Re Brewer, R.J. Ex parte Eurodollar Pty Ltd v Donnelly, M.C

[1992] FCA 382

IN THE FEDERAL COURT OF AUSTRALIA )

GENERAL DIVISION	1
BANKRUPTCY DISTRICT OF THE	1 No NX 69 of 1991
STATE OF NEW SOUTH WALES	1

Re:  RICHARD JAMES BREWER
Debtor

Ex Parte:	EURODOLLAR PTY LTD
Applicant
MAX CHRISTOPHER D O N N E L L Y a s Controllina Trustee of RICHARD JAMES BREWER
Respondent

REASONS FOR JUDGMENT

EINFELD J SYDNEY 5 MAY 1992

On 6 June 1991 Eurodollar Pty Ltd lodged a proof of debt in the estate of Richard James Brewer (the debtor) in the sum of $1,053,704. The estate became constituted when the debtor executed an authority under section 188 of the Bankruptcy Act 1966 on 17 May 1991 appointing Max Christopher Donnelly as his controlling trustee (the trustee) for the purpose of presenting a Part X arrangement to creditors. The debtor stated in his statement of affairs that Eurodollar was an unsecured creditor in the amount of $988,817. The debtor is the principal shareholder and a director of Eurodollar and is

the only signatory to Eurodollar's bank account.

The first meeting of creditors called by the trustee on 6 June 1991 was adjourned to enable Eurodollar to substantiate its claim. After several other adjournments for the same purpose, the trustee on 12 September 1991 admitted only $189,055 of the debt. His principal reason for doing so was that on the evidence made available to him, only that sum was a true debt to Eurodollar by the debtor, the remainder being moneys paid by Eurodollar at the debtor's instigation which did not constitute any type of loan or other legally binding arrangement. As I understand the position, having regard to the balance of the indebtedness of the debtor, if Eurodollar is only permitted to participate at a meeting of creditors to the extent of the debt allowed by the trustee, the proposed Part X arrangement will not be accepted.

An application was filed on behalf of Eurodollar on 3 October 1991 seeking orders effectively reversing the trustee's decision and substituting the whole debt sought to be proved by Eurodollar. The application is said to be based upon section 104 of the Act. This section provides as follows:

( 1 ) A c r e d i t o r who i s d i s s a t i s f i e d w i t h a d e c i s i o n

o f the t r u s t e e u n d e r s u b - s e c t i o n 1 0 2 ( 1 ) , ( 3 ) or

( 4 ) i n r e s p e c t o f a p r o o f o f d e b t may a p p l y t o

the Court t o r e v i e w the d e c i s i o n .

( 2 ) The C o u r t may, upon the a p p l i c a t i o n , c o n f i r m ,

reverse or v a r y the d e c i s i o n o f the t r u s t e e .

( 3 ) S u b j e c t t o the power of the C o u r t t o e x t e n d the

t i m e ,	an	a p p l i c a t i o n	under	th is	section	t o
r e v i e w a	d e c i s i o n s h a l l	not	be	heard	by	the

C o u r t u n l e s s i t was made w i t h i n 21 d a y s from

the d a t e on which the d e c i s i o n was made.

Section 102 makes provision for the acceptance or rejection of proofs of debt lodged by creditors. These two sections are found in Part V1 of the Act which relates to the administration of the property of bankrupts. Hence section 104 is said to be applicable in the present circumstances by subsection (2) of section 237:

(2 ) . . . . . . . . . s e c t i o n s . . . . . . . . 82 t o 114

( i n c l u s i v e ) . . . app ly , w i t h t h e p re sc r ibed

m o d i f i c a t i o n s ( i f a n y ) , t o a deed o f

arrangement a s i f -

( a ) a s eques t ra t i on o r d e r had been made

aga ins t t h e d e b t o r on the d a y on which he

executed t h e deed; and

( b ) t h e t r u s t e e o f the deed were t h e t r u s t e e

i n h i s bankruptcy.

Whether, as seems to be the position, these sections only confer jurisdiction on the Court after the debtor has executed a deed of arrangement and not at this stage of proceedings, the paucity of evidence presented in this case provides good reason for the Court not to exercise its discretion to grant

only been given the opportunity of examining the summary	the relief sought at the present time. This is because I have
financial material made available by Eurodollar and the debtor to the trustee prior to his decision of 12 September 1991, not the primary evidence which establishes or denies the debt.
The power to consider and reject a proof of debt, given to a trustee by section 102 of the Act, was said in Re Van Laun: Ex Parte Pattullo [l9071 1 KB 155 at 162 to permit a trustee even
to go behind a judgment against the bankrupt. Chief Justice Barwick said in Wren v Mahonev [1971-21 126 CLR 212 at 223 that proofs of debt should be rejected where there is evidence of fraud, collusion, miscarriage of justice, unfairness or unreasonableness in a compromise, foolishness, absurdity or impropriety, or an inequality or inequity between relevant parties.
In the context of the similar powers of a company liquidator, Justices Brennan and Dawson, with the concurrence of Justice
Toohey, said in Tannina Research Laboratories Inc. V O'Brien
[l9901 169 CLR 332 at 339:

The principles which determine enforceability of the liability to which a proof of debt relates are, in the main, the same as the principles which would be applied in an action brought directly against the company to enforce that liability ... But this general rule is qualified.. . There are some liabilities which would be enforceable against the company but which a liquidator is not bound to admit to proof of debt lest the interests of creditors and contributors may be unjustly affected. A liquidator may properly reject a proof of debt if the

is not a true liability of the company but is	liability, though enforceable against the company,
founded merely on some act or omission on the part of the company which unjustly prejudices the interests of the creditors or contributories in the assets available for distribution.

In appropriate proceedings under section 104 of the Act to review the decision of a trustee, it seems that the function of the Court is not to consider the correctness of the decision in the light of the material before the trustee at the time but to determine the question on the material before

the Court as to whether there is a debt capable of proof:
Pavne: Ex Parte Levi (Toohey J unreported, 23 September 1986);
Re Rodaers: Ex Parte CMV Parts Distributors Ptv Ltd [l9891 20
FCR 561. In such circumstances the High Court in Tanninq

Laboratories said at 341:

. . .a l i q u i d a t o r who d e f e n d s his d e c i s i o n t o r e j e c t a

p r o o f of d e b t i s no l o n g e r a c t i n g i n a q u a s i -

j u d i c i a l c a p a c i t y ; he i s c a s t i n the role o f a n

a d v e r s a r y , d e f e n d i n g the a s s e t s a v a i l a b l e for

d i s t r i b u t i o n a g a i n s t a l i a b i l i t y which , a c c o r d i n g to

the	v i e w he	formed	when	a c t i n g q u a s i - j u d i c i a l l y ,	i s
not	l e g a l l y	e n f o r c e a b l e . . . The	i s s u e	i s	c o n t e s t e d

be tween the p u t a t i v e c r e d i t o r on the one hand and

the l i q u i d a t o r on the other; the l i q u i d a t o r i s a

p a r t y l i t i g a n t .

As I understand it, no burden of proof is cast upon the trustee. The Court is required to determine whether the evidence establishes that the putative creditor has a "debt capable of proof".

Section 30(l) (b) permits the Court to make such orders as it

thinks necessary "for the purposes of carrying out or giving	effect to this Act". This power presumably permits the Court
in proceedings such as this to sanction the intervention of, or to add as a party, any creditor who has an interest and might be able to assist in the resolution of issues before the Court.
When this case came on for hearing on 25 February 1992, evidence was given by the debtor partly in his individual capacity and partly in his capacity as a director of Eurodollar about the nature and substance of the claimed debt. Despite Tannina Laboratories, there was virtually no adversarial confrontation to this evidence from the trustee although a number of matters arose during the hearing which could with advantage, and should, have been investigated by way of cross-examination and by other means. The attitude was taken on behalf of the trustee, no doubt on instructions, that it was basically for Eurodollar to establish the basis upon which the debt sought to be proved in the estate was incurred. As a consequence, there was minimal cross-examination and the matter was said to be one for the Court. Adversarial litigation simply does not function in these circumstances. The issues for determination cannot be determined and the Court cannot carry out its function.
At the end of that hearing I felt distinctly uneasy about the nature of the application and the evidence before the Court, and indeed about the jurisdiction that I was being asked to exercise. It seemed to me then that the Court was simply unable to resolve the matter on the material before it with little assistance about the way in which this unusual
jurisdiction might be exercised. The concept that in bankruptcy an important matter of this kind should be resolved by some type of abstract onus of proof exercise was not appealing. The matter was therefore adjourned so that I could review the evidence and seek the assistance of such authority as existed in this area.
The review made clear to me that the Deputy Commissioner of Taxation had a major interest in this estate although he had not been officially present at the hearing. I therefore gave directions on 5 March 1992 that the transcript of the hearing be sent by the trustee to the Australian Taxation Office to see if it wished to enter the proceedings in any particular way. When the matter resumed on 12 March, counsel appeared to seek leave for the Deputy Commissioner to intervene in the proceedings. I gave provisional leave and set 19 March for a hearing in which the Deputy Commissioner could advance argument on his entitlement to participate in the proceedings and to cross-examine the debtor. I directed that the Deputy Commissioner file and serve one or more affidavits stating why he did not seek to participate in the proceedings at an earlier stage and outlining the matters which he wished to advance in cross-examination and argument. The parties were directed to file and serve outlines of their submissions.
On 19 March 1992, having regard to the submissions that had
been filed, it became clear that the Deputy Commissioner was raising a threshold argument that the Court did not have the
jurisdiction or power to make the orders sought by Eurodollar. The nature of the appropriate discretionary exercise was also raised. I therefore ordered further written submissions on these questions. Meanwhile the Deputy Commissioner had on 16 March filed his own application to review the decision of the trustee to admit any debt of Eurodollar at all. This application, which is in the nature of a cross-application to Eurodollar's application, was returned on 19 March and the written submissions were directed to include an explanation and justification of this application. As it seems to me, it may have a significant impact on the Deputy Commissioner's jurisdictional attack on Eurodollar's application. If there is jurisdiction to deal with one, there must surely be jurisdiction to deal with the other.
On 19 March, therefore, I heard argument to supplement the written submissions on the application by the Deputy Commissioner for confirmation of the provisional leave to appear given on 12 March and reserved my decision. This is a judgment on that question alone.
As directed, the Deputy Commissioner has filed two affidavits to support leave being granted to him to appear. They reveal that there was a junior officer of the Australian Taxation Office in Court on 25 February 1992 when the hearing of Eurodollar's application took place. This officer, who had no official responsibilities in relation to this case, was in the
Court precincts on other business and was merely sitting in on
this hearing as a matter of interest. The person actually in charge of this case at the Australian Taxation Office was at the time involved elsewhere. He was later informed by the junior officer of what had taken place on 25 February.

The senior officer's affidavit in turn provides a history rather than an explanation of why the Taxation Office did not appear at the hearing and seek to participate in the proceedings. In fact his affidavit is quite confusing. He says that prior to a meeting of creditors called by the trustee for 7 February 1992, he was telephoned by someone from the trustee's office to advise that the debtor had filed an affidavit sworn on 31 January 1992 "on the day of the hearing". The trustee's officer told him that the matter had been set down for hearing on 25 February 1992.

Presumably the hearing referred to was an earlier mention because the debtor's affidavit was not filed on 25 February but on the day on which it was sworn. This gave the Taxation Office almost four weeks to obtain a copy of the affidavit but it apparently did not do so. No copy was sent by the trustee. The affidavit of the taxation officer in charge of the matter says that the Australian Taxation Office did not become "fully appraised of the matter" until he received a copy of the transcript of the proceedings on 25 February 1992 which I had directed to be sent. It is, to say the least, surprising that

affidavit of 31 January 1992 and that the Taxation Office did	all creditors were not supplied with a copy of the debtor's
not take the initiative of obtaining a copy as soon as it became aware of its existence.
However, the Court is not here giving judgment on the consequences of inaction by people who should have known better, whatever inconveniences and unnecessary costs result. It must try to do justice in accordance with wider principles

- l0 -

and to protect the interest of creditors and the public at large. The Court needs assistance in resolving the matter now before it. As the Court itself cannot be an adversary, assistance can only come from a true adversarial party. In the light of the attitude taken by the trustee at the hearing, there is no available adversary other than the Deputy commissioner.

A decision by the Court to review the trustee's decision in favour of Eurodollar may have a significant effect upon the possible entitlements of the Deputy Commissioner. He challenges jurisdiction. If there is jurisdiction, he proposes that any available discretion should not be exercised in favour of Eurodollar. The Deputy Commissioner wishes to call evidence and make submissions to the effect that the amounts claimed by Eurodollar in the debtor's estate do not constitute debts by the debtor to Eurodollar. The history of this case shows that it is likely that the Deputy Commissioner

will have a significant volume of information going to that	issue and that he has special knowledge of the debtor's
a£ £ airs.
There can be little doubt that the Australian Taxation Office could and should have taken action at an earlier stage. Its failure to do so has caused delay, inconvenience and cost that should not have occurred. Eurodollar has been one victim. The trustee's approach to the matter has meant that other creditors have also been victims of these effects. However, whatever other action should be taken to do justice to and protect the interests of all these people and entities, these events do not provide a reason to refuse the Deputy Commissioner leave to appear and the reopening of the proceedings to permit his full participation.
I therefore grant leave to the Deputy Commissioner to appear in the proceedings, to cross-examine the debtor, to present its own application and to bring such evidence as is desired. I order that the hearing be re-opened to permit that course of action. Directions by way of timetable and any other orders sought as a consequence of this judgment will be dealt with in Court when the parties have had an opportunity to consider these reasons.

t prccedlng p q n s are a true copy of the j I cerffy that this and the (10)

Reascns icr dudgmmi he~eln of hls Honour

Justace Clnlcld

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