Mandri v Nicholls as trustee for the Bankrupt Estate of Mandri
[2017] FCCA 2728
•10 November 2017
FEDERAL CIRCUIT COURT OF AUSTRALIA
| MANDRI v NICHOLLS AS TRUSTEE FOR THE BANKRUPT ESTATE OF MANDRI | [2017] FCCA 2728 |
| Catchwords: BANKRUPTCY – Composition with creditors – bankruptcy upon debtor’s petition – consent orders to vacate property – repeated offers to purchase interest in property made by bankrupt or family members – several proposals for composition with creditors of bankrupt’s estate – trustee’s requests for further information to assess the veracity of offers to finance proposal – application for order that trustee convene meeting of creditors to consider and if thought fit, vote in favour of current proposal – applicable principles – whether the proposal was a proposal made under s 73 of Bankruptcy Act 1966 – relevant considerations – whether as a matter of discretion court would order that trustee convene meeting where proposal would provide no dividend. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.1, 2, 3, 4A, 5, 19, 30, 55, 58, 73, 74, 75, 76, 109, 161B, 162, 222D, 303 |
| Cases cited: Adsett v Berlouis (1992) 37 FCR 201 Texts cited: |
| Applicant: | GOVIND MANDRI |
| Respondent: | ALAN RICHARD NICHOLLS AS TRUSTEE FOR THE BANKRUPT ESTATE OF GOVIND MANDRI |
| File Number: | MLG 2002 of 2017 |
| Judgment of: | Judge A Kelly |
| Hearing date: | 5 October 2017 |
| Date of Last Submission: | 5 October 2017 |
| Delivered at: | Melbourne |
| Delivered on: | 10 November 2017 |
REPRESENTATION
| Counsel for the Applicant: | Mr Skinner |
| Solicitors for the Applicant: | Evans Ellis Lawyers |
| Counsel for the Respondent: | Mr Spencer |
| Solicitors for the Respondent: | McLean & Associates Solicitors |
ORDERS
The application filed 18 September 2017 be dismissed.
The applicant pay the respondent’s costs of this application, including reserved costs.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 2002 of 2017
| GOVIND MANDRI |
Applicant
And
| ALAN RICHARD NICHOLLS AS TRUSTEE FOR THE BANKRUPT ESTATE OF GOVIND MANDRI |
Respondent
REASONS FOR JUDGMENT
Introduction
By application filed on 18 September 2017, orders were sought pursuant to s 30 of the Bankruptcy Act1966 (Cth) (Act), to compel the respondent, who is trustee of the applicant’s bankrupt estate, to convene a meeting of creditors pursuant to s 73 of that Act.
The bankrupt sought to secure the immediate object of convening such meeting so as to enable the creditors of his bankrupt estate to consider, and if thought fit to vote in favour of, a proposal which he desired to make for a composition in satisfaction of his debts. By this means, the applicant sought to achieve the ultimate object of securing an annulment of his bankruptcy.
On 5 October 2017, I dismissed the application. My reasons follow.
Background
On 15 January 2015, the applicant presented a debtor’s petition, which petition was accepted by the Official Receiver on 19 January 2015: sub-s 55(1). On that date, the respondent was appointed trustee of the applicant’s bankrupt estate: sub-s 55(4).
On the date of acceptance of the debtor’s petition, the applicant was registered proprietor of the fee simple estate in land situate at 56B Regent Parade, Cheltenham, being land more particularly described in certificate of title volume 11166 folio 459 (Property). The Commonwealth Bank of Australia holds the registered interest of a first mortgagee in the Property (CBA Mortgage).
By force of para 58(1)(a) of the Act, the applicant’s interest in the Property is vested in the respondent as trustee of the bankrupt’s estate. On 3 February 2015, the trustee lodged a caveat on title to the Property. On 19 April 2016, the respondent was registered as the sole proprietor of the Property in his capacity as trustee of the bankrupt’s estate.
On 26 May 2015, the Property was valued at $890,000.
By his statement of affairs, the applicant disclosed unsecured debtors in his estate having an aggregate indebtedness of ~$674,000.
The respondent trustee indicated his intention to deal with the Property for the benefit of creditors of the applicant’s bankrupt estate. In response, Subhag Mandri, the applicant’s spouse, asserted an interest in the Property in respect of which interest she lodged a caveat. The interest so asserted was that of chargee pursuant to an agreement dated 10 January 2014 between herself and the bankrupt. Although the agreement has never been produced to the trustee, the caveat has been overtaken by events described below.
Some 18 months after lodging her caveat, on 30 June 2015, the applicant’s spouse then sought to purchase the trustee’s interest in the Property. This, the first proposed purchase, did not eventuate.
The trustee determined to reject the caveatable interest in the Property as claimed by Mrs Mandri and on 17 July 2015, invited her to lodge a formal claim. In July 2015, lawyers were engaged by Mrs Mandri to advance her claim that she had an interest in the Property grounded upon an express or constructive trust. Upon consideration of the submissions by those lawyers, the trustee, on 2 October 2015, rejected the asserted claim. Mrs Mandri did not appeal that decision.
Within four months thereafter, on 9 February 2016, a sequestration order was made against Mrs Mandri’s bankrupt estate.
The trustees of Mr and Mrs Mandri’s bankrupt estates reached an agreement respecting the Property and any interest which the trustee of Mrs Mandri’s bankrupt estate may have asserted in the Property.
The trustee then attempted to secure vacant possession of the Property. By notice dated 30 March 2016 the trustee sought that the bankrupt vacate possession of the Property by 6 May 2016. The trustee’s notice stated that if vacant possession was not given, proceedings would be taken to secure a Writ of Possession.
In May 2016, the applicant’s spouse sought to purchase the trustee’s interest in the Property. This proposed purchase did not eventuate.
The CBA Mortgage had fallen into arrears such that by July 2016 the amount due to CBA was $703,795 of which $23,346 was in arrears.
On 12 August 2016, the trustee commenced an action joining as defendants both Mr and Mrs Mandri seeking orders for possession of the Property. On 13 October 2016, each of the defendants consented to orders in that proceeding, including that within 28 days, they would deliver up vacant possession of the Property. Further orders were made authorising the trustee to remove any personal property that remained on the Property after that 28 day period. The defendants were legally represented when those orders were made.
The defendants did not comply with those consent orders.
On 8 November 2016, Shivana Mandri, the bankrupts’ daughter, made an offer to purchase their interest in the Property for $120,000. The trustee’s made a request for evidence as to the purchaser’s loan application and current income which was denied.
Contrastingly, on 9 January 2017, the bankrupt then made an offer to purchase the Property for $100,000.
From 8 March 2017 (when the trustee issued a Writ of Possession), further offers to purchase the Property were received. The trustees response was, in effect, that offers at fair market value would be considered and advice was given of that current value at $980,000.
The equity in the Property is being diminished by non-payment of the amounts due under the CBA Mortgage, including interest.
On the basis of the current value at $980,000 and having regard to the amounts due under the CBA Mortgage, in respect of municipal rates, costs of sale and the statutory realisation charge, the trustee considers that the net equity in the Property is ~$196,000. The trustee contends that the bankrupt estate is entitled to that net equity.
Further, the trustee adduced evidence that as at 28 September 2017 (being shortly prior to the final hearing in this application), the position of the bankrupt estate (using rounded numbers) was as follows:
Assets
Description
Value
Property
$980,000
Secured liability
CBA
$730,000
Net equity*
$250,000
Liabilities of bankrupt estate
Remuneration
$115,600
Expenses
$45,100
Anticipated future remuneration
$22,000
Costs of enforcing possession of the Property and this application
$42,000
Sub-total of liabilities
$224,700
Net Position*
(amount available to estate)
$25,300
* Subject to adjustment under agreement with Mrs Mandri’s trustee.
It will be recalled that the applicant disclosed unsecured debtors in his estate having an aggregate indebtedness of ~$674,000.
By his written submissions, it was said that (on the eve of this hearing), on 27 September 2017, the applicant had lodged an application for review of the trustee’s remuneration by the Inspector General.
History of offers
The trustee provided a detailed summary of some 15 events, which cumulatively may be identified as constituting a series of offers made by or on behalf of the bankrupt, his wife or daughter to purchase the Property. While I have examined the documents relied upon, it is unnecessary to examine this history in particular detail.
Suffice to say for the purposes of the present application that all of those offers have come to nothing. Although orders were made by consent on 13 October 2016 that the defendants would, within 28 days, vacate the Property, thereafter some five further offers were made.
The proposals
It is against this background that the bankrupt has made proposals for a composition in satisfaction of his debts. In the period October 2015 – August 2017, the applicant made three composition proposals.
It is sufficient to address the current proposal. On 28 August 2017, the applicant made a proposal entitled Composition Offer which reads:
I GOVIND MANDRI of 56B Regent Parade, Cheltenham VIC 3192 put forward a proposal for a Composition (“the Composition Offer”) to my creditors pursuant to Section 73 of the Bankruptcy Act 1966 (“the Act”) in accordance with the terms as prescribed below:
1.That ALAN NICHOLLS consents to be the Trustee of my proposed composition (“the Composition Trustee”).
2.I will procure a payment in the sum of $190,000 (“the Composition Fund”) to be paid to the Composition Trustee upon the creditors resolving to accept the composition offer as a duly convened meeting of creditors.
3.The Composition Fund consists of payment of $7,700 made prior to the date of the meeting of creditors, with the balance payable within 30 days of the acceptance of the composition by creditors.
4.The Composition Fund will be available to meet the debts and costs of the estate, including the disbursements and remuneration of the bankruptcy trustee and the Composition Trustee and any government charges.
5.The bankruptcy trustee’s remuneration and proposed remuneration of the Composition Trustee will be subject to approval by creditors at the meeting of creditors to be convened to consider the Section 73 composition proposal.
6.Distribution is to be made in accordance with the provisions of Section 109 of the Act.
7.The remaining funds are to be distributed amongst unsecured creditors “pari passu.”
8.The payment in full of the Composition Funds set out above will be in full and final satisfaction of the creditors’ proved claims and the debts and costs of the bankrupt estate and composition.
The Composition Offer was dated and signed. The sources of the funds necessary for payment of the Composition Funds are addressed below at [32], [40, [140]-[145].
The combined effect of cll 4, 5 and 8 of the proposal is that the payment in full of $190,000 pursuant to that offer would be payable in full and final satisfaction of the “the creditors’ proved claims and the debts and costs of the bankrupt estate and composition.”
The applicant provided a copy of his proposal to the trustee and the parties exchanged correspondence concerning its detail. Of particular interest to the trustee was the source of the funds for the Composition Offer. The trustee noted that of the total sum of $190,000 pursuant to that offer: (1) a third party, Luc Jean Pierre Minerve, had made an offer to provide $140,000 to satisfy the Composition Proposal; (2) the bankrupt’s daughter, Shivana, would offer to pay $50,000. The trustee identified the lack of detail surrounding these offers and questioned whether they were credible or of any substance.
The trustee has not convened a meeting of the applicant’s creditors.
Procedural History
On 18 September 2017, an application was filed in this court seeking orders pursuant to s 30(1) that the respondent call a meeting of creditors pursuant to s 73 to vote upon the proposal. Ancillary orders were also sought, that the respondents send a copy of the proposal together with an accompanying report to creditors pursuant to sub-s 73(2) (which is repealed). Further orders were sought to secure the object that execution of Writ of Possession on the Property be stayed.
In support of that application the applicant filed affidavits sworn on Sunday, 17 September 2017 by the applicant and his solicitor.
The bankrupt’s affidavit recounted a history of the matter including that he had consulted business advisors in October 2015 to discuss a possible proposal under s 73 of the Act. The bankrupt further deposed that in March 2017 he had engaged Des Ryan of Ryan Insolvency to assist him in his dealings with the trustee and in negotiating the terms of his s 73 proposals. He deposed, “I had known Des Ryan for about 10 years as a result of my previous business dealings with him.”
The bankrupt’s affidavit detailed the three proposals that he had made for a composition with his creditors under s 73. As he deposed, the trustee responded to such proposals and made requests that the bankrupt provide supporting documentation for the proposal and security for the costs of the proposed creditors meeting. The bankrupt confirmed that by August 2017, he knew the trustee was unwilling to further delay recovering possession of the Property. He complained of the costs of the administration of the bankrupt estate.
The affidavit sworn by the applicant’s solicitor deposed to the circumstances in which he had been retained in mid-September 2017, his attempts to gain an understanding of the matter and of his attempts to persuade the trustee to withhold from executing on the Property.
On 18 September 2017, the court heard an interim application to stay further execution of the Writ of Possession against the Property. In the course of that hearing the respondent proffered an undertaking to request the Sheriff of the Supreme Court of Victoria to stay further execution of the Writ until 4.00pm on 5 October 2017. In the course of that application I observed that there was a paucity of evidence supporting the proposals; in particular, whether there was any substance to the two offers to advance funds in settlement of and satisfaction of the creditor’s claims. The applicant was afforded an opportunity to address that issue. Orders were made setting the proceeding down for hearing on 4 October 2015 and regulating the filing of further affidavits and submissions.
Before the final hearing, the applicant served two further affidavits:
(a)the first, made by Mr Minerva on 21 September 2017, deposed that he had agreed to pay the respondent the amount of $132,300 in respect of the proposed composition and to pay the respondent a further sum of $7,700 in respect of the respondent’s costs for calling a meeting of creditors;
(b)the second, made by Ms Shivana Mandri on 27 September 2017, deposed that she had “advised the Applicant that I would provide him with $50,000 (“the funds”) pursuant to the Composition (“My Offer”).”
I address the detail of this evidence below.
The respondent filed an affidavit by his solicitor, Ms Mclean, made on 30 September 2017. Ms McLean furnished an extensive exhibit which was relied upon as indicating the history of the administration of the bankrupt estate to date.
No further affidavits were filed and there was no cross examination of the deponents who had sworn those affidavits.
It was necessary to adjourn the proposed hearing on 4 October 2017. With the co-operation of the parties’ practitioners it was possible to relist the matter on Thursday, 5 October 2017.
Applicable principles
The term ‘composition’ is not defined by s 5 of the Act, in the Dictionaries provided in the Insolvency Practice Schedule or in the Insolvency Practice Rules. However, the term is considered to encompass the acceptance in full settlement and discharge of a debt by something other than prompt payment of the debt owed: Re Cook; Ex parte Registrar of the Court of Bankruptcy (1931) 3 ABC 225; Re Griffith (1886) 3 Morr 111.
In, Re Cook; Ex parte Registrar of the Court of Bankruptcy, Paine J held at 228 that the term ‘composition’ had a definite signification, being the acceptance in full settlement and discharge of a debt by something other than prompt payment of the amount owed. Although his Honour cited no authority for that proposition, it was usefully contrasted with the meaning of the expression ‘scheme of arrangement’ which involves the setting in order of affairs of a person but did not necessarily entail a settlement or satisfaction. His Honour concluded that it was clear from the language of the Act that a very wide power of arranging and settling the affairs of the person in question was vested in trustees: see also Arcuri v Jones [2003] FCA 68, [16] (Lindgren J).
In Re Griffith (1886) 3 Morr 111, 116, a question arose whether the obligations embodied in a debtor’s proposal bore the nature of a scheme or a composition. Cave J said at 116 that “Where the debtor makes over his assets to be administered by a trustee there is no doubt that it is a scheme. Where the debtor keeps his assets and undertakes to pay over to the creditors a certain sum, that is a composition. ” The terms embodied in the subject proposal were considered to bear elements of both a scheme and a composition, however Cave J held the arrangement to more nearly resemble a scheme.
Legislative regime
Part IV of the Act, Proceedings in connexion with bankruptcy, is arranged in six divisions. Division 6 of Part IV, comprises ss 73 – 76B and concerns Composition or arrangement with creditors. By way of overview, ss 73-74 provide one scheme for annulment in bankruptcy.
Section 73 relevantly provides:
(1)Where a bankrupt desires to make a proposal to his or her creditors for:
(a)a composition in satisfaction of his or her debts; or
(b)a scheme of arrangement of his or her affairs;
he or she may lodge with the trustee a proposal in writing signed by him or her setting out the terms of the proposed composition or scheme of arrangement and particulars of any sureties or securities forming part of the proposal.
(1A)The trustee must, within 2 business days after receiving the proposal, give a copy of the proposal to the Official Receiver.
(1C). . .
Section 73 derives from, but is a more flexible provision than, s 16(1) of the Bankruptcy Act 1914 (UK). A substantive difference between the provisions is that s 73 does not fix a time for the lodging of a proposal by the bankrupt for such composition: McDonald Henry & Meek, Australian Bankruptcy Law and Practice 6th Ed, Vol 1, [73.1.05]. A bankrupt may lodge a proposal under s 73 at any time.
The consequences of acceptance of the bankrupt’s proposal should be recognised. If the proposal is accepted by a special resolution of creditors at a meeting held in accordance with the Insolvency Practice Rules, the bankruptcy is annulled: sub-s 74(1). Annulment becomes operative on the day the special resolution is passed. Further, a composition or scheme accepted in accordance with Division 6 is generally binding on all the creditors of the bankrupt so far as it relates to provable debts due to them from the bankrupt: sub-s 75(1).
Consideration of the principles applicable to compositions and schemes of arrangement under the Act requires recognition of their historical context. In particular, since 1992 the Parliament has removed the need for court approval of a composition. The removal of this requirement should be understood as reflecting the degree of confidence which the Parliament places in creditors and trustees to deal with the estate of a bankrupt under composition or arrangement without interference by court process: Labocus Precious Metals Pty Ltd v Thomas [2003] FCA 1154, [50]-[61] (Allsop J, as his Honour then was).
In Labocus, Allsop J observed that in many cases there is a public and private importance in the discharge or annulment of a bankruptcy (composition being one route to annulment). His Honour recognised that the responsibility for forming a judgment whether a proposal should be put to creditors at a meeting to consider a special resolution to accept a proposed composition fell to the trustee – an officer of the court whose conduct was amenable to review under the Act. Allsop J also recognised that a composition was liable to be set aside and that the resulting annulment might likewise be set at naught by a further sequestration order. To similar effect, default in payment of the sums required under a composition may terminate automatically the composition: see ss 76, 222D; Perovitch v Whitton (No.2) [2016] FCAFC 152, [39], [41] (Siopsis, Gleeson and Edelman JJ).
Those matters serve to reinforce a conclusion that the relative merit of a proposal for composition fall for consideration in the first instance by a trustee skilled in and responsible for the business judgment whether a proposal was to the benefit of the bankrupt’s creditors generally and then for the body of creditors whose self-interest would inform their consideration of the proposal: Labocus [58], [60], [70]; Hingston v Westpac Banking Corporation (2012) 200 FCR 493, [90] (Greenwood, McKerracher and Nicholas JJ).
Once the trustee has determined that the proposal ought to be put to a meeting of creditors, it is for them to make up their own minds as to what it is they wish to do. They are not required to act judicially or quasi judicially in considering or voting upon the proposal for composition. The vote upon that meeting is a non-curial procedure which, if carried by special resolution in accordance with the Act and Rules, brings about the annulment of the bankruptcy: Labocus, [54]. Accordingly, no narrow or pedantic view should be taken of the scheme effected by Division 6 of Part IV. As Allsop J observed in Labocus at [56], provisions relating to a proposed composition should be construed with an eye to substance over formality and so as not to subvert the intended practical freedom thereby sought to be given to a bankrupt. For the same reasons, an objection based upon procedural issues should not be permitted to deny the substance of the legitimacy of the creditors’ views as expressed by a vote at their meeting: see also Hingston, [90]-[92] (Greenwood, McKerracher and Nicholas JJ).
In the period 1996 – 2016, s 73 has been the subject of amendment, most recently, by the Insolvency Law Reform Act 2016 (Cth) (2016 Act). In my view, the foregoing considerations are of no lesser relevance to an understanding of the scope and operation of more recent amendments to the Act.
2016 Act
The 2016 Act is comprised of three sections and three schedules respectively. Sections 1 – 3 of the 2016 Act, commenced with effect from 29 February 2016: sub-s 2(1), Table Item 1. Section 3 provided that legislation specified in the schedules to that Act was amended, repealed or took effect as set out in the Items of such schedules.
Schedule 1 to the 2016 Act was arranged in three Parts and addressed: (1) amendments relating to the Insolvency Practice Schedule (Bankruptcy) (Insolvency Practice Schedule); (2) amendments consequential on the introduction of the Insolvency Practice Schedule; (3) transition to the Insolvency Practice Schedule.
Schedules 2 and 3 to the 2016 Act, which concern corporations, are not relevant.
Schedule 1 to the 2016 Act is arranged in three Parts and is comprised of 178 Items. Each of the Items in Parts 1 – 3 commenced with effect from 1 March 2017: sub-s 2(1), Table Item 2.
Part 1 of Schedule 1 to the 2016 Act was comprised of two Items.
(a)by Item 1, s 4A was inserted in the Bankruptcy Act. Section 4A provided that the schedule to be known as the Insolvency Practice Schedule had effect.
(b)by Item 2, there was added as Schedule 2 to the Bankruptcy Act, the Insolvency Practice Schedule.[1]
[1]The description in Schedule 1 to the 2016 Act of the Insolvency Practice Schedule (Bankruptcy) was employed to distinguish it from Schedule 2 to the 2016 Act, which concerns Insolvency Practice Schedule (Corporations).
Part 2 of Schedule 1 to the 2016 Act effected amendments to the Bankruptcy Act consequential upon the introduction of the Insolvency Practice Schedule and comprised Items 3 – 100. Relevantly, Items 26-30 repealed sub-ss 73(1A), 73(1B), 73(2) to (5), 73A, 73B(4), and 73C. In turn, several of the matters addressed by those repealed provisions found their place in the Insolvency Practice Schedule.
Part 3 of Schedule 1 to the 2016 Act was arranged in 6 Divisions comprising Items 101 – 178 and concerned the transitional operation of the Insolvency Practice Schedule. An understanding of those transitional provisions is assisted by reference to Item 102 which provided a Dictionary for the purposes of that Part. This Dictionary included definitions of the expressions:
(a)‘commencement day’, means the day on which Schedule 1 to the 2016 Act commenced (i.e. 1 March 2017);
(b)‘old Act’, is the Bankruptcy Act 1966, and;
(c)‘ongoing administration’ of a regulated debtor’s estate, means an administration of a regulated debtor’s estate that started before the commencement day and ended after that day.
The expressions ‘regulated debtor’, ‘regulated debtor’s estate’ and ‘trustee of a regulated debtor’s estate’ were separately defined in a further Dictionary in the Insolvency Practice Schedule (see below).
I note that this proceeding concerns an ongoing administration within the meaning of Part 3 of Schedule 1 to the 2016 Act.
A ‘simplified outline’ was provided by Item 101 for Part 3, Schedule 1 to the 2016 Act. Item 101 explained, relevantly, that Part 3 of the Insolvency Practice Schedule would apply to the administration of an estate that started on or after the commencement date and that it would also apply in relation to new events in most ongoing administrations.
To similar effect, Item 126 provided a simplified outline for Division 3 of Part 3 in Schedule 1 of the 2016 Act. It stated in relation to ongoing administrations that the Insolvency Practice Schedule would apply in accordance with that Division 3 (but usually in relation to new events). Item 126 provided that generally the old Act would continue to apply to old events and processes that were incomplete. Item 127(2) reiterated that in relation to ongoing administrations, Part 3 of the Insolvency Practice Schedule would apply in accordance with that Division 3.
Neither of the Dictionaries located in Schedule 1 to the 2016 Act provide a definition of ‘new events’ or ‘old events’.
A terminal point of the parties’ submissions was that, where relevant, the provisions in Part 3 of Schedule 1 to the 2016 Act, applied to the present proceeding. General rules relating to estate administrations provided for by Part 3 of the Insolvency Practice Schedule apply to the administration of this bankrupt estate, it being an ongoing administration within the meaning of Part 3, Sched’ 1 to the 2016 Act.
In Part 3 of Schedule 1 to the 2016 Act, the following transitional provisions may be noted:
(a)by Item 129, ss 161B and 162 of the old Act continue to apply to the remuneration of a trustee under an ongoing administration (despite the repeal of those provisions). Applied here, the trustee’s remuneration continues to be regulated by the old Act, including with respect to the trustee’s duties concerning such remuneration and the payment of third parties;
(b)by Item 152, Division 75 of the Insolvency Practice Schedule (meetings of creditors), applies to an ongoing administration (unless the meeting has already been convened or was held before the commencement day);
(c)Item 164 concerns proceedings brought under the old Act in relation to a regulated debtor’s estate either before the commencement day or after that day;
(d)Item 168 addresses the position of special resolutions.
As the applicant promulgated his proposal on 28 August 2017 in this ongoing administration, Division 75 of the Insolvency Practice Schedule applies in the determination of this application.
It is necessary to maintain the distinction between Schedule 1 to the 2016 Act and the Insolvency Practice Schedule (Bankruptcy).
Insolvency Practice Schedule
Schedule 2 to the Bankruptcy Act is the Insolvency Practice Schedule (Bankruptcy). The Insolvency Practice Schedule is arranged in 4 Parts.
Part 1 of the Insolvency Practice Schedule, Introduction, comprises Divisions 1 – 6. Division 1 contains a series of express objects, including that regulated debtor’s estates should be regulated consistently (absent a clear reason not to do so), and that in the administration of a regulated debtor’s estate, there should be greater control given to creditors: sub-s 1-1(2).
Relevantly, the meaning of ‘regulated debtor’ includes a bankrupt and ‘regulated debtor’s estate’ includes the estate of a bankrupt. Relatedly, the expression ‘trustee of a regulated debtor’s estate’ includes the trustee of a bankrupt estate: ss 5-15(a), 5-16(a), 5-20(a).
Part 2 of the Insolvency Practice Schedule, Registering and Disciplining practitioners, comprises Divisions 10 – 50 and is of no immediate relevance.
Part 3 of the Insolvency Practice Schedule contains General rules relating to estate administration and comprises Divisions 55, 60, 65, 70, 75, 80 and 90. As to this Part:
(a)Division 70 concerns Reporting to Creditors. Section 70-50 authorises that the Insolvency Practice Rules may provide for and in relation to the obligations of trustees of regulated debtors’ estates to give information, provide reports and produce documents: sub-s 70-50(1), see also sub-s 70-50(2).
(b)Division 75 concerns Meetings of Creditors. Section 75-50 provides that the Insolvency Practice Rules may provide for and in relation to meetings of creditors, including in relation to such meetings, the circumstances in which meetings may or must be convened (as the case requires) and the costs of such meetings: (sub-paras 75-50(1), (2)(a), (2)(n)).
Part 4 of the Insolvency Practice Schedule addresses Other Matters and comprises Divisions 95 – 105. Sub-section 105-1(1) authorises the making of the Insolvency Practice Rules.
Insolvency Practice Rules (Bankruptcy) 2016[2]
[2]Although the Insolvency Practice Rules (Bankruptcy) 2016 is expressed to be an instrument made under the Act, the text of various rules refers to the rules as sections: e.g. s 75-175.
The Insolvency Practice Rules 2016 (Insolvency Practice Rules), which are arranged in three Parts, comprise ss 1-1 to 90-90. Parts 1 and 2 became operative on 1 March 2017, while Part 3 became operative on 1 September 2017.
Part 1 contains introductory rules (ss 1.1 to 5.15) and contains yet another Dictionary (which contains no relevant definitions).
Part 2 contains rules relating to the registration and discipline of trustees (ss 15-1 to 50-100) and is of no immediate relevance.
Part 3 provides general rules relating to estate administrations (ss 60-1 to 90-90) and comprises Divisions 60, 65, 70, 75, 80 and 90.
Division 70 of the Insolvency Practice Rules concerns ‘Information.’ Section 70-1 is made for the purposes of s 70-50 of the Insolvency Practice Schedule (Reporting to Creditors): sub-s 70-1(1). Section 70-50 regulates the time for complying with a reasonable request for information and allows that it does not apply where, under the Act or Rules, it is not reasonable for the trustee of a regulated debtor’s estate to comply with a request.
Division 75 of the Insolvency Practice Rules concerns Meetings of creditors and comprises ss 75-1 to 75-50. Sub-division E of Division 75, which concerns additional rules for particular kinds of estates, includes rule 75-175, a rule that relates to the calling of a meeting in relation to compositions or arrangements.
Section 75-175(1) provides that s 75-175 applies “if a regulated debtor lodges a proposal with the trustee of the regulated debtor’s estate under subsection 73(1) of the Act.”
Where a proposal made under sub-s 73(1) has been lodged, s 75-175 of the Insolvency Practice Rules then applies with the result that the remaining rules in sub-s 75-175(2)-(6) operate. Relevantly, the other rules in sub-s 75-175(2)-(6) provide:
(2) The trustee must:
(a)call a meeting of the creditors of the regulated debtor’s estate; and
(b)send a copy of the following to the creditors at least 5 business days before the day of the meeting
(i)the proposal and a report on the proposal;
(ii)if the meeting is the first meeting of creditors held during the administration of the estate – a copy of the regulated debtor’s statement of affairs, or a summary of that statement;
(iii)- (iv) . . .;
(2A) . . .
(2B)Before calling the meeting, the trustee may require the regulated debtor to lodge with the trustee an amount that is sufficient to cover:
(a)the estimated costs that will be incurred by the trustee in arranging and holding the meeting; and
(b)the estimated remuneration that will be payable to the trustee in respect of the meeting.
(2C). . .
(2D)The report on the proposal referred to in subparagraph (2)(b)(i) must:
(a)indicate whether the proposal would benefit the regulated debtor’s creditors generally; and
(b)name each creditor who was identified as a related entity of the regulated debtor in the debtor’s statement of affairs.
(3)Despite paragraph (2)(a), the trustee may refuse to call a meeting if the proposal does not make adequate provision for payment of accrued remuneration that:
(a)is owing (at the time the proposal is lodged) in relation to the administration of the regulated debtor’s estate, but are not able to be taken out of the debtor’s estate; and
(b)if the trustee is a registered trustee—has been determined in accordance with section 60‑10 or 60‑11 of the Insolvency Practice Schedule (Bankruptcy) before the proposal is considered.
(4) - (6) . . .
Section 75-180(1) provides that section 75-180 applies “to a meeting that is called under section 75-175.” Section 75-180 concerns the subject, documents to be tabled at a meeting in relation to compositions and arrangements. In addition, sub-s 75-180(8) is titled Composition or scheme must be available for inspection if proposal is accepted.” Sub-section 75-180(8) provides that if, at a meeting of the creditors the proposal is accepted by special resolution by the creditors, the trustee must make the composition or scheme of arrangement available for inspection by the creditors.
For completeness, I note that in sub-division F, Other rules about meetings, s 75-250 concerns directions to a trustee to convene a meeting and when it may or may not be reasonable for a trustee, acting in good faith, to decline to call a meeting despite such a direction. Section 75-250 is made for the purposes of s 75-15 of the Insolvency Practice Schedule and is not relevant: sub-s 75-250(1).
A proposal
As noted, sub-s 75-175(1) of the Insolvency Practice Rules provides that the section applies “if a regulated debtor lodges a proposal with the trustee of the regulated debtor’s estate under subsection 73(1) of the Act.” Thus, the application of s 75-175 rests upon a premise that a regulated debtor has lodged with their trustee a proposal under sub-s 73(1) of the Act.
Section 75-175 is not engaged unless the proposal is a proposal lodged under s 73 of the Act. On one view, a proposal will not be a proposal under sub-s 73(1) of the Act unless the criteria prescribed by that sub-section are observed: cfGriffith University v Tang (2005) 221 CLR 99.
Axiomatically, s 75-175 will not apply to a request for a meeting of creditors made by a bankrupt which does not conform to the requirements of sub-s 73(1). What does such conformity require? The text of s 73 of the Act indicates only that the proposal must be:
. . . a proposal in writing signed by him or her setting out the terms of the proposed composition . . . and particulars of any sureties or securities forming part of the proposal.
In s 73 the expression ‘proposal’ means bona fide proposal: Re Bendel; Ex parte Pattison (1997) 80 FCR 123, 131C (Heerey J); Arcuri v Jones [2003] FCA 68, [18] (Lindgren J). Although in Re Bendel, it was common ground that, for the purposes of s 73, ‘proposal’ meant a bona fide proposal, his Honour observed, “but the fact that a proposal is extremely favourable to the bankrupt does not mean that it is not bona fide.”Heerey J held that “The merits of the proposal were a matter for the creditors at the meeting . . .”
For example, a proposal may not necessarily be rendered too vague or uncertain by reason that the proposal had no unconditional finance. In Labocus, Allsop J held at [69] that this, “did not stop there being a proposal, rather it said something as to its attractiveness.”
The principles stated above are now underlined by the express object that in the administration of a regulated debtor’s estate, there should be greater control given to creditors: see sub-s 1-1(2), Div’n 1, Part 1, Insolvency Practice Schedule.
In Labocus, Allsop J recognised the inherent difficulty in finding that a proposal was not bona fide where an applicant had put on an affidavit but not been cross-examined upon it: at [73] citing Re Bendel.
If it is concluded that the debtor has lodged a bona fide proposal with the trustee and that that proposal is otherwise a proposal under sub-s 73(1), the provisions in s 75-175 of the Insolvency Practice Rules are engaged. Where s 75-175 does apply, it will apply in its entirety. In the result, although the text of sub-s 75-175(2)(a) does express in mandatory terms an obligation to call a meeting, that provision is to be read in the context of and is constrained by the remaining provisions of s 75-175: cf CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384, 408; Hingston, [105]-[106] at 514.
Where a bona fide proposal has been lodged under s 73, the whole of the provisions contained in s 75-175 will then apply.
Purported destruction of rights
An alternative basis for a conclusion that a proposal is not one made under s 73 is that the terms of the proposal purport to subvert or deny rights conferred by the Act.
In Re Alam’s Deed of Arrangement (1932) 4 ABC 98, Lukin J at 111 rejected as ‘obviously unsound’ a submission that parties may by deed subordinate, override or neutralise other provisions of the then applicable provisions of the Act. His Honour held at 113 that it was:
. . . legally impossible, by any agreement between the parties, to contract out of the Act, or to waive the rights imperatively conferred, or the performance of the conditions imperatively imposed, in such Act.
In Re Bellis (1959) 20 ABC 80, Paine J speaking of the nature of a scheme of arrangement, held at 84 that it should contain no provision which was in conflict with the applicable provisions of the Act.
In Arcuri v Jones [2003] FCA 68, Lindgren J, referring at [16] to those authorities, agreed that a scheme of arrangement must not subordinate, override or neutralise any provision of the Act and endorsed those principles as being applicable to a composition.
Relevantly, Lindgren J held at [18] that:
The creditors could not, by accepting a scheme of arrangement, deprive Mr Jones as trustee of Mr Arcuri’s estate, of the remuneration to which he would be otherwise entitled. It would subordinate, override or neutralise s 162 of the Act and would be in conflict with that section if they could do so.
In Arcuri v Jones, the bankrupt’s proposal sought to fix the trustees remuneration and reduce it to $2,000. Applying the principles stated in Re Alam's Deed of Arrangement and Re Bellis, Lindgren J declined the bankrupt’s application for an order that the trustee call a meeting. His Honour refused the application on the bases that the proposal was not bona fide and as a matter of discretion, on grounds of futility: [19]. Lindgren J felt “pleased to arrive at the conclusion that the Act does not compel such an unjust result, whatever amount may finally be determined to represent the true amount of remuneration to which Mr Jones is entitled”: [23]; see also Mango Boulevard Pty Ltd v Whitton; In the matter of Spencer(Bankrupt) [2011] FCA 418, [35].
A trustee in bankruptcy is entitled under general law to an indemnity out of the trust estate in respect of all costs, charges and expenses properly incurred by the trustee: Wenkart v Panzer (No.8) (2004) 135 FCR 422, [59] (Lindgren J) citing Re Love; Hill v Spurgeon(1885) 29 Ch D 348 at 350; Re Beddoe; Downes v Cottam[1893] 1 Ch 547 at 558; Adsett v Berlouis(1992) 37 FCR 201 at 210.
By contrast, a right to remuneration is not given to trustees by the general law, and the general law right to indemnity does not extend to any entitlement to remuneration that may exist in the circumstances of a particular case; for example, as a result of an express or implied contract. Instead, where a trustee’s remuneration has not been fixed (whether by the creditors or a committee of inspection), the trustee is entitled to be remunerated as prescribed by the regulations: s 162(4): Wenkart v Panzer (No.8) (2004) 135 FCR 422, [59]-[60]; Wenkart v Pantzer [2013] FCAFC 81; see also the safeguards provided in respect of remuneration in s 109 and reg’ns 8.08-8.11.
The trustees right of indemnity confers a beneficial interest in the trust assets to the extent of that indemnity: Chief Commissioner for Stamp Duties (NSW) v Buckle (1995) 38 NSWLR 574, 586; Chief Commissioner for Stamp Duties (NSW) v Buckle (1998) 192 CLR 226.
These are valuable rights: cfStewart v Atco Controls Pty Ltd (In Liquidation) (2014) 252 CLR 307, [22]-[23], [35], (Crennan, Kiefel, Bell, Gageler and Keane JJ); cf Re Amerind Pty Ltd (In liq’n) (2017) 320 FLR 118, [53], [249]-[256] (Robson J).
Section 109 of the Act provides a scheme of nine categories of payments all of which rank before any other payments are made from the bankrupt estate. Included in those other payments which would be payable in priority to any dividend to unsecured creditors under Division 5 of Part VI of the Act are the interest and realisation charges payable pursuant to ss 5-6 of the Bankruptcy (Estate Charges) Act1997 (Cth). The costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee, also rank in priority before payment from any amount available for distribution to unsecured creditors of a bankrupt estate: para 109(1)(a).
Consequently, an appraisal of the merit of convening a meeting of creditors calls for consideration of those issues also.
Sufficiency and reality of a proposal
Whether or not a proposal is bona fide, it remains open to challenge its content on the ground that it is vague or uncertain: Labocus, [36(1)], [69]; Wenkart v Panzer [2003] FCA 432, [26].
Although greater control is now given to the creditors of a bankrupt estate, in a given case, a court might look carefully at any procedure leading to a composition which: (a) is dominated by creditors who are related to the bankrupt; (b) reflects a lack of commercial reality, or; (c) is suggestive of sharp practice: Labocus, [55]; Hingston, [91].
It will in the first instance be a matter for the judgment of the trustee whether a proposal is sufficient in detail and of underlying commercial substance such that that proposal should be put to a meeting: Labocus, [58]. There, Allsop J observed that the trustee may form the view that there is insufficient reliable information to allow for the formation of an opinion for the purposes of furnishing the report that is required as to whether the proposal would benefit the bankrupt’s creditors generally. His Honour also noted that the issue may arise subsequently (as where an interested person sought to restrain a meeting on the basis that what was being put was not a proposal): [58], see s 303. In either case, Allsop J held that a substantial question that would arise was:
. . . whether there is a proposal of sufficient clarity and reality to permit a judgment . . . under s 73(2A).
The requirement in sub-s 73(2A) of the Act is now located in para 75-175(2)(b)(i) of the Insolvency Practice Rules.
It is primarily a matter for the trustee whether the proposal is sufficiently formulated to go forward to a creditors meeting: Labocus at [70]. Whether this question is to be addressed at the time of the trustee’s evaluation of the proposal, the formation of an opinion for the purposes of a report or upon application to the court by an interested person, it is inappropriate to lay down definitional criteria upon which the detail and reality of the proposal are to be assessed.
In Wenkart v Panzer [2003] FCA 432 at [26], Beaumont J considered the trustees obligations under sub-s 73(2A) and (4) and stated:
. . . if the trustee does not have sufficient material upon which the trustee could indicate one way or the other whether a proposal would benefit the bankrupt’s creditors generally, then, in my opinion, there is no absolute and certainly no unconditional obligation on the trustee to call a meeting
This statement of principle was endorsed in Labocus at [69].
In light of the reasoning in Bendel, Labocus, Hingston and Wenkart considered above, I conclude that once a proposal has been found to be bona fide, it will not for that reason alone constitute a proposal that is lodged under s 73. A trustee is not under an unconditional obligation to call a meeting. Upon an assessment of: (a) the bona fides of the proposal; (b) the sufficiency and clarity of the terms of the proposal; (c) the offering or absence of any sureties or securities for performance of the composition, and; (d) other discretionary considerations (e.g. any delay attending the making of the proposal), a trustee may conclude that the proposal is such that a meeting of creditors ought not be convened. It remains important to maintain the distinction between a proposal which engages the obligation to convene a meeting under s 73 and a purported proposal which does not.
The distinction is of some significance in light of the amendments effected by the 2016 Act which may be seen more emphatically to oblige a trustee to call such a meeting under para 75-175(2)(a) of the Insolvency Practice Rules. In many of the decisions cited above, recognition was given to the legislative changes which confer on the creditors of a bankrupt estate greater involvement in a decision whether a proposal should be accepted. Objects enacted by the 2016 Act reinforce that is for those creditors, exercising self-interest, whether to vote in favour of or against a resolution to accept a composition.
Once a trustee concludes that a proposal should be characterised as one made under s 73 the obligations to prepare a report and call a meeting arise. Pursuant to sub-s 75-175(2)(b), the trustee should form an opinion whether a proposal is for the benefit of all creditors generally. It is otherwise where a trustee forms the opinion that the bankrupt’s request does not constitute a proposal made under s 73. In my opinion, a trustee must consider whether a request made for a composition is a proposal lodged under sub-s 73(1). I prefer a construction of s 73, in the context of the other provisions in Part IV, Div’n 6 and of s 75-175(2)(a) of the Insolvency Practice Rules, that a trustee must consider a proposal, whether or not it is bona fide, and reach a conclusion whether it is or is not a proposal lodged under s 73. Further, the trustee may form the view that it would be inimical to the interests of the estate to convene a meeting of creditors to vote upon the purported proposal. The need to form such a conclusion is consistent with a trustee’s duties under s 19 to administer the estate economically and efficiently. I respectfully adopt the observations that the circumstances may require that the proposal is one which should be examined carefully and whether it is suggestive of a family dealing, sharp practice or lacks commercial reality. In the first instance, the trustee may conclude that it is insufficiently formulated, or that the proposal does not as a matter of reality, constitute such a proposal: Labocus at [55], [58], [70]; Wenkart [2003] FCA 432 at [26]. Just as an interested person may apply to restrain the convening of a meeting called by a trustee, so too, a bankrupt who has made a proposal may apply to compel the trustee to call such meeting over the trustees refusal to do so. The rights and obligations in s 73 are to be read with ss 30, 303.
A contrary construction of sub-s 73(1) would engage the obligations in s 75-175(2)(a) of the Insolvency Practice Rules, notwithstanding that a trustee had already landed upon a clear conclusion that the proposal was not one lodged under s 73. In this context, I note that in Arcuri v Jones [2003] FCA 68, Lindgren J held at [18] that, “even, if as a matter of construction, sub-s 73(1) does apply to [this] proposal, in the exercise of its discretion the Court will not order [the trustee] to call a meeting of creditors which would be a futility, and any acceptance by the creditors of the [bankrupt’s] proposal would be ineffective and therefore futile, . . ” As I understand this reasoning, his Honour was stating that the court would not exercise the power conferred by s 30 to compel an exercise in futility. The court might otherwise have to be asked to set aside a special resolution in favour of a futile composition.
I note that Div’n 45 of the Insolvency Practice Schedule authorises the court to make such orders as to costs as it thinks fit in relation to a registered trustee, including in relation to the costs of a matter that is considered by the court and for the non-recovery of costs from the debtor’s estate: ss 45-1(a), 45-5(1), 45-5(2), 90-15. While costs are a matter in the discretion of the court, such provisions might be invoked where a bankrupt successfully applied for an order to compel the trustee to call a meeting which meeting the trustee had refused to call. The trustees conduct would be open to examination.
Requirements for meeting
Once it is concluded that the proposal is one lodged under s 73, the trustee is obliged to call a meeting of creditors and to send each of them a copy of the proposal and the bankrupt’s statement of affairs. The trustee’s report must indicate whether the proposal would benefit the bankrupt’s creditors generally: paras 75-175(2)(a)-(b) of the Insolvency Practice Rules. Earlier provisions in the Act have been repealed and now find their place in the Insolvency Practice Rules. The obligation expressed in para 75-175(2)(a) which requires the trustee to call a meeting, derived from sub-s 73(2) (now repealed).
The mandatory requirements in para 75-175(2)(a) that the trustee must call a meeting, are to be read with sub-s 75-175(2B) and 75-175(3).
Before calling a meeting, the trustee may require the bankrupt to lodge with the trustee an amount that is sufficient to cover the estimated costs that will be incurred by the trustee in arranging and holding the meeting and in respect of the estimated remuneration payable to the trustee for doing so: sub-s 75-175(2B); see also sub-s 42-60. The text of sub-s 75-175(2B) expressly conditions the obligation to call a meeting upon an entitlement – before calling such meeting – to require the bankrupt to lodge with the trustee an amount that is sufficient to cover those costs. It follows, in my view, that the trustee is not obliged to call a meeting until each of those requirements has been satisfied. I am conscious that a contrary conclusion was reached in Wenkart v Panzer (No.8), but this was by reason that the amendments to s 73 did not apply to the subject proposal: [2004] FCA 280, [57], [63].
Moreover, despite the obligation cast by para 75-175(2)(a) to call a meeting of creditors, a power is reserved to the trustee to decline to do so. The trustee is entitled to refuse to call a meeting where the proposal does not make adequate provision for the payment of accrued remuneration: para 75-175(3). The entitlement to so refuse arises in respect of both accrued remuneration that is owing and that which has been determined in accordance with applicable provisions of the Insolvency Practice Rules. The phrase ‘accrued remuneration’ is not defined in the Act of any of the Dictionaries: see, however, Division 60, Insolvency Practice Schedule, as concerns a trustee’s remuneration.
In Arcuri v Jones, Lindgren J considered proposed amendments to s 73 of the Act (being the genesis of the provisions now found in sub-s 75-175(2) and 75-173(3) of the Insolvency Practice Rules). His Honour considered that properly construed, those provisions:
. . . accept as their starting point whatever entitlement to remuneration the trustee may have for past work, and relieve the trustee of the further work and expense of calling a meeting unless the proposal makes adequate provision for payment of that remuneration for past work. Similarly, the proposed amendment to subs (3) would prevent the bankrupt amending his or her proposal at the meeting in a way which would detract from the provision of the proposal safeguarding the trustee's entitlement to remuneration to which subs (2B) refers.
Those observations are instructive in the present case.
Nothing elsewhere in the text of s 73, the Insolvency Practice Schedule or the Insolvency Practice Rules appears to confer a right in the trustee to refuse to call the meeting to consider a proposal lodged under s 73.
The obligations to call a creditors’ meeting and to furnish a report should also be read in light of the express duties of a trustee under s 19, including that a trustee should administer an estate as efficiently as possible by avoiding unnecessary expense, exercising their powers in a commercially sound way and observing the duties created by the Insolvency Practice Schedule: see para’s 19(1)(j)-(l) of the Act. The application of those duties may be seen as militating in favour of, or against, a conclusion that a meeting should be called and report given. In this context, s 30 reserves a discretion in the court whether to order that the trustee convene a creditors meeting and prepare a report.
Report
I have addressed above the requirement that the trustee furnish a report. The central consideration for the trustee is whether the proposal is in the interests of all creditors generally.
In Hingston at [91] the Full Court endorsed analysis which paid regard to a calculus of factors in forming an opinion on that central question:
. . . a calculus of factors must be taken into account including such matters as . . . whether, from the perspective of all creditors substantial further investigation was required of a particular transaction or the affairs of the debtor more generally; whether some particular creditors may have dominated the vote in circumstances where there may be questions about the relationship between the debtor and those creditors; whether the composition proposal is properly regarded as trivial resulting in a negligible distribution to unsecured creditors; the relativity between the positions under an administration in bankruptcy and a distribution under the composition proposal.
The list so provided was expressed to be non-exhaustive. In particular, the Full Court endorsed the other considerations also relied upon by the trial judge, one of which had been the inadequacy of the amount being paid to the creditors: [55], [91].
Consideration
The applicant submitted that the decision whether the Composition Offer should be accepted was one for the creditors.
A comparison was invited of the outcome to creditors in a sale of the Property versus that contained in the Composition Offer. It was suggested that in a sale of the Property, creditors would get no dividend, whether the Property was sold at a value of $890,000 or in a fire sale at $800,000. One difficulty in that approach was that it ignored the more current valuation of the Property at $980,000.
Other difficulties in the process of comparison as advanced by the applicant included that:
(a)it was only in the example of a sale of the Property that allowance was made for the trustee’s costs and disbursements (for which an allowance of $75,000 was made);
(b)the applicant’s submissions ignored that the liabilities in the administration of the bankrupt estate were now ~$224,500;
(c)no allowance was made for the statutory liability for the interest charge or realisation charge of the bankrupt estate.
The applicant’s submissions were effectively silent as to the precise sum that would be payable to the trustee in respect of accrued remuneration, costs and expenses. The applicant’s submissions did not confront the terms of the Composition Offer including that the combined effect of cll 4, 5 and 8 of the proposal was that the payment of $190,000 pursuant to that offer would be made in full and final satisfaction of the “the creditors’ proved claims and the debts and costs of the bankrupt estate and composition.”
The trustee submitted that the court should make no order for the substantive reason that the Composition Offer, if carried by a special resolution, would subvert rights conferred by the Act, in particular, to be paid the costs, charges and expenses of the administration, together with the right to have the trustee’s remuneration fixed in default of agreement by the creditors: Mayne v Jaques (1959) 101 CLR 169. It was further submitted that implementation of the Composition would negate the trustee’s right of indemnity out of the estate. I agree.
Further, the trustee was entitled to have regard to the reality and sufficiency of the Composition Offer. I note the detail of the Composition Offer provided that the sum of $7,700 would be paid toward the costs of arranging and holding the creditors meeting. In reality, the offer to creditors was $182,300 of which an unspecified amount was to be allowed for the costs of this administration.
Although the document promulgated by the applicant described itself as a Composition Offer, as identified in the course of argument, several features of the proposal were notable. First, despite cl 1 of the Composition Offer, the trustee was never asked, and has not consented, to being trustee of this composition. Secondly, objectively, no dividend is expressly offered to unsecured creditors. Thirdly, the proposal entails extinguishment of existing rights. Fourthly, the proposal would reduce the trustee’s remuneration to a sum significantly beneath that which has accrued in the administration of this estate.
I agree in the trustee’s submission that although the proposal is described as a Composition Offer and employs that terminology in relation to the terms that are embodied in it, the proposal resembles more closely a scheme of arrangement. The applicant proposes to make over his assets to be administered by a Composition Trustee. The Composition Offer contemplates the setting in order of the applicant’s affairs but will not provide any satisfaction of the creditors’ claims. The applicant seeks to retain his assets (in particular, the Property), but will not in reality pay any monies to his creditors.
There having been no cross-examination, it is not open to find that the offer was not bona fide. But I make no affirmative finding that it was.
I apply the principles stated in Re Alam's Deed of Arrangement, Re Bellis and Arcuri v Jones. In my view the determinative consideration which weighs against the grant of relief is that that the applicant ought not be permitted by means of the Composition Offer to subordinate the trustee’s rights under the Act or those statutory entitlements to payment of the interest and realisation charges. The trustee is entitled to have accrued remuneration determined in accordance with the Act. The applicant seeks, in effect, to sterilise those entitlements.
The trustee was under a duty to the body of creditors comprising the bankrupt’s estate to identify, get in and realise the assets of the estate: para 19(1)(b), (f) of the Act. In this case the trustee has done so and secured judgment by consent conferring rights to possession of the Property and payment of costs. The trustee has a duty to realise the Property and so to administer the assets available to the bankrupt estate. There is no suggestion of impropriety in this matter. No reason is shown why the trustee ought not retain the benefit of the judgment for possession, including his right to the costs of that proceeding: Stewart v Atco Controls Pty Ltd (In Liq’n), [24], [35], [39], [58]-[59].
As Mr Spencer for the trustee submitted, and I agree, the net effect of the application for an order that the Compromise Offer should be put to a meeting of creditors was to wrest control of the realisation of the Property from the trustee and to vest control in the creditors. Such a change in control at this stage in the administration of the bankrupt estate would effectively subvert rights which the trustee has secured by judgment to possession of the Property, to the realisation of that property for the bankrupt estate and his statutory rights to the costs and expenses of the administration and his right to have his remuneration fixed in accordance with the Act. Statutory obligations respecting payment of the interest and realisation charges may also be affected.
For those reasons, I consider the Composition Offer was not a proposal lodged under the Act. Alternatively, to adopt the reasoning of Lindgren J in Arcuri, I would not as a matter of discretion make an order under s 30 to require the trustee to call a meeting (or to prepare a report).
Further, the history of the matter outlined in the evidence gave cause to consider whether the offer was dominated by creditors who are related to the applicant or whether it reflected a lack of commercial reality or was suggestive of sharp practice. In this regard, other features of the current proposal warrant consideration.
The first relates to the financial support for the proposal that is being offered by the bankrupt’s daughter, Shirvana Mandri, who deposed to her willingness to make an offer of $50,000 toward the Composition Offer. According to some evidence Ms Mandri is a law student whose income or independent means of support were not clear. Ms Mandri declined to provide further information on the stated basis that she was not prepared to disclose such information due to privacy concerns. Ms Mandri’s affidavit exhibited an email chain which, it was said demonstrated the veracity of her offer. On examination, it appeared that Ms Mandri’s offer was itself dependent upon support by way of guarantee to provide $50,000 to the bankrupt. The supposed guarantee being contained in an email was not signed and Ms Mandri deposed that the guarantor was unable, by reason of religious holidays, to provide further evidence. Ms Mandri’s affidavit was affirmed on 27 September 2017 and was to be assessed in the context that, by email transmitted on 21 September 2017, the applicant’s lawyers recognised the barrier posed by the religious holiday to obtaining further evidence but stated that as “the matter is returnable on 4 October 2017, no prejudice will be suffered by your client.” I question why the applicant did not take an opportunity between 21 September 2017 and 5 October 2017 to provide further evidence from the guarantor. I also question the enforceability of the guarantee said to support Ms Mandri’s offer: cf sub-s 126(1) Instruments Act 1958 (Vic). These considerations were reinforced by the applicant’s submission which conceded that one of the ‘unknowns’ in respect of the proposal was whether Ms Mandri had the ability to procure the $50,000 so as to complete her offer.
The second relates to the third party offer of Mr Minerve, who deposed that he would contribute $140,000 toward the Composition Proposal. A quite different concern arose in relation to Mr Minerve’s offer.
On 17 January 2015, the applicant signed a declaration that the particulars given in his statement of affairs were correct. In Part D of that Statement, where the applicant identified his liabilities, he referred to a judgment that had been obtained against him by Mr Minerve. The nature of that liability was unknown when the trustee gave his initial advice to creditors in a report dated 27 January 2015. However, in a further report dated 26 March 2015, the trustee informed creditors, amongst other things, that the liability to Mr Minerve was $526,131. This report stated that Mr Minerve had issued a warrant of seizure and sale against the applicant’s property which warrant had been registered on title to the Property. The trustee’s report further informed creditors that steps had been taken to stay enforcement of that warrant.
Mr Minerve’s affidavit was therefore of greater interest for what it did not say. In particular, it said nothing about the existence of his judgment debt against the applicant or that a warrant had been issued. Nor did it provide any explanation as to why a person already owed $526,000 would be willing to provide a further sum of $140,000. The court may speculate as to why those matters were not disclosed. Mr Minerve is a creditor of the bankrupt estate who is admitted to be owed $526,000. It can also be assumed that, he would vote in any meeting. Unsecured creditors of the bankrupt estate are owed $674,000. Non-disclosure of this debt was a significant omission.
In my view, the trustee was, and the court is, entitled to take those matters into account in assessing whether the Composition Offer constituted a proposal under s 73 of the Act, or alternatively, whether, as a matter of discretion, it was otherwise appropriate to grant relief under s 30 to require the trustee to call a meeting of creditors.
In the present case, the terms of the Compromise Offer meant that rights conferred by the Act would be subverted and that creditors would gain nothing by way of dividend. I accept that creditors here will most likely fare no better whether the Writ of Possession is executed or the proposal is passed by special resolution at a creditors’ meeting. However, those considerations do not meet the fundamental objection to the Composition Offer; namely, that it will serve to subordinate, override or neutralise other provisions of the Act.
I also accept that the question whether the Compromise Offer was sufficiently certain and sufficient are matters relevant to the attractiveness of a proposal – a question that is to be left for creditors. However, this does not gainsay the trustee’s obligation to evaluate the proposal and to assess whether the vagueness of the terms proposed may in combination with other matters, support a conclusion that the proposal being made does not constitute a proposal made under s 73.
The applicant’s failure to respond in a meaningful way to requests for information concerning the Compromise Offer, coupled with the lack of detail in the affidavits, supported the trustee’s conclusion that there was not sufficient material to enable a report to be prepared. The trustee was entitled to look carefully at the bankrupts request that a meeting of creditors be convened and whether it was suggestive of a family dealing, sharp practice or lacked commercial reality. It did.
A final consideration to be weighed in the balance was the lateness of the making of the offer. The applicant deposed that he had consulted insolvency specialists in 2015 and (although he had made a series of proposals and offers to purchase the Property), the current proposal was made on the eve of execution of the Writ of Possession. Although s 73 does not prescribe a time within which a proposal may be made, I consider that delay is a relevant consideration.
I am satisfied that the Compromise Offer did not constitute a proposal within the meaning of s 73 and that it would be futile to grant relief. For those reasons, the application should be dismissed.
I certify that the preceding one-hundred and fifty (150) paragraphs are a true copy of the reasons for judgment of Judge A Kelly
Associate:
Date: 10 November 2017
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