Re Hetherington, John Fenton Ex Parte Deputy Commissioner of Taxation v Niemann, Ernest Harding

[1982] FCA 290

DEPUTY COMMISSIONER OF TAXATION v. NIEMANN (1982) 69 FLR 79
Nos. 84-96 of 1982x
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
C.A. Sweeney J.(1)

CATCHWORDS

Bankruptcy: deeds of arrangement - whether deeds comply with the provisions of Part X of the Act - distribution clause in each deed purported to require the trustee to intermingle funds which were required by the Act to be administered separately - whether the court should declare each deed to be void or whether it should declare provisions of each deed to be void - conduct of registered trustee examined - circumstances in which a registered trustee should not accept appointment as controlling trustee or as trustee of a deed.

Bankruptcy Act 1966 (C'th): SS108; 190; 222(1), (2), (3); 237(2)

Bankruptcy Rules Rule 100, Form 43

Bankruptcy - Deeds of arrangement - Whether the deeds comply with Pt X of Act - Distribution clause required trustee to intermingle funds - The Act requires these funds to be administered separately - Whether each deed to be declared void or whether distribution clause to be severed.

Bankruptcy - Registered trustee - Conduct examined - Conflict of interest - Circumstances barring a registered trustee from accepting appointment as controlling trustee or trustee of a deed - Bankruptcy Act 1966 (Cth), ss 108, 109, 222(1), (2), (3), 237(2) - Bankruptcy Rules, r. 100.

HEADNOTE

In 1977 a group of medical practitioners, including each of the twelve debtors named as respondent to these applications before the Federal Court of Australia, embarked upon the business venture of establishing a private hospital. When they ran into financial difficulties meetings of creditors were held.

In the case of each debtor an almost identical deed of arrangement was agreed to and executed by each debtor on 25 May 1981. The Deputy Commissioner of Taxation applied in each case for the deed to be declared void and to be terminated. At the wish of all parties all the applications were heard together. The full facts of the case including the text of cl. 3 of the deed of arrangement in the judgment is set out.

Held, that in each of these cases the deed of arrangement is declared void on the ground that it does not comply with the requirements of Pt X of the Bankruptcy Act 1966 (Cth) (the Act). Nor does it comply substantially, within the meaning of that phrase in s. 222(3) of the Act, with those requirements because:

(1) In order to comply with Pt X of the Act, a deed of arrangement of an individual debtor must require the trustee to hold his contributions upon trust for his creditors, to be distributed rateably among them.

Attorney-General of Ontario v. Attorney-General for the Dominion of Canada (1894) AC 189, referred to.

(2) The resolution proposed and accepted by each meeting of creditors was fundamentally based on the creditors receiving the fruits of the distribution prescribed by cl. 3 and granting in return the right to the release and discharge provided by cl. 4.

(3) To use the power of severance so as to strike out the substance of cl. 3 would be to produce in each case a fundamentally different deed from that for which the creditors voted.

Duties of a registered trustee considered.

HEARING

1982, December 14. #DATE 14:12:1982

APPLICATION.

Application to the Federal Court of Australia for a declaration that a deed of arrangement executed on 25 June 1981 is void and that the said deed be terminated.

W. F. Ormiston Q.C. and B. R. S. Kendall, for the applicant.

A. C. Chernov Q.C. and P. B. Murdoch, for the respondents.

Cur. adv. vult.

Solicitor for the applicant: B. J. O'Donovan, Commonwealth Crown Solicitor.

E. F. F.

JUDGE1

At the conclusion of addresses on 8 November 1982 I said:-

"In each of these cases I am of opinion that the deed of arrangement does not comply with the requirements of Part X of the Bankruptcy Act 1966. In each case I am satisfied within the meaning of S.222(3) of the Act that the deed does not comply substantially with those requirements. In each case I am satisfied that I should make an order declaring that the deed is void on the ground that it does not comply with the requirements of Part X and it is so ordered."

I then said that in due course I would publish my reasons for that opinion and those orders and for such opinions, if any, as I might express in relation to the other grounds relied upon by the applicant. My reasons now follow.

In his application in the estate of John Fenton Hetherington dated 6 October 1981, as amended from time to time by leave, the Deputy Commissioner of Taxation ("the Commissioner") sought the following orders:

"1. A Declaration that a Deed of Arrangement executed on 25th day of June 1981 by John Fenton Hetherington as the debtor, of the one part, and Ernest Harding Niemann as the trustee, on the other part, and so executed pursuant to a special resolution of a meeting of creditors of the debtor requiring the debtor to execute the same held 25th day of June 1981 is void, upon the following grounds:

(i) the said Deed of Arrangement was not entered into in accordance with the provisions of Part X of the Act, and in particular, without limiting the generality of the foregoing:

(a) the said special resolution was invalid because it was determined by votes cast by persons purporting to hold proxies which were invalid in that the purported proxies were not in the form prescribed by the Bankruptcy Rules and were inaccurate and uncertain;

(b) the debtor being a joint debtor with other persons being partners in the Sherbourne Clinic Partnership failed to submit to the said meeting of creditors both a statement of his joint affairs and a statement of his separate affairs;

(c) separate resolutions were not put to the said meeting in respect of joint affairs and of the separate affairs of the debtor and the joint creditors did not vote upon a resolution proposed solely for their consideration and the separate creditors did not vote upon a resolution proposed solely for their consideration.

(d) the said Ernest Harding Niemann failed to advise creditors who executed instruments of proxy in favour of persons attending the said meeting of the terms and effect of the said deed and a Memorandum to Creditors of the Sherbourne Clinic Partnership dated 27th May 1981 did not explain the terms and effect thereof.

(e) the debtor failed to submit a Statement of Affairs in accordance with the provisions of Part X of the Act and, further or alternatively, omitted certain material particulars from the Statement of Affairs submitted to the said meeting of creditors.

PARTICULARS

The said Statement of Affairs was not a proper or sufficient Statement of Affairs within the meaning of section 195 of the Act, and Rule 78 and Form 11 of the Rules, and in particular failed to include proper or sufficient particulars of all assets of the debtor, including his interest in the assets of the Sherbourne Clinic Partnership, and failed to include proper or sufficient particulars of all liabilities of the debtor including his liabilities (and the names and addresses of the creditors to whom those liabilities were owed) as a member of the Sherbourne Clinic Partnership

(ii) that the said Deed of Arrangement did not comply with the requirements of Part X of the Bankruptcy Act, and, in particular, failed to make separate provision for the joint and separate administration of the affairs of the debtor.

2. An order that the said Deed be terminated upon the following grounds:

(i) the said Ernest Harding Niemann as controlling trustee of the debtor's estate:

(a) in the said Memorandum to Creditors dated 27th May 1981 circulated to creditors before a meeting of creditors of the debtor held the 11th day June 1981; and

(b) in Statements made to a meeting of creditors of the debtor held on the 11th day of June 1981 and at a meeting of creditors held on the 25th day of June 1981 -
incorrectly stated to the creditors of the debtor that upon agreement by the debtors' creditors to the arrangement embodied in the said Deed (and agreement by creditors to deeds in similar form to the said Deed to be executed by other debtors being members of the said partnership, if such other debtors were directed to execute such deeds by resolutions of meetings of their respective creditors) he anticipated that, over a period of three years, the trade creditors of the said partnership would be paid the full amount of debts due and owing to them by the said partnership in respect of the period 8th July 1980 to 1st October 1980.

(ii) the said Deed cannot be proceeded with without injustice to the creditors, or some of them, because:

(a) certain creditors of the debtor being joint creditors of the debtor voted, or instructed their proxies to vote, for the said special resolution with the result that the voting entitlement and power of persons who were separate creditors of the debtor was overborne;

(b) the Respondent (by which expression the applicant meant to refer to the respondent E.H. Niemann) made a Statement to the said meeting of creditors to the effect that if those persons who were joint creditors of the debtor did not recover the full amount of debts due to them by the debtor and other joint debtors being members of the said partnership, the said joint creditors could claim and recover the balance outstanding thereof from the said partnership, which was not the effect of the said Deed;

(c) the said Ernest Harding Niemann cast proxy votes in favour of the Deed in circumstances where he had a conflict of interests namely a conflict between his duty as the appointed proxy of certain creditors of the debtor and his duty as the informal administrator of the Sherbourne Clinic Partnership and his duty as the Official Manager of Tamaree Nominees Pty. Ltd.

(iii) the Deed was unreasonable and unfair to the applicant and the other separate creditors of the debtor in that, inter alia, no property of the debtor was assigned to the trustee and the expected dividend arising out of the agreed contribution of the debtor was less than 5 cents in the dollar and the debtor was to be discharged for all further liability in respect of all provable debts.

(iv) the Deed, and in particular Clause 3 is meaningless and unintelligible.

(v) that benefits were provided to a creditor, General Credits Ltd, other than those provided under the Deed, which were not disclosed to the creditors of the debtor or at any meeting of the creditors:

(a) undertaking by the debtor to General Credits Ltd, dated 23rd June 1981;

(b) undertaking by the debtor to General Credits Ltd, to appoint the Respondent Niemann as a trustee of his family trust, dated 25th June 1981.

2A. An order for an injunction to restrain the Respondent Ernest Harding Niemann by himself, his servants or agents from making any distribution of any funds received or held by him pursuant to the said Deed of Arrangement or from paying any dividends to any of the creditors of the debtor until the determination of this Application herein dated the 6th day of October 1981 or until further Order.

3. An order that the debtor and the respondent Niemann pay the Applicant's costs of this Application.

4. Such further or other relief as the Court deems fit."

Leave was granted to the applicant on 5 November 1982 further to amend the application, in a manner which is set out later in these reasons.

In the case of each of the other estates listed in the heading to these reasons, the Commissioner made an application, also dated 6 October 1981, seeking an order that the deed of arrangement executed by each debtor on the same day, 25 June 1981, be declared void and an order that it be terminated.

The applications in each of the other estates were in the same form as that in respect of Dr Hetherington except that in the case of Dr Tomkins there was no equivalent of paragraph 2(v), in the cases of Drs Sterling, MacKellar, Dyson, Gunn and Pedrotti there was no equivalent of sub-paragraph 2(v)(b), and in the cases of Drs MacKellar, Sterling, Key and Gunn there was added by leave a further sub-paragraph to paragraph 2(v), adding a reference to authorities given to Mediaction Pty Ltd.

At the wish of all parties, all of the applications have been heard together. Each deed of arrangement was in common form, the only differences being in the names of the debtors and the amount of the contribution to be made by each debtor. Mr Niemann was the trustee of each of the deeds. The Commissioner was represented by Mr Ormiston Q.C. and Mr B.R.S. Kendall and Mr Chernov Q.C. and Mr P.B. Murdoch appeared for the respondents in each application.

The applications were listed for mention on 11 November, 1981 when the parties agreed on a time-table for the interlocutory steps to be taken, and they were adjourned to 16 February 1982 for further mention and costs were reserved.

On 8 December 1981 the Commissioner filed further applications in which he sought leave to insert paragraph 2A, set out above, in each of his applications, an interim or interlocutory injunction restraining Mr Niemann by himself, his servants or agents, from making any distribution of any funds received or held by him pursuant to the said Deed of Arrangement or from paying any divident to any of the creditors of the debtor until the determination of his applications or until further order, and an order for costs.

At the hearing of these further applications, the evidence showed that as a result of correspondence between the solicitors for the respondent Mr Niemann and the Deputy Crown Solicitor on behalf of the Commissioner, Mr Niemann's solicitor Mr Bigmore, by letter dated 7 October 1981, confirmed that, before making any further distribution from the estate, the trustee would await the outcome of the Commissioner's applications. In a letter to the Crown Solicitor dated 2 December 1981 Mr Bigmore stated:-

"I am now instructed to indicate to you that Mr Niemann revokes his undertaking made on his behalf and recorded in my letter to you of the 7th October, 1981.

Mr Niemann intends to make a distribution of the funds presently in his possession as trustee and the deeds of arrangement at the expiration of 7 days from the date hereof unless as injunction is sought and granted within that time."

On 9 December 1981 the Court made an order restraining Mr Niemann by himself his servants or agents from making any distribution of any funds received or held by him pursuant to the Deeds of Arrangement until the determination of the applications dated 6 October 1981 or until further orders. The date of the next mention was amended to 17 March 1982 and Mr Niemann was ordered to pay the applicant's costs of and incidental to the applications dated 8 December 1981, such costs to be taxed if not agreed upon.

In their notices of opposition, as amended by leave, Mr Niemann and each debtor set out the following grounds of opposition:-

"1. A declaration that the Deed of Arrangement executed the 25th June, 1981 is void ought not to be made by this Honourable Court on the grounds relied upon by the applicant in paragaph 1 of the application because they are not sustainable for the following reasons:-

(i) There was no failure to enter into the said deed in accordance with the provisions of Part X of the Act upon the grounds alleged by the applicant in paragraphs 1 (a), (b), (c) and (d) of the said application or at all, because -

(a) (i) the proxies were valid; (ii) the proxies were in the form or to the effect of the form prescribed by the Bankruptcy Rules: (iii) the proxies were neither inaccurate nor uncertain;

(iv) if all or some of the proxies were invalid, or were not in the form or to the effect of the form prescribed by the Bankruptcy rules, or were in certain respects inaccurate or uncertain, then none of such matters constituted such non-compliance with the provisions of Part X of the said Act as would justify this Honourable Court making a declaration that the said deed, or any provision thereof, is void.

(b) (i) the debtor was not a joint debtor for the purposes of the provisions of Part X of the said Act for the following reasons:

(x) he did not sign a joint authority under Part X of the said Act;
(y) Part IX A of the Rules does not validly amend or modify Part X of the said Act;
(z) even if Part X of the said Act is validly amended or modified by Part IX A of the Rules, on a proper interpretation of the said Act the debtor was not required to sign a joint authority under the said Part X.

By reason of the debtor not being a joint debtor as aforesaid neither he nor the other persons being partners in the Sherbourne Clinic Partnership was or were required to submit to the said meeting of creditors both a statement of his joint affairs and a statement of his separate affairs;

(ii) if the debtor was a joint debtor within the meaning of Part X of the said Act as aforesaid he was nevertheless not required to submit to the meeting of creditors both a statement of his joint affairs and a statement of his separate affairs;

(iii) if the debtor was required to submit to the said meeting both a statement of his joint affairs and a statement of his separate affairs such requirement was in fact complied with;

(iv) if the debtor was required to submit to the said meeting a statement of his joint affairs and a statement of his separate affairs and failed so to do, such failure did not constitute such non-compliance with the provisions of Part X of the said Act as would justify this Honourable Court making a declaration that the said deed, or any provisions thereof, is void.

(c) (i) There was no requirement that separate resolutions be put to the said meeting in respect of the alleged joint affairs and of the alleged separate affairs of the debtor;

(ii) none of the creditors who voted or who was entitled to vote at the said meeting was a joint creditor or a separate creditor of the debtor for the purposes of Part X of the said Act;

(iii) if such creditors consisted of joint creditors and separate creditors of the debtor for the purposes of the said Part X:

(X) there was nevertheless no requirement that separate resolutions be put to them for their respective considerations;
(Y) alternatively, if there was such a requirement then any non-compliance therewith did not constitute such non-compliance with the said Part X as would justify this Honourable Court in making a declaration that the said deed, or any provision thereof, is void.
(d) (i) The respondent did not in contravention of the said Act, or at all, fail to advise -

(X) those creditors who executed instruments of proxy in his favour or in the favour of the Chairman of the said meeting;
(Y) in his memorandum to creditors - the terms and effect of the said deed;

(ii) in any event the respondent was not required by the said Part X or the Rules to advise the said creditors of the terms and effect of the said deed.

(e) (i) the Respondent says that the Applicant is not entitled to rely on this alleged ground under paragraph 1(i) of the Amended Application;

(ii) in the event that the Applicant is entitled to rely on this alleged ground under paragraph 1(i) of the Amended Application, the Respondent says as follows:

(X) there was no failure on the part of the debtor to submit a Statement of Affairs in accordance with the provisions of Part X of the Act;

(Y) further, he did not omit any material particular from his Statement of Affairs submitted to his creditors at the meeting;

(Z) if the debtor did omit any one or more material particulars from the said Statement of Affairs, nevertheless, it would not be in the interests of the creditors for the Court to declare the Deed of Arrangement, or any provision thereof, void.

(ii) (a) The said deed complied with the requirements of the said Part X;

(b) There was no requirement that the said deed make separate provision for the joint and separate administration of the affairs of the debtor;

(c) if there was a requirement that the said Deed make separate provision for joint and separate administration of the affairs of the debtor then this requirement has been fully, or alternatively substantially, satisfied;

(d) if the said deed does not comply substantially with the said Part X, such non-compliance does not justify this Honourable Court in making a declaration that the said deed is void.

2. This Honourable Court should not order that the said deed be terminated because the grounds relied upon by the applicant in paragraph 2 of the application are not sustainable for the following reasons:

(i) Insofar as the statements attributed to the respondent in paragraph 2(i) of the application were in fact made by him to some of the creditors, they were correct.

(ii) (a) (X) None of the creditors who voted or who was entitled to vote at the said meeting was a joint creditor for the purposes of the said Part X;

(Y) if such creditors included joint creditors for the purposes of the said Part X their vote in the circumstances described in paragraph 2 (ii) (a) of the application did not and could not amount to the overbearing of the voting entitlement and power of the remaining creditors;

(Z) in any event there was no requirement that any such joint creditors and the remaining creditors should vote separately upon the said resolution.

(b) The statement attributed to the respondent in paragraph 2(ii) (b) was not made.

(c) (i) there was no conflict of interests affecting the duty of the Respondent to the creditors who appointed him as their proxy for the purpose of voting at the meeting of creditors;

(ii) if there was such a conflict of interests as is alleged then the Respondent says that the same did not affect the exercise of his discretion in determining how to cast the proxy votes, or, alternatively, there is no evidence that the same so affected him.

(iii) The operation of the said deed will be such as to be of benefit to the great majority of creditors of the debtor while the termination thereof will not be of advantage to the applicant and will result in significant disadvantages to the remaining creditors.

(iv) (i) Neither the Deed, or Clause 3 thereof in particular, is meaningless or unintelligible.
(ii) Alternatively, if meaning cannot be attributed to the words in Clause 3, the words therein, commencing with the words "All moneys", and ending, "Save as aforesaid", should be severed so that Clause 3 reads "The trustee should apply any moneys received by him in accordance with the provisions of the Act".

(v) The whole of the relevant agreement between the debtor and his creditors, including General Credits, is to be found in the Deeds of Arrangement and no relevant benefit was provided to General Credits other than under the Deed.

3. The Applicant is not entitled to an Order in terms of the Order sought in paragraph 3 thereof as amended."

It will be convenient to deal first with that portion of paragraph 1 of each application, which is in identical terms, in which a declaration is sought that the deed of arrangement is void upon the ground that it does not comply with the requirements of Part X of the Bankruptcy Act 1966 ("the Act")

This portion of paragraph 1 of the application is based upon the provisions of sub. secs (1) (2) and (3) of Sec 222 of the Act which are found in Part X, the relevant portions of which provide as follows:-

"222. (1) Where there is a doubt, on a specific ground, whether . . . . . . a deed of arrangement . . . . . . complies with the requirements of this Part, . . . . . . , the Registrar, the trustee, a creditor or the debtor may apply to the Court for an order under sub-section (2).

(2) Upon the hearing of an application made under sub-section (1), the Court may, subject to this section, make an order -

(a) declaring that the deed . . . . . . is void, or that it is not void, on the grounds specified in the application; or

(b) declaring that a provision of the deed is void, or is not void, on the ground specified on the application.

(3) The Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this Part if the deed complies substantially with those requirements."

In 1977 a group of Shepparton medical practitioners, including each of the 12 debtors named as being a respondent to the applications before the Court, embarked upon the business venture of establishing a private hospital in that city. On 13 May 1977 Tamaree Nominees Pty Ltd ("Tamaree") was incorporated as trustee of a business trust, units in which were held by the doctors, their family trusts and members of their families. On 19 September 1977 Tamaree changed its name to Sherbourne Clinic (Nominees) Pty Ltd, and on 12 June 1980 there was a change back to the original name.

On 17 October 1977 Tamaree became the registered proprietor of the land upon which the hospital now stands. On 19 March 1979 Tamaree executed a mortgage of the hospital property to General Credits Ltd and also a charge in favour of that company. On the same day, the doctors, the wives of some of them, and where appropriate the doctors' trustee companies, and Hansen & Yuncken Pty Ltd, which was the builder of the hospital, executed guarantees in favour of General Credits Ltd of the obligations of Tamaree in respect of the financing of the project by General Credits Ltd. Without objection from any party, Mr G. Gibson of Counsel was given leave to intervene in each of the applications on behalf of Hansen & Yuncken Pty Ltd.

Tamaree operated the business of the hospital until 6 July 1980. On the following day, the Sherbourne Clinic Partnership commenced business and began to lease the hospital premises and conduct the affairs of the hospital. The partnership included the twelve doctors whose deeds are subject to challenge, Dr Levin and Dr Gibb, who also executed deeds of which Mr Niemann is trustee, but who were not indebted to the Commissioner and whose deeds have not been challenged, and Dr Donaldson, who later executed a deed with a trustee other than Mr Niemann. No challenge has been made to Dr Donaldson's deed.

On 1 October 1980 Mr Niemann became the manager of the Sherbourne Clinic Partnership pursuant to an agreement which provided as follows:

"TO ALL MEN TO WHOM THESE PRESENTS SHALL COME GREETINGS

THIS AGREEMENT made the 1st day of October 1980 between the several persons named and described in the schedule hereto (hereinafter referred to as the "Partners") and ERNEST HARDING NIEMANN (Chartered Accountant) of 8th Floor, 44 Market Street, Melbourne in the State of Victoria (hereinafter referred to as "The Manager").
WITNESSETH
1. The Partners having agreed to enter into Partnership by a Deed of Partnership dated the 30th day of June 1980. The object of the Partnership being to carry on the business of leasing, managing and operating a registered Private Hospital at Sherbourne Clinic, Fitzgerald Street, Shepparton in the said State.

2. Pursuant to paragraph 34 of the Rules of the said Partnership the Partnes wish to appoint a person to manage the Private Hospital at Sherbourne Clinic and hereby appoint ERNEST HARDING NIEMANN (the Manager).

3. The appointment of the Manager shall begin on the 1st day of October, 1980 and continue until the end of the two year period pursuant to paragraph 2 of the Deed of Partnership.

4. The remuneration of the Manager and his staff shall be paid on a time basis in accordance with the scale of fees as laid down from time to time by the Bankruptcy Trustees and Liquidators Association of Australia.

5. The Partners hereby entrust and confer upon the Manager all those powers previously exercisable by the Management Committee.

6. Now it is hereby agreed that the Partners shall save harmless and keep indemnified the Manager against all personal liability of any kind in connection with his appointment under this Agreement."

The twelve doctors whose deeds are subject to challenge, Dr Levin, Dr Gibb and Dr Donaldson were named in the schedule to the agreement. The agreement was signed sealed and delivered by Mr Niemann and all of the doctors except Dr Dyson and Dr Sterling, although sealing clauses were provided for them. The agreement referred to a Deed of Partnership dated 30 June 1980 and conferred upon Mr Niemann all of the powers previously exercisable by the Management Committee, which included the power to "have control of and manage the business of the Partnership" (Clause 29(f)) and "to cause true accounts to be kept of all items of income and expenditure of the partnership and of the assets and liabilities of the partnership." (Clause 35)

On 20 October, 1980 a meeting of creditors of Tamaree, by special resolution in the following terms, resolved that the company be placed under official management and that Mr Niemann be appointed as Official Manager:

"(a) "That TAMAREE NOMINEES PTY LTD be placed under Official Management for a period of two years from the 20th day of October 1980."

(b) "That ERNEST HARDING NIEMANN of 8th Floor, 44 Market Street, Melbourne in the State of Victoria (Chartered Accountant) is appointed as Official Manager of TAMAREE NOMINEES PTY LTD".

(c) "That the remuneration of the Official Manager be on a time basis in accordance with the scale of fees laid down from time to time by the Bankruptcy Trustee and Liquidators Association of Australia".

(d) "That a Committee of Management be formed pursuant to Section 202 of the Companies Act 1961"."

Notice of Mr Niemann's appointment was lodged at the Corporate Affairs Office on 24 October 1980.

Trade creditors who had supplied goods to the hospital between 8 July 1980 and 1 October 1980 did not receive payments in accordance with trade terms. Mr Niemann negotiated an arrangement with them under which they were to receive repayments of these debts "in bi-monthly instalments", in the belief, as he deposed, that the doctors would be able to provide the necessary funds from their own resources. This belief proved to be unfounded, and on 20 May 1981 Dr Hetherington and thirteen of his partners signed separate authorities under S188 of the Act authorizing Mr Niemann, a registered trustee, in each case, to call a meeting "of my creditors and to take over control of my property" in accordance with Part X of the Act. On 27 May 1981 Mr Niemann addressed a memorandum to "Trade Creditors, Sherbourne Clinic" which read as follows:-

'44 Market Street Melbourne, Victoria Australia 3000

Hungerford Hancock & Offner Chartered Accountants TELEPHONE: [phone]

CABLES: PERTINAX. MELBOURNE TELEX: 33839

27 May 1981

MEMORANDUM TO TRADE CREDITORS

SHERBOURNE CLINIC

Included with this memorandum are notices of a meeting called pursuant to Part X of the Bankruptcy Act.

Two matters are of particular importance to trade creditors:

1. Trade creditors who supplied goods to the Sherbourne Clinic between 8 July 1980 and 1 October 1980 have been receiving repayments of their debts in bi-monthly instalments. Regrettably, the personal financial difficulties of 14 partners in the clinic mean that this arrangement can continue no longer. I anticipate that subject to the agreement of creditors at the meeting, these debts will now be repaid over a period of three years.

1. Goods and services supplied to the clinic since 1 October 1980 have been paid for under normal trade terms. This situation will continue. In short the trading operations of the clinic will not be adversely affected by the notices forwarded with this memorandum.

Queries may be directed to me at the above address. Telephone enquiries are best directed to my manager, Mr. John Brooke on [phone].

E.H. NIEMANN

Official Manager

In the course of the hearing, counsel for the Commissioner referred particularly to Mr Niemann's statement that he anticipated that, subject to the agreement of creditors at the meeting, the "frozen debts", as they came to be called, "will now be repaid over a period of three years", and pointed out that the memorandum did not specify what it was with which the creditors were to be asked to agree at the meeting. Under S.204 of the Act the creditors at such a meeting may, by special resolution resolve that the debtor's property be no longer subject to control, require the debtor to execute a deed of assignment or a deed of arrangement, accept a composition or require the debtor to present a debtor's petition within seven days from the day on which the resolution was passed. Counsel for the Commissioner also emphasised the concluding sentence - "in short the trading operations of the clinic will not be adversely affected by the notices forwarded with this memorandum". The memorandum was signed by Mr Niemann under the title of "Official Manager," the office he held in relation to Tamaree. At the time of sending it, he was also the Manager of the Sherbourne Clinic Partnership and the controlling trustee under Part X of the Act of fourteen of its members. The notice enclosed with the memorandum was in the following terms: FORM 34

RULE 77

NOTICE OF MEETING

THE BANKRUPTCY ACT 1966-73

BANKRUPTCY DISTRICT OF

THE STATE OF VICTORIA

TAKE NOTICE that the persons whose names appear on the attached list. having traded as a partnership known as THE SHERBOURNE CLINIC, Fitzgerald Street, Shepparton in the State of Victoria on the 30th October 1980 signed an authority under sub-section (1) of Section 188 of the Bankruptcy Act 1966 authorising Ernest Harding Niemann (Chartered Accountant) of 44 Market Street, Melbourne in the said State to call a Meeting of his Creditors (and to take over control of his property) and that, in pursuance of Section 194 of the Bankruptcy Act 1966, a Meeting of Creditors of the abovementioned debtor will be held at The Victoria Hotel, Fryers Street, Shepparton in the said State on Thursday the 11th June 1981 at 7 p.m.

DATED this 27th day of May 1981

ERNEST HARDING NIEMANN

Controlling Trustee

It should be observed that the notice stated that "the persons whose names appear on the attached list", which contained the names of fourteen doctors, "having traded as a partnership known as THE SHERBOURNE CLINIC" signed an authority "to call a Meeting of his Creditors (and to take over control of his property)" and that "a Meeting of Creditors of the above mentioned debtor will be held" at the place and time named.

There was also enclosed with the memorandum a single instrument of appointment of proxy which read as follows: FORM 43

RULE 100

INSTRUMENT OF APPOINTMENT OF PROXY

IN THE BANKRUPTCY ACT

1966-73

BANKRUPTCY DISTRICT OF

THE STATE OF VICTORIA

I, a Creditor

appoint

of

to be my Proxy at the Meeting of the Creditors of the abovementioned

Debtor/s to be held on the 11th day of June 1981 (or any meeting of the Creditors of the abovementioned Debtor/s) to vote*

FOR AGAINST USE DISCRETION

) ) ) ) ) Signed by the abovementioned ) ) Creditor in my presence: ) ) ) ) ) ) ) ) ) Signature, address and ) occupation of witness: ) ) * Here set out powers of proxy

* See attached list

The heading of this form did not refer to any estate, whereas Form 43, prescribed by Rule 100 of the Bankruptcy Rules, has the word "(Title)" below "Instrument of Appointment of Proxy", which appears to be an indication that, as one might expect, the instrument should recite the name of the estate in which it is given. In the body of the form, the words "of the above mentioned debtor" are clearly inserted so as to refer back to the name of the debtor in the title.

There was a further enclosure headed "PROOF OF DEBT FOR THE PURPOSE OF VOTING AT MEETING OF CREDITORS" which was in the following form: THE BANKRUPTCY ACT 1966-73

PROOF OF DEBT FOR THE PURPOSE OF VOTING
AT MEETING OF CREDITORS
AMOUNT OF DEBT CLAIMED
PETER MOSS LEVIN 83 OF 1981 PART X $
JOHN FENTON HETHERINGTON 84 OF 1981 PART X $
PETER ROBERT KING 85 OF 1981 PART X $
BRUCE RONALD STERLING 86 OF 1981 PART X $
JOHN DUNCAN MACKELLAR 87 OF 1981 PART X $
GRAEME IAN JONES 88 OF 1981 PART X $
JOHN GREY GIBB 89 OF 1981 PART X $
ANTHONY A A COATES 90 OF 1981 PART X $
JOHN STANLEY DYSON 91 OF 1981 PART X $
IAN FARQUHAR GUNN 92 OF 1981 PART X $
JAMES ROGER KEY 93 OF 1981 PART X $
WILLIAM DE BURGH O'HARE 94 OF 1981 PART X $
JOHN ALEXANDER PEDROTTI 95 OF 1981 PART X $
RONALD JOHN TOMKINS 96 OF 1981 PART X $
Name of Creditor
Consideration for debt
Whether debt secured or unsecured
If secured, give details of security, including dates, etc.


Balance, if any, after deducting value of Security (See Note 2)

DATED the day of June 1981
Signature of Creditor
NOTE 1
A Creditor may not vote on any unliquidated or contingent debt or a debt the value of which is not ascertained.
NOTE 2
A Secured Creditor shall be entitled to vote only in respect of liabilities, if any, after deducting the value of his security. If a Secured Creditor votes in respect of the whole debt, he may be deemed to have surrendered his security.
NOTE 3
This Proof should be signed by a Creditor or a person in the employ of the Creditor duly authorised by that Creditor to sign. If a Creditor is a Company, it should be signed by a person authorised under the Seal of the Company to make a Proof of Debt on its behalf. The Chairman of the meeting may admit or reject a Proof of Debt for the purpose of voting at the meeting.

A common plan of action was submitted at each of the meetings of creditors, designed to regulate the estates of each of those doctors whose creditors resolved that he should enter into a deed of arrangement to be administered by Mr Niemann as trustee. Apart from variations in relation to the names of the doctors and the amount of the contributions which each doctor was required to make, the deeds were in common form.

The plan had a number of fundamental features, one negative and the others positive. The negative feature was that there was not to be a Part X deed in respect of the partnership of which the doctors were members, and which Mr Niemann was already administering. It was clearly intended that the partnership would continue to operate and that it would continue to be administered by Mr Niemann under the October 1980 arrangement.

One of the positive features of the plan was that the trade creditors who had formerly agreed to the bi-monthly instalment arrangement with Mr Niemann were to prove and receive a dividend in respect of the estate of each doctor.

Central to the plan of action submitted to the meetings were the provisions of Clause 3 of each deed, which was in the following terms:-

"3. All moneys received by the trustee pursuant to the operation of the preceding clause hereof shall be credited to the separate estate of the debtor and to any one or more joint estates administered by the trustee and in respect of which the debtor is a joint debtor in such proportion as is necessary to effect the result that each of the creditors, whether the debtor be indebted to such creditor severally, jointly or jointly and severally, receives as nearly as possible the same number of cents in the dollar from dividends paid out of all the said estates as a consequence of the payment into such estates of amounts pursuant to clause 2 of this or any other Deed. Save as aforesaid, the trustee shall apply any moneys received by him in accordance with the provisions of the Act."

The language of this clause is not free from obscurity in its reference to "joint estates", as Mr Niemann was in fact administering a series of individual deeds. However, when one reads the composite phrase "joint estates administered by the trustee and in respect of which the debtor is a joint debtor" together with the pooling provisions of the clause, it is, in my opinion, proper to treat that phrase as referring to the estates of the partners of the particular debtor, who were, as such, joint debtors with him, and of whose deeds Mr Niemann was trustee.

The highest estimate of a dividend to be paid to creditors was that it would not exceed 3.3 cents in the dollar. A dividend was to be payable to each of the creditors, whether a doctor were indebted to him severally, jointly, or jointly and severally.

Under Clause 3 it was envisaged that a dividend in respect of each estate would be received by trade creditors of the partnership in respect of the frozen debts, and that creditors, such as General Credits Ltd, who had obtained joint and several guarantees from the doctors, would benefit similarly. The Commissioner was to receive a dividend in respect of each estate based upon the taxation liability of the particular doctor. A separate creditor of one doctor only, such as the Shepparton Credit Union Co-operative Limited in the estate of Dr Tomkins, was to receive only one dividend.

S.237(2) makes applicable to deeds of arrangement the provisions of S.108, which read as follows:-

"108. Except as otherwise provided by this Act, all debts proved in a bankruptcy rank equally and, if the proceeds of the property of the bankrupt are insufficient to meet them in full, they shall be paid proportionately."

S.108 gives legislative expression to what has always been regarded as a cardinal feature of the administration of bankrupt and insolvent estates. As Lord Herschell L.C. said in Attorney-General of Ontario v Attorney General for the Dominion of Canada (1894 AC 189 at p200):_

"But it will be seen that it is a feature common to all systems of bankruptcy and insolvency to which reference has been made, that the enactments are designed to secure that in the case of an insolvent person his assets shall be rateably distributed amongst his creditors whether he is willing that they should be so distributed or not."

In order to comply with Part X of the Act, a deed of arrangement of an individual debtor must require the trustee to hold his contributions upon trust for his creditors, to be distributed rateably amongst them.

Clause 3 of each of these deeds purported to provide that all moneys received by the trustee under the deed should be credited to the estate of the debtor making the contribution and to any one or more of the estates which it designated in such proportion as was necessary to effect the result which it prescribed. In order to comply with the Act, all moneys received by the trustee of a particular debtor should be credited to the estate of the debtor making the contribution, and to no other estate.

Each of the deeds under consideration purported to require the trustee to intermingle funds which were required by the Act to be administered separately, because each was required to be a separate fund, held by the trustee upon separate trusts, for separate sets of creditors. The inadmissible intermingling of the funds may be illustrated by a hypothetical example. If one of the doctors, say Dr Tomkins, were to pay in full to the trustee the contributions set out in clause 2 of his deed, but another of the doctors, say Dr Hetherington, were to fail to make the contributions required of him, the operation of clause 3 would produce the result that the separate creditors of Dr Tomkins, such as the State Bank and the Shepparton Credit Union Co-operative Limited, to whom Dr Hetherington is a complete stranger, would suffer as a consequence of Dr Hetherington's default. Under the method of distribution prescribed by the Act, Dr Hetherington's contributions or failure to make them would be irrelevant to the separate creditors of Dr Tomkins.

It is desirable that a deed of arrangement under Part X be slef-contained in its operation. After the first meeting of creditors had passed the special resolution that Dr Hetherington should execute his deed, it was not possible to ascertain the effect of Clause 3 of that proposed deed until it became clear whether any other doctor was to be required by a meeting of his creditors to enter into a deed containing a clause identical with Clause 3, and whether Mr Niemann would become trustee of that later deed. Even when the last of the meeting of the creditors of the doctors was concluded, it was still possible that the remaining member of the partnership might execute a deed. In fact he later did so, but Mr Niemann was not the trustee of his deed. One of the objects of registration of a deed of arrangement under Part X is to enable any person who is interested in the estate of a debtor who is thought to have entered into a Part X deed to ascertain that debtor's position by searching a file maintained under the debtor's name. Any person searching the Part X records would have been faced with the difficulty of identifying the other estates referred to in Clause 3.

In any case in which the Court is considering the making of a declaration under S.222, the word "may" in sub-sec (2), in my opinion, confers a discretion upon it, in the exercise of which it is to comply with the provisions of sub-sec (3). The question then remains whether the Court should declare that each deed is void, or whether it should declare that Clause 3 of each deed is void. The last sentence of Clause 3 reads "Save as aforesaid, the trustee shall apply any monies received by him in accordance with the provisions of the Act". Apart from noting the apparent concession that what went before this sentence was not in accordance with the provisions of the Act, it is of course true that, if all the words of Clause 3 down to and including "Save as aforesaid" were severed from the clause, what remained would plainly be in accordance with the Act.

Clause 9 of each deed provided that:

"9. Every provision or part of a provision of this Deed shall be read and construed subject to the Act and to the intent that where any provision or part of a provision would, but for this provision have been construed as being in conflict with the Act and could if read as a whole in the Deed result in the Deed being declared void pursuant to Section 222 of the Act, it shall nevertheless be a valid provision or part of a provision to the extent to which it is not in conflict with the Act, so that full effect may be given to the Deed."

S.222(2) provides that the court, may, subject to this section, make an order that the deed, or a provision of the deed, is void, or is not void.

Each doctor was to contribute the amount specified in his deed either in a lump sum or by monthly instalments over a period of three years. No assets of the doctors were to be assigned to the trustee. Clause 4 of each deed provided that each doctor was to be absolutely released and discharged from all the provable debts owed by him to each of his creditors:

(a) if after payment of the sum specified as his contribution, the trustee certified that he had applied all moneys in his hands in accordance with Clause 3, the distribution clause of each deed; or

(b) if the creditors had at a meeting held as provided by the Act by special resolution resolved that the debtor should be so released and discharged.

In my opinion Clause 3 is fundamental to each of the deeds. The arrangement for which it provided was central to the resolution which was accepted by each meeting of creditors, who voted for it as the only financial benefit they were to receive under the proposed deed. Apart from the possibility of a special resolution of creditors releasing the debtor, a certificate that the trustee had applied all moneys in his hands in accordance with clause 3 was the condition for a release and discharge of all the debtor's debts.

The resolution proposed to and accepted by each meeting of creditors was fundamentally based upon the creditors receiving the fruits of the distribution prescribed by Clause 3 and granting in return the right to the release and discharge provided by Clause 4. To use the power of severance so as to strike out the substance of Clause 3 would be, in my opinion, to produce in each case a fundamentally different deed from that for which the creditors voted.

In my opinion, for the reasons set out above, each of the deeds under consideration purported to provide for an arrangement which was plainly inconsistent with Part X. I am satisfied that each deed failed to comply substantially with the requirements of that Part within the meaning of S.222(3).

I do not propose to deal with any of the other claims made in the applications, but I feel that I should not part with these cases without making some reference to the various roles played by Mr Niemann, lest silence be mistaken for approval.

As we have seen, Mr Niemann became the manager of the Sherbourne Clinic Partnership on 1 October 1980 and on 20 October 1980 he was appointed Official Manager of Tamaree. From 7 July 1980 the partnership had been leasing the hospital premises from Tamaree and conducting the business of the hospital upon them. Tamaree had very substantial liabilities to General Credits Ltd which were guaranteed by the partners, jointly and severally. There were also guarantees by the wives of some of the partners and by the trustee companies of some of them. Mr Niemann made an unofficial arrangement with the trade creditors of the partnership, in respect of goods supplied between 8 July 1980 and 1 October 1980.

Although the lease provided for an annual rental to be paid by the partnership of $360,000.00, the actual rental charged was $240,000.00 for the period ended 30 June 1981 and $468,000.00 for the year ended 30 June 1982. The rental figure in respect of a particular financial year was not arrived at by Mr Niemann until after that year ended. In determining it, he took into consideration the amount which the partnership could afford to pay, and the amount which Tamaree was required to pay General Credits Ltd by way of interest and equipment leasing charges pursuant to obligations owed by Tamaree to General Credits Ltd. Tamaree was dependent upon the rent to permit it to meet its obligations to General Credits Ltd.

During the year Mr Niemann on behalf of the partnership would pay such amounts as it could afford on account of rent owed by it to Tamaree, directly to General Credits Ltd in part satisfaction of the interest and leasing charges owed by Tamaree to General Credits Ltd. No entry would be made in the accounts of Tamaree at the time of such payments, but appropriate journal entries would be made at the end of each year to ensure that the books of both Tamaree and of the partnership represented that the partnership had paid rent to Tamaree for the use of the hospital premises, and that Tamaree had paid General Credits Ltd interest and leasing charges.

Mr Niemann admitted when cross-examined by Mr Ormiston that he had conducted the affairs of Tamaree and the partnership together as if they were one entity regardless of the legal consequences. At all material times both Tamaree and the partnership were in financial difficulties.

Mr Niemann was exercising the powers of the lessor and lessee of the hospital premises. Thus he had occasion to write letters to himself as may be seen from the letter of 1 July 1982 which read as follows:- Hungerford Hancock & Offner
Chartered Accountants




1 July 1982
Mr. E.H. Niemann,
Manager, Sherbourne Clinic Partnership,
25th Floor, Nauru House,
80 Collins Street,
MELBOURNE 3000.


I agree to renew your lease of the hospital premises for the period commencing on 1 July 1982 to the 30 September 1982.




E.H. NIEMANN
Official Manager
Tamaree Nominees Pty Ltd

S.190 of the Act sets out the duties and powers of a controlling trustee. Sub-sections (1)(2) and (3) of S.190 read as follows:

"190(1) Where a registered trustee consents to exercise the powers conferred by an authority under section 188
. . . . . . . . . . . . the trustee . . . . . . shall proceed to call a meeting of the debtor's creditors in accordance with this Division.

(2) Where a registered trustee consents to exercise the powers conferred by such an authority, he is, by force of this section, empowered -

(a) to take immediate control of the debtor's property and affairs;

(b) to make such inquiries and investigations in connexion with the debtor's property and affairs as the trustee considers necessary;

(c) to carry on a business of the debtor if, in the opinion of the trustee, it will be in the interests of the creditors to do so; and

(d) to deal with the debtor's property in any way that will, in the opinion of the trustee, be in the interests of the creditors.

(3) The power of the trustee to deal with the debtor's property conferred by sub-section (2) does not authorize the trustee to sell the property or any part of it (not being perishable property) except in the ordinary course of business or with the leave of the Court."

Only a person registered under the Act as qualified to act as a trustee is eligible to become a controlling trustee.

When it was contemplated that Mr Niemann should become the controlling trustee of each of the doctors he was still holding the offices of Official Manager of Tamaree and manager of the partnership. In circumstances such as those, a registered trustee should not automatically accept appointment as controlling trustee. While looking to what may be regarded as the practical convenience to the debtor or debtors of his doing so, he should not ignore other and more important considerations. He should earnestly consider whether by becoming controlling trustee he may be exposing himself to a conflict between interest and duty, or to any conflict between any existing duties flowing from any relationship with a debtor or a creditor, or any duties attaching to any office or post already held by him, and the duties involved in the proposed office of controlling trustee. He should not rely upon what he conceives to be his own ability to reconcile any such conflict but should rather ensure that the conflict does not arise. A controlling trustee should not be in a position where it may reasonably appear to those who are entitled to the benefit of his impartial discharge of the duties of his office that such a conflict exists. As the office is a statutory one, there is also a public interest that the holder of it should not be, or reasonably appear to be, subject to a conflict.

In Re Forbes, 24 FLR 87 at p95 Judge White, as he then was, said:

"Another factor which militates against the desirability of a fresh meeting is the proposal to appoint as trustee the person who is presently the accountant for the debtor, the debtor's parents and their family company. The $1,500 composition sum offered at the disputed meeting came from debtor's mother.

The same accountant-trustee would be torn between his long-standing and continuing loyalties to his client company (and unconscious loyalty to his former client, the debtor) on the one hand, and his new obligations to the creditors on the other. The debtor's solicitor and counsel, Mr Fuller, suggested that the past failure to recognize the conflict could be overcome by the mere machinery step of appointing another independent trustee. Until I pointed out the conflict, it had been assumed that a fresh meeting would be called with the same trustee being appointed, if the creditors were agreeable. In my view, whether the impugned composition stood or another similar composition took its place, the named trustee would be unable, in the circumstances, to carry out his duties in the fully independent manner required of him."

In Re Partridge (unreported, Sydney 22 September 1982) Lockhart J granted an application by Mr Partridge to be registered as qualified to act as a trustee under the Act. Mr Partridge was qualified to practise both as a solicitor and as a chartered accountant and carried on practice in both capacities, essentially though not exclusively, at Port Macquarie in New South Wales. It was stated on his behalf, and confirmed by an undertaking, that he would no longer act as an accountant. In granting the application, his Honour said (at p3), in relation to Mr Partridge:-

"He must be scrupulously careful to ensure that he never allows himself to be placed in a position of conflict between various duties or between duty and interest; nor must he ever allow the situation to arise where he may be seen to be in that position of conflict or potential conflict. A registered trustee must not only be impartial; he must be seen to be impartial. The smaller the community in which he practices, the greater the possibility of conflict."

In my opinion, Mr Niemann, by reason of the offices which he already held and his involvement in the affairs of Tamaree and the partnership, should have declined to accept appointment as controlling trustee.

It is also appropriate to consider Mr Niemann's conduct as controlling trustee of each of the doctors. It is clear from the evidence that the concept of separate deeds and the form of the proposed deeds were his brainchildren. He displayed an unswerving loyalty to the plan and a single-minded determination to see that it was brought into effect, no doubt because he was convinced that it was in the best interests of all concerned with the hospital venture, Tamaree, the partnership, the doctors themselves and the creditors of all of them. He calculated the contribution which he thought it appropriate that each doctor should make under his deed and submitted the figures to each doctor. With two minor qualifications, the results of those calculations appeared in the deeds.

In answer to Mr Ormiston, he said that it was his intention that the deeds should exclude Tamaree from the creditors entitled to prove but in fact there was no such provision in any of the deeds. When first called as a witness by Mr Chernov he said that as official manager of Tamaree he was prepared to give such written confirmation or undertaking as may be necessary to ensure that Tamaree did not lodge a proof of debt in any of the estates under the deeds.

It was Mr Niemann's belief when he spoke to the creditors at the meeting that there was a provision in each deed that the trade creditors would be entitled to prove in respect of their frozen debts against the estates of all the debtors.

I accept the evidence given by Mr Brooke, based upon a conversation which he had with Mr Niemann, that the latter's view was that the deeds of arrangement were in the best interests of the creditors and, "in that sense it had to be sold" to General Credits Ltd, whose vote would obviously be decisive. Mr Brooke, a qualified accountant, was Mr Niemann's deputy at all material times in relation to Mr Niemann's involvement with the doctors, the partnership and Tamaree. In his letter to General Credits Ltd dated 5 June 1981 Mr Niemann was plainly seeking to encourage that company to vote in favour of the deeds. That letter omitting formal parts read as follows:


"I enclose copies of the draft Statements of Affairs of each of the 14 doctors from the Shepparton area who are partners in the Sherbourne Clinic.

Each of these 14 debtors have assigned their estates to me under Part X of the Bankruptcy Act and a meeting of creditors will be held in Shepparton on 11 June 1981.

The Deed calls for the payment of various amounts from each of these for each of the next 36 months and totalling $22,000 per month.

As you can see from the Statements some of these doctors are insolvent without the debts under guarantee or without their liability to the partnership creditors.

If the meeting does not approve the Deeds then all of the doctors intend to sign their own petitions.

I appreciate that this will cause difficulties to the company regarding the personal loans taken out by the doctors and I very much regret the circumstances. However, the situation is factual and I firmly believe it is in the best interests of the company to vote in favour of the Scheme.

I therefore recommend;

1 That the company makes a demand on these doctors for the whole of the debt outstanding under the guarantee.

2 That they do this prior to 11 June 1981.

3 That they attend the meeting and vote in favour of the Deed.

Dr Donaldson is at least not at the present time a party to these proposals.

Yours faithfully
E H Niemann
Controlling Trustee"

At each of the meetings of 11 June 1981 Mr Niemann was appointed the chairman, and after each meeting had proceeded for some time, Mr Attwell, the attorney for General Credits Ltd, successfully moved "that the meeting be adjourned for 14 days to allow the debtor to put a more acceptable proposition and for the creditors to consider their positions." It had become obvious at this time that General Credits Ltd was not satisfied with the proposed plan as it stood. Later that evening, after the formal meetings of 11 June 1981 had adjourned, Mr Attwell had further discussions with the doctors at which Mr Niemann was present. During these discussions General Credits Ltd outlined various steps that it required to be taken in order to improve its position.

Mr Niemann wrote to General Credits Ltd by letter dated 12 June 1981 which omitting formal parts read as follows:


"This is to record our discussion of our mutual problems concerning Tamaree Nominees Pty. Ltd. and the fourteen doctors who are associated with it.

I appreciate your problem regarding the personal debts of a number of the doctors and the likelihood of some loss being incurred on these accounts.

I suggested as a basis of discussion that if you were prepared to release Hansen & Yuncken from their guarantee of the Tamaree debt they may well agree to guarantee the individual accounts. With one exception all of these accounts are either jointly owed by the wife or they are in respect of some asset of significant value. Therefore, the possibility of a total loss is remote and the most likely course of events is a loss of less than $10,000.

The hospital is operating efficiently. The average daily charge rate for a bed is lower than it should be and an increase will be made when we judge the time to be appropriate. Average occupancy rates exceed 40 beds which is our break-even point. Break-even includes the payment of all interest and lease rentals. Revenue per bed will increase with the new hospital funding arrangements so that this will bring an immediate and substantial improvement in our revenue.

The new legislation which virtually requires everyone to be members of a hospital fund will increase substantially the number of people who are able to afford coming to Sherbourne and this again must have a material effect on our income. I cannot at the present time quantify these amounts but as I see the situation in the future, providing conditions remain substantially the same I see that from the hospital revenue we will pay all the interest and lease payments to you and be able to make a reduction of the capital sum owing

It is, however, important to remember that present occupancy in the hospital as well as future occupancy will be materially affected by whether or not the doctors concerned are working to the extent they are at present. If they reduce the number of operations they perform the effect on the Clinic would be adverse and immediate.

Please let me know if there is any further information that you need.

Yours faithfully,
E.H. NIEMANN
Official Manager"

He also sent a letter to General Credits Ltd dated 17 June 1981 in the following terms:

This is to confirm the discussions held with Mr. Brooke today.

I understand that you are willing to accept the monthly payments that we have scheduled for each of the doctors to make.

In order to protect General Credits against a detrimental disposition of assets in any of the family trusts or wives who are guarantors or parties to a debt you would need to have the following:

1. A sworn list of assets and liabilities of each of the parties.

2. My appointment as Trustee in each of the trusts.

3. A firm and binding agreement by each of the other guarantors not to dispose of any assets in a manner which is detrimental to the interests of General Credits without first obtaining my approval.

In most Trusts it is easy to change the Trustee. Consequently, my position would not be legally secure. However, the fact of my removal would make you aware of the necessity to take immediate action under the guarantee.

If all of these matters are agreed to by all parties concerned, you would then vote in favour of the Deeds of Arrangement as proposed.

E.H. NIEMANN
Official Manager

Between the meetings of 11 June 1981 and 25 June 1981 Mr Niemann, his staff, and the doctors attended to the requirements of General Credits Ltd. Statutory declarations disclosing the assets and liabilities of those wives and family trusts of the doctors who had executed guarantees in favour of General Credits Ltd of Tamaree's obligations were provided. Mr Niemann was aware that these statutory declarations were provided to General Credits Ltd. Six of the doctors (Drs Hetherington, King, Jones, Coates, Key and O'Hare) executed undertakings to appoint Mr Niemann as trustee of their family trusts. The undertaking in each case was addressed to General Credits Ltd and to Mr Niemann and provided as follows:

"I/We hereby undertake to take whatever action is necessary to have Ernest Harding Niemann appointed as trustee or joint trustee of my/our family trust within 14 days from the date hereof."

However, Mr Niemann was not actually appointed as a trustee or joint trustee of any of the family trusts until some time after the meetings of 25 June 1981.

All of the doctors except Dr Tomkins executed undertakings not to sell their family homes without obtaining the approval of General Credits Ltd. The undertaking in each case was addressed to General Credits Ltd as follows:

"I, . . . . . (name of doctor) . . . . ., undertake not to sell or dispose of family home as disclosed in Statement of Affairs or owned by my Family Trust, without first obtaining written approval from General Credits Ltd and/or any Trustee appointed by you."

Each undertaking was forwarded by letter from General Credits Ltd to Messrs Hungerford Hancock and Offner, for the attention of Mr Brooke, "to be signed by the doctors". I accept Mr Brooke's evidence that he discussed that letter with Mr Niemann.

Mr Niemann when cross-examined by Mr Ormiston said that he had no knowledge of the undertakings not to sell the family home and that Mr Ormiston's questions concerning them was the first that he had heard of them. Having regard to the paragraph numbered 3 in the letter from Mr Niemann to General Credits Ltd dated 17 June 1981 which was signed by Mr Niemann and which is set out above, to the fact that all but one of those undertakings were witnessed by a Mr C.A.V. Filson, who at that time worked for Mr Niemann, and to the evidence of Mr Brooke, I cannot accept Mr Niemann's evidence that he was not aware of the family home undertakings at the time when they were prepared and given.

Four of the doctors (Drs Sterling, MacKellar, Gunn and Key) signed authorities addressed to Mediaction Pty Ltd authorising it to dispose of the doctors holdings in it and directing that "any proceeds from such sale are to be forwarded to General Credits Ltd". All of these authorities were witnessed by Mr Filson.

None of the above benefits was provided or made available to any creditor other than General Credits Ltd, nor were they disclosed by Mr Niemann or anyone else to the creditors when the meetings resumed on 25 June 1981. Each of the resumed meetings passed a special resolution requiring the doctor to execute a deed of arrangement and nominating Mr Niemann as trustee of the deed. At each of the meetings Mr Niemann exercised his vote as proxy holder for several of the trade creditors in favour of those resolutions. Each of the deeds was executed by the doctor and by Mr Niemann as trustee on the same evening of 25 June 1981.

At a late stage of the hearings, on 3 November 1982, during the cross-examination of several of the trade creditors who swore affidavits which were filed on behalf of the respondents in each case, it became apparent that some creditors had received a letter dated 27 September 1982 from Mr Niemann which omitting formal parts read as follows:- "MEMORANDUM TO TRADE CREDITORS - SHERBOURNE CLINIC


From the 8 July 1980 until 1 October 1982 the Sherbourne Clinic has been operated by a Partnership known as the Sherbourne Clinic Partnership.
From 1 October 1982 the Sherbourne Clinic will be operated by Tamaree Nominees Pty Ltd which is the company which owns the hospital.

Sufficient funds are, or will be, on hand to ensure payment of all current trading debts of the hospital within normal terms.

There is no need for any creditor to open a new account with the Clinic.


E.H. NIEMANN
Official Manager"

Mr Brooke gave evidence that the business of the hospital was transferred from the partnership back to Tamaree on 1 October 1982, and that decision to transfer the operation of the hospital back to Tamaree was made by Mr Niemann after he had consulted Mr Brooke and had discussed the matter at a meeting with the doctors.

Mr Niemann in his capacity as Official Manager of Tamaree and lessor of the hospital premises wrote a letter dated 14 September 1982 to himself in his capacity as manager of the partnership and lessee of the hospital premises which omitting formal parts read:

"Pursuant to my letter dated 1 July 1982 I confirm my decision not to extend your lease of the hospital premises beyond 30 September 1982."

Mr Brooke explained that the operation of the hospital had been transferred back to Tamaree to ensure the continuity of the business, the concern being that, if these proceedings by the Commissioner were successful, and the deeds were declared void or terminated, one or more of the doctors might become bankrupt, which would hamper the operation of the business if it remained in the hands of the partnership.

At this time the hospital venture had some prospects of improvement. If one of the doctors had become bankrupt, his interest in the partnership might have been of some benefit to his creditors. A manoeuvre of the character of the transfer of the business to Tamaree was not a fitting one for a registered trustee who was at the time the trustee of these Part X deeds. It illustrates the depths of Mr Niemann's committment to his own plan and the lengths to which he was prepared to go to see that it was carried out.

Tamaree did not provide any consideration to the partnership for the transfer of the business. Mr Brooke said that no arrangement had been reached between the partnership and the company as regards a possible re-transfer of the business back to the partnership at some time in the future, but he thought that this would probably be done by Mr Niemann if the deeds survived the attacks made upon them by the Commissioner in these proceedings.

The creditors of Tamaree were not notified of Mr Niemann's decision to transfer the operation of the hospital back to it, and only those creditors of the partnership who were currently supplying the hospital received the memorandum from Mr Niemann dated 27 September 1982 which is set out above.

The Commissioner was granted further leave to amend the application in each case to include an additional ground which became sub-paragraph (vi) of paragraph 2 of his applications and read as follows:

"2 (vi) That the said Deed cannot be proceeded with without injustice to the creditors, or it ought otherwise to be terminated, because the Respondent Niemann as Manager of and on behalf of the Sherbourne Clinic Partnership, on or about the 1st day of October 1982 assigned transferred or otherwise disposed of the hospital business known as "The Sherbourne Clinic" to Tamaree Nominees Pty. Ltd., or alternatively has ceased to conduct the said hospital business, in circumstances where certain trade creditors of the said partnership had been informed by the Respondent Niemann in the said memorandum and orally at the said meeting that:

(a) the said partnership would continue to carry on the said business if the said Deed, and other Deeds to be entered into by other members of the Partnership, were approved; and further, or alternatively,

(b) he expected that the said partnership would make payments in satisfaction or part satisfaction of the balance of the debts owed to trade creditors of the said partnership."

Mr Niemann had been appointed as trustee of the family trusts of some of the doctors at the instigation of General Credits Ltd. He saw his role in that capacity to be to ensure for the sake of General Credits Ltd that the trusts did not make any distributions of capital and that their assets were maintained intact. In his letter to General Credits Ltd dated 17 June 1981 Mr Niemann said "In most Trusts it is easy to change the trustee. Consequently, my position would not be legally secure. However, the fact of my removal would make you aware of the necessity to take immediate action under the guarantee."

Mr Niemann was cross-examined upon the position he would have been in, had one of the doctors been unable for some reason to meet the contributions required of him under Clause 2 of his deed of arrangement, of which Mr Niemann was the trustee, and his family trust desired to make a distribution of capital to him to enable him to meet those contributions. Mr Niemann said that in such a hypothetical situation his understanding was that in his role as trustee of the family trust he would have felt obliged to prevent such a distribution, which would have been in the interests of the creditors entitled to share in the distributions under the deeds.

It is plainly the obligation of a trustee of a Part X deed of arrangement to act impartially in the interests of the creditors entitled to the benefit of the deed. He must not only be impartial but be seen to be impartial.

The reasons which should have led Mr Niemann to decline appointment as a controlling trustee of any of the doctors apply with added strength in relation to appointment as a trustee of the deeds, which provided for payments to be made to the trustee over a period of three years. The history of what followed after his acceptance of these offices provides striking evidence of the way in which the conflicts which any prudent man should have anticipated actually arose.

When the conflicts arose they did not appear to cause Mr Niemann any concern. On the contrary, he appeared to be completely satisfied of the wisdom of his combining the offices of Official Manager of Tamaree, manager of the partnership, controlling trustee, and later trustee of the deeds, and trustee of some of the family trusts. Even under cross-examination by counsel for the Commissioner, he appeared to be continuing to attempt to persuade the Commissioner that it would be in his interests to drop his objections to the deeds.

The orders made on 8 November 1982 have been set out at the beginning of these reasons. Liberty to apply is reserved generally to any party. I will hear counsel in relation to questions of costs at a time to be arranged.