Paradise Enterprises Limited v Kakavas
[2011] FMCA 370
•27 May 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| PARADISE ENTERPRISES LIMITED v KAKAVAS | [2011] FMCA 370 |
| BANKRUPTCY – Application to adjourn Creditor’s Petition – application pending proceedings in the Federal Court to set aside a Personal Insolvency Agreement – counter application seeking summary dismissal of Petition pursuant to s.206 Bankruptcy Act – consideration of effect of s.206 – consideration of discretion to adjourn. |
| Bankruptcy Act 1966, ss.52(2)(b), 188, 206, 216, 222, 229(2) |
| McDonald, Henry & Meek: Australian Bankruptcy Law & Practice, Thomson Reuters, Sixth Edition Venetoulis; Re: Ex parte Calsil Ltd (1976) 13 ALR 625 |
| Applicant: | PARADISE ENTERPRISES LIMITED |
| Respondent: | HARRY KAKAVAS |
| Supporting Creditor: | CROWN MELBOURNE LIMITED |
| Supporting Creditor: | DEPUTY COMMISSIONER OF TAXATION |
| File Number: | MLG 1308 of 2010 |
| Judgment of: | Burchardt FM |
| Hearing date: | 5 May 2011 |
| Date of Last Submission: | 5 May 2011 |
| Delivered at: | Melbourne |
| Delivered on: | 27 May 2011 |
REPRESENTATION
| Counsel for the Applicant: | Mr Morrison |
| Solicitors for the Applicant: | Kliger Partners |
| Counsel for the Respondent: | Mr Galvin |
| Solicitors for the Respondent: | Madgwicks Lawyers |
| Counsel for the Supporting Creditor Crown Melbourne Limited: | Mr Dodgshun |
| Solicitors for the Supporting Creditor Crown Melbourne Limited: | Minter Ellison |
| Counsel for the Supporting Creditor Deputy Commissioner of Taxation: | Ms Prestidge |
| Solicitors for the Supporting Creditor Deputy Commissioner of Taxation: | ATO Legal Services Branch |
ORDERS
The further hearing of the Creditor’s Petition be adjourned until the completion of the application in the Federal Court to set aside the Personal Insolvency Agreement executed by the debtor.
The costs of the parties be reserved.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 1308 of 2010
| PARADISE ENTERPRISES LIMITED |
Applicant
And
| HARRY KAKAVAS |
Respondent
REASONS FOR JUDGMENT
In this matter, the applicant creditor seeks that the further hearing of its Petition be adjourned pending the completion of proceedings underway before Marshall J in the Federal Court of Australia. In those proceedings, Paradise Enterprises Limited (“Paradise”) seeks to join Crown Melbourne Limited (“Crown”) in an action to set aside a personal insolvency agreement entered into by the respondent.
Mr Kakavas says that s.206 of the Bankruptcy Act 1966 (“the Act”) requires the Court to dismiss the petition and further that, in any event, the dismissal of the Petition would cause the applicant no prejudice. The applicant, needless to say, disagrees it would suffer no prejudice in this regard.
For the reasons that follow, I think that the applicant should have the orders it seeks.
The facts
The facts in this matter are not the subject of dispute, as I understand it. What I set out below is partly taken from the written submissions of the respondent and otherwise from the affidavit material. Given the lack of dispute, it is not necessary to be more detailed in attribution.
On 8 September 2010, the respondent committed an act of bankruptcy. On 21 September 2010, the applicant presented its Creditor’s Petition against his estate. Thereafter, the two supporting creditors lodged notices of appearance as indeed did the respondent.
On 1 November 2010, the respondent gave an authority pursuant to s.188 of the Act authorising Stirling Lindley Horne and Petr Vrsekcy to call a meeting of his creditors. The meeting was initially scheduled for 6 December 2010. The proposal put forward by the respondent was for payment of a total of $555,000 (with the first payment of $55,000 and successive monthly payments of $50,000) to be paid by a person other than him on behalf of his estate. The total value of the respondent’s debts was in many millions of dollars and the return thus to be engendered was, on any view, relatively small.
On 28 February 2011, the respondent’s creditors by special resolution resolved to approve the personal insolvency agreement (“the PIA”) proposed by the respondent, and the respondent executed it on the same day.
In the meantime, the Petition had been adjourned on a number of occasions. Relevantly, on 3 February 2011, Registrar Hetyey adjourned the Petition until 3 March 2011, and it was adjourned on that day by Registrar Pringle to 5 May 2011.
On 11 March 2011, Crown filed an application pursuant to s.222 of the Act to set aside the PIA. On 27 April 2010, Paradise sought to join in that proceeding which is in Marshall J’s docket. Counsel for the applicant informed me without objection that the application for joinder is due to be heard by Marshall J on 16 May 2011.
As I have said, the applicant seeks to adjourn the further hearing of this Petition pending the final resolution of the proceedings before
Marshall J which may or may not have the result that the PIA is set aside. It is clear from the affidavit material filed that both Paradise and Crown will assert, in effect, that the PIA was improperly entered into because a large number of friendly creditors were admitted to vote at the meeting by what I would infer would be alleged to have been friendly trustees.
The section 206 point
Section 206 of the Act provides:
(1) Where:
(a)a meeting of creditors has, in accordance with this part, passed a special resolution requiring the debtor to execute a personal insolvency agreement; and
(b)a creditor’s petition was presented against the debtor before the passing of the resolution or is presented against him after the passing of the resolution but before the agreement has been duly executed;
the Court may, upon application by the debtor, a creditor or a person nominated as trustee of the proposed agreement, if it appears to the Court that it would be for the advantage of the creditors that the debtors affairs be administered under the agreement, adjourn the hearing of the petition for such period as it considers necessary to allow the agreement to be executed and, if the agreement is duly executed within that period, shall dismiss the petition.
(2)Where a creditor’s petition is presented against a debtor who has been required by special resolution at the meeting of creditors to execute a personal insolvency agreement, the creditor who presents the petition must, as soon as practicable, give notice in writing of that fact to the person who has been nominated as trustee of the agreement and to the Official Receiver.
Counsel for the respondent said that the net effect of s.206 in the circumstances of this case was that the Petition must be dismissed. It was submitted that the Petition was adjourned pending the meeting of creditors (and that appears to be correct) and that the PIA was executed within the time provided for in s.216 of the Act and, therefore, pursuant to s.206, the Court is required to dismiss the Creditor’s Petition. It was submitted, correctly enough, that pursuant to s.229(2) of the Act, the creditor could not proceed with the Petition while the agreement remains valid. Indeed, that was the basis upon which the application for adjournment was pressed. I note that there has been no submission made that the application for an adjournment was prohibited by s.229(2). I would have ruled against such a submission as applying for an adjournment pending the resolution of another proceeding does not seem to me to constitute conduct properly described as “to proceed with such a petition” (s.229(2)).
Counsel for the applicant submitted that s.206 of the Act was not enlivened as the PIA had already been executed before the matter came before the Court.
The learned authors of McDonald, Henry & Meek: Australian Bankruptcy Law & Practice, Thomson Reuters, sixth edition, state in their commentary of s.206 as follows at paragraph 206.0.10:
“a)A personal insolvency agreement must be executed by the debtor and the trustee within 21 days of the special resolution (s216) so that generally speaking this section would affect only a petition which is set down for hearing within that period. There will of course be cases where the trustee fails to execute the personal insolvency agreement. For procedure when this happens, see s217.”
The learned authors continue at paragraph 206.1.05 under the heading “Section 206(1): Adjournment of petition”:
“This commentary is to be read in the context of s189AAA which provides for the stay of proceedings relating to a creditor’s petition until a meeting of creditors.
The Registrar has power to make an order under this subsection. Pt 3, Third Schedule to the Federal Court rules.
This is a discretionary power which is vested in the court to enable it to consider inter alia whether the personal insolvency agreement will be for the advantage of the creditors and later if the personal insolvency agreement is duly executed dismiss the petition: Re Lissek; ex parte Ricki Reed (Sales) Pty Ltd (1967) 10 FLR 487; re Dolman; ex parte Elder Smith Goldsbrough Mort Limited (1967) 10 FLR 384. The command “shall dismiss the petition” operates only where the creditors having resolved for a personal insolvency agreement and before it is executed the court has considered the question of whether an administration under the personal insolvency agreement would be advantageous to creditors and the court considering that such an admission would be advantageous, has adjourned the petition so that the personal insolvency agreement may be executed: re Venetoulis; ex parte Calsil Ltd (1976) 13 ALR 625.”
I have looked at the authorities referred to, and it is clear that the two earlier authorities need to be approached with a measure of caution given that the legislation was in different terms. The case of Venetoulis; Re: Ex parte Calsil Ltd (1976) 13 ALR 625 (“Venetoulis”), however, appears from the terms of the judgment itself to have been in relevantly identical terms to those applying now. At page 626, Riley J said the following:
“On 1 June 1976, Calsil Ltd filed a creditor’s petition for a sequestration order against MB (Michael) Venetoulis. The return date of the petition was 18 August 1976. On that day, I was told that on 11 August the debtor had signed an authority under s188 of the Bankruptcy Act, that a registered trustee had consented in writing to exercise the powers conferred by the authority, and that a further meeting of creditors was to be held soon. I therefore adjourned the further hearing to 14 September, on which day it was, by consent, further adjourned to 29 September.
At the resumed hearing on 29 September, counsel for the petitioning creditor sought to proceed with the petition, but counsel for the debtor applied for its dismissal on the ground that on 8 September a meeting of creditors called in accordance with s190(1) by the controlling trustee had, pursuant to s204(1)(b), required the debtor to execute a deed of arrangement, which the debtor had done on 27 September. Counsel based his application on s206(1) of the Act. He referred to the sequence of events which I have related, and submitted that under s206(1) it was mandatory on the court to dismiss the petition. But in my opinion the command that the court “shall dismiss the petition” operates only in a case where, the creditors having passed a special resolution under s204(1)(b) but the deed, not having been executed, the court has considered the question whether “it would be for the advantage of the creditors that the debtors affairs be administered under the deed” and, it having appeared to the court that the creditors would be so advantaged, has adjourned the hearing of the petition so that the deed may be executed. This is not such a case. When the matter came before me on 18 August the authority under s188 had become effective, but the meeting of the creditors had not been held and it was in order that the wishes of the creditors might be ascertained that in accordance with the usual practice I adjourned the matter: see Irlicht, assignments (etc) by debtors, par 305, p 11. In my opinion, therefore, s206 is not applicable and the debtors application should more properly be regarded as an application for the dismissal of the petition under s52(2)(b) on the ground that the court “is satisfied by the debtor … that for other sufficient cause a sequestration order should not be made”, particulars of that ground being that the creditors have required the debtor to execute a deed of arrangement under Part X and that he has done so.”
In this matter no application has been pressed by the debtor under s.52(2)(b) of the Act and in circumstances where the validity of the PIA is itself before the Federal Court, that is scarcely surprising.
Accordingly, as I read Riley J’s decision, s.206(1) can only operate in circumstances where:
a)the creditors have passed a special resolution but the deed has not yet been executed;
b)the court has considered the question of whether it would be for the advantage of the creditors that the debtor’s affairs be administered under the deed;
c)the court has formed the view that the creditors would be so advantaged; and
d)has adjourned the hearing of the Petition so that the deed may be executed.
It is readily apparent that none of those conditions is met here. First, the deed has been executed before the Court has not had any opportunity to consider whether it would be for the advantage of the creditors that the debtor’s affairs be administered under the deed. Second, and axiomatically, the Court has not considered that question. Third, and this of course also necessarily follows, the Court has not formed any conclusion that the creditors would indeed be so advantaged; and finally, the Court has not adjourned the hearing of the Petition so that the deed may be executed.
In my view, the debtor’s submission that s.206 of the Act requires the Court in the circumstances of this case to dismiss the Petition is radically unsound and cannot be sustained.
Should the hearing of the Petition be adjourned in any event?
Each side asserted that there was no prejudice to the other in the Court making the orders that they sought. Each side resisted the other’s assertions. In circumstances where parties litigate an issue with this sort of vigour it is difficult to sustain the proposition that either outcome is likely to be wholly free of prejudice to the party affected.
Both the applicant and the respondent advanced arguments as to the likely existence or non existence respectively of prejudice in regard to the relation back period depending upon whether the Petition was summarily dismissed or not. I can confess that I did not find either side’s submissions overly persuasive.
Bearing in mind that it is clear the Court has a discretion as to this matter, it seems to me that the operative and most relevant consideration is the currency of the proceedings before Marshall J. If the net outcome of those proceedings is that the PIA is held to be invalid, it would seem to be wholly inappropriate to require in effect the creditors to start all over again. In my view, this follows as a matter of ordinary common sense and first principles. Any prejudice that may be occasioned to the respondent debtor would in the circumstances ultimately arise from the course of conduct that led him to be ultimately made bankrupt. Were that to be the outcome, it is difficult to see that any such prejudice is inappropriate.
Conclusion
For the above reasons, I will make the orders sought by the applicant and adjourn the further hearing of the proceeding until the hearing and determination of the matter before Marshall J. In the circumstances I would also reserve the parties’ costs.
I certify that the preceding twenty-four (24) paragraphs are a true copy of the reasons for judgment of Burchardt FM
Date: 27 May 2011
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