Mango Boulevard Pty Ltd v Whitton
[2015] FCA 1169
•2 November 2015
FEDERAL COURT OF AUSTRALIA
Mango Boulevard Pty Ltd v Whitton [2015] FCA 1169
Citation: Mango Boulevard Pty Ltd v Whitton [2015] FCA 1169 Parties: MANGO BOULEVARD PTY LTD (ACN 101 544 601) and BMD HOLDINGS PTY LIMITED (ACN 010 093 349) v ROBERT WILLIAM WHITTON, RICHARD WILLIAM SPENCER and SILVANA PEROVICH File number: VID 1183 of 2010 Judge: RANGIAH J Date of judgment: 2 November 2015 Catchwords: BANKRUPTCY AND INSOLVENCY – application to review trustee’s decision – consideration of ss 149B and 178 of the Bankruptcy Act 1966 (Cth) – where trustee objected to discharge of bankruptcies – where objections extended bankruptcies and allowed bankrupts to put deed of compositions to creditors – whether review of trustee’s decision available – whether objection made for improper purpose – where objection advanced purpose of bankruptcy law – application dismissed
BANKRUPTCY AND INSOLVENCY – application to set aside creditors’ resolution to replace trustees – whether resolution made for an improper purpose – alleged that creditors replaced trustee to object to discharge of bankruptcies to enable bankrupts to put compositions – evidence unable to sustain definite inference – no improper purpose – application dismissed
PRACTICE AND PROCEDURE – application to reopen case to adduce further evidence – whether reopening in interests of justice – where evidence concerns events after judgment reserved – where leave to reopen would cause delay – where delay would render proceeding nugatory – where new evidence not dispositive of proceeding – application dismissed
Legislation: Bankruptcy Act 1966 (Cth) ss 64, 73, 73A, 82, 86(1), 139U, 139W, 149, 149A, 149B, 149C, 149D, 149N, 153, 178 and 181
Bankruptcy Legislation Amendment Act 2002 (Cth)
Federal Court of Australia Act 1976 (Cth) ss 37M and 37N
Explanatory Memorandum for the Bankruptcy Legislation Amendment Bill 2002Cases cited: Adsett v Berlouis (1992) 109 ALR 100 cited
Allan v Transurban City Link Ltd (2001) 208 CLR 167 applied
Ample Source International Ltd v Bonython Metals Group Pty Ltd(No 6) (2011) 285 ALR 488 cited
Arthur Yates & Co Pty Ltd v The Vegetable Seeds Committee (1945) 72 CLR 37 cited
Cummings v Claremont Petroleum NL (1996) 185 CLR 124 cited
Dare v Doolan [2004] FCA 461 cited
Frost v Sheahan (2005) 220 ALR 733 cited
Frost v Sheahan (as Trustee of the Bankrupt Estate of Frost) (2008) 249 ALR 538 distinguished
Gye v McIntyre (1991) 171 CLR 609 applied
Healey v Prentice (No 2) [2000] FCA 1598 cited
In re The Mayor & c. of the City of Hawthorn; Ex parte Co-Operative Brick Co. Ltd [1909] VLR 27 cited
Inspector-General in Bankruptcy v Nelson (1998) 86 FCR 67 applied
Macchia v Nilant (2001) 110 FCR 101 cited
Prentice v Wood (2002) 119 FCR 296 distinguished
Quinn v Official Trustee in Bankruptcy (1996) 63 FCR 136 cited
Re Ansett; Ex parte Ansett v Pattison (1995) 56 FCR 526 cited
Re Crawford (Deceased); Ex parte the Trustee of the Official Receiver and Autoterms Limited (1943) 13 ABC 201 cited
Re Hall (1994) 14 ACSR 488 cited
Re Tyndall; Ex parteOffıcial Receiver (1977) 30 FLR 6 cited
Trustees of the Property of Cummins (a Bankrupt) v Cummins (2006) 227 CLR 278 cited
Van Reesema v Official Trustee in Bankruptcy (1983) 69 FLR 424 citedDate of hearing: 8-12 September 2014, 10-12 November 2014, 22 October and 28 October 2015 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 245 Counsel for the Applicants:
(8-12 September 2014
10-12 November 2014)Mr P O’Shea QC with Ms M Luchich and Ms G Hartridge Counsel for the Applicants:
(22 and 28 October 2015)Mr P Franco QC with Mr D Turner Solicitor for the Applicants: Minter Ellison Counsel for the First Respondent:
(8-12 September 2014
10-12 November 2014)Mr PP McQuade Counsel for the First Respondent:
(22 and 28 October 2015)Mr PP McQuade QC Solicitor for the First Respondent: James Conomos Lawyers Counsel for the Second and Third Respondents:
(8-12 September 2014
10-12 November 2014)
Mr FM Douglas QC with Mr DD Keane Counsel for the Second and Third Respondents:
(22 and 28 October 2015)Mr DD Keane Solicitor for the Second and Third Respondents: Delta Law TABLE OF CONTENTS
THE ISSUES IN DISPUTE
[6]
BACKGROUND
[9]
REVIEW OF WHITTON’S DECISION TO OBJECT TO THE DISCHARGE OF THE BANKRUPTS FROM BANKRUPTCY
[35]
THE STATUTORY PROVISIONS
[40]
Whitton’s purpose in lodging objections to the discharge of the bankrupts from bankruptcy
[45]
Whitton’s administration of the bankrupt estates after his appointment
[46]
The history of Whitton’s dealings with the bankrupts before he was appointed trustee
[57]
What was Whitton’s purpose in lodging the objections?
[87]
Construction of s 149B(1) of the Bankruptcy Act
[114]
REVIEW OF THE RESOLUTIONS OF CREDITORS APPOINTING WHITTON AS TRUSTEE IN PLACE OF THE FORMER TRUSTEES
[158]
What was the creditors’ purpose in appointing Whitton as trustee in place of the former trustees?
[163]
Whether the purpose alleged by the applicants was an improper purpose.
[199]
STANDING
[204]
DISCRETION
[238]
SUMMARY
[240]
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 1183 of 2010
BETWEEN: MANGO BOULEVARD PTY LTD (ACN 101 544 601)
First ApplicantBMD HOLDINGS PTY LIMITED (ACN 010 093 349)
Second ApplicantAND: ROBERT WILLIAM WHITTON
First RespondentRICHARD WILLIAM SPENCER
Second RespondentSILVANA PEROVICH
Third Respondent
JUDGE:
RANGIAH J
DATE OF ORDER:
2 NOVEMBER 2015
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The originating application is dismissed.
2.The first respondent’s application to reopen his case is dismissed.
3.Order 1 of the orders made by Logan J on 29 April 2011 is set aside.
4.Order 1 of the orders made by Rangiah J on 22 October 2015 is set aside.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 1183 of 2010
BETWEEN: MANGO BOULEVARD PTY LTD (ACN 101 544 601)
First ApplicantBMD HOLDINGS PTY LIMITED (ACN 010 093 349)
Second ApplicantAND: ROBERT WILLIAM WHITTON
First RespondentRICHARD WILLIAM SPENCER
Second RespondentSILVANA PEROVICH
Third Respondent
JUDGE:
RANGIAH J
DATE:
2 NOVEMBER 2015
PLACE:
BRISBANE
REASONS FOR JUDGMENT
In this proceeding, the applicants seek review of decisions of a trustee in bankruptcy to object to the discharge of two bankrupts from their bankruptcies.
The applicants also seek review of resolutions made by creditors replacing the former trustees with the current trustee.
The applicants seek the following relief:
·Pursuant to s 178 of the Bankruptcy Act 1966 (Cth), that the decision of the first respondent to object to the discharge of the second and third respondents from their bankruptcies, be set aside.
·Further or alternatively, that notices dated 12 November 2010 objecting to the discharge of the second and third respondents from their bankruptcies given by the first respondent, be set aside.
·Declarations that the second and third respondents are discharged from bankruptcy.
·Pursuant to s 30 of the Bankruptcy Act, that resolutions made on 5 November 2010 by the creditors of the bankrupt estates of the second and third respondents, namely, that the previous trustees be removed as trustees of the bankrupt estates and that the first respondent be appointed trustee in their stead, be set aside.
·Pursuant to s 30 of the Bankruptcy Act, that a new trustee be appointed as trustee of the bankrupt estates of the second and third respondents.
·That the respondents pay the applicants’ costs of this application.
The second respondent, Richard William Spencer, and the third respondent, Silvana Perovich, are bankrupts. The first respondent, Robert William Whitton, is the trustee of the bankrupt estates of Spencer and Perovich. The applicants claim to be creditors of the bankrupts.
The case is an unusual one. Contrary to what would ordinarily be expected, it is the applicants who seek orders that would have the effect of discharging the bankrupts from bankruptcy, while the bankrupts oppose those orders.
THE ISSUES IN DISPUTE
Whitton lodged an objection to the discharge of Spencer and Perovich from bankruptcy under s 149B(1) of the Bankruptcy Act on 12 November 2010, two days before they were due to be automatically discharged. The grounds of objection relied on by Whitton were that each bankrupt had failed to provide written information about their property, income and expected income, and had failed to disclose any particulars of income as required by the Bankruptcy Act. The consequence of the objections was that the bankruptcies of Spencer and Perovich were extended by 5 years to 14 November 2015.
Whitton’s evidence is that he lodged the objections in order to encourage the bankrupts to provide the information. The applicants allege that, in fact, Whitton lodged the objections in order to extend the periods of bankruptcy so as to allow Spencer and Perovich to put proposals for compositions under s 73 of the Bankruptcy Act to their creditors. The applicants assert that this is an improper purpose, by which they mean a purpose that is not a purpose for which a trustee is lawfully permitted to object under s 149B(1).
The applicants also allege that resolutions passed at a joint meeting of creditors held on 5 November 2010 appointing Whitton as trustee in place of Spencer’s and Perovich’s former trustees in bankruptcy were made for an improper purpose. The improper purpose alleged is to have a trustee appointed who would lodge objections to discharge and thereby achieve extensions of the bankruptcies so as to allow the bankrupts to put forward proposals for compositions of their debts.
BACKGROUND
This proceeding arises out of a joint venture for the development of land at Mango Hill in Queensland. The first applicant, Mango Boulevard Pty Ltd (“Mango Boulevard”), Spencer and Perovich were parties to the joint venture. Mango Boulevard is a wholly owned subsidiary of the second applicant, BMD Holdings Pty Ltd (“BMD Holdings”). The joint venture was to be conducted through a company, Kinsella Heights Developments Pty Ltd (“Kinsella Heights”), which is not a party to this proceeding.
The parties have engaged in a litany of proceedings, particularly in the Supreme Court of Queensland and the Court of Appeal. The litigation has involved not just the parties to the present proceeding, but has also involved a number of other parties associated with the joint venture. It should be noted that the history of the proceedings is not directly relevant to deciding any of the issues in dispute, but the parties seem to agree that an understanding of the background is necessary.
Spencer and Perovich were formerly directors of a number of companies through which they conducted the business of property development. Those companies included Neo Lido Pty Ltd (“Neo Lido”), Neolido Holdings Pty Ltd (“Neolido Holdings”) and Neovest Ltd (“Neovest”). Those companies are not parties to this proceeding.
In 2002, Neo Lido contracted to purchase land at Mango Hill, acting as agent for Kinsella Heights. On 4 July 2003, a number of agreements were entered into concerning the development, including:
·a Share Sale Agreement between Spencer (as trustee for the Spencer Family Trust), Perovich and Mango Boulevard;
·a Shareholders Deed between Spencer (as trustee for the Spencer Family Trust), Perovich, Mango Boulevard and Kinsella Heights; and
·a Deed of Guarantee & Indemnity between BMD Holdings, Spencer (as trustee for the Spencer Family Trust), Perovich and Neolido Holdings.
Spencer (as trustee for the Spencer Family Trust) and Perovich initially held all of the shares in Kinsella Heights. By operation of the Share Sale Agreement, Mango Boulevard came to own 50% of the shares in Kinsella Heights. Spencer and Perovich each retained 25% of the shares – which equated to 25 shares each.
Following the declaration of Spencer’s bankruptcy, Mio Art Pty Ltd (“Mio Art”) replaced Spencer as trustee for the Spencer Family Trust.
Under the Share Sale Agreement, the price for the sale of the shares in Kinsella Heights to Mango Boulevard was an amount of $5 million payable 7 days after the completion date and the balance, if any, within 2 days after the determination of the purchase price pursuant to cl 4. The determination of the purchase price required a market valuation of the property to be obtained in accordance with assumptions set out in cl 4.4.
Mango Boulevard has not paid the whole of the $5 million. Spencer and Perovich claim that an amount of at least $1,130,856.40 plus interest is outstanding. Mango Boulevard denies that it is obliged to make any further payments to Perovich or Spencer or Mio Art. Mio Art has proceedings against Mango Boulevard and BMD Holdings on foot in the Supreme Court in respect of money claimed to be owed under the Share Sale Agreement.
The major asset in Perovich’s estate is the 25 shares in Kinsella Heights. If Perovich’s composition proposal is approved by the creditors, Perovich would regain control of the 25 shares. On the other hand, if the applicants are successful and the bankrupts are discharged from bankruptcy, the shares will remain vested in the trustee in bankruptcy and will allow the applicants the opportunity to negotiate with the trustee to purchase the shares. Accordingly, this proceeding is a piece in the strategic battle between the applicants and the bankrupts for the land owned by Kinsella Heights.
I will set out a brief chronology of relevant events. I will address some of these events in more detail later in these reasons.
Sequestration orders were made against the estates of Perovich and Spencer on 20 August 2007 and 24 August 2007 respectively. Paul Desmond Sweeney and Terry Grant van der Velde (“the former trustees”) were appointed trustees of each of the bankrupt estates. The former trustees were employed by, or otherwise associated with, a company operating under the business name “SV Partners”.
Spencer and Perovich each filed a statement of affairs on 13 November 2007 and consequently, by force of s 149(1) of the Bankruptcy Act, were due to be automatically discharged from bankruptcy on 14 November 2010.
In March 2008, Perovich raised with Whitton a proposal to the effect that Whitton would replace the former trustees. Spencer and Perovich lobbied the creditors of their respective bankrupt estates to support this change. However, at a joint meeting of creditors on 5 August 2008, resolutions to remove the former trustees and to appoint Whitton failed.
There were further discussions between Perovich, Spencer and Whitton from July to October 2010 concerning replacement of the previous trustees with Whitton and proposals for compositions with the bankrupts’ creditors.
On 25 September 2010, Perovich lodged a proposal with the former trustees setting out a proposal for a composition under s 73 of the Bankruptcy Act and requested that a meeting of the creditors be called to discuss the proposal. On 30 September 2010, the former trustees wrote to Perovich’s solicitor requesting a substantial amount of information about the proposed composition and requiring, pursuant to s 73A, that Perovich lodge an amount of $37,250 to cover estimated costs. Perovich did not provide the information requested by the former trustees or lodge the amount requested.
After lobbying by Perovich, a number of creditors requested that the former trustees convene a joint meeting of creditors to consider resolutions that Whitton be appointed as trustee in place of the former trustees. On 14 October 2010, Perovich withdrew her proposal for the composition and indicated to the former trustees that she would submit a substantially similar proposal for a composition to a new trustee.
On 15 October 2010, the former trustees called concurrent meetings of the creditors of the estates of Perovich and Spencer to be held on 29 October 2010. On 19 October 2010, the former trustees sent reports to Spencer’s and Perovich’s creditors. The reports indicated that the former trustees did not intend to object to the discharge of the bankrupts from bankruptcy. The report relating to Perovich’s estate raised a number of questions and concerns about the proposal for composition that Perovich had lodged, despite that proposal having been withdrawn.
In the meantime, the former trustees had negotiated a heads of agreement with the applicants for resolution of the dispute relating to the Share Sale Agreement, but that agreement was never executed.
The meeting of creditors commenced on 29 October 2010, but was adjourned to 5 November 2010. On 1 November 2010, the former trustees applied to the Federal Magistrates Court of Australia for leave to resign as trustees. On 4 November 2010, the application was adjourned so as to allow the creditors’ meeting to take its course.
On 5 November 2010, the creditors passed resolutions appointing Whitton as trustee of the estates of Spencer and Perovich in place of the former trustees. The Federal Magistrates Court proceeding was later dismissed by consent.
Whitton, as the new trustee, wrote to Spencer and Perovich on 8 November 2010. Whitton noted that Spencer and Perovich had not lodged sufficient details with the former trustees to enable the former trustees to determine Spencer and Perovich’s level of income contribution (if any), as required by s 139U of the Bankruptcy Act. The letters asked whether Spencer and Perovich were prepared to provide that information within 14 days.
By letter dated 10 November 2010, Delta Law, solicitors for Spencer and Perovich, conceded that the bankrupts had failed to disclose particulars of their incomes required by the Bankruptcy Act, stated that they would not be able to provide that information within 14 days, said they had no objection to Whitton filing an objection to their discharge from bankruptcy and stated that, in fact, Whitton was obliged to do so.
On 12 November 2010, Whitton lodged with the Official Receiver written notices of objection to the discharge of Spencer and Perovich from bankruptcy pursuant to s 149B(1) of the Bankruptcy Act. But for those objections, they would have been automatically discharged from bankruptcy two days later.
On 29 December 2010, the applicants commenced the present proceedings.
On 11 February 2011, Spencer and Perovich each lodged with Whitton a proposal for a composition under s 73 of the Bankruptcy Act. If Whitton had not lodged the objections and the bankruptcies had not been extended there could have been no prospect of any compositions with creditors before the discharge of the bankrupts from bankruptcy.
Whitton applied to this Court for directions regarding the proposed compositions. On 29 April 2011, Logan J directed Whitton not to hold a meeting of creditors pending the determination of this proceeding. On 22 October 2015, I varied that order to allow Whitton to prepare for, call and hold a meeting under s 73, but directed that such meeting was not to be called or held prior to the delivery of these reasons.
REVIEW OF WHITTON’S DECISION TO OBJECT TO THE DISCHARGE OF THE BANKRUPTS FROM BANKRUPTCY
The applicants’ challenge to Whitton’s decision to object to the discharge of Spencer and Perovich from bankruptcy is brought pursuant to s 178 of the Bankruptcy Act. That provision is, relevantly, in the following terms:
(1)If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.
In Frost v Sheahan (as Trustee of the Bankrupt Estate of Frost) (2008) 249 ALR 538 at [34], Besanko J summarised the principles which govern an application under s 178:
(1)Section 178 confers a “supervisory jurisdiction over the conduct of the trustee”.
(2) It is not necessary for an applicant for relief under the section to show that the trustee’s decision was absurd, unreasonable or taken in bad faith. The court has a wide discretion to make such order as seems appropriate in the circumstances of the case. At the same time, the court will be slow to make orders which will have the effect of interfering in the day-to-day administration of a bankrupt’s estate and, in cases involving an exercise of business or commercial judgment, will place considerable weight on the trustee’s decision. Furthermore, a court will not intervene under s 178 simply because the judge forms a different view from that of the trustee.
(3) An order may be made under s 178 even if the trustee’s decision was correct on the material before him, if, for example, additional material is put before the court.
(4) The power to make orders under s 178 is not necessarily ousted by the presence of an alternative remedy…
(Citations omitted.)
In Healey v Prentice (No 2) [2000] FCA 1598, Madgwick J said at [21]:
It would be enough to excite the court to intervene if it be shown that the impugned conduct of the trustee was incorrect or that other conduct was, or on the material before the Court would be, preferable and that justice and equity require the Court's intervention. An applicant no doubt carries the onus of establishing this. It is plain that the Court should not be too ready to intervene for fear of making the role and work of a trustee unmanageable. That the judge who hears a review application might have acted differently from the way a trustee did is not to the point. The question is whether it is just and equitable that the Court should afterwards intervene in some fashion.
The applicants’ challenge to Whitton’s decision to object to the bankrupts’ discharge from bankruptcy raises four issues. They are:
(a)Whether Whitton’s purpose in lodging the objections to discharge from bankruptcy was to allow the bankrupts the opportunity to make proposals for compositions to their creditors, or to encourage the bankrupts to provide details of their income, or a combination of both?
(b)Whether a trustee can only object to the bankrupt’s discharge from bankruptcy for the purpose of inducing the bankrupt to act in accordance with the bankrupt’s obligations, on the proper construction of s 149B.
(c)Whether the applicants have standing to apply to the Court under s 178(1).
(d)Whether the Court’s discretion under s 178(1) should be exercised in favour of granting the applicants the relief they seek.
Before considering these issues, it is useful to set out the relevant provisions of the Bankruptcy Act.
THE STATUTORY PROVISIONS
Subdivision B of Div 2 of Pt VII of the Bankruptcy Act deals with objections to discharge from bankruptcy. The relevant provisions of Subdiv B are these:
149B Objection to discharge
(1)Subject to the following provisions of this Subdivision, at any time before a bankrupt is discharged from bankruptcy under section 149, the trustee may file with the Official Receiver a written notice of objection to the discharge.
(2)The trustee of a bankrupt’s estate must file a notice of objection to the discharge if the trustee believes:
(a)that doing so will help make the bankrupt discharge a duty that the bankrupt has not discharged; and
(b)that there is no other way for the trustee to induce the bankrupt to discharge any duties that the bankrupt has not discharged.
149C Form of notice of objection
(1) A notice of objection must:
(a)set out the ground or each of the grounds of objection, being a ground or grounds set out in subsection 149D(1) but not being a ground or grounds of a previous objection to the discharge that was cancelled; and
(b)refer to the evidence or other material that, in the opinion of the trustee, establishes that ground or each of those grounds; and
(c)state the reasons of the trustee for objecting to the discharge on that ground or those grounds.
(1A)Paragraph (1)(c) does not apply to a ground specified in paragraph 149D(1)(ab), (d), (da), (e), (f), (g), (h), (ha), (ia), (k) or (ma).
(2)A notice of objection is not invalid merely because it does not state the ground or grounds of objection precisely as set out in subsection 149D(1) provided that the ground or grounds can reasonably be identified from the terms of the notice.
149D Grounds of objection
(1)The grounds of objection that may be set out in a notice of objection are as follows:
…
(ab)any transfer is void against the trustee in the bankruptcy because of section 121;
…
(d)the bankrupt, when requested in writing by the trustee to provide written information about the bankrupt’s property, income or expected income, failed to comply with the request;
(da)after the date of the bankruptcy, the bankrupt intentionally provided false or misleading information to the trustee;
(e)the bankrupt failed to disclose any particulars of income or expected income as required by a provision of this Act referred to in subsection 6A(1) or by section 139U;
(f)the bankrupt failed to pay to the trustee an amount that the bankrupt was liable to pay under section 139ZG;
(g)at any time during the period of 5 years immediately before the commencement of the bankruptcy, or at any time during the bankruptcy, the bankrupt:
(i)spent money but failed to explain adequately to the trustee the purpose for which the money was spent; or
(ii)disposed of property but failed to explain adequately to the trustee why no money was received as a result of the disposal or what the bankrupt did with the money received as a result of the disposal;
(h)while the bankrupt was absent from Australia he or she was requested by the trustee to return to Australia by a particular date or within a particular period but the bankrupt failed to return by that date or within that period;
(ha)the bankrupt intentionally failed to disclose to the trustee a liability of the bankrupt that existed at the date of the bankruptcy;
…
(ia)the bankrupt failed to comply with subparagraph 77(1)(a)(ii);
…
(k)the bankrupt refused or failed to sign a document after being lawfully required by the trustee to sign that document;
…
(ma)the bankrupt intentionally failed to disclose to the trustee the bankrupt’s beneficial interest in any property;
…
(Underlining added.)
As I have noted, under s 149 of the Bankruptcy Act, Spencer and Perovich would, in the absence of an objection under s 149B, have been automatically discharged from bankruptcy on 14 November 2010.
When Whitton filed the notices of objection, ss 149A, 149B and 149G had the effect of extending the bankruptcies of Spencer and Perovich for a period of 5 years until 14 November 2015.
The provisions dealing with compositions are set out in Div 6 of Pt IV of the Bankruptcy Act. The relevant sections are as follows:
73 Composition or arrangement
(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 working days after receiving the proposal, give a copy of the proposal to the Official Receiver.
…
(2)The trustee shall call a meeting of creditors and shall send to each creditor before the meeting a copy of the proposal accompanied by a report on it.
(2A)The report must indicate whether the proposal would benefit the bankrupt’s creditors generally.
…
(2B)The trustee may refuse to call the meeting if the proposal does not make adequate provision for payment to the trustee of accrued fees that:
(a)are owing to the trustee (at the time the proposal is lodged) in respect of the administration of the bankrupt’s estate, but are not able to be taken out of the bankrupt’s estate; and
(b)have been approved by the creditors before the proposal is considered.
…
(4)The creditors may, by special resolution, accept the proposal.
…
73ATrustee may require surety for cost of meeting
(1)Before calling a meeting under section 73, the trustee may require the bankrupt 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 fee that will (if approved by the creditors) be payable to the trustee in respect of the meeting.
…
74 Annulment of bankruptcy
(5)Upon the passing of a special resolution at a meeting of creditors of a bankrupt under subsection 73(4), the bankruptcy is annulled, by force of this subsection, on the date on which the special resolution was passed.
…
(6)Where a bankruptcy is annulled under this section, all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment shall be deemed to have been validly made or done but, subject to subsection (7), the property of the bankrupt still vested in the trustee vests in such person as the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his or her estate or interest in it, on such terms and subject to such conditions (if any) as the Court orders.
…
75Effect of composition or scheme of arrangement
(1)Subject to this section, a composition or scheme of arrangement accepted in accordance with this Division is binding on all the creditors of the bankrupt so far as relates to provable debts due to them from the bankrupt.
A discharged bankrupt is not a “bankrupt” for the purposes of s 73(1): Quinn v Official Trustee in Bankruptcy (1996) 63 FCR 136. It is necessary for a bankrupt to propose the composition, and have the composition accepted, before his or her discharge from bankruptcy.
Whitton’s purpose in lodging objections to the discharge of the bankrupts from bankruptcy
I will start by describing Whitton’s administration of the bankrupt estates after his appointment as trustee, then the history of his dealings with Spencer and Perovich before he was appointed trustee, and then consider what Whitton’s purpose in lodging objections was.
Whitton’s administration of the bankrupt estates after his appointment
Whitton was appointed as trustee on Friday, 5 November 2010. On Monday, 8 November 2010, Whitton wrote to each of Spencer and Perovich saying:
I am advised that in the course of the administration of your Bankrupt Estate you have as yet failed to lodge with the former Trustees sufficient details to enable them to determine your level of income and contribution (if any) in accordance with Section 139U of the Bankruptcy Act 1966. I note that such was requested in writing by the former Trustees initially on 4 August 2008 but on no subsequent occasion.
Given the imminent automatic discharge of your bankruptcy would you please advise forthwith whether you are prepared to provide within 14 days such information to enable compliance with the relevant section.
On 10 November 2010, Delta Law, the solicitors for Spencer and Perovich replied saying:
We refer to your letters of 8 November 2010 to Messrs Spencer and Perovich. They have considered your request and concede that they have each, when requested in writing by their previous trustees, failed to comply with a request in writing to provide written information about their income, or expected income, and have failed to disclose, in material respects particulars of income as required by a provision of the Bankruptcy Act 1966(Cth) referred to in section 6A or by section 139U.
Whilst your letter asks whether they are prepared to provide within 14 days such information to enable compliance with the relevant section, it would appear to us that relevantly, the period expires this Saturday 13 November 2010. This would be impossible to achieve.
If you were to file an objection to discharge, this would provide both Spencer and Perovich with an inducement to provide the information to you as soon as possible.
Also, we are unable to perceive any other way for you to induce them to discharge their duties they have not discharged. It therefore appears to us that the preconditions to filing an objection to discharge pursuant to s 149B(2) are fulfilled.
If you agree, we have no objection to your filing an objection to discharge, and in terms of the statute, you are obliged to do so.
As the matters are serious you can be assured that Spencer and Perovich will co-operate fully with you in the forthcoming period.
On 9 November 2010, solicitors acting for the applicants wrote to Whitton asking him whether or not he intended to object to the discharge of Spencer and Perovich from bankruptcy. Whitton relied on the same day, saying:
I refute your allegations that the rationale for the change in Trustee is to allow the bankrupts to submit proposals pursuant to Section 73 of the Bankruptcy Act 1966 (“the Act”).
In respect to the objection of the bankrupts’ discharge, I will consider [the] same independently of any proposal pursuant to Section 73 of the Act.
On 10 November 2010. Mango Boulevard made an offer to Whitton to purchase the shares in Kinsella Heights for $1 million, with there to be a further valuation to determine whether any additional payment was to be made under the Share Sale Agreement.
On 11 November 2010, Whitton received a letter from Anthony Commisso, the director of ACCA Business Building Team Pty Ltd, which claims to be a creditor of the estates of Spencer and Perovich. Commisso said that he was concerned that not all matters had been investigated by the former trustees, and that he would like to see the bankruptcies extended for the maximum period possible. Commisso’s letter said that the issues of concern included that the bankrupts had failed to supply their trustees with all the documents and information they were required to provide, and failed to provide income returns. Commisso also noted that he had been contacted by Mango Boulevard to seek his support for the retention of the former trustees in order to conclude a deal between them. He expressed concern that Mango Boulevard had some ulterior motive, which he said should be investigated.
On 12 November 2010, Whitton lodged notices of objection to the discharge of Spencer and Perovich from bankruptcy. The notices were in almost identical terms. The notice relating to Perovich was as follows:
I, Robert Whitton, of William Buck, Level 29, 66 Goulburn Street, SYDNEY NSW 2000, the Trustee of the above bankrupt estate, hereby object to the discharge of Silvana Perovich from bankruptcy by force of Section 149B of the Bankruptcy Act 1966 (“the Act”) on the following grounds:
Pursuant to Section 149C(1)(c), the reason for the objection on the grounds set out under Section 149D(1)(d) and 149D(1)(e) is the bankrupt has failed to provide written information about her property, income and expected income, and she has failed to disclose any particulars of income as required by the Act.
The following documentation in support of the above is detailed below:
- Letter to bankrupt dated 8 November 2010 (enclosed as Annexure “A”)
- Letter from bankrupt’s solicitor dated 10 November 2010 (Annexure “B”)
- Letter from unsecured creditor dated 11 November 2010 (Annexure “C”)This objection has the effect of extending the bankruptcy for a period of eight (8) years from the date on which the bankrupt filed her Statement of Affairs (“SOA”). In this regard, as the SOA was filed on 13 November 2007, the date of discharge has been extended until 14 November 2015.
Whitton deposed, in an affidavit admitted into evidence at the trial, that in exercising his discretion to object to the bankrupts’ discharge from bankruptcy, he had regard to the following matters:
(a)I had been appointed as the trustee of the Bankrupts’ estates on Friday 5 November 2010;
(b)the Bankrupts were due to be automatically discharged from bankruptcy on Sunday 14 November 2010;
(c)the Bankrupts had not provided details of their income and property to the former trustees;
(d)the former trustees had decided not to object to the Bankrupts’ discharge but had also stated that they had “not turned their mind[s] to a detailed review of whether a ground for objection could be made out”;
(e)the Bankrupts appeared to have substantial access to lawyers and advisers, which might indicate that they had been obliged to contribute income to their estates;
(f)to the best of my knowledge, the Bankrupts had not made income contributions;
(g)the Bankrupts’ failure to provide details of their income and property was a serious matter;
(h)the former trustees had been removed by an overwhelming vote of the creditors, who had lost confidence in the former trustees and who, inferentially, would be interested in Mr Whitton making investigations as to what returns might be available in the estates;
(i)by objecting to the discharge, I was conscious from my experience that the objection to their discharge would encourage the bankrupts to provide details of their income.
Whitton deposed that his reasons for exercising the discretion to object to the bankrupts’ discharge from bankruptcy were:
(a)the bankrupts had not lodged income information with their trustees in bankruptcy or me;
(b)I had only been appointed a short time and wanted time to investigate whether the bankrupts had the capacity to contribute income for the benefit of their creditors;
(c)The bankrupts appeared to have substantial access to resources that needed to be investigated and considered from an income perspective;
(d)In my experience as a bankruptcy trustee, by objecting to the discharge from bankruptcy of a bankrupt, that encouraged bankrupts to provide details of their income;
(e)I believed that my objections to discharge from bankruptcy of Spencer and Perovich would encourage these bankrupts to provide me with details of their income;
(f)I could at any later time cease to object to the discharge or withdraw any objection under the Bankruptcy Act;
(g)if my investigations revealed that the bankrupts had no capacity to contribute income for the benefit of their creditors, I could cease to object to the discharge or withdraw any objection under the Bankruptcy Act.
Whitton also deposed that:
In deciding to object to the discharge from bankruptcy of Spencer and Perovich, I did not take into account or have regard to the fact that the effect of the objection would enable Spencer and Perovich to make proposals for composition to their creditors.
The applicants allege that contrary to Whitton’s evidence, he did not lodge the objections because he believed extensions of the bankruptcies would encourage Spencer and Perovich to provide details of their income. They allege that, instead, Whitton wished to allow Spencer and Perovich to make proposals to their creditors for compositions, which could only be achieved by extending the bankruptcies. The applicants submit that Whitton’s earlier assistance to Spencer and Perovich by advising them as to removal of the former trustees and their proposals for compositions is consistent with assisting them by extending the bankruptcies to allow them to put their proposals for compositions. On the other hand, the respondents submit that Whitton was never the bankrupts’ advisor and did no more than would be expected in circumstances where he had to consider whether he was prepared to act as trustee.
In order to assess the parties’ submissions it is necessary to consider the history of Spencer and Perovich’s earlier dealings with Whitton in some detail. It is also necessary to consider Whitton’s evidence under cross-examination.
The history of Whitton’s dealings with the bankrupts before he was appointed trustee
On 18 March 2008, Whitton spoke, for the first time, to Spencer and Perovich. The discussion was over the telephone. Perovich told Whitton that she had substantial claims against the applicants, that the quantum of claims against the applicants could be more than $100 million and the claims were the subject of proceedings in the Supreme Court. Perovich expressed concerns about the former trustees’ administration of the estate. In particular she was concerned that the former trustees had taken little or no action to pursue claims against the applicants. Perovich also told him that she and Spencer were looking for a way that they could change their trustees in bankruptcy.
On the same day, Whitton emailed Perovich a document summarising the options and steps to change a trustee. In his email, Whitton said:
The most obvious starting point is to get a significant creditor or creditors to write to the existing Trustee requesting him to either call a meeting for such purpose or to institute the streamlined approach as envisaged by s 181A of the Bankruptcy Act and at such time include a Consent to Act from me.
On 5 August 2008, Whitton attended a concurrent meeting of creditors of Spencer’s and Perovich’s bankrupt estates. The meeting was called at the request of Commisso and Jonathon McLeod, the liquidator of Neovest. Whitton had signed a Consent to Act as trustee. A resolution that Whitton be appointed to replace the former trustees was moved, but failed. Greener Investments Pty Ltd (“Greener Investments”), which claimed to be a creditor, was allowed to vote, having given its proxy to the former trustees. It had submitted a proof of debt for approximately $116 million. Greener Investments’ vote was critical to the failure of the resolution. The issue of the former trustees’ dealings with Greener Investments remained controversial until they were eventually replaced.
Whitton cannot recall any other correspondence or telephone conversations with Spencer or Perovich between the meeting of creditors and about early July 2010.
In early July 2010, Whitton had a telephone conversation with Perovich. Perovich said that she and Spencer still had concerns about the former trustees. She also told Whitton that she and Spencer had been obtaining legal advice about their exits from bankruptcy and the possibility of putting forward deeds of composition to the creditors so that their claims against the applicants could be pursued. Whitton told Perovich that he was available to meet with her and Spencer and their lawyers to discuss their exits from bankruptcy and the proposed deeds of composition.
Whitton was copied into emails on 9 July and 13 July 2010 from Perovich to barristers acting for her, Francis Douglas QC and Kevin Connor. She proposed a meeting between Whitton and Douglas QC and Connor.
On 21 July 2010, Whitton received an email from Perovich which attached draft deeds of composition for both Spencer and Perovich and a draft proposal from Mio Art as trustee of the Spencer Family Trust regarding the compositions. Perovich set out what she thought were the options open to her and Spencer and indicated that their preferred option was to have Whitton appointed as trustee and put a deed of composition to the creditors. The email referred to unresolved issues concerning the draft deeds of composition and concluded, “[L]ook forward to discussions with you on this”. The draft deeds of composition named Whitton as the trustee of each composition.
On 27 July 2010, Perovich sent Whitton an email attaching a judgment of Lander J of the Federal Court of Australia. The former trustees, who were also administrators of Greener Investments, had applied for an order that Greener Investments continue under administration rather than being wound up. Lander J held that there was clearly potential for conflicts of interest if Sweeney and van der Velde at once were administrators of Greener Investments and trustees of the estate of Perovich, and that they were not sufficiently independent. Their application was refused.
On 5 August 2010, Whitton sent an email to Perovich asking if there was any update regarding the proposed compositions. Perovich replied that she would call him later that day and give him an update.
On 2 September 2010, Perovich sent an email to Whitton containing a draft letter to one of the former trustees, Sweeney, and draft proposals for compositions for Perovich and Spencer. The email to Whitton said that timing was now an issue and that:
If Mr Sweeney does become slow or uncooperative we will need a slick game plan to change/remove SV Partners before the assets vest with them.
Whitton replied on 2 September 2010, saying “[W]ill review and revert asap”.
The draft compositions for Spencer and Perovich were provided to the former trustees on 3 September 2010. The former trustees replied to Spencer on 15 September 2010. They said they had reviewed the draft proposal and “wish to draw your attention to a few issues that need to be considered if you wish there to be any reasonable chance of a proposal firstly being put to creditors and secondly being accepted by creditors”. The former trustees described information which they said would be required so that they could complete a proper report. That information was extensive. They said that the costs of completing the report would be potentially in the order of $20,000 to $40,000, or more if it were necessary to obtain an independent valuation of the property owned by Kinsella Heights.
On 9 September 2010, Perovich emailed Whitton saying that Sweeney had said that he would need until the following week to consider and respond to her draft proposal. The email said that Perovich expected that Sweeney would be approaching the solicitors for the applicants, Minter Ellison, to see if they would improve their offer or match the offer which the proposed composition represented. The email attached a letter that Spencer had received from the former trustees concerning his outstanding income statements. The email asked Whitton to give consideration to the time frames for the processes involved if it was determined to “force the composition” or remove the trustees. Whitton responded by telling Perovich that he would give her a call the next day.
On 15 September 2010, Perovich emailed Whitton and Douglas QC with a response from the former trustees to the draft proposal for a composition. Perovich expressed dissatisfaction with the former trustees’ response, suggesting that it may be better to spend their money taking the matter to court. Douglas QC responded, saying that Perovich should not act too hastily. Whitton responded saying that he agreed with Douglas QC. Perovich replied saying that she would send a summary of her commentary concerning the former trustees’ letter “so we can discuss”.
Sometime between 15 and 20 September 2010, Whitton had a telephone conversation with Perovich. Perovich expressed the view that the former trustees had put unreasonable barriers in front of her regarding the proposal. Perovich told Whitton that she and Spencer intended to forward proposals for compositions to their creditors if Whitton was appointed as their trustee in lieu of the former trustees. She said that it was their intention in making the proposals for composition to provide a method for the proper funding and prosecution of the claims against the applicants in the Supreme Court proceedings which would maximise the returns available to their creditors. During that conversation, Perovich said that she and Spencer had previously been asked by the former trustees to provide details of their income, but had failed to provide that information as they were unsure of their income, or the income that they had received during the bankruptcies.
On 24 September 2010, Whitton received an email from Spencer and Perovich that was also sent to Douglas QC and Connor. The email attached redrafted proposed deeds of composition. The email stated that in the proposed composition Spencer was having Mio Art cover all of his estate’s debts via the Perovich estate and that Spencer’s offer was for both estates. Spencer and Perovich asked Whitton how they would express this in the deeds of composition. Whitton responded advising them that he thought there would have to be three estates, one for each of Spencer and Perovich and then a joint estate. There were further emails between Spencer and Whitton concerning this issue.
On 24 September 2010, Perovich sent an email to Whitton informing him that Connor had recommended that a formal proposal for composition for only Perovich’s estate (and not Spencer’s) should be put at that stage and asking Whitton what his thoughts were on this issue. There does not appear to have been any response by Whitton.
On 25 September 2010, Perovich formally lodged a proposal under s 73 with the former trustees setting out the terms of a proposed composition, and asked that a meeting of the creditors be called to discuss the proposal.
On 30 September 2010, the former trustees wrote to Perovich in response to her proposal for a composition. The letter required Perovich to provide security for the trustees’ remuneration, costs and expenses in the sum of $37,250 by 5 October 2010. They said that the trustees’ report and notice convening the meeting would then be issued by 18 October 2010. The letter raised a number of queries concerning the proposal.
On 3 October 2010, Whitton was copied into an email from Perovich to Douglas QC and Connor. Perovich said that she and Spencer saw merit in trying to have the trustees changed. It is apparent from the email that Spencer and Perovich saw the former trustees as an impediment to having their compositions put to and accepted by the creditors.
At some stage after this, Whitton signed a Consent to Act as trustee of the bankrupt estates of both Perovich and Spencer. On 20 October 2010, Whitton was provided with a copy of the reports to creditors issued by the former trustees. In the reports, the former trustees noted that Perovich had asked for a meeting of creditors to be convened to consider her proposal for a composition. They noted that they had responded, but that instead of providing the surety and the further information requested, Perovich had arranged for a number of creditors to write asking them to convene a meeting of creditors for the purpose of removing them as trustees and replacing them with another trustee. They also noted that upon Perovich becoming aware of their intention to comment on and make a recommendation in relation to her proposal for a composition, she withdrew that proposal.
The report to creditors in respect of Perovich stated:
Whilst we had not turned our mind to a detailed review of whether a ground for objection could be made out, we had formed a view that there would be no utility in lodging any objection to Ms Perovich’s bankruptcy. That is there was no tangible benefit to be gained by the bankrupt estate in objecting to Ms Perovich’s automatic discharge from bankruptcy. This matter was conveyed to Ms Perovich in answer to her enquiry.
The report then referred to Perovich’s withdrawn proposal for a composition with her creditors. The report said:
With a meeting of creditors to be called and a report to creditors having to be issued (for the meeting to consider the change of Trustees), in the interests of not having the estate incur so many extra costs, we decided to proceed to issue a report and call a meeting of creditors to consider not only the proposed change of trustee but also the bankrupt’s proposal under section 73 of the Act…
When we informed the Ms Perovich of that intention, she withdrew her proposal for a Composition with her creditors under section 73 of the Act. She did however confirm her intention to resubmit her proposal for a composition, on substantially similar terms, to that new trustee (if he is appointed) to call a further meeting to consider her proposal.
Despite the withdrawal of the proposal, the former trustees’ report set out information which they said would be useful for any future consideration of the proposal. The former trustees set out a number of issues they had identified with the withdrawn proposal for composition and raised a number of queries.
The former trustees’ reports noted that their work in progress for the administration of Perovich’s estate was $412,291.50, while for Spencer’s estate their fees were $112,650.50. They noted that their fees would be paid in priority to any distribution.
On 13 August 2010, Mango Boulevard had approached the former trustees of Perovich’s estate in an attempt to settle the Supreme Court litigation. On 6 October 2010, a heads of agreement was agreed but not executed. The agreement provided for a guaranteed payment of $500,000 for the purchase of Perovich’s shares. The former trustees’ reports did not refer to the heads of agreement.
On 29 October 2010, Whitton attended the concurrent meeting of the creditors of Spencer’s and Perovich’s bankrupt estates. At the meeting there was a discussion between Sweeney and the creditors concerning admitting a proof of debt for Greener Investments. A resolution was passed that the meeting be adjourned until 5 November 2010 with a view to court proceedings being taken to determine whether the former trustees should remain and whether Greener Investments was a creditor.
On 1 November 2010, the former trustees filed an application seeking orders under s 180 of the Bankruptcy Act that the Court accept their resignation as trustees and that Whitton be appointed as trustee. The application was set down to be heard on 4 November 2010. On 4 November 2010, the application was adjourned to allow the creditors’ meeting to take place, as the applicants had filed a notice of opposition to the former trustees’ application to resign.
On 5 November 2010, Whitton attended the reconvened concurrent meeting of creditors. At that meeting, Whitton was asked a number of questions. Whitton informed the creditors that he had not made any assessment as to whether he would lodge objections to Spencer’s and Perovich’s discharge from their bankruptcies. He said that it may be that a composition would be in the best interests of the creditors, but he had not formed any view upon it. He indicated there would not be enough time before the automatic discharge from bankruptcy for him to prepare a report upon any composition and give the requisite notice to the creditors. He reiterated that the first decision to be made was whether there were valid grounds to extend the bankruptcies.
At the meeting, a majority of the creditors (by value) voted in favour of resolutions that Whitton be appointed as trustee of the bankrupt estates of Spencer and Perovich in place of the former trustees.
What was Whitton’s purpose in lodging the objections?
Having set out this history of events, I will turn to consider the applicants’ allegation that Whitton lodged the objections in order to extend the bankruptcies for the purpose of allowing Spencer and Perovich to put proposals for compositions to their creditors. The investigation of Whitton’s reasons requires consideration of what Whitton understood, from his meetings, telephone calls and emails, that Spencer and Perovich were hoping to achieve. It also requires consideration of whether Whitton was motivated to assist Spencer and Perovich to achieve their aims and to what end.
When he became trustee, Whitton was aware that Spencer and Perovich wished to exit their bankruptcies by way of annulment upon acceptance by their creditors of compositions, rather than automatic discharge. Whitton knew that Spencer’s and Perovich’s aim was to avoid the assets of their bankrupt estates remaining vested in the trustees after their exits from bankruptcy. He knew that the former trustees did not intend to object to Spencer’s and Perovich’s discharge. Whitton knew that the former trustees had stated in the proceedings before Lander J that there would be no dividend payable to the creditors (although Sweeney seems to have qualified this to some extent in the meeting of 29 October 2010). He knew that there could be no compositions before the bankrupts’ automatic discharge on 14 November 2010, given the short time frame.
Whitton had advised Spencer and Perovich in 2008 to lobby the creditors to call a meeting to replace the former trustees with Whitton. Whitton had advised Spencer and Perovich about their proposals for compositions and he knew that he was to be proposed as the trustee for each composition. Whitton knew that Spencer’s and Perovich’s motivation in seeking to have him replace the former trustees was that they believed that Whitton would be a “new and sympathetic” trustee who would lodge objections to their discharge from bankruptcy which would allow them time to propose compositions with their creditors.
The mere fact that Spencer and Perovich believed that Whitton would take particular steps that would support their interests does not mean that Whitton took those steps for the purpose of supporting their interests.
However, the applicants submit that the emails and discussions between Whitton and Spencer and Perovich show that Whitton acted as their advisor in relation to removing the former trustees, having Whitton replace the former trustees, and upon the compositions; and that makes it likely that he was motivated to act in their interests. They submit that Whitton’s attempts in cross-examination to indicate that he was not acting as an advisor but was merely, for example, giving a “summary” of “options” or “commenting” were disingenuous and should not be accepted.
The emails and other communications I have described show that Whitton was more than a mere commentator in respect of Spencer’s and Perovich’s plans and proposals prior to being appointed as trustee. He advised them as to how they could go about removing the former trustees. Whitton had agreed to being appointed as trustee of the proposed compositions, or at least raised no objection to being appointed, and had advised them about the form of their proposals for compositions. Whitton was included in emails between Spencer, Perovich and their counsel and, together with their counsel, was treated as an advisor and was asked for and provided advice. He did act as their advisor in respect of the removal of the former trustees, the proposed compositions and strategy (for example, in his emails of 15 and 24 September 2010). In respect of some requests for advice, it is not clear whether he provided advice, but he certainly expressed his willingness to do so (for example, in his emails of 5 August 2010 and 24 September 2010).
The applicants rely on Whitton’s answer to questions asked of him by Tony Stocks, a director of Mango Boulevard, in the meeting on 5 November 2010. Stocks asked, “[H]ow do you know Mr Spencer and Ms Perovich?”
Whitton responded:
I think creditors, who were present at the meeting in 2008 were aware, that I considered and provide a consent at that time. Obviously on that occasion I met Mr Spencer and Ms Perovich. Mr Conomos, who is a creditor, again requested me to provide a consent for this meeting. I have again met Mr Spencer and Ms Perovich here. Other than that, I don’t know them at all.
The applicants submit that this answer significantly understated Whitton’s knowledge of and dealings with Spencer and Perovich. Under cross-examination, Whitton stated that he intended to convey that he had never physically met Spencer and Perovich other than at creditors’ meetings held in 2008 and 2010. However, that was not what he said to Stocks. Even allowing for the likelihood that his response was not captured strictly verbatim, in giving his answer Whitton understated the extent of his knowledge of and dealings with Spencer and Perovich.
Clyne J concluded at 205:
There is probably no reason why, when a trustee who is honestly and properly carrying out his duties, should not be removed from his office if the creditors so desire, but, when creditors make improper and unfounded allegations against a trustee to secure or justify his removal, and the conduct of these same creditors leads to the strongest suspicions that their reason for having the trustee removed is a desire to help an important shareholder of the company which is a creditor, the Court should interfere.
In Dare v Doolan [2004] FCA 461, Cooper J said:
[12]Prima facie, the Act empowers the creditors to remove a trustee in circumstances which appear to the creditors to justify such a removal. The power to remove is not preconditioned upon there being any misconduct on the part of the trustee. If, for example, relations between the trustee and the creditors have broken down for whatever reason, that will be sufficient. Where a trustee has lost the confidence of creditors and those creditors seek the removal of the trustee, he or she should not resist removal unless there are proper reasons to do so: Adsett v Berlouis (1992) 109 ALR 100 at 112.
[13]Ordinarily, the Court would not interfere with an exercise of the power under s 181 to remove a trustee unless a good cause is shown for its interference: Re Crawford Ex parte The Trustee (1943) 13 ABC 201 at 202; Macks v Ardalich [1999] FCA 679 at [22] - [23].
The applicants submit that good cause is shown for the setting aside of the resolution of creditors where their purpose was to replace the former trustees with a trustee who would object to the discharge of the bankrupts from bankruptcy in order to extend the period of bankruptcy and allow the bankrupts to put compositions to the creditors.
The applicants submit that such a purpose is an improper purpose. The question of whether it is an improper purpose depends on whether it is an improper purpose for a trustee to object in order to extend the periods of bankruptcy so as to allow bankrupts to propose compositions with their creditors. I have already rejected that argument. This is an additional reason why the applicants’ application for relief under s 30(1) cannot succeed.
STANDING
The applicants allege that they are each, within s 178(1), “a creditor” and “any other person…affected by an act, omission or decision of the trustee”.
The applicants allege that Mango Boulevard is a creditor of the bankrupt estates of Spencer and Perovich because:
(a)On 15 June 2007, the Supreme Court ordered that Spencer and Perovich pay Mango Boulevard’s costs fixed in the amount of $9,880.90, and that debt is the subject of proofs of debt.
(b)On 21 November 2006 and 20 March 2007, the Supreme Court ordered that Spencer and Perovich pay Mango Boulevard’s costs on the standard basis, and on 26 February 2007 and 3 April 2007 that they pay Mango Boulevard’s costs on an indemnity basis. Those costs have not been assessed, but are the subject of proofs of debt for the amount of $23,258.65.
(c)On 22 September 2006, the Supreme Court ordered that Spencer and Perovich pay Mango Boulevard’s costs. Those costs have not yet been formally quantified and are not the subject of a proof of debt.
(d)Mango Boulevard has a claim against Spencer and Perovich arising from an undertaking as to damages which they gave to the Supreme Court on 2 June 2006, which is yet to be the subject of a proof of debt.
(e)Mango Boulevard has a claim against Spencer and Perovich for damages for breaches of the Shareholders Deed, the breach being that Spencer and Perovich became bankrupt, which claim is yet to be subject to a proof of debt.
The applicants allege that BMD Holdings is a creditor because on 7 December 2006 the Federal Court ordered that Spencer and Perovich pay BMD Holdings’ costs. Those costs were taxed and allowed in the amount of $47,075. That debt is the subject of a proof of debt submitted by BMD Holdings.
Spencer and Perovich deny the applicants are creditors. They allege that while the extent of the applicants’ debts claimed to be proved in the bankruptcies totals $80,214.55, those companies owe Perovich and Mio Art as trustee for the Spencer Family Trust amounts well in excess of $1 million under the Share Sale Agreement. The question of whether any such amounts are owed is the subject of proceedings in the Supreme Court and a private arbitration. Spencer and Perovich assert that, pursuant to s 86(1) of the Bankruptcy Act, the applicants may only claim the amounts they are owed less deduction of the amounts that they owe the bankrupt estates. They argue that the applicants have no claims against the estates.
The applicants submit that there can be no question of any set-off arising in relation to Spencer. Spencer is personally liable for the costs orders. On the other hand, the claim against the applicants in the Supreme Court is asserted by Mio Art as trustees of the Spencer Family Trust.
Section 86 of the Bankruptcy Act provides:
(1)Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy:
(a)an account shall be taken of what is due from the one party to the other in respect of those mutual dealings;
(b)the sum due from the one party shall be set off against any sum due from the other party; and
(c)only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be.
I accept the applicants’ submission. The costs orders made against Spencer were made in his capacity as trustee of the Spencer Family Trust, but he is personally liable for those costs (although he has a right of indemnity against the Spencer Family Trust). Spencer has been replaced as trustee of the Spencer Family Trust by Mio Art. Any order that may be made by the Supreme Court will be in favour of Mio Art, not Spencer. For s 86(1) to apply, the credits, the debts and the claims must be between the same persons: Gye v McIntyre (1991) 171 CLR 609 at 623. Therefore, no set-off is available.
The applicants argue that any claim by Perovich for monies owing under the Share Sale Agreement is not yet a liability. There has been no determination as to any amount due from the applicants to Perovich. I accept that it is not presently established that there is any “sum due” from the applicants to Perovich for the purposes of s 86(1).
The applicants are creditors of each of the estates of Spencer and Perovich for the purposes of s 178(1). As they are creditors, they also have standing for the purposes of their application under s 30(1).
I will briefly consider the applicants’ claim to have standing under s 178(1) on the basis that they are persons affected by the trustee’s decision. The substance of their argument is that but for the objection to discharge, they could have avoided once and for all the possibility of the shares in Kinsella Heights reverting to Perovich if her proposal for a composition succeeds, and could have avoided the possibility of having to pursue commercial negotiations with Perovich to resolve the proceedings, rather than with her trustee in bankruptcy.
In Allan v Transurban City Link Ltd (2001) 208 CLR 167, the High Court considered whether the appellant was a “person affected” within the statute under consideration. Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ said:
16In Re McHattan and Collector of Customs (NSW), Brennan J stated that “[a]cross the pool of sundry interest, the ripples of affection may widely extend”. However, as Davies J pointed out in Alphapharm Pty Ltd v SmithKline Beecham (Australia) Pty Ltd, Brennan J “did not propose that any ripple of affection would be sufficient to support an interest”…The starting point, as indicated by several authorities in the Full Court of the Federal Court, is the construction of the Authority Act with regard to its subject, scope and purpose.
17Transurban correctly submitted that the phrase in s 119(1) of the Authority Act “who is affected by a reviewable decision” has an ambulatory operation. What serves to identify a person as one affected by a reviewable decision will vary having regard to the nature of the reviewable decision itself.
The fact that s 178(1) gives a right to the bankrupt, a creditor or “any other person [who] is affected” by an act, omission or decision of the trustee indicates that there may be parties other than the bankrupt or a creditor who are sufficiently affected to have standing to seek review of the trustee’s decision.
The applicants’ argument is, in substance, that it is affected as a potential debtor of the bankrupts’ estates. The affection claimed is to the effect that it will be more difficult to negotiate a commercial resolution with Perovich than the trustee. I do not think that the ripples of affection extend so far as to give the applicants standing on the basis that they prefer to negotiate with the trustee, rather than Perovich.
Until this point I have considered the question of standing on the basis of the evidence led and the submissions put at the trial. However, on 22 October 2015 the first respondent applied to reopen his case. That application was supported by Spencer and Perovich.
Whitton wishes to lead evidence which is said to demonstrate that the applicants are not creditors. The evidence concerns events that have occurred since the trial.
Whitton deposes that he caused a creditor’s statutory demand to be served on BMD Holdings. It is not clear when the statutory demand was served, but it must have been after 22 May 2015. The statutory demand demanded an amount of $602,728 said to payable to Perovich under the Share Sale Agreement, less certain set-offs. The set-offs totalled $80,214.55. That amount consisted of $9,880.90 in respect of the costs order made on 15 June 2007, $47,075 in respect of the costs order made on 7 December 2006 and $23,258.65 in respect of the costs arising from orders made on 21 November 2006 and 26 February, 20 March and 3 April 2007. Those amounts are the subject of proofs of debt. Those amounts were claimed jointly and severally in both bankrupt estates.
On 22 July 2015, solicitors acting for BMD Holdings wrote to Whitton concerning the creditor’s statutory demand. The letter is headed “Without prejudice save as to costs”, but the applicants made no objection to the letter being admitted into evidence for the purposes of the application for reopening. That letter indicates that BMD Holdings was prepared to make a payment into Court in return for Whitton withdrawing the statutory demand. BMD Holdings offered to pay $428,879 less the set-offs of $80,214.55, an amount of $348,664.45, in return for Whitton agreeing to withdraw the demand.
The solicitor’s letter notes that Mango Boulevard and BMD Holdings had received notices of assignment in relation to certain of Perovich’s rights to receive certain amounts under the Share Sale Agreement. The letter notes that Whitton would be unable to provide any valid discharge in view of those notices of assignments. Accordingly, it was proposed that the amount of $348,664.45 be paid into Court. The solicitor’s letter also says that “[f]or the avoidance of doubt, our clients do not accept that such a payment into court would extinguish their claims in the bankrupts’ estates.”
In a further letter dated 10 August 2015, BMD Holdings’ solicitors state:
BMD Holdings accepts that it is liable to pay $348,664.45 of the amount demanded. However, in light of the various assignments entered into by Ms Perovich of certain of her rights to payment under the Share Sale Agreement, our client does not know whether to make payment to you or one or more of the assignees.
On 26 August 2015, BMD Holdings paid the $348,664.45 into the trust account of the solicitors acting for Whitton.
The respondents submit that s 86(1) of the Bankruptcy Act operates such that there is no amount that may now be claimed in the bankruptcy by the applicants. They submit that, therefore, the applicants are not creditors and have no standing to bring this application.
The applicants oppose the application for reopening. They claim that they remain creditors of the bankrupt estates for a number of reasons.
Firstly, the applicants argue that they do not owe Perovich or her estate any amount under the Share Sale Agreement. They point to the notices of assignments they have received. They also note their solicitor’s qualification that the applicants did not accept that the payment they proposed would extinguish their claims in the bankrupts’ estates. They submit that the correspondence shows that the payment made into Whitton’s solicitor’s trust account was simply a commercial decision made in response to the creditor’s statutory demand, rather than amounting to an admission of any kind.
Secondly, the applicants submit that they have another debt provable in the bankruptcy. On 3 April 2007, the Supreme Court ordered that unless Spencer and Perovich complied with certain orders by 4 pm on 27 April 2007, there would be an order that Spencer and Perovich pay Mango Boulevard’s costs to be assessed on the standard basis. Those costs have not yet been the subject of any proof of debt. The applicants’ solicitors estimate that the amount of the costs will be at least $16,000. The applicants assert that the costs order is a debt or liability to which the bankrupts were subject at the date of the bankruptcy within s 82(1) and is provable in the bankruptcies.
Thirdly, the applicants claim that the fact that Spencer and Perovich became bankrupt in August 2007 meant that they were in breach of a Shareholder’s Deed between Spencer, Perovich, Mango Boulevard and Kinsella Heights. Any damages arising from that breach have not yet been quantified. They argue that such damages are a liability provable in the bankruptcies.
In Ample Source International Ltd v Bonython Metals Group Pty Ltd(No 6) (2011) 285 ALR 488, Robertson J succinctly summarised the principles to be applied by the Federal Court in considering an application for leave to reopen:
[355] Leave to reopen needs to be considered by reference to the Full Court decision in Londish v Gulf Pacific Pty Ltd (1993) 45 FCR 128 at 138–9; 117 ALR 361 at 372 (Londish). The threshold is lower than that which applies after the entry of judgment. If there was no deliberate decision not to call material, the primary consideration is embarrassment or prejudice to the other side: Smith v New South Wales Bar Association (No 2) (1992) 176 CLR 256 at 266–7; 108 ALR 55 at 62. The essential principle is that the court should do justice as between the parties. Within that concept, of course, must be the cogency or relevance of the material sought to be adduced on the application to reopen. There is reference in Londish to applications to amend and therefore the approach in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; 258 ALR 14; [2009] HCA 27 must now inform the principle.
[356] In my view, the approach taken in other courts, examples of which are Reid v Brett [2005] VSC 18 and EB v CT (No 2) [2008] QSC 306, relied on by Ample Source, is inconsistent with the principle in relation to reopening as articulated in Londish. I must follow the authority in this court and I apply Londish.
It is also necessary to take into account ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth).
There is no question of any deliberate decision not to call the evidence that the first respondent now seeks to adduce. The evidence concerns events which occurred after judgment was reserved.
However, the first respondent has delayed in bringing this application. The applicants paid the $348,864.45 on 26 August 2015. Whitton has not provided an adequate explanation for waiting nearly two months before applying to reopen his case.
The primary issues are prejudice to the applicants, how that prejudice can be ameliorated and the just resolution of the dispute.
If leave to reopen were granted, the first step would be for Whitton to further amend his defence. The applicants would have to be given an opportunity to further amend their statement of claim or to further amend their reply. The applicants would also have to be given the opportunity to call further evidence. There are substantial questions of law and fact involved in the determination of the argument that Whitton wishes to raise. The applicants have indicated that it is likely to be some months before there could be a further hearing.
Spencer and Perovich will be automatically discharged from bankruptcy on 14 November 2015. After that date, it will be too late for them to put their proposed compositions to the creditors. Although they support the first respondent’s application for reopening, I understand them to oppose any delay in conclusion of the proceeding.
The findings I have made so far concerning the principal proceeding require that it must be dismissed. The proposed new evidence would not alter that outcome.
In these circumstances, it would not be in the interests of justice to allow Whitton to reopen his case.
DISCRETION
The respondents submit that even if I accept the applicants’ submissions as to improper purpose, I should exercise the Court’s discretion under ss 30(1) and 178(1) against granting the applicants any relief. They raise a number of factors in support of their submissions.
Having rejected the applicants’ submissions, I have found that the exercise of considering the exercise of the discretion on the fictitious premise that I accepted the applicants’ submissions is simply too artificial and difficult to complete. I do not propose to embark further on that exercise.
SUMMARY
I find that Whitton did not lodge objections to the discharge of Spencer and Perovich from bankruptcy for an improper purpose.
I find that the applicants have not proved that the creditors who voted in favour of the resolutions put at the meeting on 5 November 2010 did so for an improper purpose.
I decline to allow Whitton to reopen his case.
The application will be dismissed.
I will set aside Order 1 of the orders made by Logan J on 29 April 2011. I will also set aside Order 1 of the orders I made on 22 October 2015. I set aside those orders because there is no longer any basis for Whitton to be prevented from preparing for, calling and holding any meeting of creditors under s 73 of the Bankruptcy Act.
I will hear the parties as to costs.
I certify that the preceding two hundred and forty-five (245) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rangiah. Associate:
Dated: 2 November 2015
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