QBSA v Ball
[2001] FMCA 47
•5 December 2001
FEDERAL MAGISTRATES COURT OF AUSTRALIA
QBSA v BALL & ANOR. [2001] FMCA 47
BANKRUPTCY – Deed of Arrangement – application to declare void and/or terminate – Bankruptcy Act 1966 (Cth) ss 222 and 236.
re Nelson (1963) 19 ABC 172
re Mills; Ex parte Lloyds (1997) 73 FCR 551
Bankruptcy Act 1966, ss 64D, 64J, 64K, 64N(2)(b), 64ZA(1), 222(1), 236.
| Applicant: | QUEENSLAND BUILDING SERVICES AUTHORITY |
| First Respondent: | STEPHEN PHILLIP BALL |
| Second Respondent | JEFFREY HARCOURT CROWTHER |
| File No: | BZ 50 of 2001 |
| Delivered on: | 5 December 2001 |
| Delivered at: | Melbourne |
| Hearing Date: | 11 July 2001 |
| Judgment of: | McInnis FM |
REPRESENTATION
| Counsel for the Applicant: | Mr T P Sullivan |
| Solicitors for the Applicant: | Jones King |
| Counsel for the Respondents: | Mr M Martin |
| Solicitors for the Respondents: | McCowans |
ORDERS
Pursuant to s 222(1) of the Bankruptcy Act the Deed of Arrangement entered into between the first respondent and second respondent on 15 December 2000 be declared void or invalid on the grounds that:
(a)no quorum existed; and/or
(b)no meeting was constituted on 15 December 2000.
The Deed of Arrangement entered into as a consequence of the resolution of 15 December 2000 is void and of no effect and is set aside.
Pursuant to s 222(7) of the Bankruptcy Act the estate of Stephen Phillip Ball be sequestrated and that pursuant to s 229(9) of the Act the making of this application by the applicant as a creditor be equivalent to the presentation of a creditors petition.
The first respondent and second respondent pay the applicant’s costs of and incidental to the application to be taxed in default of agreement under Rule 62 of the Federal Court Rules and in accordance with the Bankruptcy Act.
FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE
BZ 50 of 2001
QUEENSLAND BUILDING SERVICES AUTHORITY
Applicant
And
STEPHEN PHILLIP BALL
First Respondent
JEFFREY HARCOURT CROWTHER
Second Respondent
REASONS FOR JUDGMENT
Background
This is an application made by the applicant pursuant to s 222(1) of the Bankruptcy Act 1966 (“the Act”) seeking orders in relation to a deed of arrangement purportedly entered into between the first and second respondents on 15 December 2000.
In its application, the applicant claims the following:
“i)That pursuant to s 222(1) of the Bankruptcy Act (“Act”) that the deed of arrangement entered into between the first respondent and second respondent on 15 December 2000 be declared void or invalid on the grounds that;
a.No quorum existed; and/or
b.No meeting was constituted on 15 December 2000.
ii)Alternatively, that the said deed of arrangement entered into as a consequence of the resolution on 15 December 2000 which was purported to be passed at a meeting on
15 December 2000 is void and of no effect and accordingly be set aside on the grounds set out in paragraph 1.iii)That pursuant to s 222(7) of the Act that the estate of the first respondent be sequestrated and that pursuant to
s 229(9) that the making of this application by the applicant as a creditor, be equivalent to the presentation of a creditors petition.iv)That the first respondent and/or the second respondent pay the applicant’s costs of and incidental to this application;
v)Such further or other orders that this Honourable Court considers appropriate.”
The applicant is a creditor of the first respondent debtor. The second respondent was appointed trustee of the Part X Deed of Arrangement.
At the hearing of the application, the applicant was represented by Mr Sullivan and the respondents represented by Mr Martin of counsel.
In support of the application, the applicant relied upon an affidavit sworn by CRAIG STANTON BALDWIN on 1 February 2001. The uncontested facts set out in that affidavit by way of background include reference to a claim by the applicant against the first respondent for the sum of $61,262.31 in proceedings issued in the District Court of Queensland on 4 October 2000. That claim arose pursuant to s 71 of the Queensland Building Services Authority Act 2000 (the “QBSA Act”). It is not in dispute the first respondent was the holder of a general builder and housebuilder licence granted by the applicant on 10 September 1993 and cancelled on 15 January 1996.
The amount of the applicant’s claim is said to be calculated as follows:
b)$18,090.85 for non-completion of building works at 25 Brosnahan Court, Belivah, Queensland; and
c)$43,171.46 in relation to non-completion of works by the first respondent at 12–14 Kimberley Drive, Shailer Park, Queensland.
A Notice of Intention to Defend the District Court proceedings was filed by the first respondent on 9 November 2000.
On 4 December 2000, the applicant received a letter from the second respondent of the firm of solicitors, named McCowans, dated
1 December 2000 giving notice to creditors that the first respondent had appointed the second respondent as controlling trustee pursuant to Part X of the Act. The notice called a meeting at the offices of McCowan Solicitors to be held on 15 December 2000 (“the meeting”). The applicant did not attend the meeting. Minutes of the meeting show that it lasted for ten minutes having started at 10.17 am and concluding at 10.27 am.
Upon becoming aware of the meeting, it is said by Mr Baldwin on behalf of the applicant that he then forwarded a facsimile transmission to the second respondent of McCowans Solicitors on 5 January 2001. That facsimile transmission requested information including the outcome of the meeting and other information concerning the appraisal of property undertaken being appraisals of land at 1066 Pimpama Street/Jacobs Creek Road, Jacobs Well (“the property”) and a motor vehicle which is agreed was a 1995 Commodore motor vehicle (“the vehicle”).
In his letter dated 5 January 2001 Mr Baldwin claims that pursuant to s 189A(1)(b) of the Act, the controlling trustee must make reasonable enquiries to determine whether creditor’s interests would be best served by accepting the proposal.
On 9 January 2001, Mr Baldwin forwarded to the Deed Administrator a facsimile. The facsimile gives notice that the applicant would make an application under s 222 of the Act to set aside the resolution in the best interests of the creditors. It then seeks further information as to the resolution of the meeting and valuation of the property and the vehicle.
Further correspondence was then referred to by Mr Baldwin in his affidavit and in particular a letter dated 9 January 2001 from Bendeich & Co to the applicant. That letter was forwarded on behalf of the trustee of the Deed of Arrangement and explains the process of obtaining valuations and also refers to the minutes of the meeting where it is asserted “2 creditors were present at and at (sic) voted at the meeting, namely Beryl Christie (for $3,800) and Ross Christie (for ($4,695)”. Reference was made to draft minutes of the meeting which has been received by the Court as Exhibit A5. An incomplete copy of those minutes was attached to the Baldwin affidavit and marked as Exhibit G, which was part of correspondence from Mr Crowther of McCowans to the applicant dated 10 January 2001. It should be noted that Exhibit A5 which has now been tendered purports to be the draft Minutes of the meeting yet it should be noted that that document is a copy of a facsimile document and is unsigned and undated save for the typed date “December 2000”.
The letter from Bendeich & Co dated 9 January 2001 after referring to the minutes as being draft minutes only and that they seemed to record that both creditors voted in favour of the Part X arrangement does not take the matter any further.
A letter dated 10 January 2001 was then forwarded to Mr Crowther from the applicant expresses concern at the responses to the issues raised in earlier correspondence and seeks further information prior to the commencement of proceedings.
A letter dated 10 January 2001 from the applicant was forwarded to the first respondent, again foreshadowing an application to the Federal Court to set aside the deed of arrangement.
Other correspondence passing between Mr Crowther of McCowans and the applicant includes enclosures of draft minutes and valuations and some debate occurs in relation to the responsibilities of the controlling trustee. Further correspondence also refers to the controlling trustee’s view that the applicant should have attended the creditor’s meeting and in particular a letter dated 12 January 2001 from Mr Crowther of McCowans to the applicant states, “We are moved to comment that it is generally in the interests of creditors for them to attend the meetings after they have received notification and avail themselves of the opportunity to ask relevant questions and pursue, peruse relevant documentation at the meeting. It is not the controlling trustee’s job to comment on investigations and to provide documentation (other than the Minutes on this occasion) after the event when a creditor elects not to attend a meeting. This is time consuming, expensive and unnecessary.”
In the same letter Mr Crowther as the controlling trustee states,
“We respectfully recommend that in future you either attend the meeting or appoint a proxy with specific instructions to advise you as to the result. If you have any specific questions which you want raised at the meeting, then you should voice them prior to the meeting. The writer would be happy to act as your proxy, regardless of which way the BSA wants to vote on these matters. It is much more constructive than writing threatening letters after the event suggesting that you are going to obtain baseless costs orders.”It will be clear from the correspondence that Mr Crowther has taken a proactive role in the matter and indeed continues to assert that he conducted the meeting in a proper manner.
It is, however, common ground that the meeting was attended by a proxy Mr Hawney representing two creditors. It is further common ground that Mr Crowther acted as the president of the meeting and on his evidence has indicated to the Court that he believed he was attending the meeting in his role as controlling trustee. In his evidence, in fact, he stated, “In my mind I was attending as a controlling trustee.” It was asserted, however, during the course of submissions for and on behalf of the respondents, that on the evidence Mr Crowther was a creditor. The basis upon which this claim is made is dealt with in the submissions.
The applicant further relied upon an affidavit of BRUCE BLAISE PATANE sworn 8 February 2001 where the deponent annexes significantly the notice to creditors and in addition the controlling trustee’s report. In essence, the debtor’s proposals involve the payment of a total of $18,000 to the trustee of the deed, with $350 being paid on or before the trustee signs the deed, and the balance of $17,650 to be paid by monthly instalments of $735.42 commencing 15 December 2000. The debtors proposal to the meeting included the statement that the debtor would “ensure Beryl Christie and Ross Christie and Allan Clinch who otherwise may seek to claim as a creditor if I were to become bankrupt shall not receive any dividend under this Deed”.
In the controlling trustee’s report under the heading “Summary of Debtor’s Statement of Affairs”, assets are listed as: Vehicles $4,000 and Real Property $105,000. It is these two items which are the subject of submissions and dispute in this application. Under the heading “Motor Vehicle” the controlling trustee’s report states:
“Mr Ball has disclosed that he owns a 1985 VS Commodore sedan”.It is common ground that in fact the vehicle owned by Mr Ball was a 1995 VS Commodore sedan and evidence was given in relation to the vehicle’s value. In the controlling trustee’s report, however, under the heading “Investigations” and the sub-heading “Motor Vehicle” the report states, “I have received a written appraisal from Melcolmn (sic) Automotive Service Centre valuing the Commodore at $4,000.00.” The valuation in relation to the vehicle dated 10 November 2000 simply states, “APPRAISAL ON COMMODORE 1985 VS SEDAN MOTOR VEHICLE APPROXIMATELY $4,000.00.” The evidence from the first respondent indicates that he was not aware that the vehicle had been taken away for inspection, or indeed that it had been inspected at all. He could not explain why it was referred to as a 1985 model, though indicated that the reference to “VS sedan” would indicate that it was a 1995 and not a 1985 model as “VS” sedans were not produced in 1985. He further indicated, however, that he is aware that current advertisements for a similar model are seeking a price of approximately $9,000 and it was noted that he had purchased the vehicle some two years prior to the valuation for the sum of $18,000.
Applicant’s submissions
The applicant relying upon material to which I have referred has submitted it is appropriate in the present case to declare that the Deed of Arrangement entered into between the first respondent and the second respondent should be declared void and further that I should proceed to make an order that the estate of the first respondent be sequestrated and that in making the application the applicant be a creditor equivalent to the presentation of a creditor’s petition.
The applicant relied upon an affidavit of Craig Baldwin file the 2nd day of February 2001, an affidavit of Bruce Patane filed 12 February 2001 and a further affidavit of Mr Patane filed 10 July 2001. In addition counsel for the applicant provided an outline of submissions and indeed a further submission in writing.
The applicant required the first respondent and second respondent to be made available for cross examination and to that extent reliance was made upon the evidence of each witness.
Essentially the applicant asserts that at the meeting the requirement under s 64N(2) of the Act that a quorum in circumstances where there is more than one creditor is constituted by two persons participating in person or by telephone each of which is either a creditor who is entitled to vote or the proxy of such creditor. The words of the section have been adapted by me for the present purposes. I was referred however to the authority of re Nelson (1963) 19 ABC 172 which had decided a similar provision of the legislation namely s 202(1) of the Act as it then was which according to the applicant is in the same form as s 63N of the Act. The requirement of the provision it was submitted is that two creditors being creditors entitled to vote at the meeting should be present. I was further referred to s 64N(1) of the Act where it is said that the second respondent must determine whether a quorum is present and that in the present case a determination that a quorum was present by the second respondent was incorrect. On the basis that there was no quorum present a meeting was not constituted to resolve any proposal by the first respondent or to resolve entry into a Deed of Arrangement. In the circumstances it was submitted that pursuant to s 222(1) of the Act the Deed must be declared void or alternatively pursuant to s 236 the Deed must be terminated. The applicant’s counsel submitted that there is no discretion for the Court.
It was further submitted that the first respondent had committed an act of bankruptcy (see s 40(1)(l) of the Act) and pursuant to s 222(7) of the Act the court it was submitted can sequestrate the estate of the debtor. In response to submissions on behalf of the respondent that there was a quorum on the basis that Mr Crowther was a creditor of the first respondent I was referred to s 64N(2)(b) of the Act which provides:
“(2) A quorum is constituted:
(a) if there is only one creditor who is entitled to vote:
(i) by that creditor, or a proxy or attorney of that creditor, participating in person or by telephone; and
(ii) by the presence in person of the trustee; or
(b) otherwise—by 2 persons participating in person or by telephone each of whom is either a creditor who is entitled to vote or the proxy or attorney of such a creditor.”
I was further referred to s 64ZA(1) of the Act which provides:
“1) This section applies to voting:
(a) at an election under section 64P of a person to preside at a meeting; and
(b) on any motion proposed at a meeting or an amendment proposed to such a motion.
(2) In this section:
creditor means a creditor who, or whose proxy or attorney, participates in the meeting in person or by telephone.
(3) A person other than a creditor is not entitled to vote.
(4) Subject to subsections (5) and (6), each creditor is entitled to vote and has one vote.
(5) If a creditor holds a security in respect of a debt, the creditor is not entitled to vote unless the debt, or the total amount of the debts, owed to the creditor exceeds the amount estimated by the creditor in the statement given to the trustee under section 64D to be the value of the security.
(6) A creditor who has failed to give to the trustee a statement in accordance with section 64D is not entitled to vote.
(7) A creditor is not disqualified from voting merely because the creditor is the President or the minutes secretary.
(8) The trustee may determine any question that arises as to the entitlement of a person to vote.
(9) If the trustee needs a period in which to determine a question referred to in subsection (8), the meeting is to be adjourned to such time, date and place as the meeting resolves, being a date not later than 14 days after the date of the original meeting, for the purpose of enabling the trustee to determine the question.”
I was also referred to s 64D which provides:
“The notice must state that each creditor must give to the trustee at or before the meeting a written statement setting out:
(a) the amount in respect of which the creditor claims that the bankrupt is indebted to the creditor; and
(aa) if the creditor has been assigned a debt that the bankrupt owes to the creditor—the value of the consideration that the creditor gave for the assignment of the debt; and
(b) if the meeting is the first meeting of the bankrupt's creditors:
(i) whether the creditor holds a security in respect of the debt and, if so, the value of the security as estimated by the creditor and the amount of the creditor's debt after deducting that value; and
(ii) brief particulars of the transaction and circumstances that gave rise to the debt.”
Section 64J provides:
“(1) The trustee must prepare an attendance record in accordance with subsection (2) for the purposes of the meeting and must keep the record in his or her possession after the conclusion of the meeting.
(2) The attendance record must include 5 columns and must indicate that particulars of creditors are to be entered as follows:
(a) the name of each creditor participating in person or by telephone, or represented by a proxy or attorney participating in person or by telephone, is to be entered in the first column;
(b) if a creditor is so represented by a proxy or attorney, the name of the proxy or attorney is to be entered in the second column opposite to the name of the creditor in the first column;
(c) in respect of each creditor whose name is entered in the first column:
(i) the value of the creditor's debt is to be entered in the third column; and
(ii) if the debt is secured in whole or in part:
(A) the nature, and the value as estimated by the creditor, of the security is to be entered in the fourth column; and
(B) the balance of the creditor's debt after deducting that value is to be entered in the fifth column.
(3) The attendance record must also include provision for recording whether the bankrupt is present and the names of any other persons present who are not creditors or proxies or attorneys of creditors, including provision for recording the capacity in which those other persons are present.”
Section 64K provides:
“(1) The trustee is to preside at the meeting until a person is appointed to preside under section 64P.
(2) The trustee must open the meeting and introduce himself or herself and, if the bankrupt is present, introduce the bankrupt.
(3) If the bankrupt is not present, the trustee must announce that fact and, if the trustee is aware of any reason why the bankrupt is not present, must state that reason.
(4) The trustee must circulate the attendance record prepared in accordance with section 64J among the creditors, and creditors' proxies and attorneys, participating in person and must ask them to enter in that record the relevant particulars, as required by the attendance record, of:
(a) the creditors who, or whose proxies and attorneys, are so participating in person; and
(b) those proxies and attorneys; and
(c) the debts of those creditors.
(5) The trustee must enter in the attendance record the relevant particulars, as required by the attendance record, of:
(a) creditors who, or whose proxies or attorneys, are participating in the meeting by telephone; and
(b) those proxies and attorneys; and
(c) the debts of those creditors.
(6) The trustee must state in the attendance record whether or not the bankrupt is present and, if the bankrupt is not present and the trustee is aware of any reason why the bankrupt is not present, must set out that reason.”
It was submitted in applying those provisions that even if it could be accepted that the second respondent as at the commencement of the meeting had an existing debt of $500 he was not a person participating in the meeting as a creditor who was entitled to vote within the meaning of s 64N(2)(b) of the Act. To participate and vote it was submitted that he:
·Needed to be a creditor who participated in the meeting in person s 64ZA(2) and (3);
·In order to vote he needed to have provided the written notice in accordance with s 64D, s 64ZA(6);
·Whether or not Mr Crowther was a creditor he did not provide any such written notice in the form of the s 64D notice.
It was further submitted that the provisions of the Act require the trustee to prepare an attendance record in accordance with sub-s (2). In the present case it can be seen that the attendance record pursuant to s 64J(2) of the Act is to identify each creditor participating in person, the value of the creditor’s debt, the value of any security for that debt. Section 64J(3) also makes provision for the attendance of persons who are not attending as creditors. It notes that the capacity in which those persons attended must be recorded in the attendance record. That record is then passed around to all present to ensure that it is accurate (section 64K).
Reliance was placed upon Exhibit `H’ of the affidavit of Mr Baldwin sworn 1 February 2001 which was the attendance record that showed only Mr William Hawney attended as proxy for two creditors. There is no record of Mr Crowther attending as a creditor but in fact he was attending according to that record as controlling trustee. The Part X voting records show that the only creditors who participated were Mr and Mrs Christie by their joint proxy Mr Hawney who had attended in person.
Reference was made to the draft Minutes which are Exhibit G to Mr Baldwin’s affidavit of 1st February 2001 which show that the only creditors participating in the Part X meeting were Mr and Mrs Christie. Reference was made to the second last paragraph where it is stated, “It was noted that there were only two creditors present and a committee of inspection required three creditors to be appointed”.
I was further referred in the written submissions of the applicant to a letter dated 19 February 2001 (Exhibit A6) from the second respondent to Mr Patane of the applicant’s solicitors wherein it is stated,
“I have examined the facts and taken advice on the matter. Although two creditors were present by proxy, it seems that the proxies were not separate individuals. Both creditors were represented by the same person.
In those circumstances, you are quite correct in maintaining that no quorum existed although I was of the belief, at the time, that one did exist. Accordingly, your client would be entitled to the relief sought in paragraphs 1 and 2 of its application and I consent to such orders.”
In the light of that material it was submitted that the second respondent did not participate at the meeting as a creditor and did not have a presently existing debt owing to him and therefore there was no quorum.
The evidence of the first respondent included reference to the additional fee of $500 which he agreed was payable once the meeting had taken place. In the circumstances it was submitted that the court could not be satisfied that there was indeed even a debt which would justify an interpretation of the second respondent attending or participating at the meeting as a creditor.
It is noted that in evidence the second respondent conceded under cross-examination that if the estimate of the value of the property and the vehicle was based upon wrong information then the opinion expressed by the second respondent as to the creditors being better off under the Deed of Arrangement would therefore be inaccurate. It was agreed by the second respondent that apart from the reference to the creditors in the two proxies there has been no other formal proof of debt submitted by any other creditor including himself. He simply asserted that he had on file a bill to the first respondent. The second respondent gave evidence that he did not record himself as being a creditor who could vote at all at the meeting. It is significant that during the course of his evidence the second respondent said in relation to the meeting, “In attending I did not turn my mind to the fact that I was a creditor other than to tell the meeting that I was a creditor towards the end of the meeting”. He agreed that in fact what he did was to seek a resolution in relation to having remuneration paid to him as a controlling trustee.
Respondent’s submissions
The respondents submit the application should be dismissed with costs. It was submitted that the applicant’s submissions are technical and that although two creditors were present at the meeting they were represented by one person who held a proxy for each creditor. It was argued although only one person was at the meeting and accordingly there was not a quorum that the controlling trustee Mr Crowther was also a creditor and present at the meeting thereby providing a quorum which means the application should fail.
It was submitted that the applicant bears the onus of establishing that in any event the court should exercise a discretion to set aside the Deed of Arrangement and make a sequestration order. Criticism was made of the lack of evidence from the applicant to establish that the creditors would be better off if the first respondent was made bankrupt. There was no evidence it was submitted that there is anything in the first respondent’s affairs which requires an investigation or gives cause for suspicion. The amount it is said under the composition is not trivial and is greater than what would be paid under a bankruptcy. There was no evidence it was submitted by the respondents to satisfy the court of the any of the matters which would entitle the court to exercise a discretion in favour of the applicant. Reference was made to re Mills; Ex parte Lloyds (1997) 73 FCR 551 per Merkel J at 559 at 560.
Reasoning
As indicated I was referred to the Decision of Merkel J in re Mills Ex parte Lloyds and in particular have noted His Honour’s comment in relation to the factors that are relevant in the exercise of the power to declare a composition void under s 222 or to set it aside under s 239. It is useful in this reasoning to set out the relevant factors referred to by Merkel J as follows:-
“(a) Whether, after considering all the circumstances of the case, a greater opportunity to inquire into the debtor's affairs and a more comprehensive explanation by the debtor were called for: see Doukidis; Ex parte Consolidated Constructions Pty. Ltd. Toohey J unreported, 26 June 1985 at 15. In Mendelson v. Lelleton & Ors Lindgren J unreported, 6 November 1996, Lindgren J observed at 38 that where there is cause for investigation of the debtor's dealings the interests of unsecured creditors and the public interest would be served by the investigation being conducted by a trustee in bankruptcy armed with the coercive power provided by the Act.
Further, in Re Bendel Ex parte Lowe Lippman (A firm) Merkel J unreported, 19 April 1996 I concluded that where serious issues are raised about preferences to some creditors, dissipation of assets, the validity or enforceability of "loans" from associated parties and, in particular, whether any "friendly" debts were intended to create legal relations, a sequestration order rather than a composition is the more appropriate vehicle for resolving such issues.
(b) If circumstances arise which "give cause for a suspicion" or to "arguable" causes of action which may benefit creditors then that can suffice to set aside the composition: see Mendelson at 33. It is not necessary to establish that the creditors will be, or even are more likely to be, advantaged by bankruptcy rather than the composition. It is sufficient if bankruptcy will afford:
“a prospect or possibility of economic advantage to creditors sufficient to justify the conclusion that it is in their interests to make the declaration.” per Jenkinson J in Augustyn v. Putnin (1988) 83 ALR 514 at 515.
In Augustyn, French J (with whom Spender J agreed), in explaining why "a real possibility of a financial benefit" to creditors was sufficient, said at 521-2:
And although in Doukidis; Ex parte Consolidated Constructions (Federal Court, 26 June 1985, unreported), Toohey J said that "it is enough if the evidence justifies an inference that there are likely to have been assets and that the creditors may be better off if the composition is set aside" (a dictum repeated in Re Brown; Ex parte Humes Ltd (1987) 74 ALR 611 at 619 per Pincus J), it does not follow that the court must be satisfied on the balance of probabilities that there will be a financial benefit to creditors from an order avoiding or setting aside a deed.
….
In my opinion, his Honour the trial judge in the present case was entitled to form the view that the orders sought would provide the creditors with an opportunity to further investigate the appellant's position and that it was in their interests to do so.
See also Re Cufari at 551-2.
(c) If the amount offered under the composition is little or trivial there may be no harm of any consequence to creditors for the composition to be set aside if other factors warrant that course: see Re Richards; Ex parte Beneficial Finance Corporation Limited Jackson J unreported, 17 March 1986 at 3 and 6 and Mendelson at 32.
(d) A Court may be more disposed to set aside a composition if no payments to creditors have been made pursuant to the composition: see Raschilla v. Gulluni (1987) 14 FCR 57 at 70.
(e) A composition passed, inter alia, on the basis of a report to creditors as to the debtor's financial affairs which is misleading will also be a relevant factor: see Re Cufari at 549.”
In this matter I accept the submission by the applicant that the meeting did not comply with the Act in the sense that there was no quorum present. I do not accept that Mr Crowther attended the meeting in his capacity as a creditor and nor indeed do I accept that at the time of the meeting he was in fact a creditor. I further accept that in any event he had not provided proper notice pursuant to s 64D. He had certainly been engaged to perform certain work and was owed money for at least part of that work which had yet to be completed. None of the records show however that he attended in his capacity as a creditor and indeed all the records demonstrate he attended as controlling trustee. His own evidence and correspondence confirms this fact.
Although it had been submitted by Counsel for the Respondents that the intention of the second respondent is irrelevant and that I should therefore disregard his evidence where he states that “In my mind I was attending as a controlling trustee”, it is my view that this evidence is relevant. Whilst it is clear that Mr Crowther “participated” in the meeting it is equally clear that I am entitled to rely upon all the evidence including his own statement in drawing a conclusion that at the time of the meeting he was not a creditor for the purposes of the Act and therefore was not entitled to vote and that he could not be used in order to constitute a quorum. It is inappropriate for a court to disregard the evidence of the witness in relation to the capacity in which he attended the meeting and further inappropriate for the court to disregard the minutes of the meeting which did not reveal a second respondent as attending in his capacity as a creditor.
I am further satisfied that one person representing two creditors by way of proxy cannot provide a quorum for the purpose of the Act. It does not matter that at the time of the meeting it is argued that a 100% of creditors attended and voted in favour of the resolution in circumstances where one proxy represented two creditors. That represents non compliance with the Act and the failure to provide a quorum which as indicated invalidates the meeting and provides me a basis upon which I can exercise my power to declare the Deed void and/or terminate the Deed.
I should add for the sake of completeness that a quorum is not a technical matter but rather fundamental to a creditor’s meeting. The legislation cannot be ignored and to provide a valid Deed of Arrangement arising out of a creditor’s meeting, it is essential in my view to comply with the provisions of the Act in relation to a quorum. This is not a case where it could be argued that there has been substantial compliance.
Accordingly there has not been a quorum present and s 64N(2) of the Act has not been complied with. Any determination by the second respondent pursuant to s 64N(1) of the Act that there was a quorum present was therefore invalid.
Having found that there was no quorum present in my view it is appropriate in the circumstances to declare the Deed of Arrangement void pursuant to s 222(1) of the Act and/or that pursuant to s 236 the Deed should be terminated.
I note that the amount claimed by the applicant against the respondent is the sum of $61,262.31. This is clearly a significant amount compared with the $3,800 allegedly owed to Beryl Christie and $4,695 allegedly owed to Ross Christie. The valuations of the assets of the first respondent are also important. It is clear in my view that there is significance in the fact that a valuation was placed upon the vehicle as a 1985 model when in truth it was a 1995 model. I am also satisfied and accept that the valuation of the property is at least open to challenge as the appraisal was done on an immediate forced sale basis after the first respondent became aware that bankruptcy proceedings may be commenced by the applicant. In any event the real estate agent’s appraisal on that basis was not provided with the creditor’s report. In the circumstances I am satisfied that there are variations in the valuation of the vehicle and at least potentially other assets of the first respondent and that in the present case it would be preferable for the court to make a sequestration order as this is a more appropriate means of resolving issues than a composition or arrangement particularly where there appears to be at the very least a suggestion of “friendly debts” and on the material before me a prospect of economic advantage to creditors beyond the terms of the arrangement which had only allowed for a proposal for payment of $18,000 to the trustee with the amount of $735.42 to be paid by monthly instalments. I have considerable doubt concerning the validity of the valuation of the vehicle which may or may not have arisen as a consequence of its misdescription in the valuation and/or the method of valuation of the property. I note in particular the evidence of the second respondent who conceded in cross examination that if, as I have found, the estimate of the value of the property and the vehicle was based upon wrong information then the opinion expressed as to the creditors being better off under the Deed of Arrangement would therefore be inaccurate. It is noted there has been no other formal proof of debt submitted by any other creditor save for the creditors in the two proxies.
I am satisfied that there is sufficient evidence to establish that the creditors may be better off if the first respondent was made bankrupt. The circumstances leading up to the Deed of Arrangement and the doubts about valuations are sufficient cause for suspicion in my view. I conclude that in the present case granting the orders sought by the applicant would provide creditors with opportunity to properly investigate the first respondent’s position and that it is in their interests to do so. I am conscious of the fact that the composition in the present case at least on the face of it does not appear to be trivial and does not involve a situation where there is no payment to creditors. However I am satisfied for the reasons stated that it is appropriate to make the orders sought by the applicant.
Accordingly I propose making the following orders:-
(1)Pursuant to s 222(1) of the Bankruptcy Act the Deed of Arrangement entered into between the first respondent and second respondent on 15 December 2000 be declared void or invalid on the grounds that:
(a)no quorum existed; and/or
(b)no meeting was constituted on 15 December 2000.
(2)The Deed of Arrangement entered into as a consequence of the resolution of 15 December 2000 is void and of no effect and is set aside.
(3)Pursuant to s 222(7) of the Bankruptcy Act the estate of Stephen Phillip Ball be sequestrated and that pursuant to s 229(9) of the Act the making of this application by the applicant as a creditor be equivalent to the presentation of a creditors petition.
(4)The first respondent pay the applicant’s costs of and incidental to the application to be taxed in default of agreement under Rule 62 of the Federal Court Rules and in accordance with the Bankruptcy Act.
In this application I have already indicated the orders I propose making. I invited counsel for the parties to make submissions in relation to the form of those orders including the form of the order in relation to costs. I had proposed in my judgment to make orders in relation to costs that only applied to the first respondent.
Mr Sullivan, who appears for the applicant, has submitted that in the circumstances it is appropriate that I should vary that proposed order by including reference to the second respondent. He submits that in relation to the conduct of the hearing I should take note of a letter written by the second respondent dated 27 February 2001 which appears to concede the applicant’s position and to that extent appears to also concede that the applicant would “be entitled to relief sought”. It was further submitted by Mr Sullivan as I understand it in reply that the second respondent took an active part in the proceedings and swore an affidavit and to that extent should therefore, having regard to those matters, be liable for costs.
Mr Martin who appears for the respondents, when invited to consider the form of the orders, sought to challenge the suggestion and the submission that orders should be made for costs against the second respondent. He submitted that the reasons I have delivered relating particularly to the issue of the quorum are reasons which are founded on a technical deficiency and that any fault that arises from that technical deficiency is a fault which should not necessarily be visited upon the second respondent. He otherwise, as I understand it, submits that in all the circumstances of this application it would not be appropriate in the exercise of my discretion to order the second respondent to pay costs.
Having considered those submissions it is my view that the court in an application of this kind clearly does have a discretion. Although my initial proposed order did not include an order in relation to costs against the second respondent, it is perfectly appropriate that that issue should be agitated and raised when I announced my intention to make the orders. Having considered the submissions that have been made, and further considering the reasons for my decision, it seems to me that in the exercise of my discretion it is appropriate to vary the proposed order to include the second respondent. I do so on the basis that although it may be said that there was a technical issue concerning quorum, I have in my reasons indicated that I do not regard that as a mere technicality.
I am also conscious of the fact that there was certainly evidence given and arguments advanced actively by the second respondent which took up time during the hearing including that the role of the second respondent was that of creditor rather than controlling trustee. That issue occupied a large degree of time during the hearing and certainly occupied the attention of the court in the delivery of its reasons. I am further satisfied that it is relevant to take into account as I have been referred to the letter dated 27 February 2001 where at least at that stage there was some degree of acknowledgment of the appropriateness of the arguments that were being advanced then for and on behalf of the applicant. For those reasons it is my view that it is appropriate to accede to the submission made by Mr Sullivan. Accordingly the orders I make are those which are indicated in the foregoing reasons for judgment save and except that I vary order 4 by inserting after the words “the first respondent” the words “and second respondent” so the order reads:
(4)The first respondent and second respondent pay the applicant’s costs of and incidental to the application to be taxed in default of agreement under Rule 62 of the Federal Court Rules and in accordance with the Bankruptcy Act.
I certify that the preceding fifty-five (55) paragraphs are a true copy of the reasons for judgment of McInnis FM
Associate:
Date: 5 December 2001
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