Munro v McLeod

[2006] FMCA 388

FEDERAL MAGISTRATES COURT OF AUSTRALIA

MUNRO & ANOR v MCLEOD [2006] FMCA 388

BANKRUPTCY – Adjournment of creditor’s petition – proposed personal insolvency agreement – automatic stay until first meeting of creditors – discretion to adjourn petition when meeting adjourned – uncontested major insolvency – trustee requiring adjournment to determine voting rights – concerns as to bona fides of proposed agreement – previously agreed adjournment allowed to stand.

Bankruptcy Act 1966 (Cth), ss.188A, 189, 189AAA, 204(1), 206, 222, Part X

Field v Commercial Banking Co of Sydney Limited (1978) 37 FLR 341
McLeod v Munro & Anor [2005] FMCA 774
Re Bendel, Ex parte Lowe Lippmann (a firm) [1996] FCA 262
Re Ginnane; Ex parte Ginnane (1994) 60 FCR 429

First Applicant: KEVIN JOHN MUNRO

Second Applicant:

YALTARA NOMINEES PTY LIMITED

ACN 064 261 132

Respondent: DAVID JOHN MCLEOD

File Number: SYG3358 of 2005

Judgment of: Smith FM

Hearing date: 8 March 2006

Delivered at: Sydney

Delivered on: 8 March 2006

REPRESENTATION

Counsel for the Applicants: Mr M R Aldridge SC

Solicitors for the Applicants: Bamford Associates, Lawyers

Counsel for the Respondent: Mr J T Johnson

Solicitors for the Respondent: Dennis and Company, Solicitors

Counsel for Paul Gerard Weston (Controlling Trustee): Mr J Rose

Solicitors for Paul Gerard Weston (Controlling Trustee): Watson Mangioni, Lawyers

ORDERS

1. The orders made on 24 February 2006 are confirmed. 

2. Costs are reserved in relation to the hearings on 7 and 8 March 2006. 

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG3358 of 2005

KEVIN JOHN MUNRO

First Applicant

YALTARA NOMINEES PTY LIMITED

Second Applicant

And

DAVID JOHN MCLEOD

Respondent

REASONS FOR JUDGMENT

(revised from transcript)

1. I have before me a creditor’s petition filed on 16 November 2005, in which the petitioners move on a debt of $335,708.68 based on a judgment obtained in the District Court of NSW on 30 September 2004.  A bankruptcy notice requiring payment of that amount was served on 16 November 2004 and was not complied with before a time specified by Raphael FM, being 4.00 pm on 1 June 2005 (see McLeod v Munro & Anor [2005] FMCA 774).

2. There has been no notice of objection of opposition filed against the petition by the debtor, and the submissions before me today have proceeded on the basis that no ground of opposition is available to the debtor and that he is manifestly insolvent. 

3. Notwithstanding the absence of grounds of opposition, the petition has been adjourned on three occasions prior to today’s listing, and the listing reports show that all three adjournments were by consent of the parties, including the petitioners.  It is currently adjourned to 4 April 2006, under an order made by a Registrar with the consent of all parties.  It has now been restored to the list at the request of the petitioners, who submit that, in the circumstances I shall describe below, I should revoke the previous order and should proceed today to make a sequestration order. 

4. On 15 December 2005, the petition was adjourned to 24 January 2006.  There is no evidence before me as to the basis on which the petitioners agreed to that adjournment.  However, the file contains an affidavit by the debtor sworn and filed on 15 December 2005, which deposes to the currency of proceedings commenced by him against Mr Munro, the first named petitioner, in the Supreme Court of Victoria.  This affidavit has not been read in today’s proceedings.  However, reference is made in an affidavit of Mr Munro sworn on 23 February 2006 to a statement of assets and liabilities attached to the debtor’s affidavit of 15 December 2005, which the debtor said showed “my current assets and liabilities”.  This showed total assets of $13,659,500 and total liabilities of $9,738,500.  It revealed that, after deduction for secured liabilities, his estate would be in deficit in relation to unsecured creditors except for a “contingent asset law suit K Munro Yaltara”, for which he gave the value of $5,000,000.

5. On 24 January 2006 the Registrar further adjourned the petition to 24 February 2006 by consent.  Once again, there is no evidence as to the basis for either party seeking or agreeing to that adjournment. 

6. Prior to the next listing the petitioner, Mr Munro, filed his affidavit of 23 February 2006. This indicated that he had been served with a proposal by the debtor under s.188A of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) for a personal insolvency agreement, and with notice of the appointment of a trustee to control his property pursuant to s.189 of the Bankruptcy Act. The trustee is Mr Weston, who was represented before me today.

7. The proposal presented to creditors said that the debtor would agree to include the following terms in a personal insolvency agreement:  

   1.Assignment of my rights in recovery of debt due by Kevin Munro in the amount of $1,184,000. 

   2.Assignment of my rights of action in any legal proceedings against Mr Kevin Munro and any professional advisor up until 20 January 2006 and any recovery arising thereon. 

   3.The sum of $100,000 payable before 30 April 2006. 

   4.Release of all my debts owing to creditors as at 20 January 2006. 

8. The attached report of the trustee dated 14 February 2006 on the proposal referred to a full statement of assets and liabilities presented to him by the debtor.  The trustee’s summary of its contents included: 

   2.7Unsecured Creditors 

   Attached as Annexure A is a list of the unsecured creditors extracted from the Debtor’s statement of affairs.  The list states there are 47 creditors claims amounting to $21,965,237 and I am attempting to confirm the existence of these debts through the requisite proving procedures under the provisions of the Act. 

   The Debtor has indicated on the listing a number of these creditors as being “related” however upon further enquiry of the Debtor he has included “related” to incorporate family members, entities in which he holds an interest (including as an equity participant) and also any party with whom he has had a business association in the past (including partners and employees of his business enterprises). 

   2.8Contingent Asset

   The Debtor has also commenced action in relation to a claim against Mr Kevin Munro for alleged negligent advice to the Debtor and GDK Financial Solutions Pty Ltd under circumstances where Mr Munro was aware that his advices were relied upon for the participation and involvement in partnership and retirement village schemes.  These schemes were deemed to be Managed Investment Schemes (“MIS”) under the provisions of the Corporations Act.  The MIS provisions of the Corporations Act subsequently became the source of 7 complex Primelife litigation proceedings in Melbourne of which GDK Financial Solutions and the Debtor are parties with significant legal costs being incurred in addition to which the Debtor is also claiming damages. 

   The former solicitor acting for the Debtor has advised they “believe there is a high likelihood of success in obtaining damages in favour of Mr McLeod and GDK Financial Solutions against Mr Munro”. 

   The PIA proposal incorporates any rights to damages arising from this action to be provided for the benefit of creditors.  Similarly should the action be successful in the event of the Debtor’s bankruptcy, the proceeds available from any damages awarded to the bankrupt would be available to creditors. 

   The contemplated success of running this action would obviously be dependant not only upon the merits of the case and the assistance and involvement of the Debtor, but also upon the ability of the Debtor or his Trustee to fund the action.  At this time I am aware that the Debtor has approached at least one potential funding party who has expressed potential interest however, I emphasise that no assessment as to the fundamental merits of the case have been undertaken by any potential funder and it is envisaged that the costs associated with any such action would be substantial. 

9. In view of the difficulty in evaluating this “contingent asset”, the trustee gave it no value when estimating the possible returns to creditors.  He expressed his opinions that under the proposed personal insolvency agreement “creditors could expect to receive a dividend of between 0.2 and 8.8 cents in the dollar”, and “under bankruptcy, creditors could expect to receive a dividend of between 0 and 4.7 cents in the dollar”. 

10. These opinions were explained in his report, which concluded with a recommendation: 

    Pursuant to Section 189A(3) I am required to give an opinion as to whether it would be in the best interest of the Debtor’s creditors to deal under this part with the Debtor’s affairs in the manner indicated in the Statement given under sub‑paragraph 188(2)(c)(ii). 

    Based on the matters dealt with in this report, and the information before me, I am of the view that it is in the best interests of creditors to accept the Debtor’s offer for a PIA. 

    Whilst there is no certainty in the return to creditors in either the PIA or bankruptcy scenarios, there is more upside potential for creditors under the PIA proposal. 

    Under the PIA it is estimated the return to creditors could be in the order of 0.2 cents in the dollar (minimum) to 8.8 cents in the dollar. 

    The return to creditors under a bankruptcy scenario is more likely to be at the lower end of the dividend range of between 0 and 4.7 cents in the dollar given the uncertainty of the Debtor’s ability to earn an income if he were declared bankrupt. 

    The risks in litigation of the rights of action and debtor amount are the same under the PIA or in bankruptcy however, based on my experience in these matters, I believe it is less likely that the necessary assistance would be given by the Debtor to a Bankruptcy trustee which would be required to successfully pursue the debtor amount and rights of action recoveries in the event of legal action being undertaken.  In the event of sufficient incentive being given to the Debtor as is contemplated and required of the Debtor under the proposed PIA, I believe it is more likely that the assistance required by the PIA trustee would be forthcoming. 

    Under the PIA proposal, a minimum amount of $100,000 will become available to creditors (subject to costs).  Under bankruptcy, no funds are guaranteed will be available/recovered for the benefits of creditors. 

11. Mr Munro’s affidavit of 23 February 2006 also attached the agenda which had been served upon him by the trustee, giving notice of a meeting of creditors to be held on 27 February 2006 at 3.30 pm. The agenda indicated that various documents, including the trustee’s report, would be tabled, questions would be allowed, the president would summarise matters, options would be considered, any proposal for a special resolution under s.204(1) would be put to the meeting, and there was provision for other procedures, and discussion of any other business.

12. It is clear, therefore, that prior to the adjournment of the petition on 24 February 2006, the petitioners were aware of the meeting, and that this provided the reason for the adjournment. An adjournment until after the date of the meeting was required due to the provisions of s.189AAA, which imposed an automatic stay on the “proceedings relating to a creditor’s petition” until “(c) the conclusion of the meeting; or (d) the adjournment of the meeting; whichever is the earlier”.  It should be noted that the statutory stay did not continue until the conclusion of any adjourned meeting, but was only available up until the end of the first day of the meeting.  The petitioners were not, therefore, required to acquiesce in any adjournment beyond 27 February 2006.

13. The Registrar’s report for the listing on 24 February 2006 attaches short minutes of orders signed by representatives of the petitioners and the debtor.  This provided: 

    1.By consent of both parties the petition be adjourned until 10.15 am on 4th April 2006. 

    2.Applicant file and serve any affidavit upon which they intend to rely by 10 March 2006. 

    3.Respondent file and serve any affidavit upon which he intends to rely by 21 March 2006. 

    4.Liberty to restore to the list on 3 days notice. 

    5.Costs be reserved. 

14. The meeting called by the trustee did commence on 27 February 2006.  Reference to what occurred is contained in an affidavit by the trustee which was read before me, but neither a full report of the meeting nor its minutes have been presented to the Court. 

15. It appears that prior to the meeting, the trustee was presented with proofs of debt far exceeding the amounts anticipated by the debtor in his statement of affairs, and which formed the basis for the trustee’s report which I have referred to above.  The trustee’s affidavit refers to these proofs in somewhat ambiguous terms.  On one reading of his affidavit he was presented with proofs of debt totalling some $63,000,000, but on another reading, which is preferred by his legal representative, he was faced with proofs of debt totalling between $110,000,000 and $120,000,000. 

16. Within these amounts, the trustee identified an amount of some $6,000,000 as being claimed by creditors, including the present petitioners, from whom he had notice of an intention to oppose the proposal for a personal insolvency agreement.  He had notice that a significant proportion of the remainder were in favour of a personal insolvency agreement, and it appears that another group of creditors had not yet revealed their position.  Within the group of supporting creditors were a substantial number of creditors who are related to the debtor, and who were excluded from a dividend under the proposed insolvency agreement.  However, the exact grouping of creditors is a matter left significantly obscure to me on the evidence. 

17. [I note that two days after I had delivered this judgment and made the orders shown above, the trustee’s solicitor forwarded a letter dated 10 March 2006 to the Court seeking to clarify the trustee’s affidavit.  However, I do not consider it appropriate for me to make any revisions to this judgment in the light of the contents of that letter.] 

18. Counsel for the petitioners put to me some calculations which suggest that the petitioners have reason to anticipate that, if most of the new proofs of debt are allowed by the trustee, it would be likely that the proposed insolvency agreement would be adopted, either in the terms proposed or as amended by vote of a requisite majority of the creditors. 

19. However, the meeting never reached the stage of any votes being taken from creditors, since the trustee required more time to examine a significant proportion of the proofs of debt, so as to determine who should be accepted as creditors with voting rights.  In his affidavit, the trustee refers to proxies held by Mr Hector McLeod (the debtor’s father) for debts totalling $49,895,076, by Mr Brereton for debts totalling $6,298,238, and by Mr Munro for about $900,000.  He described how the meeting came to be adjourned: 

    10.My determination as to the amounts for which Mr McLeod, Mr Brereton and Mr Munro are entitled to vote will, on the information available to me, determine whether the proposed Personal Insolvency Agreement is accepted by creditors.  In order to determine the amount for which they are entitled to vote I need to review various documents and obtain legal advice.  I formed this view before the creditors meeting which took place on 27 February 2006. 

    11.A quorum of creditors was present at the meeting of creditors held on 27 February 2006, at which I was appointed to act as chairman.  I said to the creditors present words to the following effect: 

    “Shortly prior to this meeting I was handed a number of documents in support of the proofs of debt lodged by Montgomery Mercantile Pty Limited as trustee of the PGGDK Unit Trust and others.  In order to make a determination whether to admit or reject those proofs of debt and the amounts for which they can vote, I will need to review all of the documents and obtain legal advice.  In the circumstances it will be necessary to me to adjourn this creditors meeting.” 

    12.Also present at the meeting was Kevin Munro and John Melluish of Ferrier Hodgson, representing the Applicants in these proceedings.  Before the date of the meeting, I was aware that these proceedings were listed for 24 February 2006.  I was then of the understanding that these proceedings were to be adjourned to 28 February 2006, the date following the meeting.  Mr Munro said words to the effect of: 

    “The petition was adjourned.  It has been listed for hearing on the fourth of April.” 

    13.I said words to the effect of: 

    “Is there any objection to me adjourning the meeting to 3:30 pm on 13 March?”. 

    Neither Mr Munro nor any other creditor present objected to that proposal.  The meeting of creditors was then adjourned to 3:30 pm on 13 March 2006. 

20. On 2 March 2006, the petitioners availed themselves of the liberty to apply given in the directions of the Registrar made on 24 February 2006, and applied for the relisting of the petition, giving notice to the debtor and the trustee.  Their letter said: 

    We refer to the above matter and since the statutory adjournment afforded by s.189AAA is no longer available to the debtor we have sought to relist this matter for a hearing before a Magistrate next Tuesday. 

21. The matter then was listed before a Registrar yesterday, and was referred to me.  Due to other commitments in the bankruptcy list I was unable to address the matter until today.  I have had the benefit of useful submissions from counsel for all parties, which have assisted me to reach an immediate decision on the matter. 

22. The petitioners’ position was simple.  This was that their entitlement to a sequestration order was uncontested, and prima facie the Court should therefore proceed to make an order for sequestration. 

23. This starting point for a consideration of whether discretionary adjournments of a bankruptcy petition should be allowed is firmly established in authority, including in propositions adopted by a Full Court in Field v Commercial Banking Co of Sydney Limited (1978) 37 FLR 341 (“Field”).  These are usefully extracted by Ryan J in Re Ginnane; Ex parte Ginnane (1994) 60 FCR 429 at page 447, where his Honour gave further discussion on the question as to when a petition should be adjourned to allow further proceedings in relation to a Part X proposal. The relevant matters for consideration which are formulated by Sweeney J in Field’s case are: 

    (1)The course of dealings between the parties, from the time when the obligation to the petitioning creditor is said to have arisen to the date of the hearing. 

    (2)The attitude to the application of the petitioning creditor, as prima facie, on proof of the matters mentioned in s 52(1) of the Bankruptcy Act, the court will proceed to make an order for sequestration (see Rozenbes v Kronhill (1956) 95 CLR 407).

    (3)The general financial position of the debtor.  

    (4)The relation between the debt of the petitioning creditor and the total liabilities of the debtor, as it may be seen, for example, that the petitioning creditor’s opposition would be sufficient to defeat any special resolution proposed at a creditor’s meeting.  

    (5)Any attitude to the application disclosed by other creditors.  

    (6)Any evidence bearing upon the question whether it would be for the advantage of the creditors that the debtor’s affairs be administered under Pt X of the Act.  

    (7)The likelihood that the debtor would be able to place before a meeting of creditors a particular proposal, or evidence of his general circumstances, calculated to persuade them to vote for the administration of his affairs under Pt X.  

1. In response, both the debtor and the controlling trustee sought to maintain the current adjournment of the petition to 4 April 2006.  They argued that the adjournment had been agreed upon by the petitioners, and that Mr Munro had informed the meeting of that adjournment without suggesting that the Court might be asked to consider the petition on an earlier occasion.  Their submissions in favour of maintaining the agreed adjournment referred to the opinions given by the trustee in his report and affidavit, and, in particular, to his request for more time to determine what creditors should be admitted to voting rights on the question of a personal insolvency agreement.  They argued that it was generally in the interests of creditors to allow the adjourned meeting to proceed. 

2. Weighing up the matters referred to in Field and other authorities, I have decided that these submissions provide the considerations which sway me in favour of allowing the previously agreed adjournment to stand.  I accept the foundation proposition which I have identified above, and that the Court should not adjourn a petition to allow consideration of a Part X agreement unless it considers such an adjournment would be for the general benefit of the creditors, and that the considerations in favour of the adjournment outweigh the prima facie entitlement of the petitioning creditor to proceed on its petition. 

3. There is, however, authority that: 

   Absent special circumstances one may accept that the adjournment of a hearing of a bankruptcy petition to enable the creditors to consider a fair and bona fide Part X arrangement, may enjoy reasonable prospects of success.  (See Re Bendel, Ex parte Lowe Lippmann (a firm) [1996] FCA 262 at [8]).

4. The question of the bona fides of the present proposal was raised by the petitioners in the present case.  Their counsel made a strong argument that there were a number of concerns that the Court should have about the present proposal for a personal insolvency agreement and the procedures which presented it to a trustee and creditors. 

5. Three particular concerns were pointed to.  The first was that the foreshadowed dividend, even on the trustee’s calculations based on total liabilities in the region of $21,000,000, was so small, and would become illusory if indeed the debts totalled over $100,000,000, as to render the merits and bona fides of the proposed agreement suspect. 

6. Secondly, that the proposed insolvency agreement did not give the creditors access to any property of the debtor except the promised $100,000 and the highly intangible benefits of litigation against Mr Munro.  This feature of the proposal would, in practical effect, allow the debtor to escape from the exercise of investigatory powers available to a trustee in bankruptcy to investigate the debtor’s general property dealings and rights in relation to other species of property and transactions.  Although in theory the controlling trustee might acquire these powers, he would have no reason to contemplate their exercise when giving effect to the agreement proposed.  

7. Thirdly, that the Court should take into account, in particular, that the debtor had grossly underestimated the amount of his liabilities when presenting sworn evidence to the Court, and then in his statement of affairs to the controlling trustee.  It was submitted that the discrepancies provided reason to suspect that the new creditors’ claims might not be genuine, but were instigated by a desire to swamp voting rights at the meeting. 

8. It is quite possible that there may be substance in these concerns.  However, the evidence in their support is at present extremely intangible, and does not persuade me to make findings sufficient to give the concerns a weight which overrides the considerations which favour allowing the present adjournment to stand. 

9. There was debate in argument before me as to how those concerns could be aired if the adjournment were allowed and a personal insolvency agreement were adopted under s.204. It is clear that they could still be litigated, either in proceedings in this Court under s.206 before the execution of the agreement, or in proceedings under s.222 to set aside the agreement. However, counsel for the petitioners argued that I could now be sufficiently satisfied as to their substance, and that it was desirable to avoid the need for such litigation by immediately proceeding to make a sequestration order, thereby saving the petitioners from the burden of additional future litigation.

10. I have given serious consideration to this submission, and found it attractive.  However, at the end of the day I consider that the interests of all creditors, accepting that they represent a very diverse group of interests in the present matter, would be best served by allowing the trustee the opportunity to make further investigations and determinations about who should be identified as creditors with voting rights.  I consider that that process, and the consequential reports which will emerge from the trustee, should be allowed to occur before the Court could properly examine the concerns about any agreement which might be adopted by the requisite majority of creditors.  I consider that the process which is currently being undertaken by the trustee would significantly assist the Court when determining whether sequestration in bankruptcy is the course which is the most desirable way of dealing with the admitted insolvency of this debtor. 

11. I am therefore persuaded that further time should be permitted to allow the current procedures under Part X to proceed, at least to the extent of allowing the adjourned meeting to be held next week.  Beyond that time, I have formed no views as to whether further adjournments would be appropriate.  It would depend upon such information as would be presented to the Court if and when a further relisting of the matter occurred.  I would hope that, if that occurs, all parties would be better able to inform the Court about the known state of this debtor’s estate and the interests of his creditors. 

12. For the above reasons I have decided not to proceed with the petition today.  I shall not fix a further date for its hearing, but shall allow the existing order listing it on 4 April 2006 to take effect.  That listing will be before a Registrar, and there will be provision on that day for reference to a Duty Bankruptcy Magistrate, which will not be me.  If the parties want to arrange the relisting of the matter before then, they already have liberty to apply on three days notice.  Such an application can be made to the Registrar.  I am willing myself to deal further with the matter should the parties wish to request the Registrar to refer it to me rather than to the then current Duty Bankruptcy Magistrate.  However, my availability will need to be consulted before deciding if that is a desirable course. 

RECORDED   :   NOT TRANSCRIBED 

1. The debtor seeks costs of today’s listing, by reason of my refusal to accede to the petitioners’ request that I should make an immediate sequestration order.  However, I have decided that the costs of all parties should be reserved to await the outcome of the petition, and the eventual determination of all matters of costs.  I am not persuaded that the petitioners’ request for the relisting today was inappropriate, in the circumstances which I have described in my reasons above. 

RECORDED   :   NOT TRANSCRIBED 

1. I include within that order the reserving of the costs of the trustee. 

I certify that the preceding thirty‑seven (37) paragraphs are a true copy of the reasons for judgment of Smith FM

Associate:  Lilian Khaw

Date:  24 March 2006