Mendelson, Roger Glave v Lelleton, Anne
[1996] FCA 953
•6 NOVEMBER 1996
CATCHWORDS
BANKRUPTCY - composition under Part X of the Bankruptcy Act 1966 - whether composition was accepted by a special resolution of creditors as required by s 204 - proper inference to be drawn as to whether creditor had executed instrument of proxy satisfying sub-s 200 (3A) - whether composition should be declared void pursuant to sub-s 222 (2) - whether sequestration order should be made against joint and separate estates of debtors pursuant to sub-s 222 (7) - whether composition should be set aside and sequestration order made pursuant to sub-s 239 (2) - consideration of factors relevant to exercise of discretion whether to make sequestration order.
Bankruptcy Act 1966 (Cth) ss 198, 200, 204, 222, 239
ROGER GLAVE MENDELSON & ANOR v ANNE LELLETON & ORS
No NX 46 of 1995
Lindgren J
Sydney
6 November 1996
IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION )
BANKRUPTCY DISTRICT OF THE ) No NX 46 of 1995
STATE OF NEW SOUTH WALES )
BETWEEN:
ROGER GLAVE MENDELSON and MURRAY BURTON ROUND
Applicants
AND:
ANNE LELLETON, MARIA LELLETON, ANGELA LELLETON and GEOFFREY DAVID McDONALD
Respondents
CORAM:Lindgren J
PLACE:Sydney
DATE:6 November 1996
MINUTE OF ORDERS
THE COURT ORDERS:
THAT the proceeding be listed on Friday 8 November 1996 at 9.30 am for the making of orders including orders as to costs.
THAT the parties supply to the Associate to Lindgren J by 5.00 pm on Thursday 7 November 1996 form of agreed short minutes of the orders to be made, or, if agreement has not by then been reached, the forms of short minutes of orders for which they will respectively contend.
NOTE: Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION )
BANKRUPTCY DISTRICT OF THE ) No NX 46 of 1995
STATE OF NEW SOUTH WALES )
BETWEEN:
ROGER GLAVE MENDELSON and MURRAY BURTON ROUND
Applicants
AND:
ANNE LELLETON, MARIA LELLETON, ANGELA LELLETON and GEOFFREY DAVID McDONALD
Respondents
CORAM:Lindgren J
PLACE:Sydney
DATE:6 November 1996
REASONS FOR JUDGMENT
INTRODUCTION
Nature of proceeding
By an application filed on 26 June 1995, the applicants seek the following substantive relief:
"1.The Deed of Composition or Composition of the first, second and third Respondents passed on 17 May, 1995 be declared void pursuant to Section 222 (1) of the Bankruptcy Act 1966.
2.A declaration that the Deed of Composition or Composition of the first, second and third Respondents was not validly passed by a special resolution of creditors on 17 May, 1995 in accordance with Part X of the Bankruptcy Act 1966.
3.A declaration that the Deed of Composition or Composition of the first, second and third Respondents was not accepted by a special resolution of the meeting of creditors on 17 May, 1995 under Section 204 of the Bankruptcy Act 1966.
4.The Deed of Composition or Composition of the
first, second and third Respondents passed 17 May, 1995 be set aside pursuant to Sub-Section 239 (1) and/or Sub-Section 239 (2) of the Bankruptcy Act 1966.
5......... ........ ........ ........ ........ .......
6.That a Sequestration Order be made against the Estates of the first, second and third Respondents.
7.The time for the Applicants to make application to set aside the Composition of the first, second and third Respondents pursuant to Section 239 (1) be extended."
There never was a deed of composition. What the applicants attack is the purported acceptance of a composition by a special resolution of creditors on 17 May 1996 ("the Special Resolution").
Introduction to facts
The fourth-named respondent ("Mr McDonald"), who is a registered trustee, is trustee of the composition. At the beginning of the hearing, his solicitor filed, with leave, a notice of appearance and announced that Mr McDonald submitted to such order, save as to costs, as the Court might make.
The applicants are solicitors. At the relevant time, they acted as trustees for persons who provided funds for advance on "contributory mortgages". There were some 38 contributories to the mortgage advance of $700,000 with which this case is concerned.
Maria Lelleton is the mother of Anne Lelleton, Angela Lelleton and John Lelleton. (For convenience, and with no disrespect, I will often refer to them individually simply by their first names, and to the four of them collectively as "the Lelletons".)
On 31 March 1995, Anne and John, who lived in Sydney, signed an authority under s 188 of the Bankruptcy Act 1966 ("the Act") in favour of Mr McDonald as controlling trustee. On 3 April 1995, Angela and Maria, who lived in Melbourne, signed that authority. On 5 April 1995, Mr McDonald signed a consent to exercise the powers conferred on him by the authority.
The Lelletons proposed a composition with their creditors under which they would pay $42,000 by instalments to the trustee of the composition, $22,000 within seven days of the passing of the special Resolution accepting the composition and the balance of $20,000 by John and Anne over two years by eight equal quarterly instalments of $2,500 each. According to their joint statement of affairs, they owed $5,834,200 to 15 unsecured creditors, including $5,120,000 to Ehden Constructions Pty Ltd ("Ehden"), $475,000 to the applicants, and $110,000 to National Australia Bank Limited ("NAB"). One of the other creditors was Paul Mitchell, the husband of Angela, to whom $6,500 was said to be owed for a "loan". No secured creditors were disclosed in the joint statement of affairs. According to that statement, they were entitled to property having a value of $4,520 and were owed $550 for "book debts". There was therefore a deficiency of $5,829,130 in
their joint estate.
On 6 April 1995 John became a bankrupt. The authority under s 188 which he had signed only six days earlier then ceased to have effect in respect of him (cf para 189 (1) (e) of the Act) but remained in force in respect of Maria, Anne and Angela. (I will refer to all three of Maria, Anne and Angela collectively as "the Debtors" as distinct from all four "Lelletons".)
Mr McDonald, as controlling trustee, convened a meeting of creditors for 3 May 1995. On 3 May the meeting was adjourned to 17 May. In the meanwhile, the Debtors amended the terms of the composition proposed. Mr McDonald notified creditors of the revised terms on 10 May. The amount to be paid remained $42,000 but it was to be paid as to $5,000 within seven days of the date of the passing of the special resolution accepting the composition, as to $17,000 within 45 days of that date and to the remaining $20,000 by equal quarterly instalments of $2,500 each over two years, the first payment to be made on 30 September 1995. The funds to be received by the trustee of the composition were to be distributed firstly in payment of the fees and expenses of the controlling trustee and of the trustee of the composition, and secondly to "all proven creditors, both joint and separate, on a pro-rata basis". On 17 May 1995 the creditors of the Debtors passed the Special Resolution and appointed Mr McDonald as trustee of the composition.
CHRONOLOGICAL OUTLINE OF BACKGROUND FACTS
On 12 October 1988, the applicants lent $700,000 to the Lelletons on the security of a mortgage over land at 28 Studley Park Road, Kew, Melbourne ("the Kew Property").
On 11 October 1989, the Lelletons defaulted.
On 10 November 1990, the applicants sold the Kew Property.
On 28 February 1993, a written agreement was apparently entered into between Ronald David Silverstein ("Silverstein") and the Lelletons ("the Agreement"). A copy of the Agreement is annexed to these Reasons and marked "A". I will say more of the Agreement later. The Debtors contend that the Agreement gave rise to an indebtedness of $5,120,000 from the Lelletons, and thus from the Debtors, to Silverstein, which he later assigned to Ehden, and that, accordingly, Ehden became a creditor of the Debtors to the extent of $5,120,000.
On 2 May 1993, Silverstein apparently made a written demand for payment of $5,120,000 from the Lelletons, pursuant to the Agreement ("the Demand"). A copy of the Demand is annexed to these Reasons and marked "B".
By deed dated 1 August 1993 ("the Assignment"), Silverstein purportedly assigned his rights under the Agreement to Ehden. A copy of the Assignment is annexed to these Reasons and marked "C".
On 5 November 1993, the applicants issued a proceeding in the Supreme Court of Victoria against the Lelletons (No 9461 of 1993), for recovery of the balance of principal and interest outstanding under the Mortgage after allowing credit for the proceeds of the sale of the Kew Property.
On 29 August 1994,
(a)in the Supreme Court of Victoria, Master Evans entered judgment for the applicants against the Lelletons for $384,175.59 (including interest from 1 June 1994 to 29 August 1994 of $3,087.41) and costs; and
(b)the Lelletons initiated an appeal against the Master's decision.
On 31 October 1994, the appeal was heard by O'Bryan J.
10.On 18 November 1994, O'Bryan J dismissed the appeal.
11.On 29 November 1994, the applicants caused bankruptcy notices to be issued against the Lelletons.
12.On 2 December 1994, the Lelletons initiated an appeal to a Full Court against the decision of O'Bryan J.
13.On 30 March 1995, the appeal to a Full Court was dismissed by reason of the Lelletons' failure to file appeal books.
14.On 31 March 1995, John and Anne signed an authority under s 188 of the Act and statements of their affairs, the Lelletons signed a joint statement of affairs, Maria signed a statement of affairs and Angela made an affidavit that she had no assets or liabilities other than as shown in the joint statement of affairs.
15.On 3 April 1995, Angela and Maria signed authority under s 188.
16.On 5 April 1995, Mr McDonald countersigned the authority under s 188 and the authority and the statements of affairs and Angela's affidavit were filed in this Court.
17.On 6 April 1995, John became a bankrupt. (The Debtors have never become bankrupt. Although bankruptcy notices were issued against them and John on 29 November 1994 and subsequently served, creditors' petitions subsequently presented against them on 2 May 1995 were dismissed on 15 June 1995 in view of the currency of the s 188 authorities.)
18.On 13 April 1995, Mr McDonald, as controlling trustee, forwarded to creditors a notice convening a meeting of creditors for 3 May 1995, a statement by the Lelletons of the terms of the composition with creditors proposed by them, his report under s 189A of the Act, copies of the joint and separate statements of affairs and affidavit, and other documents.
19.On 2 May 1995 the applicants presented creditor's petition No VP 426 of 1995 against the Debtors returnable on 16 June 1995.
20.On 3 May 1995, the first meeting of creditors was held. At the commencement of the meeting, Mr McDonald announced that in view of the bankruptcy of John on 6 April 1995, the meeting would not be a meeting of John's creditors. The meeting was later adjourned to 17 May 1995.
21.On 10 May 1995, Mr McDonald notified creditors of the amended terms of the composition proposed by the Debtors.
22.On 17 May 1995, at the adjourned meeting of creditors, the Special Resolution was purportedly passed.
23.On 7 June 1995,
(a)the applicants received from Mr McDonald notice of the purported passing of the Special Resolution; and
(b)the time for filing of an application under s 239 of the Act expired.
24.On 15 June 1995, creditor's petition No VP 426 of 1995 was dismissed.
25.On 26 June 1995, the application commencing the present proceeding was filed.
26.On 30 June 1995, according to Anne, the last payment made under the composition was made to Mr McDonald as trustee of the composition. According to Mr McDonald's account of receipts and payments from 17 May 1995 to 30 November 1995 only $15,000 had been paid up to the latter date. (Mr McDonald has undertaken not to make a distribution to creditors pending the determination of this proceeding.)
OUTLINE OF FACTS RELATING TO THE PASSING OF THE SPECIAL RESOLUTION
One of the documents annexed to Mr McDonald's notice dated 13 April 1995 of the meeting of creditors to be held on 3 May 1995 was a statement of prescribed information required by Bankruptcy Rule 75. The statement included the following paragraphs:
"Voting by proxy (as distinct from attorney) on any of the special resolutions envisaged in Section 204 (1) is not permissible unless the creditor authorises the person appointed as proxy to vote in a specified manner, ie. in favour, against, or to abstain. This is not the case with respect to all other matters, such as the appointment of a Trustee, and for those matters a proxy may be appointed to vote in a particular way or generally as the proxy sees fit.
To facilitate entitlement, two separate forms of proxy must be completed - one in respect of the relevant special resolutions, and one for any other resolution."
As will become clear, the applicants contend that Ehden, by virtue of whose vote the Special Resolution was passed, had provided only one form of proxy, namely, that appropriate to "any other resolution" as distinct from one enabling the proxy to vote for, relevantly, a special resolution in favour of acceptance of a composition referred to in sub-s 204 (1) of the Act.
It is not necessary for me to give here a detailed account of the contents of the controlling trustee's report to creditors under s 189A. It concluded that acceptance of the proposed composition would result in a dividend to unsecured creditors of approximately 0.7 cents in the dollar and that it would, "only slightly be in creditors' best interests to accept the Part X composition ...".
The "meeting" held on 3 May 1995 was in fact a number of meetings being held concurrently, namely a joint meeting of the Debtors' creditors, and separate meetings of the creditors of each of Anne, Angela and Maria. Mr McDonald was appointed chairman. The composition offered to creditors was discussed, but no resolutions were passed. The meeting was adjourned to 17 May.
At the adjourned meeting on 17 May the Special Resolution was passed in the joint estate and the separate estates of the Debtors. By the Special Resolution, the creditors accepted the composition, the amended terms of which were noted earlier. In the minutes, the voting was recorded as follows in the joint estate and in the separate estates of Maria and Angela (the voting was only slightly different in the separate estate of Anne):
"For Amount $
Ehden Constructions Pty Ltd 4,020,000.00
Ray Aitken $1,200.00
Ausdell [sic - Ausdel] Pty Limited 18,000.00
City Motor Holdings Pty Limited 12,500.00
Sam Francipane 400.00
Hill Ryner & Co 400.00
Alex Lewenberg
Darth Management Pty Limited 7,000.00
Hyperno Pty Limited 15,100.00
GEO Domes Architects Pty Limited 1,000.00
MC2 Pty Limited 1,000.00
TOTAL4,076,700.00
88.89%
For [sic - Against] Amount $
Mendelson & Round 416,425.04
National Australia Bank 93,150.66
TOTAL509,575.70
11.11%"
(Addition of the figures in the table gives $4,076,600 rather than $4,076,700. The evidence shows that Alex Lewenberg had been admitted to vote in respect of a debt of $1,200, and MC2 Pty Ltd in respect of a debt of $1,100 rather than $1,000. If those amounts had appeared, the total would have been $4,077,900.)
The minutes record that Mr McDonald noted that Ehden held more than 75% of the voting power and that if its claim had been rejected, the Special Resolution would not have been passed. (The contrary has not been suggested before me.) At the heart of the present application, in so far as it is made under s 222 of the Act, is the question whether Mr McDonald, as chairman erred in accepting that Ehden was a creditor for voting purposes.
Ordinary resolutions appointing Mr McDonald as trustee of the composition in the joint and separate estates and approving his remuneration were also passed.
OUTLINE OF FACTS RELATING TO THE ACCEPTANCE OF EHDEN AS A CREDITOR FOR VOTING PURPOSES
The applicants were represented at the creditors' meeting by their proxy, Andrew White (Andrew White was a solicitor employed in the applicants' office and is to be distinguished from Warren White who was employed in Mr McDonald's office. I will refer to them by those names in order to eliminate any chance of ambiguity.)
At the initial meeting on 3 May 1995, the chairman refused to accept an instrument of proxy from Ehden in favour of Sam Francipane, on the ground that there was insufficient evidence to support the alleged debt of $5,120,000. Mr McDonald advised those present that the alleged debt had originally been owed to Silverstein, who had assigned it Ehden.
The meeting was adjourned to enable Ehden to substantiate its claim and to afford other creditors an opportunity to raise any further queries in relation to the alleged debt.
Ehden's claim was discussed at the adjourned meeting on 17 May. Mr McDonald informed those present that as controlling trustee he had received, on 16 May, a copy of the Agreement. Andrew White said that he still could not accept Ehden's claim, as he believed that the Agreement was unenforceable because the provision for the payment of $5.12 million by the Lelletons to Silverstein was a penalty. He questioned the Debtors about their relationship with Silverstein and the circumstances in which they had entered into the Agreement.
Mr McDonald said that he proposed to reduce Ehden's claim to $4.02 million for voting purposes. The reason which he gave is recorded in the minutes as follows:
"The Chairman advised that in similar agreements the damages resulting from a breach of contract would be the contract price less the subsequent selling price of the property. As the property had not been sold, an approximation of value could be used."
Mr McDonald treated the Agreement as a contract for the sale by Silverstein to the Lelletons of certain land at Bacchus Marsh ("the Bacchus Marsh property") for $5,120,000, for breach of which the Lelletons were liable to pay unliquidated damages to Silverstein. Mr McDonald had obtained from a valuer a faxed letter dated 17 May 1995 expressing the opinion
that the current market value of the Bacchus Marsh property was between $850,000 and $1,100,000. The amount of $4.02 million represented the difference between the amount claimed of $5,120,000 and that amount of $1,100,000. Mr Francipane objected to the reduction while Andrew White objected to recognition of the claim for voting purposes at all.
If Mr McDonald's view of the Agreement was correct, Ehden was not entitled to vote (see sub-s 198 (2) of the Act set out below).
RELEVANT PROVISIONS OF THE ACT
Part X (ss 187-243A) provides for "ARRANGEMENTS WITH CREDITORS WITHOUT SEQUESTRATION". One class of such private arrangements is the "composition" which is defined in sub-s 187 (1) to mean:
"an arrangement ... by which the creditors of the debtor:
(a)...
(b)agree to accept, in full satisfaction of the debts due to them, less than the full amount of those debts, whether in the form of money or other property and whether by instalments or otherwise;"
The notion of a "creditor" is not defined in Part X. However, sub-s 243 (1) provides that, inter alia, ss 82-107 of the Act apply in relation to a composition, and s 82 has the effect, relevantly, that a liability in unliquidated damages for
breach of contract is a debt provable in a bankruptcy, and therefore that the person to whom that liability is owed is a "creditor". But sub-s 243 (4) provides that if, inter alia, such a provision is inconsistent with Part X, that provision does not apply. It would be inconsistent with sub-s 198 (2) set out below to treat a creditor in respect of a liability in unliquidated damages as being entitled to vote.
Section 187A provides that Part X applies in relation to joint debtors. Section 188 provides, relevantly, that a debtor who desires that his affairs be dealt with under Part X without his estate being sequestrated may sign an authority in accordance with the prescribed form authorising a registered trustee to call a meeting of his creditors and to take over the control of his property. It is not in issue that Mr McDonald was a registered trustee or that s 188 was otherwise satisfied here. Section 189 provides that where a debtor has given an effective authority to a registered trustee under s 188, the debtor's property remains subject to control until, relevantly:
"(c)the creditors accept a composition under [Division 2 of Part X]; [or]
(d)........ ........ ........ ........ ........ .......
(e)the debtor becomes a bankrupt; ...
whichever first happens."
Sub-section 197 (1) provides that a meeting of creditors
called pursuant to an authority under s 188 may, by "resolution", be adjourned from time to time. The expression "resolution" is defined in sub-s 5 (1) to mean "a resolution passed by a majority in value of the creditors present personally, by attorney or by proxy at a meeting of creditors and voting on the resolution".
Sub-sections 198 (1), (2) and (7) are as follows:
Subject to this section, every creditor is entitled to vote at a meeting under this Division.
(2)A creditor is not entitled to vote in respect of an unliquidated or contingent debt or a debt the value of which is not ascertained.
(7)The spouse, or the de facto spouse, of the debtor is not entitled to vote at a meeting under this Division."
Sub-sections 200 (1), (2) and (3A) assume particular importance in the present case:
A creditor may vote either in person or by his attorney or by a proxy appointed in writing by the creditor or his attorney.
(2)Subject to subsection (3A), a proxy may be appointed to vote on all matters arising at the meeting or on particular matters specified in the instrument of appointment.
(3)........ ........ ........ ........ ........ .
(3A)A person is not entitled to vote as proxy of a creditor on a proposed resolution under section 204 unless the instrument by which the person is appointed authorises
the person to vote in a specified manner on each of the following kinds of resolution under that section:
(a)a resolution that the debtors' property be no longer subject to control under this Division;
(b)a resolution requiring the debtor to execute a deed of assignment;
(c)a resolution requiring the debtor to execute a deed of arrangement;
(d)a resolution accepting a composition;
(e)a resolution requiring the debtor in this section to present a debtor's petition within 7 days after the passing of the resolution;
and the person votes on the proposed resolution in accordance with the instrument."
There was no suggestion that Ehden had appointed Mr McDonald as its attorney. The applicants submit that the instrument of appointment of proxy which Ehden executed in favour of Mr McDonald fell foul of sub-s (3A). They further submit that Ehden was not a "creditor", or, in the alternative, that it was a creditor only in respect of "an unliquidated or contingent debt or a debt the value of which is not ascertained" within the meaning of sub-s 198 (2) set out earlier, and so was not entitled to vote.
Section 201 provides as follows:
"201Any question as to the right of a person to vote at a meeting under this Division, or as to the amount of the debt in respect of which a person is entitled to vote at such a meeting, shall be determined by the chairman,
who may, if he thinks it necessary to do so, adjourn the meeting for a period, not exceeding 14 days to enable him to investigate the matter."
Section 204 empowers the creditors, at a meeting called pursuant to an authority under s 188, by "special resolution", inter alia, to:
"(c)accept a composition; or
(d)require the debtor to present a debtor's petition within 7 days from the day on which the resolution was passed."
The expression "special resolution" is defined in sub-s 5 (1) to mean:
"a resolution passed by a majority in number and at least three-fourths in value of the creditors present personally, by attorney or by proxy at a meeting of creditors and voting on the resolution."
The applicants rely on s 222 as the source of the Court's power to make the declaration of voidness, and if it be made, the sequestration order, which they seek. Relevantly, s 222 provides as follows:
"222(1)Where there is a doubt, on a specific ground, ... whether a composition has been accepted by a special resolution of a meeting of creditors under section 204, ... a creditor ... may apply to the Court for an order under subsection (2).
(2)Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order:
(a)declaring that the ... composition is void, ... on the ground specified in the application; ...
(3)...... (4) ...... (5) ......
(6)The Court shall not make an order under subsection (2) ... unless the application for the order is made:
(a) ........ .... (b) ........ .......
(c)in relation to a composition - before the final payment has been made under the composition.
(7)The trustee or a creditor may include in an application under subsection (1) ... an application for a sequestration order against the estate of the debtor and if the Court, on the first-mentioned application, makes an order under subsection (2) ... declaring the ... composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.
(8)........ .. (9) ........ .. (10) ........ ."
While s 222 is concerned, relevantly, with the validity of a purported acceptance by special resolution of a composition, s 239 empowers the Court to set aside a composition which was validly accepted. Section 239 provides, relevantly, as follows:
"239(1)A creditor may, within 21 days from the date on which the special resolution accepting a composition under [Part X] was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor.
(2)If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for
any other reason the composition ought to be set aside, it may make an order setting it aside and if it thinks fit, may forthwith make the sequestration order sought."
Section 240 provides that subject to the section, a composition under Part X operates, unless set aside, declared void or terminated under that Part, to release the debtor from all provable debts, other than those (if any) that would not be released by his discharge from bankruptcy if he had become a bankrupt on the day on which the composition was accepted. (Sections 241 and 242 provide for termination of a composition. The applicants once sought termination under s 242, but no longer do so.)
REASONING
Should the composition be declared void under sub-s 222 (2) of the Act?
In deciding whether to declare the composition void under sub-s 222 (2) by reason of its not having been accepted by a special resolution of creditors, the Court has jurisdiction to determine whether Ehden was entitled to vote at the creditors' meeting: see, for example, Re Levy; Ex parte Scholfield Goodman & Sons Ltd (1980) 50 FLR 99 at 112-113 (Bowen CJ); Forshaw v Thompson (1992) 35 FCR 329 (FC) at 336-340 per Lockhart J; Re Burns; Ex parte National Mutual Life Association of Australasia Ltd v Burns (1992) 39 FCR 477 (Hill J) at 449; Re Nolan; Ex parte Seargeant (unreported, FCA/ Sackville J, 14 March 1995) ("Nolan") at p 22. The Court is
not restricted to considering the material that was before the chairman of the meeting: Re McLean; Ex parte Friends Provident Life Office (1992) 36 FCR 502 (Heerey J) at 510; Re Dingle; Ex parte Westpac Banking Corporation v Worrell (1993) 47 FCR 478 (FC) at 486; Re Nolan at p 22.
The effect of para 200 (3A) (d) quoted earlier in these Reasons is clear: Mr Francipane was not entitled to vote as proxy of Ehden on the proposed resolution under s 204 to accept the composition, unless the instrument by which he was appointed authorised him to vote "in a specified manner" on the resolution and he voted on it in accordance with the instrument.
The Bankruptcy Rules and Forms are consistent with this disentitling provision. Sub-rule 78A (1) provides as follows:
"78A(1)An instrument of appointment of a proxy to vote at a meeting held under Part X of the Act must be in accordance with:
(a)if the proxy is appointed to vote on a special resolution under section 204 of the Act - Form 44; and
(b)in any other case - Form 43."
Form 44 referred to in para 78A (1) (a) is as follows:
"Form 44
Rule 100
APPOINTMENT OF PROXY TO VOTE ON A SPECIAL RESOLUTION
UNDER SECTION 204 OF THE BANKRUPTCY ACT 1966(Title)
I, (full name of creditor) of (address), a creditor of (name of debtor), appoint (full name of proxy) of (address of proxy) to be my proxy at the meeting of creditors of the debtor on the day of , 19 (or at any meeting of those creditors) to vote on each of the following kinds of resolution under section 204 of the Act in the manner specified:
Kind of resolution
Manner of voting
(specify, in each case,
‘for’, ‘against’ or
‘abstain’).(a)a resolution that the debtor's property be no longer
subject to control under Division 2 of Part X of the
Act;
(b)a resolution requiring the debtor to execute a deed
of assignment;
(c)a resolution requiring the debtor to execute a deed
of arrangement;
(d)a resolution accepting a composition;
(e)a resolution requiring the debtor to present a
debtor's petition within 7 days;
Other conditions:
(Specify any conditions in accordance with
which the proxy is, on any matter,
required to vote).
I am an unsecured creditor and the total amount owed to me is $ (insert amount) or I am a secured creditor and the total amount owed to me after deducting the value of my security is $ (insert amount).
Dated 19 .
__________________________________
(Creditor)
Signed by the creditor ]
in the presence of ](Signature, address and
occupation of witness)"
The content of Form 43 can be seen in the following document which was executed by Ehden in favour of Mr Francipane which was in evidence (bold typeface indicates handwriting and ordinary typeface indicates the standard form as adapted by the controlling trustee to the particular case):
FORM 43
RULE 100
APPOINTMENT OF PROXY
Bankruptcy Act 1966
IN THE FEDERAL COURT OF AUSTRALIA ) File No NSW NX 46 of 1995
GENERAL DIVISION )
BANKRUPTCY DISTRICT OF THE )
STATE OF NEW SOUTH WALES )
RE: JOHN LELLETON, ANNE LELLETON, MARIA LELLETON & ANGELA LELLETON
Debtors
I, EHDEN CONSTRUCTIONS PTY LTD of 19 CURTIS ROAD CHESTER HILL........ .....
a creditor of JOHN LELLETON, ANNE LELLETON, MARIA LELLETON & ANGELA LELLETON, appoint
........ SAM FRANCIPANE........ ........ ........ ........ ........ .
of 71/168 GOULBURN ST, SYDNEY........ .. to be my proxy at the meeting of
creditors of the debtor(s) on 3rd May 1995 at 3.00pm.
(and at any subsequent meeting (1)).
to vote on all matters arising at the meeting(1)
OR
to vote on the following matters(1)
(and in the specified manner(2))
I am an unsecured creditor and the total amount owed to me is $5,120,000 or I am a secured creditor and the total amount owed to me after deducting the value of my security is $ NIL.....
Dated 3rd MAY 1995.
(1)Delete as appropriate NB: companies need to sign under seal or by (2)Delete if inapplicable signature of an authorised officer.
___________________________________
(Signature of the Creditor)
SIGNED by the creditor [signature]
) DIRECTOR
in my presence: [signature]
) DIRECTOR
........ ........ ........ ........ ........ ........ ....
Signature, address and occupation of witness
(The reference to "Rule 100" in the top right hand corner of Forms 43 and 44 is an anachronism. Statutory Rule 1992 No 194 repealed r 100 and inserted r 78A.)
It will be noted that the instrument is dated 3 May 1995 and appoints Mr Francipane to be Ehden's proxy at the meeting of the Lelletons' creditors to be held that day at 3.00 pm "and at any subsequent meeting". At the meeting on 3 May 1995 and at the resumption of it on 17 May, although there was considerable discussion about the existence of Ehden's debt, no question was raised as to the effectiveness of the instrument which appointed Mr Francipane as proxy of Ehden. Thus, there was nothing in the discussion at the meeting on 3 May which would have prompted Ehden to supplement by 17 May, whatever instrument or instruments of proxy it had lodged with Mr McDonald.
On the hearing before me, the applicants tendered, and there was admitted into evidence as part of Ex A11, the instrument of appointment of proxy by Ehden in favour of Mr Francipane set out above. I have reached the conclusion that the appropriate inference to draw is that that was the only instrument of proxy which was given by Ehden to Mr Francipane. In order to explain why I have reached this conclusion, it is necessary to recount the relevant facts in some little detail.
At the commencement of the hearing before me on 23 July 1996, Mr Blessington, solicitor, announced that he appeared for Mr McDonald as fourth-named respondent; with leave, filed in Court a notice of intention to appear; indicated that Mr McDonald consented to any order the Court might see fit to
make except an order for costs against him; and sought and was granted leave to be excused from attending further. It is common ground that he left Mr McDonald's file with counsel who appeared for the applicants. During the course of the hearing, counsel for the applicants tendered from the file instruments of proxy. They were admitted into evidence without objection and were as follows:
EXHIBIT CREDITOR PROXY
A9 City Motor Holdings Pty Ltd D A Aitken
A10 Darth Management Pty Ltd D A Aitken
A11 Ehden Constructions Pty Ltd Sam Francipane
A12Alex Lewenberg Geoff McDonald
A13 G E O Domes Pty Ltd Geoff McDonald
A14 Gaetano Russo Geoff McDonald
A15 Hyperno Pty Ltd Geoff McDonald
A16 Ausdel Pty Ltd Geoff McDonald
A17 Mark A Cammiss Geoff McDonald
A18 MC2 Pty Ltd Geoff McDonald
A19 Mitchell Trading Company Pty Ltd Geoff McDonald
A20 Paul Mitchell Geoff McDonald
A21 Hill Ryner & Co Geoff McDonald
A22 Australia & New Zealand Banking
Group Limited Warren White
A23 Raymond Henry Aitken D A Aitken
(The claims by some of these "creditors" were disallowed for voting purposes, namely Gaetano Russo, Mark A Cammiss, Mitchell Trading Company Pty Ltd and Paul Mitchell, while Australia and New Zealand Banking Group Ltd was admitted to vote only in the separate estate of Anne, and not in the joint estate.) In addition, he tendered as part of Ex A1 the instrument of appointment of proxy given by the applicants to Andrew White, and as part of Ex A2 the instrument of appointment of proxy given by National Australia Bank Limited, also in favour of Andrew White.
In every case except that of Ehden, there was a Form 44
instrument, whether with or without a Form 43 instrument and/or other documents stapled to it. The pattern thus revealed makes it clear that Mr McDonald, or those assisting him, had adopted the reasonable practice of stapling together the instrument or instruments of proxy and supporting documents relating to the respective individual creditors. I infer from these facts alone that the one and only instrument of proxy which Ehden had lodged was the Form 43 instrument set out earlier.
When he came to tender the document executed by Ehden in favour of Mr Francipane, counsel for the applicants said this:
"MR CHIPPINDALL: ... There is then the proxy in respect of Ehden Constructions [Pty Ltd] in favour of Sam Francipane for $5.12 million and that proxy is tendered. There does not seem to be in the bundle of documents any instruction by [sic - to] Mr Francipane as to how he was to vote in respect of the resolutions. That appears on page 5 of the minutes. There seems from the documents which I have had access to, no Form 44 proxy which is the form which people are directed to identify their debts.
The other copy merely seems to be a document dated 3 May in favour of Mr Francipane to vote in all matters arising in the meeting. Certainly he perhaps could not vote at all unless there was some evidence that there was a formal instruction for him to vote one way or another.
MR SKINNER: Your Honour, I have no objection to the tender of that proxy." (T 43.23-.35)
That was in the course of the hearing on 23 July (the hearing extended into 24 July).
Certain documents were stapled to the Form 43 proxy which counsel for the applicants tendered. They were the following:
A handwritten but unsigned memo dated 1 May 1995 addressed to Love & Rogers (of which firm Mr McDonald was a partner) for attention Warren White reading as follows:
"I enclose herein copy of Notice of Demand from Silverstein in the sum of $5,120,000 which were subsequently assigned to Ehden Constructions P/L.
Silverstein advises me that the original of the agreement dated 28/2/93 is with Ehden Constructions P/L together with the original of the Notice of Demand."
A copy of the Demand (annexure "B" to these Reasons).
A copy of the Assignment (annexure "C" to these Reasons).
A letter dated 16 May 1995 from Mr Silverstein to Mr Warren White of Love & Rogers enclosing, inter alia, copy of the Agreement.
A copy of the Agreement (annexure "A" to these Reasons).
In addition to the date of the letter numbered 4 above, the facsimile imprints on documents 4 and 5 made clear that they had been faxed from Silverstein on 16 May 1995, that is to say, the day before the adjourned meeting was held (in any event, according to the minuted record (noted below) Mr McDonald said at the meeting that he had received them the preceding day). It was clear to me that documents 4 and 5 could not have been annexed to the Form 43 instrument dated 3 May 1993 at the time of the initial meeting held on that date. I raised this problem with counsel as a result of which documents 4 and 5 were detached and, for the time being, marked for identification as "MFI 1". Accordingly, what was then admitted as Ex A11 was the executed Form 43 instrument to which were stapled the documents numbered 1, 2 and 3 above. Documents 5 and 6 were later separately tendered and became Ex A30. Again, the point is that the stapling, on or after 16 May, by Mr McDonald or those assisting him, of documents 5 and 6 to the Form 43 instrument and documents 1, 2 and 3, suggests that he had had but one form of instrument of appointment of proxy in his possession, namely, the Form 43 instrument.
This view of matters is supported by the evidence of the proceedings at the initial meeting of creditors on 3 May and at the resumption of that meeting on 17 May. On 3 May, in the context of Ehden's claim, Mr McDonald "tabled" copies of the documents numbered 2 (the Demand) and 3 (the Assignment). Andrew White, the proxy for the present applicants and for National Australia Bank Limited, questioned the alleged indebtedness to Ehden of $5,120,000. Mr McDonald decided to adjourn the meeting to allow Ehden to substantiate its claim.
The minutes for the resumed meeting on 17 May record that Mr McDonald tabled further documents which had been received in
substantiation of the claims of some creditors. In the case of some of them, he tabled instruments of proxy received since 3 May. In relation to Ehden, the minutes do not record the tabling of any further instrument of proxy but do record the tabling of a copy of the Agreement which Mr McDonald said he had received the preceding day. There again followed considerable discussion about the alleged debt. Mr McDonald decided to admit Ehden's claim for voting purposes to the extent of $4,020,000 as noted earlier.
This evidence of what occurred at the initial and adjourned meeting further supports the inference that documents 4 and 5 came to be stapled to the Form 43 instrument of appointment of proxy and documents 1, 2 and 3, because the Form 43 instrument was the only instrument of proxy that was ever supplied to Mr McDonald.
The Debtors submit that the applicants could have procured the issue by the Registrar in Bankruptcy of a summons under Bankruptcy Rule 125 to Mr McDonald to produce all instruments of appointment of proxy by Ehden in favour of Mr Francipane, with a view to negativing the possibility that Ehden had given an instrument of appointment of proxy further to the one in evidence. But the Debtors could have called on the applicants to produce all such documents, and, in particular, any Form 44 instrument of appointment of proxy executed by Ehden in favour of Mr McDonald, from Mr McDonald's file. It is common ground that the Debtors' legal representatives knew that the file was
in Court and held by the applicants' legal representatives. In my view the evidence tendered by the applicants imposed an evidentiary onus on the Debtors to rebut the inference to which I have referred. There were time and means for them to gain access to Mr McDonald's file.
In the result, I infer that there was no instrument of proxy executed by Ehden in favour of Mr McDonald satisfying the requirements of para 200 (3A) of the Act, Bankruptcy sub-r 78A (1), or Bankruptcy Form 44. The consequence is that Mr Francipane was not entitled to vote as proxy of Ehden in support of the Special Resolution. It is not in dispute that without that vote, the Special Resolution would not have been passed. There was, therefore, no effective acceptance of the composition.
Should a sequestration order be made under sub-s 222 (7) of the Act?
If the Court considers a composition to be void under sub-s 222 (1), it "may, if it thinks fit, forthwith make the sequestration order sought [in the application for the declaration of voidness]". The discretionary power, conferred by the words "if it [the Court] thinks fit" in sub-s 222 (7), is unqualified and must be exercised in the light of all the circumstances, without an inclination prima facie one way or the other: Re Tsangaris; Ex parte Gaymark Investments Pty Ltd (1986) 39 NTR 15 (Kearney J) ("Tsangaris") at 18-19. The Court must take into account both the potential benefit to
creditors and the potential detriment to the debtor of making a sequestration order: Ex parte Moon; In re Moon (1887) 19 QBD 669 (Lindley LJ) at 677; Tsangaris, supra, at 18.
The following considerations persuade me to conclude that a sequestration order should be made:
(1)The return to creditors from the composition will be minuscule or non-existent. The report of Mr McDonald as controlling trustee under s 189A predicted a return of approximately .07 cents in the dollar. The accounts prepared by him as trustee of the composition for the period 17 May 1995 to 30 November 1995 reveal that up to 30 November 1995 the Debtors had paid to him $15,000 out of which $14,337 had been appropriated to cover his remuneration and expenses. Without allowing for interest earned on the funds in his hands or any further remuneration and expenses for him, the balance of the sum of $27,663 ($42,000 - $14,337) divided among unsecured creditors whose debts were admitted for voting purposes of $4,586,275.70 (according to the minutes of the meeting of 17 May 1995) the dividend would be .06 cents in the dollar.
(2)The Debtors defaulted under the terms of the composition. By 30 November 1995 they should have paid $24,500 but had in fact paid only $15,000 by that date.
(3)The Agreement, Demand and Assignment give cause for suspicion. I do not express a final view as to the effect of the three documents. The following view is, however, arguable.
Under the Agreement, the Lelletons did not undertake any obligation to use their best endeavours to obtain a purchaser but had a 60-day exclusive agency and were entitled simply to allow that period to pass and become liable themselves to pay the full amount of $5,120,000; no question of penalty arises because the amount was not payable on breach of contract; the Lelletons became indebted to Silverstein for $5,120,000 when the 60-day period expired on 29 April 1993; pursuant to cl 3 of the Agreement, the debt bore interest from the date of the Demand, 2 May 1993; the consideration for the promise to pay $5,120,000 and interest was Silverstein's promise of a 60-day exclusive agency and his promise to transfer title when, but not before, the sum of $5,120,000 and interest were paid; Silverstein was owed the interest bearing debt and was entitled to retain title to the Bacchus Marsh property until the sum of $5,120,000 was paid in full; the Assignment was in respect of the debt, not a right to recover unliquidated damages.
This view of the legal effect of the transaction itself raises questions, central to which are the value of the Bacchus Marsh property at the date of the Agreement, the
consideration for the Assignment and the circumstances surrounding the making of the Agreement and of the Assignment. It is desirable in the interests of creditors and in the public interest that these issues be investigated with the benefit of the coercive powers of a trustee in bankruptcy.
(4)There are questions relating to other transactions involving the Debtors which, if investigated in bankruptcy, may lead to the recovery of property for the benefit of their unsecured creditors.
(a)Angela and her husband Paul Wanostrocht Mitchell became the joint registered proprietors of a property at 21 Berkeley Street, Hawthorn, being the land comprised in Certificate of Title Volume 5864 Folio 710, on 14 September 1993. By Transfer T390358U bearing date 26 October 1994 registered on 2 November 1994 they transferred that property to Mr Mitchell alone. The consideration described in the Transfer was "natural love and affection".
(b)The same Mr and Mrs Mitchell were joint registered proprietors of a property at 21 Neptune Street, Mornington, being the land comprised in Certificate of Title Volume 10146 Folio 489. By Transfer T461314H bearing no date but registered on 13 December 1994, they transferred it to George William
Keystone and Jayne Keystone. The consideration mentioned in the Transfer was $139,500. In response to questions at the meeting of creditors, Angela said that there had been no surplus on the sale of the property. Apart from that bald statement, what happened to the net proceeds of sale remains unexplained.
(c)There was a company called Mitchell Trading Company Pty Ltd. At the relevant time, Angela and her husband were directors of it and Angela was its secretary. They were its only shareholders. It registered a third mortgage over a property at 66 Abbotsford Road, Abbotsford, Victoria, owned by Maria. In her statement of affairs, Maria gave the following particulars of her creditors secured by mortgages over that property:
Secured creditor
Amount of debt
Particulars of security
Estimated value of security
Estimated deficiency
Rennick & Gaynor
$198,000
First mortgage
$198,000
Nil
St George Finance
$39,000
Second mortgage
$39,000
Nil
Mitchell Harding [sic]
$55,000
Third mortgage
$53,000
$2,000
$292,000
$290,000
$2,000
The report under s 189A of Mr McDonald as controlling trustee included the following:
"I have ... caused a property search to be conducted on the Debtors covering transactions in Victoria. The search revealed that Maria Lelleton is currently listed as the owner of three properties. I have requested further details on these properties and am awaiting these at present. John Lelleton has advised that the properties comprise 66 Abbotsford Street.
I have also investigated the sale of the property situated at 66 Abbotsford Road, Abbotsford, Victoria and advise that there is a current contract for sale in process. The selling price of the property is $280,000. I have sighted an appraisal, which confirms that the selling price is reasonable. Based on this appraisal I believe the sale contract would not be upset in the event that the Debtors were declared bankrupt.
My staff has spoken to the three parties disclosed as secured creditors. The first and second mortgagees have been confirmed that they are owed approximately $245,000. I have also spoken to the Managing Director of Mitchell Trading Pty Limited. The debt to Mitchell Trading Pty Limited is as a result of this company advancing money to Maria Lelleton in August 1994. The amount advanced was $45,000. I have also been advised that Mitchell Trading Pty Limited is the purchaser of 66 Abbotsford Street. A deposit has been paid and settlement is due in September 1995. Based on the mortgage figures no surplus is expected.
I have sighted extracts from the sale contract. The extract appears to indicate that only two properties comprise 66 Abbotsford Street. I have requested John Lelleton to supply my office with a copy of the sale contract so the matter may be examined further.
At the meeting of creditors I will advise creditors of the results of my investigations into the sale contact and the further details requested on the 3 properties."
At the meeting of creditors on 3 May, Mr McDonald observed that the third mortgage to Mitchell Trading Company Pty Ltd was not registered and that "should an unregistered mortgagee exist, it should have been stamped for stamp duty." At the resumed meeting on 17 May, he reported that he had received a copy of the mortgage document and the contract of sale (I presume between Maria as mortgagor and vendor of the one part, and Mitchell Trading Company Pty Ltd as third mortgagee and purchaser of the other part). He reported that the mortgage was for $45,000 plus 12% interest, and that both the third mortgage and the contract of sale were both dated 10 August 1994.
The third mortgage and the contract of sale were dated the same day and entered into between related parties. The question arises whether the amount secured by the third mortgage ($45,000) was actually advanced to Maria. If it was, what did she do with the amount of the mortgage advance? If it was not, was the third mortgage/sale transaction a scheme to "absorb" her "equity" in the property in order to defeat unsecured creditors?
(5)Anne Lelleton Marketing Pty Ltd was registered on 16 February 1995. Its directors at the relevant time were Denis Aitken and Alan Butcher. It has been suggested that Anne has an association with Denis Aitken. She became employed by the company at a remuneration considerably less than that which she had been receiving previously ($30,000 as against $60,000).
(6)By the time of the meeting on 3 May 1995, the applicants had served on the Debtors bankruptcy notices, the time for compliance with which had expired, and had presented a creditor's petition against them. There would normally have arisen a prima facie entitlement in the applicants as petitioning creditors to the making of a sequestration order upon the return of their petition on 16 June. It was only the intervention of the passing of the Special Resolution on 17 May accepting the composition which presented this from happening. It is now clear that in law no special resolution was passed and the composition was not accepted by creditors.
There is cause for investigation of the Debtors' dealings by a trustee in bankruptcy armed with the coercive powers provided by the Act. Both the interests of unsecured creditors and the public interest would be served by such an investigation.
For the foregoing reasons, I consider that a sequestration order should be made against the joint and separate estates of the Debtors under sub-s 222 (7) of the Act.
Application for extension of time and order under s 239 of the Act
In the light of the conclusion reached above I need not consider the application for an extension of time and substantive relief under s 239 of the Act. It seems to me, however, appropriate that I indicate that if I had not reached
the foregoing conclusions under s 222, I would have made the following orders under s 239:
(a)an order extending the time within which the applicants were entitled to apply to the Court for an order setting aside the composition accepted by special resolution of the creditors on 17 May 1995, to 26 June 1995, the date on which their application in the present proceeding was filed;
(b)an order setting aside the composition on the ground that its terms are unreasonable and are not calculated to benefit the creditors generally; and
(c)a sequestration order against the estates of the Debtors.
I would have extended the time because the extent of lateness is not great, there is no evidence of prejudice arising from the 19 days' lateness, and there is some evidence explaining the lateness, including evidence of the fact that the applicants' legal advisers were awaiting a copy of the minutes of the meeting of creditors. Although, as counsel for the Debtors submits, that explanation may not be of the most cogent kind, having regard to other matters in my view it suffices.
A further consideration which would have persuaded me to grant the extension of time is the fact that the applicants would in
my view, have had a strong case for obtaining a substantive order under s 239. In brief, the reasons why I think that the terms of the composition are unreasonable and are not calculated to benefit the creditors generally are the reasons which I gave earlier in favour of the making of a sequestration order under sub-s 222 (7).
CONCLUSION
The composition should be declared void, a sequestration order should be made against the estates of the Debtors and the applicants' costs of an incidental to this proceeding should be ordered to be paid out of their estates as if those costs were those of a petitioning creditor. The proceeding will be listed on a date in the near future for the making of those orders and any further appropriate order for which a party may ask.
I certify that this and the preceding 39 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.
Associate:
Dated:6 November 1996
Heard: 23, 24 July, 31 October 1996
Place: Sydney
Decision: 6 November 1996
Appearances: Mr J A Chippindall of counsel instructed by Murray Mendelson & Round appeared for the applicants.
Mr B Skinner of counsel instructed by Hill Ryner & Company appeared for the respondents.
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