Re Coleman, R.P. v Ex parte Lazy Days Investments P/L

RE: RODNEY PAUL COLEMAN
EX PARTE: LAZY DAYS INVESTMENTS PTY. LIMITED
No. WP735 of 1994
RE: STEPHEN MICHAEL COLEMAN
EX PARTE: LAZY DAYS INVESTMENTS PTY. LIMITED
No. WP736 of 1994
FED No. 1045/94
Number of pages - 5
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
LEE J

CATCHWORDS

Bankruptcy - act of bankruptcy - notice of suspension of payment of debts - notice "without prejudice".

Bankruptcy Act 1966 para 40(1)(h)

Crook v. Morley (1891) AC 316
Cropley's Ltd v. Vickery (1920) 27 CLR 321
In Re Daintrey; Ex Parte Holt (1893) 2 QB 116
In Re a Debtor (1929) 1 Ch. 362
Re Hewson; Ex Parte Sydney Stock Exchange (1967) 10 FLR 479
In Re Scott; Ex Parte Scott (1896) 1 QB 619

HEARING

PERTH, 11 October 1994
#DATE 11:10:1994

Counsel for the Debtors: N.W. McKerracher

Solicitors for the Debtors: Messrs Bennett and Co.

Counsel for the Creditors: D.M. Shane

Solicitors for the Creditors: Messrs Williams and Hughes

ORDER

THE COURT ORDERS THAT:

1. The estate of each debtor be sequestrated.

2. The cost of each petition, including reserved costs, be taxed and paid out of the estate of each debtor respectively.

Note: Settlement and entry of orders is dealt with in Order 124 of the Bankruptcy Rules.

JUDGE1

LEE J These are two petitions for the sequestration of the estates of Rodney Paul Coleman and Stephen Michael Coleman ("the debtors") under the Bankruptcy Act 1966 ("the Act"). The two petitions are heard together, the factual matrix giving rise to the indebtedness and alleged acts of bankruptcy relied on in each petition being identical.

The acts of bankruptcy described in the petitions are that the debtors by letter dated 1 February 1994 gave notice to creditors that they had suspended or were about to suspend payment of their debts within the meaning of para.40(1)(h) of the Act.
The debtors were guarantors of trading debts of Jarra Pty. Ltd. ("Jarra") which traded under the name of "The Surf Factory" and conducted business as a retailer of clothing and other accoutrements relevant to the surfing industry. The petitioning creditor, Lazy Days Investments Pty. Ltd., supplied the "The Surf Factory" with stock and was one of the creditors to whom the debtors had given a personal guarantee in relation to the trade debts of Jarra.
Jarra Pty. Ltd. had ceased trading at some time prior to the distribution of the letter.
The first issue for determination is whether the letter dated 1 February 1994 amounted to a notice of suspension or of imminence of suspension of payment of debts within the meaning of para.40(1)(h) of the Act. The second issue concerns the debtors' contention that the letter was written without prejudice and, therefore, was inadmissible in evidence.
The letter is four full pages in length and has two annexures which are the respective statements of the financial position of the two debtors.
The letter commences with an explanation as to why the debtors were writing to creditors. The first reason given is to explain why Jarra has ceased trading. The second reason given is to put forward a proposal for dealing with the liability of the debtors to those creditors to whom personal guarantees had been given for the trading debts of Jarra.
The explanation proffered for the cessation of trading by Jarra was theft of Jarra's stock in the latter part of 1993.
The proposal put to the creditors holding personal guarantees was that the debtors undertake to make available a sum of $10,000 to be obtained "by borrowing or through financial assistance from family or friends" to be distributed to those creditors.
The respective financial statements of the debtors annexed to the letter demonstrated that each debtor had a substantial excess of liabilities over assets. In particular the statements showed the liability of the debtors to creditors of Jarra holding personal guarantees to be $190,000. The liability to these creditors represents slightly less than half the value of the total liabilities of the debtors to creditors other than those holding personal guarantees.
The debtors acknowledged that should the proposal put forward in the letter be accepted the return to the creditors holding personal guarantees would be five cents in the dollar. The debtors then stated that the proposal was made on the basis that: firstly, it was accepted by all creditors holding personal guarantees in full and final settlement of all claims those creditors may have against the debtors; secondly, recovery actions were not pursued or, if already commenced, not continued; and thirdly, and relevantly for the determination of the second issue, if the proposal were not accepted by all creditors holding personal guarantees, it was without admission of liability and without prejudice to any defence the creditors may be entitled to raise in proceedings against the debtors.
The letter explicitly acknowledged that the "inevitable result" of rejection of the proposal and pursuit of the debtors would be consideration by the debtors of entering a "Part X arrangement pursuant to the Bankruptcy Act" or filing their own petitions in bankruptcy. The letter went on to state that if the debtors were forced to take either step there would be "virtually no return to any creditors".
It was submitted on behalf of the debtors that as the letter was sent to a specified group of creditors only, namely those creditors holding personal guarantees granted by the debtors, and in the absence of communication to the body of creditors as a whole, the debtors were not communicating a notice of suspension or a notice of intention to suspend payment of debts within the meaning of para.40(1)(h) of the Act.
In Re Scott; Ex Parte Scott (1896) 1 QB 619 at 624 considered a similar provision to para.40(1)(h) and concluded that notice to one creditor amounted to notice to all creditors of an intention to suspend payment of debts if the debtor had the intention that all creditors were to be so dealt with.
Towards the end of this letter the debtors state the need to resolve the position with "all personal creditors" for the reason that to deal with each creditor individually would involve the risk of giving certain creditors a preference. This statement clearly evinces the debtors' intention to deal with all creditors as a whole.
Furthermore, the acknowledgment by the debtors that a Pt.X arrangement or petitions in bankruptcy would have to be considered should the creditors refuse to accept the proposal reinforced that conclusion.
The circumstances in which the notice was communicated is relevant to the determination of whether the notice amounted to act of bankruptcy within the meaning of para.40(1)(h). (See: Re Hewson: Ex Parte Sydney Stock Exchange (1967) 10 FLR 479 at 484.) As stated in the letter Jarra's financial backer had withdrawn support and a provisional liquidator had been appointed in November 1993. It was estimated that the loss arising from the missing stock was in the range of $150,000 to $209,000.
The natural conclusion to be drawn from that context and the contents of the letter is that there was no possibility of the principal debtor being able to discharge the indebtedness to trade creditors by continuing its business.
I am therefore satisfied that the requirements referred to in Cropley's Ltd. v. Vickery (1920) 27 CLR 321 have been satisfied, namely, that it was the intention of the debtors to suspend payment of their debts because of the circumstances set out in the letter and that a reasonable creditor would have understood the letter to be a notice that payment by the debtors of their liabilities under the guarantees could not be expected. (See: In Re a Debtor (1929) 1 Ch 362.) Indeed, the purpose of writing to creditors was, in substance, to request them to act upon the footing that the debtors were unable to pay their debts. (See: Crook v. Morley (1891) AC 316 at 321.)
The debtors cannot avoid an act of bankruptcy by objecting to the admissibility of the letter on the basis that a proposal made in the letter was made without prejudice. I adopt the following statement of the rule excluding documents marked "without prejudice" set out by Vaughan Williams J in In Re Daintrey; Ex Parte Holt (1893) 2 QB 116 at 119-120:

"In our opinion the rule which excludes documents marked 'without prejudice' has no application unless some person is in dispute or negotiation with another, and terms are offered for the settlement of the dispute or negotiation, and it seems to us that the judge must necessarily be entitled to look at the document in order to determine whether the conditions, under which alone the rule applies, exist.

The rule is a rule adopted to enable disputants without prejudice to engage in discussion for the purpose of arriving at terms of peace, and unless there is a dispute or negotiations and an offer the rule has no application. It seems to us that the judge must be entitled to look at the document to determine whether the document does contain an offer of terms. Moreover, we think that the rule has no application to a document which, in its nature, may prejudice the person to whom it is addressed. It may be that the words 'without prejudice' are intended to mean without prejudice to the writer if the offer is rejected; but, in our opinion, the writer is not entitled to make this reservation in respect of a document which, from its character, may prejudice the person to whom it is addressed if he should reject the offer, and for this reason also we think the judge is entitled to look at the document to determine its character. ...

There was an offer, i.e., the offer of a composition, which was intended to apply, amongst other things, to the petitioner's claim in the action; but the document, the letter of the debtor to the petitioner, was, in our opinion, more than this: it was a clear act of bankruptcy, and it was notice to the petitioner of such act of bankruptcy, and it seems to us that a notice of an act of bankruptcy cannot be given 'without prejudice' because the document in question was one which, from its character, might prejudicially affect the recipient whether or not he accepted the terms offered thereby. For the reasons already given we think that such a document does not fall within the rule which excludes offers for peace written without prejudice, and ought to have been admitted in evidence. If admitted, it conclusively proves the act of bankruptcy."

Furthermore, although it is not apparent that the parties were then in dispute, proper construction of the letter shows that the claim to immunity from prejudice was directed at admission of liability for debts and, to the foregoing of defences in respect of that liability.
I am, therefore, satisfied that the acts of bankruptcy relied on in these petitions have been committed and accordingly sequestration orders against the estates of the respective debtors will be made, with further orders that the cost of each petition, including reserved costs, be taxed and paid out of the estate of each debtor respectively.

[1994] FCA 1045

11 OCTOBER 1994