Minister for Immigration, Local Government and Ethnic Affairs v Hamsher

[1992] FCA 184

Re: ALAN KEVIN LOCKETT
Ex parte: NORTHERN EQUITY LIMITED and R. and I. BANK OF WESTERN AUSTRALIA
LIMITED
Nos. 138A and 138B of 1991 X
FED No. 184
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
French J.(1)

CATCHWORDS

Bankruptcy - composition - application to set aside - substantial unsecured debts - small net assets - small amount offered in composition - 1.57 cent dividend - performance dependent upon debtor's income - uncertainties surrounding income - interest of creditors and public interest - composition set aside - sequestration order made.

Bankruptcy Act 1966 s.239, s.188, s.194, s.189

re: Brennan ex parte: Stokes (Australasia) Limited (unrep. Fed. Court; 31 May 1988)

Re: John Codrington; Ex parte: Don McKay Tourist and Charter Pty Limited (unrep; Fed. Court; 1 September 1989)

Augustyn v. Putnin (1988) 83 ALR 514

Re: Richards Ex parte: Beneficial Finance Corporation (unrep. Fed. Court; 17/3/86)

NZI Capital Corporation Ltd v. Lancaster (1991) 30 FCR 441

HEARING

PERTH

#DATE 6:4:1992

Counsel for the Applicant in No. 138A of 1991 X: Mr S. Paterniti

Solicitors for the Applicant in No. 138A of 1991 X: Parker and Parker

Counsel for the Applicant in No. 138B of 1991 X: Mr G. Flynn

Solicitors for the Applicant in No. 138B of 1991 X: Mallesons Stephen Jaques

Mr A.K. Lockett appeared on his own behalf

ORDER

THE COURT ORDERS THAT:

1. The composition approved by special resolution of a meeting of creditors on 19 December 1991 is set aside.

2. The estate of Alan Kevin Lockett is sequestrated.

3. Anthony Douglas-Brown be appointed as trustee in bankruptcy of the estate.

4. The costs of Northern Equity Limited in bringing this application be taxed and paid out of the estate.

5. There be no order as to costs in relation to the application brought by the R. and I. Bank of Western Australia.

Note: Settlement and entry of Orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

Introduction

Northern Equity Limited (Receivers and Managers Appointed) and the R. and I. Bank of Western Australia apply to set aside a composition entered into between Alan Kevin Lockett and his creditors pursuant to a special resolution at a meeting of creditors held on 19 December 1991. Both applicants rely upon s.239 of the Bankruptcy Act 1966 to support their applications. The principal grounds of the applications are that the amount offered under the composition is small to the point of triviality against the amount of Mr Lockett's liabilities, that there are unresolved questions about his asset position and companies with which he is associated that should be investigated in a bankruptcy, that the vote was very close and that certain of the creditors who voted in favour of the composition were not at arms length from Mr Lockett.

Factual Background

1. On 25 November 1991, Mr Lockett signed an authority under s.188 of the Bankruptcy Act 1966 authorising Evan Robert Verge, a registered trustee, to call a meeting of his creditors for the purposes of Part X of the Act. On the same day Mr Verge executed a consent to so act. In his statement of affairs as at 25 November, Mr Lockett disclosed liabilities to unsecured creditors of $1,915,645 and assets totalling $1,063, leaving a deficiency of $1,914,582. Some twenty unsecured creditors were listed, the largest in value of which was a company called Bowfort Australia Ltd said to be owed $1,250,000 under a guarantee of a debt owed by Etoile Nominees Pty Ltd as trustee for the Etoile Investment Trust. The next largest creditor listed was the R. and I. Bank for $142,299.50 under a guarantee for Silkmist Pty Ltd and $125,000 under guarantees for Silverdawn Pty Ltd as trustee for the Alan Lockett Family Trust and Etoile Nominees Pty Ltd as trustee for the Etoile Investment Trust. Northern Equity Limited was shown as a creditor for $20,000 in respect of what was described in the statement of affairs as a disputed loan. The statement indicated that Mr Lockett had no real property. It disclosed shares held in Etoile Nominees Pty Ltd and Silverdawn Pty Ltd, which were valued at nil. Cash at bank, cash in hand, household furniture and effects and a watch and rings were said to amount in value to $1,063.

2. In an affidavit filed in these proceedings, Mr Lockett who represented himself, said he could not afford legal representation. He said that he had separated from his wife and three daughters aged 9, 6 and 4 in January 1991. His wife is currently receiving a single parent pension and is living in rented accommodation after being required by the Commonwealth Bank to vacate their former family home at 6 Prisk Street, Karrinyup. He has not paid maintenance to her up to date and cannot afford any at this time. He estimates his maintenance obligation to be $200 per week. The motor vehicle which he was using was repossessed by a finance company in December 1991. Mr Lockett is presently employed as a financial consultant by Valencia Investments Pty Ltd, a company controlled by his brother, Colin Lockett. He earns $500 per week and has borrowed money from family and friends to supplement his cash requirements. He is also endeavouring to establish a new business called Fillinyerpool Services and hopes to generate an income of about $1,000 per week "in the foreseeable future". He said in his affidavit that he has been involved in businesses with substantial assets in the past, but that these have all failed and that no assets of any value remain within his control.

3. On the day that he executed the authorisation under s.188, Mr Lockett gave Mr Verge a letter in the following terms:
   

"You are advised that I am unable to meet my personal debts and debts associated with directorships/or guarantee debts due in respect of: . Etoile Nominees Pty Ltd as trustee for The Etoile Investment Trust . Silverdawn Pty Ltd as Trustee for The Alan Lockett Family Trust . Northern Equity Limited (Receiver and Manager appointed)

. Campus Holidays Limited (In Liquidation) . Silkmist Pty Ltd (Receiver and Manager Appointed)

. Denbrook Holdings Pty Ltd . Hillarys Boat Harbour Pty Ltd . Hillarys Boat Harbour No 2 Pty Ltd It is further advised that my current earnings relate to consultancy work undertaken from time to time and fluctuates considerably.

I am currently separated from my wife and three small children aged 9, 6 and 4 years of age and expect to be required to provide for their maintenance. Whilst I cannot guarantee my future income I propose to offer my creditors a composition of $24,000 payable by quarterly instalments of $2,000 over a three (3) year period.

Such an arrangement under Part X of the Bankruptcy Act would not be easy for me to maintain but would afford an opportunity to make a return to my creditors."

1. On 4 December 1991, Mr Verge instructed an insolvency manager with his firm, Mr Roger Brookes, to arrange for the posting to creditors of a notice of meeting and other documents as required by s.194 of the Bankruptcy Act. Notice in the prescribed form together with the other documents was sent by post to all creditors including, according to Mr Brookes, the R. and I. Bank. Notice of the meeting was published in the West Australian newspaper on 9 December 1991.

2. Mr Verge had prepared a controlling trustee's report as required by s.189(a) of the Bankruptcy Act 1966 which report was included with the documents sent to the creditors. In that report he summarised the statement of affairs. Under the heading "Relevant Information" he advised that the debtor had disclosed that he had incurred substantial financial obligations as a result of the failure or insolvency of the companies of which he was a director. Mr Verge went on:
   

"I have conducted a search into the ownership of land holdings by the Debtor and an associated company and believe from information provided by the Debtor and his accountant that there is minimal prospect of funds becoming available."

He noted that Etoile Nominees Pty Ltd was a registered owner of certain land subject to a mortgage with the Commonwealth Bank and four Writs of Fi Fa lodged between October 1990 and September 1991. He went on:

"Information provided to me highlights the inability of his associated entities to effect a transfer of any funds or assets to the debtor or his estate."

The report referred to protected assets and then set out the proposed composition. Mr Verge commented:

"I am aware that his current income is solely due from consulting work and therefore is not guaranteed and on that basis would add a word of caution in respect of this arrangement."

He nevertheless observed that a proposal giving creditors an opportunity to receive some funds, even if minimal, over a period of time was preferable to the application of the provisions of the Bankruptcy Act "whereby there would appear to be minimal prospects". Creditors were advised that Mr Lockett did not have the capacity to make a lump sum payment and that a deed of arrangement would serve little purpose as there was a prospect of additional creditor claims over the period of the arrangement. A deed of assignment could not be justified as Mr Lockett did not have any assets that would give any benefit to creditors. Mr Verge did not consider that full bankruptcy would offer a significant advantage in that it would tend to result in a minimal return on creditors' claims during the usual bankruptcy period of three years. His experience had been that while there is the requirement to make contributions under full bankruptcy, "there is a psychological barrier and resultant lack of incentive to debtors to strive to make such payments". It was noted however that the Official Receiver's Office disagreed with that view, believing that any proposal that could be offered under a Part X arrangement should also be offered under a full bankruptcy arrangement. The trustee concluded with a statement of concern that Mr Lockett did not have a proven record in respect of income potential over the ensuing few years. He was also concerned about the large number of businesses with which he had been involved, but believed from the information that he had cited that there was limited prospect of recovery of any funds. There was, however, the prospect that additional creditors could emerge owing to the insolvency of the associated entities.

1. At the meeting of creditors, Mr Verge was elected as chairman and the statement of affairs was received. The creditors were reminded of information previously sent to them and that by negotiation between a major creditor and Mr Lockett's family the amount of the composition proposed had been increased from $24,000 to $38,000 on the basis that $30,000 would be available to creditors. The minutes record that Mr Verge reminded creditors of his concern at the capacity of Mr Lockett to make contributions owing to the limited income likely to be received from his consulting work and because of his marriage separation and the need to support three children in a separate residence. A special resolution was passed at the meeting in the following terms:
   

"That the creditors of the Debtor accept the following Composition in full and final satisfaction of all the Debtor's joint and separate unsecured liabilities:

1. The Trustee of the Composition shall be the person nominated by the estate creditors pursuant to s.204(4) of the Bankruptcy Act.

2. The Debtor to make available to the Trustee all the divisible property but exclusive of household furniture and effects disclosed in the Statement of Affairs sworn on 25th November 1991.

3. The Debtor to make regular minimum quarterly contributions of $3,000 to be paid to the Trustee and accumulated in a trust account in a total amount of $38,000 to be distributed to creditors from time to time.

4. The term of such Composition be for a period of three (3) years.

5. The Trustee of the Composition shall apply the moneys received by him pursuant to the Composition in the manner prescribed by section 109 of the Bankruptcy Act.

6. The Composition to be entered into pursuant to Part X of the Bankruptcy Act 1966 - 81.

7. The definitions contained in sections 5 and 187 of the Bankruptcy Act 1966-81 shall apply to the terms used in the Composition."

The voting among creditors was as follows:

In favour of the resolution:

Bowfort Australia $1,250,000 C. Lockett $ 3,700 J. Guilfoyle $ 775 P. Zaknich $ 250 Against:

Deputy Commissioner of

Taxation $ 40,677 Northern Equity $ 20,000 Commonwealth Bank of

Australia $ 54,620

The total value of the debts owed to those voting in favour was $1,254,725. The total value of the debts owing to those voting against was $115,297. The R. and I. Bank was not represented at the meeting. Whittakers Limited which claimed to be a creditor, was not permitted to participate as the Chairman considered its claim to be contingent and unliquidated and therefore not admissible for voting purposes under sub-s.198(2) of the Act. The three small creditors who voted in favour of the resolution did not do so for commercial reasons. Mr Colin Lockett agreed to support the composition because of Mr Alan Lockett's deteriorating financial position "and the fact that he is my brother". Mr Guilfoyle is a personal friend and Mr Zaknich who had known Mr Lockett for about 12 months, said he felt sorry for him. The principal creditor, Bowfort Australia Pty Ltd, insisted upon an increase of the original offer from $24,000. There is no suggestion that it supported the composition for anything other than commercial reasons.

1. The minutes recorded that, after the special resolution was passed, Mr Verge reminded Mr Lockett that he had given undertakings:
   

1. To contribute regular amounts of $3,000 each quarter.

2. To make a total payment of $38,000 over 3 years.

3. That family members would undertake by way of guarantee

payment in respect of the amount.

1. On 13 January 1992, Mr Lockett's brother, Colin, signed a document in which he agreed to make such contributions as were necessary to meet the terms of the composition. By the document which he signed he agreed:
   

"1. that by the 19th December 1992 an amount of at least $12,000 has been paid to the estate; and

2. that by the 19th December 1993 an amount of at least a further $12,000 has been paid or a total of $24,000 to the estate; and

3. that by the 19th December 1994 an amount of at least a further $14,000 or a total of $38,000 has been paid to the estate.

4. That upon written advice by Evan Robert Verge, Registered Trustee of the Estate of Alan Kevin Lockett of any default that payments of the balance due shall be paid within thirty (30) days but no earlier than the 19th January 1993, 19th January 1994 and/or 19th January 1995.

6. This agreement is binding but if necessary I shall sign a further guarantee document as may be required."

By cl.6 of the document it was provided:

"This guarantee/indemnity has been provided knowing that the Debtor had irregular and uncertain earning capacities and that such Composition arrangement with the creditors was accepted subject to this guarantee being given and executed.

I further advise that I do have sufficient financial resources and capabilities and pledge my intention to comply with this undertaking."

The approximate dividend for creditors under the composition according to a calculation made by Mr Alden Halse, one of the joint receivers of Northern Equity, is 1.57 cents in the dollar.

1. In support of the application to set aside the composition Mr Evan Holland, the Manager of the Retail Loan Management Unit of the R. and I. Bank said that it was owed $142,299.50 by Mr Lockett under a judgment obtained in the Supreme Court of Western Australia on 16 January 1990. A bankruptcy notice had issued against Mr Lockett in respect of that judgment debt on 9 September 1991 and was served on him on 18 November 1991, one week before he appointed Mr Verge as his controlling trustee. According to Mr Holland the bank had no record of being served with a notice of the meeting of creditors. However, as mentioned earlier, Roger Brookes, an Insolvency Manager with Mr Verge's firm had been asked to arrange for the notice of meeting and supporting documents to be posted to the creditors and had done so. He had personally placed the various materials in envelopes for each of the creditors and addressed them using pre-gummed labels onto which addresses had been photocopied from the mailing list. The list of addressees included the R. and I. Bank at Fremantle and at Perth. There were 21 addressees altogether and the postbook for the day, which was for December 1991, recorded 21 postings.

2. Mr Holland's affidavit indicated that the relevant officer of the Bank, Mr Shane Dickson, first became aware that there was to be a meeting of Mr Lockett's creditors from a report appearing in the West Australian on 10 December 1991. He had spoken then to the Bank's solicitors and confirmed that they were to proceed with a proposed petition for a sequestration order. Further, he had advised Mr Verge by telephone that the proposed composition was unacceptable to the Bank. On 18 December 1991 the Bank executed a petition for a sequestration order but the petition has not been filed. Mr Dickson said that had he received a r.77 notice of meeting before 19 December 1991 he would have made arrangements for the Bank to have been represented at the meeting and for the representative to vote against the acceptance of the composition. The fact is, however, that the report in the West Australian on 10 December 1991 included the following passage:
   

"Creditors were yesterday advised under s.194 of the Bankruptcy Act to attend a meeting on December 19 in the South Perth offices of Byfield Beavis to discuss the payment proposal."

1. The application to set aside the composition is brought under s.239 of the Bankruptcy Act 1966 which provides, in the relevant parts:
   

"239(1) A creditor may, within 21 days from the date on which the special resolution accepting a composition under this Part 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."

Sub-sections (3) and (4) are not material for present purposes.

1. Mr Lockett, who represented himself, put his case forcefully and attractively. The principal thrust of his argument in answer to the contention that the sum offered to creditors under the composition was trivial, was that having regard to his own commitments it would place a heavy burden upon him. Bankruptcy would be the softer option. Under the composition creditors would at least get something, whereas in a bankruptcy administration they would get nothing.

2. I was referred by Mr Lockett and counsel for the applicants to a number of cases, some reported some not, but each turning in the end upon its own circumstances. There is no doubt, however, that the fact that the composition yields a very small return to creditors is relevant in deciding whether it should be set aside under s.239. Morling J. said in re: Brennan ex parte: Stokes (Australasia) Limited (unrep. Fed. Court; 31 May 1988) at p 5:
   

"...for a Composition to be reasonable or to be calculated to benefit the creditors generally, the terms must be such as to offer the creditors some real advantage above that which they might obtain if the debtor's estate is administered in bankruptcy."

His Honour went on to say at p 6 of the judgment that:

"... where a debtor had incurred debts of huge proportions relative to his assets, there is much to be said for the proposition that it is in the public interest that there be a public examination of the bankrupt (and possibly other persons) under s.81 of the Bankruptcy Act."

1. Other factors relevant to his Honour's decision to set aside the composition in that case were the fact that the composition had not been implemented and that no payments had been made to creditors, the nature of the relationship between the debtor and the creditors who voted in favour of the composition, the possibility that the creditors might do as well in bankruptcy as they would under the deed and the prima facie right of the applicant to a sequestration order especially have regard to the size of the bankruptcy. Morling J.'s approach was followed by Burchett J. in Re: John Codrington; Ex parte: Don McKay Tourist and Charter Pty Limited (unrep.; Fed. Court; 1 September 1989). His Honour at p 13 said he did not think that any narrow view should be taken of what is meant by the expression "not calculated to benefit the creditors generally" which appears in s.239. He compared this with the phrase "in the interests of the creditors" which appears in s.222(5) which has on some occasions been given a restrictive construction. Nevertheless as his Honour pointed out, there is authority even within the framework of that formula to support the proposition that it is not limited to cases in which the creditors' interests can be expressed in terms of economic advantage - Augustyn v Putnin (1988) 83 ALR 514 at 515 and 522.

2. In Re: Richards; Ex parte Beneficial Finance Corporation (unrep. Fed. Court; 17/3/86), Jackson J. at p 3 observed that where the amount offered pursuant to a composition is trivial compared to total debts that may be a sufficient "other reason" in terms of s.239(2) for setting the composition aside. His Honour saw the public interest and not only the interests of the creditors as relevant in this context. Where a debtor had incurred liabilities amounting to one hundred times his gross assets, the case was better dealt with by way of bankruptcy thereby giving rise to such matters as public examination of the bankrupt and other persons under s.81 than pursuant to the rather more bland provisions of Part X dealing with compositions. More recently, in a case where unsecured creditors were for practical purposes getting nothing and would be better off taking advantage of the investigatory procedures under bankruptcy administration a composition was set aside - NZI Capital Corporation Ltd v Lancaster (1991) 30 FCR 441 at 445 (Foster J.).

3. The present case is one in which Mr Lockett has incurred debts over a thousand times greater than his assets. The amount offered will yield a dividend which for most of the creditors will be so small as to be of no commercial significance. No money has been paid under the composition and the possibility of payment being made is dependent upon the uncertain fortunes of Mr Lockett as a consultant. There seems to have been little or no investigation of his income history or asset position in relation to the various companies with which he has been associated. The document signed in support of the composition by his brother, Colin, appears unlikely to be legally enforceable and nothing is known of the brother's ability to honour the undertakings made in it. The creditors were closely divided on the composition and three of the four creditors who voted in favour of it were not at arms length from Mr Lockett.

4. It seems to me that having regard to the total liabilities, this composition is not going to confer any significant benefit upon the creditors. I note that had the R. and I. Bank been present at the meeting it would have opposed the composition. Its non-attendance is not to be attributed to any fault of Mr Lockett or the trustee. Nevertheless, the attitude of the bank and the size of the debt owed to it is a relevant factor in determining whether or not the composition may be said to benefit the creditors as against bankruptcy administration. There are also, I think, questions which should be asked concerning Mr Lockett's income history and the history of assets acquired and/or disposed of by himself or companies associated with him. These matters have not been the subject of any thorough investigation.

5. Although a court should be slow to depart from the views of the creditors as expressed in a special resolution adopting a composition, those views may be given less weight where they emanate from creditors who are not at arms length from the debtor. While accepting that Bowfort Australia Pty Limited has no doubt made a commercial judgment that it is in its interests to support the composition, I am not satisfied that the participation of the other creditors reflects any such assessment. In the event, in my opinion, it is in the interests of the creditors generally and in the public interest that this composition be set aside and that having regard to the circumstances of this case, including the existence of unsatisfied judgment debts and service of an unsatisfied bankruptcy notice against Mr Lockett, a sequestration order ought to be made. For these reasons the composition will be set aside and a sequestration order made.