Re Eustice, A.K

[1994] FCA 499

RE: ANDREW KENNETH EUSTICE
No. SX17 of 1994 PART X
FED No. 499/94
Number of pages - 8
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIAN DISTRICT REGISTRY
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
GENERAL DIVISION
BRANSON J

CATCHWORDS

Bankruptcy - Arrangements with creditors without sequestration - whether to set aside a Part X composition - whether terms of composition are unreasonable or are not calculated to benefit the creditors generally - insubstantial amount available for distribution - sequestration order - public interest

Bankruptcy Act 1966 (Cth), s239

Re Richards; ex parte Beneficial Finance Corporation (Jackson J, 17 March 1986, unreported)
Re Emmett; ex parte Beneficial Finance Corporation and Others (O'Loughlin J, 16 December 1991, unreported)
Re Brennan; ex parte Stokes (Australia) Limited (Morling J, 31May 1988, unreported)
NZI Capital Corporation Ltd. v. Lancaster (1991) 30 FCR 441 at445 Re English; Scottish and Australian Chartered Bank (1893) 3 Ch385 at 409
Re Segal; Lensworth Finance Ltd. v. Segal and Ward (1976) 9ALR 154 at 163

HEARING

ADELAIDE, 28 June 1994
#DATE 15:7:1994

Counsel for the Applicant: Mr G Coppola

Solicitors for the Applicant: Kelly and Co.

Counsel for the Debtor: Mr J Sulan QC

Solicitors for the Debtor: Cowell Clarke

ORDER

THE COURT ORDERS THAT:
1. The composition accepted by creditors on 22

April 1994 in respect of the debtor be set aside.

2. A sequestration order is made against the estate

of the debtor.

3. The court notes that Richard George Freer a

registered trustee has consented to act as trustee of the estate of the debtor.

4. The applicant's costs to be taxed and paid

according to the Bankruptcy Act.

Note: Settlement and entry of orders is dealt with in Rule 124 of the

Bankruptcy Rules.

JUDGE1

BRANSON J The applicant by application dated 13 May 1992 seeks an order under section 239 of the Bankruptcy Act 1966 setting aside a composition under Part X of the Act accepted by the creditors of Andrew Kenneth Eustice ("the debtor") at an adjourned meeting of creditors held on 22 April 1994. It further seeks a sequestration order against the estate of the debtor. In the alternative the applicant seeks an order pursuant to subsection 222(4) of the Bankruptcy Act declaring the deed of composition void. As the matter was argued this alternative was not, as I understand it, seriously pressed.

1. Section 239 provides by subsections (1) and (2) as follows:-
   

"(1) A creditor may, within 21 days from the date on which the special resolution accepting a composition under this part (i.e. Part X) was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor.

(2) If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought."

1. It is necessary to consider the terms of and the circumstances leading to the resolution of creditors of 22 April 1994.

2. The statement of affairs of the debtor which was tabled at the meeting of creditors shows liabilities to unsecured creditors of $5,257,744.80 and assets of $40,000.00. On that basis the total deficiency would appear to be $5,217,744.80. The statement of affairs indicates a total deficiency of $5,253,744.80. This seems to be an arithmetical error. The statement of affairs further shows three secured creditors and an aggregate secured indebtedness of $475,000. I note however that the minutes of the adjourned creditors meeting of 22 April 1944 record that the aggregate value of the debt in respect of which creditors were in attendance and eligible to vote was $6,210,601.69.

3. The proposal of the debtor was for the payment within 30 days of the sum of $20,000. This sum was to be available for pro-rata distribution to creditors after payment of the debtor's trustee.

4. The debtor attended the creditors meetings and answered questions.

5. The minutes of the meeting of creditors held on 20 April 1994 record the following exchanges:-
   

"Mr Brennan asked where funds owed to him by the debtor had been applied.

The debtor stated that he had applied monies received from the sale of vehicles into an oil deal and these monies had since been lost.

...

Mr Button asked whether any investigations had been carried out to determine whether any assets would be available to a trustee in bankruptcy.

The debtor's solicitor replied that she was not aware of the disposal of any assets and that Ms O'Halloran had provided funds for the debtor over the last three years so there were unlikely to be any preferential payments recoverable by a trustee (Ms O'Halloran is the debtor's mother-in-law)

...

Mr Button told the meeting that he understood the debtor had borrowed approximately $800,000 in the last year. He asked the debtor where this money had been spent. The debtor replied that monies had been lost in the purchase of land. Additional monies had been used in his move to Sydney and the remainder had simply been spent.

The Chairman stated that he wished to adjourn the meeting for 48 hours so he could investigate the Creditor's Books of Debt more fully."

1. At the adjourned meeting on 22 April 1994 the proposed composition under Part X of the Bankruptcy Act was approved. The voting is recorded in the minutes of the meeting as follows:-
   

" Number Value Total number of creditors

attending and eligible to

vote on a special resolution 26 $6,210,601.69 Number Value Total number in favour of

resolution 19 $5,762,409.04 Total number against

resolution 6 $ 101,692.65

1. Excel Finance Corporation abstained from voting."

2. By an affidavit sworn and filed on 17 May 1994 Brenton Franklin Button deposes to being a chartered accountant in the employ of Ernst and Young and subject to the direction of Mr. Richard England, the receiver and manager of Excel Finance Corporation Ltd., (Receiver and Manager Appointed), a partner of the firm Ernst and Young. He further deposes to having attended the meeting of creditors of the debtor and explains that Excel abstained from voting on the special resolution with respect to the proposed composition because he was aware that a majority in number of the creditors present had indicated an intention to vote in favour of the resolution and at least 75% in value of such creditors had indicated an intention to vote in favour of the resolution. He states:-
   

"But for these matters in combination, Excel would have voted against the resolution."

1. Annexure 1 to the minutes of the meeting of creditors of 20 April 1994 show only one Mr. Button attending such meeting, a Mr. Brenton Button. I am prepared to assume that the Mr. Button recorded in the minutes as asking questions of the debtor asked such questions on behalf of the applicant.

2. The applicant put into evidence a statement of affairs of the debtor in the form of a statutory declaration made by the debtor and dated 5 April 1993.

3. The April 1993 statement of affairs shows assets of $486,000 and total liabilities of $4,814,928. Of particular interest is the fact that the April 1993 statement of affairs shows loans from family and friends plus interest in the total sum of $889,000. By contrast the March 1994 statement of affairs shows loans, including loans described in the earlier statement as being from family and friends, in the total sum of $2,032,000. That is the total value of liabilities described simply as loans increased by $1,143,000 over the period of eleven months immediately preceding the composition. There is no increase shown in assets over the same period, indeed assets are shown to diminish over the period by $446,000.

4. Although the debtor has sworn an affidavit in opposition to the application herein, such affidavit makes no reference to the increase in his loan liabilities between April 1993 and March 1994. The only explanations offered by the debtor with respect to the fate of the funds raised by such loans are thus those set about above in his answers to creditors questions at the creditors meeting of 20 April 1994.

5. In Re Richards; Ex parte Beneficial Finance Corporation (an unreported decision of Jackson J, judgment delivered 17 March 1986) His Honour said of a composition likely to return approximately one cent in the dollar to the creditors in respect of their debts:-
   

"The amount offered pursuant to the composition in settlement of the debts is so trivial when compared to the total of the debts that in the circumstances of the particular case I would regard that fact alone as a sufficient 'other reason' in terms of s.239(2) for setting the composition aside. I take that view because it seems to me that in a case where a debtor having gross assets amounting to only $2500.00 has been prepared to incur debts amounting to a hundred times that amount, the case is better dealt with by way of bankruptcy (thereby giving rise to such matters as public examination of the bankrupt and other persons under s.81) than pursuant to the rather more bland provisions of Part X dealing with compositions."

1. In this matter the statement of affairs of the debtors shows total liabilities significantly more than a hundred times his disclosed assets. It is also apparent on the whole of the evidence that the debtor borrowed additional funds of more than a million dollars over a period of less than a year when he was already apparently hopelessly insolvent. No sensible explanation has been offered by the debtor for this conduct and there was a marked lack of particularity in the answers given by the debtor to questions asked at the creditors meeting concerning the fate of the funds.

2. In Re Emmett; Ex parte Beneficial Finance Corporation and Others (unreported decision of O'Loughlin J, judgment delivered on 16 December 1991) Richard's Case was described as "a high water mark". Nonetheless it is, in my view, not out of line with other authority. In Re Brennan; Ex parte Stokes (Australia) Limited (an unreported decision of Morling J, judgment delivered 31 May 1988) where the debtor's father-in-law was prepared to advance him $20,000 for the benefit of creditors whose debts totalled in excess of $2 million, His Honour said:-
   

"In a case where a debtor has incurred debts of such huge proportions relative to his assets, there is much to be said for the proposition that it is in the public interest that there be a public examination of the bankrupt (and possibly other persons) under s.81 of the Bankruptcy Act."

1. His Honour's remarks were approved by Burchett J in Re Codrington; Ex parte Don McKay Tourist and Charter Pty. Ltd., (an unreported decision, judgment delivered 1 September 1989) and by Neave J in Re Palazzolo; Ex parte Discusso and Others (unreported decision, judgment delivered 19 July 1991). See also Re Lockett; Ex parte Northern Equity Limited (unreported decision of French J, judgment delivered 6 April 1992).

2. In N.Z.I. Capital Corporation Ltd. v. Lancaster (1991) 30 FCR 441 Foster J at p 445 said:
   

"The evidence establishes, to my satisfaction, that, having regard to the likely cost of the administration of the composition, the amount available to unsecured creditors would be ... somewhere between nothing and 1/50 of a cent in the dollar. ...

There can be no doubt that a strong case is made in the present proceedings for the setting aside of the composition on the simple basis that the unsecured creditors are, for practical purposes, getting nothing and would be better off if the debtor were made bankrupt so they could take advantage of the investigatory procedures then available to them."

1. Mr. Sulan QC, counsel for the debtor put at the forefront of his argument the following passage from the judgment of Lindley LJ in Re English; Scottish and Australian Chartered Bank (1893) 3 Ch 385 at p 409:-
   

"If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the Court can be ... .

The Court ought to be slow to differ from them. It should do so without hesitation if there is anything wrong; but it ought not to do so, in my judgment, unless something is brought to the attention of the Court to show that there has been some material oversight or miscarriage."

1. I accept that the Court "should be cautious in substituting its own judgment for that of the creditors" (Re Segal; Lensworth Finance Ltd. v. Segal and Ward (1976) 9 ALR 154 per Riley J at p 163) and that the applicant must "satisfy the Court that (it is) entitled to obtain orders that countermand the wishes of the majority of the creditors whose debts equal or exceed 75% in value of all debts; (it) must put before the Court sufficient material to establish that grounds exist for granting the relief sought" (Re Emmett; Ex parte Beneficial Finance Corporation above per O'Loughlin J). In the Emmett's Case, however, O'Loughlin J said this of the debtor's conduct:
   

"He had made himself available to be questioned by his creditors (as required by the Act); through his solicitor he painted a gloomy - but nevertheless very clear - picture: he had virtually nothing left but his boat and he asked that he be given the chance to avoid bankruptcy: a long established prosperous business had been wiped out because of the 'downturn in the property market.' Unfortunately, that would have been a story that was well known to all of those creditors and they, better than most, would have known whether the personal affairs of the debtor warranted further investigation. Dr. Baxter pointed to the large debt owing by the debtor to his family trust, complaining that no explanation had been given for its size; he also questioned might not the debtor have earlier had other assets and if so what happened to them. I accept that they are reasonable comments; indeed they are the type of matters that could and should have been raised at the creditor's meeting. The applicants, through Mr. Winter, had the opportunity to raise these topics but chose not to do so. Although this failure is not in any sense fatal to an application such as this one wonders just how important those matters truly were then and are now to the applicants? Consider how different it would be if those questions had been asked at the meeting and the debtor had (say) refused to answer them or had given some unsatisfactory reply] Then the ground might have been - and perhaps would have been - laid for this Court to intervene notwithstanding the views of the majority."

1. It seems to me that this case comes some way towards the scenario envisaged by O'Loughlin J in the above passage. At the creditors meeting Mr. Button asked whether any investigations had been carried out to determine whether any assets might be available to a Trustee in Bankruptcy. The answer to this question, given not by the debtor but by his solicitor, was at best indirect. Mr. Button further asked where the approximately $800,000, which he understood the debtor to have borrowed in the last year, had been spent. In view of the sum involved it seems to me that the debtor's reply, set out above, was unsatisfactory.

2. It is true that the minutes of the creditors meeting do not show that the representative of the applicant at the meeting sought to persuade the meeting that the composition would not be in the interest of the creditors generally. However I do not consider that he was obliged to do so, and in the face of strong support for the composition, which included support from the debtor's family and friends, he may well have considered that it would not be likely to be productive for him to do so (Re Brennan; Ex parte Stokes - above). Mr. Button has provided an explanation, which I accept, for his failure to vote in opposition to the resolution that the proposed composition be accepted.

3. Another circumstance which I consider relevant to my consideration of this matter is that at the time of the creditors meeting the applicant had presented a petition seeking the sequestration of the debtor's estate. A petitioning creditor who proves the matters upon which its petition is based has, prima facie, a legal right to an order (see Re Brennan; Ex parte Stokes - above - and the case therein cited).

4. I have taken into account that certain of the creditors who voted in favour of the composition have sworn affidavits stating that they considered that the composition would return them a greater dividend and in quicker time than would an administration of the debtor's estate in bankruptcy. I have also taken into account the affidavit of Mr. Huppatz, who has considerable experience in matters of this kind generally, although no knowledge of this matter specifically. Mr. Huppatz has deposed to a belief that generally a composition under Part X of the Bankruptcy Act involves less in administration costs, and produces a speedier and more equitable return to creditors than would occur if a sequestration were made and the debtor declared bankrupt.

5. Having weighed all of the above factors I have come to the conclusion that the composition ought to be set aside. In my view the composition does not offer the creditors any real advantage over that which they might obtain if the debtor's estate were administered in bankruptcy. The amount which will be available for distribution will be quite insubstantial when compared with the total amount owing to the creditors. It may be that on this basis alone I may conclude that "the terms of the composition are unreasonable or are not calculated to benefit the creditors generally" (Re Brennan; Ex parte Stokes - above).

6. However I prefer to rest the order of the Court on the final limb of subsection 239(2) of the Bankruptcy Act, namely "that for any other reason the composition ought to be set aside."

7. In my view the circumstances of this case suggest that it would be in the public interest that there be a public examination of the debtor, and possibly other persons under s.81 of the Bankruptcy Act. I have not disregarded the interests of the creditors who, I accept, may finish up recovering nothing. However I consider that it is more important that the debtor's affairs be fully investigated by the Public Trustee following the sequestration of his estate.

8. For the reasons given I am of the view that the application to set aside the composition should be granted. This makes it unnecessary for me to consider the claim under section 222.

9. The final question is whether I should exercise the power contained in s.239(2) forthwith to make the sequestration order sought. In my view it would be desirable for such an order to be made forthwith. Accordingly I set aside the composition and make a sequestration order.