Re Bullen, E.g. & Anor v Ex Parte Bunnings Forest Products PL (ACN 008 665 898)
[1994] FCA 821
•27 JULY 1994
Re: EDMUND GERALD BULLEN and SUSANNE LEE BULLEN
Ex Parte: BUNNINGS FOREST PRODUCTS PTY LTD
No. P601 of 1994
FED No. 821/94
Number of pages - 11
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
FRENCH J
CATCHWORDS
Bankruptcy - meeting of creditors - proposal for deed of arrangement - proposal rejected - meeting adjourned - consideration of modified proposals at subsequent adjourned meetings - whether adjourned meeting of creditors empowered to approve proposal - application to have deed of arrangement declared void - application dismissed.
Bankruptcy Act 1966 s.188, s.189, s.190, s.197, s.204, s.222
Pretorius v. Dalton's Carpet Tiles Pty Ltd (1984) 1 FCR 346
Re Appleton; Ex parte ARC Engineering Pty Ltd (1985) 6 FCR 328
Re Henry Ratcliffe; Ex parte Till (1875) LR 10 Ch App 631
Re Palmer; Ex parte Taylor (1988) 79 ALR 621
Re Turner; Ex parte Official Receiver in and for the Bankruptcy District of the State of Western Australia (1992) 39 FCR 528
HEARING
PERTH, 19 July 1994
#DATE 27:7:1994
Counsel for the Creditor: Mr L. Christensen
Solicitors for the Creditor: Phillips Fox
Counsel for the Trustee: Mr G. O'Hara
Solicitors for the Trustee: Kott Gunning
ORDER
The Court Orders That:
1. The application is dismissed.
2. The parties have leave to make written submissions on the question of costs within seven days.
Note: Settlement and entry of Orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
Introduction
FRENCH J Susanne Lee Bullen and Edmund Gerald Bullen signed authorities under s.188 of the Bankruptcy Act 1966 authorising a registered trustee to call meetings of their creditors for the purposes of Pt X of the Act. A proposal for a Deed of Arrangement was put at the meeting so called and rejected by creditors. The debtors said that no modified proposal would be forthcoming. A resolution to require the debtors to present their petition in bankruptcy was not passed and the meeting was adjourned unanimously. At the adjourned meeting a modified proposal was put to the creditors and again rejected for failure to achieve the requisite majority. Once again the meeting was adjourned. At the further reconvened meeting, a further modified proposal was put and this time accepted by the requisite majority. An unsecured creditor which has filed a creditors petition against the debtors, seeks to have the Deed of Arrangement executed pursuant to the resolution declared void, principally upon the basis that the adjourned meeting of creditors had no power to approve a modified proposal for a Deed of Arrangement.
Factual History
2. On 30 March 1994, Susanne Lee Bullen and Edmund Gerald Bullen signed authorities under s.188 of the Bankruptcy Act 1966 authorising David John Frost, a registered trustee, to call meetings of their creditors for the purposes of Pt X of the Act and to take over control of their property. On 5 April 1994, Mr Frost signed consents to the exercise of the powers conferred by the authorities. At the same time as signing the authorities the Bullens signed a statement indicating that they proposed that their affairs be dealt with by way of a Deed of Assignment. Their joint statement of affairs indicated an amount of $1,576,468 owing to their creditors and assets totalling $236,249, leaving a deficiency of $1,340,219. Some 198 unsecured debts for goods or services supplied were listed and amounts owing to employees totalling $5,956. No separate assets or liabilities were disclosed in the separate statement of affairs filed by Mr Bullen, nor in that filed by Mrs Bullen.
On 27 April 1994, on the application of the trustee, orders were made by the Registrar in Bankruptcy that the time limited for lodging a copy of the authority and consent and of the statements of affairs be extended up to and including 27 April 1994. An order was also made extending the time in which to call a meeting in pursuance of the authority to 24 May 1994. That time was further extended to 31 May 1994 by an order made on 13 May 1994. According to the trustee, the extensions were necessary because of the extensive investigations required to be carried out into the affairs of the Bullens and the conduct of their business which they carried on as trustees for the Bullen Family Trust trading as Bullen and Associates.
On 16 May 1994, the trustee sent a letter to creditors of the Bullens giving notice of a meeting of creditors to be held at 2.30 pm on 31 May 1994. A report on the Bullens' affairs and their proposal to creditors was enclosed with the letter. Attached to the report from the trustee was a report prepared by the McLernon Group Limited which was commissioned to investigate the affairs of the debtors on 11 March 1994. That report disclosed, inter alia, that Mr and Mrs Bullen acted as trustees for the Bullen Family Trust and carried on business as such under the name Bullen and Associates. The business was that of a building contractor and was evidently the source of most of the liabilities incurred by the Bullens. In his capacity as trustee of the Bullen Family Trust, Mr Bullen holds 25% of the issued share capital of a garage and farmshed manufacturing company called Brown and Joy Industries Pty Ltd. He acts as a consultant to that company from time to time with respect of new developments and potential expansion programs. The McLernon Group, which also discussed other assets held in the trust, concluded that the only asset of value appeared to be the 25% shareholding in Brown and Joy Industries Pty Ltd.
In his report to creditors, the trustee set out details of the Bullens' proposal which was described as a Deed of Arrangement. It was said that the Deed of Assignment initially proposed had been amended to a Deed of Arrangement upon legal advice. The terms of the Deed of Arrangement were as follows:
1. The debtors assign all their divisible property for the benefit of their creditors.
2. The debtors pay the following amounts into the estate for the benefit of their creditors: Date of Payment Amount of Payment Source of Funds 31 July 1994 $50,000 Brown and Joy 31 January 1995 $10,000 Salary 31 July 1995 $10,000 Salary 31 January 1996 $25,000 Salary and Tax refund 31 July 1996 $10,000 Salary 31 January 1997 $25,000 Salary and tax refund 31 July 1997 $10,000 Salary $140,000
3. That an option is granted to the debtors to purchase all the shares which will be held by the estate in Brown and Joy Industries at any time prior to 31 December 1997 for $50,000.
4. The debtors are entitled to receive any dividends paid by Brown and Joy Industries Pty Ltd with respect to the abovementioned shares during the period of this arrangement.
5. The trustee's fees to a maximum level of $15,000 are paid by the debtors.
6. The debtors are to assist the trustee to perform the maintenance contracts as required.
7. The debtors agree to present their own petition for bankruptcy within seven days, in the event that the terms of the Deed of Arrangement are breached or that the debtors fall into arrears with the above schedule of payments by more than 90 days.
On the trustee's estimation the dividend payable under this proposal ranged from 11.3 cents on a worst case realisation of assets to 16.5 cents on what was described as a likely realisation. This was compared with a range of dividends in bankruptcy between nil and 8.8 cents. In his report the trustee stated his opinion that it would be in the best interests of the creditors to deal with the debtors' affairs in the manner indicated in their proposal.
On 31 May 1994, a joint meeting of the Bullens' creditors was held at the Booragoon Tavern. At the meeting a resolution was put in relation to the proposed Deed of Arrangement. The resolution failed to reach the requisite special majority there being 72.5% of the creditors in value in favour and 27.3% in value against. A resolution was then moved that the debtors be required to file their petition within seven days of the date of the meeting. However that resolution was not passed. The chairman of the meeting is then recorded in the minutes as having said:
"I will now move on to the next resolution that the property no longer be in control of the debtors. If that is not passed we will come back again as the assets are in control of Mr Frost. I have examined the proxies and this resolution will fail. I therefore suggest the meeting be adjourned."
Subsequently, a resolution was carried unanimously that the meeting be adjourned for seven days. A representative of Bunnings Forest Products Pty Ltd ("Bunnings") then asked whether it was intended to propose the same arrangement at the next meeting or an amended version. If it were to be amended, he suggested that it would be more attractive were the proposed deed to exclude the retention of the entitlement to the share option in Brown and Joy Industries Pty Ltd. The chairman said that he would ask Mr Bullen if he were going to put in an amended proposal. He then said that he had been informed that the proposal would stand as it was. He gave notice that the reconvened meeting would be held on 7 June 1994 and subsequently declared the meeting adjourned for seven days.
On 7 June 1994, the meeting of creditors was reconvened. In opening the meeting the chairman, Mr Hely, noted that there had been some argument raised by the solicitors for one of the creditors that the meeting was not valid. He said he was of a different opinion and believed that a resolution could be passed under s.204 of the Act. A resolution was proposed for the execution by the debtors of a Deed of Arrangement in terms which were substantially similar to those of the previous proposal but with the following changes:
1. Whereas previously it was proposed that an option be granted to the debtors to purchase the shares to be held by the estate in Brown and Joy Industries Pty Ltd at any time prior to 31 December 1997 for $50,000, it was now proposed that the option be granted to purchase the shares at any time prior to 31 July 1997 for the greater of the sum of $50,000 or the market value of the shares as determined by an independent expert appointed by the trustee.
2. There were three additional terms providing for release of the debtors upon their compliance with the terms of the Deed of Arrangement, a proviso that the Deed of Arrangement should contain any other provisions which would give proper effect to the conditions required by the trustee or the trustee's legal advisors and a provision that the claims of all creditors of the separate estates of E.G. and S.L. Bullen would be treated equally as if they were creditors of the joint estate.
A resolution for execution of the amended Deed of Arrangement was put but again failed to reach the requisite special majority. Those in favour represented 73.4% in value of the creditors. A subsequent motion for the debtors to present their petition in bankruptcy within seven days was defeated with 58% in value of the creditors voting against it. The Chairman then suggested that the meeting be adjourned to a date to be fixed by the Trustee.
A portion of the transcript of the meeting which was in evidence indicated that the chairman advised the creditors that the meeting should not be adjourned to a specific date. Bunnings, it was pointed out, had filed a creditors petition and it was hoped that a sequestration order would be made against the estate. It was then said by the chairman:
"The debtor's can't go down under the Bankruptcy Act and present their own petition at the moment because they can't present a petition while the 180 Authority still exists, so I would suggest and I would seek a proposer that the meeting just be adjourned to a date to be fixed by the Trustee and someone to second that for the purposes of the petition going through."
A question followed about whether the trustee could retire and the debtors' property be returned. The adjournment resolution was then put and passed. There was evidence put before the Court by way of an affidavit filed after the hearing, apparently without objection, that the resolution was carried unanimously.
Subsequently the reconvened meeting was fixed for 6 July 1994. In the meantime on 30 June 1994, an application had been filed in the petition proceedings instituted by Bunnings. By that application Bunnings sought an interlocutory order restraining the Bullens from executing any deed or taking any steps to implement any composition under Pt X by reason of any resolution or at a purported meeting pursuant to Pt X of the Act. The application should, no doubt, have been brought in the Pt X proceedings. However, on 4 July an order was made in the following terms:
"On the undertaking of the controlling trustee, David John Frost, that he will not, prior to 5pm on Friday 8 July 1994, take any step to execute any deed of arrangement, deed of assignment, or in relation to any composition pursuant to Part X of the Bankruptcy Act which the debtors' creditors may resolve for them to enter into at a meeting to be held on 6 July 1994:
1. the application for an injunction be adjourned to 2.15pm on 8 July 1994;
2. costs today reserved;
3. liberty to apply generally."
The reconvened creditors meeting proceeded on 6 July 1994 and a special resolution was passed with 80% of creditors by value voting in favour of the execution of a Deed of Arrangement in terms substantially similar to those of the original proposal but with the following changes:
1. Whereas originally it was proposed that an option be granted to the debtors to purchase all the shares to be held by the estate in Brown and Joy Industries Pty Ltd at any time prior to 31 December 1997 for $50,000 it was now proposed that the option be granted to purchase the shares at any time prior to 31 July 1997 for the greater of the sum of $50,000 or the market value of the shares as determined by an independent expert appointed by the trustee. This change was in the same terms as that proposed at the meeting of 7 June 1994.
2. Whereas originally the debtors would have been entitled to receive any dividends paid by Brown and Joy Industries Pty Ltd with respect to the shares during the period of the arrangement, it was now proposed that any dividends paid by the company prior to the debtors exercising the option would be paid into the estate for the benefit of the debtors' creditors. This was not a term which had been included in the Deed of Arrangement proposed for 7 June.
There were some other changes of a comparatively minor nature. A further resolution to appoint Mr Frost as trustee under the Deed of Arrangement was passed as was a resolution for the establishment of a committee of inspection. A resolution approving the trustee's fees at $19,000 for the period 8 June to 7 July 1994 was passed and the meeting was then closed.
The application for an order to restrain the Bullens from executing the Deed of Arrangement came on for hearing on 8 July. After some argument it was adjourned to 18 July on the basis that the Bullens would proceed to execute the Deed and that subsequently Bunnings would bring an action under s.222 of the Bankruptcy Act to have the Deed declared void. A date for hearing of that application was fixed for 18 July and it was agreed that argument advanced in support of the injunction application could be treated as argument for the purposes of the s.222 application.
On 14 July 1994, Bunnings filed an application seeking a declaration that the Deed of Arrangement is void pursuant to s.222 of the Act. Further argument was heard and documentary and affidavit evidence received on that day. Judgment was reserved until 27 July 1994.
The Contentions of the Parties
12. It was submitted for Bunnings that the execution of an authority under s.188 authorises the calling of one meeting only at which the various options for which s.204 of the Bankruptcy Act provides can be put. Once a resolution has been put pursuant to the provisions of s.204 of the Act that is the end of the effect of the s.188 authorities. A resolution for a Deed of Arrangement, Deed of Assignment or a Composition cannot be put at any subsequent meeting. It is sufficient for the purposes of s.222 that the court conclude that there is a doubt as to the validity of the Deed of Arrangement. Such doubt, it is said, exists in the present case and the court therefore has a discretion to declare the Deed void. Various factors relating to the position of the Bullens were adverted to as supporting the exercise of the discretion in favour of a declaration.
In addition to the above matters, argument was also advanced that proxy forms relied upon at the meeting were deficient in form and therefore invalid.
Statutory Framework
14. The execution of an authority authorising a trustee to take control of a debtor's property and call a meeting of creditors is provided for in s.188 of the Bankruptcy Act:
"188(1) A debtor who desires that his affairs be dealt with under this Part without his estate being sequestrated and -
(a) is personally present or ordinarily resident in Australia;
(b) has a dwelling-house or place of business in Australia;
(c) is carrying on business in Australia, either personally or by means of an agent or manager; or
(d) is a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent of manager,
may sign an authority in accordance with the prescribed form -
(e) authorising a registered trustee to call a meeting of his creditors and to take over the control of his property; or
(f) authorising a solicitor to call a meeting of his creditors."
An authority signed by a debtor under s.188(1) is not effective for the purposes of Pt X of the Act unless there is a written consent from the trustee, attestation of the signatures of the debtor and the trustee to the authority and provision by the debtor to the trustee of a statement of the debtor's affairs and a statement indicating how the debtor proposes that his or her affairs will be dealt with under the Act (s.188(2)). An authority under s.188(1) that is effective for the purposes of Pt X is not revocable by the debtor (s.188(3)). Section 188(4) imposes an obligation on the trustee to file a copy of the relevant consent, the authority under s.188 and a copy of the statement of affairs and the statement indicating how the debtor proposes that his or her affairs be dealt with under Pt X. The continuation of the trustee's control of the property is defined by s.189:
"189(1) Where a debtor has given an effective authority to a registered trustee under section 188, the property of the debtor becomes subject to control under this Division and continues to be so subject until -
(a) the creditors resolve at a meeting called under this Part that the debtor's property be no longer subject to control under this Division;
(b) a deed of assignment or a deed of arrangement is executed by the debtor and the trustee of the deed in pursuance of a special resolution of his creditors under this Division;
.
.
.
(e) the debtor becomes a bankrupt; or
(f) the debtor dies,
whichever first happens."
By s.189(2) restrictions are imposed on debtors whose property is subject to control under Division 2 of Pt X from dealing with their property otherwise than with the consent of the controlling trustee. The trustee is required to prepare a report under s.189A. Section 190 then requires the trustee to call a meeting of the debtor's creditors as follows:
"190(1) Where a registered trustee consents to exercise the powers conferred by an authority under section 188 or a solicitor consents to call a meeting of creditors in pursuance of such an authority, the trustee or solicitor, as the case may be, shall proceed to call a meeting of the debtor's creditors in accordance with this Division."
The meeting of creditors to be called in pursuance of an authority under s.188 is required to be held not later than 35 days after the authority is signed and not earlier than 14 days after notices to creditors are delivered by post under sub-s.194(2). Section 195(1) imposes an obligation on the debtor to attend the meeting of creditors.
Section 197 provides for adjournments of meetings in the following terms:
"197(1) A meeting may, by resolution, be adjourned from time to time.
(2) Where a meeting is adjourned, the adjourned meeting shall, unless it is otherwise provided by the resolution by which it is adjourned, be held at the same place as the original meeting."
The passage of a deed of arrangement, deed of assignment or composition is provided for in s.204:
"204(1) The creditors may, at a meeting called in pursuance of an authority under section 188 by special resolution -
(a) where the debtor's property is subject to control under this Division, resolve that the debtor's property be no longer subject to control under this Division;
(b) require the debtor to execute a deed of assignment or deed of arrangement under this Part;
(c) accept a composition; or
(d) require the debtor to present a debtor's petition within 7 days from the day on which the resolution was passed."
The Validity of the Adjourned Meeting
17. At the core of the applicant's case is the contention that s.188 authorises the calling of only one meeting at which the options available under s.204 of the Bankruptcy Act can be put. Reliance was placed upon a decision of the Full Court in Pretorius v. Dalton's Carpet Tiles Pty Ltd (1984) 1 FCR 346. At the meeting under consideration in that case the debtor's proposal for a composition was rejected and a resolution passed requesting the debtor to lodge his own petition in bankruptcy. The debtor did not comply with that request but instead requested another meeting be called to reconsider the proposal. A further meeting was called by the trustee at which a resolution accepting the composition was passed. An application by certain of the unsecured creditors to have the composition declared void was successful and a sequestration order was made. An appeal against the decision was dismissed by the Full Court. In dismissing the appeal the Court held that the scheme provided by Pt X of the Act contemplates that only one meeting of creditors may be called pursuant to an authority under s.188 for the purpose of considering a composition by a debtor subject to the possibility that a meeting may be adjourned pursuant to s.197. the Court said at p.352:
"We find nothing offensive to the policy of Pt X in the conclusion we have reached as to its construction. On the contrary, we think that such a result accords with the evident policy of the Act. In other words, we think that it is possible to discern from the general structure of Pt X a legislative intention that if a debtor cannot carry the meeting of creditors summoned for the purpose of considering the proposition he proffers, then he should not be permitted to call meeting after meeting even ad infinitum in the hope that by a process of attrition, inconvenience or added expense, he will eventually achieve acceptance of his proposal. It is significant in this regard that the debtor is assumed to be insolvent: the signing of an authority under s. 188 is an act of bankruptcy
(s.40(1)(i)). It should not, therefore, be presumed that such a debtor should have the luxury of calling any number of meetings until he achieves his purpose."
However the important qualification was added:
"This is not to say that the matter of the proposed composition need to immediately resolved: as has been said, the meeting may be adjourned under s.197. Further, even if the meeting of creditors were to reject the composition proffered by the debtor, a sequestration order is by no means inevitable: the court has a discretion to refuse such an order in a proper case...."
In Re Appleton; Ex parte ARC Engineering Pty Ltd (1985) 6 FCR 328, a motion for the acceptance of a composition was put to an adjourned meeting of creditors and lost. A resolution was passed that the debtor's property no longer be subject to control. On the same day, the debtor signed a further authority and another meeting was held to consider the same composition. A resolution was put and initially defeated, but put again and passed. Pincus J held that, technical questions apart, there was a matter of substance raised in the case in that there was a prospect of attacking a transaction between the debtor and his wife. The facts about the transaction were, in the Judge's view, not sufficiently known at that time. As a second point it was put to his Honour that once the motion was put and not passed at the second meeting it could not be put again. His Honour accepted that proposition relying upon Re Henry Ratcliffe; Ex parte Till (1875) LR 10 Ch App 631. In that case there were observations made to the effect that there is a power to adjourn a meeting provided that the resolution to do so is bona fide. It was said, however, that it is not bona fide for a majority which is insufficient to pass a resolution for composition, to pass a resolution for adjournment when it has been ascertained that a resolution for the composition could not be passed. Sir W.M. James LJ said:
"When the sense of the meeting has been ascertained the meeting is over and the power of adjournment is gone..."
Mellish LJ said:
"I am of opinion that in the present case the sense of the meeting was taken, and that this having been done the meeting was at an end and could not be adjourned."
Pincus J concluded that, once having been put and not passed, the motion should not have been put again and considered the underlying principle to be similar to that in Pretorius.
On the other hand it has been said that it is competent for an adjourned meeting to consider the alternative options available to creditors under s.204 of the Act - Re Palmer; Ex parte Taylor (1988) 79 ALR 621 - although that was a case in which the court was concerned about the decision of a Registrar to reduce a trustee's remuneration to nil. The question of the powers of an adjourned meeting was not exhaustively canvassed in the judgment. In Re Turner; Ex parte Official Receiver in and for the Bankruptcy District of the State of Western Australia (1992) 39 FCR 328, Einfeld J held that there was nothing in the Act or the cases to prevent creditors from voting to reject a deed for the time being and adjourning to consider other possibilities or options, including the acceptance of the same or a modified deed at a later meeting if nothing better were to emerge.
The cases establish that when a meeting of creditors has rejected a proposal and the meeting has been concluded there is no power to call a second meeting. Nor is there a power to recommit a proposal, once rejected, for reconsideration at the same meeting. There is, however, a general discretion in the creditors to resolve to adjourn a meeting but this may not be used by an ordinary majority to wear down the opposition of the balance of creditors needed to support a special resolution in favour of a proposal.
In this case, the initial meeting on 31 May had rejected the debtors' proposal and the debtors had stated that no modified proposal would be forthcoming. The meeting was adjourned by unanimous resolution. Similarly the meeting of 7 June was adjourned by unanimous resolution after rejection of the modified proposal. In my opinion, however, there was at all times only one meeting. There is nothing in the authorities and no reason of principle or policy why the one meeting of creditors cannot consider variations of proposals for deeds of arrangement, assignment or compositions under Pt X of the Act. To hold otherwise would be to impose a requirement for a restrictive all or nothing approach to whatever proposal was first put forward by debtors. Such an approach cannot be in the interests of the creditors or in the public interest. That is not to say that the Court would tolerate a situation in which an ordinary majority of creditors achieved successive adjournments for the purpose of "wearing down" the balance of creditors necessary to make up a special majority for the purpose of accepting a proposal. There is no suggestion in this case that such a technique or tactic was employed. In my opinion therefore the objection raised by Bunnings on the basis that the meeting held on 6 July was invalidly constituted fails.
Questions were also raised by Bunnings about the validity of proxy forms relied upon at the meeting, the extent to which the Deed of Arrangement was consistent with the resolution and discretionary matters related to the state and history of the debtors' affairs. So far as the proxy form issue is concerned, it was contended that on the face of the proxy forms put in evidence, corporate common seals appeared to have been affixed without the necessary attestation although it was not contended that the proxy forms had not been signed by a representative of the relevant company. The Court was left to speculate as to the provisions of the Articles of Association of the relevant companies and, in any event, as was pointed out by counsel for the trustee, there is no requirement in the Bankruptcy Act, the Bankruptcy Rules or the common forms requiring that an appointment of proxy by a company is to be executed under seal.
As to the other matters raised in relation to the affairs of the Bullens, they were the subject of report by the trustee and the McLernon Group Ltd which he engaged to inquire into the Bullens' affairs. On the face of it the creditors were entitled to the view that the proposal as modified was in their interests and to vote as they did. The applicant also contended that the Deed of Arrangement itself did not reflect the terms of the resolution passed by the creditors. But the points made were of a somewhat technical character and seemed to be informed by the proposition that bankruptcy and deeds of arrangement "...have a punitive effect upon debtors". I do not accept that proposition. The bankruptcy law is devised in the interests of creditors and debtors and the public interest. It has protective aspects but is not informed by a punitive principle. The discrepancies upon which counsel for the applicant relied included a provision under which the debtors could accelerate the payments which had been agreed under the proposal as accepted. Neither this nor the other points were, in my opinion, of sufficient merit to justify setting aside the Deed of Arrangement as entered into. The application will be dismissed.
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