NZI Capital Corporation Limited v Lancaster
[1991] FCA 425
•26 JULY 1991
Re: NZI CAPITAL CORPORATION LIMITED
And: ROGER LONSDALE LANCASTER
Re: DEPUTY COMMISSIONER OF TAXATION
And: MARIA LANCASTER
No. X19 and X22 of 1991
FED No. 425
Bankruptcy
30 FCR 441
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF NEW SOUTH WALES
GENERAL DIVISION
Foster J.(1)
CATCHWORDS
Bankruptcy - Part X Arrangements - Composition - Application to have composition set aside - s 239(2) - unreasonable composition - composition not calculated to benefit creditors generally - return to creditors of less than one-fiftieth of a cent in the dollar - "any other reason" - secret arrangement with other creditor - exercise of discretion to set composition aside.
Bankruptcy Act 1966 - s 222, s 239.
Re Brennan; Ex parte Stokes (Australasia) Limited (Morling J, unreported, 31 May 1988)
Re Richards; Ex parte Beneficial Finance Corp. Limited (Jackson J, unreported, 27 March 1986)
Re Segal: Lensworth Finance Limited v Segal (1975) 9 ALR 154
Re van Twest; Ex parte Tubemakers Australia Limited (1986) 69 ALR 573
Re Milner; Ex parte Milner (1885) 15 QBD 605
Re Jacobs; Ex parte O'Connor (1984) 1 FCR 1
HEARING
SYDNEY
#DATE 26:7:1991
Counsel for the applicant in X19 of 1991: B.A. Coles
Instructed by: Kemp Strang and Chippendall
Counsel for the applicant in X22 of 1991: M.L. Brabazon
Instructed by: Australian Government Solicitor
Counsel for the respondents: M. Cashion
Instructed by: Cutter, Hughes and Harris
ORDER
The composition be set aside.
The respondent pay the applicant's costs.
The applicant be granted leave to seek a hearing date for the Creditor's Petition.
NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
The respondents in these proceedings are husband and wife. The applicants in each case seek orders (inter alia) that a composition established under Part X of the Bankruptcy Act 1966 (the "Act") be set aside. There are significant overlapping areas of fact between the applications. Accordingly, it was ordered that they be heard with one immediately following the other and that, where relevant, the evidence in one application be evidence in the other. It is, nevertheless, convenient that the applications be dealt with separately in these reasons. I deal first with the application involving the respondent Roger Lonsdale Lancaster.
In this application the applicant NZI Capital Corporation Limited was a significant creditor of Mr Lancaster. It had obtained a judgment against him on 22 June 1990 in the Supreme Court of New South Wales Commercial Division in the sum of $1,052,450.58 plus costs. This judgment being unpaid, the applicant issued a Bankruptcy Notice with which Mr Lancaster failed to comply. Thereafter the applicant presented a Creditor's Petition which was duly served and was returnable before this Court on 12 February 1991. Prior to that return date the applicant called a meeting of creditors pursuant to Part X of the Act, which meeting was held on 11 February 1991. Consequent upon the calling of the meeting, the hearing of the Creditor's Petition was adjourned and still stands adjourned.
At that meeting Mr L.E. Bracken sought to represent and vote on behalf on a company Equiticorp Finance Limited (in liquidation). There was a dispute as to whether this company was in fact a creditor of Mr Lancaster. The meeting was adjourned until 15 February 1991 so that this question might be resolved. At the resumed meeting on that date, in circumstances to which I shall make reference later, that company was not accepted by the chairman of the meeting as having established its right to vote as a creditor. The special resolution in favour of the proposed composition was put to the meeting and was carried by the requisite majority in numbers and value of creditors present. The evidence establishes to my satisfaction that had the company been allowed to vote, it would have voted against the resolution, with the result that the required majority in value would not have been established and the resolution would not have been passed.
The resolution that was passed was as follows:
"Creditors accept a Composition pursuant to Part X of the Bankruptcy Act 1966 encompassing the following terms:
- the amount of $5,000 be paid to a trustee, payable within 30 days of the date of the meeting and;
- the funds received by that trustee be distributed in accordance with Division VI of the Bankruptcy Act."
Before I turn to the specific grounds upon which this composition has been attacked, it is appropriate to record the following facts. Mr Lancaster's insolvent situation was brought about as a result of his personally guaranteeing the repayment of loans made to the company Lancaster Securities Limited. Mr Lancaster, at all relevant times, was a stockbroker and this company was the vehicle by which his stockbroking and related activities were conducted. The company suffered financial destruction in the Stock Market "crash" of 1987, leaving it with substantial debts which were the subject of Mr Lancaster's guarantees. The company's most substantial creditor was the Westpac Banking Corporation ("Westpac"), the debt being constituted by the overdraft on the company's trading account. This debt was approximately $3.5 million. It was secured by Mr Lancaster's personal guarantee and also the personal guarantee of his wife. It was further secured by a mortgage over their home at 356 Moore Park Road Paddington. It also appears that Mr Lancaster owed Westpac $560,000 on a personal bill facility secured on certain shares which were subsequently sold by Westpac for $21,253.33.
Additionally, Mr Lancaster owed the applicant company approximately $1,060,000 as a result of nonpayment of various loan facility agreements. He was in debt to another finance company called BCC Australia Limited by virtue of a guarantee given to that company of repayment of a loan to Lancaster Securities Limited. Also, Equiticorp Finance Limited (to which I have already made reference) claimed to be owed approximately $800,000 as a result of a loan made to Mr Lancaster for the purchase of shares. That loan was the subject of dispute, in so far as Mr Lancaster asserted that he had made the borrowing not from that company but from a company Equiticorp Financial Services Limited. He asserted that he had compromised that debt. He claimed that he owed no money to Equiticorp Finance Limited.
In addition, Mr Lancaster owed small amounts of money, being less than $2,000 each to certain friends and relatives the detail of which does not matter, but the presence of whom at the meeting called to consider the composition ensured the existence of a numerical majority voting in favour of it.
At the meeting of 15 February 1991, the applicant voted against the resolution accepting the composition and also indicated that it would challenge it, as it has done in these proceedings. It appears that all others present who were not there merely as observers, with the exception of the representative of Equiticorp Finance Limited who was refused the right to vote, voted in favour of the resolution.
The applicant through its counsel, in seeking to set aside the composition, relies primarily upon s 239(2) of the Act which provides that:
"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."
Reliance was also placed upon s 222 of the Act which provides, so far as relevant, as follows:
"222 (1) Where there is a doubt, on a specific ground ... whether a composition has been accepted by a special resolution of a meeting of creditors under section 204 ... a creditor ... may apply to the Court for an order under subsection (2).
(2) Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order -
(a) declaring that the ... composition is void ... on the ground specified in the application.
...
(4) Where the Court on the application of ... a creditor is satisfied that the debtor -
(a) has given false or misleading information in answer to a question put to him with respect to any of his conduct or examinable affairs at the meeting of creditors at which the resolution ... accepting the composition was passed; or
(b) has omitted a material particular from the statement of the debtor's affairs given under subsection 188(2) or included an incorrect and material particular in that statement. The Court may make an order declaring the ... composition to be void ...
(5) The Court shall not make an order declaring a ... composition ... to be void on a ground specified in subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so."
The applicant relies upon the refusal of the chairman of the meeting to permit the representative of Equiticorp Finance Limited to vote as being an "other reason" for the composition being set aside pursuant to s 239(2). Alternatively, the applicant relies upon this refusal of the chairman as creating a doubt on a specific ground as to whether the composition had been accepted by the special resolution within the meaning of s 222(1) of the Act. The claim is made by the applicant and not by Equiticorp Finance Limited, although there would appear to be no reason why the applicant could not rely upon the claimed defect if it be established.
The evidence on the matter is exiguous. It consists largely of statements as to what occurred at the relevant meetings, appearing from the minutes of the meetings or in affidavit material tendered in the case. The nature of the dispute appears to be constituted by a claim on the part of Equiticorp Finance Limited that the debt was owing to it by virtue of an assignment from the original creditor, called Equiticorp Financial Services Limited, at a point of time before Mr Lancaster entered into a compromise of the debt with the latter company, such compromise having taken place outside any relevant period of relation back. The evidence clearly establishes that such a compromise was entered into and that Mr Lancaster never at any stage received any notice of the assignment of the debt to Equiticorp Finance Limited. It would be a commercially strange situation if the original creditor company entered into the compromise after it had in fact assigned the debt that it was purporting to discharge.
The chairman of the meeting adjourned it to enable proof to be placed before him of the assignment upon which Equiticorp Finance Limited relied as basing its claim to vote upon the composition. Documentary material, part of the evidence in these proceedings, suggested that he required the production of the deed of assignment duly executed and stamped. It was claimed before me that this demand for a stamped document rendered the decision of the chairman invalid and that the chairman had before him at relevant times a deed in unstamped form which would have indicated that the debt had been validly assigned. This is an insubstantial argument. The deed of assignment was not tendered in evidence in these proceedings. I am not satisfied that there was an assignment of the debt nor that the chairman wrongly refused the right to vote to the claimed assignee. Accordingly, this attack upon the composition fails.
It is also claimed that the composition should be set aside as there was no disclosure in the statement of the debtor's affairs that he was possessed of household furniture to the value of some $9,000. The existence of this furniture is disclosed in his affidavit in these proceedings. I am satisfied on the evidence that none of the furniture includes any items of particular value. There is, in my view, a strong likelihood that this furniture would be "necessary household property" and not available to the creditors. In any event, the furniture is obviously of such minute significance in comparison with the totality of the debtor's indebtedness that I would not be prepared, as a matter of discretion, to set aside a composition otherwise properly arrived at simply because of a failure to disclose its existence.
A somewhat similar attack is made on the basis that the value of a car, used by the debtor and his wife, was not disclosed at the relevant time. Once again the evidence relating to this vehicle is far from clear. Mr Lancaster obviously has in his possession a small motor vehicle which was provided to him by his father for family use at some stage after the onset of his severe financial difficulties. It was obviously a family arrangement designed to assist Mr and Mrs Lancaster in their financial extremities. There was clearly enough an agreement that Mr Lancaster would pay his father $15,000 for the car. Indeed, this indebtedness is shown in the statement of affairs. However, I am not able to determine that there was any intention that title to the vehicle would pass prior to the actual payment of this money, before which time Mr Lancaster would merely have a right to use the vehicle. Moreover, there is no evidence of the value of the vehicle at any relevant time. Bearing in mind the notorious rate of depreciation in value of small vehicles and the fact that a vehicle used by the bankrupt primarily as a means of transport not exceeding in value the amount of $2,500 is, in any event, exempt, I find myself unable to attribute any real significance to this aspect of the attack made on the composition. I would not, in exercise of discretion, set aside the composition on this ground, nor do I consider that it was seriously submitted that I should.
Other grounds of attack, however, are of far greater moment. In the first place, Mr Coles, counsel for the applicant, asserts that the amount of money, $5,000, offered to the creditors in the composition and accepted by the relevant majority is, on the face of it, "unreasonable" and "not calculated to benefit the creditors generally" within the meaning of s 239(2). He described the amount offered as being so small as to be "derisory". The evidence establishes, to my satisfaction, that, having regard to the likely costs of the administration of the composition, the amount available to unsecured creditors would be, as was submitted, somewhere between nothing and one-fiftieth of a cent in the dollar. So far as I have been able to ascertain, this would seem to be the smallest amount offered by way of payment to creditors in a composition in any of the decided cases under s 239. For instance, in Re Brennan; Ex parte Stokes (Australasia) Limited (Morling J, unreported, 31 May 1988) the composition under consideration resulted in a dividend to creditors of about 0.8 of a cent in the dollar. This was held by his Honour to be correctly described as being "more or less a token". Also, in Re Richards; Ex parte Beneficial Finance Corp. Limited (Jackson J, unreported, 27 March 1986), the amount available to unsecured creditors under the composition was about 1 cent in the dollar. His Honour described the amount offered as "so trivial when compared to the total of the debts that in the circumstances of the particular case I would regard that fact alone as sufficient to provide `other reason' in terms of s 239(2) for setting the composition aside". There can be no doubt that a strong case is made in the present proceedings for the setting aside of the composition on the simple basis that unsecured creditors are, for practical purposes, getting nothing and would be better off if the debtor were made bankrupt so they could take advantage of the investigatory procedures then available to them.
As against this, it is submitted on behalf of the respondent that nothing has been adduced in the case which could indicate, other than in a speculative fashion, that the creditors would be in a better position if he were made bankrupt: whereas, if he were bankrupted, his position would be significantly worsened, insofar as he would be prevented by that fact from entering into gainful employment in areas of the securities industry. It is also submitted that, insignificant as the amount of the potential dividend is, the composition has nevertheless been accepted by the required proportion of creditors in number and value, whose decision should not lightly be interfered with by the Court (Re Segal: Lensworth Finance Limited v Segal (1975) 9 ALR 154 at 163: Re van Twest; Ex parte Tubemakers Australia Limited (1986) 69 ALR 573 at 575). In this regard considerable reliance is placed upon the evidence that the amount of $5,000 was to be provided by the debtor's father, that the debtor was in no financial position to make any personal contribution, and that no more funds would be forthcoming from other sources.
There is, however, another most important consideration in this case. As I have already indicated, Westpac was the major creditor without whose favourable vote the special resolution establishing the composition would not have been passed. It held as security for its debt a first mortgage over the matrimonial home at 356 Moore Park Road Paddington. The sale of the home pursuant to the mortgage would have recouped for Westpac only a very small fraction of its debt. It did not exercise its power of sale but over a protracted period of time held discussions with Mr Lancaster in relation to his indebtedness and the position of the home. I am satisfied that quite early in those discussions, before any question of a composition with creditors arose, and before bankruptcy proceedings had been commenced by the present applicant, discussions were held between the respondent and Westpac on the basis that, the respondent himself having no funds, his mother-in-law would provide $325,000 to be paid to Westpac in consideration of the release of the security over the home. It does not appear that discussions ever reached the stage of agreement in detail. For instance there was no agreement that, if the amount be accepted, the bank would, rather than submitting the property to auction, merely sell it for that price to the respondent's mother-in-law or whether it would merely accept that sum as consideration for the discharge of the mortgage, leaving the title to the home in the names of Mr and Mrs Lancaster. If this latter course were adopted, the home would, of course, remain as an asset available to their creditors. I am satisfied that things, in a sense, simply drifted on until activity on the part of the present applicant produced a from of agreement between the respondent and Westpac. Whether the amount of $325,000, when originally offered represented a fair estimate of the market value of the premises is not clear. However, at the time when agreement was reached, the property had become less attractive to purchasers because of obvious damage in certain parts of it through white ant infestation. Moreover, property values had declined in general. Valuations were obtained for the purpose of discussions between the respondent and Westpac. I am satisfied that the respondent understood that if he were to obtain Westpac's favourable vote in relation to a composition, he would have to offer an attractive arrangement in respect of the security on the home. The bank had obtained an up-to-date valuation of the property in the amount of $250,000. It was a conservative valuation and lower than other valuations that were available. However, the amount of $325,000, which was still available from the respondent's mother-in-law, was, I am satisfied, regarded both by the respondent and those considering the matter in Westpac as being significantly more than what would be received for the property in a mortgagee's sale in the market.
In these circumstances an arrangement was entered into, the nature and purpose of which was made quite clear in the evidence. On 20 November 1990 Mr Lancaster wrote to Westpac referring to earlier correspondence and discussions. He stated that the market value of the home was now less than the $325,000 previously discussed. He referred to opinions on value given by a leading estate agent in the area, this being to the effect that the current market value was in the range of $280,000 to $310,000 "which is $15,000 to $45,000 (say $30,000) less than the amount of $325,000 we have previously discussed". He then stated the following proposal: "as Westpac is my major creditor (taking the Lancaster Securities Limited overdraft guarantee into account) Westpac's approval of the scheme arrangement would effectively mean its acceptance by my creditors. If however money is put into a pool in the scheme of arrangement Westpac's share of that money would be diluted by the other creditors participating. However, if Westpac receives an attractive market price for the release of the mortgage on 356 Moore Park Road Paddington other creditors do not participate in any portion of that amount. For example if I place $30,000 in a pool in the scheme of arrangement and that is accepted by creditors, Westpac would receive 50% to 70% of the pool ($15,000 to $21,000) depending on the relevant size of all creditor's claims. However, if Westpac is paid $325,000 to release the mortgage on the house instead of the average ... price of $295,000 the other creditors do not participate in that $30,000". The letter went on to state that if Westpac was willing to support a scheme of arrangement that released the respondent from all liabilities to Westpac, with a token $1,000 in the pool, and also released his wife from her guarantees, Westpac would be offered $325,000 to release the mortgage. As indicated already, Westpac obtained a valuation which in fact valued the property at only $250,000.
Although bank documents tendered in evidence do not make it clear that this offer was accepted or agreed to unconditionally, the evidence of Mr Hartley, the bank officer having the conduct of the matter at Westpac puts, in my view, the situation beyond doubt. He stated that by January of 1991 he understood that the $325,000 was being offered and would be available only if the bank agreed to the proposed composition, which agreement could be decisive of its acceptance. He also understood that if the composition was put into effect it would prevent other creditors from enforcing their judgments, collecting their debts or bringing proceedings in bankruptcy. He understood that the $325,000 was coming from "family sources" and that the bank was being given an opportunity "to do rather better than it was perceived ... as likely to do if it had to take the step of realising its security". It would benefit to the extent of some $75,000, which benefit "would not itself be generally available for other creditors". He recommended that the bank agree to the scheme in order to receive $325,000, such a step being essential "to stop other creditors from attaching any claim to the Paddington property once the bank's mortgage was discharged".
It would seem that Mr Lancaster had some reservations as to the property being only worth $250,000, but it clearly was important that the bank should accept the view that there was a significant financial advantage accruing to it if it took the $325,000 on offer in consideration on supporting the composition. Of course, at the time when the bank, by proxy, voted in favour of the composition at the creditors meeting of 15 February 1990, there was not in existence, apparently, any enforceable agreement imposing any obligation on Mr Lancaster's mother-in-law to make the payment of $325,000. However, it is plain that, in a situation where there was not inconsiderable strain in the family, Mr Lancaster's mother-in-law wished to take quite understandable steps to ensure that her daughter and grandchildren would have a home to live in and was prepared to make the payment to achieve that result. Consequently, at the time of the meeting, there was, I am satisfied, a clear understanding that the bank would support the composition and thereafter discharge the security upon receiving a payment of $325,000. The effect of all this would be that it would receive up to $75,000 more than the value of its security which would go towards payment of the unsecured portion of its debt over and above its share of whatever amount was left of the $5,000 composition payment after the deduction of administration expenses. Although, relative to the size of its unsecured debt, it would be getting very little, it would still be getting substantially more than the other unsecured creditors. In return Mr and Mrs Lancaster would retain their home, free of the mortgage and free of any claims from the other creditors.
It is against the background of this broad understanding having been reached between Westpac and the respondent that consideration of events at the meeting of 15 February must take place. What then occurred, in my view, is best established from the minutes (exhibit A). So far as relevant in this matter they read as follows:
"Mr Donnelly (representing the applicant) asked the debtor what the arrangements with Westpac and whether any advances had been made to settle the debt. Mr Lancaster said he had been in constant contact with Westpac and had assisted them and co-operated with them over the years. Mr Lancaster said he had approached them on numerous occasions to try and settle the debt. Mr Chalmers (solicitor for the debtor) said discussions had been made regarding the security on the Lancaster's property at Paddington. The property at Paddington is jointly owned and Mr and Mrs Lancaster and their three children lived in the property. Mrs Lancaster's mother was negotiating to advance sufficient funds to discharge the mortgage.
Mr Donnelly asked whether the arrangements with Westpac were as part of their agreement to vote in favour of the Part X arrangement. Mr Chalmers confirmed that negotiations had not been concluded with Westpac and that there was no specific association between the two issues. Mr Donnelly pointed out to the creditors that they were being offered $5,000 and yet Mr Lancaster can produce about $325,000 to discharge the mortgage.
Mr Donnelly asked why the creditors should accept the Composition when his wife can borrow $325,000.
Mrs Lancaster interjected by stating that her mother was only considering paying such money for the benefit of her grandchildren and that the property would not remain in the name of Mr Lancaster."
No-one was present representing Westpac, but the chairman held its proxy to vote in favour of the resolution. The information about the arrangements with Westpac, or absence of them, came therefore from Mr Lancaster and Mr Chalmers, his solicitor. It is clear that the amount of $325,000 was stated as being available from Mrs Lancaster's mother for the purpose of discharging the mortgage and that its provision was being considered for the benefit of the grandchildren. The point was made in opposition to acceptance of the composition by Mr Donnelly that, in effect, family money could be made available for the discharge of the mortgage in the sum of $325,000 whereas only $5,000 could be made available in payment of the debtor's unsecured liabilities. No information was given, nor was it sought, as to whether $325,000 was more than the realisable market value of the property. It was merely stated that it was "sufficient to discharge the mortgage".
It is to be noted that when Mr Donnelly sought information as to whether there was a connection between the proposed payment and Westpac's voting in favour of the composition, the question was not answered by Mr Lancaster but by his solicitor in the terms set out above. It was a guarded answer as recorded and, no doubt, reflected the extent of his instructions. Mr Lancaster, however, did not enlarge upon the matter himself. The meeting was therefore not informed as to the position, which I have found to exist, namely that there was a broad understanding that in consideration of the $325,000 being made available for the discharge of the mortgage, Westpac would vote in favour of the composition. The question of Westpac receiving an additional advantage in relation to other creditors was not ventilated.
The circumstances of this composition are almost identical to those considered by the English Court of Appeal in Re Milner; Ex parte Milner (1885) 15 QBD 605. In that case, the debtor entered a composition deed with his creditors, in which all the creditors received 10s in the pound in final satisfaction of the debtor's liabilities. One of the creditors, after entering into the deed, discovered that some of the creditors had been induced to enter the deed by the making of an additional payment to them by the debtor's brother. The creditor sought to have the composition set aside. The Court of Appeal held that he was so entitled.
Bowen L.J. stated (at p615):
"...it is of the very essence of such a transaction that the creditors who take part in the scheme act upon the faith and understanding that they are all coming in upon terms of equality, and if a deed is prepared to carry out this equal distribution, every creditor who executes it does so in the faith that there is no private bargain with any of the other creditors which will destroy this equality. If there is any private agreement that one of the creditors is not to be dealt with upon this equal footing, but is to receive a preference, that is a breach of faith, and if the debtor is aware of it, it strikes at the root of the deed, and entitles any creditor who has been thus deceived to treat it as void."
Similarly, Brett MR said at p612:
"...it is of the very essence of a composition of this nature that all the creditors who come in under it oblige themselves to each other, and the debtor obliges himself to every one of them, that, so far as he is concerned, all of them shall come in upon a footing of equality."
The Master of Rolls was of the view that had the additional payments been made out of the debtor's own money, thus reducing the funds which were available to the creditors generally, this principle of equality would be violated and as a result the composition would not bind the creditors. Moreover, he held that this consequence would flow even where the additional payments were made by a third party. At p613 he said:
"...then the case of Knight v Hunt (5 Bing 432) carries the principle still further, for it decides that it is immaterial whether the bribery is to be carried out at the expense of the debtor or not, if one of the creditors derives an advantage from some other person than the debtor, still he has broken faith with the other creditors, and they are entitled to say that they are not bound by the deed. I should hesitate to say that this would be so if the preferential payment was made without the knowledge of the debtor; but in the present case it was made with his knowledge."
Milner's case was, of course, concerned with a consensual arrangement made between the debtor and his creditors. It could be said, then, that the secret arrangement between the brother and some of the creditors had the effect of vitiating the consent given by the remaining creditors which had been predicated on there being fair, open and equal dealing all round. The present arrangement was, of course, not such an agreement between debtors and creditors, but a composition effected under Part X of the Act. Such a composition does not require the agreement of all creditors. By s 238 of the Act it is provided, inter alia, that if the composition is accepted by special resolution passed in accordance with the Act then it is binding upon all the creditors whether they voted in favour of it or not. Whilst it is in force no creditor can present, or continue with the presentation of, a creditor's petition against the debtor. Nor can any creditor enforce any remedy against the debtor's property or person, nor commence or continue any legal proceedings against the debtor in respect of a provable debt.
Despite these differences, is the principle referred to in Re Milner available to a creditor seeking to impugn a composition under Part X? The dissatisfied creditor may, as already indicated, attack a composition under s 222 and s 239 of the Act. Section 222 is in specific terms which do not, in my view, attract the operation of these principles. However, s 239 is in more general terms and enables the Court to set aside a composition if it considers that "for any other reason" the composition ought to be set aside.
The relevant sections were considered by Fisher J in Re Jacobs; Ex parte O'Connor (1984) 1 FCR 1 at pp 3 et seq. His Honour said (at p 5) in relation to the operations of s 238 and s 239:
"as a special resolution is described as a resolution passed by a majority in number and at least three-fourths in value of the creditors present and voting at a meeting, it is clear that the majority of creditors may in this way impose its will on minority creditors. The latter's remedy is an application to court under s 239 of the Act".
I am clearly of the view that a creditor who has had a composition imposed upon him, as well as a creditor who has voted in favour of it, can claim that the composition should be set aside because some secret arrangement, of the type envisaged in Re Milner, has taken place between the debtor and one or more of the creditors. Such an arrangement furnishes an "other reason" for the Court's avoiding the composition under s 239(2).
I am satisfied that the facts as I have found them entitle the applicant to invoke the principle of Re Milner. I am, therefore, satisfied that it has established a ground for setting aside the composition.
It is submitted, however, on behalf of the respondent, that the Court has an overriding discretion to refuse to set aside the composition if the whole of the circumstances indicate that no useful purpose would be achieved by doing so. It is put that it is not shown that there is any likelihood at all of any further assets being discovered if the respondent be made bankrupt and subjected to the ordinary investigatory procedures of the bankruptcy administration. It is further put that the only effect would be to deprive him of an opportunity to make a livelihood as a stockbroker during the period of his bankruptcy. It is submitted, in effect, that to impose the status of bankruptcy upon him would amount to utilising that status as a form of punishment.
It is clear that the respondent has suffered considerably as a result of his heavy financial losses and that he is under considerable personal strain. One can sympathise with this and also with his desire to be free of financial problems and endeavour to rehabilitate himself in the commercial world. There is also force in the submission that the amount of money to be provided by his mother-in-law in excess of the market value of the home will never, in any event, become available to the body of the unsecured creditors, as that arrangement will simply disappear if the composition is set aside.
If these proceedings were brought simply under s 222 of the Act I might have some difficulty in being satisfied that it would be in the interests of the creditors to set aside the composition. I feel it likely that nothing will be achieved for them by further investigation of the respondent's financial affairs and that there is no significant prospect of the estate being increased by after-acquired property or available earnings of the respondent during the period of bankruptcy. However, I have come to the conclusion that the proceedings must succeed under s 239(2). In my view, the terms of the composition are demonstrably unreasonable having regard to the negligible amount available for distribution amongst the unsecured creditors. The composition is not such as to benefit creditors generally. Furthermore, the secret arrangement and insufficient disclosure of it provide compelling reasons for exercising the Court's discretion under the section. The countervailing considerations are not, in my view, sufficient to deflect me from this course.
Accordingly, I order that the composition be set aside pursuant to s 239(2) of the Bankruptcy Act.
In relation to the second proceedings in which the Deputy Commissioner of Taxation is the applicant and Maria Lancaster is the respondent, much the same considerations apply. The size of the debts, which is comparable to that in the first proceedings, is such as to render the amount available for the unsecured creditors, being a similar amount of $5,000, manifestly unreasonable and not for the benefit of the creditors generally. I have the same view of the case made in respect of the motor vehicle as in the first application. There are additional features relating to an inadequate opportunity to investigate the financial situation of a company operated by this respondent and also the failure to notify a lessor company to which rent was owed of the meeting of creditors. This latter fact, on its own, would not have induced me to exercise my discretion against the composition, particularly in the circumstances that the lessor itself made no complaint.
However, the considerations in relation to the secret arrangement carry the same weight in these proceedings as in the first proceedings. Mrs Lancaster was a co-guarantor of the debt to Westpac and liable for it in the same way as her husband. Although she did not play any part personally in the arrangement, she is a well educated and intelligent person who, I am satisfied, knew of its existence in general terms and allowed her husband to deal with the bank on her behalf.
The same countervailing considerations apply as in the first proceedings. Indeed, I can see little or no likelihood of there being any ultimate advantage to creditors if she is made bankrupt. However, for the same reasons as I have set forth in relation to the first proceedings, I feel constrained to exercise my discretion in favour of the setting aside of the composition in her case. I order that it be set aside under s 239(2) of the Act.
The question of whether I should proceed to make sequestration orders against these two debtors if the compositions were set aside was discussed during the hearing. I have decided not to take that step immediately but merely grant leave to the applicant petitioning creditors to seek a hearing date for those petitions. I do so in the hope that, there having been a not inconsiderable canvassing of the financial positions of these two people in these proceedings, it may still be possible for arrangements to be made which will avoid the consequences of their being made bankrupt. I order that the respondents pay the applicants costs in each of these proceedings.
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