Re Beames; Ex parte Beneficial Finance Corporation Ltd
[1985] FCA 235
•07 JUNE 1985
Re. DOUGLAS MacLEOD BEAMES; Ex Parte BENEFICIAL FINANCE CORPORATION LIMITED
(1985) 7 FCR 216
PART X 136, PART X 137 and PART X 138 of 1984
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND
Pincus J.(1)
CATCHWORDS
Bankruptcy - definition of "deed of assignment" for "benefit of creditors" - little or no assets assigned - declaring deed void - "interests of creditors" - major creditor not notified of meeting.
Moneylenders - Queensland Act - procuration fee - avoiding effect of illegality.
Mortgage - no express covenant to repay sum advanced - implying covenant to repay.
Contract - discretion to one party - effect in law - merger of contractual terms - economic duress.
Bankruptcy Act ss.188, 194, 198(3), 222, 231, 232
Money Lenders Act (Q) ss.14, 15(2)
Re Dempsey; ex parte Stapleton and Bedwell (1954) St. R. Qd. 351
Re Williamson; ex parte Wearne (1980) 43 F.L.R. 305
Svanosio v. McNamara 96 C.L.R. 186
Havenbar Pty Ltd v. Butterfield (1974) 133 C.L.R. 149
Jackson v. Swift Australian Coy (1968) Qd. R. 1
Stocks & Holdings (Constructors) Pty Ltd v. Arrowsmith 112 C.L.R. 646
Hopkins v. Worcester and Birmingham Canal Proprietors L.R. 6 Eq. 437
Re Kleiss; ex parte McDonough (1968) 15 F.L.R. 281
Bankruptcy - Arrangements without sequestration - Deed of assignment - Assignment for benefit of creditors - No assets available for unsecured creditors - Substantial creditor seeking declaration that deed void - Bankruptcy Act 1966 (Cth), s 187(1).
Bankruptcy - Arrangements without sequestration - Deed of assignment - Declaration that deed void - Non-compliance with statutory requirements - Notice of initial meeting not given to substantial creditor - Bankruptcy Act 1966 (Cth), ss 194(2), 222(1).
Bankruptcy - Arrangements without sequestration - Deed of assignment - Setting aside deed - Proof that setting aside in interests of creditors - No evidence that creditors likely to obtain monetary advantage - Bankruptcy Act 1966 (Cth), ss 222(4), 222(5).
HEADNOTE
The applicant sought to set aside three deeds of assignment entered into under the Bankruptcy Act Pt X. The debtors had failed to disclose the existence of a debt to the applicant which exceeded half a million dollars and the applicant was not notified of the creditors meeting. Under the deed the unsecured creditors did not receive any benefit. The debtors disputed the existence of the debt to the applicant and as a preliminary issue the court found that there was a liability to the applicant as alleged. The court then considered whether the deed ought to be set aside.
Held: (1) Although there had been a breach of the Money Lenders Act (Qld), s 14, that breach did not avoid the transaction out of which the debt was said to arise: Re Dempsey; Ex parte Stapleton and Bedwell (1954) St R Qd 351 (High Court) applied.
(2) To be a deed of assignment within the Bankruptcy Act 1966, s 187(1) it is not necessary that any benefit in fact be derived from the assignment as long as some is within the contemplation of the assignors.
(3) Where a debtor fails to notify the existence of a creditor failure to serve that creditor with notice of the creditors' meeting cannot amount to failure to comply with s 194(2) as that section is confined to "each person who is stated by the debtor to be a creditor" so that the applicant's case is not within s 222(1) and the discretion vested by s 222(2).
Re Kleiss; Ex parte McDonough (No 1) (1968) 15 FLR 281, distinguished.
(4) The applicant's case fell for consideration within s 222(4) as inhibited by the provisions of s 222(5). To comply with s 222(5) it is not necessary that the facts show that the creditors will or might get any large benefit from the setting aside of the deed; at the least however it must appear that in some respect the creditors may be better off if the deed is voided and the applicant had not discharged that onus.
HEARING
Brisbane, 1985, May 23-24; June 7. #DATE 7:6:1985
APPLICATIONS
Three applications by a creditor that deeds of assignment entered into under the Bankruptcy Act 1966 Pt X be declared void.
W T McMillan, for the applicant.
D M Beames (Solicitor) for the respondents.
Cur adv vult
Solicitors for the applicant: Watkins Stokes.
BAG
ORDER
The applications be dismissed.
NOTE: Settlement and entry of orders is dealt with in Order 36
of the Federal Court Rules.
Orders accordingly
JUDGE1
These are three applications by Beneficial Finance Corporation Ltd, which I shall call "Beneficial". Each is for a declaration that a deed of assignment dated 20 December 1984 be declared void on the ground, chiefly, that a material particular was omitted from the statement of affairs and for a sequestration order. The grounds are elaborated on in an affidavit by William Peter Bennett filed in each matter but it is necessary to mention only one additional ground specified in that affidavit, namely that the deed "is without substance and a sham as no property has in fact passed the debtor's trustee".
As to that additional ground, in the course of discussion with Mr McMillan for Beneficial, it emerged that the grounds relied on consisted solely in matters mentioned in s.222(4), in that material particulars were omitted from the statements of affairs. It was not urged, as I understood counsel's position, that the matter fell within s.222(2). This aspect of the matter is dealt with in more detail below. Sections 222(1), (2) and (4) read as follows:-
"(1) Where there is a doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204 the Registrar, the trustee, a creditor or the debtor may apply to the Court for an order under sub-section (2).
(2) Upon the hearing of an application made under sub-section (1), the Court may, subject to this section, make an order -
(a) declaring that the deed or composition is void, or that it is not void, on the ground specified in the application; or
(b) declaring that a provision of the deed is void, or is not void, on the ground specified in the application.
(4) Where the Court, on the application of 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 his conduct, trade dealings, property or 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 his affairs under section 195 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."
For simplicity, I shall call the respondent assignors simply respondents, although in fact there is another respondent in each matter, Mr Ivor Worrell, the trustee.
Each respondent executed an authority under s.188 of the Bankruptcy Act 1966 authorising Mr Worrell to call a meeting of creditors for the purpose of Part X and to take control of the respondent's property. Meetings were held accordingly on 20 December 1984, at each of which it was resolved that the respondent to whose affairs the meeting related be required to execute a deed of assignment in accordance with Part X. Each did so, on the same day. It was also resolved that the trustee of each deed be Mr Worrell, who had been the controlling trustee. Further, at each meeting the controlling trustee's remuneration was fixed at $500 plus outlays in respect of each respondent.
The principal complaint made by Beneficial was that it was given no notice of the meeting of creditors, although, it was said, each respondent was indebted to it in a sum in excess of half a million dollars. The respondents admitted that no notice had been given but said there was no indebtedness.
Beneficial claimed that each respondent has been at all material times indebted to it as a "covenantor" under a bill of mortgage of land given by a company called Essenport Pty Ltd on 1 December 1983. In action No. 994 of 1985, pending in the Supreme Court of Queensland, the question whether Essenport (the mortgagor) is indebted to Beneficial is in issue. The pleadings in that action are before me and set out grounds upon which Essenport denies the existence of the alleged debt.
The hearing of these cases took two days. On the first day, Mr Morrisey of counsel appeared for the respondents but on the morning of the second day withdrew, for reasons which seem to me proper. After that Mr Beames, one of the respondents, appeared in the matter, on his own behalf and (in effect) for the other respondents as well. Mr Beames is a solicitor. However, he did not argue all the questions raised by the pleadings in the Supreme Court action and in particular did not argue a question concerning the effect of the Money Lenders Act which, during the time Mr Morrisey had the conduct of the matter, was plainly to be raised.
In some circumstances it might seem appropriate that this Court adjourn the proceedings to await the determination of the Supreme Court action, in which a major issue relevant to the outcome of these proceedings arises. It seems clear, however, for a number of reasons, that I should not take that course. The principal reason is that the parties are not the same; the Supreme Court proceedings raise issues between Essenport, the mortgagor, and Beneficial; none of these respondents are joined. Although, at least as to the existence of indebtedness, the questions raised must be the same here as in the Supreme Court, I do not see that I have any option but to accede to Mr Morrisey's invitation to consider, and determine as between the parties joined here, the defences he has raised in the Supreme Court to the claim by Beneficial.
CONSTRUCTION OF MORTGAGE
It was argued that, in the events which have happened, the mortgage on its proper construction places no liability on the respondents, although they are parties to it. The contention was, in brief, that on the proper construction of the mortgage no liability arises, so far as these respondents are concerned, unless and until the principal sum mentioned in it ($1,390,000) is advanced to the mortgagor, an event which has not occurred.
The consideration clause of the bill of mortgage is as follows:-
"Essenport Pty Ltd (hereinafter called 'the mortgagor') ... IN CONSIDERATION OF the sum of $1,390,000 (ONE MILLION, THREE HUNDRED AND NINETY THOUSAND DOLLARS) (hereinafter called 'the Principal Sum') agreed to be lent to the Mortgagor by Beneficial Finance Corporation Ltd ... the receipt thereof is hereby acknowledged DOTH HEREBY COVENANT AND AGREE with Beneficial, as follows: AND the Principal Sum having been lent and advanced at the request of the party or parties set out in Item 1 of the Schedule hereto (hereinafter called 'the Covenantor') the Covenantor as a separate covenant DOTH HEREBY COVENANT AND AGREE with Beneficial as follows:'
There is a contradiction in these expressions. The consideration provision commences by saying that the sum of $1,390,000 is agreed to be lent but then acknowledges receipt of the sum. Were there nothing else in the mortgage, there might be some doubt as to whether the true intention was that the sum was agreed to be lent or actually lent. However, the typed Schedule makes it clear that the former is the true interpretation. It says in Clause 8(a):-
"After an initial advance of $448,000 (four hundred and forty-eight thousand dollars) the principal sum shall be advanced by the mortgagee and accepted by the mortgagor by way of progress payments in such amounts and at such time as may be determined by the mortgagee in the manner hereinafter provided ..."
It is clear, in view of the Schedule, that the parties did not agree that the $1.39 million would be advanced all in one sum.
However, that conclusion is not necessarily fatal to the respondents' argument. The question remains whether the covenantors are obliged to make payment, on demand as Beneficial would have it, before the whole sum said to be agreed to be lent has been advanced.
Under article 2.01 the mortgagor agrees to pay the principal sum together with interest at the times and in the manner set forth in item 3(a) of the Schedule. The importance of that, so far as the respondents are concerned, is that article 12 makes any person joined as a Covenantor jointly and severally liable as principal debtor for the principal sum and interest and "all other monies hereby secured". That is, as I understand article 12, each covenantor has the same liability as has the mortgagor. The respondents and others are named in the Schedule as covenantors.
Clause 3(a) of the Schedule, to which article 2 refers one to ascertain the times at which the principal sum ($1,390,000) is to be repaid, makes that sum repayable upon demand. However, the next sub-clause says among other things that the principal has to be paid "no later than 18 months from the date upon which the first advance is made hereunder". These two provisions are capable of being reconciled, on the basis that the intention was that the principal should be paid on demand, but if no demand was made, in any event within 18 months.
The strength of the argument for the respondents lies in the fact that nowhere in the mortgage is it stated that the mortgagor, or the covenantors, agree to pay any lesser sum than the principal sum ($1.39 million) on demand. Article 12, as already mentioned, makes the covenantors liable in respect of "all other monies hereby secured" but the expression "monies hereby secured" is defined in such a way as to achieve the result that "other monies hereby secured" does not include, as I understand the matter, sums included within the $1.39 million principal sum.
Clause 8 of the Schedule begins by saying that:-
"(a) After an initial advance of FOUR HUNDRED AND EIGHTY THOUSAND DOLLARS ($480,000) the principal sum shall be advanced by the Mortgagee and accepted by the Mortgagor by way of progress payments in such amounts and at such time as may be determined by the Mortgagee in the manner hereinafter provided.".
That does not, in itself, throw any doubt upon the proposition in the consideration clause, namely that the mortgagee has agreed to advance $1.39 million. However, Clause 8(c), in my opinion, has the effect that in truth the mortgagee is not obliged to advance anything beyond the initial sum. It is convenient to quote certain parts of Clause 8:-
(b) (i) Beneficial has agreed to lend and advance the principal sum to the Mortgagor for the sole purpose of enabling the Mortgagor to construct and complete as expeditiously as possible ... the erection of a building containing six (6) building unit lots ...
(c) Beneficial may in its absolute discretion make advances on account of the principal sum pursuant to Clause (a) hereof within seven (7) days of receipt of a written request from the mortgagor for such advance accompanied by such certificates, reports and valuations from such architects, engineers and other persons as Beneficial may require from time to time certifying in addition to any other matter which may be required by Beneficial from time to time as to the monies then due for payment to any contractor sub-contractor or other persons in relation to the works and that all monies mentioned in any previous certificate report or valuation as then being due for payment have actually been paid to the said contractors, sub-contractors or other persons entitled to receive payment thereof PROVIDED THAT:
...
(ii) Nothing hereinbefore contained shall make it obligatory upon Beneficial to make any advance on account of the principal sum hereunder unless Beneficial in its absolute discretion shall think fit having regard inter alia to the value of the land hereby mortgaged the value of the works erected thereon the progress of the works the value of the works remaining uncompleted and the amount of monies contributed to the cost of the works by the mortgagor from time to time ...".
I have had some difficulty in determining the legal effect of Clause 8(c)(ii). On the whole, I think its proper construction is that it places no enforceable obligation whatever upon the creditor. In some circumstances, contractual provisions apparently giving one party a complete discretion are read down so as to preserve a residue of obligation; an example is the case of Havenbar Pty Ltd v. Butterfield (1974) 133 CLR 149. Contrasting decisions are Jackson v. Swift Australian Coy (Pty) Ltd (1968) Qd R 1 and Stocks & Holdings (Constructors) Pty Limited v. Arrowsmith (1964) 112 CLR 646. It appears to me to be arguable, despite the reference to "absolute discretion" in the beginning of Clause 8(c) and the statement in Clause 8(c)(ii) to similar effect, that reading the Clause as a whole Beneficial has an obligation to advance monies unless, for example, it is bona fide of the opinion that it should not do so having regard to the matters set out in the Clause. But that is not what the Clause says and I see no reason why I should strain to make implications in it in favour of either party. Although Clause 8(c)(ii) sets out, apparently exhaustively, the matters to which Beneficial is to have regard in exercising its discretion, that discretion is nevertheless stated to be absolute, and the effect of the Clause, read as a whole, is that the creditor has no obligation whatever to advance any sum beyond the $448,000 mentioned. The extent of the conflict between the provisions in the Schedule and those in the consideration clause is thus made clear: not only was the principal sum receipt of which is acknowledged never advanced, but it was never agreed to be advanced, in my view.
In the end, the effect of the mortgage so far as relevant may be summarised as follows:-
1. The mortgagee advances $448,000 and may, but is not obliged to, advance up to $1,390,000.
2. The mortgagor, and therefore the covenantors, expressly promise to pay the principal sum, which is defined to be the $1,390,000 maximum advance, on demand.
The question, simply stated, then is whether, and if so in what circumstances, the mortgagee can recover any lesser sum than $1.39 million. In my view, it must be implicit in the document that if the mortgagee, being entitled so to do, advances only sums amounting to less than $1.39 million, it is entitled to recover those sums. That is so, although there is no express promise to pay, on demand or otherwise, such sum less than but forming part of the $1.39 million.
The reason for my conclusion is that it seems to be quite improbable that the parties intended that the mortgagee should never be able to get its money back, unless it advanced the whole $1.39 million. It would require very clear langugage to achieve that result: Hopkins v. Worcester and Birmingham Canal Proprietors (1868) LR 6 Eq 437.
It does not seem to me necessary, for the purposes of the matters before me, to determine whether monies I have held due by the covenantors (including the respondents) to Beneficial are due on demand, or only on reasonable notice being given. That is so because on either view Beneficial is and at all material times was a creditor of the respondents and s.198(3) of the Bankruptcy Act 1966 says:-
"For the purpose of an enabling a creditor to vote, a debt that is certain but is payable in the future shall be deemed to be payable at the time of the meeting.".
That is, as long as there is a debt, not being a contingent debt, it does not matter for the purposes of a creditors' meeting of the relevant kind whether the debt is immediately payable, or not.
Mr Beames gave me to understand, and I accept, that he had legal advice on the construction of the mortgage. However, whatever the precise content of that advice, he obviously should have explained the position to the trustee, Mr Worrell and Mr Worrell would, no doubt, then have advised Beneficial of what was proposed so that it could protect its interests. Although it must be conceded that the terms of the bill of mortgage are difficult to comprehend and the document appears to contain contradictions within itself, I can see no reasonable justification for the respondents having proceeded on the assumption that the document placed no liability upon them. The legal effect of their having taken that course is, however, another matter.
MONEY LENDERS ACT
In the Supreme Court proceedings, a question is raised with respect to the operation of the provisions of s.14 of the Queensland Money Lenders Act. Although the point was but briefly mentioned by Mr Morrisey on the first day, and was not pursued by Mr Beames on the second, it is evident enough that the suggestion is that the whole transaction was unlawful because of s.14 of the Money Lenders Act, as is pleaded in the Supreme Court action. I do not think I am justified in treating the point as having been abandoned because Mr Beames addressed no submissions to it.
The Reply and Answer and Counter-claim of Essenport Pty Ltd in the Supreme Court action set up that Essenport paid Beneficial $5,000 on or about 2 December 1983 and it is clear that that occurred. It appears that the $5,000 payment was not treated in an orthodox way in the accounts of Beneficial. Mr Beames gave evidence, and in the absence of any contradicting evidence I accept, that Mr Ahrens of Beneficial told him prior to settlement on 2 December 1983 that if the $5,000 was not paid then, the matter would not be settled. No employee of Beneficial who had any knowledge of the circumstances surrounding the $5,000 payment was called. The letter dated 28 November 1983 from Beneficial to Essenport setting out approval of the loan application mentioned the $5,000 as being a condition of the approval, in these words:-
"5. Subject to an Option fee of $5,000 being payable to Beneficial Finance Corporation Ltd at settlement; such fee is non-refundable and is to cover to extend the loan at the end of the term subject to continued compliance with Beneficial's lending policies."
The expression "the end of the term" is a reference to the period of 18 months referred to elsewhere in the letter. No certain meaning can be attached to the reference to extension of the loan. No period of extension is mentioned and it is clear that the clause I have quoted is not such as to give any enforceable right to Essenport on payment of the $5,000.
In the bill of mortgage, the principal is made payable on demand. I have referred above to the difficulty of determining, as a matter of construction, when the amount actually advanced (being less than the principal) was repayable. Whatever be the proper solution to that problem, it is clear that the mortgage did not give credit in respect of any sum for a period of 18 months. Nor does the mortgage give any right falling within the description in the letter referred to above.
The $5,000 was not paid for any "option", for there was
none. Mr Beames says, and I accept, that he had to pay the $5,000 to get the loan. I agree with the contention made on his behalf that the $5,000 did not give him any rights. Nevertheless, it was plainly connected with the making of the loan.
Section 14(1) of the Queensland Money Lenders Act 1916, so far as relevant, reads as follows:-
"Except as hereinafter in this section provided, it shall not be lawful for any person to charge, recover or receive directly or indirectly, or as a partner with any other person, any monies -
(i) for or in respect of the making, procuring, negotiating or obtaining of any loan, or of any proposal, application or offer to make, procure, negotiate or obtain any loan, or for or in respect of the collection of repayments of any loan."
One problem in determining the effect of s.14 is that it does not mesh well with the definition of "interest" under s.3. It is evident from the Statute that the charging of interest is permissible, subject to restrictions such as those in s.12. The definition of "interest", which I do not here set out, is clearly wide enough to include sums also falling within s.14. Since s.14 does not say that sums paid by way of interest are excepted from its provisions, there is an obvious gap in the Statute; it is left uncertain to what extent it is lawful to charge monies which constitute "interest" within the definition but are nevertheless within the description in s.14. For example, if the lender requires that some interest be paid in advance, at the outset, is that a breach of s.14? It would be surprising if the answers to these questions depended merely upon the name given by the parties to the payment. I do not know any satisfying solution to this problem, either generally or of such a kind as to cover the present circumstances. I merely hold that in my opinion the Statute read as a whole must surely intend to catch a payment of the sort here in question; if it does not, s.14 must have very little application indeed.
In arriving at my conclusion that there has been a breach of s.14, I am reinforced by the absence of any explanation of the payment coming from Beneficial. I note that among the consequences of breach of the section are that an offence is committed, but for the purpose of this litigation the standard is not proof beyond reasonable doubt. It does not appear that there is any difficulty, in truth, as to the facts and the question as to the application of s.14 is one of construction. On that, as I have said, my view is against Beneficial and in favour of the respondents.
The civil consequences of the breach are prescribed by s.14(2):-
"Every contract made or entered into or transaction entered into or performed in breach of or with intent to evade or avoid this section shall be absolutely void:
Moreover, any money or monies worth directly or indirectly paid or allowed to or received by any person in contravention of this section may, notwithstanding any contract or agreement to the contrary, be recovered by the borrower from such person."
It follows from this provision that Essenport is entitled to recover the money paid. The question raised as to the first sentence is whether it has the effect of completely destroying the lender's rights as against the borrower, in the circumstances of this case. The contention put forward in the Supreme Court action appears, as I understand the matter, to be that condition 5 of the letter was a condition precedent and its invalidity infected the whole transaction.
The effect of s.14(2) was considered by the High Court in a bankruptcy case, Re Dempsey; ex parte Stapleton and Bedwell (1954) St R Qd 351. The facts of that case were that Dempsey (the bankrupt) had agreed to buy a business from Neild but was unable to pay the price. Dempsey entered into an oral agreement with Bedwell under which Bedwell was to pay Neild the price by way of advance to Dempsey. Bedwell was to become the purchaser in order that he might have the business, or at least most of it, as security. Dempsey agreed to pay Bedwell a sum being 250 pounds larger than the purchase price, together with interest.
The Official Receiver claimed the business, on the basis that Neild held it as trustee for Dempsey. It was held that the 250 pounds was a fee covered by s.14 of the Money Lenders Act and at first instance the conclusion was thought to follow that the Official Receiver took the property free of any interest of Neild. On appeal to the High Court that was reversed. The High Court agreed with the view that s.14(1) applied but held that s.14(2):-
"... does not mean to annihilate any more of a transaction comprising a charge, recovery or receipt obnoxious to the first para. of s.14 than affects or relates to the monies of the prohibited description. It does not avoid the whole transaction of which the charge in the nature of a procuration fee forms only in incident or part"
(pp.361-362).
Mr Morrisey told me that this decision is clearly distinguishable and I assume the basis of that submission was that the $5,000 payment was not merely an incident or part of the transaction but was, on the evidence, a condition of the whole matter - indeed, a condition precedent.
In the case of Re Dempsey, the High Court, in effect, assimilated s.14(2) to s.15(2) of the same Act, which expressly avoids contracts made and transactions entered into in breach of s.15(1) only "to the extent of such breach". The Court said at p.363 that the difference in expression between the two provisions "is due to the accidents or exigencies of drafting". That is, Re Dempsey is authority that s.14(2) should be read as if it made transactions entered into in breach of s.14(1) void only to the extent of the breach. In this case, in my view, that produces the result that the avoiding part of s.14(2) has no operation. That is so because what Essenport got by the payment of $5,000 was, on the evidence, the whole of the transaction. Since, applying Re Dempsey, the whole transaction cannot be avoided, the only thing which is left to be avoided is the payment of the $5,000. But avoidance of that has no significance; the money was in fact paid and under s.14(2) has to be paid back.
In Re Dempsey the effect of s.14(2) was held to be that instead of being obliged to pay Bedwell 2,550 pounds, in accordance with the contract, he was indebted only to the extent of 2,300 pounds plus interest; the 250 pounds which was identified as a procuration fee was irrecoverable. Where, as here, there is no outstanding obligation to invalidate, since the procuration fee has been paid, it may seem to pay scant respect to the actual words used by the legislature in s.14(2) to hold that, so far from the whole transaction being "absolutely void"; nothing whatever is avoided. But I am of the view, and hold, that the avoiding part of s.14(2) in these circumstances does not affect the transactions entered into between the parties.
OTHER DEFENCES
In the Supreme Court proceedings brought by Beneficial, other defences are raised by Essenport and I understood from Mr Morrisey before he withdrew that he wished to have them considered in these proceedings, also. I clearly should do so, since the covenantors under the mortgage can have no greater liability than that of the mortgagor, Essenport.
Essenport's pleading in the Supreme Court sets up that there was an agreement for a loan, preceding the execution of the mortgage, and that there were various breaches of that agreement. It is not necessary to set out in full my consideration of the breaches alleged, for I have come to the conclusion that, whether or not the allegations are factually correct, they cannot succeed in law.
It is not absolutely clear that there ever was any concluded agreement, preceding the execution of the mortgage. If there was, it was constituted by Essenport's acceptance of an offer made by Beneficial, in writing, dated 28 November 1983. Without setting out the reasons why it is unclear whether those documents constitute a binding agreement, I will proceed on the assumption that they do. The defence set up to the claim of Beneficial on the mortgage, then, is that by reason of breaches of the agreement so constituted, Essenport became entitled to, and did, rescind the agreement. The breaches alleged are all, in my view, able to be described as complaints about the content of the bill of mortgage. That is, the case set up in the Supreme Court, on this branch of the matter, is that Beneficial did not carry out the promise it made by the agreement preceding the mortgage, in that it insisted upon execution of a mortgage in terms divergent from those set out in the agreement. If that were so, it would not provide an answer to Beneficial's claim under the mortgage.
The general rule is that the conditions of a contract such as that entered into here, contemplating the execution of a dealing in land, merge in the dealing: Svanosio v. McNamara 96 CLR 186. For example, a complaint is made of the fact that the loan agreement required guarantees from a smaller number of persons than those who were in the end required to give them. It does not appear to me possible to hold that the guarantees are thereby avoided. Prima facie, the law looks to the mortgage document to ascertain the rights and obligations of the parties; the only important exception is that some terms of the contract may be collateral, or otherwise intended to survive the execution of the mortgage. None of the terms raised by the defendant in the Supreme Court even arguably fall in that category.
Another way of expressing this is to say that to the extent that the provisions of the mortgage conflict with those of the loan agreement, the mortgage terms must prevail as they were clearly intended to supersede the earlier provisions. If, on being proffered a form of mortgage which did not conform to the agreement, the mortgagor or other intended parties were unwilling to accept its terms, they had no obligation to execute it. They might, in addition to refusing to execute it, have brought an action for damages.
What they clearly cannot do is execute the mortgage and then say that they are not bound by it because they should not have been required to execute it. In Pao On v. Lau Yiu Long (1980) AC 614 the Privy Council had to consider an allegation that a party had secured a change in a previously arranged transaction, by threatening a breach of contract. The judgment appears to recognise that in circumstances having some similarity to those of which the respondents complain, relief may be granted on the ground of "economic duress". However, no allegations which would give rise to a necessity to consider the scope of that doctrine are pleaded in the Supreme Court proceedings and the facts placed before me do no more than suggest the possibility of such a defence. In the circumstances, there is no necessity to consider that question further.
THE MEANING OF "DEED OF ASSIGNMENT"
The expression "deed of assignment" has a definition in s.187(1) reading as follows:-
"'Deed of assignment' means a deed by which a debtor assigns all his divisible property for the benefit of his creditors.".
As mentioned above, a ground formally taken, but not fully argued, was whether each deed was merely a sham, which was said to be equivalent to saying it had no substance. Although the point was not pressed, it necessarily arises, particularly in respect of Mrs Beames. It appears to me to be a question whether a deed which assigns nothing which may conceivably benefit the unsecured creditors is within the statutory definition i.e. is "for the benefit of ... creditors". Consideration of this point involves reference to the statements of affairs which were tabled at the meetings.
That relating to Mr Beames disclosed certain assets subject to securities and the statement asserted that there was a small estimated deficiency in respect of securities. The only asset disclosed by Mr Beames not subject to security was a sum of $300 cash described as deposited with the controlling trustee. As to Mrs Beames, the only assets disclosed consisted in a sum of $300 said to be deposited with the contributing trustee. Each of Mr and Mrs Beames' statement of affairs showed substantial indebtedness.
The statement of affairs of Mr Snashall differed significantly, in that in addition to the amount deposited with the contributing trustee ($400 in his case) the statement disclosed some thousands of dollars worth of unencumbered chattels, plus a one-fifth share in unencumbered real property in New South Wales, which property Mr Snashall said in evidence was worth about $50,000.
In summary, then, the statements of affairs of the respondents Mr and Mrs Beames had in common that each showed no assets whatever available for the unsecured creditors, with the possible exception of the sum of $300 deposited with the controlling trustee.
According to the evidence, the controlling trustee Mr Worrell required $1,500 from the respondents to perform his functions and $1,000 of that was raised by the sale of a caravan belonging to Mr Snashall. Apparently, the $500 necessary to make his fee up to $1,500 was never paid. The sums of $300 each (in respect of Mr and Mrs Beames) and $400 (in respect of Mr Snashall) said to have been deposited with the controlling trustee, thus, really consisted of the $1,000 supplied by Mr Snashall. Although Mr Beames swore that the $300 deposited in respect of his affairs was his own money, it seems evident that it was part of the $1,000 supplied by Mr Snashall for the purpose of paying part of Mr Worrell's fee and never became Mr Beames' money. Mr Worrell pointed out that his entitlement to a controlling trustee's fee was dependent upon the vote at the creditors' meeting, but the substance of the matter was that the $1,000 was raised to pay the fee and simply paid to Mr Worrell on behalf of Mr Snashall.
I am satisfied that it was never intended that any part of the $1,000 paid by Mr Snashall should go to benefit the creditors and that no part of it became the property of Mr or Mrs Beames.
Of the two respondents Mr and Mrs Beames, the simpler case is that of the latter; her statement of affairs disclosed unsecured creditors of $612,376, the only asset disclosed being the $300 just dealt with. In the view I take, the $300 does not affect the matter.
Mrs Beames gave no evidence concerning her tax position but Mr Worrell, in his evidence, said rather vaguely that a sum thought to be $600 was to come from the Commissioner of Taxation by way of refund in respect of Mrs Beames. Despite the uncertainty as to the facts relating to that sum, Mr Worrell's evidence about it makes it unnecessary to pursue the point concerning the validity of Mrs Beames' deed further, on the view I have of the definition of "deed of assignment". While a purported assignment of no property is not only a nullity under the general law but also cannot arguably be one "for the benefit of creditors" I do not think any great benefit must be in contemplation to comply with the Statute. Admittedly, particularly in the light of the size of Mrs Beames' indebtedness, the slightly nebulous $600 does not appear to proffer any significant benefit. One might also argue for application of the maxim de minimis non curat lex. But the onus of showing that the deed, in statutory form, is not in truth such a deed as mentioned in the Statute is on Beneficial and I hold that it is has not been discharged.
For the sake of completeness, it is necessary to mention that there was discussion in the evidence about an interest in a family trust held by Mrs Beames. The relevant document was tendered and became Exhibit 7. It appears that Mrs Beames is only a discretionary beneficiary. Although for some purposes that interest cannot be ignored, an assignee of it obtained no right to get money; it is a mere expectancy. It is, therefore, the $600 said to be due from the Commissioner of Taxation, and that only, which in my view "saves" Mrs Beames' deed from total voidness, not on the ground of breach of some provision of the Statute, but on the ground of not being a deed of assignment, as defined by the Statute at all.
As for Mr Beames' deed, the problem is rather different. Some aspects of the evidence concerning his property are dealt with below. For the purposes of consideration of whether his deed conforms to the statutory definition, it is enough to note that, in addition to the property disclosed in the statement of affairs, he had at the date of the deed, other interests, including shareholdings, which were unencumbered. Those interests may well turn out to have no value, but it is not proved that they have none.
It is not necessary, in order that the deed may conform to the definition, that it be shown that the creditors benefit in the sense that they become better off than they would have been if the deed were not executed and the debtor simply went bankrupt. That sort of comparison does not appear to me to be involved in the notion of benefit. Nor, in my view, is it necessary that, in the end, the creditors obtain anything at all from the assignment. Suppose a debtor executed an assignment, believing himself to have a substantial interest in leasehold property, if the lessor forfeited the lease immediately on the occurrence of the assignment, so that the creditors in fact got nothing, it would seem to me still possible to describe the deed as one "for the benefit of creditors". That is, it is not necessary that any benefit in fact be derived from the assignment, as long as some is within the contemplation of the assignor.
The statement of affairs estimated the value of Mr Beames' property subject to security to be $85,000. That was said to be insufficient to discharge the sums owing to the secured creditors. It can hardly be said, then, that the deed was intended to benefit the secured creditors. As for the unsecured creditors, whose debts were said to amount to $622,061, it is certainly difficult to say that there was any benefit in contemplation. Indeed, as will appear, in one respect Mr Beames did his best to make sure that the creditors would get nothing. Nevertheless, and not without doubt, I have come to the view that it is not established that there was no such property as might have been thought to provide some benefit to the creditors.
No similar problem arises with respect to Mr Snashall, whose statement of affairs showed significant unencumbered assets. In the result, then, I hold that all three deeds were "deeds of assignment" within the statutory definition.
EXERCISE OF DISCRETION UNDER S.222
It is important to keep in mind that, as mentioned above, the only ground put forward by counsel on behalf of Beneficial was that property had not been included in the statement of affairs, so that s.222(4)(b) applied. As, on the views taken above, there was a non-disclosure, in each case, of the debt each respondent owed to Beneficial, that ground is made out. Further, it is unnecessary to set out the details of the evidence, which was rather voluminous, concerning other alleged non-disclosures, none of them comparable in importance to the large sum due to Beneficial. Before stating my view as to the effect of the non-disclosure, under s.222(4) it is necessary to mention the question whether s.222(1) applies. That is so, not because Beneficial urged that s.222(1) applied, but because of the decision of Gibbs J. (as he then was) in Re Kleiss; ex parte McDonough (1968) 15 FLR 281.
In that case his Honour had to consider a debtor who had executed a deed of assignment and who had two separate businesses. The meeting of creditors which required the debtor to execute the deed was not attended by any of the creditors of one of the businesses, because they were given no notice. The case has therefore a similarity to the present one, although here only one creditor, and not a whole class of creditors, was omitted.
Gibbs J. clearly regarded the matter as falling within s.222(1). At pp.282-283 his Honour said:-
"When s.188 refers to a meeting of creditors, it means a meeting of all the creditors and not merely of one class of creditor. If a debtor carries on two business, the section does not mean that a meeting may be called of the creditors of one business only (see Re James (1932) 5 ABC 152). Section 194(2) requires notice of a meeting to be given to each person who is stated by the debtor to be a creditor. It does not follow from the provisions of this section that if a debtor fails to notify a solicitor of some of his creditors the Court will necessarily uphold a deed executed pursuant to the resolution at the meeting attended only by the other creditors. On the other hand, the inadvertent omission of some creditors will not necessarily result in the invalidation of the deed.
Under s.222 the Court may, on the application of the trustee, a creditor or the debtor, make an order declaring a deed of assignment to be void on the ground that it does not substantially comply with the provisions of Part X. It seems to me that such an order may be made when it appears that a number of creditors whose debts are of substance have not been given an opportunity to attend the meeting called under s.194.".
I take this decision to be authority that, where a whole class of creditors is not notified, whether or not because of default of the debtor, the matter may be considered under s.222(1) and, in the discretion of the Court, declared to be void under s.222(2). The importance of the decision is that the Court is not inhibited, as it is in cases falling within s.222(4) by s.222(5) which is as follows:-
"The Court shall not make an order declaring a deed or composition or a provision of a deed or composition to be void on a ground specified in sub-s.(4) unless it is satisfied that it would be in the interests of the creditors to do so.".
In my view, Re Kleiss does not govern this case. The reason is that s.194(2), which defines the persons to whom notice of meeting must be given, is confined to "each person who is stated by the debtor to be a creditor". That provision was complied with here, because, as I hold, the respondents never told Mr Worrell that Beneficial was a creditor of theirs. It was not a breach of s.194(2) which caused Gibbs J. to hold as he did in Re Kleiss, but the fact that there was simply not a meeting of the creditors, but only of a class of them.
It follows, in my view, that Beneficial can succeed, in respect of each of the respondents, only if it can establish, in the words of s.222(5) that it would "be in the interests of the creditors" to set the deed aside. There must be some positive proof; it is not enough to be able to say that it is not shown that setting aside would hurt the creditors.
The relevant expression was considered by Lockhart J. in
Re Williamson; ex parte Wearne (1980) 43 FLR 305. His Honour held, following Re Dolman; ex parte Elder Smith Goldsbrough Mort Ltd (1967) 10 FLR 384 that:-
"In exercising the power conferred by sub-s.4 the Court is to have regard to all relevant matters including the interests of the creditors of the debtors and of the public ...".
His Honour considered, in Re Williamson, the following circumstances as relevant to the exercise of the discretion:-
(i) The explanation as given by the debtors as to the circumstances in which they acquired assets after execution of the deeds was truthful.
(ii) Although there was a possibility that income might be made available under s.131 of the Act, the debtors did not appear to have any money remaining after paying the living expenses.
(iii) The trustees had completed the task of realising the assets and all that remained to be done, after determining a certain claim, was to distribute.
(iv) The debtors were foolish rather than dishonest in the way they handled their financial affairs.
(v) If the deeds were set aside, there would be extra costs incurred without any benefit to the creditors or the public.
This suggests that a broad view is to be taken of all the circumstances of the case. Some but not all of these considerations may arguably apply in the present case. I am particularly influenced by the following view of Lockhart J.:-
"I must take a practical view and not indulge in speculation as to theoretical possibilities of other assets emerging or other creditors possibly coming to light if the debtors are made bankrupt."
Each of the respondents must be considered separately, in exercising the discretion.
Mrs Beames presents a simple set of facts. On the evidence, she has almost nothing. There is no suggestion made that she was personally at fault in any way, either in respect of the non-disclosure of the money owing to Beneficial, or otherwise. Most importantly, I am quite unable to hold that there is the slightest reason to think that making her bankrupt would be in the interests of the creditors.
To comply with s.222(5) it is not necessary that the facts show that the creditors will or might get any large benefit from the setting aside of the deed; at the least, however, it must appear that in some respect the creditors may be better off if the deed is voided. The task of finding that to set the deed aside would be in the interests of the creditors is not made easier by the fact that so many provisions of the Act apply without differentiation to assignors under Part X and to bankrupts; see s.231. The most important practical difference, as it seems to me, between the effect of a deed of assignment and that of a sequestration order is that the former is much less inhibiting to the debtor. Whereas bankruptcy, under s.149, prima facie lasts for three years the trustee may at an early date give the assignor debtor a certificate under s.232 which, to put it broadly, signifies the end of the trusteeship. The evidence given by Mr Worrell, the trustee of the respondents, was to the effect that as to Mr Beames he was satisfied at the outset that there was nothing in the estate and he could well have got the certificate within a few weeks. The same would apparently apply to Mrs Beames.
As to the interests of creditors, it may further be noted that some creditors might prefer a trustee selected by them, rather than one chosen by the debtor. Whereas in some instances that might be sufficient reason to set the deed aside, here that ground was not advanced and no attack was made upon Mr Worrell's administration; in particular, it was not suggested that he was at fault in reaching the conclusion, as he apparently did, without extensive investigation, that there was nothing in the estate of Mr Beames or Mrs Beames.
As for Mr Snashall, much the same considerations apply, but there is one significant difference. Evidence was given from which it might be inferred that Mr Snashall was involved in an attempt to secure a company property cheaply, to the detriment of creditors.
It was proved that Essenport, on 16 June 1984, executed a lease in favour of Mr Snashall, a director and shareholder, in relation to property at Ryan's Road, St Lucia. It was said that the property had cost $500,000. By a document attached to the lease, in consideration of a sum of $10, Mr Snashall was given an option to buy the property for half the sum paid for it, lasting for three years and he was also given a right to obtain a three-year extension of the option on paying another $10. It would seem to me very possible that this was an attempt, albeit unlikely to be successful, to make the property unavailable to creditors if and when the secured creditor was paid off. I do not believe the explanation given by Mr Beames in relation to the transaction and do not accept that it was an honest one. If, as the judgment of Lockhart J. to which reference is made above would suggest, the commercial honesty or otherwise of the assignors matters, this must count in the scales against Mr Snashall. However, I must say that I did not get the impression that he gave his evidence other than honestly and carefully and I am not satisfied that he took any active part in misleading Mr Worrell or the creditors with respect to the debt due to Beneficial.
Nevertheless, he signed the statement of affairs although, in all probability, he was aware that he had, in effect, guaranteed the relevant debt. It appears to me unnecessary, however, to consider matters of that sort further. The reason is that I am, again, quite unable to see that there is any likelihood that setting aside the deed could help the creditors, at all.
The last, and most difficult matter is that of Mr Beames himself. He was the principal actor, if not in substance the only actor, in most of the relevant events.
I would with little hesitation, if I had an unfettered discretion, set Mr Beames' deed aside and make a sequestration order against him. The reasons are, put briefly, as follows:-
(i) Whether or not Mr Beames had legal advice that there was a good argument about the obligation to Beneficial, in my opinion he acted reprehensibly in concealing the fact that he, together with others, had executed a document promising to pay a very large sum to Beneficial. If only on the ground of simple honesty, that should have been disclosed.
(ii) The deed was never intended to provide anything for the unsecured creditors; its sole purpose was to relieve Mr Beames of the threat of bankruptcy and of his debts, so that he could pursue a new venture on which he was engaged at the time of the deed.
(iii) As to that new venture, involving a company called Brisbane River Quays Pty Ltd, he concealed his interest from the creditors and also, as I find, did not give a candid account of this matter in Court.
(iv) He was, at least, careless in disclosing his assets, in other respects of lesser importance.
(v) A major creditor was denied its right to attend and vote.
Putting the matter more generally, on the whole of the evidence it may seem quite inappropriate that Mr Beames should be accorded, at the price of assigning what he and his trustee regarded as nothing of substance, the privilege of speedily ridding himself of his entanglements, including the debt owing to Beneficial, which company was not allowed any say. That is particularly so when I have no confidence that the explanation Mr Beames gave orally to his creditors, whatever its precise content, gave them a fair picture of his financial position, on which they might make a judgment as to how to vote.
It is desirable to give some detail with respect to Brisbane River Quays Pty Ltd. That company, previously called Followhurst Pty Ltd, was mentioned by Mr Beames as one in which he had become interested since the deed. He said he had acquired his interest in February 1985 for $1. Subsequently, after reference was made to the penalties for perjury, he said that he obtained his interest in the company months before the deed was executed and thought it was "as early as May 1984". A further revelation which followed was that he transferred his share in the company to his counsel, Mr Morrisey, on 10 December 1984 shortly prior to the deed "because I knew that all my property was going to vest.". He apparently, according to his evidence, got an interest again in January. Regrettably, one could not be sure that even that version of events is right. Mr Morrisey gave no evidence. On the face of it, there is at least some reason to think that Mr Beames' giving up his interest before the assignment was merely a matter of form and (although he denied that there was any trusteeship) the intention always was that he would reacquire an interest after the deed.
I do not know if the share in Brisbane River Quays Pty Ltd is of any value at present, although it may be in the long run. However, I am of the view that it was unfair to the creditors that they were told nothing of these matters. I doubt if it is in the interests of the proper administration of the bankruptcy law to reward Mr Beames for his efforts by leaving him with the advantage he sought.
Yet, and with reluctance, I am forced to the conclusion that in his case also it would be contrary to s.222(5) to set the deed aside. So far from attaining any degree of satisfaction that it would be "in the interests of the creditors to do so" I am fairly confident that the creditors would gain nothing by my following that course. For example, the Brisbane River Quays project obviously could not be pursued by Mr Beames if he were made bankrupt. Unless one were to engage in the sort of speculation which Lockhart J. in the case of Re Williamson (above) rightly criticised, it would not be possible to entertain the thought that the unsecured creditors would get anything from discharge of the deed and consequent bankruptcy. As against that, the argument might be advanced that the proper course is to set the deed aside for the purpose of letting the creditors reconsider the matter. But the mere holding of another meeting, to discuss the matters disclosed in these proceedings, could not be in itself of advantage to the creditors; the interests spoken of in s.222(5) must be, directly or otherwise, the obtaining of money.
I should mention that I consider s.222(5) is too restrictive. It may permit to stand a deed which should in truth be declared void, because of the difficulty of establishing that the declaration would be in the interests of creditors. A declaration may make no difference whatever in that respect and yet be a proper course for other reasons.
In the result, the applications made by Beneficial are dismissed. There will be no order as to costs.
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