Metropolitan Demolitions Pty Ltd v Gialouris, Jim
[1998] FCA 936
•7 AUGUST, 1998
FEDERAL COURT OF AUSTRALIA
BANKRUPTCY – deed of arrangement - joint debtors – whether one debtor had separate liabilities to creditors – whether debtors omitted material particulars or included incorrect material particulars in their statements of affairs – whether deed of arrangement void – whether sequestration order should be made.
Bankruptcy Act 1966 (Cth), ss 5, 82, 187, 187A, 188, 188A, 189, 190, 194, 195, 196, 204, 213, 216, 221, 222, 224.
Bankruptcy Regulations, reg 10.02, Sch 6, Pt 1.
T Irlicht, Assignments, Arrangements and Compositions by Debtors (2nd ed 1986).
Re Forbes; Ex parte Industrial Acceptance Corporation Ltd (1974) 24 FLR 87 (SA Insolv Ct/White J), cited.
Gee v Schmutter (1971) 123 CLR 503, cited.
Re Williams; Ex parte Official Trustee in Bankruptcy (1990) 26 FCR 191 (Hill J), followed.
Musolino v Sidiropolous (1991) 101 ALR 235 (FCA/FC), cited.
Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544 (von Doussa J), applied.
Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 (FCA/FC), cited.
Augustyn v Putnam (1988) 83 ALR 514 (FCA/FC), cited.
NZI Capital Corporation Ltd v Lancaster (1991) 30 FCR 441 (Foster J), cited.
Re Morris; Ex parte Adams (1980) 48 FLR 341 (FCA/C.A. Sweeney J), followed.
METROPOLITAN DEMOLITIONS PTY LIMITED V JIM GIALOURIS AND SOPHIE GIALOURIS & ANOR
NG 7833 OF 1997
SACKVILLE J
SYDNEY
7 August, 1998
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 7833 of 1997
BETWEEN:
METROPOLITAN DEMOLITIONS PTY LIMITED
APPLICANTAND:
JIM GIALOURIS AND SOPHIE GIALOURIS
FIRST RESPONDENTSKEVIN RICHARD SHIRLAW
SECOND RESPONDENTJUDGE:
SACKVILLE J
DATE OF ORDER:
7 AUGUST, 1998
WHERE MADE:
SYDNEY
THE COURT:
DECLARES, pursuant to s 222(4) of the Bankruptcy Act 1966 (Cth), that the deed of arrangement executed on 20 March 1998 is void.
MAKES sequestration orders against the estates of each of the debtors, Jim Gialouris and Sophie Gialouris.
ORDERS that the applicant’s costs be paid out of the estates of the debtors.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 7833 of 1997
BETWEEN:
METROPOLITAN DEMOLITIONS PTY LIMITED
APPLICANTAND:
JIM GIALOURIS AND SOPHIE GIALOURIS
FIRST RESPONDENTSKEVIN RICHARD SHIRLAW
SECOND RESPONDENT
JUDGE:
SACKVILLE J
DATE:
7 AUGUST, 1998
PLACE:
SYDNEY
REASONS FOR JUDGMENT
THE PROCEEDINGS
The applicant (“Metropolitan”), by an application filed on 16 July 1997, seeks an order pursuant to s 222(2), or alternatively s 222(4) of the Bankruptcy Act 1966 (Cth) (the “Bankruptcy Act”), that a deed of arrangement entered into by the first respondents (the “debtors”) and the second respondent (the “trustee”) be declared void. The deed of arrangement was executed on 20 March 1997, purportedly in pursuance of Part X of the Bankruptcy Act. It provided for the debtors, who are husband and wife, to pay to the trustee the sum of $10,000, whereupon they were to be released from all provable debts. This sum has been paid to the trustee but not yet distributed.
Section 222(1) provides that, where there is a doubt whether a deed of arrangement was entered into in accordance with Part X of the Bankruptcy Act, a creditor (inter alia) may apply to the Court for an order under s 222(2) declaring the deed to be void. Similarly, s 222(4) provides that where the Court, on application by a creditor, is satisfied that the debtor has omitted a material particular from his or her statement of affairs, the Court may declare the deed to be void. Metropolitan says that it is a creditor of the debtors, by reason of a default judgment obtained against them in the Local Court at Sydney in the sum of $51,170.18. The judgment was obtained in relation to excavation and associated works said to have been performed by Metropolitan on behalf of the debtors.
The principal grounds on which Metropolitan relies for the orders it seeks are the following:
First, at the time each of the debtors executed authorities under s 188 of the Bankruptcy Act, the husband (to whom I refer as “Mr Gialouris”) had liabilities to creditors for which the wife (to whom I refer as “Mrs Gialouris”) was neither jointly nor severally liable. Since all creditors of the debtors were not joint, it was not open to the person authorised by the s 188 authorities to call a joint meeting of creditors (as he did). Any resolution passed at a joint meeting of creditors held on 11 March 1997 was therefore void and of no force and effect for the purposes of Part X of the Bankruptcy Act. Thus the deed of arrangement, which purported to have been executed pursuant to the resolution, was also void and a declaration to that effect should be made pursuant to s 222(2) of the Bankruptcy Act.
Each of the debtors omitted material particulars or included incorrect material particulars in their statements of affairs given pursuant to s 188A of the Bankruptcy Act. In those circumstances, the Court should make an order declaring the deed to be void pursuant to s 222(4) of the Bankruptcy Act.
Metropolitan should have been admitted as a creditor in the sum of $51,170.18, the amount of a judgment debt it obtained against the debtors in the Local Court. Instead, it was admitted only to the extent of $4,000. Had Metropolitan been permitted to vote to the extent of its true entitlement, the resolution approving the proposal for a deed of arrangement would not have secured the approval of three-fourths in value of the creditors voting at the meeting, as required by s 204(1) of the Bankruptcy Act.
In any event, the deed of arrangement was not in accordance with the terms of the creditors’ resolution. This, too, was a ground for ordering that the deed be declared void.
Metropolitan also asks the Court to make orders for the sequestration of “each of the respective estates of the [debtors]”, pursuant to the power conferred by s 222(7) of the Bankruptcy Act. That power is enlivened when the Court makes an order declaring a deed of arrangement to be void.
In the alternative, Metropolitan seeks an order pursuant to s 236(1) of the Bankruptcy Act terminating the deed executed by the debtors. In the event the Court makes an order terminating the deed, Metropolitan seeks a sequestration order against the debtors pursuant to s 236(3).
As is often the case in bankruptcy matters, the course of these proceedings was not smooth. The matter was listed for hearing on 26 March 1998. On that occasion, the debtors were represented by senior and junior counsel, while Metropolitan was represented by Mr Johnson of counsel. Mr Johnson sought an adjournment on behalf of Metropolitan because relevant documentation concerning debts undisclosed in the debtors’ statements of affairs had just come to light. In the result, I granted an adjournment of the hearing until 25 June 1998.
On the adjourned hearing, Mr Johnson again appeared for Metropolitan, while Ms Kaur-Bains appeared for the debtors. As I have already indicated, Metropolitan relied on a number of legal and factual contentions in support of its case. The debtors resisted each of the contentions relied on by Metropolitan. Among other issues, the debtors sought to go behind Metropolitan’s default judgment in order to establish that the actual indebtedness was not the amount of the judgment debt ($51,170), but only about $4,000. Because the debtors conceded that they owed some moneys to Metropolitan, no challenge was made to Metropolitan’s standing as a creditor for the purposes of the present proceedings.
THE LEGISLATION
Part X of the Bankruptcy Act provides for arrangements between debtors and creditors, without sequestration orders being made. Part X was substantially amended by the Bankruptcy Legislation Amendment Act 1996 (Cth), No 44 of 1996, which came into force on 16 December 1996.
Part X applies, with the prescribed modifications, in relation to joint debtors, whether partners or not: s 187A. Prior to the insertion of s 187A by the Bankruptcy Amendment Act 1980 (Cth), there was doubt as to whether Part X applied to joint debtors: see Re Forbes; Ex parte Industrial Acceptance Corporation Ltd (1974) 24 FLR 87 (SA Insolv Ct/White J); T Irlicht, Assignments, Arrangements and Compositions by Debtors (2nd ed 1986), par 402. Regulation 10.02 of the Bankruptcy Regulations now modifies the provisions specified in Part 1 of Schedule 6 to the Regulations “in relation to their application in accordance with [s 187A], to joint debtors”. Thus in applying Part X to joint debtors, it is necessary to take account of the modifications effected by Part 1 of Schedule 6.
Section 187 of the Bankruptcy Act defines certain terms for the purposes of Part X. These include the following:
“ ‘debtor’means a person who is insolvent.
‘deed of arrangement’ means a deed (not being a deed of assignment...) providing for the arrangement of the affairs of a debtor with a view to the payment, in whole or in part, of his or her debts.
‘deed of assignment’ means a deed by which a debtor assigns all his or her divisible property for the benefit of his or her creditors.
‘divisible property’, in relation to a deed of assignment executed by a debtor, means the property...that would be divisible amongst his or her creditors under Part VI if he or she had become a bankrupt on that day.”
Part 1 of Schedule 6 to the Bankruptcy Regulations provides that in the application of Part X of the Bankruptcy Act to joint debtors, the expressions “a debtor” and “the debtor” are to be read as “joint debtors” and “the joint debtors”, respectively. Similar rules of interpretation apply to like expressions. To the extent that the context reasonably permits, a reference to joint debtors is taken to include a reference to any of the joint debtors: see Part 1, cl 1.1.
Section 188(1) of the Bankruptcy Act permits “[a] debtor”, who desires that his or her affairs be dealt with under Part X and who meets specified criteria, to sign an authority authorising a solicitor or registered trustee to call a meeting of the debtor’s creditors and to take control of his or her property. An authority signed by a debtor is not effective for the purposes of Part X unless the person authorised consents to exercise the power granted by the authority: s 188(2). Part 1 of Schedule 6 to the Bankruptcy Regulations modifies s 188(1) in relation to joint debtors, by substituting “[w]here each joint debtor is a person” for the expression “[a] debtor”: Part 1, cl 2.1.
When an authority under s 188 becomes effective, the person authorised under it becomes the controlling trustee: s 188(6). Within fourteen days after the authority becomes effective, “the debtor” must give the controlling trustee a statement of his or her affairs and a proposal for dealing with them under Part X: s 188A. In the case of joint debtors, the statement of affairs must be provided by each joint debtor: Part 1, cl 3.1. Once an authority is given by a debtor, his or her property is subject to the controls imposed by Part X: s 189(1). These controls continue until one of a number of specified events occurs, such as the debtor and trustee making a deed of arrangement following a special resolution of creditors: s 189(1A). A debtor cannot revoke an authority given under s 188: s 188(3).
The controlling trustee must prepare a report summarising and commenting on the information about the debtor’s affairs: s 189A(1)(a). If the debtor has given the controlling trustee a proposal for dealing with the debtor’s affairs, the report is to state whether the controlling trustee believes that creditors’ interests would be better served by accepting any proposal put forward by the debtor or by the bankruptcy of the debtor: s 189A(1)(b). The controlling trustee must also prepare a written statement about the special resolutions under s 204 that may reasonably be expected to pass at the creditors’ meeting called pursuant to the authority: s 189B(1).
The controlling trustee must call a meeting of the debtor’s creditors: s 190(1). In general, the meeting is to be held not later than thirty-five days after the debtor signed the authority: s 194(a). The debtor is required to attend the creditors’ meeting, unless prevented by illness or other sufficient cause: s 195(1). The debtor must answer questions put at the meeting with respect to his or her conduct or examinable affairs, to the best of his or her ability: s 195(3).
Following the 1996 amendments, which repealed ss 197-203 of the Bankruptcy Act, the procedure for calling and holding meetings is not now specified in detail in Part X. Instead, s 196 provides as follows:
“196. Division 5 of Part IV applies, with any modifications prescribed by the regulations, in relation to a meeting called under an authority under section 188 as if:
(a) the debtor who signed the authority were bankrupt; and
(b) the controlling trustee were the trustee in the bankruptcy.”
The prescribed modifications are set out in Part 2 of Schedule 6 to the Bankruptcy Regulations: see reg 10.05. It is necessary only to note that Division 5 of Part IV of the Bankruptcy Act contains no equivalent to the former s 198(a), which was repealed in 1996. That sub-section provided, inter alia, that a creditor was not entitled to vote in respect of an unliquidated contingent debt or a debt the value of which is not ascertained.
Section 204(1) of the Bankruptcy Act provides that the creditors, by special resolution passed at a meeting convened pursuant to s 188(1), may (inter alia):
“(b)require the debtor to execute a deed of assignment or deed of arrangement under this Part.”
“Special resolution” is defined by 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 telephone, by attorney or by proxy at a meeting of creditors and voting on the resolution.”
A deed of assignment or deed of arrangement must be executed within twenty-one days from the day on which the special resolution requiring the debtor to execute the deed was passed: s 216(1). Where a debtor fails without sufficient cause to execute a deed as required by the special resolution, the Court on the application of a creditor may forthwith make a sequestration order against the debtor’s estate: s 221(1). Section 213(1) provides as follows:
“213. (1) Subject to this Part, a deed of assignment or a deed of arrangement executed by a debtor after the commencement of this Act is void unless:
(a)it is entered into in accordance with this Part; and
(b)it complies with the requirements of this Part.”
Section 222 confers power on the Court to declare a deed of assignment or deed of arrangement void.
“222. (1) Where there is a doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204, the Inspector-General, the trustee, a creditor or the debtor 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 deed or composition is void, or that it is not void, on the ground specified in the application; or
(b)declaring that a provision of the deed is void, or is not void, on the ground specified in the application.
(3)The Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this Part if the deed complies substantially with those requirements.
(4)Where the Court, on the application of the Inspector-General, the trustee or a creditor, is satisfied that the debtor:
(a)…; or
(b)as omitted a material particular from the statement of the debtor’s affairs given under subsection 188(2) or included an incorrect and material particular in that statement;
the Court may make an order declaring the deed or composition to be void or declaring any provision of the deed or composition to be void.
(5)The Court shall not make an order declaring a deed or composition, or a provision of a deed or composition, to be void on a ground specified in subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so.
(6)The Court shall not make an order under subsection (2) or (4) unless the application for the order is made:
(a)…;
(b)in relation to a deed of arrangement – before the terms of the deed have been carried out;…
(7)The trustee or a creditor may include in an application under subsection (1) or (4) 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) to (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.
…
(9)The making of an application by the trustee or a creditor for a sequestration order under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor’s petition against the debtor, but the provisions of sub-section 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.”
Where a deed of assignment or deed of arrangement is declared to be void under s 222, all payments made and acts done under the deed prior to the Court’s order are valid and effectual: s 224. It should be noted that the reference in s 222(4)(b) to s 188(2) is apparently intended to be a reference to s 188A of the Bankruptcy Act.
Section 236(1) empowers the Court, upon the application of a creditor, to terminate a deed of arrangement. The power arises, inter alia, where the Court is satisfied that the debtor has failed to comply with a provision of the deed (s 236(1)(a)), that the deed cannot be proceeded with without undue delay to the creditors (s 236(1)(b)) or that “for any other reason the deed of arrangement ought to be terminated” (s 236(1)(c)). The Court is not to make an order terminating a deed on the ground specified in s 236(1)(a) or (c) unless satisfied that it would be in the interests of the creditors to do so: s 236(2). The creditor may include in an application under s 236(1) an application for a sequestration order against the estate of the debtor and, if the Court terminates the deed, it may make a sequestration order forthwith: s 236(3).
EVENTS LEADING TO THE DEED OF ARRANGEMENT
Metropolitan’s Default Judgment
On 23 October 1996, Metropolitan commenced proceedings in the Local Court at Sydney against Mr and Mrs Gialouris. Metropolitan’s statement of liquidated claim named Mr and Mrs Gialouris and sought the sum of $40,000 plus interest. The plaintiff’s cause of action was said to be
“for work done by the Plaintiff at the Defendants’ request, between 26 May 1990 and 10 September 1991”.
The particulars referred to an invoice dated 20 October 1994 (over three years after the work had been completed), a copy of which was annexed to the statement of claim. That invoice was addressed to Mr Gialouris at the Maroubra Junction Hotel, where both he and Mrs Gialouris worked. The invoice claimed $50,360.20, from which was deducted a payment by the debtors of $10,000, producing a total amount due of $40,360.20. Presumably, Metropolitan’s claim was limited to $40,000 because of the jurisdictional limit of the Local Court.
On 10 December 1996, solicitors acting on behalf of Mr Gialouris sought further particulars of Metropolitan’s claim. These were provided on 16 December 1996. The particulars alleged that an oral agreement had been made between Mr Gialouris and Mr Giannikouris of Metropolitan at an on-site meeting at a residential property at Lurline Bay, where the work was to be undertaken. (Mr Gialouris intended to build a house on the Lurline Bay property as a family home.) The particulars further alleged that Metropolitan agreed to provide the necessary labour, plant and equipment to excavate the site and remove all soil and waste. The work was to be on a “direct cost” basis and Mr Giannikouris was to keep a record of hours spent, plant used and expenses incurred. The particulars stated that the invoice dated 20 October 1994 was hand delivered to Mr Gialouris on 12 September 1995, that is, nearly one year after its purported date.
Notwithstanding the request for further particulars, Mr Gialouris’ solicitors did not file a defence to the proceedings. On 29 January 1997, Metropolitan obtained a default judgment against the debtors in the sum of $51,170.18, including interest.
Bonfat Pty Ltd and the Maroubra Junction Hotel
Prior to 1997, Mr and Mrs Gialouris operated a hotel known as the Maroubra Junction Hotel. The freehold of the hotel was owned by Bonfat Pty Ltd (“Bonfat”), the trustee of a trust known as the Gialouris Family Trust (“GF Trust”). Both Mr and Mrs Gialouris were beneficiaries of the GF Trust. Although the evidence was sketchy, it appears that Bonfat ran the business and Mr and Mrs Gialouris “took drawings”, presumably by way of advances by or distributions from the Gialouris Family Trust.
Mr Gialouris executed guarantees in favour of various suppliers to Bonfat. None of these guarantees was in evidence. Nor did the evidence establish whether or not Mrs Gialouris had also executed guarantees. For reasons that will become clear, it is not necessary to make a finding as to whether Mrs Gialouris did or did not execute guarantees.
According to Mr Gialouris’ uncontradicted evidence, Bonfat sold the freehold of the hotel and the business in 1995 and went into liquidation some time in 1996. The records of Bonfat are presently with the liquidator. For reasons not made entirely clear, those records were not tendered in evidence in these proceedings.
In about March 1996, Mr Gialouris signed an authority to call a meeting of his creditors, pursuant to Part X of the Bankruptcy Act. His proposal was not approved at the creditors’ meeting. However, as Mr Gialouris acknowledged, his experience with the 1996 creditors’ meeting alerted him to the importance of completing an accurate statement of affairs for the purposes of conducting a creditors’ meeting under Part X of the Bankruptcy Act.
The Statements of Affairs
On 13 February 1997, Mr Gialouris signed an authority, pursuant to s 188 of the Bankruptcy Act, authorising a solicitor, Mr France of Brown & Partners, to call a meeting of Mr Gialouris’ creditors in accordance with Part X of that Act, and to take control of Mr Gialouris’ property. Mr France consented to exercise the powers conferred by the authority. On the same day, Mrs Gialouris executed an authority in identical terms. Mr France also consented to exercise the power conferred by Mr Gialouris’ authority.
On 14 February 1997, Mr Gialouris completed a statement of affairs, in apparent compliance with s 188A of the Bankruptcy Act. The statement of affairs recorded assets of $600 and liabilities of $875,129. The list of unsecured creditors included the following:
Angela Karozis (Mrs Gialouris’ mother) $310,000
Bill Gialouris $145,000
Creton Gialouris $ 58,000
George Gialouris $ 20,000
Stewart Levitt & Co (Mr Gialouris’ solicitors) $ 36,000
Metropolitan Demolitions $ 3,600
The list of unsecured creditors made no mention of any indebtedness of Mr Gialouris to Terrace Guardians Ltd, a matter to which I shall refer later.
Mr Gialouris answered “no” to the following question in his statement of affairs
“Have you, your spouse or any member of your family had an interest in a Trust in the last 5 years, or have you transferred any assets to a trust in the last 5 years?”
In answer to a question asking whether he had been a director or shareholder of a company at any time in the previous five years, Mr Gialouris stated that he had been a director or shareholder of Bonfat. He did not state that Bonfat was the trustee of the GF Trust. No mention was made of Kelshari Pty Ltd (“Kelshari”) or CK Delicatessens Pty Ltd (“CK Delicatessens”), companies of which (as will be seen) Mr Gialouris was recorded as being a director.
Mr Gialouris’ statement of affairs identified proceedings commenced by “Amber Tiles” as a court action in which he was then currently involved. However, his list of creditors did not include any debt due to Amber Tiles, nor to Fire Earth Gallery Pty Ltd, trading as “Amber Eastern Suburbs”. The evidence showed that the proceedings to which the statement of affairs referred were in fact instituted by Fire Earth Gallery Pty Ltd trading as Amber Eastern Suburbs.
Mrs Gialouris also signed a statement of affairs on 14 February 1997. Her statement of affairs was very similar to that of her husband. The list of unsecured creditors included in her statement appears to be a photocopy of the list in Mr Gialouris’ statement. In any event, the list was identical. She also said that she had had no interest in a trust in the previous five years. Mrs Gialouris’ statement did not refer to the proceedings commenced by Amber Eastern Suburbs.
The Creditors’ Meeting
On or shortly after 21 February 1997, Brown and Partners sent a notice addressed to “the creditors of Jim Gialouris and Sophie Gialouris”. The notice, which attached a number of supporting documents, including the respective authorities signed by Mr and Mrs Gialouris, stated that
“[t]he above debtors signed an authority under [s 188] on 13 February 1997 authorising [Mr France] to call a meeting of their creditors for the purposes of Part X….”
The supporting documents included a notice of meeting to consider the “debtor’s proposal”. This gave notice that Jim Gialouris and Sophie Gialouris had “signed authorities under [s 188(1)] authorising [Mr France] to call a meeting of their creditors”. The notice was in a form which plainly was prepared prior to the 1996 amendments to the Bankruptcy Act, since it included a reference to the repealed s 198(2) (preventing a contingent creditor voting at the creditor’s meeting).
On 24 February 1997, Mr and Mrs Gialouris signed a single “Debtors’ Proposal for Deed of Arrangement Pursuant to Section 188(2)(c)(ii)”. The reference to s 188(2)(c) was incorrect, since s 188(2)(c) of the Bankruptcy Act had been repealed by the 1996 amendments, although the new s 188A required a debtor to provide the trustee with a proposal for dealing with his or her affairs. The proposal was in the following form:
“We, JIM GIALOURIS…and SOPHIE GIALOURIS…intend to offer to execute a Deed of Arrangement pursuant to the provisions of Part X of the Bankruptcy Act 1996 to
1.Assign to the trustee all our divisible property as defined by Section 116 of the Bankruptcy Act, 1966.
2.Pay to the trustee the sum of $10,000.00, such payments to be distributed equally amongst all our creditors after payment of the trustees costs and expenses.”
The trustee submitted a report to creditors as required by s 189A of the Bankruptcy Act. The report noted that, as the creditors recorded in each statement of affairs were the same and the assets were similar, one report had been prepared for both parties. The report also noted that a number of creditors, including Stewart Levitt & Co, Angela Karozis and other members of the debtors’ families, had agreed not to prove in the estate. This reduced the total of creditors’ entitlements to prove in the estate to $306,130.
According to the report, Mr and Mrs Gialouris had separated and each was unemployed. The trustee predicted that, if sequestration orders were made against the debtors, neither would be able to make any significant contribution to the trustee during the usual three year term of the bankruptcy. Accordingly, creditors could expect no dividend after payment of fees and expenses. Under the deed of arrangement, creditors could expect to receive a dividend amounting to 2.02 cents in the dollar.
On 11 March 1997, Mr Giannikouris completed, on behalf of Metropolitan, a proof of debt claiming that Mr and Mrs Gialouris were indebted to Metropolitan in the sum of $51,170.18. On the same day a meeting of the creditors of Mr and Mrs Gialouris was held. The meeting was chaired by Mr France.
The minutes record, among other things, that Metropolitan’s proof of debt sought to rely on a judgment by default obtained in the Local Court, but that a motion had been filed on behalf of Mr and Mrs Gialouris to set aside the judgment. Mr Gialouris advised the meeting that approximately $3,500 was admitted to be due to Metropolitan. The Chairman admitted the proof of debt for voting purposes in the sum of $3,500. He also admitted Stewart Levitt & Co as a creditor in the sum of $55,510.26.
The Chairman proposed that Mr and Mrs Gialouris execute a deed of arrangement pursuant to Part X of the Bankruptcy Act, whereby they assigned to the trustee all their divisible property and paid the trustee $10,000, such sum “to be distributed equally amongst all creditors after payment of the trustee’s costs and expenses”. The trustee was to be paid a minimum of $3,000.
The minutes record that a majority of creditors in number and value favoured the proposal, as follows:
“VOTING SCHEDULE
FOR $
Carlton & United Breweries 14,763.84
Carlton Special Beverages 2,058.87
George Gialouris 20,000.00
Scots College 11,228.93
Australian Liquor Marketers 78,455.84
Deolan Holdings 170,000.00
Tooheys 4,474.69
Creton (Greg) Gialouris 65,345.00
Stewart Levitt 55,510.26
Heller Equipment Finance 48,137.00
469,974.43
AGAINST $
ANZ 13,048.78
Hills Northwest 12,201.85
Tax 43,406.56
Bank SA 55,439.66
Metropolitan Demolitions 4,000.00
128,096.85
It should be noted that Deolan Holdings Pty Ltd (“Deolan”) was permitted to vote, notwithstanding that no reference was made to its debt in the debtors’ statements of affairs. Deolan seems to have been a company associated with Bill Gialouris, although the evidence is unclear on the point. It is also unclear why Metropolitan’s debt for voting purposes was recorded as $4,000, rather than $3,500 or $3,600.
The Deed of Arrangement
On 20 March 1997, a deed was entered into between Mr and Mrs Gialouris (called “the Debtors”), of the one part, and Mr Shirlaw, a registered trustee, of the other. The deed contained the following recitals:
“WHEREAS:
A.The Debtors are unable to pay their creditors in full and have made an offer to enter into a DEED OF ARANGEMENT pursuant to the Act in full satisfaction of their debts.
B.The Debtors have given Michael Edward France, Solicitor, written authority pursuant to Section 188 of the Act to convene a meeting of their creditors.
C.At a meeting of the creditors of the Debtors called in pursuant of the said authorities and held on 11 March 1997, a Special Resolution of their creditors, was passed requiring the Debtors to enter into this DEED OF ARANGEMENT and nominating the Trustee as Trustee thereof.”
It was common ground that the deed was a deed of arrangement, notwithstanding that it included an assignment of the debtors’ property: Gee v Schmutter (1971) 123 CLR 503, at 510-512, per Barwick CJ, with whom McTiernan and Windeyer JJ agreed.
The deed shows signs of having been adapted from a standard form. In particular, although Mr and Mrs Gialouris were referred to as the “Debtors”, the deed contained a number of references to “Debtor”, although the usage is not consistent. For example, “Divisible Property” was defined to mean
“the property of the Debtor…that would be divisible amongst his creditors…under Part VI of the Act as if he had become bankrupt…”.
The definition clause provided that words imparting the singular were deemed to include the plural: cl 1(g). Nonetheless, it would seem that the use on some occasions of the “Debtor” instead of “Debtors” was a drafting error.
Under the deed, “the Debtors” covenanted to pay the trustee $10,000 and to assign the “Divisible Property of the Debtors” to the trustee: cll 2, 3. The trustee, so far as was necessary, was to call in and convert the “Property of the Debtors” set out in cll 2 and 3, and to administer the same in the following manner (cl 4):
“(a)firstly, in payment of costs, charges, remuneration and expenses of or incidental to the administration of this Deed properly due or incurred by the Trustee…;
(b)secondly, by payment to the Creditors proportionately according to the amount of such Creditors’ proved debts…to the intent that such Creditors shall share equally in the proceeds of the Divisible Property;
(c)thirdly…in accordance with and in the order prescribed by Part VI of the [Bankruptcy Act], as modified by section 237(2).”
“Creditor” was defined to mean “a person who has a provable debt against the Debtor”: cl 1(c).
The deed was expressed to bind the “secured Creditors of the Debtors as well as the unsecured Creditors”: cl 6. The deed further provided as follows (cl 8):
“Upon payment of the said sum of $10,000, receipt of which is acknowledged, the Debtors shall be released from all provable debts.”
THE DEBT TO METROPOLITAN
Application to Set Aside the Judgment
On about 10 March 1997, the debtors filed a motion in the Local Court to set aside the judgment obtained against them by Metropolitan. In an accompanying affidavit, Mr Gialouris swore that he had instructed his solicitors to seek further particulars of the claim. However, he claimed that he had moved address in January 1997, and consequently did not receive correspondence from his solicitors. He had not realised that instructions were necessary for his solicitors to file a defence in the Local Court proceedings.
The affidavit annexed a draft defence. In that defence, Mrs Gialouris denied that she requested Metropolitan to perform any work on her behalf or that she entered into any agreement with Metropolitan. Mr Gialouris admitted an agreement, but said that it provided for payment of a lump sum of $12,000 for excavation and associated work at the Lurline Bay property.
In early May 1997, the debtors withdrew their motion to set aside Metropolitan’s judgment. They took this course because they understood that the effect of the deed of arrangement was to release them from any indebtedness to Metropolitan. In early August 1997, following the filing of Metropolitan’s application in this Court, the debtors filed a further motion in the Local Court seeking to set aside Metropolitan’s judgment. As far as the evidence shows, that motion has not yet been dealt with, presumably because of the pending application in this Court to set aside the deed of arrangement.
The position of the debtors in relation to the debt due to Metropolitan fluctuated from time to time. Mr and Mrs Gialouris included Metropolitan as a creditor for $3,600 in each of their respective statements of affairs. Written submissions filed on their behalf prior to the first scheduled hearing (26 March 1988) submitted that, since Mrs Gialouris had admitted that she was indebted to Metropolitan, it should be accepted, for the purposes of the deed of arrangement, that the indebtedness was joint. On the other hand, Mr Gialouris swore an affidavit in the Local Court proceedings verifying a defence, which denied any agreement between Mrs Gialouris and Metropolitan.
At the resumed hearing, Ms Kaur-Bains persisted with the contention that the debtors were jointly indebted to Metropolitan, albeit only in the sum of $4,000, rather than the amount of the Local Court judgment debt. This was notwithstanding that the evidence of each of the debtors suggested that it was only Mr Gialouris who owed any money to Metropolitan. Ms Kaur-Bains did not ask me to make a finding that any indebtedness to Metropolitan was that of Mr Gialouris alone.
The parties to these proceedings have therefore approached the litigation, for their own forensic reasons, on the basis that the debtors were jointly indebted to Metropolitan. There was a dispute as to whether that indebtedness was in truth for the amount of the judgment debt, or for the lesser sum of $4,000. Metropolitan relied on the judgment debt principally to support its claim that the trustee had erred in admitting Metropolitan’s proof of debt only in the sum of $4,000, rather than $51,170.18, and that this error allowed the resolution to pass with the necessary majority. Metropolitan also submitted that, in considering whether a sequestration order should be made pursuant to s 222(7) of the Bankruptcy Act, the indebtedness should be taken to be the amount of the judgment debt. For their part, the debtors contended that their indebtedness was limited to the sum of $4,000.
Each debtor gave evidence of the dealings with Metropolitan, although it was only Mr Gialouris who claimed to have any detailed knowledge of the matter. Given that the quantum of the indebtedness was clearly raised by the debtors and that Metropolitan relied on the Local Court’s judgment, it is rather curious that Metropolitan put on no evidence to contradict the evidence given by the debtors.
While I have reservations about certain aspects of Mr Gialouris’ evidence, there is no basis for rejecting his sworn account of his dealings with Metropolitan. Indeed, it was not put to him in cross-examination that he was not telling the truth. I have also taken into account that there are some unexplained features of the evidence about which Metropolitan might have been expected to (but did not) shed light. These include Metropolitan’s apparently extraordinary delay in preparing and, subsequently, forwarding the invoice to Mr Gialouris and its failure to make any claim for payment in the intervening period.
Having regard to these matters, I make the following findings:
Mr Gialouris entered into an arrangement in early 1990 with Mr Giannikouris on behalf of Metropolitan, whereby Metropolitan was to perform excavation and related work at the Lurline Bay property.
The price agreed between Mr Gialouris and Mr Giannikouris for the work was $12,000 plus reimbursement of the cost of certain timber and hiring charges. The amount to be reimbursed was quantified at $1,943.50.
Mr Gialouris paid $10,000 to Metropolitan in respect of the work performed at the Lurline Bay property. The indebtedness to Metropolitan is therefore in the sum of $3,943.50.
Had I been asked to make a finding as to whether the indebtedness was joint or that of Mr Gialouris alone, I would have had to take into account Mrs Gialouris’ unchallenged evidence that she had not participated in or authorised any contractual arrangements with Metropolitan. However, as I have said, both counsel accepted that the indebtedness was joint and it may be that this was why Mr Johnson did not seek to challenge Mrs Gialouris’ evidence. It is not appropriate to make a finding that would contradict the position adopted by all parties to the litigation.
SEPARATE INDEBTEDNESS
Terrace Guardians
Metropolitan contended that Mr Gialouris had failed to disclose in his statement of affairs a contingent liability to Terrace Guardians Pty Ltd (“Terrace Guardians”). It was said that this contingent liability was his alone and arose from a deed of guarantee and indemnity executed by him in relation to a loan by Terrace Guardians to his mother-in-law, Mrs Karozis. Metropolitan also relied on this contingent liability as supporting its case that Mr Gialouris had separate debts from those of his wife, and that the existence of these debts rendered the deed of arrangement void. Mr Johnson argued that the repeal of s 198(a) of the Bankruptcy Act meant that a contingent creditor was entitled to vote at a creditors’ meeting: see also ss 237(2), 82(1).
The evidence relating to Terrace Guardians was neither clearly presented nor complete. However, the unchallenged evidence of Mr Gialouris indicates that he arranged the loan, in the first instance, to enable Mrs Karozis to purchase two properties. The loan was repaid by her, in part, in early 1994, but a further advance was made by Terrace Guardians later that year. Although a request was made to Mr Gialouris to become a party to the mortgage itself, he declined to adopt this course of action.
From the documentation in evidence, the following appears to be the position:
On 15 November 1993, a mortgage broker advised Mrs Karozis that Terrace Guardians was prepared to advance up to $675,000, for a term of one year, on the security of two nominated properties. The guarantors were to be Mr Gialouris and Bonfat, as the trustee of the GF Trust.
On 15 December 1993, Terrace Guardians advanced $675,000 to Mrs Karozis. She executed the first mortgage of certain property as security for the advance. The term of the mortgage loan was expressed to be for one year. The mortgage included in the definition of “Collateral Security” the guarantee and indemnity given in favour of Terrace Guardians by Mr Gialouris and Bonfat.
Also on 15 December 1993, Mr Gialouris and Bonfat executed a deed of guarantee and indemnity. Under this deed, inter alia, they each guaranteed payment by Mrs Karozis of the “Guaranteed Money”. This expression was defined to include all amounts which, at any time,
“are payable, are owing but not currently payable, are contingently owing, or remain unpaid, by the Debtor to the Financier”. (cl 1.1)
The mortgage was varied on 10 June 1994. The variation extended the term of the loan until 14 December 1996.
The mortgage was further varied on 7 October 1994. This variation altered the amount of the loan to $565,000. The variation also amended the definition of “Collateral Security”, by deleting the reference to the guarantee and indemnity executed by Mr Gialouris on 15 December 1993. Other securities were substituted in its place, but none of these was executed by Mr Gialouris.
The evidence relating to Mr Gialouris’ liability to Terrace Guardians (if any) was left in a somewhat unsatisfactory state, principally because an affidavit prepared by an officer of Terrace Guardians contained a number of inadmissible passages and did not descend to annexing records that would have clarified the position. It is necessary to consider the variation of mortgage of 7 October 1994, which deleted the reference to Mr Gialouris’ guarantee and indemnity. I must also take into account Mr Gialouris’ evidence (which I accept) that he had never been served with any demand by Terrace Guardians. In these circumstances, I am not prepared to find that Mr Gialouris was indebted, contingently or otherwise, to Terrace Guardians at the date he completed his statement of affairs, or at any subsequent time. Although it is not necessary to make an affirmative finding, the documentary evidence, albeit incomplete, suggests that it is likely that Mr Gialouris was released from his guarantee in 1994.
Indebtedness to Stewart Levitt & Co
Mr Stewart Levitt, principal of the firm Stewart Levitt & Co, gave evidence that he had acted for Mr and Mrs Gialouris and their companies since 1992. He was also a friend of theirs, although by 1996 he had come to regard Mr Gialouris as an unreliable payer.
On 11 March 1997, Mr Levitt prepared an invoice in respect of proceedings in the Local Court and Supreme Court of New South Wales to which Mr and Mrs Gialouris were parties. These proceedings had concluded by June 1994. The invoice, which Mr Levitt admitted had been hurriedly prepared, charged for 225 hours of Mr Levitt’s time at the rate of $250 per hour, a total of $56,250. However, the invoice recorded that this had been reduced to $45,000. Mr Levitt gave evidence that the invoice had been prepared on 11 March 1997 because he was aware that the creditors’ meeting was to take place that day. At about the same time (although the dating of the documents is unclear), Mr Levitt lodged a proof of debt claiming that Mr and Mrs Gialouris owed him $55,510.26. The computation of this amount was not explained.
In the meantime, on 24 February 1997, the controlling trustee reported to creditors that he had been instructed by Mr Gialouris that Stewart Levitt & Co (among other creditors) had agreed not to prove in the estate in respect of the debt of $36,000 that had been disclosed in the debtors’ respective statements of affairs. Nonetheless, at the creditors’ meeting of 11 March 1997, Stewart Levitt & Co’s proof was admitted in the sum of $55,510.26. Mr Levitt was recorded as voting in favour of the deed of arrangement.
There was a good deal of evidence concerning the fees due to Stewart Levitt & Co, including ledger cards relating to a number of transactions in which Mr Levitt acted on behalf of Mr Gialouris and (less often) on behalf of Mr and Mrs Gialouris. Mr Johnson prepared a chart which summarised the fees charged by the firm and the matters in respect of which the fees were charged. In relation to the proof of debt by Stewart Levitt & Co I am satisfied of the following:
$45,000 was due to the firm by Mr and Mrs Gialouris in respect of the proceedings referred to in the invoice of 11 March 1997;
of the remaining $10,510.26, a maximum of $1,363 was due by Mr and Mrs Gialouris, the balance being due to the firm by Mr Gialouris alone.
Thus, of the $55,510.26 in respect of which Stewart Levitt & Co lodged a proof, at least $9,147.26 was due by Mr Gialouris alone.
Amber Eastern Suburbs
Mr Gialouris was cross-examined about the proceedings instituted against him by Amber Eastern Suburbs. On his own evidence, he ordered a quantity of tiles from the supplier with which he had previous dealings. Moreover, Mr Gialouris ordered the tiles (as he acknowledged) in his own name. He claimed in his evidence that he had purchased the tiles on behalf of his mother-in-law, Mrs Karozis. While I accept that the tiles were delivered to Mrs Karozis’ property, I do not accept Mr Gialouris’ evidence that the debt was not his, but his mother-in-law’s. On any view, Mrs Gialouris incurred no liability in respect of the tiles.
Mr Johnson put to Mr Gialouris that his indebtedness to Amber Eastern Suburbs was $957, but Mr Gialouris said he could not remember the amount. Although Mr Johnson referred to an invoice, he did not tender any such document. There was evidence that Amber Eastern Suburbs had filed a proof of debt, but again the proof of debt was not tendered.
While the evidence is somewhat unsatisfactory, I consider that, at the date of the creditors’ meeting, Mr Gialouris was indebted to Amber Eastern Suburbs for an amount which, on the evidence, cannot be precisely quantified, although Ms Kaur-Bains did not dispute the figure of $957. The likelihood is that Mr Gialouris had a right of contribution or indemnity from Mrs Karozis in respect of this indebtedness.
Trade Creditors
Mr Johnson sought to argue that the indebtedness due to the “trade creditors” voting in favour of the deed of arrangement was that of Mr Gialouris alone and not of Mr and Mrs Gialouris jointly. This issue had not been raised in the applicant’s statement of grounds relied on for relief claimed. I declined to grant leave to the applicant to amend that statement, having regard to the prejudice that would have been occasioned to the respondents, had the amendment been allowed. Accordingly, I do not need to address this issue.
MATTERS SAID TO BE UNDISCLOSED
GF Trust
As I have already pointed out, both Mr and Mrs Gialouris were beneficiaries of the GF Trust, of which Bonfat was the trustee. While the evidence showed that Bonfat went into liquidation in 1996, there was no evidence as to the financial position of the GF Trust. Nor was there any detailed evidence as to whether Mr or Mrs Gialouris were entitled to any moneys through the GF Trust, although Mr Gialouris said in an affidavit that he had no assets.
Mr Gialouris’ explanation for omitting any reference to the GF Trust was that it had ceased to exist and that he had not transferred assets to it. On the evidence, the probabilities are that Mr and Mrs Gialouris had a claim as creditors of the GF Trust, since a significant, although unquantifiable proportion of the moneys borrowed by them was onlent to Bonfat in connection with the operation of the Maroubra Junction Hotel. There was no documentary evidence as to whether the GF Trust had sufficient assets to make any such claim of commercial value.
The Angela Karozis Family Trust
The Angela Karozis Family Trust was established on 1 September 1992. Mrs Karozis was the settler and Mr Gialouris the trustee. The beneficiaries were Mrs Gialouris’ sister and any child or grandchild of her sister. Neither Mr Gialouris nor any member of his immediate family was a beneficiary of the Trust.
Kelshari
Australian Securities Commission records show that, at the time Mr Gialouris completed his statement of affairs, he held 25,000 of 100,000 issued shares in Kelshari. Mr Gialouris was also a director of the company, the status of which was recorded in April 1998 as “Strike-Off Action in Progress”.
Mr Gialouris’ evidence was that his involvement in Kelshari had ceased in about 1990 at which time his shareholding was to be transferred to another director. The issue was not explored further in the evidence.
C K Delicatessens
Australian Securities Commission records show that Mr Gialouris was a director and shareholder of CK Delicatessens, until the company was dissolved on 18 April 1997. The other shareholder was Mrs Karozis. Mr Gialouris thus was a director and shareholder of CK Delicatessens at the time he completed his statement of affairs.
In evidence he said that he had been appointed a director when his father-in-law had passed away, but did not recall ever being a shareholder. He also said that he should not have been a director after about 1992, but was not asked to give an explanation for this answer.
Debt Due to Bill and Anne Gialouris
The statement of affairs recorded that Mr and Mrs Gialouris were indebted to Bill Gialouris in the sum of $145,000, although this may have been a reference to the debt due to Deolan. Mr Gialouris said that he and his wife had borrowed moneys from Bill Gialouris and that it had been used in the hotel business. Mr Gialouris acknowledged that he and his wife would have been creditors of Bonfat (as trustee of the GF Trust) in respect of moneys on-lent by them to Bonfat for use in the hotel business. He said that he did not disclose that fact in his statement of affairs because Bonfat had been placed in liquidation in 1996.
Debt Due to Angela Karozis
Angela Karozis is Mrs Gialouris’ mother. Each statement of affairs records an indebtedness of $310,000 to Mrs Karozis. Mr Gialouris said that this represented moneys advanced over a period of time to them jointly. Mr Gialouris could not recall how the money was used, except that some went to pay off debts.
REASONING
Separate Creditors
It follows from the findings I have made that, at all material times, Mr Gialouris had separate creditors, as well as creditors to whom he and his wife were jointly indebted. The separate creditors were Stewart Levitt & Co (as to approximately $9,147) and Amber Eastern Suburbs (as to $957). (I have rejected Metropolitan’s contention that Mr Gialouris was also separately indebted to Terrace Guardians.) Neither of the separate creditors I have identified was recorded as such in the statements of affairs prepared by Mr and Mrs Gialouris.
In these circumstances, Mr Johnson relied on Re Williams; Ex parte Official Trustee in Bankruptcy (1990) 26 FCR 191 (Hill J), to support the contention that the resolution passed at the creditors’ meeting was void. In Re Williams, a husband and wife signed separate authorities to call a meeting of their several creditors pursuant to s 188 of the Bankruptcy Act. In addition, they each signed a joint authority to call a meeting of their creditors. The husband’s statement of affairs disclosed that he had both separate and joint debts; the wife’s disclosed only joint debts. Two meetings were held, or purported to be held, pursuant to the authorities given under s 188. Two sets of minutes were prepared. The first recorded a resolution that the creditors of the husband accepted a composition contributed by the husband and wife jointly in full satisfaction of all debts owed by the husband. A resolution in identical terms was recorded in respect of the meeting of the wife’s creditors. So far as the resolution passed by the husband’s creditors was concerned, the resolution was put to a vote of both his joint creditors and his separate creditors although only the separate creditors voted.
Hill J referred to s 187A of the Bankruptcy Act (which applies Part X to joint debtors, subject to the prescribed modifications). His Honour also referred to the provisions of the Bankruptcy Rules then in force. In particular, r 100C provided that at a meeting of joint and separate creditors, separate creditors were not to vote on a resolution proposed for consideration by joint creditors; joint creditors were not to vote on a resolution for consideration by separate creditors; joint and several creditors could vote on resolutions proposed for joint creditors and on resolutions proposed for separate creditors. Rule 100E also modified the then s 195 of the Bankruptcy Act, by requiring joint debtors to submit both a statement of their joint affairs and a statement of the separate affairs of each debtor.
Hill J reached the following conclusions (at 195):
“In my view, the proper interpretation of the Act is that where a composition is proposed to be made between two or more debtors (having joint and several debts) and their creditors joint and several, there is a requirement, subject to r 100C, that there be held separate meetings of the several creditors of each debtor as well as a separate meeting of the joint creditors of each.
These separate meetings could, of course, be held consecutively. They may also, and this is reinforced by r 100C, be held concurrently. Where they are held concurrently in circumstances where it can be said there is in truth but one meeting as contemplated by r 100C, it is nevertheless important that the distinction be retained between the composition that is offered between a debtor and his or her several creditors and the composition that is being offered between the debtors and their joint creditors.
Accordingly, there must be proposed to the separate creditors of each debtor the respective resolutions to be passed with respect to the separate liabilities, and to the joint creditors the resolution proposed with respect to the joint liabilities. Voting in respect of each resolution should be open only to the appropriate class of creditor.
Where, for example, joint creditors are given the opportunity to vote in respect of a resolution relating only to the separate debts of a debtor, the resolution passed, in my view, will not comply with Pt X even if it turns out, as in the present case in respect of the separate debts of Mr Williams, that only the separate creditors voted.”
Neither counsel addressed whether Re Williams continues to apply to creditors’ meetings in respect of joint debtors after the 1996 amendments to the Bankruptcy Act. Section 187A remains in Part X of the Bankruptcy Act. However, the present Bankruptcy Regulations, which commenced on 16 December 1996 and replaced the Bankruptcy Rules previously in force, contain no equivalent to r 100C of the Bankruptcy Rules referred to in Hill J’s judgment. Nor do they contain any equivalent to r 100E. Be that as it may, Ms Kaur-Bains, as I followed her, was content to proceed on the basis that the holding in Re Williams represents the law after the 1996 amendments. In effect, the debtors’ submission was that Re Williams did not apply in the circumstances of the present case, because Mr and Mrs Gialouris had only joint debts. I have already rejected that submission.
On the assumption that Re Williams represents the current law, the resolution passed by creditors in the present case was not in accordance with the Bankruptcy Act. Each of the debtors signed separate authorities. However, they signed a single proposal and, more significantly, a single resolution was put to and passed by a meeting of all creditors. According to Re Williams, it was necessary to distinguish between a composition offered between a debtor and his or her several creditors, and a composition offered by debtors to their joint creditors. Ms Kaur-Bains did not suggest that the reasoning, if it continues to apply after the 1996 amendments, does not apply to a deed of arrangement, as distinct from a composition. In the present case, the chairman of the meeting did not put separate proposals to the separate creditors of Mr Gialouris and to the joint creditors of Mr and Mrs Gialouris.
On the reasoning in Re Williams, it would not seem to matter that the principal separate creditor, Stewart Levitt & Co, probably would have voted in favour of a resolution, had it been put to the separate creditors of Mr Gialouris (although this issue was also not addressed in submissions). The failure to comply with the statutory requirements would be enough to justify a declaration being made under s 222(2) of the Bankruptcy Act, to the effect that the deed of arrangement is void. Since there had been a failure to call a valid and properly convened creditors’ meeting, it could not be said that the deed of arrangement complied substantially with the requirements of Part X: see s 222(3); cf Musolino v Sidiropolous (1991) 101 ALR 235 (FCA/FC), at 245.
Because the parties did not address some of the issues that may arise in connection with the principles stated in Re Williams, I prefer not to rest my decision solely on the separate creditors’ issue. Accordingly, I shall consider whether there was any material omission from or material mis-statement in the debtors’ statements of affairs.
Material Omission or Mis-Statement
The test for determining whether a particular is “material” for the purposes of s 222(4)(b) was stated by von Doussa J in Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544, at 549:
“A particular is ‘material’ within the meaning of s 222(b)(b) if it is a particular which would be relevant to and might be likely to affect the making of a decision by the creditors: see Re Segal; Lensworth Finance Ltd v Segal (1975) 45 FLR 85; Beard v Prestige Baking Industries Pty Ltd (1981) 52 FLR 384, per Fox J (at 397-398), per Lockhart J (at 417-419) and per Sheppard J (at 424-425). The test is an objective one. The subsection does not require that a misstatement be made ‘knowingly’. In Re Segal; Lensworth Finance Ltd v Segal (supra) Riley J said (at 87-88) that it is essential that the information contained in the statement of affairs be ‘full and correct: the creditors are entitled to all available information about the debtors’ conduct, trade dealings, property [and] affairs before they make their decision’.”
Since the test is objective, the materiality is not to be determined solely with reference to creditors who attended the meeting: Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 (FCA/FC), at 533, per Lockhart J, with whom Fisher and Davies JJ agreed.
A difficulty in the present case is that the evidence on some significant issues was incomplete or imprecise. However, it is clear that Mr and Mrs Gialouris failed to disclose in their respective statements of affairs that each was a beneficiary of the GF Trust. It is true that they each disclosed a shareholding in Bonfat, but nothing was said about the company being a trustee of a trust in which they held a beneficial interest. Moreover, each debtor specifically stated that he or she had had no interest in a trust during the preceding five years. Those statements were false. As the authorities make clear, it does not matter whether the erroneous statements were made innocently or with knowledge of this falsity.
In assessing the materiality of the debtors’ non-disclosures and of their false statements, further omissions must be taken into account. Mr Gialouris acknowledged that some of the moneys borrowed from Bill Gialouris were on-lent to Bonfat, for the purposes of the hotel business. So, too, was a proportion of the moneys borrowed from other sources. Thus, apart from any other interest the debtors may have had in the GF Trust, they would appear to have a claim as creditors of Bonfat, in its capacity as trustee of the GF Trust.
In my opinion, the existence of the debtors’ undisclosed interest in the GF Trust (including their claims against Bonfat in respect of moneys on-lent by the debtors) would have been relevant to and likely to affect the creditors’ decision as a deed of arrangement. Creditors may well have taken a different view of a proposal by the debtors to be released from a total indebtedness of nearly $900,000 (or $306,000 if family members and Stewart Levitt & Co were excluded) on payment of only $10,000, had they been aware of the interest of the debtors in the GF Trust and of their entitlements as creditors of Bonfat.
I do not think that the fact that Bonfat has been placed in liquidation detracts from this conclusion. Mr Gialouris’ oral evidence suggested that Bonfat had no assets. But the GF Trust owned and operated a substantial hotel business. The debtors have failed to adduce any documentary evidence demonstrating the financial position of the GF Trust and whether, as creditors, they might be able to obtain some benefit from the Trust or Bonfat. After all, they were directors of Bonfat and (so I infer) the controllers of the GF Trust.
In my view, creditors (I leave aside family members), learning of the existence of the GF Trust and of moneys lent by the debtors to the Trust, would be likely to require more information before deciding whether to approve a resolution proposing a deed of arrangement. They would be likely to require information as to the assets available for distribution among creditors of Bonfat or the GF Trust and the extent of any claims available to the debtors in respect of assets of the Trust. In my opinion, the failure to disclose the existence of the GF Trust and the debtors’ possible entitlements as creditors of the Trust were material omissions. The incorrect answer given in each statement of affairs relating to the debtors’ interest in Trusts was also an “incorrect and material particular” within s 222(4)(b) of the Bankruptcy Act.
It is doubtful whether Mr Gialouris’ failure to disclose his shareholdings in Kelshari and CK Delicatessens amounted, of itself, to the omission of a material particular from his statement of affairs. On the one hand, the existence of these shareholdings at the date Mr Gialouris completed his statement of affairs clearly raised the possibility that he was entitled to benefits from each of the companies. Moreover, I did not find entirely convincing Mr Gialouris’ explanation of his failure to disclose the shareholdings. On the other hand, there was no evidence directly contradicting Mr Gialouris’ claim that he had long ceased to play an active role in the companies and (by inference) that he had no expectation of deriving any benefit from them. In addition, his account received some support from the fact that the companies appear to have been dissolved shortly after he prepared his statement of affairs.
The principal significance of Mr Gialouris’ failure to disclose his shareholdings in Kelshari and CK Delicatessens is that knowledge of their existence would have made creditors more likely to wish to probe Mr Gialouris’ financial affairs, especially his interest in the GF Trust. Disclosure of the shareholdings would have suggested to creditors that his business interests were wider than the conduct of the Maroubra Junction Hotel and that further inquiries into his affairs might have been productive from their point of view.
I do not think that the omission by Mr Gialouris of any reference to his role as trustee of the Angela Karozis Trust was material. There is nothing to suggest that he had any beneficial interest in that Trust.
Metropolitan’s Debt
The basis for Metropolitan’s claim that it should have been admitted as a creditor in the sum of $51,170.18 is undercut by my finding that it was a creditor only to the extent of approximately $4,000. I therefore reject Metropolitan’s submission on this issue.
A Declaration?
Under s 224(5) of the Bankruptcy Act the Court is not to make an order declaring a deed void on the ground specified in s 224(4)(b) “unless it is satisfied that it would be in the interests of creditors to do so”. For the test in s 224(5) to be satisfied, it is not necessary that a positive financial benefit to creditors be shown. It is sufficient that there be a real possibility of financial benefit: Augustyn v Putnam (1988) 83 ALR 514 (FCA/FC), at 515, per Jenkinson J, 521-2, per French J.
I am satisfied that an order declaring the deed void would be in the interests of creditors, as that expression has been construed. The dividend available to creditors under the deed of arrangement can be described as “more or less token”: see NZI Capital Corporation Ltd v Lancaster (1991) 30 FCR 441 (Foster J), at 445. There is much that is unexplained or unclear about the debtors’ affairs. These include the apparent ability of the debtors to raise large amounts of money from family members for the purposes of the hotel business; the apparent lack of records relating to the debtors’ affairs; the absence (so far) of records substantiating the assets and liabilities of the GF Trust or the progress of the winding up of Bonfat; and the possibility that Mr Gialouris’ business activities ranged more widely than his statement of affairs suggested. It may be that further inquiries will yield little of benefit to creditors. The evidence of the debtors themselves suggests that this may be the case. But in my view, having regard to the incompleteness of the available information, there is a “real possibility” of financial benefit if the deed of arrangement is set aside, thus clearing the way for investigations into the matters that are presently unexplained or unclear. I also take into account that a number of creditors other than Metropolitan voted against the resolution authorising the deed of arrangement. The resolution itself passed by the necessary majority because of the support of members of the Gialouris family.
It follows that an order should be made pursuant to s 222(4) of the Bankruptcy Act declaring void the deed of arrangement executed on 20 March 1998.
The Terms of the Resolution
In view of the conclusion I have reached on other issues, there is no need to consider whether the deed of arrangement was in accordance with the creditors’ resolution and, if so, what consequences flow.
A SEQUESTRATION ORDER?
A debtor who signs an authority under s 188 of the Bankruptcy Act commits an act of bankruptcy: s 40(1)(i). Where a deed of arrangement approved by creditors is set aside, prima facie the Court should proceed to a sequestration order unless sufficient cause is shown to override the rights of individual creditors: Re Morris: Ex parte Adams (1980) 48 FLR 341 (FCA/C.A. Sweeney J), at 352.
In this case, each of the debtors has substantial debts and virtually no declared assets. As I have found, there is a real possibility of financial benefit to creditors if appropriate investigations were to be made into the debtors’ affairs. Such investigations may be undertaken if sequestration orders are made. In my opinion, a sequestration order should be made against the estate of each debtor.
Metropolitan’s costs of the proceedings should be paid out of the respective estates of the debtors.
I certify that this and the preceding thirty-one (31) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville
Associate:
Dated: 7 August, 1998
Counsel for the Applicant: Mr J T Johnson Solicitor for the Applicant: Andrew P Quigley Counsel for the Respondent: Ms S Kaur-Bains Solicitor for the Respondent: Stewart Levitt & Co Date of Hearing: 26 June, 1998 Date of Judgment: 7 August, 1998
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