Re Foster; Ex parte Foster v Duus
[1994] FCA 185
•14 APRIL 1994
Re: JOHN LEWIS FOSTER
Ex parte: JOHN LEWIS FOSTER and ROSS ANDREW DUUS
No. QB368 of 1993
FED No. 185/94
Number of pages - 8
Bankruptcy - Costs
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
EINFELD J
CATCHWORDS
Bankruptcy - meeting of creditors - validity of resolution of creditors if bankrupt not present due to request of creditors - whether for the purpose of a quorum a creditor who does not vote is counted.
Costs - order against non-party
Words and Phrases - meaning of "resolution"
Bankruptcy Act ss 5(1), 64N(2), 77(c)
Knight v FP Special Assets Limited (1992) 174 CLR 178
Bent v Gough (1992) 36 FCR 204
Ex parte Best (1881) 18 Ch D 488
HEARING
BRISBANE, 8 March 1994
#DATE 14:4:1994, SYDNEY
Counsel and Solicitors for Mr Dunning instructed by
the Respondents: Mr I.R. Beale of Minter
Ellison Morris and Fletcher
Counsel and Solicitors for Mr Eleftheriou instructed by
the Applicant: Baker Johnson and Partners
ORDER
The Court orders that:
1. The application for the invalidation of the resolution of the
meeting of creditors held on 18 March 1993 be dismissed.
The trustee is to place before the court any affidavit evidence on
the issue of an order for costs against Mrs Foster by 4 pm Friday 18 March, together with the full written submissions that he wishes to make on the subject.
Mrs Foster may place any evidence or affidavit she wishes to have
the Court consider in this regard by 4 pm Friday 29 March together with the full submissions which she wishes to make.
Any evidence in reply to be filed and served by 4 pm Wednesday 30
March.
The submissions by the parties shall also include submissions in
relation to the bankrupt's application that the costs of Mr Bax's attendance should be paid by the trustee.
Note: Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules.
JUDGE1
EINFELD J The bankrupt was bankrupted on his own petition on 23 February 1993. Pursuant to a consent to act as trustees, Phillip Jefferson and Jay Stevenson became the trustees in bankruptcy.
Subsequently the bankrupt wished to leave Australia on an overseas journey of approximately three weeks commencing on 2 April 1993. It was the intention of the trustees to return his passport to him for that purpose, the circumstances of which are set out in a judgment of Justice Cooper on 1 April 1993, which I shall not repeat. It will suffice to say, as his Honour's judgment makes clear, that in the period leading up to his departure a deal of dispute erupted about whether the passport should be returned to him for the purpose stated. The circumstances as attested to by the evidence do not bring great credit upon any of the parties involved in the matter. But in the end his Honour ordered that the passport be returned for the particular purpose required, on conditions. As I understand it, the bankrupt and his wife went on the trip, and have long since returned.
Arising out of the dispute over the return of the passport, a meeting of creditors was requested on 11 March 1993 and convened on 18 March. There was a lengthy agenda for the meeting, two of the items of which were the removal of the existing trustees, Mr Jefferson and Mr Stevenson, and the appointment of Ross Anthony Duus of Ernst and Young as a replacement trustee. The evidence available to me suggests that although there may have been other ancillary purposes to the meeting, these were its major purposes. The ground for the change of trustees was that the existing trustees were about to return the passport to the bankrupt for the purposes of the overseas trip to which I have referred.
The meeting was, in due course, convened. The bankrupt and the trustee Mr Stevenson were present at the meeting which was also attended by the major creditors in terms of value, Mr and Mrs McWilliam, and a proxy for a firm of solicitors, Corrs Chambers Westgarth, who were also creditors. In addition Mr and Mrs McWilliam held proxies for a Mr and Mrs Kilpatrick one or both of whom were creditors as well. It turns out that Mr and Mrs Kilpatrick were at the time undischarged bankrupts, and on the evidence before me, it is clear that their trustee was not informed of the meeting or of the fact that they were proposing to, and did in fact, provide proxies to the McWilliams.
The meeting appointed an independent chairman and at a certain stage the bankrupt was by resolution of those present asked to leave. The minutes reveal that the resolution was passed on the voices and do not note any objection by the trustee to that course, although his affidavit in these proceedings discloses that he was surprised by the move to exclude the bankrupt from the meeting.
In the bankrupt's absence a resolution was proposed that Messrs Jefferson and Stevenson be removed as trustees. The minutes note that the resolution was moved by Mr McWilliam, presumably in his capacity as a debtor himself, and seconded by him with his proxy for Mr Kilpatrick. The instructions of the person present as proxy for Corrs Chambers Westgarth were apparently to abstain on the voting on any resolution. As a consequence the resolution was passed on the voices.
The meeting then considered a motion for the appointment of Mr Duus as trustee. Once again, the motion was proposed by Mr McWilliam. Mr Duus' consent to act was apparently indicated by a written document. The minutes do not note who seconded the resolution, but it may be assumed in the light of the other facts to which I have adverted that it was seconded by Mr McWilliam in his other capacity as proxy for the Kilpatricks. Once again the minutes note that the resolution was carried unanimously on the voices. It seems that during all of these deliberations the bankrupt was still in the building although not physically present at the meeting.
The application before the Court today was filed on 3 August 1993. It is difficult to understand why a matter of this kind has taken seven months to come on for hearing. The application seeks an order that the resolution removing Mr Jefferson and Mr Stevenson as trustees be declared void. It does not seek an invalidation of the appointment of Mr Duus, but if I were minded to uphold the application to invalidate the removal of the earlier trustees, I would be prepared to entertain an application to add a request for an order invalidating the resolution appointing Mr Duus. The same contentions for the invalidation of the resolution to remove the earlier trustees would apply to the resolution for his appointment.
There are two arguments advanced in favour of the order sought in the application. The first is that there was not a valid quorum present at the meeting. The Bankruptcy Act provides in section 64N(2) that where there is more than one creditor entitled to vote, a quorum is constituted -
..... by two persons participating in person or by telephone each of whom is either a creditor who is entitled to vote or the proxy or attorney of such a creditor.
That provision makes it perfectly clear that in order for the chair to determine whether a quorum is present, there must be present two persons, either in person, by telephone or by proxy, each of whom is a creditor. The minutes show that at the time when the determination of a quorum was made, Mr Stevenson was in the chair. Although the minutes do not state precisely who was present, there is an entry showing that creditors and observers were present as per the attendance register. Undoubtedly, Mr Stevenson took into account the proxy held by Mr and Mrs McWilliam for the Kilpatricks as well as the presence by proxy of Corrs Chambers Westgarth. The minutes show simply him saying that:
I declare that a quorum exists for the conducting of the meeting today.
There is an argument as to whether the proxy for the Kilpatricks was valid. Mr Duus, who is participating in these proceedings more in the capacity of an amicus curiae than an adversarial litigant, has put the viewpoint in argument that the proxy was valid to bestow upon Mr McWilliam the capacity to vote in respect of the Kilpatricks' debt. There is also an argument put on behalf of the trustee that Mr and Mrs McWilliam may in fact have been two creditors present at the meeting and possibly even that the Kilpatricks should also be treated as two separate creditors even though there was only one debt. However, it does not seem to me necessary to determine in this particular proceeding whether two partner creditors represent one or two persons for the purposes of section 64N. This is because on any view the McWilliams must have represented at least one person present, and the proxy for Corrs Chambers Westgarth represented the second.
An argument was sought to be mounted that as the brief of the proxy for Corrs Chambers Westgarth was to abstain in relation to any resolution, some reading of the Act might be possible so as to remove this person from the calculation of a quorum defined by section 64N. In my opinion that argument is not correct. Section 5(1) defines a "resolution" as:
..... a resolution passed by a majority in value of the creditors present personally or by attorney or by proxy at a meeting of creditors and voting on the resolution.
Without going into the question as to whether a person who abstains on a vote is actually voting, which I think is the case, this definition of "resolution" merely requires an affirmative vote by one or more creditors who hold a majority in value of the debts in the estate. It does not mean that all the members of the identified quorum have voted on the resolution and still less that all those persons have voted in favour of the resolution. All it means is that the majority of the creditors in terms of the value of debts owed, who were present personally or by proxy, have voted on and in favour of the resolution.
Both in relation to the removal of Messrs Jefferson and Stevenson and the election or appointment of Mr Duus, the voting indicates that Mr McWilliam, exercising his own power to vote in respect of his and his wife's debt, voted in favour of the resolution. As the total indebtedness declared was in the vicinity of $150,000 of which the McWilliams were owed $127,000, it is therefore clear that a majority in value of the creditors personally present at the meeting voted on the resolution as required by section 5(1). As there is, in my opinion, no interaction between the provision for the quorum in section 64N(2) and the definition of "resolution" in section 5(1), there was correctly found to have been a quorum present at the meeting. There is no basis on that argument for the invalidation of the resolution.
The second argument was that the bankrupt was not present personally during the voting on the removal of the initial trustees and the appointment of the replacement trustee. This argument is based upon a provision of section 77 of the Act that:
A bankrupt shall, unless excused by the trustee or prevented by illness or other sufficient cause .....
(c) attend a meeting of creditors whenever the trustee requires.
The evidence established that the bankrupt's presence at this meeting was preceded and secured by a request from the trustee that he be present. The argument put on behalf of the bankrupt is that section 77 is mandatory and that in the event that the bankrupt is not present at a meeting of the creditors unless excused by the trustee or prevented by illness or other sufficient cause, then the meeting and everything that takes place at it is invalidated.
In my opinion that argument ought not to be accepted. The provisions of section 77, as intimated by its heading "Duties of Bankrupt as to Discovery, etc., of Property" is to protect the interests of creditors, not to give rights to bankrupts. The purpose of the section is to make sure that the bankrupt is present to give creditors such information and assistance in determining the matters before them as they may wish to have or need. It is indicative of a range of obligations in the Act which a bankrupt must render to the trustee as the representative of the creditors and to the creditors directly during the course of bankruptcy. Section 77 is, in fact, the first section in Part V of the Bankruptcy Act which is headed "Control Over Person and Property of Debtors and Bankrupts". This is not a series of provisions which protects or grants rights to the bankrupt, but is part of the administration of the bankrupt's activities and property during the course of the bankruptcy to be exercised in the interests of the creditors.
I was referred in this connection to a decision of the English Court of Appeal, as long ago as 1881, in a case called Ex parte Best 18 Ch D 488. That case concerned a meeting to consider a composition but there is no serious difference in principle with the present circumstances. There were three judgments given by the members of the Court, all of them it seems ex tempore after argument. It is expressly clear in the case of two of the judgments, and impliedly or inferentially clear in the third judgment, that the debtor's presence at such meetings was for the purpose of assisting the creditors and not to provide rights to the debtor. Lord Justice Cotton described the obligation as:
The debtor must be in the room unless the creditors excuse him.
Lord Justice Brett said that the creditors cannot waive the presence of the bankrupt just on a whim, or as he put it, "if they please", but they may do so for "other cause satisfactory to the meeting". It is implicit also in the decision of the Lord Chancellor, Lord Selborne, that if the creditors do not wish the debtor to be present, they may in certain circumstances dispense with the presence. In the particular case, as a matter of fact, the debtor was apparently in a room adjoining the room in which the meeting was taking place, and much of the debate in the case concerned whether in such circumstances, although not actually in the room, he was in fact present at the meeting.
Even without that decision, it might have been clear that the provision in section 77 that a bankrupt may be excused for sufficient cause may include that the trustee or the creditors have dispensed temporarily or permanently with his presence. I am quite satisfied that the creditors may, if they wish, excuse the debtor from being present at a meeting, and there is to my mind no difference between their making such a decision and, as happened in this case, passing a resolution that he leave.
Having said that, I must say that nothing has struck me as justifying the resolution for his removal. As I pointed out, the minutes show that apart from formal matters concerning the remuneration of trustees, the only substantive business transacted in his absence was the removal of the initial trustees and the substitution of the replacement trustee. As this was the principal business of the meeting, I cannot see why he could and ought not to have been present at the time when those matters were transacted. However, I do not think that the debtor can claim an entitlement to be present in the face of a resolution by the creditors that he remove himself, nor does section 77 give him the right to have the meeting invalidated by reason of his absence. There is nothing to suggest that the resolution for the removal of the trustees or for the appointment of a replacement trustee was affected by his absence, or would have been affected by his presence. In the circumstances, I am therefore unable to uphold this second challenge to the meeting.
Other arguments raised on behalf of the trustee therefore do not need to be addressed and determined in these proceedings. Arguments were put that even if there were irregularities in relation to the meeting and resolutions, they were curable by sections 64ZF and 306 of the act. Alternatively, it was argued that even if there were some irregularities found, the Court's discretion to grant or not to grant the order sought should be exercised against the invalidation of the resolution. Several grounds were put in this regard, some of which, I think, have significant cogency. The Court is reluctant to set aside deliberations of creditors which appear to reflect their rational and voluntary choice, particularly when the action to invalidate is taken a considerable time after the meeting, and a great number of facts and events have taken over in the intervening period.
In this particular case, now virtually a year after the meeting, there would be a very considerable loss of time, cost and inconvenience if the Court were to undo what has now been a fact in existence for a year. The bankrupt waited from the meeting on 18 March to 3 August to launch these proceedings. The explanation he gave for this delay was that his present solicitor was only appointed late and the solicitor acted quite promptly. I make no criticism at all of the solicitor whose conduct has been impeccable but the question at stake is not how long the solicitor took to take the proceedings, but how long the bankrupt took to act at all.
I certainly allow for the fact that the bankrupt was overseas for the three weeks in April, but the meeting was held on 18 March, and if an attack was going to be made on the resolutions passed then, the time to have taken these proceedings was immediately after the meeting before the replacement trustee had taken control of the estate and was already expending time and money on its administration. Thus if the matter turned on discretionary questions, I would be favourably inclined to regard the delay, and the apparent absence of any cause for this proceeding other than some personal differences or difficulties which the bankrupt says he is having with the present trustee, as significant. However, as I have said, discretionary questions do not need to be considered, because in my view neither of the specific attacks made on the deliberations and activities of the meeting on 18 March 1993 have been made out.
This bankrupt has now been in bankruptcy for something of the order of 13 months. It seems to me that the disputation between the McWilliams and the bankrupt who were formerly business partners, which has marked his bankruptcy, really must settle down. The Court has now been activated on two occasions to deal with matters of very little moment, one from each side of the argument, the McWilliams as the major creditors, and the bankrupt. A considerable amount of money must have been spent on these sets of proceedings, not to mention the considerable tension that must have developed between the parties principal in the matter. I know that the circumstances of bankruptcies sometimes cause a sense of grievance and upset, but there is no future to pursuing vendettas in Court. All it does is cost money and more upset. And the expenditure of money out of this estate means only that the creditors will receive less in a distribution of assets that would otherwise be the case. Some of them here deserve and presumably need that money for their own activities, yet if costs are awarded against the estate, they find themselves, basically without a choice, directing the money towards the activities and interests of lawyers. That is not in the public interest, nor is it in the interests of a rational administration of the estate.
Mr Foster is a bankrupt because he presented his own petition. The trustee must be allowed to get on with his work. It will not be of assistance to anyone concerned to have another brushfire in yet further proceedings during the course of this bankruptcy. I hope that it will be possible for the parties to realise calmly that the law must be allowed to take its course. I appeal to everyone involved to bring a degree of maturity and sophistication and some commonsense to the administration of the estate so that it can be completed in the quickest and most efficient possible way.
The application for the invalidation of the resolution is dismissed. Any other orders sought?
The application before the court having been dismissed, the trustee applies for an order for costs of an unusual kind. The application first of all is that costs be paid by the bankrupt in the knowledge that the bankrupt is unable to meet an order for costs and the estate has inadequate funds to pay them. Alternatively, or cumulatively, the trustee applies for an order that the costs be paid by Mrs Foster, the wife of the bankrupt. There is, to say the least, a bare minimum of evidence to support this application. Some evidence was extracted in the course of these proceedings, which was essentially irrelevant to the proceedings except as to costs, that the bankrupt has transferred his half-interest in the home in which he lives with his wife and family to his wife, thereby divesting himself of his interest in the premises, wholly or very substantially.
Moreover, there was evidence that Mrs Foster retained the solicitor who has been acting in these proceedings for her husband, and that that solicitor has, in due course, briefed counsel to appear. Although the solicitor's evidence was that no account for costs had yet been rendered, the inference was that when the time comes, they will be rendered to Mrs Foster and not to the bankrupt. It is clear that Mrs Foster is funding, or has retained a solicitor with the inference that she will fund, the costs of her husband in this application.
There is no doubt that the Court has power under section 32 of the Bankruptcy Act to make an order against a non-party. This is established with some learning by members of a Full Court of this Court in Bent v Gough (1992) 36 FCR 204. The question, therefore, is whether such an order ought to be made in these proceedings. My attention was drawn in argument to some remarks of the High Court in Knight v FP Special Assets Limited (1992) 174 CLR 178. At 192, Mason CJ and Deane J recognised what their Honours described as:
..... a general category of case in which an order for costs should be made against a non-party.
The criteria mentioned by their Honours, not necessarily to be taken as a comprehensive outline of the limit of the circumstances applicable, included where the party to the litigation, presumably in this case the party upon whom an order for costs might otherwise devolve in the litigation, is an insolvent person or a person of straw, where the non- party has played an active part in the conduct of a litigation, and where he or she has an interest in the subject matter of the litigation. In those circumstances, their Honours said that if the interests of justice require that a costs order be made against a non-party, it should be made.
That would, so the argument goes, include Mrs Foster in this particular proceeding. It is said of her that as the transferee of the half-share in the home, she has an interest in making the task of the trustee as difficult as possible so that he will not be in a position to examine and perhaps make an application to the Court concerning her husband's former interest. It is also said that Mrs Foster has an interest in, I suppose, retaining as much flux in the administration of her husband's estate as is possible in order to preserve his assets as best she can, whether they have been transferred to her or not.
I think there is some strength in what the trustee argues in this matter, but it strikes me that the evidence falls short, at the moment, of establishing sufficient facts. Moreover, I am uninclined to make an order against a non-party without giving the person concerned an opportunity to be heard in the matter. As I mentioned in the judgment on the substantive application, this case has undertones or overtones which make it very difficult for a judge to get at the facts. A great deal of emotiveness has come into the relationship between the principal creditor and the bankrupt which has possibly infected others including the trustees who have had association with the estate.
This is not a particular criticism of any of the trustees concerned because it would perhaps be surprising if to some extent this dispute had not rubbed off on them in some way, but the fact is that it makes a resolution of factual issues quite a difficult task, and I am uninclined to make an order against a non-party without hearing that person. For that reason what I propose to do in the case is to give some directions for the fuller and better litigation of the issue of costs so that the Court will be in a better position to determine where the justice properly lies.
I therefore order that the trustee place before the court, by way of affidavit, such additional evidence on the issue of an order for costs against Mrs Foster as he may be advised by not later than 4 pm on Friday 18 March, together with the full written submissions that he wishes to make on the subject. I direct that the solicitor for the bankrupt notify Mrs Foster that an application has been made that she pay the trustee's costs of this application and that she may, if she wishes, place before the Court on affidavit the facts and matters which she would wish to have the Court consider in this regard. Such affidavit evidence is to be filed and served by not later than 4 pm on Friday 25 March, together with the submissions which she wishes to advance, or her lawyers wish to advance, in opposition to the order sought. Any evidence in reply to the evidence of Mrs Foster by the trustee is to be filed and served by not later than 4 pm Wednesday, 30 March.
At the end of that process, I shall consider the judgment that ought to be given on the issue of costs. Until that time, the issue of costs will remain part-heard.
HIS HONOUR: I will add to the order I made before. The submissions by the parties in relation to the proposed order for costs against Mrs Foster shall also include such submissions as they wish to make in relation to the bankrupt's application that the costs of Mr Bax's attendance on subpoena to give evidence should be paid by the trustee in any event.
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