Oayda R.R. v Mercantile Mutual Life Insurance Company Ltd
[1994] FCA 1083
•20 Feb 1994
1033 19+
JUDGMENT No. ....... .W.I ., ........ ..
C A T C H W O R D S
BANKRUPTCY - Composition with creditors - Alleged
irregularities - Proof of debt by secured creditor that
neither valued nor relinguished the security
Responsibilities of trustee - Order that trustee personally
pay costs of proceeding.
Bankru~tcv Act 1966, ss 198, 200, 222 and 306.
ROBERT RAFEC OAYDA v MERCANTILE MUTUAL LIFE INSURANCE COMPANY
LIMITED (ACN 009 657 176)
No. NX 75 of 1994
CORAM : WILCOX J PLACE: SYDNEY DATE : 20 FEBRUARY 1994
REGISTRY
RECEIVED
19 APR 1995
FEDERAL COURT OF
AUSTRALIA
PRINCIPAL
IN THE FEDERAL COURT OF AUSTRALIA )
) No. NX 75 of 1994
NEW SOUTH WALES DISTRICT REGISTRY ) ) GENERAL DIVISION 1
RE: R O B E R T R A F E C OAYDA Debtor
EX PARTE :
MERCANTILE MUTUAL LIFE INSURANCE COMPANY LIMITED (ACN 009 657 176)
CORAM: WILCOX J PLACE : SYDNEY DATE : 20 FEBRUARY 1995
MINUTES OF ORDER
THE COURT ORDERS THAT:
It be declared that Permanent Trustee Australia Limited, as trustee of the Howard Mortgage Trust, not having lodged prior to the meeting of creditors of the Debtor on 27 June 1994 a valid proxy, was not entitled to vote at the meeting of creditors of the
Debtor on 27 June 1994 called by the Respondent and at any adjourned meeting of creditors of the Debtor. It be declared that Permanent Trustee Australia Limited, as trustee of the Howard Mortgage Trust, was wrongly permitted by the Respondent to vote by proxy at the second adjourned meeting of creditors of the Debtor on 27 July 1994.
The speclal resolution passed at the meeting of creditors on 27 July 1994 be set aside.
The composition under Part X of the Bankru~tc~ Act
1966 proposed by the Debtor and accepted pursuant to
that special resolution be declared void.
The trustee, Kevin Shirlaw, pay the costs of the proceedings to date and these costs not be reimbursed to him out of the estate of the debtor.
Note : Settlement and entry of orders is dealt with in
Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRAIJIA )
1 No. NX 75 of 1994
G ~ ~ ~ R A I ; DIVISION i
ROBERT RAF E C OAYDA
Debtor
EX PARTE:
MERCANTILE MUTUAL LIFE INSURANCE COMPANY LIMITED (ACN 009 657 176)
CORAM: WILCOX J PLACE : SYDNEY DATE : 20 FEBRUARY 1995
EXTEMPORE REASONS FOR JUDGMENT
WILCOX J: On 27 July 1994 a meeting of creditors of Robert Rapek Oayda passed a resolution in the following terms:
"That the composition under part 10 of the Bankruptcy Act 1966 proposed by the debtor be
The meeting resolved: accepted in the terms and conditions as outlined in the proposal to creditors." "That Kevin Richard Shirlaw, having consented to act as trustee and having made a declaration in accordance with section 215A of the Bankruptcy Act 1966, both of which were submitted to the meeting and persons entitled to vote given a reasonable opportunity to inspect the declaration, be appointed
trustee. " The meeting went on to pass ancillary resolutions
concer;~ing remuneration of the controlling trustee. By an application filed 17 August 1994, Mercantile Mutual Life Insuraace Company Limited ("Mercantile Mutual") sought orders
including a declaration that it was entitled to vote at the
meeting of creditors of Mr Oayda which commenced on 27 June 1994 and culminated in the resolutions of 27 July 1994, a declaration that it was wrongly excluded by the respondent, Mr Shi::law, from voting on 27 July 1994, a declaration that Permanent Trustee Australia Limited as trustee of the Howard Mortgaqe Trust was not entitled to vote on 27 July 1994, an order setting aside the composition and an order that a sequestration order be made against the estate of the debtor.
It appears that, at the time the application was filed, there was pending in this court an action commenced by Mr Oayda and others against Mercantile Mutual in which a substantial damages claim was made. Because of that complic:ation, counsel for the present parties, namely Mercantile Mutual and Mr Shirlaw, consented to the
The perticular matters that were identified as preliminary that effect was made on 11 October 1994 by Registrar Quinn. determination of certain preliminary matters. An order to matters and have been before me today, were stated in this
way:
"1. The Court hear and determine as a preliminary
matter the Applicant's claims for:
a) A declaration that Permanent Trustee Australia Limited, as trustee of the Howard Mortgage Trust, not having lodged
p r i o r t o the m e e t i n g o f c r e d i t o r s o f the
Debtor on 27 June 1994 a v a l i d proxy , was
n o t e n t i t l e d t o v o t e a t the m e e t i n g o f
c r e d i t o r s o f the Debtor on 27 June 1994
c a l l e d by the Respondent and a t a n y
adjourned m e e t i n g o f c r e d i t o r s o f the Debtor.
b)
A d e c l a r a t i o n t h a t Permanent T r u s t e e
A u s t r a l i a L i m i t e d , a s t r u s t e e o f the
Howard Mortgage T r u s t , was wrong1 y
p e r m i t t e d by the Respondent t o v o t e by
p r o x y a t the second adjourned m e e t i n g o f
c r e d i t o r s o f the Debtor on 27 J u l y 1994. ~ n d , c o n s e q u e n t l y , t o the extent t h a t they r e l a t e t o the above:
c ) An o r d e r pursuant t o s e c t i o n 222 o f the
Bankrup tcy Ac t 1966 t h a t the s p e c i a l r e s o l u t i o n passed a t the m e e t i n g o f
c r e d i t o r s on 27 J u l y 1994 be set a s i d e and t h a t the Composit ion under Par t X o f the Bankrup tcy A c t 1966 proposed by the Debtor and accep t ed pursuant t o t h a t s p e c i a l
r e s o l u t i o n be dec lared v o i d .
d ) F u r t h e r , and i n the a l t e r n a t i v e t o c ) , an
o r d e r pursuant t o section 239 o f the
Bankrup tcy Ac t t h a t the s p e c i a l r e s o l u t i o n
passed a t the m e e t i n g o f c r e d i t o r s on 27 J u l y 1994 be set a s i d e and t h a t the Composi t ion under Part X o f the Bankruptcy A c t 1966 proposed by the Debtor and accep t ed pursuant t o t h a t s p e c i a l
r e s o l u t i o n be dec lared v o i d . "
T h e e n t i t l e m e n t o f Mercan t i l e Mutual t o v o t e a t the mee t ing o f
the c r e d i t o r s i s n o t one o f the m a t t e r s t o be the s u b j e c t o f a
preliminary d e t e r m i n a t i o n . However, counse l f o r Mr Sh i r l aw
s p e c i f L c a l l y s t a t e s t h a t h i s c l i e n t does n o t c h a l l e n g e Mercan t i l e Mutual ' s r i g h t s t o r a i s e the p o i n t s i n i s s u e . I t
seems t o be c l e a r t h a t Mercan t i l e Mutual i s a c r e d i t o r o f Mr Oayda i n r e s p e c t o f moneys payable under a guarantee and i n t e r e s t t h e r e o n s u b j e c t t o any l i a b i l i t y which it might have
i n r e s p e c t o f the a c t i o n f o r damages commenced b y M r Oayda against it.
M r Skinner, counsel for the trustee, Mr Shirlaw,
stated that he did not dispute that there were irregularities in respect of the meeting of creditors and that the only question for the Court to determine is how it should deal with these irregularities having regard to the terms of s.306 of the Bankru~tcv Act 1966. I will return to the terms of that
section in due course. It is first necessary to consider what
are the irregularities demonstrated by the evidence.
It appears from the minutes of the various meetings that ate in evidence that the creditors of Mr Oayda first met on 27 June 1994 pursuant to a notice issued to them by Mr Shirla~i, the person to whom the debtor had given an authority under s.188 of the Bankru~tcv Act to call a meeting. When the meeting convened, Mr Shirlaw was appointed chairperson. He requested those present to complete particulars in an attendance register and noted that a summary of proxies and powers of attorney had been prepared. He tabled this summary.
The summary of proxies and attorneys included a proxy ln the sum of $4,738,517 .S0 by a creditor identified as Howard Mortgage Trust in favour of Mr Shirlaw himself. The amount of the debt claimed in respect of this creditor was, far and away, the largest of those referred to in the schedule of proxies or attorneys or indeed, claimed by the creditors who were represented at the meeting and accepted as creditors. I exclude Mercantile Mutual which was represented but not accepted as a creditor. The next highest creditor, after Howard Mortgage Trust, was Continental Shirts Manufacturing pty Limited in the sum of $2,616,000. This creditor was represented by a M r Robertson of Arthur Andersen and there was a dispute as to his entitlement to vote on behalf of that creditor. The third highest creditor referred to in the schedule of creditors was the Commonwealth Bank in the sum of $845,297. It appears that the Commonwealth Bank has consisrently opposed to a composition.
The evidence discloses the form of proxy used by Howard Mortgage Trust, and which must have been the basis of the entry in the schedule of proxies. There are numerous problens about the document. In the first place, the evidence is now clear that the relevant creditor was not the Howard Mortgaqe Trust, but rather the Permanent Trustee Australia Limited, the trustee for an unincorporated trust known as the
Howard Mortgage Trust. by a company called Howard Funds Management Limited, of whom It seems that this trust was managed John Mlchael Thomas was executive manager. The form of proxy that was before the meeting on 27 June was given in the name, not of Permanent Trustee Australia Limited, or even Howard Mortgage Trust, or even Howard Funds Management Limited but M r Thomas personally. The form of proxy was executed by Mr Thomas who apparently then placed under his name a rubber stamp containing the words: "Howard
Funds Management Limited". There is no basis for assuming that Mr Thomas had any right to appoint a proxy on behalf of Permanent Trustee Australia Limited. Moreover, no appointee was stated. The form of proxy simply leaves a blank at this point.
Further, the form of proxy fails to specify the manner of voting by the appointee, as required by s.200(3A) of the Act. The printed form provided for the proxy giver to put a circle around one of the alternatives:
in respect of a series of matters; but the form was not
comple5ed.The next document in the bundle was a document, also
signed by Mr Thomas above the rubber stamp Howard Funds
Management Limited. It is undated and appoints Mr Shirlaw: "To be my attorney". The power of attorney purports to authorise him to attend a meeting of creditors of Mr Oayda to be held on 27 June, and any adjourned meeting thereof, and in respect of any matter to vote in any manner he sees fit.
Finally, there was a proof of debt. This was lodged
by Mr Thomas as executive manager and contained the statement that Mr Oayda was on the date he signed the authority, namely
23 May 1994:
"And still is, justly and truly indebted to Permanent Trustee Australia Limited as trustee for the Howard Mortgage Trust care of Howard Funds Management Limited, Level 31, 50 Bridge Street, Sydney, in the sum of $4,738,517.50 in accordance with particulars specified in the statement of account annexed hereto."
The printed form contained a para. 2, which was designed for cases where no security was held - this was
struck out. Para. 3 was completed so as to read:
"The following security is held by (b) first mortgage over 252
Sussex Street, Sydney for the payment of part/the whole of the
sum specified in paragraph 1".
The printed form, which was taken from the
prescribed form 15 under the Bankruptcy Regulations, obviously
intended that where the letter (b) appeared there would be a
repetition of the name of the creditor. The name was not
repeated, but it seems apparent that the statement is being
made that the identified creditor, namely Permanent Trustee Australia Limited, holds security, the security being a first mortgage over a particular property in the Central Business District of Sydney.
Section 198(5) of the Bankru~tcv Act provides that,
except as provided by subs.(6), a secured creditor is not
entitled to vote in respect of a secured debt unless he
surrenders his security. Subsection (6) says as follows:
"A s e c u r e d c r e d i t o r may, i f he h a s furn i shed t o t h e
chairman, i n w r i t i n g , p a r t i c u l a r s of t h e s e c u r i t y
and of t h e v a l u e a t which he e s t i m a t e s i t , v o t e i n
r e s p e c t o f t h e b a l a n c e (if any) o f t h e secured d e b t a f t e r d e d u c t i n g t h e v a l u e a t which he h a s e s t i m a t e d
t h e s e c u r i t y . "
The proof of debt lodged with M r Shirlaw at or prior to the meeting of 27 June 1994, contained neither a statement by or on behalf of Permanent Trustee Australia Limited that it surrendered its security nor particulars of the value at which the creditor estimated the security. The particulars attached to the proof of debt set out details of the composition of the claimed sum of $4,738,517.50. It is apparent from this documeilt that this is the gross amount and that no allowance has been made for any value that might attach to the security.
Mr Skinner has submitted that in these circumstances Permanent Trustee Australia Limited that it surrendered its
I should read the proof of debt as containing a statement by
security. I do not think that the document can be read in this way. If it be the fact that the company held a first mortgaqe over a property in Sussex Street, Sydney, it seems to me unltkely in the extreme that it would have been prepared to surrender that security simply in order to vote the whole of its gr3ss debt in respect of the estate of a creditor where the return was estimated to be only about 10 cents in the dollar. I think, if one turns the question around the other way and asks what would be the chances of the trustee successfully relying upon this form of proof of debt as a defence to a claim by Permanent Trustee Australia to exercise mortgagee's powers over 252 Sussex Street, Sydney, the answer would be that there would be no prospect whatever. In the first ?lace the document was not executed by Permanent Trustee Australia, but by Mr Thomas, and it is not clear what his
authority was to take that step. Secondly, there was no unequivocal relinquishment of the security. I agree with MI Skinner that a problem is caused by the prescribed form of proof of debt. It would have been desirable for the form to have specifically included a printed provis~on for a statement of the value of the property. It does n3t, and there may be some merit in the prescribed form being reconsidered with this in mind; but, whatever the merit of that suggestion, the inadequacies of the form cannot obviate the necessity for compliance with subs. (5) and (6) of
declined to allow anybody to vote the Permanent Trustee
s.198. As it seems to me, the document that was put before Mr Shirlaw was inadequate as a proof of debt. He should have Australia Limited debt unless and until the security had been surrendered or the creditor had valued the security.
There was discussion at the meeting on 27 June about this and other matters, as a result of which the meeting was adjourned for four weeks until 25 July. On that day there was furthe= discussion, following which the meeting was again adjourned for two days until 27 July. As I have already mentioned, on the latter day the relevant resolutions were passed.
Prior to that day a further document, or a series of documeats, were furnished to Mr Shirlaw on behalf of Permanent Trustee Australia Limited. They were an improvement on their predecessors but still had problems. The form of proxy this time was at least in the name of the creditor, Permanent Trustee Australia Limited, and it did contain a specification of the manner of voting. A particular appointee was named, namely Mr Thomas. The document was executed by two attorneys under power of Permanent Trustee Australia. Considered as a form of proxy, therefore, it is difficult to see any problem about this document. However, one oddity that arises, and which relates to the proof of debt problem, is that in para 3 the statement is made: "I am a secured creditor and the total amount owed to me after deducting the value of my security is
obviously the gross value of the debt. A proof of debt was $4,738,517.50". As I have previously pointed out, this was attached to this document. It was executed by Permanent Truster? Australia Limited and followed a similar form to its predecessor. Once again, the proof was in the sum of $4,738,517.50. Once again, the statement was made that securixy was held, being a first mortgage over 252 Sussex Street, Sydney, for "part/the whole of the sum specified in paragraph 1". Once again, no attempt was made to value the security. Nor was the security surrendered.
The third document was a power of attorney whereby Permanent Trustee Australia appointed Mr Thomas as its attorney to attend the meeting of creditors to be held on 27 June, or any adjourned meeting thereof, and to vote as he saw fit at that meeting.
It seems to me that a similar problem arises in respec': of the proof of debt submitted to this meeting. I think it is fundamental that a person who claims to be a secured creditor must elect either to rely on the security or to surrender the security. If the creditor elects to rely on the security, the creditor is entitled to vote only for the difference between the gross debt and the net debt after taking account of the security. I say that this is fundamental because, otherwise, unfairness to other creditors could result . A secured creditor could vote in respect of the wt.ole of his/her gross debt, with whatever advantages
using voting power, whilst also taking advantage of the attend the ability to manipulate the course of a bankruptcy by security. In other words, the creditor is voting a debt which is not fully, or perhaps all, at risk. In my opinion, Mr: Shi::law made a fundamental error in permitting the Permanent Trustee debt to be voted until such time as there had been compliance with s.198(5) and (6).
Furthermore, even if the Permanent Trustee debt could be voted on 27 July, the only person who had authority to vote that debt was the appointee in both the proxy and the power of attorney, Mr Thomas. The minutes reveal that Mr Thomas did not in fact vote the debt; Mr Shirlaw did. Mr Skinner says that I should infer that Mr Thomas authorised M r Shirlaw to vote on his behalf. I see two problems about that. One is that there is no basis for drawing that inference. It is just as likely that Mr Shirlaw was still under the influence of the belief which caused him to vote the debt at the earlier meeting and had not addressed his mind to the fact that tnere was now a specific appointee. There is no mention in the minutes of any authority given by Mr Thomas to Mr Shirlav to vote the debt and the minutes set out in considerable detail what happened at the meeting.
Secondly, I think it is highly questionable whether Mr Thcmas had any authority to delegate to Mr Shirlaw the power given to him on behalf of Permanent Trustee. This is not an act referred to in the general power of attorney and
would lot be covered, and is not covered, by the proxy, which is a p-:oxy to vote. Accordingly, it seems to me that the debt claimed by Permanent Trustee Australia, even assuming that there was a proper proof of debt, was not properly voted on 27 July.
As I say, Mr Skinner does not challenge the claim
that there were irregularities but he says that s.306 should
be used to cure the position. Section 306(1) reads as
follows :
"Proceedings under t h i s a c t a r e n o t i n v a l i d a t e d by a
formal d e f e c t or an i r r e g u l a r i t y un le s s t h e cour t
b e f o r e whom t h e o b j e c t i o n on t h a t ground i s made i s o f op in ion t h a t s u b s t a n t i a l i n j u s t i c e has been
caused by t h e d e f e c t o r i r r e g u l a r i t y and t h a t t h e i n j u s t i c e cannot be remedied by an o r d e r o f t h a t c o u r t . "
I do not think s.306(1) can be applied in this case. It may be possible to argue that the voting of the Permanent Trustee debt by Mr Shirlaw rather than Mr Thomas falls within the category of a formal defect or irregularity, Mr Thomas being present at the time and being apparently aware of the course being taken by Mr Shirlaw. But I do not think I can regard the failure to comply with s.198(5) and (6) of the Act as either a formal defect or an irregularity. As I have said, this :.S a fundamental matter. It goes to the basis of creditors' rights to participate in a meeting and has important ramifications as between creditors. In the present
case, if the Permanent Trustee debt had not been voted, the relevant resolutions would have been defeated. The debt claimed by Continental Shirts Manufacturing was excluded from the vote and, as I have already said, the next largest debt, by a considerable margin, was that of the Commonwealth Bank.
If everything else had happened as it did, but the Permanent Trustee debt had been excluded, there would have been a vote, in terms of value of debts, against each of the resolutions.
The exslusion of Continental Shirts is itself a controversial matter. but this can hardly help the trustee's argument because it appears that the person who represented that company, or purported to represent the company at the meeting, wished to vote against the composition resolutions.
It is clear that the decision of Mr Shirlaw to admit the Permanent Trustee debt to the ballot was critical in the relevant resolutions being passed and that this has affected the rights of other creditors. Consequently, S. 306 should not be applied.
I cannot pass from the case without expressing dismay at the number of serious irregularities that occurred in connection with this matter. Mr Shirlaw is an accountant and an experienced registered trustee. It seems to me that it is not asking too much of those who are registered as trustees, and thus obtain access to substantial remuneration for rendering services under the Bankruptcy Act, to become cognisant of its terms and punctilious in its observation.
bankrupt's affairs for a considerable time and has involved number of irregularities has delayed the dealing with the In the present case, Mr Shirlaw's actions in permitting a the pazties in unnecessary expense. I make the declarations set out in subparas. (a) and (b) of para. 1 of the order of 11 October 1994. I make an order as set out in subpara. (c) of that paragraph.
[Counsel addressed on costs.]
M r Pembroke, on behalf of Mercantile Mutual, asks
for an order for costs against the trustee. Mr Skinner does not opnose this but says that the order should not require him to pay the costs personally. I think the Court should order Mr Shirlaw to pay the costs personally. As I have said, the litigazion stems from his neglect of his responsibilities and I see no reason why the cost of that litigation should be thrown upon the creditors.
Accordingly, I order that the trustee, Kevin Shirlaw, pay the costs of the proceedings to date and these costs not be reimbursed to him out of the estate of the debtor. I stand the matter into the Registrar's bankruptcy
list a : 9.30 on Tuesday, 28 February 1995.
I cert~fy that this and the preceding fourteen (14) pages
are a true copy of the Reasons for Judgment
of the Honourable Justice Wilcox.
Associate: Dated: 20 February 1995
APPEAIWNCES
Counse: for the Applicant Creditor: M A Pembroke Solicitors for the Applicant Creditor: Mal lesons Stephen
Jaques
Counse: for the Respondent: B Skinner Solicilors for the Respondent: Williams Palmer Noss Date of hearing: 20 February 1995
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