs and a proposal (s 188A). The substance of the proposal was as follows:
“DETAILS OF PROPOSAL
1.Due to my current financial circumstances I have reviewed my position and find I have no alternative but to put the following Composition to my creditors which will provide the following funds:
Provision of funds from my share of house property 65,000
Provision of funds from my share of furniture and fittings 7,500
Contribution from third parties 25,000
$97,5002.The composition will be in full settlement and satisfaction of my joint and several debts at the date creditors, by special resolution, accept the composition.”
The Trustee’s written statement concerning special resolutions that could reasonably be expected to be passed at the creditors’ meeting (required by s 189B) formulated the debtor’s proposal as follows:
“The debtor’s proposal is:
1.A Composition to my creditors which will provide the following funds within four (4) months:
Provision of funds from my share of house property 65,000
Provision of funds from my share of furniture and fittings 7,500
Contribution from third parties 25,000$97,500
2.The composition will be in full settlement and satisfaction of my joint and several debts at the date creditors, by special resolution, accept the composition.”
As can be seen, this statement included a time limit of four months for the provision by the debtor of the funds.
The Trustee’s report, prepared pursuant to s 189A of the Bankruptcy Act, noted that the debtor’s house was subject to three mortgages, but was likely to yield a surplus of $65,000 for the debtor. The report also noted that a caveat had been lodged over the property by an “unsecured creditor” (Nearhaze Pty Ltd), but that steps had been taken to remove the caveat since the debtor was of the view that there was no caveatable interest. The report recorded that the debtor had advised that he might be able to find a job paying $100,000 per annum, although he claimed that this opportunity might not be available if a sequestration order were to be made. For that reason, the debtor’s family was prepared to contribute to the compositon. In the circumstances, the Trustee’s opinion was that the creditors’ interest would be served by accepting the proposal.
At the creditors’ meeting, a special resolution was passed in the terms already quoted. Eleven creditors representing $712,535 voted in favour of the special resolution and creditors representing $3 voted against it. One of those voting against was Nearhaze Pty Ltd (“Nearhaze”), a company apparently controlled by the same persons as the creditor. The Trustee admitted Nearhaze only as to $1 and refused to permit the creditor to vote at all.
The debtor has paid no moneys to the Trustee pursuant to the composition. Nor has anyone else. The evidence indicates that Nearhaze has maintained its caveat in respect of the debtor’s home and that proceedings are on foot in the Supreme Court of New South Wales to determine which of a number of claimants is entitled to the surplus which has been derived from the sale of the property.
Reasoning
The grounds relied on by the creditor pursuant to s 222(2) and s 242(1) of the Bankruptcy Act were specified in an affidavit filed on its behalf of 27 April 1998. These grounds were supplemented by a notice of additional grounds, filed on 6 November 1998.
It is unnecessary to detail all the grounds, a number of which were addressed by Mr Smallbone in his submissions. It must be said that the submissions were not always easy to follow. In part, this was because the creditor did not comply with directions to file written submissions on the substantive issues. Some contentions (for example that the debtor had incorrectly included in his statement of affairs a debt of $650,000 said to be due to a particular creditor) depended on complicated analyses of scattered documents, the significance of which was often unclear and their provenance sometimes uncertain.
It is enough for present purposes to note that one of the grounds relied on by the creditor was that the debtor had failed to carry out or comply with a term of the composition, in that he had failed to provide or cause to be provided the funds totalling $97,500 referred to in the proposal approved at the creditors’ meeting. (This ground assumed, contrary to another argument put by the creditor, that the form of the special resolution complied with s 204(3) of the Bankruptcy Act, which requires the resolution to “specify the terms of the composition”).
The creditor relied on s 242 of the Bankruptcy Act which, relevantly, is as follows:
“242(1) The Court may, upon application by...a creditor...if it is satisfied:
(a)that the debtor...failed to carry out or comply with a term of the composition;
(b)...; or
(c)that for any other reason the composition ought to be terminated,
make an order terminating the composition.”
(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.”
I am satisfied that the debtor has not provided or caused to be provided to the Trustee any of the funds the composition required to be paid. The proposal put to the meeting was that recorded by the Trustee, and this provided for a time limit of four months. The special resolution, if it was effective at all, must be read as incorporating the terms of the proposal put to the meeting by the Trustee. In these circumstances, the creditor has satisfied the terms of s 242(1)(a) of the Bankruptcy Act.
Section 242(2) precludes the Court from making an order terminating the composition unless it is satisfied that it would be in the interests of creditors to do so. Mr Smallbone did not devote any attention to this question. For the test in s 242(2) to be satisfied, it is not necessary that a positive financial benefit to creditors be shown. It is sufficient that there be a real possibility of financial benefit: Augustyn v Putnin (1988) 83 ALR 514 (FC), at 515, 521-522.
The present is perhaps a borderline case. However, on balance, I am satisfied that there is a real possibility of financial benefit to creditors. No step has been taken by the debtor to implement the terms of the composition, notwithstanding that over twelve months have passed. It is hardly likely that creditors will receive any benefits from the composition, should it remain on foot. On the other hand, there is material which suggests that the debtor has the ability, at least potentially, to earn substantial amounts, either in employment or as a consultant. If he does realise this potential, a portion of his earnings will be available for his creditors, should a sequestration order be made. Moreover, the debtor’s affairs appear to be somewhat complex and to have involved transactions of substantial commercial value. While there is no basis on the presently available material for a positive finding that the debtor has withheld information about his assets, there may well be some benefit to the creditors if a trustee in bankruptcy has the opportunity to examine his affairs. There is, in my view, a real possibility that such an investigation might reveal assets or claims that the trustee in bankruptcy can realise for the benefit of creditors.
I am aware that the proceedings in the Supreme Court relating to the proceeds of sale of the debtor’s home are continuing. If the debtor’s trustee in bankruptcy (assuming a sequestration order is made in consequence of the composition being terminated) considers it worthwhile to proceed with the litigation, any benefits obtained will be available to creditors. In other words, the termination of the composition is unlikely to prevent creditors receiving the advantage of any order in favour of the debtor concerning the proceeds of the matrimonial home.
In my opinion, a sequestration order should be made against the estate of the debtor. A debtor who signs an authority under s 188 of the Bankruptcy Act commits an act of bankruptcy: s 40(1)(i). Where a composition is set aside, prima facie the Court should proceed to a sequestration order unless sufficient cause is shown to override the rights of individual creditors: Re Morris; Ex parte Adams (1980) 48 FCR 341 (Sweeney J), at 352. Whatever the position concerning entitlement to vote at the creditors’ meeting, the creditor has the benefit of a judgment against the debtor in the sum of $240,856.16, obtained on 15 January 1998. The debtor has not suggested that there is any reason to go behind the judgment: cf Corney v Brien (1951) 84 CLR 343; Wren v Mahony (1972) 126 CLR 212.On the contrary, he has consented to the making of a sequestration order. His statement of affairs indicates clearly that his liabilities are vastly greater than his declared assets. For the reasons I have given, I think it is in the interests of his creditors that the composition be terminated. For similar reasons, a sequestration order should be made.
Costs
The creditor seeks an order for costs against the Trustee. Mr Smallbone founded this application on two principal arguments. First, he contended that the Trustee was responsible, in whole or in part, for recommending a composition that was doomed to failure. Secondly, the Trustee had waited for over two months after the proceedings had been instituted before filing a submitting appearance.
The evidence shows that, at all material times, Nearhaze maintained a caveat over the title to the debtor’s home. The evidence also suggests that, by the time of the creditors’ meeting, the debtor had taken no formal steps to have the caveat removed. The Trustee’s report to creditors stated that he understood the following:
“…a caveat has also been lodged by an unsecured creditor however steps have now been taken to have this caveat removed as the debtor is of the view that there is no caveatable interest”.
There is little doubt that the Trustee could have made further enquiries. Had he done so, he would have seen that the estate or interest claimed by the caveator was said to arise by virtue of a mortgage dated January 1997, executed by the debtor and his wife in favour of Nearhaze. The evidence does not make clear why the Trustee was content to rely on information provided to him by the debtor. However, the minutes of the creditors’ meeting record that:
“...[t]he meeting was advised that the caveat on the debtors [sic] property which the debtor believes ought to be removed is the one lodged by Nearhaze Pty Limited (apparently holding an unregistered mortgage). The meeting was advised that if the caveat is unable to be removed then there is unlikely to be sufficient proceeds from the sale of the debtors [sic] house property to be available to creditors. Accordingly if the debtor did not raise $100,000 by the means then it is likely he would be made bankrupt.”
This passage indicates, clearly enough, that the creditors were advised, prior to the vote on the special resolution, that Nearhaze’s caveat was supported by an unregistered mortgage. The creditors nonetheless supported the special resolution.
In these circumstances, while the Trustee might well have made further enquiries concerning the nature of Nearhaze’s interest underlying its caveat, I do not think it can be said that the Trustee bears responsibility for the creditors’ approval of a flawed scheme. The position was made known to the creditors prior to their approval of the proposal.
As far as the second argument is concerned, the Trustee initially filed an appearance in the proceedings instituted by the creditor. It was not until 9 July 1998, just over two months after the proceedings were instituted, that the Trustee filed his submitting appearance. However, he foreshadowed his intention of taking this course on 18 June 1998, prior to the first directions hearing before a Judge. Mr Smallbone conceded that the Trustee’s delay in filing a submitting appearance did not increase the costs of the litigation, bearing in mind that during this period, and for a considerable time thereafter, the debtor opposed the relief sought by the creditor.
In these circumstances, I do not think that the Trustee’s delay in filing the submitting appearance provides a basis for making a costs order against him. The case is clearly different, for example, from Kennedy v Australian Mutual Provident Society, 12 November 1996, Federal Court of Australia (Full Court), unreported, where the trustee was found to have played an active role as a “partisan party”.
Mr Smallbone did rely on some other alleged defaults by the Trustee. These included an allegation that the Trustee had notice of an arrangement between the debtor and Dr Lowe (who lodged a proof of debt for $650,000) whereby Dr Lowe would be compensated by the debtor through future deals. This is said to have been a collusive arrangement between the debtor and Dr Lowe, by which Dr Lowe was insulated from the consequences of the very composition he was supporting. I think the evidence falls short of demonstrating that the Trustee knew or should have been aware of such an arrangement (assuming it existed). Nor am I satisfied that the Trustee acted improperly in refusing to permit the creditor to vote at the creditors’ meeting. It was not easy to follow the fragmented documentation relied upon by Mr Smallbone, but it suggests that there was a very close relationship between the secured debt due to Nearhaze and the debt due to the creditor. Mr Smallbone accepted that, while the debts were “juridically” distinct, payment of one debt would, pro tanto, discharge the other. It is far from clear that the Trustee erred in his decision or, if he did, that the error made any difference to the outcome of the special resolution.
The final question is, assuming that a costs order should be made in favour of the creditor against the debtor, what form that order should take. Mr Smith, on behalf of the Trustee, accepted that the creditor should have the benefit of an order requiring its taxed costs to be paid out of the debtor’s estate. However, he submitted that a direction should be made pursuant to Federal Court Rules (“FCR”), O 62, r 36(1)(b). This sub-rule permits the Court to direct the taxing officer to examine the costs incurred by a party and to disallow such costs as he or she finds to have been improperly, unreasonably or negligently incurred.
Correspondence admitted into evidence shows that the creditor has incurred costs of approximately $100,000 in the conduct of the present proceedings. On the face of it, this amount seems extraordinarily high for a case that ultimately took only half a day to determine. While I am not in a position to say whether any particular expense was incurred unreasonably, I think there are grounds for concern, having regard to the fact that the costs of the creditor will be entitled to priority in the administration of the bankrupt estate: Bankruptcy Act, ss 109(1)(a), 242(5).
My concern is compounded by the lack of clarity in the presentation of some of the grounds relied upon by the creditor in support of orders declaring the composition void or setting it aside. My distinct impression is that the creditor has undertaken lengthy and expensive enquiries, supported by extensive use of subpoenas, for the purpose of gathering evidence to justify a number of grounds of attack, some of which have not been clearly defined or, so it would appear, fully thought out.
The creditor’s conduct of this case, from the perspective of a costs order, must be assessed in light of the fact that, by July 1998, it was clear that the debtor had failed to comply with the terms of the composition. The creditor had anticipated that this would occur, since the grounds identified in the affidavit of 27 April 1998 included a claim that the debtor had failed to carry out or comply with a term of the composition. It is far from clear why the creditor found it necessary to engage in extensive enquiries to support a number of alternative grounds for declaring the composition void or having it terminated, when such an apparently clear ground was available. Moreover, there was at least one other ground on which the creditor relied that required virtually no evidence for it to be dealt with. This was the creditor’s contention that the special resolution was void because it failed “to specify the terms of the composition”. That issue (which I have not found necessary to address) could have been subject to an order for the determination of a separate question and might well have been heard together with the application founded on s 242(1)(a) of the Bankruptcy Act. In short, the creditor could have taken steps which would have drastically curtailed the scope of the proceedings.
Mr Smallbone contended that it is open to a creditor to rely upon any grounds that might be available and to collect the evidence that might support those grounds. It is certainly by no means uncommon for a “scattergun approach” to be adopted in litigation, particularly in the bankruptcy jurisdiction. However, this is not a trend to be encouraged. In my view, the parties to litigation, especially in an area such as bankruptcy where the interests of other creditors are involved, have a responsibility to consider whether it is reasonable to pursue every possible argument that might be raised in support of the relief claimed.
I think this is a case where a direction pursuant to FCR, O 62, r 36(1)(b) should be made. This will give the taxing officer the responsibility for examining the costs incurred by the creditor, in the light of the comments I have made, to determine whether any have been improperly, unreasonably or negligently incurred.
Orders
The following orders should be made:
1.Pursuant to s 242(1) of the Bankruptcy Act, the composition of the debtor, accepted at a meeting of creditors on 2 March 1998, be terminated.
2.Pursuant to s 242(3) of the Bankruptcy Act, the estate of the debtor be sequestrated.
3.Subject to Order 4, the debtor pay the costs of and incidental to the application, such costs to be taxed and paid out of the debtor’s estate.
4.Pursuant to FCR, O 62, r 36(1)(b), the taxing officer examine the costs incurred by the creditor and disallow such costs as he or she shall find to have been improperly, unreasonably or negligently incurred.
I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville. Associate:
Dated: 15 March 1999
Counsel for the Applicant: Mr D A Smallbone Solicitor for the Applicant: Doherty Partners First Respondent: No appearance Counsel for the Second Respondent: Mr J D Smith Solicitor for the Second Respondent: Dunhill Madden Butler Date of Hearing: 10 March 1999 Date of Judgment: 15 March 1999
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