Re Farrow, J.C. v Ex parte Panasonic Australia Pty Ltd
[1991] FCA 245
•10 MAY 1991
Re: JEFFREY CHARLES FARROW
Ex Parte: PANASONIC AUSTRALIA PTY LIMITED
No. P 2766 of 1990
FED No. 245
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
GENERAL DIVISION
Davies J.(1)
CATCHWORDS
Bankruptcy - Deed of Arrangement under Part X of the Bankruptcy Act - whether the Court should make an order terminating the deed.
Bankruptcy Act 1966 (Cth) - ss.233, 236
HEARING
SYDNEY
#DATE 13:5:1991
Counsel for the applicant: Mr C.R. Newlinds
Solicitors for the applicant: Henry Davis York
Counsel for the respondent: Mr R.G. Cunich and
Mr A.E. Cramer-RobertsSolicitor for the respondent: Abbott Tout Russell Kennedy
ORDER
The petition be dismissed.
The application to set aside the Deed of Arrangement be refused.
No order be made as to the costs of the proceedings.
NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
These proceedings commenced as a petition brought by Panasonic Australia Pty Limited ("Panasonic") for the sequestration of the estate of the debtor, Jeffrey Charles Farrow. At the hearing on 21 February 1991, counsel for Mr Farrow sought an adjournment to enable a proposal to be put to his creditors. Mr Farrow had authorised a registered trustee in bankruptcy, Mr M.C. Donnelly, to call a meeting of creditors.
The evidence before the Court showed that a company owned and controlled by Mr Farrow, Componere Systems Pty Limited ("Componere"), had been a successful agent for the sale and maintenance of Panasonic facsimile machines. However, in or about May 1986, Mr Farrow's solicitor, Mr R.C. Cooper, invited Mr Farrow to provide finance to a Mr Spartalis to enable him to purchase the right to manufacture a brick-making machine said to have been developed by Bergood Pty Limited ("Bergood"). Mr Farrow became interested in the matter and subsequently, when Mr Spartalis withdrew, Mr Farrow and Mr Cooper, through a jointly owned company, Paeson Pty Limited ("Paeson"), entered into an arrangement with Bergood to acquire the rights to and to develop Bergood's brick-making machine.
A great deal of money was put into this enterprise which was unsuccessful. When the enterprise collapsed, Paeson, Mr Farrow and Componere sued Bergood and certain other persons alleging, inter alia, breaches of s.52 of the Trade Practices Act 1974 (Cth). On 5 February 1990, Burchett J. made findings in favour of the applicants. In brief, his Honour accepted the evidence given by Mr Farrow and found that he, Paeson and Componere had been deceived. On 30 March 1991, his Honour gave judgment for the applicants in the sum of $1,335,328.03.
However, it appears that by this time the respondents were impecunious. Accordingly, the lengthy legal proceedings which resulted in judgment simply added to the financial woes of Componere, Paeson and Mr Farrow. The costs of the litigation were very substantial. Componere and Paeson collapsed under the weight of debt and Mr Farrow, who had guaranteed the companies' obligations, found himself in the position of having unsecured creditors of $2,402,806, with assets only of cash at bank $80, cash in hand $50 and household furniture and effects valued at $5,000.
In support of the application for an adjournment, it was said that one of the creditors, NZI Management Services Ltd ("NZI"), was prepared to fund a preliminary inquiry as to whether proceedings could and should be taken by Mr Farrow against his former solicitor, Mr R.S. Cooper, and that NZI might fund proceedings against Mr Cooper if the preliminary advice favoured that course. In the circumstances that there appeared to be little benefit to creditors from sequestrating Mr Farrow's estate, that the major contributing cause to the downfall of Mr Farrow's businesses had been the subject of lengthy litigation before Burchett J., and that his Honour had found in favour of Mr Farrow and his companies, it seemed to me that I ought to allow the matter to be considered by the creditors. Accordingly, against the opposition of counsel for Panasonic, I adjourned the proceedings to allow the meeting of creditors to be held.
When the matter came on for hearing again on 18 March 1991, I was informed that, on 13 March 1991, a meeting of the creditors had by special resolution approved a deed of arrangement. The resolution was as follows:-
"To approve the Deed of Arrangement in the terms and conditions as tabled at the meeting being the Deed of Arrangement attached as Annexure "K" to the Controlling Trustee's report.
Moved: Mr Brown
Seconded: Mr Teng
For the motion:
CBFC Leasing Pty Limited ($34,295) Leasco Australia Pty Limited ($51,021) Arm Equipment Finance Pty Limited
T/a Beneficial Equipment ($660,247) McCartin and Associates Pty Ltd ($5,000) NZI Capital Corporation Ltd ($1,070,000) Wilson Wong and Tan ($4,000) Wayne White ($8,000) Total ($1,823,563) Against the motion:
ANZ Banking Group Ltd ($107,964) Oce Australia Ltd ($86,596) Panasonic Australia Pty Ltd ($176,604) Total ($371,174) Motion carried as a Special Resolution."
Mr M.C. Donnelly was appointed trustee of the deed of arrangement. The deed was executed on 13 March 1991.
Relevant provisions of the deed provided that all the divisible property of Mr Farrow, other than his household furniture and effects, passed to the trustee. Mr Farrow covenanted with the trustee that he was to pay the sum of $33,800 by way of $5,000 already paid to the trustee and 12 monthly instalments of $600 per month payable on or before the first day of each month commencing on 1 April 1991, 12 monthly instalments of $800 per month payable on or before the first day of each month commencing on 1 April 1992 and 12 monthly instalments of $1,000 per month payable on or before the first day of each month commencing on 1 April 1993. Mr Farrow covenanted to cooperate with and to assist the trustee in all respects to recover contingent assets of his estate by way of litigation or otherwise and to give assistance to Paeson and Componere to help them recover moneys to which they might be entitled including any claims they might have against Mr R.S. Cooper. The property assigned expressly included the benefit of the judgment in the proceedings in which Burchett J. gave judgment and of any cause of action that Mr Farrow might have against Mr R.S. Cooper. The deed provided that the deed should terminate at the expiration of 40 calendar months from the commencement date or, if the creditors by special resolution should extend the time for payment of the $33,800, at the expiration of 4 calendar months after that further time, or if Mr Farrow should pay the sum of $33,800 before the expiry of 36 calendar months, then 4 months after the payment of that sum. The deed provided that, upon the payment of the sum of $33,800 in accordance with the deed, Mr Farrow shall be released from all provable debts. To cover the position should one of the creditors fund further litigation against Mr R.S. Cooper or otherwise, the deed expressly provided that, subject to the approval of the creditors or of the Court, the trustee may negotiate with any creditor for a priority payment of the whole or part of the creditor's debt if the creditor funded any litigation which resulted in the creditors receiving a benefit.
I am satisfied as to the proof the matters required for a valid deed of arrangement under Part X of the Bankruptcy Act 1966 (Cth)("the Act").
When the matter came on for hearing on 18 March 1991, counsel for Panasonic submitted that I should not give weight to the deed of arrangement for, he submitted, it would be perverse to give effect to a deed under which the only benefit to the creditors seemed to be a payment of $33,800 by instalments over 36 months while the unsecured debts amounted to $2,402,806. Counsel relied upon the words "for other sufficient cause" which appear in s.52(2) of the Act. It appears to me, however, that this aspect of the matter is entirely covered by s.233 of the Act which provides, inter alia:-
"(1) A deed of arrangement that is entered into in accordance with this Part and complies with the requirements of this Part is, upon being duly executed by the debtor and the trustee, binding on all the creditors of the debtor.
(2) Subject to subsections (3) and (4), where a deed of arrangement has become binding on the debtor's creditors, it is not competent for a creditor, so long as the deed remains in force -
(a) to present a creditor's petition against the debtor, or to proceed with such a petition presented before the deed became so binding, in respect of a provable debt;
...".
On being informed that I may take that view, counsel for Panasonic then arranged to have filed in Court an application under s.236 of the Act. Section 236 provides, inter alia:-
"(1) The Court may, upon application by the trustee, a
creditor of the debtor, or, if the debtor has died, the person administering the estate of the debtor, if it is satisfied -
(a) ...
(b) that the deed of arrangement cannot be proceeded with
without injustice or undue delay to the creditors, the debtor or, if the debtor has died, the estate of the debtor; or
(c) that for any other reason the deed of arrangement ought to
be terminated, make an order terminating the deed.
(2) The Court shall not make an order terminating a deed on the ground specified in paragraph (1)(a) or (c) unless it is satisfied that it would be in the interests of the creditors to do so."
This application was heard on 16 April 1991.
It will be noted that creditors claiming debts of $2,203,737 were present at the meeting of creditors and that the major creditors were finance companies. Of these, four of the companies with the greatest claims voted in favour of the motion. The ANZ Banking Group Limited, Oce Australia Limited and Panasonic voted against the motion but their claims were, by comparison, relatively small. Only Panasonic, which claimed for $176,604, has appeared in these proceedings.
Counsel for Panasonic submitted that, under a bankruptcy, after acquired property would pass to the trustee but would not do so under the deed of arrangement. In the absence, however, of some tangible indication that Mr Farrow would be likely to receive some property during the course of bankruptcy which would be of value to creditors, I give little weight to this factor.
Of more significance is counsel's contention that, if Mr Farrow's affairs are investigated, it may be found that he has given a preference to some creditor or that some property which has been transferred can be recovered back. However, with respect to this matter also, no tangible matter has been put forward. Mr Farrow was cross-examined and one or two matters were put to him. It does not seem to me, however, that there is any probability of recovering through bankruptcy a benefit which would not be obtained under the deed of arrangement.
The minutes of the creditors' meeting show that Mr Farrow was pressed at length on such matters. The representative for Panasonic put a number of questions to Mr Farrow including questions about matters that had been raised before me. The representatives of other creditors also questioned Mr Farrow. It is clear that there was a good deal of discussion about Mr Farrow's affairs. In the light of the evidence in the proceedings before me and of the discussion at the creditors' meeting, it does not appear to me that there is any matter which, in the interests of the creditors and of the proper administration of the bankruptcy laws, ought to be investigated in a bankruptcy.
On the whole, it seems to me that there is no sound reason to doubt the judgment of the creditors as expressed at the creditors' meeting. The creditors were well able to look after their own interests and had an adequate opportunity to consider Mr Farrow's affairs. The creditors were aware that the petition was on foot and would have assumed that, if they did not pass a special resolution, Mr Farrow would be made bankrupt and that the ordinary course of a bankruptcy administration would follow. So they had a clear choice either to accept the deed of arrangement or to favour bankruptcy. The creditors preferred to accept the arrangement. It is noticeable that the major creditor, NZI, was taking a positive step to recover funds for the creditors by funding the initial consideration of whether proceedings might be taken against Mr Cooper. NZI might well have thought that any prospect of recovery from this source would be enhanced by having Mr Farrow's full cooperation and that the creditors were more likely to obtain this if they cooperated with him in the deed of arrangement than if they did not.
Whether this be so or not, it is clear that the creditors came to the view that nothing was to be gained by the sequestration of Mr Farrow's estate and that they should accept whatever benefits might be obtained from the scheme of arrangement.
I would add that the scheme of arrangement seems to be a well drawn deed, the matter seems to have been fairly put to the creditors and the minutes are well drawn and comprehensive. No doubt the creditors had confidence in Mr Donnelly's administration.
In these circumstances, the application under s.236 is refused. In this circumstance, the petition must be dismissed.
In the events which have occurred and, having regard to the lateness of the scheme of arrangement, I think that I should make no order as to the costs of the proceedings.
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