Re Brennan, J.B. Ex parte Stokes (Australasia) Ltd v Brennan, J.B. & anor

[1988] FCA 833

CATCHWORDS

BANKRUPTCY - composltion - appllcatlon to set aside -

llttle benefit to credltors - ma~orlty of credltors havlng some relation to the debtor - composltlon not implemented - prima facie rlght to sequestratlon order

- terms of compositlon unreasonable - not calculated

to beneflt credltors generally - appllcation granted.

Bankruptcy Act, 1966, S. 239

re: JOHN BARRYMORE BRENNAN Debtor

ex parte: STOKES (AUSTRALASIA) LIMITED . Appllcant

and: JOHN BARRYMORE BRENNAN and

MAXWELL WILLIAM PRENTICE . Respondents

No. NSW 52 of 1988 X

Sydney.

Morling J.

31 May 1988

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION	No. NSW 52 of 1 9 8 8 X
BANKRUPTCY DISTRICT OF THE
STATE OF NEW SOUTH WALES AND	Part X
THE AUSTRALIAN CAPITAL TERRITORY

RE :  JOHN BARRYMORE BRENNAN

Debtor

EX PARTE: STOKES (AUSTRALASIA) LIMITED

Applicant

AND :  JOHN BARRYMORE BRENNAN and
I'IAXFIELL WILLIAM PRENTICE

Respondents

MORLING J. 31 May 1988

REASONS FOR JUDGMENT

This is an application made by a credltor under s .239

of the Bankruptcy Act 1966 f o r an order setting aside a

Compositlon made under Part X of the Act.

On 19 May 1 9 8 7 the appllcant recovered a final

judgment against John Barrymore Brennan ("the debtor") in the

Supreme Court of Vlctoria In the sum of $150,590. The

judgment remains unpaid.	On 16 September 1 9 8 7 the debtor was
served with a bankruptcy notice.	Thls notice was not complied

with and a creditor's petltlon was presented to thls Court on

2 December 1 9 8 7 .

Before the hearing o f the petltion the debtor signed an authority under s.188(1) of the Act authorizlng Mr Maxwell Willlam Prentlce, a reglstered trustee, to call a meetlng of his credltors. The meetlng was held on 25 February. There

were seven creditors present In person or by proxy at the

meetlng. Accordlng to the mlnutes of the meetlng, the

particulars of their debts were as follows:

Name of credltor	Amount
AGC Llmited	$ 4,911.00
Stokes (Australasia) Limlted	150,790.00
Primal Internatlonal Pty Limlted	183,000.00
Pump Torque Pty Llmited	1,540.00
S.H. Lock (Aust) Limlted	1,806,659.00
Chrlstle & Partners	1,968.50
Roberts Nissen	150.00
After some dlscusslon	at the meetlng a special

resolution was passed to accept a Composltlon under Part X of the Act. The most relevant terms of the Composltlon are as follows:

The Composltlon to be continued for a maximum

period of twelve (12) months or as extended
by credltors at	a general meetlng.

That the Trustee recelve from the debtor wlthln fourteen (14) days of the date of this

admlnistratlon (SIC) a lump sum contributlon

of Twenty thousand dollars ($20,000).

At the explratlon of twelve (12) months period or as extended by creditors in general meeting, payments made to creditors are to be

accepted as in full settlement of the claims of those credltors as at 25 February 1988."

The Chalrman of the meeting informed those present that the debtor's debts had arlsen out of guarantees whlch he had glven in respect of loans made to companies of whlch he had been a dlrector, and which had been placed In recelvershlp. These loans had been obtalned overseas and were unhedged agalnst currency fluctuations. As a result of the devaluatlon of the Australian dollar the borrowing companies had lost heavily and had apparently been unable to meet their

obligations to the lender.

A Statement of Affalrs was tabled at the meetlng. The

statement dlsclosed llabllities of $2,091,345. In addltion to the debts above referred to, the debtor dlsclosed a debt of

$2,000 to Amerlcan Express and $35,000 to Westpac Bank.

S.H. Lock (Aust) Llmlted ("Lock") was shown as a secured

creditor to the extent of $40,000. The debtor's only assets were shown as being household furnlture and effects to the value of $2,000, and $20 In cash.

It was explained to the meeting that the debtor's

father-in-law was prepared to pay $20,000 to the credltors In

complete satlsfaction of thelr debts. The payment was

expressed to be "more or less a token" and It was stated that "it represents the situation (sic) to allow M r Brennan to more or less go on with hls llfe and hls commerclal activltles in future without these debts hanglng over his head."

I was informed from the bar table that after payment of the trustee's remuneration out of the $20,000, each creditor would receive a dlvidend of about .8 of a cent in the dollar on hls debt.

The applicant was represented at the meetlng by Its

sollcitor. Although he asked some questions of the debtor he did not raise any speclflc oblectlon to the proposed Compositlon nor did he claim that the payment of $ 2 0 , 0 0 0 was inadequate or that the Compositlon was not for the benefit of credltors generally.

The debtor’s father-In-law has pald the sum of $ 2 0 , 0 0 0 to the trustee and it is belng held in trust for the beneflt of the creditors pendlng the outcome of this application.

Section 2 3 9 ( 2 ) of the Act provldes that If the Court considers that the terms of the Composltlon are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the Composltion ought to be set aslde, it may set it aside decide and make a sequestratlon order agalnst the estate of the debtor. At the meetlng, the appllcant and

AGC Limited voted agalnst the resolution, the votes of the

other flve creditors being cast In favour of It. However, i t is to be observed that there was a relatlonshlp of one kind or another between the debtor and these five creditors. The debtor was a director of Primal International, although that company was In recelvershlp. He was also a dlrector of Pump Torque. Christie 6 Partners were his solicitors, and Roberts

Nlssen his accountants.	His relatlonship with Lock does not
clearly appear from the evidence.	It appears that the debtor

is employed by a company known as Prlmex. It was stated at the meetlng that there was a relatlonship between Prlmex and Lock, but it is not clear exactly what that relatlonship 1s. However, there does appear to be some reason to belleve that the company for which the debtor now works is connected in some

way with Lock.

On 17 November 1987 the sollcitors f o r the debtor wrote a letter to the sollcitors for the applicant advising that if thelr client was declared bankrupt there would be no funds available for hls unsecured credltors and requestlng the applicant to conslder accepting a payment of $10,000 (to be provided by a member of the debtor's family) In full satisfactlon of the applicant's debt. It was-stated in thls letter that the debtor had reached an agreement wlth S.H. Lock whereby a small proportion of the amount owing to lt would be repaid over a period of seven years and that In conslderatlon of thls agreement Lock had refrained from taking bankruptcy proceedlngs against the debtor and hls wlfe.

In the llght of the facts to whlch I have referred, I have come to the conclusion that the terms of the Composltlon are unreasonable and are not calculated to beneflt the
creditors generally.	It seems to me that for a Composltlon to

be reasonable or to be calculated to benefit the credltors generally, the terms must be such as to offer the credltors some real advantage above that which they might obtaln if the debtor's estate 1s administered in bankruptcy. In the present case, the amount which will be avallable for distributlon between the credltors 1 s quite lnsubstantlalwhen compared wlth the total amount owlng to the creditors. It was correctly described at the meeting as being "more or less a token".

Counsel for the debtor submltted that since the debtor had no assets, the credltors would do better out of the Composltion than they would from the sequestration of his estate even though any dividend payable to creditors would be a token. I do not think thls will necessarlly be the case. It is conceivable that if the debtor is made bankrupt he may be required to make contrlbutlons to his estate. His weekly gross income is currently about $600. This may well not justify an order that he make payments to his estate, but he appears to have been in a substantlal way In business In past years, and there is always the posslbllity that his Income may increase. In this respect the maklng of the agreement wlth

Lock referred to in the letter of 17 November 1987 Indicates	an
expectatlon on the part of Lock and the	debtor that his future
income wlll permlt the payment of some amount (albeit small)	in
reduction of his debts.	Moreover, whlle there 1s no reason to
suppose that the debtor has not dlsclosed all his assets in his

Statement of Affairs, the credltors would be ~ustlfled in thinking that it was to thelr advantage that the extent of the debtor's assets should be more fully Investigated. In a case where a debtor has incurred debts of such huge proportions relatlve to his assets, there IS much to be said for the proposltion that it is in the publlc interest that there be a publlc examination of the bankrupt (and possibly other persons) under s.81 of the Bankruptcy Act.

It may be accepted that the Court should be cautious

in overturning a declsion	reached by creditors in approving a
Composition under Part X.	See re Segal; Lansworth Finance
Ltd v Segal (1975) 9 A.L.R. 154 at p.163 and	Re Van Twest;
-

- Ex parte Tubemakers Aust. Ltd. (1986) 69 A.L.R. 573 at p.575.

But in the present case, the fact that all the credltors who voted In favour of the resolutlon had some connectlon with the debtor is not without slgnlficance. In the case of the creditors other than Lock, conslderations of friendship may have influenced the way they voted. In the case of Lock, the apparently on-going employment relatlonship between It and the

debtor (albelt lndlrect) may have influenced its decislon, as

may have the prospect of the maklng of an agreement of the kind

referred to in the letter of 17 November 1987. I do not suggest that conslderatlons of these kinds, ~f they exlsted, were Improper. But they do reduce the welght which the Court should otherwise give to the fact that a malority of the creditors voted in favour of the resolution: cf Re Landmark Corporation Ltd and Companles Act (1968) 1 N.S.W.R. 759 and

Re Van Twest; ex parte Tubemakers Aust. Ltd. (supra) at p.575.

Counsel for the debtor also relled upon the clrcumstance that the appllcant's sollcltor dld not submit to the meetlng that the Composltion would not be In the interests of the creditors generally. I do not- thlnk he was obliged to do s o , and the fact that his client's vote was cast against he resolutlon was a sufficient indlcatlon of lts lack of approval
of the Composltion.	Cf. re Aka1 3 A.C.L.R. 353 at p.357.8.

It must be borne in mlnd that at the tlme of the meetlng the applicant had presented a petition seeking the sequestration of the debtor's estate. A petltionlng credltor who proves the matters upon which hls petition is based has,

prima facie, a legal rlght to an order: see Rozenbes	v
Kronhill (1956) 95	C.L.R. 407 at p.419 and re Llssek; ex parte
Ricki Reed (Sales) Pty Limlted (1967) 10 F.L.R.	487 at p.491.

It must also be borne In mind that bankruptcy proceedlngs involve the public interest as well as the interests of the debtor and his credltors.

In a case such as the present, the Court has a

discretion which it must exercise having regard to the interests of the debtor and the creditors, and the lnterests of

the public. Cf. re Dolman; ex parte Eldersmlth Goldsbrough Mort Llmited (1967) 10 F.L.R. 384 at p.391, (a case in which a petitioning creditor's petltion for a sequestration order founded on the execution of a deed of arrangement made under Part XI1 of the Bankruptcy Act 1924 was opposed by the debtor on the ground that it was for the advantage of creditors that

his estate should be administered under the deed).

The matters which lead me to conclude that the Composition In thls case should be set aside are:

(a) the small sum of money offered to the

creditors as compared wlth the overall amount

of the debtor's debts;

(b)	the fact that the Composltion has not been implemented and that no payments have as yet been made to the creditors (cf. Raschilla v Gulluni (1987) 14 F.C.R. 57 at p.70);
(C)	the relatlonshlp between the debtor and the
creditors who voted In favour of the

Compositlon;

(d)	the possiblllty that the credltors may do as well in bankruptcy as they will under the deed; and
( e )	the prima facie right of the applicant to a sequestratlon order, especlallyhavlng regard to the slze of the bankruptcy.

All these considerations lead me to the view that the application to set aslde the Composltlon should be granted and that, consequently, a sequestratlon order should be made. I will hear counsel as to the form of the orders which should be made,

I certify that thls and the eight ( 8 )

preceding pages are a true copy of the Reasons

for Judgment	Morling.
Associate:
Date:	31 May 1988

Counsel for debtor

and respondents:  M r R. Keller

instructed by:  Chrlstie & Partners

Counsel for appllcant:  Mr J. Chipplndall

Instructed by:  Holman Webb

Date of Hearing:
Date of Judgment: