Policy Nominees Pty Ltd (ACN 008 803 781)(Provisional Liquidator Appointed) v McDougall, Stuart Stanley
[1997] FCA 1067
•16 OCTOBER 1997
FEDERAL COURT OF AUSTRALIA
BANKRUPTCY - deed of arrangement - whether trustee’s report to creditors expressed requisite opinion whether or not it would be in the interests of creditors to deal under Pt X with the debtor’s affairs in the manner proposed - differences between debtor’s proposal and deed into which meeting of creditors resolved debtor should enter - whether deed thereby precluded from complying substantially with Pt X - whether deed in fact a composition because capable of taking effect immediately to release debtor from his debts - term of deed allowing creditors to resolve at a subsequent meeting that debtor should be released and discharged from all provable debts - whether inconsistent with s 234 of Bankruptcy Act - whether severable - effect of severance clause in deed - debtor’s statement of affairs - obligation pursuant to r 78 of Bankruptcy Rules to disclose interest under a trust - whether complied with - whether non-disclosure of a material particular - whether non-disclosure of a charge account debt adverted to in trustee’s report material.
Bankruptcy Act 1966, ss 187, 188, 189A, 204, 222, 234, 237A
Bankruptcy Rules, r 78
Re Burlock; Deputy Commissioner of Taxation v Burlock (1994) 49 FCR 522 distinguished
Gee v Schmutter (1971) 123 CLR 503 applied
Re Peters (1960) 18 ABC 213 applied
Re Marshall; Marshall v Marshall and Luckins (1973) 2 ALR 172 distinguished
Re Segal; Lensworth Finance Ltd v Segal and Ward (1975) 9 ALR 154 applied
Re Morris; Ex parte Adams (1980) 48 FLR 341 distinguished
POLICY NOMINEES PTY LTD (ACN 008 803 781) (PROVISIONAL LIQUIDATOR APPOINTED) and MARTIN ALAN THOMAS v STUART STANLEY MCDOUGALL and RICHARD MORROW
VG 147 of 1997
RYAN, WHITLAM and MARSHALL JJ
MELBOURNE
16 OCTOBER 1997
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 147 of 1997
ON APPEAL FROM A JUDGMENT OF A SINGLE JUDGE OF THE FEDERAL
COURT OF AUSTRALIA
BETWEEN:
POLICY NOMINEES PTY LTD (ACN 008 803 781) (PROVISIONAL LIQUIDATOR APPOINTED)
AND
MARTIN ALAN THOMAS
APPELLANTSAND:
STUART STANLEY MCDOUGALL
FIRST RESPONDENTRICHARD MORROW
SECOND RESPONDENTJUDGES:
RYAN, WHITLAM AND MARSHALL JJ
DATE OF ORDER:
16 OCTOBER 1997
WHERE MADE:
MELBOURNE
MINUTES OF ORDER
THE COURT ORDERS THAT:
The appeal be dismissed.
The appellant pay the respondent’s costs of the appeal, such costs to be taxed in default of agreement.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 147 of 1997
ON APPEAL FROM A JUDGMENT OF A SINGLE JUDGE OF THE FEDERAL
COURT OF AUSTRALIA
BETWEEN:
POLICY NOMINEES PTY LTD (ACN 008 803 781) (PROVISIONAL LIQUIDATOR APPOINTED)
AND
MARTIN ALAN THOMAS
APPELLANTSAND:
STUART STANLEY MCDOUGALL
FIRST RESPONDENTRICHARD MORROW
SECOND RESPONDENT
JUDGES:
RYAN, WHITLAM AND MARSHALL JJ
DATE:
16 OCTOBER 1997
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
THE COURT: This is an appeal from an order of a Judge of the Court dismissing an application seeking to set aside a deed of arrangement dated 11 February 1996 (“the deed”) between Stuart Stanley McDougall (“the debtor”) and David Anthony Bradshaw (“the Trustee”) and to have a sequestration order made against the estate of the debtor.
By cl 3 of the deed the debtor conveyed and assigned to the Trustee:
all the estate as defined in Clause 1 hereof upon trust to deal with the same in accordance with this Deed (including and subject to any conditions or limited or specific trusts set out in the SCHEDULE) and the Trustee accepts the appointment as Trustee of this Deed and the conveyance and assignment of the said estate upon the trusts hereinafter (and in the SCHEDULE) set out.
“The estate” is defined in cl 1(a) of the deed to mean:
all the property of the Debtor specified in the SCHEDULE hereto but does not include after-acquired property.
The Schedule to the deed refers to “All divisible assets as ascribed by Section 187 of the Act.” “Divisible assets” are not defined by the Act or the deed but cl 1(h) of the deed contains this definition:
“the divisible property” means the property of the Debtor that would be divisible property within the meaning of Section 187 of the Act were this Deed a Deed of Assignment in respect of which the provisions of Sections 118 to 122 (both inclusive) of the Act would not be relied upon by the Trustee and as if for the expression “the commencement of the bankruptcy” in paragraph 116(1)(a) of the Act the expression “the date of this Deed” were substituted.
Clause 5 of the deed is in these terms:
The Debtor convenants and agrees with the Trustee that he will pay to the Trustee the sum of $25,000.00 payable on the signing of this Deed, which the Debtor convenants shall be provided by Peter O’Mara, of Duranbah Road, Duranbah.
Provision for the release of the debtor from all provable debts is made by cl 7 stipulating:
The Debtor shall be absolutely released and discharged from all the provable debts owed by the Debtor to each of the Creditors respectively and from all claims, actions, suits, demands and other proceedings by each of the Creditors of or on account of those debts in either of the following events only:-
(a)if at any time after the payment of the total amount referred to in Clause 5 hereof, the Trustee shall certify in accordance with Section 237A of the Act; or
(b)if the Creditors have at a meeting held as provided by the Act by special resolution resolved that the Debtor shall be so released and discharged. The date of the release and discharge shall be either the date of the said certificate or the date of the passing of the Special Resolution as the case may be and the release and discharge shall be a complete defence to any claim, action, suit, demand or other proceeding in respect of or on account of any of those debts.
The special resolution requiring the debtor to enter into the deed was carried at a meeting of his creditors which commenced on 2 February 1996 and was adjourned to 16 February 1996.
The first ground of attack on the deed advanced both at first instance and on appeal was that the Trustee’s report to the meeting of creditors did not comply with s 189A(3) of the Bankruptcy Act 1966 (“the Act”) because it failed to state whether or not, in the Trustee’s opinion, it would be in the best interests of the debtor’s creditors to deal under Pt X of the Act with the debtor’s affairs in the manner indicated in the debtor’s proposal. That proposal had been:
that my affairs be dealt with pursuant to a Deed of Arrangement which will provide for interalia:
1.The assignment of all my divisible assets as ascribed by Section 187 of the Act.
2.The payment of the sum of $25,000.00 payable on Execution of the Deed of Arrangement which shall be provided by Peter O’Mara of Duranbah Road, Duranbah, NSW.
The Trustee’s report was dated 18 January 1996 and referred to a statement of affairs by the debtor disclosing assets of $5,600 and unsecured creditors of $3,617,815. By way of a footnote to that part of his report, the Trustee noted that “the Debtor has advised subsequent to completing the Statement of Affairs that he inadvertently omitted a debt of $9,800.00 in respect of a Charge Account.” The report went on to provide the following information in respect of the debtor’s relationship with Lidcombe Banner Pty Ltd as trustee for his family trust:
The Debtor is currently employed through the Family Company, Lidcombe Banner Pty. Ltd. which acts as Trustee for Stuart McDougall Family Trust, as a Sales and Marketing Consultant. The Company is currently paid a consulting fee of $6,250.00 per month in respect of the services of the Debtor by Ruskin Industries Ltd. The Debtor is paid a gross wage of $500.00 per week plus a car benefit.
5.THAT the Debtor has advised that the Company, Lidcombe Banner Pty. Ltd. was formed in 1992 and was appointed as Trustee of The Stuart McDougall Family Trust. The former Corporate Trustee, Stupen Pty. Ltd. had been struck off due to failure to lodge returns with the Australian Securities Commission. The Debtor advised that the Company, as Trustee is servicing a debt of approximately $381,000.00 with the National Australia Bank Ltd Moorabbin East. The debt is secured over the family home at 89 Cathies Lane, Wantirna which has been registered in the name of Penny McDougall, the Debtor’s wife, for approximately ten years. The Debtor believes the property has a market value of approximately $220,000.00. The debt is also secured over a town house, Unit 30 Daisey Hill, Brisbane, which the Debtor believes has a market value of $100,000.00. Same was purchased by the Company as Trustee for $128,342.00 in 1993 with funds advanced by The National Australia Bank Ltd.
6.THAT the Debtor has advised that the Company, Lidcombe Banner Pty. Ltd. was contracted as a Consultant, to assist in the formation of the Public company, Ruskin Industries Ltd. by Mr Peter O’Mara, Principal of the Companies, Polytheme Pty. Ltd. and Plasticpac Pty. Ltd. These Companies were taken over by Ruskin Industries Ltd. The Company, Lidcombe Banner Pty. Ltd. received one million shares for assisting in the formation. These shares have purportedly been sold for $250,000.00 over 1994 and 1995. The Debtor alleges that the funds were applied in reduction of debts. At the date of this Report an accounting of the sale of shares and the disbursement of the proceeds of sale are being sought.
Paragraphs 7 to 17 of the Trustee’s report recited the debtor’s description of how his financial difficulties had arisen and his explanation of the circumstances in which specific debts disclosed by his statement of affairs had been incurred. The report noted that the debtor had no immediate prospects of being able to pay his debts and had therefore submitted a proposal for consideration by his creditors. The report concluded with these paragraphs:
19.THAT based on the information furnished, and in the event of Bankruptcy of the Debtor, a Trustee would most likely have access to the assets of The Stuart McDougall Family Trust pursuant to the provisions of Section 139D of the Act. In addition, the Debtor would, subject to the maintenance of existing terms of employment, be required to pay contributions pursuant to the provisions of Section 192L (f) [sic] of the Act.
At this juncture, I have no means of estimating the likely return to Ordinary Unsecured Creditors in the event of Bankruptcy. The continuation of employment would most likely be affected by the Debtor’s inability to take an active part in the management of Corporations, pursuant to the provisions of Section 224(1)(c) of the Corporations Law. As raised in earlier paragraphs of this report, I am currently making further enquiries in relation to the income stream and assets of The Stuart McDougall Family Trust.
20.THAT in the event of acceptance of the proposal and based on the debts as disclosed in the Statement of Affairs of the Debtor, I estimate the rate of return to Ordinary Unsecured Creditors to be 0.55 cents in the dollar.
21.THAT in view of the rate of return to Creditors, I consider I cannot recommend acceptance of the Proposal to Creditors. Subject to no adverse matters arising from further enquiries and information furnished, creditors may give consideration to acceptance of the Proposal on compassionate grounds.
On behalf of the appellant it was submitted that the Trustee’s report suffered from the same defect which had been identified in Re Burlock; Deputy Commissioner of Taxation v Burlock (1994) 49 FCR 522 where the relevant paragraph of the trustee’s report had been in these terms:
In the circumstances, Mr Burlock is attempting to provide creditors, a return which although quite small does represent a significant hardship upon him as he will be repaying the loan of $50,000 back to relatives over the next 3 years. Accordingly in the circumstances my recommendation or lack of same would carry no real weight and accordingly I invite creditors to carefully peruse the relevant material to assess the position which they wish to adopt. Certainly I do attach significance to the debtors desire to attempt to resolve matters with his creditors to the best of his ability.
The trial Judge in Burlock regarded the absence from the trustee’s report of an expression of opinion as a sufficiently serious departure from the requirements of Pt X of the Act to justify his exercising the discretion conferred by s 222(2) of the Act to set aside the subject deed of arrangement. That view was confirmed on appeal by the Full Court which observed, at 529:
A controlling trustee has marked advantages over the general body of creditors. His position as controlling trustee gives him access to the business and financial records of the debtor (s 189(1)). The debtor is required to furnish him with such information with respect to any of the debtor’s examinable affairs as the controlling trustee requires, and to comply with any directions given to him by the controlling trustee (s 189(2)). The debtor “shall not remove, dispose of or deal with any of his property except with the consent of the controlling trustee” (s 189(2)(a)).
Section 189A(1) requires the controlling trustee within 14 days after consenting to exercise the powers conferred by an authority under s 188 to prepare and file in the office of the Registrar a report in writing which complies with that section. Subsection (3) provides that the report shall state whether or not in the trustee’s opinion, it would be in the best interests of the debtor’s creditors to resolve that the debtor enter into the proposed deed.
The controlling trustee may, with the consent in writing of the debtor, obtain such advice or assistance as he thinks necessary (see s 190(5A)).
The controlling trustee can explore the possibility that there may be antecedent transactions by the debtor which may be set aside, to the benefit of the creditors, in the course of the administration of his estate, if an order of sequestration were made. The trustee’s expenses in carrying out his duties are paid out of the fund provided under the deed, whereas an individual creditor, already faced by a bad debt, will incur further expense in seeking to ascertain facts relevant to his decision as to how he should vote at the meeting, which will not be recoverable by him.
The learned primary Judge in the present case distinguished Burlock, observing at p 8 of the reasons:
In my opinion paragraph 21 does express an opinion, albeit an opinion couched in terms of a recommendation. In Burlock no recommendations were made at all and the Trustee left the matter completely up to the creditors. In considering this matter I must bear in mind the edict in s 222(3) of the Act that I should not declare a deed void on the grounds of non-compliance with the requirements of Part X if the deed “complies substantially with those requirements”. Although that sub-section does not refer, in terms, to the Trustee’s report, it indicates a legislative intention that a deed is not to be declared void under s 222(1) on the grounds of non-compliance with Part X if in fact there is substantial compliance. In my opinion, on a fair reading, paragraph 21 of the report does identify to a reasonable reader an opinion of the Trustee that the rate of return of 0.55 cents in the dollar to ordinary unsecured creditors is such that it is not in the creditors’ best interests to accept. The language of “I cannot recommend” especially in the context of a rate of return of 0.55 cents in the dollar is, in my opinion, tantamount to the Trustee saying it is his opinion that it is not in the interests of creditors to accept the proposal. The last clause in paragraph 21 that the creditors “may give consideration” to acceptance of the proposal on compassionate grounds supports the proposition that the opening part of paragraph 21 is in fact the expression of an opinion that the rate of the return and the proposal is not in the best interests of creditors.
We agree with the interpretation given by his Honour to paragraph 21 of the Trustee’s report. The legislation did not indicate any form of words by which the Trustee’s opinion was to be expressed. We consider that, in its context, the first sentence of paragraph 21 of the present report amounted to a statement of opinion that it would not be in the interests of the debtor’s creditors to deal under Pt X with the debtor’s affairs in the manner proposed by the debtor.
Mr Irlicht, who appeared for the appellant, submitted that the condition with which the second sentence of paragraph 21 commenced “Subject to no adverse matters arising from further enquiries ...” was inconsistent with the interpretation which we favour that, in the Trustee’s opinion, acceptance of the debtor’s proposal was not in the interests of the creditors. However, it is plain from the grammar of that sentence that the prefatory condition or reservation attached to the suggestion that the proposal might be accepted on compassionate grounds. Properly understood, it amounted to a statement that the creditors might act contrary to what the Trustee regarded as their commercial interests unless further enquiries or information should reveal conduct on the part of the debtor disentitling him to the compassionate treatment suggested.
In view of the interpretation which we have been persuaded should be given to the Trustee’s report, it is unnecessary to consider whether, as Mr Irlicht submitted, s 222(3) of the Act preserving from invalidity a deed which complies substantially with Pt X has no application to a deed infected by non-compliance with s 189A which was enacted after s 222(3).
The appellant’s second ground of attack invoked what were said to be significant differences between the debtor’s proposal in accordance with s 188(2)(c)(ii) of the Act and the deed into which the meeting of creditors resolved that the debtor should enter. Points of difference which Mr Irlicht addressed included the provision in cl 7 of the deed for release of the debtor and the inability of the deed to contain an assignment of all the “divisible assets” of the debtor “as ascribed by Section 187 of the Act”. In our view, it is impossible to confine the power conferred on a meeting of creditors by s 204 of the Act to one requiring the debtor to execute a deed of assignment or a deed of arrangement under Pt X or acceptance of a composition substantially in conformity with the proposal which a debtor is required by s 188(2)(c)(ii) to give to the named trustee or solicitor. Section 204 relevantly provided:
(1) The creditors may, at a meeting called in pursuance of an authority under section 188 by special resolution -
(a)where the debtor’s property is subject to control under this Division, resolve that the debtor’s property be no longer subject to control under this Division;
(b)require the debtor to execute a deed of assignment or a deed of arrangement under this Part;
(c)accept a composition; or
(d)require the debtor to present a debtor’s petition within 7 days from the day on which the resolution was passed.
(2) A special resolution requiring the debtor to execute a deed of arrangement under this Part may, subject to this Act, specify provisions to be included in the deed.
(3) A special resolution accepting a composition shall specify the terms of the composition.
Before its amendment by Act No 119 of 1987, s 188 contained no requirement for any statement indicating how the debtor proposed that his or her affairs should be dealt with. All that was required was an authority authorising the calling of a meeting of the debtor’s creditors. That being the state of the legislation, it was manifestly clear before 1987 that the creditors at the meeting called pursuant to s 188 could resolve in any one of the four ways stipulated in s 204(1) regardless of any proposal or indication of preference expressed by the debtor. This is not to deny that it was contemplated when ss 188(2)(c)(ii) and 189A were inserted by Act No 119 of 1987 that the meeting of creditors would consider the debtor’s proposal and the trustee’s report on whether it was in their best interests to accept that proposal. However, to acknowledge that such consideration was contemplated in no sense entails that the power of the meeting to accept or reject the proposal as reported on by the trustee is circumscribed in the way contended for on behalf of the present appellant.
It is significant in this context that s 200(3A) which was also inserted by Act No 119 of 1987 provided for creditors voting by proxy and stipulated that the proxy instrument should authorise the holder to vote “in a specified manner on each of the following kinds of resolution” under s 204. In our view, had the legislature intended, when s 188 was amended to require an indication of a proposal by the debtor, to limit the power of the meeting to the acceptance or rejection of substantially that proposal, it would have said so, probably by making an appropriate complementary amendment to s 204. Accordingly, we consider that the meeting of creditors retains an unfettered discretion to resolve in any one of the four ways indicated in s 204(1).
In relation to this second ground of attack, Mr Irlicht imputed to the learned primary Judge an erroneous finding of fact that “prior to the creditors considering the proposal they would have received a package of documents including the proposal, the statement of affairs, the report from the Trustee and the form of the proposed deed which included the release.” There was said to be incontrovertible evidence that no document in the form of the deed into which the debtor was required to enter had been supplied to creditors before the meeting. However, even accepting that the evidence was to this effect, the view which we have formed of the combined effect of ss 188, 189A and 204 on their proper construction, preserves the correctness of the conclusion at first instance that “the creditors were not obliged to require the Debtor to execute a deed of arrangement which contained only the provisions referred to in his statement pursuant to s 188(2)(c)(ii)”.
It was next submitted on behalf of the appellant that the deed into which the meeting of creditors required the debtor to enter was not, in fact, a deed of arrangement but was a composition. “Composition” was defined in s 187 of the Act as follows:
“composition” means an arrangement (not being an arrangement entered into for the purposes of a proclaimed law) by which the creditors of a debtor -
(a)agree to accept payment of the debts due to them by instalments; or
(b)agree to accept, in full satisfaction of the debts due to them, less than the full amount of those debts, whether in the form of money or other property and whether by instalments or otherwise.
We accept the submission of Counsel for the appellant that the two limbs of the definition are not mutually exclusive so that an arrangement may provide for payment by instalments of less than the full amount of debts due to the creditors without detracting from its character as a composition. The argument for the appellant went on to refer to the following passage from the judgment of Barwick CJ in Gee v Schmutter (1971) 123 CLR 503 at 511 in which the words to which we have added emphasis were described by Mr Irlicht as “the crucial sentence”:
The next question, it seems to me, is whether the deed was a deed of composition. Such a deed is an arrangement by which there is an agreement to accept payment of the debts by instalments or payment of a lesser sum than the full amount of the debts due. Section 234 provides that “except in so far as the deed provides for the release of the debtor from his debts, the deed of arrangement does not operate to release the debtor from any of his debts”. Section 187(1) in defining “deed of arrangement” contemplates that such a deed may be made with a view to the payment in whole or in part of the debtor’s debts. There is no doubt therefore that a deed of arrangement within Pt X of the Act may contain a provision for the release of the debtor from his debts. It seems to me that a deed of arrangement which either provides for the release of the debtor or for the payment of only part of the amount due by him to his creditors as part of the arrangement it embodies is not for that reason a composition within the meaning of the Act. In my opinion, a deed of composition must itself contain an agreement to accept part payment of the debts due in satisfaction. In any case the deed in this case contemplated the payment in full of the debts and contained neither an agreement by the creditors to accept part only of the debts due to them nor a release of the debtor in any circumstances short of payment in full of the amount due. I therefore conclude that this deed was not a deed of composition.
It will be recalled that one of the events on which the present deed stipulated that the debtor should be released from all provable debts was the issue by the Trustee, after payment of the $25,000 to be provided by Mr O’Mara, of a certificate in accordance with s 237A of the Act. That section has at all times provided:
(1) Where the trustee of a deed of arrangement is satisfied that the provisions of the deed have been carried out, the trustee shall, upon request in writing by the debtor, furnish to the debtor a certificate signed by him to that effect.
(2) A certificate signed by a trustee under this section is prima facie evidence of the facts stated in it.
As we understood his argument on this point, Mr Irlicht submitted that, because the only provision of the deed which required to be carried out was the payment of the $25,000 which was payable on the signing of the deed, the Trustee could be compelled forthwith to give the certificate under s 237A so that, in substance, the deed itself contained an agreement to accept part payment of the debts due in satisfaction. However, the deed provided for the assignment of all divisible property of the debtor as well as for the payment of the $25,000 to come from Mr O’Mara. Although the evidence did not suggest that much, if anything, in the way of divisible property would come into the Trustee’s hands, it was not inconceivable, as Mr Nolan of Counsel for the respondent submitted, that the divisible property might, on further investigation by the Trustee be found to include assets the existence of which was unknown to the debtor. That inability to identify at the date of the deed all of the property which might be applied in satisfaction of the debts due to the creditors prevented the deed from taking effect immediately as an agreement of the kind described in paragraph (b) of the definition of “composition” in s 187. Moreover, a delay may have occurred in the payment of the $25,000 with the consequence that the Trustee could not be required forthwith to give the certificate under s 237A.
Accordingly we consider, with respect, that the learned primary Judge was correct when he concluded:
It therefore follows that the deed provides for more than just the composition for which Mr Irlicht contends because it provides in fact for the arrangement of the affairs of the Debtor in a manner not required or contemplated by a composition. As Mr Bornstein pointed out it provided for an assignment of the Debtor’s divisible property and unlike the provision contained in s 240 of the Act in relation to a composition operating as a release of the Debtor from his provable debts, did not provide for immediate release of the Debtor.
The fourth ground advanced on behalf of the appellant was that cl 7 of the deed was repugnant to s 234 of the Act which provides:
(1) Except in so far as the deed provides for the release of the debtor from his debts, a deed of arrangement does not operate to release the debtor from any of his debts.
(2) Where a deed of arrangement provides that the debtor is to be released from one or more of his debts, the release is binding on the creditor or creditors to whom that debt or those debts was or were owing.
Clause 7 of the deed, it will be recalled, provided for a full release of the debtor from all provable debts upon the happening of one or other of the following events:
(a)if at any time after the payment of the total amount referred to in Clause 5 hereof, the Trustee shall certify in accordance with Section 237A of the Act; or
(b)if the Creditors have at a meeting held as provided by the Act by special resolution resolved that the Debtor shall be so released and discharged.
Paragraph (b) of cl 7 in terms provides that the debtor shall be released from all provable debts if a meeting of creditors so resolves by special resolution irrespective of whether other terms of the deed, including that requiring payment of the $25,000, have been complied with. Unlike para (a), para (b) does not “provide for” the release of the debtor by stipulating itself the event or events upon which the release is conditioned. Rather, the granting or withholding of a relief is left to the unfettered discretion of another meeting of creditors, perhaps constituted differently from that which resolved to require the debtor to enter into the deed. In this sense cl 7(b) allows the creditors to alter or disregard the substantive terms of the deed of arrangement in a way stigmatised by Paine J in Re Clonan (1963) 20 ABC 245 at 258 as “a second bite at the cherry”. See also Re Marshall; Marshall v Marshall and Luckins (1973) 2 ALR 172 where Sweeney J held that a term of a deed of arrangement which empowered the trustee to declare that the deed should terminate precluded the deed from complying with the provisions of Pt X of the Act.
However, in our view, cl 7(b) is severable from the remaining clauses of the present deed so as to preserve them from invalidity; see Re Peters (1960) 18 ABC 213 where Clyne J observed, at 216:
In my opinion, a deed of arrangement under Pt. XII of the Act may contain any reasonable provisions requisite to give effect to the purposes of the deed if they do not contravene those provisions of the Act made applicable to deeds under that Part. I think also that a deed may be registered under Pt. X11, which contains a provision which, though objectionable, is severable and not fundamental and not an infringement of the Act.
In our view, the facility afforded by cl 7 to a subsequent meeting of creditors to release the debtor from his debts on a ground or grounds not specified in the deed was not fundamental to the deed as a whole. What was fundamental was the requirement for payment of $25,000 to be provided by Mr O’Mara and the assignment to the Trustee of the divisible property of the debtor. In that respect, cl 7(b) is to be contrasted with the clauses considered by Sweeney J in Re Marshall (supra) as to which his Honour observed, at 188:
Clauses 11, 12 and 13 are not, in my opinion, severable, but are fundamental. The minutes of the creditors’ meeting of 16 February 1972, at which the special resolution requiring the debtors to execute a deed of arrangement was passed, the known history of the business and the difficulties which existed between the debtors made it plain that firm control by the trustee was essential to the acceptance and operation of the deed. Clauses 11, 12 and 13 were fundamental terms of the deed, not only because of the steps which they empowered the trustee to take, but also because their presence in the deed was a constant reminder to the debtors of the grave consequences which might follow any failure to conform with the directions of the trustee or to perform their covenants. When cll 11, 12 and 13 are treated as fundamental terms of the deed, it is seen to be an attempt as a whole to displace the terms of the Act.
We are reinforced in our view that cl 7(b) is severable by the intention disclosed by cl 15 of the present deed that each part of it should be construed, as far as possible, as being severable so as to preserve the validity of the remaining parts of the deed. Clause 15 is in these terms:
Every provision or part of a provision of this Deed shall be read and construed subject to the Act and to the intent that where any provision or part of a provision would, but for this provision have been construed as being in conflict with the Act and could, if read as a whole in the Deed, result in the Deed being declared void pursuant to Section 222 of the Act, it shall nevertheless be a valid provision or part of a provision to the extent to which it is not in conflict with the Act, so that full effect may be given to the Deed.
The next focus of the appeal was on what were said to be deficiencies in the debtor’s statement of affairs furnished to the Trustee in purported compliance with r 78 of the Bankruptcy Rules. So far as is relevant for present purposes, r 78 provides:
(1) A statement under subparagraph 188(2)(c)(i) of the Act shall be in a form to be approved by the Inspector-General, and verified by an affidavit in accordance with Form 10.
(2)The form mentioned in sub-rule (1) shall require the debtor to state:
(a)in relation to unsecured debts owed by the debtor:
(i)the name and address of each creditor and the amount (if any) owed by the creditor to the debtor;
(ii)the amount of each debt;
(iii)the year when the debt was contracted; and
(iv)the nature of the debt;
...
(d)in relation to the debtor’s assets:
...
(vi)any interest (vested or contingent) under a will, trust or deed of settlement;
...
(e)particulars of contingent assets, contingent liabilities and any other liabilities, not otherwise stated;
The relevant part of the statement of affairs recited:
Nature of Property
Estimated Value
1. Cash at bank (specify name and address of bank) WESTPAC BANKING CORPORATION,
360 COLLINS ST, MELBOURNE, 3000
2. Cash in hand
3. Cash deposited with solicitor (if any) for costs of petition or other proceedings
4. Stock in trade (at cost $ ) situated at
5. Machinery situated a
6. Trade fixtures, fittings, utensils, etc., situated at
7. Farming stock situated at
8. Growing crops situated at9. Household furniture and effects situated at 89 CATHIES LANE, WANTIRNA
10. Stocks and shares
11. Interest under will, deed of settlement, etc., as follows:-
12. Real property not shown in Part III of this Statement
13. Leasehold property situated at
14. Motor vehicles (specify make and model)
15. Securities held (for example, by way of mortgage, bill of sale, etc.)
16. Other property, namely, (specify particulars)$
600
NIL
NIL
NIL
NIL
NIL
NIL
NIL
5,000
NILNIL
NIL
NIL
NIL
NILTotal
5,600
It was said on behalf of the appellant that the debtor’s statement of affairs omitted to make a necessary reference to the interest in the Stuart McDougall Family Trust the existence of which the debtor had admitted in an affidavit sworn 25 September 1996. That admission was contained in the following paragraphs:
4.Well prior to the first meeting of my creditors on the 16th February, 1996, I was given a document by Mr. Bradshaw for completion, headed “Statement of Affairs”. Mr. Bradshaw explained that this document was generally completed by those individuals filing for bankruptcy. He told me that he found it to be a useful guide for his assistance in carrying out preliminary investigative enquiries prior to convening a meeting under Part X of the Act. He provided me with this document in late November, 1995
5.I completed this document at Mr. Bradshaw’s request, disclosing, amongst other things, the existence and details of the Stuart McDougall Family Trust. I gave this document to Mr. Bradshaw on or about 9th December, 1995. A true copy of this document headed “Statement of Affairs” signed by me and dated 9th December, 1995 is annexed hereto and marked “SSMcD1”.
6.The only Trust of which I am a potential beneficiary is the Stuart McDougall Family Trust which I have openly disclosed to my Trustee, Mr. Bradshaw.
The “statement of affairs” exhibited to that affidavit contained these responses to question 40 under the heading “Trusts”:
Have you, your spouse or any member of your family had an interest in a trust in the last 5 years or have you transferred any assets to a trust in the last 5 years
Yes
Name of trust
Stuart McDougall Family Trust
Principal activity
Investment
Name & address of the trustee
Lidcombe Banner Pty Ltd
89 Cathies Lane Wantirna
Name & address of the appointor
Names of beneficiaries
Penelope McDougall
Joanne “
Melissa “Natalie “
It will be recalled that in his report on the debtor’s proposal, the Trustee had adverted to the existence of the Stewart McDougall Family Trust, had identified the trustee and had noted the likelihood that a trustee in bankruptcy would have access to the assets of the family trust as to which he (the Trustee) was making further enquiries.
The alleged omission from the statement of affairs assumes significance because of s 222(4) of the Act which provides:
Where the Court, on the application of the Inspector-General, a person authorised in writing by the Inspector-General, the trustee or 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 requiring him to execute the deed or 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 deed or composition to be void or declaring any provision of the deed or composition to be void.
Assuming that the form completed by the debtor, part of which is reproduced above, had been approved by the Inspector-General, it required the debtor to state the existence of any interest, vested or contingent, under a will, trust or deed of settlement to which he was entitled at the time of making the statement of affairs, and to describe that interest in a summary way, at least, we consider, by identifying the instrument under which it arose. The learned primary Judge found himself unable to find that the debtor at the relevant time possessed an interest under a trust of the requisite kind. His Honour’s reasoning on this aspect was expressed as follows:
There was a difficulty with all the submissions in relation to this claimed omission which was that the relevant trust deed was not produced or otherwise placed before the Court. Accordingly I have no idea as to the content or terms of the relevant provisions of the trust deed. The only evidence is that the Debtor said that he was “a potential beneficiary” under the trust. I cannot be satisfied, in the absence of knowing what that relevant beneficial interest is, that there was an omission of a material particular. I consider that the most I can infer from the Debtor’s affidavit is that he has a potential interest, not vested or even contingent, but one which depends upon a power of appointment being exercised or some other determination being made which elevates him from a potential beneficiary to an actual beneficiary.
If I am wrong in any of these conclusions I take refuge in the burden of proof cast upon the applicants to satisfy me on the balance of probabilities that there was an omission of the material particular. In the absence of the relevant trust deed I cannot be so satisfied.
We accept that the inference was available from the known facts that the debtor was one of a class to whom the appointor under the terms of a discretionary family trust could appoint a benefit. The further inference which we would draw is that the primary beneficiaries under the terms of the family trust were Penelope, Joanne, Melissa and Natalie McDougall named as beneficiaries in the earlier statement of affairs. On the basis of these inferences, the debtor did not have a vested or contingent interest under the Stuart McDougall Family Trust of the kind contemplated by r 78(2)(vi). All that he had was a hope of acquiring an interest as a result of an exercise in his favour of the appointor’s discretion.
We do not disagree with Mr Irlicht’s submission that whether an interest is vested or contingent is a separate question from whether the interest vests in a trustee in bankruptcy. In the present case, however, the anterior question which the debtor had to address was whether he had an interest at all under the family trust. On what we have identified as the available inferences, he had only a spes or expectation which could not mature into an interest until there had been an exercise in his favour of the power of appointment. That cannot amount to an “interest under” the trust as distinct from being interested in its administration; see eg Re Parsons (1890) 45 Ch D 51 where Kay J observed, at 55:
It is indisputable law that no one can have any estate or interest, at law or in equity, contingent or other, in the property of a living person to which he hopes to succeed as heir at law or next of kin of such living person. During the life of such person no one can have more than a spes successionis, an expectation or hope of succeeding to his property.
Even if we were wrong in the conclusion just expressed, we would not be disposed to regard the debtor’s failure to refer in his statement of affairs to the potential benefit under the family trust as the omission of a material particular within the meaning of s 222(4). In Re Segal; Lensworth Finance Ltd v Segal and Ward (1975) 9 ALR 154, Riley J held, at 157:
The statement of affairs required by s 195 and the answers which the debtor is required by that section to give to questions put to him at the meeting provide the basic information on which the creditors decide which of the courses available to them under s 204(1) they should adopt. It is essential that that information should be full and correct: the creditors are entitled to all available information about the debtor’s “conduct, trade dealings, property (and) affairs” before they make their decision: compare s 222(4)(a). Bearing in mind the purpose of the statement of affairs I am of opinion that a particular is material within the meaning of s 222(4)(b) if it is a particular which would be relevant to and might be likely to affect the making of the decision of the creditors under s 204(1).
That passage was approved in Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307 per Fox J at 319 and per Lockhart J at 336.
We accept that the materiality of an alleged omission from the debtor’s statement is not to be judged by the subjective effect which the omission had, or may have had, on the minds of those creditors who happened to attend the meeting (Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 at 533). However, under the legislation applicable to this appeal, all creditors, not merely those at the meeting, would have received, as well as the statement of affairs, the Trustee’s report adverting to the existence of the Stuart McDougall Family Trust; (see s 194(2A) of the Act). Support for the view that the materiality of the contents of, or omissions from, the statement of affairs is to be determined at the time when it was received by the creditors is afforded by the observations of Sweeney J in Re Morris; Ex parte Adams (1980) 48 FLR 341 where his Honour approved the passage from Re Segal quoted above and observed, at 344:
The question whether an omitted particular is material depends, in my view, on the construction of the statement of affairs as a whole, as at the time when it was verified by the debtor’s statutory declaration. A particular which is then to be regarded as material does not, in my opinion, lose that quality by reason of subsequent events.
At the relevant time in the present case, the creditors were apprised of the existence of the Stuart McDougall Family Trust, the identity of its trustee and the nature and extent of its assets together with the Trustee’s view that a trustee in bankruptcy would “most likely have access to” those assets “pursuant to the provisions of Section 139D of the Act”.
For these reasons, consistently with the approach taken by Davies J in Re Caruana Ex parte Deputy Commissioner of Taxation (1987) 17 FCR 223 at 232, we would not have regarded the omission contended for by the appellant, had it been established, as material in the sense required by s 222(4).
Another omission from the statement of affairs said by the appellant to be material in the sense discussed above was of any reference to a debt of $9,800 concededly due on a “charge account”. As to that debt, the debtor deposed in his affidavit of 25 September 1996:
10.I deny that I omitted any material particular from my Statement of Affairs and the omission of a debt in respect of a charge account in the sum of $9,800 referred to in paragraph 3(c) of the Application was both inadvertent and immaterial. Realizing the omission, I informed Mr. Bradshaw who advised creditors of the debt in his Section 189A Report. Indeed the matter was not queried at either of the Creditors’ Meetings.
The statement in the Trustee’s report pursuant to s 189A was to this effect:
The Debtor has advised subsequent to completing the statement of affairs, that he inadvertently omitted a debt of $9,800 in respect of a Charge Account.
For the reasons explained above, we consider that the supply of that information to all creditors simultaneously with the receipt by them of the statement of affairs bears significantly on the materiality of the conceded omission. Because the amount of the “charge account” debt was brought to the attention of all creditors when they received the Trustee’s report, it cannot be equated with the undisclosed amount of the debt to Housing Builders’ Association Ltd in Re Morris (supra) which Sweeney J found at 344 “may well have been considered to be the last straw, which would prevent the debtor from being able to meet his obligations under the composition”.
It is true that the creditors were never apprised, as required by r 78(2)(a) of the Bankruptcy Rules, of the name and address of the “charge account” creditor or the year when the debt was contracted. However, we are unable to conclude that the presence or absence of that information could have affected the decisions which the creditors were required to make as to their attitude to the debtor’s proposal and whether they would attend or be represented at the meeting of creditors.
Conclusion
Because we have not been persuaded that there was any error in those findings of the learned primary Judge which supported his conclusion that no occasion had arisen for the exercise of jurisdiction under s 222(2) or s 222(4) of the Act, it follows that there is no need for us to consider the way in which his Honour indicated he would have exercised his discretion had he been persuaded that there was a doubt whether the deed of arrangement had been entered into in accordance with Pt X or complied with the requirements of that Part or that the debtor had omitted a material particular from his statement of affairs. Accordingly, it is also unnecessary for the members of this Court to indicate how, had we concluded that his Honour’s provisional exercise of the discretion indicated in sub-ss (2) and (4) of s 222 had miscarried, we would have exercised the discretion for ourselves. The appeal must therefore be dismissed with costs.
I certify that this and the preceding nineteen (19) pages are a true copy of the Reasons for Judgment herein of the Court.
Associate:
Dated: 16 October 1997
Counsel for the Appellants: Mr T Irlicht Solicitors for the Appellants: Irlicht & Broberg Counsel for the First Respondent: Mr J Nolan Solicitors for the First Respondent: D E Phillips Counsel for the Second Respondent: No appearance Solicitors for the Second Respondent: No appearance Date of Hearing: 29 September 1997 Date of Judgment: 16 October 1997
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