Official Receiver v Besser

[2001] FCA 684

FEDERAL COURT OF AUSTRALIA

Official Receiver v Besser [2001] FCA 684

IN THE MATTER OF DANIEL RONALD BESSER

OFFICIAL RECEIVER FOR AND ON BEHALF OF THE OFFICIAL TRUSTEE IN BANKRUPTCY v DANIEL RONALD BESSER
N7209 of 2000

MADGWICK J
4 JUNE 2001
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N7209 of 2000

BETWEEN:	OFFICIAL RECEIVER FOR AND ON BEHALF OF THE OFFICIAL TRUSTEE IN BANKRUPTCY APPLICANT
AND:	DANIEL RONALD BESSER RESPONDENT
JUDGE:	MADGWICK
DATE OF ORDER:	4 JUNE 2001
WHERE MADE:	SYDNEY

THE COURT DECLARES THAT:

1.   The respondent was bankrupt from 5 July 1993 until 6 August 1998 and was on 6 August 1998 discharged from bankruptcy.

THE COURT ORDERS THAT:

1.   The application is dismissed.

2.   The parties are to bear their own costs.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N7209 of 2000

BETWEEN:	OFFICIAL RECEIVER FOR AND ON BEHALF OF THE OFFICIAL TRUSTEE IN BANKRUPTCY APPLICANT
AND:	DANIEL RONALD BESSER RESPONDENT

JUDGE:	MADGWICK
DATE:	4 JUNE 2001
PLACE:	SYDNEY

REASONS FOR JUDGMENT
(revised from transcript)

HIS HONOUR:

1. In this matter, the Official Receiver for and on behalf of the Official Trustee in Bankruptcy applies pursuant to s 75(5) and s 75(6) of the Bankruptcy Act 1966 (Cth) (“the Act”) for the annulment of a composition and the consequent making of a sequestration order. The respondent opposes this application on three bases.

2. Firstly, the respondent claims that the resolution of creditors purportedly passed at a meeting at which over three quarters of the creditors representing over 80 per cent of the value of the debts proved in the bankruptcy, held to consider the proposal for composition, was not validly passed because the creditors were not given the notice required by Regulation 4.18 of the Bankruptcy Regulations 1996 (Cth) before the meeting.

3. Secondly, the making of a sequestration order in particular is opposed, if there were a valid and effectual composition, because the respondent had endured the status of an undischarged bankrupt for five years and would, but for the proposal for composition, have been due for discharge, and as a practical matter, have been discharged from bankruptcy on the very day on which the meeting of the creditors was held.  Thirdly, it was submitted that in the exercise of the Court’s discretion generally the Court should not intervene. 

   Factual Background

4. Debts had been proved in the estate in the sum of $1,569,693.00.  The unconditional proposal for a composition was that $1,106,250 be paid.  Had it been paid, that would have enabled a dividend for creditors of about 63 cents in the dollar.  Otherwise, it was anticipated that the creditors would receive nothing because neither the Statement of Affairs filed by the debtor nor subsequent investigations by the applicant revealed any assets to be realised for the benefit of creditors.

5. The respondent had a background in the defence procurement business, and had formed an association with a company involved in a tender for a new business venture with a government.  The evidence is slight but it appears that, in order to feel confident that that company and the respondent could represent to that government (and to any other interested party,  perhaps would-be lenders), that the debtor had never been bankrupt, there had been negotiations between the respondent and that company as to whether it would provide the funds to be paid under the proposed composition.  While the respondent made the proposed composition unconditionally, he did not misrepresent the fact that the company had stopped short of binding itself to make the funds available.  Those creditors at the meeting, despite having received only four, rather than the seven days notice required by reg 4.18, purported to accept the proposed composition.  The applicant drew to the attention of the creditors, who included banks and other commercial lenders, a large public company, and firms of solicitors, before they voted for the proposal, the fact that reg 4.18 had not been complied with.

6. In the result, although the composition required that the said sum of $1,106,250 would be made available to the Official Trustee by 9 April 1999, only $10,000 was provided and that did not occur until 17 December 1999.  The terms of the composition were otherwise not honoured.  The applicant had certified the annulment of the respondent on 6 August 1998, by a certificate dated 11 August 1998. 

   Consideration

7. In my opinion, however one analyses this case, the same result is achieved.Let it be assumed that the problems about the adequacy of the notice for the creditors’ meeting can be overcome.  While suspicions may be held that the respondent may not have made every effort that he should to pay, it is common enough that debtors, like other people, work towards objectives that they hope will achieve desirable results but that, through no fault of their own, on occasions the hopes do not materialise.  There is no evidence at all to negative that common hypothesis and there is no reason for the Court not to act upon the basis that it is a sufficient explanation for what has occurred.  A very small amount of overt support for such an explanation is constituted by the payment of the $10,000, albeit late. 

8. Upon the failure of a composition in which a large sum of money was promised, there might in general be a strong case for saying that "it is desirable that the affairs of the former bankrupt be investigated and administered under the provisions of [the] act", a criterion upon which, according to s 75(4)(b)(iii), the Court may annul the composition.  Nevertheless, there would be no effective ability for the applicant to investigate or administer the estate unless the Court accompanied the annulment by a further sequestration order.  If there were an ability on the part of the applicant or the Court to discharge the present debtor forthwith from any new burden of bankruptcy, in the event that, after due and prompt investigation, he was positively able to show no breach of any legal obligation in relation to the failure of the composition, the necessary infliction of some period of a further bankruptcy might be justified. 

9. However, under the present regime, there is no ability in anybody to discharge a bankrupt in less than three years from the sequestration order and, as there is nothing to indicate that the debtor is other than a person who has done his best but failed, it is unacceptable to inflict on him a compulsory period of a further three years’ bankruptcy when, in relation to the same source debts, he has already suffered the status of a bankrupt for five years. 

10. Therefore, assuming a valid creditors' meeting and a valid resolution accepting the composition, in my opinion, the proper order of the Court would be simply to annul the composition.  The effect would be to revive the bankruptcy, but to recognise, by declaration, that the debtor would have been discharged from it on 6 August 1998. 

11. Alternatively, if the submissions of Mr Courtenay, solicitor for the applicant, that s 306 saves the resolution because all that was involved was a formal defect or an irregularity which did not cause substantial injustice, are incorrect, then there never was an annulment.  The position would be therefore that the respondent remained bankrupt until midnight on 6 August 1998 when he was discharged from the bankruptcy  by operation of law. 

    Disposition

12. Thus on any view, the proper course of action for the Court, in my opinion, is simply to declare that the respondent was bankrupt from 5 July 1993 until 6 August 1998, and was on 6 August 1998 discharged from bankruptcy.

13. I believe the applicant acted reasonably in bringing the matter to the notice of the Court, and should be at liberty to apply so much of the $10,000 as is available to his costs of these proceedings, with any residue to be distributed to the creditors. Further, the proceedings arose out of a default on an unconditional obligation by the respondent.  However, the respondent has not had an outcome in these proceedings worse than one to which, it may be inferred, he would have consented. Accordingly, in my opinion, the parties should bear their own costs of the proceedings.

I certify that the preceding six (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Madgwick.

Associate:

Dated:             14 June 2001

Solicitor for the Applicant:	Shaw McDonald
Counsel for the Respondent:	A. O’Sullivan
Solicitor for the Respondent:	Lewis Hutchison
Date of Hearing:	4 June 2001
Date of Judgment:	4 June 2001