Nassar, A v Nassar, A

Re: ABDO NASSAR; ADVANCE BANK AUSTRALIA LIMITED v. ABDO NASSAR; KYM ALBERT
WEIR; PETER JOHN BALNAVES; KENNETH W JOHNS; THOMAS G RODDA; JOANNE SERDARIDIS
and MARIO LOMBARDI
No. SX44 of 1994
FED No. 1040/94
Number of pages - 8
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIAN DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE
OF SOUTH AUSTRALIA
VON DOUSSA J

CATCHWORDS

Bankruptcy - composition - application to set aside - little benefit to creditors - inference that assets not disclosed in the statement of affairs exist - possibility that substantial sums due to debtor are assets of value - no explanation given in the statement of affairs as to the fate of a profitable business and its assets - family relationship with the major creditor - terms of composition unreasonable and not calculated to benefit the creditors generally - application granted.

Bankruptcy Act 1966, s 239

HEARING

ADELAIDE, 21 December 1994
#DATE 21:12:1994

Counsel for the applicant : Mr J M Cudmore

Solicitor for the applicant : Ward and Partners

The first respondent appeared in person

Second to seventh respondents did not appear

ORDER

1. Pursuant to s.239(2) of the Bankruptcy Act 1966 order setting aside the composition under Part X approved at a meeting of creditors on 13 September 1994.

2. A sequestration order be made pursuant to s.239(4) and to the creditors' petition presented in action P256 of 1994 against the estate of the debtor.

3. Subject to approval by the Registrar of this Court of a signed consent from Peter Ivan Macks, the said Peter Ivan Macks of Level 14, 26 Flinders Street, Adelaide, be appointed trustee of the estate of the debtor.

4. The act of bankruptcy occurred on 16 August 1994.

5. Costs of the petition in P256 of 1994 and of this application be taxed and paid out of the estate of the debtor in accordance with the provisions of the Bankruptcy Act.

Note: Settlement and entry of orders is dealt with in Order 36 of the Bankruptcy Rules.

JUDGE1

VON DOUSSA J This is an application under s.239 of the Bankruptcy Act 1966 to set aside a composition. Relevantly, s.239(2) reads:

"If the court...considers that the terms of a 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."

The debtor signed a notice pursuant to s.188 proposing that his affairs be dealt with by a composition under Part X on 15 August 1994. He authorised a solicitor, Mr Comazzetto, to call a meeting of creditors and he provided a statement of his affairs. On 21 August 1994 Mr Kym Weir, a registered trustee, consented for the purposes of s.215A to act as trustee. On 6 September 1994 the first meeting of creditors was called to consider the proposed composition.
There were questions raised on that occasion as to the entitlement of certain persons claiming to be creditors to vote. To enable their entitlement to be considered the meeting was adjourned until 13 September 1994. When it resumed a majority of creditors, 10 against 5, constituting a 77.46 per cent majority in value, approved the proposed composition. The substantial terms of the composition were that the debtor pay the sum of $10,000 in two instalments, one of $3,000 on 20 September 1994, and the balance of $7,000 on 9 March 1995 and that Mr Weir be appointed trustee.
An application was brought on behalf of one of the creditors, Advance Bank Limited, on 23 September 1994 challenging the composition. In the application the bank sought a number of orders. First, it sought to have the composition declared void under s.222(2) on grounds which asserted, in effect, that certain of the creditors admitted to vote by the chairman of the meeting of creditors were not entitled to vote. Secondly, an order was sought under s.222(4) declaring the composition void on the ground that the debtor omitted material particulars, and included incorrect particulars in his statement of affairs and made false and misleading statements in the course of the meeting of creditors. Thirdly, orders were sought setting aside the composition under s.239(2) on the grounds that the composition was unreasonable, not calculated to benefit the creditors generally, and was otherwise liable to be set aside. Fourthly, the application sought to have these proceedings consolidated with proceedings in action No. SP 256 of 1994 wherein the applicant had issued a creditor's petition against the debtor prior to the meeting of creditors, and the making of a sequestration order.
The proceedings named as respondents, besides the debtor and the trustee, five creditors whose debts the applicant bank disputed. Those creditors were served and at a directions hearing on 10 October 1994 it was directed that the issues raised under paragraph 3 of the application, that is the claim for orders setting aside the composition under s.239(2), be dealt with as a separate issue to be tried ahead of the issues raised under ss.222(2) and 222(4). Trial dates were fixed for 12 and 13 December 1994. It was explained to the other respondents, who expressed a reluctance to become involved in court proceedings, that if the application under s.239 failed then the other issues would be listed and they would be notified so that they could take such part as they then wished in the trial of those issues which concerned their entitlements to vote at the creditors' meeting.
When the matter came on on 12 December 1994, the debtor explained that he had encountered difficulty in instructing solicitors. To give him further time to consider his position and prepare for trial the matter was stood over until today. Upon the matter resuming today the debtor had filed no affidavits in opposition to paragraph 3 of the application, and informed the Court that he was still without legal representation. He has presented his own case in answer to the allegations of the applicant bank.
The debtor's statement of affairs listed unsecured creditors whose debts totalled $1,048,794.31 and disclosed assets of $4,060, being $60 cash in hand and $4,000 household furniture and effects. There were certain properties disclosed subject to secured loans to their full value.
The chairman of the meetings of creditors admitted to vote creditors to the value of $1,021,683.25, a summary of whom appears at paragraph 47 of the affidavit of Mr P A Govey. The amount offered by way of composition is to cover both the fees of the trustee and a dividend to the unsecured creditors. Those fees are estimated to be $3,000. The end result would be that if the balance of the composition were distributed between those creditors whose debts were admitted to vote each would receive a dividend of 0.68 cents in the dollar.
A number of grounds in support of the order setting aside the composition have been advanced by counsel for the applicant bank. First it is submitted that the offer is trivial compared with the total of the debts. Counsel referred to observations of Judges of this Court in Re Richards; ex parte Beneficial Finance Corporation Limited, (unreported, Jackson J, 17 March 1986), Re Brennan; ex parte Stokes (Australasia) Limited, (unreported, Morling J, 31 May 1988), NZI Capital Corporation Limited v Lancaster (1991) 30 FCR 441, Re Codrington; ex parte Don McKay Tourist and Charter Pty Limited, (unreported, Burchett J, 1 September 1989). In each of those cases the smallness of a dividend was commented upon as a factor which rendered the composition unreasonable and one not calculated to be in the benefit of the creditors generally. It should be remembered, however, that the discretion given to the Court to set aside a composition is a wide one and in the exercise of that discretion the Court should also have regard to the wishes of the creditors as expressed at the meeting of creditors. In the cases to which reference has been made there have been other factors in addition to the smallness of the dividend which have influenced the Court to exercise the discretion to set aside the composition: see Re Emmett; ex parte Beneficial Finance Corporation Ltd and Others, (unreported, O'Loughlin J, 16 December 1991) at pp 22-23.
In the present case the amount offered is trivial. It barely amounts to a token, and even standing alone that would be a very strong factor in favour of an exercise of the discretion to set aside the composition. However, that is not the only matter upon which the applicant seeks to rely.
It is urged that there is reason in the information before the Court to suspect that there may be other assets and that it is appropriate in the circumstances that there be a sequestration order so that there can be a public examination, and so that the trustee of the estate can investigate whether other assets do exist which can be got in and distributed for the benefit of the creditors generally.
It is not necessary for the applicant creditor seeking to set aside the composition to establish that other assets over and above those disclosed in the statement of affairs do exist or even that there is a prima facie case that they might exist. In Re Doukidis; ex parte Consolidated Constructions Pty Ltd, (unreported, Toohey J, 26 June 1985) Toohey J said at p 7:

"That is not to say that the court needs to be satisfied on this hearing that there were undisclosed assets. It is, I think, enough if the evidence justifies an inference that there are likely to have been assets and that creditors may be better off if the composition is set aside."

In Re Tripodi; ex parte Col Johnson Pty Ltd, (unreported, Burchett J, 23 January 1987), Burchett J said:

"...in a proper case it may be held that it is in the interests of creditors that there should be the full opportunity for inquiry which bankruptcy may entail, even though there is no assurance that the inquiry will in fact uncover any further assets."

The following information is referred to by the applicant as justifying an inference that there are likely to be other assets. There is an affidavit on file from a solicitor, Mr Festa, who acted for the Diners Club Limited, a creditor, who deposes to a conversation on 10 June 1994 with the debtor in which the debtor, endeavouring to defer action by Diners Club Limited, said that he had a house in Jordan which was to be sold for approximately $340,000, or failing sale would enable moneys to be raised by loan to satisfy the debt.
In the same conversation the debtor referred to commissions that were outstanding from overseas customers and in particular that he expected to receive some $8,000 on 21 June 1994 and $27,000 by 27 July 1994. There is no reflection of those assets or of income of that order in the statement of affairs. Those are matters which, standing alone, would clearly justify an inference of other assets and warrant investigation by a trustee in bankruptcy. The debtor, however, has today said that in the conversation with Mr Festa he lied about those assets and about his entitlement to commission in an effort to defer his creditor. That statement is to be put into the scales, but the fact that a debtor acknowledges having told lies to one creditor in another way adds to the need for there to be an independent investigation of the affairs of the debtor in case there have been other lies told in the statement of affairs.
The applicant refers to a loan application to the Advance Bank signed by the debtor on 20 June 1994 in which various assets were disclosed. Counsel for the applicant drew attention to the disclosure of house properties of particular values, and in particular a property at Hendon which is not referred to in the statement of affairs. Counsel also drew attention to an assertion of "other assets $70,000" in the application, for which there is no corresponding item in the statement of affairs. The debtor points out, and I accept this as a possible explanation, that the application to the Advance Bank was a joint application, it being proposed that the debtor and his wife would give security to the bank for the loan, and that the Hendon property has for many years been owned by his wife; hence it finds no reference in the statement of affairs. The debtor also states that the bank later valued the properties and put lower values on them which are the values shown in the statement of affairs. That too may be so. I therefore place no weight upon the information given about real estate in the application form.
The application, however, goes on to make reference to two motor vehicles, a Nissan and a Mitsubishi. Plainly the Nissan is under lease and that is referred to as a chattel subject to security in the statement of affairs. The other motor vehicle, however, is not referred to in the statement of affairs. Yet it is referred to in the tax return of the debtor for the year ended 30 June 1993 indicating it was an asset of his, not his wife's. So there is an asset which on the face of the affidavit evidence before the Court requires investigation as to ownership, and the entitlement of the estate of the debtor.
The debtor now wishes to offer an explanation about the insufficiency of his statement of affairs, and indeed, has endeavoured to offer explanation on some other of the alleged possible assets. But it is not a question of this Court sorting out in this hearing whether the assets exist or not. The fact is that the evidence advanced by the applicant creditor shows that there is reason for the investigation and it is for a trustee, if one is appointed, to make that investigation, not for this Court.
As to the "Other assets $70,000", there is reference in a file note of an officer of the applicant bank to the debtor saying on 8 July 1994 that there were Argo shares that could be sold to clear the debt to the bank. The debtor now says those shares belong to his wife. They were part of her interest in an estate. I have no further information about that. In the face of the debtor's explanation I do not rely upon reference to the Argo shares, nor do I rely upon the reference to "Other assets $70,000" as giving rise to any inference because those other assets might well have been those of his wife.
There are, therefore, inferences that some other assets exist that may not be fully disclosed in the statement of affairs. These are matters to be taken into account, but I do not in the overall picture see them as being the most important in the case. There are two further matters that I consider to be of greater significance in the exercise of the discretion.
The first matter is the information disclosed in the tax return of the debtor for the year ended 30 June 1993. That shows that at that date he was conducting an import and export business. He described himself, I note, as importer and exporter at the time that the meeting of creditors was called.
For the year ended 30 June 1993 that business had a gross income in excess of $500,000 and a net taxable income of $111,000 and the balance sheet for the business showed net assets of $158,000. The fate of that business enterprise is not adequately explained by the statement of affairs and the information that went to the creditors at the meeting of creditors. It is not necessary on this occasion to consider whether there were misstatements in the statement of affairs, but I note that in paragraph 3 of the general statement accompanying the statement of affairs the debtor said that he had not during the past five years carried on business on his account or in partnership.
The fact that the debtor has conducted a substantial business within 15 months of calling the meeting of creditors to which no reference is made in the statement of affairs is a matter that warrants investigation. There is a statement in the transcript of the meeting of creditors which indicates that his business failed by reason of overseas customers letting him down. I do not overlook that. The point remains that there needs to be some investigation in the interests of the creditors as to the fate of the business, the fate of the assets of the business, and the possibility that the debtor is himself able out of continuing income that may be earned in the future to make contribution to his creditors over and above that proposed in the composition.
The other matter that I consider to be of considerable significance in the exercise of the discretion is the disclosure in the statement of affairs of two debts due to the debtor, one from J T Johnson and Sons for $300,000 and one from Australian and North African Exports Pty Limited for $750,000. Those are clearly stated in the statement of affairs and not surprisingly were the subject of questions at the meeting of creditors. At the meeting of creditors the debtor informed the meeting that the $300,000 from J T Johnson and Sons was owed in commission fees. The debtor informed the meeting that he had not tried to sue for these fees as he was told by his lawyer, Mr Colton, that his chances of success were slim. On direct questioning the debtor said that he did not know whether J T Johnson and Sons were in a position to pay or not. The debtor, however, said that he had telephoned the company asking for payment and had been informed that J T Johnson and Sons were not in a position to pay.
The debtor was also questioned about the alleged debt due by Australian and North African Exports Pty Limited. He said that the company had its office in Sydney and that he had attempted to demand money from them. The company had paid him $15,000 but the balance had not been paid. He said there may be a dispute about the debt on the basis that the company had not made any profit out of the transactions in question.
The debtor said he had not sued these companies because he needed resources to do so. Those two debts therefore were disclosed. The information about them is such that they call for further investigation and the inference should be drawn from what was said at the meeting that the debts due by these companies may be of value. In my view it is important in the interests of the creditors as a whole that the possibility of effecting a recovery from one or other of those sources be investigated.
The applicant advances as a further ground in favour of the exercise of a discretion what is termed "the public interest". The Court was referred to the following passage in the judgment of Morling J in Re Brennan; ex parte Stokes (Australasia) Ltd at p 6:

"In a case where a debtor has incurred debts of such 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."

In Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 Lockhart J at p 535 said:

"Proceedings in bankruptcy or under Pt.X involve the public interest as well as the direct financial interest of creditors. The events of 1980 and the affairs of the appellant do call for inquiry, especially as the appellant's own statement of affairs reveals very few assets of his own notwithstanding his large liabilities and considerable income earning capacity."

The information before the Court indicates that substantial sums of money came into the hands of the debtor in the few months preceding the bankruptcy. There was a loan of some $35,000 from one of the creditors, Mr T G Rodda, and advances in the order of $10,000 during the same time by the applicant. When asked what had happened to these moneys at the meeting of creditors the debtor indicated that he had "gambled". What happened to these moneys and whether they were used to pay off other creditors who thereby gained a preference is a matter that in the public interest should be investigated.

A further matter advanced by the applicant which I consider should also be taken into account is the relationship of certain of the creditors with the debtor.
The most substantial creditor is Mr T G Rodda whose debt was admitted for the purposes of voting at the meeting of creditors in the sum of $517,238.50. Mr Rodda is the uncle of the debtor's wife. There seems to be a close family relationship there which is not entirely commercial as the creditor advanced further moneys to the debtor even after the meeting of creditors was called.
The same may be said for Mr P J Balnaves. Mr Balnaves is an accountant and there is not a family relationship with the debtor, but there does appear to be something out of the ordinary in terms of a commercial relationship because apparently there have been advances made by Mr Balnaves since the meeting of creditors was called. I do not place great weight on these relationships, but they show that this is not a case where all the creditors who voted in favour of the composition are sophisticated creditors entirely at arm's length.
Moreover, it is to be noted that at the meeting of creditors, when the debtor was asked whether he had made any special arrangement with Mr Rodda, he replied, "He (that is Mr Rodda) knows when I receive commissions he will be repaid". That statement appears in the affidavit evidence and it has not been refuted on oath. The debtor told me in the course of today's argument that there was a misunderstanding about that statement. He intended by the remark at the meeting to indicate that prior to the calling of a meeting he had hoped to repay Mr Rodda and other creditors from the commissions. If that is the proper interpretation to put on the remark, it merely adds weight to the fact that the outstanding commissions were at least for a period of time considered by the debtor to be valuable assets. As I have said, I consider the possibility that there are debts of value due to the bankrupt is a matter to be given considerable weight in deciding whether there should be a trustee in the bankruptcy to investigate the affairs of the debtor.
Two other matters were raised by counsel for the applicant. First, it was asserted that there were material particulars that were not correct in the statement of affairs and, secondly, that the applicant has a prima facie entitlement to a sequestration order upon the presentation of its petition, and upon proof of an act of bankruptcy and an outstanding debt.
As to the first matter, I give no weight whatsoever in today's hearing to the suggestions that false statements were made in the statement of affairs or at the creditors' meeting. That is an issue that was ordered to be separately tried, and it was made plain to the debtor that the hearing today would not go into those matters. Whilst I have made reference earlier in these reasons to the statement about the debtor not being in business this was not to demonstrate a falsity in the statement, but merely to illustrate that the creditors were given no explanation as to the fate of the business which had been conducted at least to 30 June 1993.
As to the second matter, in my view it is not appropriate in the circumstances of this case to give any weight to the prima facie entitlement of a creditor to a sequestration order where a petition has been presented, and an act of bankruptcy established. In the present case, the act of bankruptcy relied upon is the calling of the meeting of creditors. In these circumstances the position is no different to any other application under s.239 to set aside a composition, there being a power under s.239(4) in such a case to make a sequestration order.
In summary, having regard to the very low amount offered by way of the composition when compared with the extent of the debts that were disclosed in the statement of affairs and admitted for voting purposes, having regard to the possibility that other assets may exist and to the fact that there was a substantial business, the fate of which has not been fully explained, and to the fact that there were two large amounts owing to the debtor which were considered by him to be valuable not long before the bankruptcy, I consider the terms of the composition are unreasonable, and not calculated to benefit the creditors generally. I consider the discretion of the Court should be exercised in favour of setting aside the composition, and the making of a sequestration order so that there will be a trustee in bankruptcy who can investigate those matters in the interests of the creditors as a whole.
I propose therefore to order, pursuant to s.239(2) that the composition be set aside and to make a sequestration order.

[1994] FCA 1040

21 DECEMBER 1994