Newman, D.D. v Littlejohn, E.A

[1995] FCA 519

CATCHWORDS

BANKRUPTCY - controlling trustee's power of sale prior to meeting of creditors - application for leave to sell - heavy earthmoving equipment used in road-construction business - auction scheduled for day following application - no evidence that property perishable in the sense of being at risk of vandalism or destruction - creditors' meeting scheduled for 10 days subsequently - debtors initially requesting and consenting to sale - change of mind - debtors seeking to put different proposal to creditors - leave refused - auction would preclude alternative - creditors to have right to choose.

Bankruptcy Act 1966 (Cth) s.190(3)

DIANA DENISE NEWMAN AS CONTROLLING TRUSTEE OF EDWARD
ALEXANDER LITTLEJOHN AND JENNIFER LILLIAN LITTLEJOHN v.
EDWARD ALEXANDER LITTLEJOHN AND JENNIFER LILLIAN
LITTLEJOHN

CARR J.
PERTH
5 JULY 1995

IN THE FEDERAL COURT     )
OF AUSTRALIA  )
WESTERN AUSTRALIA         )       No. WAG 3029 of 1995
DISTRICT REGISTRY            )
GENERAL DIVISION             )       

IN THE MATTER of Section 190(3) of the Bankruptcy Act 1966

B E T W E E N:  DIANA DENISE NEWMAN AS

CONTROLLING TRUSTEE OF

EDWARD ALEXANDER LITTLEJOHN
  AND JENNIFER LILLIAN LITTLEJOHN

Applicant
  and

EDWARD ALEXANDER LITTLEJOHN AND JENNIFER LILLIAN LITTLEJOHN

Respondents

CORAM:     CARR J.
PLACE:      PERTH
DATE:        5 JULY 1995

MINUTE OF ORDERS

THE COURT ORDERS THAT:

1. The application for interlocutory relief be dismissed

1. As between the applicant and the respondents there be no order as to the costs of that application.

1. The applicant have liberty to apply for an order that her costs be paid out of the respondents' estate or either of the respondents' estates.

1. Any party have liberty to apply on two days written notice to the other.

1. The principal application be adjourned sine die.

NOTE:Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT   )
OF AUSTRALIA                 )
WESTERN AUSTRALIA     )           No. WAG 3029 of 1995
DISTRICT REGISTRY         )
GENERAL DIVISION         )           

IN THE MATTER of Section 190(3) of the Bankruptcy Act 1966

B E T W E E N:  DIANA DENISE NEWMAN AS

CONTROLLING TRUSTEE OF EDWARD

ALEXANDER LITTLEJOHN AND
  JENNIFER LILLIAN LITTLEJOHN

Applicant
  and

EDWARD ALEXANDER LITTLEJOHN AND JENNIFER LILLIAN LITTLEJOHN

Respondents

CORAM:     CARR J.
PLACE:      PERTH
DATE:        5 JULY 1995

REASONS FOR JUDGMENT

Introduction

This is an application under s.190(3) of the Bankruptcy Act 1966 (Cth) ("the Act") by a controlling trustee seeking leave to sell certain of the respondents' plant and equipment. The application was lodged yesterday afternoon and heard as a matter of urgency last evening because the auction at which it is proposed to sell the plant and equipment is scheduled for 10.00 this morning.

Factual Background

The respondents, Mr Edward Alexander Littlejohn and his wife Jennifer Lillian Littlejohn have until fairly recently carried on business in partnership in the road construction industry. On 21 June 1995, the respondents each signed an authority under s.188 of the Act authorising the applicant to call a meeting of their creditors and to take over the control of their property. It seems to be common ground that the respondents at that stage were content that all of their assets be sold in order to pay their creditors. In fact, on 21 June 1995 Mr and Mrs Littlejohn signed a letter addressed to Mr John Bell of Messrs John A. Bell Auctioneers, in Welshpool, Western Australia confirming what were described as verbal arrangements made for that firm to sell at public auction on 5 July 1995 the plant and equipment listed in that letter. The plant and equipment listed in that letter is the plant and equipment in respect of which the applicant seeks the Court's leave to proceed to auction this morning. The respondents' letter referred to the fact that most of the plant and equipment is subject to finance arrangements with Esanda Finance Corporation Ltd ("Esanda"), and requested Mr Bell to liaise directly with Esanda concerning the pay-out figures in respect of the plant and equipment which is either owned by Esanda and the subject of hire purchase agreements with the respondents or which is subject to a charge to Esanda. The letter concludes with a request that any net proceeds of the sale of the plant and equipment be paid to the applicant who is described as "being appointed as our Controlling Trustee under the provisions of the Bankruptcy Act".

In her affidavit filed in support of this application the applicant swears that this letter was signed by the respondents after they signed the authorities under s.188 referred to above and that the respondents had, prior to signing those authorities, orally consented on the morning of 21 June 1995, to the sale of the plant and equipment.

I was told from the bar table that the creditors' meeting is scheduled to take place on 20 July 1995 (i.e. in fifteen days time).

In the meantime Messrs John A. Bell, the auctioneers, have proceeded to make arrangements for the auction.  Approximately $8,800 has been spent in advertising the auction mainly in "The West Australian" newspaper but also in the Sydney Morning Herald and the Brisbane Courier Mail.  Some $8,200 has been spent in transporting the equipment to the site of the proposed auction, about $5,800 in repairing and cleaning the equipment and about $3,000 for valuing the equipment at its then location at towns in the eastern wheatbelt of Western Australia.  In addition to those expenses the applicant has listed the following further expenses: insurance $3,000, legal fees $3,367, wages (approx) $5,000, her fees $15,000 and freight disbursements of $1,000.  The applicant estimates that as at 4 July 1995 she had incurred costs of approximately $53,000 and states that legal costs, some wages and her fees will continue to be incurred even if the order which she seeks is granted.

The respondents oppose the application.  I shall deal with the respective arguments advanced by the applicant and the respondents below.

The Statutory Provisions

Section 190(2) and (3) respectively provide as follows:

"(2)Where a registered trustee consents to exercise the powers conferred by such an authority, [a reference to an authority under s.188 of the Act], he is, by force of this section, empowered -

(a)to take immediate control of the debtor's property and affairs;

(b)to make such inquiries and investigations in connexion with the debtor's property and examinable affairs and the trustee considers necessary;

(c)to carry on a business of the debtor if, in the opinion of the trustee, it will be in the interests of the creditors to do so; and

(d)to deal with the debtor's property in any way that will, in the opinion of the trustee, be in the interests of the creditors.

(3)The power of the trustee to deal with the debtor's property conferred by subsection (2) does not authorise the trustee to sell the property or any part of it (not being perishable property) except in the ordinary course of business or with the leave of the Court."

The Submissions

At first Mr J.C. Hammond, who appeared for the applicant, submitted that the proposed sale was in the ordinary course of business because the respondents had set in train the proposed auction prior to the applicant's appointment.  In any event that was how I understood his submission.  In reply, Mr Hammond acknowledged that in all the circumstances, without the leave of the Court the applicant did not have power to sell the equipment.  I think that concession was appropriate.  From an examination of the papers, the equipment would appear to represent virtually the whole of the respondents' undertaking and such sale would preclude any prospect of an immediate resumption of their contracting business.  There was no submission that the plant and equipment was perishable property.

Although the application, which was heard last evening, was expressed in terms of being for interlocutory relief, the principal relief sought in this application is in identical terms i.e. an order that the applicant be entitled to sell the respondents' equipment.  As the proposed sale is scheduled to take place within the hour, what is described as the interlocutory relief sought would, in fact, be final if I were to grant the order sought.

In summary Mr Hammond submitted that I should grant leave for the following reasons:

1. The circumstances were extraordinary in that a sale had been agreed to and instituted by the respondents;

2. The respondents had caused the applicant to incur substantial costs of approximately $53,000;

3. Fletcher Construction Australia Ltd ("Fletcher"), a contractor for whom the respondents had been carrying out road making works had sought and obtained an injunction from the Supreme Court of Western Australia restraining the applicant and the respondents from removing the respondents' plant and equipment from a construction site between Meckering and Cunderdin in Western Australia.  As a result of negotiations Fletcher had agreed to release all but three of the items and as at the date of this hearing had released all of the equipment for the purposes of sale.

   [In the course of his submissions Mr Hammond passed up to me a copy of a letter from Fletcher's solicitors to Messrs Hammond Worthington & Prevost which reads:

"The understanding Fletcher Construction Australia Ltd ("FCA") has had with respect to the sale of Littlejohn's plant and equipment is that an auction was going to take place on Wednesday, 5 July 1995.  FCA has never required a sale to take place.

FCA has never understood there to be a commitment by Diana Newman that the auction would take place nor did FCA enter into any agreement with Diana Newman on the basis of a commitment that such auction would take place."]

1. Messrs John A. Bell will exercise a lien over the equipment and it will not be possible for the respondents to obtain possession of it;

2. The applicant is now exposed to costs and fees of approximately $53,000; and

3. The applicant was under a duty to the respondents' creditors to proceed with the proposed auction today.

Mr R.G.S. Harrison who appeared for the respondents tendered in Court an affidavit from Mr Littlejohn.  In that affidavit Mr Littlejohn swears that he has been in the road-making industry for approximately 30 years and that he and his wife agreed to appoint the applicant as their controlling trustee because of their inability to meet wages for the fortnight ended 15 June 1995.  Mr Littlejohn then refers to certain circumstances in relation to the respondents' road construction contract with Fletcher.  He says that the applicant had acted for the respondents for approximately one month prior to her appointment as controlling trustee and that the applicant had told the respondents that the sale of all their assets would result in all creditors being paid in full with a small surplus.  According to Mr Littlejohn, the respondents acted on that belief when they "moved towards" having their creditors agree that they should enter into a Deed of Assignment.  Mr Littlejohn further says that subsequently he became aware that the respondents' assets would not be sufficient to pay the creditors in full. 
Mr Fletcher deposes that yesterday he attended a meeting with the State Manager of Fletcher and that at that meeting it was made clear to him that Fletcher was willing to consider a continuation of the road construction contract with the respondents.  Mr Littlejohn further says that the respondents wish to offer their creditors a proposal that the respondents enter into a Deed of Arrangement whereby the balance of the contract with Fletcher be re-negotiated so that it can be completed, that the term of the Deed of Arrangement be approximately six months and that further plant hire and grading contracts be entered into by the respondents under the supervision of their Trustee.  From the applicant's affidavit it would appear that the respondents are proposing that the trustee of that Deed of Arrangement should be Mr Graham Lean, a registered trustee in bankruptcy.  Mr Littlejohn then, to some extent, outlines how he proposes to continue carrying on business and lists some benefits which he believes will flow to unsecured creditors from such a Deed of Arrangement.  He says that these would include a more orderly realisation of items of plant than through an auction, and that there would be profits to be gained from completion of the contract with Fletcher instead of the prospect of Fletcher imposing liquidated damages.  At paragraph 22 of his affidavit Mr Littlejohn responds to the applicant's evidence in relation to the costs of Messrs John A. Bell & Co, storage costs and insurance costs.

Mr Harrison submitted that the applicant should provide some compelling reason why leave should be granted for this auction to take place.  Mr Harrison's first basic submission was that the interests of creditors had to be put above the applicant's own personal position.  The reference to the applicant's own personal position was to the fact that the applicant was in a position where she held some $32,240 in trust on account of the respondents' administration whereas she had incurred costs and fees of approximately $53,000 as referred to above.

Mr Harrison further submitted that if the application is granted then the creditors will be deprived of their choice between the Deed of Assignment originally proposed by the respondents, the Deed of Arrangement now proposed by the respondents, or any of the other choices referred to in s.204 of the Act.

The authors of McDonald, Hendry & Meek do not cite any authorities in respect of s.190(3). No authorities were cited to me by counsel in argument and, in the time available, I have not been able to find any authorities dealing with the principles upon which leave should be granted under that subsection. What can be gleaned from that subsection [when read with s.190(2)] is that it contemplates that the trustee may sell perishable property otherwise than in the ordinary course of business if a trustee holds the opinion that that would be in the interests of the creditors. Furthermore, a trustee appointed under s.190 may sell property in the ordinary course of business if the trustee holds the opinion that that would be in the interests of the creditors. Otherwise the leave of the Court is required.

In the apparent absence of any authority, it seems to me that, to some extent, an analogy may be drawn with a situation in which a provisional liquidator under the Corporations Law seeks leave to sell assets of a company. I do not suggest that the analogy is necessarily a complete one.

However, in my view, common to the situation of a controlling trustee and a provisional liquidator is their role of preserving assets and undertakings.  There may be circumstances in which the only way to preserve such assets and undertaking, or at least their value for creditors, is to sell them quickly.  In such a situation court approval may be forthcoming to a provisional liquidator if appropriate: Re Codisci Pty Ltd (1974) CLC 40-126.

The evidence before me suggests that the respondents' liabilities will exceed $1 million and that their assets will realise between $200,000 and $400,000 depending on the outcome of the proposed auction and the sale of other assets including the respondents' real estate.  On that basis, the applicant estimates that she will be able to pay the priority creditors in full and unsecured creditors between 20 cents and 45 cents in the dollar.

It is not possible for me, in the face of conflicting affidavits as to proposed realisation of the plant and equipment, to venture an assessment whether from a financial point of view it would be in the best interests of the creditors for today's auction to proceed.  However, in my opinion the circumstances do not disclose a situation in which the only way to preserve the assets and undertaking of the respondents or their value for the creditors is to sell them quickly.

The plant and equipment comprises heavy earthmoving equipment, graders and the like. 

The creditors' meeting is scheduled to take place in ten days time.  If the sale takes place before that meeting then the creditors will be faced with a fait accompli.  They will have been denied the choice in that matter; a matter in which in my view the choice is properly theirs.  As I mentioned in Court last evening, I have every sympathy with the predicament in which the applicant finds herself.  However, were it not for the fact that the respondents, as late as the day before yesterday, informed her that they now oppose the sale of the equipment, it is reasonably clear that the applicant would have proceeded to the sale by auction today.  It was eventually conceded that such a sale would have been beyond the applicant's power unless leave of the Court had been obtained.  The application for leave was, as I have mentioned, only filed yesterday afternoon following the respondents' announcement of their change of mind and opposition to the proposed sale.  It was conceded that the proposed sale was not in the ordinary course of business and in those circumstances (in the absence of any evidence that the plant and equipment constituted perishable property) it seems to me that before organising the auction an application should have been made to the Court for leave to sell.  It was not submitted to me that the plant and equipment constituted perishable property, although one can imagine circumstances in which plant and equipment, perhaps in a remote location and subject to theft, vandalism and the like might constitute perishable property.  That was not suggested in this matter. 

I have had regard to the costs incurred and likely to be incurred.  The main costs thrown away are likely to be the advertising expenses which comprise some $8,800 out of the total amount of $53,000 of costs and expenses to which the applicant has referred.  Mr Harrison estimated that some $12,000 to $13,000 might be wasted.  On the other hand, this has to be seen in the context of evidence that the total value of the equipment is some $833,000. 

My main reason for refusing this application, and I am speaking at this stage of the interlocutory application, is that I consider that there is insufficient urgency, bearing in mind that the creditors' meeting is scheduled for fifteen days time, for the creditors to be denied the right to decide what is to be done in relation to the respondents' estate.

A subsidiary, although (for reasons referred to below) relatively minor, concern is that the plant and equipment is the subject of proceedings in the Supreme Court of Western Australia and an injunction is still in force in relation to some of the items of equipment.  I was told from the bar table that Fletcher had agreed to release all of the equipment and of course I accept that assurance.  If I were minded to grant the application, I would have done so on the basis of that assurance.  Nonetheless, having decided to the contrary, I am reinforced to some slight extent in that decision by the fact that there are proceedings in relation to the plant and equipment still undisposed of before the Supreme Court of Western Australia.

For the above reasons the application for interlocutory relief will be dismissed.  I will hear counsel on the matter of whether the principal application should be dealt with summarily or adjourned.

In view of the role which the respondents played in, as I see it, leading the applicant into the present situation, I do not propose to make any order as to costs.  I refer to the fact that Mr and Mrs Littlejohn initially authorised the proposed sale today and very late in the piece announced their opposition to that sale.  However, I will hear counsel on the matter of costs.

I certify that this and the preceding eleven (12) pages are a true copy of the Reasons for Judgment of Justice Carr.

Associate:

Date:      24 July 1995

Counsel for the Applicant:                 Mr J C Hammond
Solicitors for the Applicant:               Hammond Worthington Prevost

Counsel for the Respondent:              Mr R G S Harrison
Solicitors for the Respondent:  Sly and Weigall

Date of Hearing:       4 July 1995
Date of Judgment:    5 July 1995