Perovich v Whitton (No 2)

Case [2016] FCAFC 152

FEDERAL COURT OF AUSTRALIA

Perovich v Whitton (No 2) [2016] FCAFC 152

Appeal from: Whitton v Perovich [2016] FCA 595
File number: QUD 456 of 2016
Judges: SIOPIS, GLEESON AND EDELMAN JJ
Date of judgment: 9 November 2016
Catchwords: BANKRUPTCY AND INSOLVENCY – trustee directions – whether an event of default can be an “event” or “circumstance” in s 222D of the Bankruptcy Act 1966 (Cth) – whether terms of compositions provide for automatic termination upon an event of default
Legislation:

Bankruptcy Act 1966 (Cth) ss 30(1)(b), 40(1)(n)(ii), 73, 74, 75(1), 76B, 187(1), 188A(1), 188A(2)(g), 188A(3), 222A, 222B, 222C; 222D, Div 6 Pt IV, Pt X

Bankruptcy Legislation Amendment Act 2004 (Cth)

Bankruptcy Regulations 1996 (Cth) reg 4.18

Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 2004 (Cth)
Cases cited:

Baltic Shipping v Dillon [1993] HCA 4; (1993) 176 CLR 344

Gange v Sullivan [1966] HCA 55; (1966) 116 CLR 418

JTA Le Roux Pty Ltd as trustee for the FLR Family Trust v Lawson [2013] WASC 293

Labocus Precious Metals Pty Ltd v Thomas [2007] FCA 1154

MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39

Rudi’s Enterprises Pty Ltd v Jay (1987) 10 NSWLR 568

Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418

Taylor v Owners - Strata Plan No 11564 [2014] HCA 9; (2014) 253 CLR 531
Date of hearing: 7 November 2016
Registry: Queensland
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: General and Personal Insolvency
Category: Catchwords
Number of paragraphs: 76
Counsel for the Appellants: FM Douglas QC and DD Keane
Solicitor for the Appellants: Delta Law
Counsel for the First Respondent: AI O’Brien
Solicitor for the First Respondent: James Conomos Lawyers Pty Ltd
Counsel for the Second Respondent: DA Kelly QC and DM Turner
Solicitor for the Second Respondent: Carter Newell Lawyers

ORDERS

QUD 456 of 2016
BETWEEN:

SILVANA PEROVICH

First Appellant

RICHARD WILLIAM SPENCER

Second Appellant
AND:

ROBERT WILLIAM WHITTON

First Respondent

MANGO BOULEVARD PTY LTD ACN 101 544 601

Second Respondent

JUDGES:

SIOPIS, GLEESON AND EDELMAN JJ

DATE OF ORDER:

9 NOVEMBER 2016

THE COURT ORDERS THAT:

1.The appeal be dismissed.

2.The appellants are to pay the costs of the first and second respondents.

3.The first respondent is at liberty to resort to the bankrupt estates of the appellants in respect of the difference between his costs reasonably incurred and the costs paid by the appellants.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


REASONS FOR JUDGMENT

THE COURT:

Introduction

  1. This appeal is brought by two debtors for whom compositions were accepted pursuant to s 73 of the Bankruptcy Act 1966 (Cth). The debtors failed to make required payments under the compositions. The issue on this appeal is whether the primary judge was correct to conclude that the compositions terminated upon the debtors’ default in making the contributions that were payable.

  2. This appeal involves essentially two issues. The first is…

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Perovich v Whitton (No 2) [2016] FCAFC 152
Case
[2016] FCAFC 152
Decision Date

CaseChat Overview and Summary

Perovich v Whitton (No 2) involved the trustees of the bankrupt estates of Ms Perovich and Mr Spencer, who had proposed compositions to their creditors. The primary judge and the Full Court of the Federal Court of Australia considered the effect of the debtors' failure to make initial contributions as required by the compositions, and whether the compositions had automatically terminated as a result of that failure. The Full Court was required to determine whether the term 'event' or 'circumstance' in s 222D of the Bankruptcy Act 1966 (Cth) could include an event of default, and whether the compositions provided for automatic termination upon an event of default.

The Full Court held that s 222D of the Bankruptcy Act does indeed provide for automatic termination of a composition upon the occurrence of any circumstance or event, and that an event of default could constitute such an event or circumstance. The Full Court noted that the Explanatory Memorandum for the 2005 amendments to the Bankruptcy Act indicated that the composition could include provisions for automatic termination upon the occurrence of specified events, including default by the debtor. The Full Court rejected the argument that s 222D only applied to events or circumstances specified by the trustee or creditors, holding that the plain terms of s 222D provided for automatic termination upon the occurrence of any such event or circumstance.

The appeal was dismissed, and the appellants were ordered to pay the costs of the first and second respondents. The first respondent was at liberty to resort to the bankrupt estates of the appellants in respect of the difference between his costs reasonably incurred and the costs paid by the appellants.

Orders

Orders of the court

1. The appeal be dismissed.

2. The appellants are to pay the costs of the first and second respondents.

3. The first respondent is at liberty to resort to the bankrupt estates of the appellants in respect of the difference between his costs reasonably incurred and the costs paid by the appellants.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

The appeal must be dismissed.The background and the Compositions The factual background to this appeal was set out in the judgment of the primary judge. As the appellants submitted, there was no issue taken with the primary judge’s statement of facts which were taken, generally, from the Statement of Agreed Facts. The facts of this appeal, borrowing heavily from the primary judge’s reasons, are as follows. The two debtors, Ms Perovich and Mr Spencer, have been involved in substantial litigation over a number of years against two parties said to be creditors, Mango Boulevard and BMD Holdings Pty Ltd (BMD). The litigation has been concerned with a strategic battle for a valuable parcel of land owned by Kinsella Heights Developments Pty Ltd at Mango Hill in Queensland. On 20 August 2007 and 24 August 2007, sequestration orders were made against the estates of Ms Perovich and Mr Spencer respectively. Mr Sweeney and Mr van der Velde (the former trustees) were appointed trustees of the bankrupt estates which, in the case of Ms Perovich, included 25 shares in Kinsella Heights. The debtors proposed compositions with their creditors so that their bankruptcies would be annulled and so that Ms Perovich could regain ownership of the shares. The former trustees would not recommend acceptance of the proposed compositions. They were prepared to sell the shares to Mango Boulevard and BMD. Mango Boulevard and BMD opposed any compositions so that they could continue to negotiate the purchase of the shares from the former trustees. The debtors persuaded their creditors to appoint Mr Whitton as trustee of their estates in place of the former trustees. Two days before the debtors were due to be automatically discharged from bankruptcy, Mr Whitton lodged objections to their discharge. One purpose for the objections was to allow the debtors to propose compositions and have those proposals considered before their bankruptcies expired. The consequence of the objections was that the bankruptcies were extended by five years to 14 November 2015. Mango Boulevard and BMD commenced proceedings in the Court, which sought review of (i) Mr Whitton’s decision to object, and (ii) the creditors’ resolutions to appoint Mr Whitton as trustee in place of the former trustees. The debtors lodged proposals for compositions under s 73 of the Bankruptcy Act with Mr Whitton as trustee, who then applied to the Court for directions. A meeting of the creditors to consider the proposals was restrained until the determination of the proceedings brought by Mango Boulevard and BMD. Those proceedings were dismissed on 2 November 2015. Any creditors’ meetings had to be held before the bankruptcies ended on 14 November 2015. There were various delays in calling the meetings, including delays due to the failure of the debtors to make timely payment of the trustee’s costs of $55,000. An abridgement of the time prescribed under reg 4.18 of the Bankruptcy Regulations 1996 (Cth) was granted for the provision of the proposals for compositions and reports to the creditors.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Faced with conflicting positions, the trustee sought directions from the Court and ancillary orders. The trustee did not, and has not, applied for the termination of the Compositions by the Court pursuant to s 222C of the Bankruptcy Act.The issues before the primary judge and his conclusions Before the primary judge, the trustee submitted that the Compositions had terminated and that the parties should be restored to the positions they were in before the Compositions were made. We note that there appears to have been no issue before the primary judge, and there was no issue in this appeal, that if the Compositions had terminated then it was appropriate for the primary judge to order that the parties be restored to the positions they were in before the Compositions were made (see, for instance, the broad powers in s 30(1)(b) of the Bankruptcy Act). The debtors made several different submissions before the primary judge as to why the Compositions had not terminated. First, the debtors submitted that there had merely been delay in paying the initial contributions, and that such a delay did not amount to default under the Compositions. The primary judge rejected that argument. The debtors, who still have not paid, did not seek to resurrect it on appeal. Secondly, the debtors submitted that even if there had been a default, s 222D of the Bankruptcy Act did not apply to default. They said that termination for default is solely governed by ss 222A, 222B and 222C of the Bankruptcy Act. This submission was rejected by the primary judge and it is a ground of appeal. Thirdly, the debtors argued that even if s 222D were capable of applying to default, it would not cause a termination in this case because, on their proper construction, the Compositions only created a power for the trustee or creditors to elect to terminate a composition pursuant to ss 222A or 222B, and the trustee or creditors had made no election to terminate. The primary judge also rejected this submission. His Honour concluded that the Compositions, on their proper construction, terminated automatically on default by the debtors.The grounds of appeal One ground, and one part of another ground of appeal, were abandoned during oral submissions. The remaining grounds of appeal were as follows:1.The learned primary Judge erred in finding that:…ii)Section 222D of the Bankruptcy Act applied to effect the termination of the Compositions upon default in payment of the initial contributions under the Compositions;iii)In the absence of an election by the Trustee and/or the creditors to terminate the Compositions the Compositions had terminated by the operation of section 222D of the Bankruptcy Act;2.The learned primary Judge erred in failing to find that in the absence of a valid termination by the Trustee and/or the creditors the Compositions remained in full force and effect. Ground 2 was treated by the parties to the appeal as consequential upon ground 1. In other words, if the debtors failed on ground 1, so that the Compositions were terminated, then the debtors must fail also on ground 2. It is convenient, therefore, to consider the two issues that arise in ground 1.Ground of appeal 1(ii): Does s 222D of the Bankruptcy Act require an election by the trustee before termination occurs?The operation of compositions under the Bankruptcy Act

Ratio Decidendi

Legal Principle Established

The Explanatory Memorandum makes this pattern clear:96Proposed new section 222A would deal with the process for termination of a personal insolvency agreement by the trustee. This process would be the same as the existing process for terminating a deed or composition without the need to call a meeting of creditors. The proposed new section would be the single provision relating to the trustee’s ability to propose termination of a personal insolvency agreement.97Proposed new section 222B would deal with the process for termination of a personal insolvency agreement by creditors. It is envisaged that this process would be used where the trustee has proposed a termination under the new section 222A but this has not occurred following an objection from a creditor or creditors. Under proposed subsection 222B(1), the creditors could terminate an agreement by passing an ordinary resolution. A special resolution would be required only where property of the debtor is covered by a restraining order or forfeiture order under the proceeds of crime legislation or where a pecuniary penalty order under that Act is in force in relation to the debtor (unless that order had already been made or was in force when the personal insolvency agreement was made) – subsections 222B(2) and (3) which represent no change from the existing provisions relating to termination of deeds and compositions. Proposed subsection 222B(4) defines ‘default’ to be a failure by the debtor (or, where the debtor has dies, the person administering the debtor’s estate) to carry out or comply with a term of the personal insolvency agreement.98Proposed new section 222C would deal with termination of a personal insolvency agreement by the Court. The Court will be able to terminate an agreement where the debtor (or, where the debtor has died, the person administering the debtor’s estate) has failed to carry out or comply with a term of the agreement, or the agreement cannot be proceeded with without injustice or undue delay to the creditors, the debtor (or, where the debtor has died, the debtor’s estate), or where the Court is satisfied that, for any other reason, the agreement ought to be terminated. The Court will also be given the power to make other orders ancillary to the order terminating the agreement including orders for compensation where appropriate.99Proposed new section 222D will provide that a personal insolvency agreement is terminated by the occurrence of any circumstance or event on the occurrence of which the agreement provides that it is to terminate. Proposed new section 188A, which sets out the requirements of a personal insolvency agreement, allows the debtor and creditors to include provisions which set out the circumstances or events which will lead to the automatic termination of the agreement.Consideration of ground of appeal 1(ii) The plain terms of s 222D provide for (i) termination on the occurrence of any circumstance or event, without limitation upon the circumstances or events which will cause termination, and (ii) termination to be “automatic”, that is termination to occur “on the occurrence” of the circumstance or event.