McMahon, John Keith EX PARTE News Ltd (T/as Newsnet)

[1997] FCA 8

IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY )       No NP 2065 of 1995
GENERAL DIVISION                 )

BETWEEN:

JOHN KEITH McMAHON
  Debtor

EX PARTE:

NEWS LIMITED (trading as NEWSNET)
  Creditor

Coram:Lindgren J

Place:    Sydney

Date:10 January 1997

REASONS FOR JUDGMENT
  (ex temporare)

INTRODUCTION
John Keith McMahon ("Mr McMahon") applies for an order setting aside a sequestration order made against his estate on 20 December 1996, or, in the alternative, for an order that his bankruptcy be annulled.  It has been common ground on the hearing that, by reason of sub-s 37 (2) of the Bankruptcy Act 1966 ("the Act"), the Court does not have power to set aside the sequestration order, and the application has proceeded as one for annulment. When I made the sequestration order on 20 December 1996, I reserved liberty for Mr McMahon to apply for an order setting it aside against the possibility that he might wish to argue that the Court had power to make such an order, but upon my raising the issue on the hearing he accepted that that power is not available.

FACTS
The matter has had a lengthy history and has been the subject of two judgments already: one of Moore J on 29 November 1996, and the other of myself on 20 December 1996. 

First, I will give an account of the background facts.  On 23 March 1994, the petitioning creditor, News Limited ("News") obtained a judgment in the Local Court against Mr McMahon for $10,272.72.  On 16 May 1995, News issued a bankruptcy notice.  On 18 October 1995, the bankruptcy notice was deemed served (I need not deal with the background to its being "deemed" served).  The bankruptcy notice required payment within 28 days, that is, by 15 November 1995.  Payment was not made. A creditor's petition by News dated 30 November 1995, was presented on 5 December 1995 with a return date of 21 February 1996. 

Also on 5 December 1995, Mr McMahon signed an authority under s 188 of the Act in favour of Robert Molesworth Cole ("Mr Cole") authorising him to convene a meeting of Mr McMahon's creditors. On 6 December, Mr Cole despatched a notice of meeting to the creditors. The meeting was convened for 20 December.

The proposal of Mr McMahon was for a deed of arrangement under which he would pay $10,000 by 29 February 1996, and assign his divisible property to the proposed trustee of the deed.  His assets comprised household furniture and effects said to be of a value of $4,000, and works of art said to be of a value of $10,000.  Of course, the household furniture and effects would not form part of Mr McMahon's divisible property in a bankruptcy and would not form part of the assets the subject of the proposed assignment.  Thus, in effect, the proposal would have the effect that the works of art would be assigned to the trustee together with an additional sum of $10,000, which would not have been available to the creditors in a bankruptcy, and which was to be provided by a friend or friends of Mr McMahon - a total of $20,000.

By a letter dated 4 January 1996, Mr Cole informed creditors of the acceptance at the meeting of creditors of the proposal and repeated its terms.  Pursuant to that notification News forwarded proof of its debt to Mr Cole on 24 January.  When the creditor's petition came before the Court on 21 February, it was adjourned to 20 March.

As noted earlier, the date for payment of the sum of $10,000 was 29 February.  It was not paid on that date.  Notwithstanding this, on 8 March, Mr Cole wrote to Sally Nash & Co, the solicitors for News, advising that he had received the sum of $10,000.  On 20 March, the adjourned date for New's petition, on the application of News, Registrar Sexton ordered that the petition be dismissed and that the costs of News, as petitioning creditor, be paid by the trustee of the deed of arrangement as if a sequestration order had been made on the petition.
On 1 April, Mr Cole wrote to Sally Nash & Co advising them that the cheque for the sum of $10,000 had been dishonoured.  In a significant statement in the letter, Mr Cole advised News's solicitors that Mr McMahon had, "on a number of occasions", undertaken to rectify the position but that he had on all occasions failed to do so.  What this seems to mean is that, the cheque having been dishonoured, Mr McMahon was given opportunities by Mr Cole to remedy the situation and had promised to do so but had failed to provide the funds necessary to enable the cheque to be honoured or otherwise to pay the sum of $10,000.  On 30 April, News's costs, referred to in the Registrar's order dated 20 March, were taxed and allowed at $2,525.74. 

In the light of the intelligence conveyed by Mr Cole's letter of 1 April, to which I have referred, on 13 May News filed an application for an order terminating the deed of arrangement, an order setting aside the order dismissing its petition, and a sequestration order against Mr McMahon's estate. 

On 14 June, Tisher Liner & Co (Mr Goldstone), the solicitors for Mr McMahon, informed Sally Nash & Co that the sum of $10,000 had been forwarded to Mr Cole.  On 17 June, Mr Cole informed Sally Nash & Co that the sum of $10,000 had now been received by him and was held by him.

On 18 June, Mr McMahon appeared in person in response to News's application and successfully sought an adjournment of the hearing to 21 August.  On 21 August, there was no appearance for Mr McMahon and the hearing of the application proceeded ex parte.  A week later, Mr McMahon appeared and said that he had misunderstood the hearing date and thought that the correct date was 28 August.  The matter was "adjourned" to 11 November, when the hearing before Moore J took place.  

His Honour reserved his decision and granted leave to Mr A Goldstone of Tisher Liner and Company to file written submissions on one point, namely, whether the life of the creditor's petition should be extended.  However, the solicitors did more than that; they forwarded to the Associate to Moore J an affidavit, apparently thinking that somehow that affidavit could become evidence in the case.  Of course, his Honour did not treat it as evidence and dealt with it at page 6 of his Reasons for Judgment.  His Honour observed that the opportunity for Mr McMahon to be called and cross-examined had passed.  He added that, in any event, the affidavit added nothing which was material. 

One would have thought that this treatment of the affidavit would have made it clear to Tisher Liner & Co that it was inappropriate to seek to lead evidence on behalf of Mr McMahon by forwarding it to a Judge's Chambers.  Unfortunately, as will be seen, it did not have that effect.

Moore J delivered Reasons for Judgment on 29 November 1996.  His Honour observed that sub-s 236 (2) authorised the making of an order terminating a deed on the ground of breach of the terms of the deed only if the Court was satisfied that it would be in the interests of the creditors to terminate it. 

I need not give a detailed account of his Honour's Reasons for Judgment - they speak for themselves. His Honour noted that Mr McMahon's liabilities amounted to $471,265, and that the arrangement embodied in the deed would give unsecured creditors 2.0-2.5 cents in the dollar. At page 8 of his Reasons for Judgment, his Honour referred to the report of Mr Cole as controlling trustee under s 189A of the Act and said that he did not view Mr Cole's report "uncritically". His Honour noted, for example, Mr Cole's observation that Mr McMahon had not lodged a tax return for the previous three years but had provided no explanation as to why it was that no liability might arise under the Income Tax Assessment Act 1936. His Honour observed that there was no allowance made for such a liability. There were other matters which gave his Honour cause for concern in respect of Mr Cole's report.

At page 10, Moore J said that, in his opinion, the affairs of Mr McMahon warranted further investigation and that further investigation would occur if his Honour were immediately to make a summary sequestration order under sub-s 236 (2) of the Act. However, he refrained from doing so. Although he terminated the deed, he did not make a sequestration order because he was not satisfied at that stage that Mr McMahon should be deprived of a further opportunity of avoiding bankruptcy by coming to an arrangement acceptable to his creditors which would have that effect.

At page 12, his Honour said that it would be open to Mr McMahon to make another appointment under s 188, and that if that occurred there would be a further report created under s 189A which would require "further investigation of the affairs of McMahon". Then his Honour added:

"Alternatively, News Ltd may press for a sequestration order under s 52 based on its petition of 5 December 1995 and, if made, further investigation would take place in that context."

In the event, his Honour terminated the deed and extended the life of the creditor's petition until 4 May 1997, but did not make a sequestration order. 

It seems clear that his Honour was not of the view that Mr McMahon should in any event have the opportunity of approaching creditors again.  On the other hand, his Honour seems to have been of the view that if there was nothing beyond the matters before him, Mr McMahon should have that opportunity.

Following the hearing, News had its petition re-listed, and on 10 December 1996, Mr McMahon signed a further authority under s 188 of the Act, this time in favour of David J Lofthouse of
Mann Judd, Chartered Accountants, as controlling trustee.  The arrangement now proposed was for payment of a sum of $20,000 instead of the original $10,000.  As well, there was to be an assignment to the trustee of Mr McMahon's divisible property.  A sum of $10,000 was to be paid within seven days of execution of the authority, that is to say, within seven days of 10 December 1996, and the balance of $10,000 was to be paid within 60 days of the date of the meeting.  It was a condition that four creditors, Rob Simon, David Robinson, Blair Fry, and Garry Fowler, should not participate in any distribution to creditors.  The amount of the unsecured creditors had increased by $12,000 by reason of the fact that Mr Cole's fees were said to be of that order.

The creditor's petition came before me on 17 December 1996 as Duty Judge.  There was no appearance for Mr McMahon.  But there was on the Court file a faxed letter dated 11 December 1996 from Tisher Liner & Co (Mr Goldstone) to the Associate to Moore J.  The Associate had replied to Mr Goldstone on the same day, 11 December 1996, correcting Mr Goldstone's impression as to the hearing date, and making it clear to him that the creditor's petition was for hearing on 17 December 1996.

On 17 December 1996, I adjourned the matter to 20 December 1996, on the basis that Mr McMahon would be advised by the solicitors for News, as he was, of the need to file evidence in proper form if he wished to oppose the making of a sequestration order.  Again, however, Tisher Liner & Co did not see fit to file anything.  On this occasion they faxed a letter and documents to me.  The letter was dated 19 December 1996. 

The hearing took place on 20 December 1996. I delivered oral Reasons for Judgment on that date.  There was no appearance by or for Mr McMahon.  Obviously, there was no evidence read or led by or for him and there were no submissions made by or for him.  I made a sequestration order and reserved the leave for Mr McMahon to apply in the respect to which I referred earlier. 

THE PRESENT HEARING AND REASONING
I turn now to what has transpired on the hearing of Mr McMahon's present application for annulment.  The hearing took place on 8 January 1997.  It is fortunate, in view of the past history of the matter, that Mr McMahon was represented by different solicitors, namely Parish Patience.  Mr Golledge of that firm, who appeared for Mr McMahon, has read affidavit evidence and said everything that could be said on his client's behalf.

The evidence before me on 8 January 1997 showed that Mr Lofthouse had allowed the meeting of creditors to take place on 2 January 1997. This was, in the circumstances, an entirely proper course to take. Mr Lofthouse's notice to creditors dated 23 December 1996 pointed out to them that a sequestration order had been made on 20 December 1996, the effect of which was, pursuant to sub-s 189 (1) of the Act, to terminate his controlling trusteeship. He pointed out that anything which might occur at the meeting might be ineffective. Nonetheless, it was helpful that, for what it was worth, the meeting should take place and that evidence of what occurred at it should be given. Mr Golledge does not rely upon the meeting as an effective meeting of creditors pursuant to the Act, but as evidence of the views of creditors in favour of the arrangement now proposed.

Nothing which I say about the convening of the meeting, including my use of terminology such as "authority under s 188 of the Act", "controlling trustee" or "special resolution", is intended to express a decision or even a view as to the validity of what transpired.

Because of the history of the matter, costs had escalated and, in addition to Mr Cole's fees of some $12,000 to which I have already referred, Sally Nash & Co's costs were said to have risen to an amount of some $10,000.  The effect of all of this would have been to make Mr McMahon's offer of even $20,000 less appealing.  Accordingly, on the day of the meeting, 2 January, he increased yet further the amount that he was prepared to offer creditors to $30,000.  This was recorded in minutes of the meeting.  The $30,000 was apparently to come from "friends" who were not identified in the minutes of the meeting, but who were, as I will note below, identified in the course of cross‑examination before me.

I do not think it necessary to set out who all the creditors were.  Without Mr Cole's $12,000, they totalled the sum of $471,265.00 mentioned earlier, and with Mr Cole's $12,000 they totalled $483,265.00.  A condition of the arrangement proposed was that the following creditors would not participate:

Rob Simon              $10,600.00
     David Robinson          25,000.00
     Blair Fry               29,989.00
     Garry Fowler            23,000.00

TOTAL$88,589.00

==========

Mr Lofthouse, as the new controlling trustee, estimated his fees as trustee of the deed of arrangement at $7,000.  Accordingly, the effect of the proposal can be set out in this way. 

Creditors other than the following priority    $471,265
       creditors:

Mr Cole   $12,000
     Sally Nash & Co   $10,000

Mr Lofthouse    $7,000

$500,265
     Less

Rob Simon  $10,600

David Robinson  $25,000

Blair Fry$29,989

Garry Fowler   $23,000
   $88,589
     Participating creditors  $411,676
  ========

The amount to be made available would be the sum of $30,000 to come from Mr McMahon's friends, and the amount of $10,000 from
art works, making a total of $40,000.  Of the total amount of $500,265.00, an amount of $29,000 for Mr Cole, Sally Nash & Co and Mr Lofthouse would have priority.  Accordingly, the sum of $29,000 is to be deducted from both the sum of $411,676.00, and from the sum of $40,000, leaving an amount of $11,000 which was to be available to be divided among creditors of $392,676.00, giving an amount of some 2.8 cents in the dollar.

At the meeting of creditors on 2 January 1997, apart from a Mr Richard Cauchi of Mr Lofthouse's office, Mr McMahon, and a Mr I Glavas of Mann Judd, apparently only one other person was present, namely Patricia Meldrum who held a proxy for Robert Simon.  Apparently Ms Meldrum is a longstanding friend of Mr McMahon: indeed, he identified her as a person who has agreed to contribute $8,000 of the total of $30,000 to come from "friends".  There was a clear majority in favour of acceptance of the arrangement, and, subject to the caution which of course Mr Lofthouse had sounded in his notice to creditors, a "special resolution" was passed accepting the proposal, in the sense of requiring Mr McMahon to execute a deed of arrangement in accordance with his amended proposal dated 2 January 1997, and appointing Mr Lofthouse as trustee of the deed of arrangement.  Other resolutions were also passed, but these need not be described.

Mr Lofthouse's report to creditors, in so far as it had included a recommendation, had understandably been cautious.  He had expressed his opinion as follows:

"My opinion is that the proposal may provide for a greater return to creditors than if the debtor were to be made bankrupt." (underlining supplied)

I think that it is clear, and indeed the contrary was not suggested on behalf of News, that a bankruptcy would give the creditors nothing.  However, the mere fact that the mathematics show that a deed of arrangement will give them something does not dictate the result of the present application since there are public interest considerations to be borne in mind. 

Mr Golledge submits that my approach should be to consider his client's application for annulment as if I were dealing with News's application which was before me on 20 December last. Mr McMahon swore an affidavit explaining that he had not appeared on that date because Tisher Liner & Co had given him to understand that he need not appear in view of the fact that submissions were being forwarded to the Judge's Associate. Without deciding that the approach described by Mr Golledge is correct, I am able to adopt it without its making any difference to the outcome of Mr McMahon's application.  Of course, Mr Golledge's submissions nonetheless contemplate that I take into account the evidence which has emerged since 20 December.

The first matter of concern to me makes it important to recall that the present proposal is made against the background which I described earlier, and, in particular, the default which
occurred under the original deed of arrangement.  One would expect that the evidence would be directed to establishing, as clearly as possible, that the funds called for by the new arrangement would definitely be provided.  Of the sum of $30,000, apparently $10,000 has in fact been made available, being the sum of $10,000 which was provided under the original arrangement. 

In cross-examination Mr McMahon mentioned the names of friends who, he said, would provide the further moneys.  He said that they were friends, not business associates.  He was asked whether these people had undertaken to provide the funds as "gifts" to him and his first answer was that they were to be gifts "in the short term", the implication being, I suppose, that ultimately he would be expected to repay.  However, later, he said that there was to be no obligation upon him to repay. 

Notwithstanding the previous history of default by Mr McMahon, there is no evidence from any of the friends in the form of a document.  It may be said that Ms Meldrum's participation in the meeting indicates her support for the proposal but the minutes of the meeting do not record that it was stated that she had agreed to give $8,000.  Moreover, it may be that the amount to be provided by Ms Meldrum forms part of the sum of $10,000 which has in fact already been provided.  There is no evidence of the details of the commitments, if any, made by the friends.  The immediate readiness of Mr McMahon to increase from $20,000 to $30,000 the amount of his offer on the very day of the meeting gives rise to particular cause for misgiving in the present context.  Moreover, the manner and terms in which Mr McMahon gave evidence of the source of the funds did not inspire confidence. 

The point of all this is that I find the evidence unconvincing.  I am not persuaded that firm promises have been made by the persons whose names were mentioned by Mr McMahon in evidence to make gifts in the sums mentioned by him.  It is, of course, no answer to say that if Mr McMahon again defaults, the opportunity will arise for a creditor to apply for termination of the deed, and so no harm will be done.  Harm would be done in that the applying creditor would be put to cost and trouble.  Now is the time for Mr McMahon to establish by clear evidence that this time the deed of arrangement will be implemented without default on his part.

A second matter concerns the creditors who are not to participate.  It is put, correctly, by Mr Golledge on behalf of Mr McMahon, that it would be a term of the deed of arrangement that it is a condition precedent that those four creditors consent not to participate in any dividend.  Accordingly, as he says, if that consent were not forthcoming, the deed of arrangement would not proceed.  But again I do not think that this submission meets the point.  Although I do not suggest that this is the present case, it would be possible, consistently with the submission, for a debtor to dream up any arrangement incorporating a condition that say 50 per cent in value of his creditors consent not to participate in any dividend, although the debtor had no evidence whatever to support an expectation that the condition would be satisfied.  It would be no answer in such a case simply to say that in that event, no harm would be done.  I think that on the present application I am entitled to expect, particularly in the light of the abortive earlier deed of arrangement, evidence that these particular four creditors have agreed not to participate in any dividend.

A third aspect of the matter which is less than satisfactory relates to taxation.  As noted earlier, apparently Mr McMahon has not filed income tax returns for three years.  He gave evidence before me that he had now instructed a firm of accountants to approach the Australian Taxation Office and that, apparently, that firm was in contact with the Australian Taxation Office as recently as the day before the hearing.  Again, one would have thought that this matter would be dealt with quite specifically in evidence, particularly in view of the fact that it had been referred to in the Reasons for Judgment of Moore J, with a view to establishing that there is no liability for income tax.  I do not think that the oral evidence led by Mr Golledge from Mr McMahon in this respect goes far enough.

A fourth matter concerns the fact that Mr McMahon was a director of some nine companies, all of which, with possibly one exception, have been dissolved. This was not known to Moore J, since the s 189A report of the earlier controlling trustee, Mr Cole, had referred to only two of the companies. It may be true, as Mr Golledge submits, that the present controlling trustee, Mr Lofthouse, has prepared a report which has revealed more than what might be revealed by some controlling trustees. But I cannot overlook the fact that Mr McMahon has been a director of the nine companies mentioned on page 4 of Mr Lofthouse's report, all of which, with perhaps one exception, have been dissolved. It does seem to me that this at least raises a question of the public interest which would be best explored in a bankruptcy.

A fifth matter to which I wish to refer is s 73 of the Act, although this is not a consideration in the same category as those which I have already mentioned. Under s 73 it is possible, following a bankruptcy, for a bankrupt to make a proposal for a scheme of arrangement of his affairs with his creditors. If the friends who wish to stand behind Mr McMahon do in fact come up with the money and the creditors were so minded, advantage could be taken of s 73. I do not suggest, of course, that that outcome would be as welcome from Mr McMahon's view point as a private arrangement under Part X, but it is a matter to be taken into account.

All things considered, if I had been looking at the matter on 20 December in the light of all the evidence which has now been led, I would still have made the sequestration order.  It follows that the present application by Mr McMahon should be dismissed.

COSTS
The question of the costs of Mr McMahon's application arises.  When the matter was being argued I raised the question of the appropriateness of an order that Tisher Liner & Co should pay the costs, or some of the costs.  At that time Mr Johnson of counsel, who appeared for News, said that he had no instructions to seek such an order.  Again today, apparently because of the absence of the responsible officer at News, Mr Johnson lacks instructions to make any submission in that respect. 

If I were minded to make an order that Mr McMahon's former solicitors pay any of the costs, of course that order would not be made today or at all until the solicitors were given an opportunity to be heard.  Tisher Liner & Co would no doubt submit, as one of their letters said, that Mr McMahon had had difficulty in funding an appearance.  It should be said, however, without equivocation, that it is unacceptable for a legal practitioner to seek to get in evidence and to make a submission without prior leave of the Court, by forwarding a document to a Judge's chambers.  In the present case, the solicitors had not even sought the consent of the opposing party.  Any order would relate only to part of News's costs, namely the part thrown away as a result of the inappropriate forwarding of material to a Judge's chambers and consequential delays in the final hearing and determination of the proceeding.  In all the circumstances, I have decided against making an order that the solicitors pay.

ORDERS
The orders of the Court are as follows:

1. Order that the motion brought by notice of motion filed by the Bankrupt on 6 January 1997 be dismissed.

1. Order that the petitioning creditor's costs of its application filed on 13 May 1996 and decided by Moore J on 29 November 1996, of its application decided by Lindgren J on 20 December 1996 and of the Bankrupt's motion referred to in Order 1 above be part of its costs as petitioning creditor of obtaining the sequestration order.

I certify that this and the preceding 18 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.

Associate:

Dated:16 January 1997

Heard:       8 January 1997

Place:       Sydney

Decision:     10 January 1997

Appearances:  Mr S M Golledge of Parish Patience appeared for the Bankrupt.

Mr J T Johnson, instructed by Sally Nash & Co, appeared for the petitioning creditor.rosie01