Re Khera, Jaswant ex parte National Australia Bank Ltd
[1996] FCA 470
•14 JUNE 1996
CATCHWORDS
BANKRUPTCY - application to declare void or terminate deed of arrangement - scope and application of s 222 and s 236 Bankruptcy Act 1966 - allegation of false information regarding debt - oral guarantee supported by later deed of confirmation of debt - inference to be drawn upon failure to call further evidence - interests of creditors - order for sequestration - whether stay of sequestration order should be granted - no prejudice
Bankruptcy Act 1966 ss 5(1), 40(1)(i), 52(3), 81, 204, 222, 222(4), 222(5), 236, 236(2), 236(3), 236(5), 237(1), 237(2), 239, 242,
Jones v Dunkel & Anor (1959) 101 CLR 298 Refd
Minister for Aboriginal and Torres Strait Islander Affairs of the Commonwealth of Australia v Douglas (unreported decision of the Full Court 28 May 1996) Refd
Augustyn v Putnin (1988) 83 ALR 514 Refd
Re Moulton ex parte Beneficial Finance Corporation Ltd (unreported decision of Neaves J 20 December 1984) Refd
Griffiths v Civil Aviation Authority (unreported decision of the Full Court 24 May 1996) Refd
Re Doukidis ex parte Consolidated Constructions v Melsom (unreported decision of Toohey J 26 June 1985) Cons
Re Tripodi ex parte Col Johnson Pty Limited (unreported decision of Burchett J 22 January 1987) Cons
Musolino & Anor v Sidiropolous & Ors (1991) 101 ALR 235 Cons
Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 Refd
Paton v Campbell Capital Limited (1990) 46 FCR 30 Cons
Re Brown (RU) ex parte Humes Ltd & Anor (1987) 74 ALR 611 Cons
Re Jaswant Khera ex parte National Australia Bank Limited
No NP 1181 of 1995
Kiefel J Brisbane 14 June 1996
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF
THE STATE OF NEW SOUTH WALES No NP 1181 of 1995
RE: JASWANT KHERA
Applicant
EX PARTE:
NATIONAL AUSTRALIA BANK LIMITED
Respondent
JUDGE MAKING ORDER: Kiefel J
DATE OF ORDER: 14 June 1996
WHERE MADE: Brisbane
MINUTES OF ORDERS
THE COURT ORDERS THAT:
The deed of arrangement entered into on 14 February 1996 be forthwith terminated.
The estate of Jaswant Khera be sequestrated and that Richard Campbell Brien be appointed trustee.
The respondent’s costs of and incidental to the motion be paid out of the estate of Jaswant Khera.
NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF
THE STATE OF NEW SOUTH WALES No NP 1181 of 1995
RE: JASWANT KHERA
Applicant
EX PARTE:
NATIONAL AUSTRALIA BANK LIMITED
Respondent
CORAM: Kiefel J
DATE: 14 June 1996
PLACE: Brisbane (Heard in Sydney)
REASONS FOR JUDGMENT
The National Australia Bank, a creditor of Mr Jaswant Khera, applies for orders that a deed of arrangement executed following special resolution of his creditors on 7 February 1996 be declared void under s 222(4) Bankruptcy Act 1966 or that it be terminated (s 236(1)(b) and (c)). The bank also seeks orders that Mr Khera’s estate be sequestrated (ss 222(7) and 236(3)).
The authority under s 118, to convene a meeting of his creditors, was signed by Mr Khera on 14 December 1995. The meeting was held in two parts, in late January and in February 1996. The matters which are relevant to this application concern the liability of Mr Khera under a guarantee, the amount said to be owed to him by the relative whose borrowings were the subject
of the guarantee and the characterisation of the creditors who voted in favour of the resolution. It is convenient to refer to this latter aspect of the matter briefly.
The requirements of a special resolution are dealt with in ss 204 and 5(1). In terms of value in this case it depended upon the vote of one Mr V H Patel, a person said to be resident in India, who was voting by his proxy. In number the resolution was carried on the vote of a majority of creditors comprised of companies or firms with whom Mr Khera was associated together with some fifteen individuals who were either relatives or friends of his family. Fourteen of those persons claimed small debts ranging from $1,000 to $3,000 which were said to have been loans to him and eleven of those advances occurred at the same time, in January 1993. The fifteenth person was Mr V H Patel whose debt is the subject of challenge by the bank and was the focus of this application. Indeed it was submitted for the bank that I ought to conclude that there was no such debt and, inferentially, that a document said to have been signed by Mr Khera and Mr Patel, which might be taken to confirm the existence of a transaction giving rise to that debt, was a sham. The sum said to be owing to Mr Patel was some $779,406. The creditors, not being those I have just referred to, who voted against the resolution, were mostly banks or legal practitioners to whom monies were owed. A number of them support the bank in its application.
By the time of his meeting Mr Khera had unsecured creditors who were owed in the order of $1.5M. He had assets of only $2,510. Taking into account the amount by which the secured debts exceeded the value of the securities, the total sum owed by him was about $1.76M.
There are two factors which might, in part, explain this large discrepancy: that his assets had been realised in recent times and that he had incurred a substantial liability to Mr V H Patel.
By late 1995 Mr Khera, a solicitor, had had two partnership disputes and what remained of them was litigation. Whilst Mr Khera said that he was likely to succeed in a claim for damages in the sum of $100,000 against his most recent partner, the claim is unquantified and one would think that the claim by the partner could be as large. The only other substantial asset he had, apart from what was described as a “family inheritance”, was his house and this had been sold and the proceeds applied towards repayment of his mortgage with MLC Life Building Society. Whilst there might have been assertions made by Mr Khera from time to time indicative of affluence, the information he completed in January 1994 for that building society was not. But, then again, it did not disclose the substantial liabilities now listed. He listed some $135,000 as fees rendered or work in progress and the sum of $20,000 which a side note explains represents goodwill in the legal practice. Apart from what was attributed to that practice, the only other substantial asset was $250,000 described as “a loan to my brother in the USA” but which had his note appended to it: “part of family inheritance which will not be available for repayment until 6/95”.
The applicant then says that if these matters be accurate, and there be no other assets, the question arises: how did Mr Khera come to be accepted by Mr Patel as a guarantor for nearly $1M? There, in any event, are a number of features about the transaction said to have taken place between them which I consider require further explanation.
Mr Patel was apparently a friend of Mr Khera’s family and in 1993 was prepared to advance monies to assist the business of Mr Govind, Mr Khera’s uncle. For this purpose Mr Khera was prepared to guarantee repayment to Mr Patel of whatever was advanced from time to time. I can accept that it is possible, in some families, for a person to feel the obligation Mr Khera said he did to assist a relative particularly if, as he says, Mr Govind had previously helped him. However, it is difficult to comprehend a solicitor making no record of it. An answer was provided by Mr Khera in evidence before me, when he said that in fact his brother-in-law made and kept a memorandum. This has never been suggested by Mr Khera before and, when pressed to explain, he added that the memorandum had not however been signed by the parties and he had not kept a copy himself. Further, if Mr Khera’s assets and income were not substantial, it is difficult to understand why he would agree to an open-ended assurance or why Mr Govind would accept him as a guarantor if that is indeed the true complexion of the arrangements between them. To this Mr Khera countered in evidence that in fact he had asked for a ceiling to be placed upon his liability, at $1M. Two things can be said about this. Firstly, it is not clear how he could have hoped to repay even that sum. Secondly, the document of January 1995, the only signed record of the transaction, makes no mention of this limit.
Mr Khera did not disclose any liability to Mr V H Patel in the statement provided to the building society. Nor were any of the borrowings from the relatives and friends, which together amounted to a significant sum, disclosed. He said that he was not aware, in January 1994, that the amount advanced by Mr Patel was of any great magnitude and that most of the advances to Mr Govind took place later in that year. That was a year when Mr Khera was, on his account,
unwell and had a limited ability to work following the collapse of his partnership. And, having regarding to claims being made during this period, it seems that he was being placed under some financial pressure. That may or may not explain why he made no inquiry as to the extent of advances made by Mr V H Patel and, then, why he did not take some step to protect his position. He must have had some notion however of the monies loaned, because he also says he made some payments, one of $10,000 and some other smaller amounts, and he had received some demands from Mr Patel prior to the execution of the deed in January 1995. Mr Khera says that when the deed was prepared he did not check the monies due to Mr Patel himself, but that members of his family or lawyers in India did so on his behalf. No statements from Mr V H Patel or members of Mr Khera’s family in India were sought to be relied upon in evidence.
The document entitled “Deed of Confirmation of Debt” recites that there had been an oral agreement in January 1993 to provide a guarantee and that monies had been advanced on the basis of it. It then proceeds:
“In pursuance of the premises and in consideration of Khera having entered into an Agreement to provide Guarantee made on or about 13 January 1993 between Khera and Patel, Khera hereby covenants with Patel that Khera will pay to Patel the sum of Australian Seven Hundred and Seventy Nine thousand Four Hundred and Six dollars ($A779,406) which is due and payable under the said Agreement to provide guarantee together with interest at the rate of 10 per centum (10%) per annum commencing on this day 25 January 1995.”
The document was said to have been signed in New Zealand on the date it bears. Consistently with that assertion the copy shows New Zealand stamp duty as having been paid in January 1995.
As to Mr Govind, he was apparently a fairly well-to-do business man when the agreement was entered into between Mr Khera and Mr Patel. No security was however sought from him and Mr Khera did not suggest that Mr Govind had been approached when demands were placed upon him by Mr Patel or when the document of January 1995 was executed, at a time when I take it Mr Govind was still enjoying freedom. Since late 1995 he has, according to Mr Khera, been held as a political prisoner in Uganda.
Apart from the monies now said to be due under the guarantee (by way of “damages”) Mr Govind is also said to owe Mr Khera $250,000 which were the monies held by Mr Khera’s brother that I have earlier referred to, but which were paid by the brother to Mr Govind. How his brother came to be in possession of Mr Khera’s inheritance has been the subject of evidence in other proceedings. Why Mr Khera would decide later to permit them to be paid to someone who already owed Mr Patel a large amount of money, if this is what he did, is also difficult to follow. Accepting notions of family loyalty, Mr Khera had no other substantial assets with which to meet his own potential liability to Mr Patel. But I must also add that whether there is any explanation was not a matter which was gone into in any detail in evidence before me.
SECTION 222(4)
On the evidence thus far I have grave doubts about the existence of and the nature of any transaction between Mr Khera and Mr V H Patel. I have even stronger doubts about the veracity of the story concerning the $250,000 although this is not relied upon in the application as
founding the basis for an order under s 222(4). However, disquiet and the formation of a view that aspects of the story put forward by Mr Khera are improbable, do not equate with proof of the non-existence of such a debt. In my view it was incumbent upon the applicant to establish that, since it asks the Court to conclude that Mr Khera has given false and misleading information or has included an incorrect particular concerning an alleged creditor. Sub-sections 222(4)(a) and (b) provides:
(4) Where the Court, on the application of the Inspector-General, a person authorised in writing by the Inspector-General, the trustee or a creditor, is satisfied that the debtor: -
(a)has given false or misleading information in answer to a question put to him with respect to any of his conduct or examinable affairs at the meeting of creditors at which the resolution requiring him to execute the deed or accepting the composition was passed; or
(b)has omitted a material particular from the statement of the debtor’s affairs given under subsection 188(2) or included an incorrect and material particular in that statement;
the Court may make an order declaring the deed or composition to be void or declaring any provision of the deed or composition to be void.”
Even though I have formed the opinion, on the short examination before me, that Mr Khera is a witness who is prepared to add to or elaborate upon matters to suit his purposes this does not establish that everything he has said, including those facts set out in the document apparently signed by Mr V H Patel, are false. In that respect it may also be observed that the deed of January 1995 was entered into a long time before any steps were taken by Mr Khera concerning his creditors. It goes someway towards casting doubt upon the transaction he refers to, but it does
not enable a positive finding that there was no such transaction. Even taking all of the factors adverse to Mr Khera into account I am unable, on the state of the evidence, to make such a finding.
Reliance was placed by the applicant on inferences which might be drawn against Mr Khera because of his failure to call evidence to further explain these matters. As I understand the submission Mr Khera ought be taken to have had the opportunity of addressing an issue clearly raised, as to the existence of the debt, but he has elected not to. But the rule in Jones v Dunkel & Anor (1959) 101 CLR 298 (recently considered in Minister for Aboriginal and Torres Strait Islander Affairs of the Commonwealth of Australia v Douglas (unreported decision of the Full Court 28 May 1996)) provides that a Court may more confidently drawn an opposing inference because it stands uncontradicted by the person who may say something about the matter. This is not however a case where there is an unexplained gap in the evidence concerning the transaction (the state of the evidence as to what became of his “inheritance” is not relevant for present purposes). Mr Khera has given his version of events. It is just that the applicant has nothing positive to contradict him with. The applicant seeks to make out its case by inferences said to be drawn by reason that Mr Khera did not call further evidence to conclude the matter in his favour or seek to adduce evidence from other witnesses including Mr V H Patel. But it was not incumbent upon him to do so and it seems to me that this is not a case where the obligation as to proof has in any relevant sense shifted to Mr Khera. Thus far I have not made mention of Mr Patel. It is however the case that any findings contended for would require inferences adverse to him also to be drawn from his failure to come forward and I am not satisfied that he has had
notice of these proceedings, even if Mr Khera’s solicitors said at one point in correspondence (but to the contrary during the hearing) that notice or service had been arranged by Mr Khera.
I do not have the requisite degree of satisfaction to make the orders sought under s 222. Before turning to the alternative course, of orders terminating the arrangement under s 236, it is appropriate to deal with a requirement common to both sections and which was challenged by Mr Khera, namely whether an order bringing the arrangement to an end would be in the interests of the creditors: s 222(5) and s 236(2). The sub-sections prohibit the making of such an order unless the Court is so satisfied.
The “interests” of creditors in the context of orders bringing an arrangement to an end do not require that the Court be satisfied that there will be an immediate financial return or even a certain financial benefit to the creditors. It suffices that there be a real possibility: Augustyn v Putnin (1988) 83 ALR 514, 521-2. And it follows from the case there referred to (Re Moulton ex parte Beneficial Finance Corporation Ltd (unreported decision of Neaves J 20 December 1984)) that in some cases it may be in the creditors’ interests to have a full investigation into the debtor’s affairs.
A public examination of a debtor who has executed a deed of assignment is available, s81, which provides for such an examination of a bankrupt, applying: see s 237(1). I have not had the benefit of submissions on the matter, but it would seem to me that the areas for examination in the context of a deed of arrangement would necessarily be of much narrower
compass and I note that the provisions relating to transactions which may be set aside (ss 120-122) do not apply (see s 237(2)).
It seems to me that there is at least a possibility of financial benefit ultimately accruing to the creditors, having regard to the questions concerning the transaction with Mr V H Patel and the alleged transfer of funds to Mr Govind the latter, if it has occurred, having taken place in mid to late 1995, a matter of months before the meeting of Mr Khera’s creditors was called. In the background of a deed of arrangement which offers little in any event to the creditors it seems to me that the question posed by the statute can be answered in the affirmative. Three payments to them of $7,500 together with 50% of Mr Khera’s net income over $35,000 for three years will not return much to the creditors and a contribution from his income could be required of him in a bankruptcy. His undertaking to pay monies received in respect of his partnership appears to me with respect to be somewhat hollow. There is no reliable evidence to show it now has any value. The cause of action which Mr Khera might have against his former partner would likely vest in his trustee as connected with his business and as affecting the extent of the property divisible amongst his creditors: see Griffiths v Civil Aviation Authority, (unreported decision of the Full Court 24 May 1996) and in particular the judgment of Cooper J at p 12. Mr Khera’s offer to pay over 75 percent of the proceeds, if he were successful, does not then seem to be of much moment except that for the 25 percent he retains he undertakes to pursue the action himself. Presumably he would fund the litigation by incurring costs to the firm he works for as he has done in another case, although this was not gone into. In any event, there is nothing to indicate that the claim is a particularly meritorious one. The deed also contains an assignment of some
property but which would vest in a trustee on sequestration. The fact that some creditors, in particular those having a close association to Mr Khera, have said that they will not prove in the arrangement does not significantly the position of creditors.
SECTION 236(1)(c)
Section 236 provides:
“236 (1) The Court may, upon application by the trustee, a creditor or the debtor, or, if the debtor has died, the person administering the estate of the debtor, if it is satisfied -
(a)that the debtor, or, if the debtor has died, the debtor or the person administering the estate of the debtor, has failed to carry out or comply with a provision of the deed of arrangement;
(b)that the deed of arrangement cannot be proceeded with without injustice or undue delay to the creditors, the debtor or, if the debtor has died, the estate of the debtor; or
(c)that for any other reason the deed of arrangement ought to be terminated;
make an order terminating the deed.”
It was submitted for Mr Khera that one could not give to the words “for any other reason” in paragraph (c) a very wide meaning and that the power to terminate under the section is limited to circumstances where the arrangement could not be carried into final effect. It did not extend to the situation where, as here, the Court may have some doubt about the matter but it had not been established that there was some misconduct or misinformation as required by s 222(4) before an order setting the arrangement aside was made.
In Re Doukidis ex parte: Consolidated Constructions v Melsom (unreported 26 June 1985) Toohey J said with respect to s 242, the equivalent of s 236 but which applies to compositions:
“On its face s 242 is concerned with a situation in which no objection is taken to the composition itself but it is said for various reasons, including failure by the debtor to comply with a term of the composition, the composition should be terminated. The use of the expression “terminated” is not consistent with setting aside a composition; rather it suggests bringing to an end a composition because it cannot be carried into final effect.
In my view s 242 is quite inapplicable to the circumstances relied upon by Consolidated Constructions. I do not overlook that para (c) speaks of “any other reason” but this has to be read conformably with the apparent purpose of the section. It is not simply s 222 or s 239 in another guise.”
And this approach was approved by Burchett J in Re Tripodi ex parte Col Johnson Pty Limited (unreported 22 January 1987) and by the Full Court in Musolino & Anor v Sidiropolous & Ors (1991) 101 ALR 235, 246. However, the conclusion to which the observations of Toohey J were relevant in Musolino, was that s 236 was not applicable where it was held that the composition did not comply with Part X. That is to say, s 236 is to be taken to refer to compositions (or arrangements) which are valid. But Toohey J in Doukidis also expressed of the view that the power to terminate under s 242(1)(c) is limited to grounds like those referred to in (a) and (b) of that subsection, which refer to some difficulty, if not impossibility, in further performance. What appears to have led his Honour to that view was the existence of other provisions giving special powers (s 222 to avoid a composition and s 239 to set it aside). One might then infer that s 242 was intended to deal with a different set of circumstances, or at least those which did not fall
within those two sections. Regardless of the correctness of that view it is difficult to apply it to deeds of arrangement, at least without further analysis, for with respect to deeds of arrangement there is no equivalent provision to s 239. If the reasoning in Doukidis’ case is correct and ought to be applied to deeds of arrangement, as was suggested in Re Tripodi it would follow that there would be no power to bring to an end deeds of arrangement other than in circumstances where there was some practical impossibility of it being completed or where the grounds for avoidance under s 222 were made out.
The terms of ss 236 and 242 do not themselves suggest a limitation with respect to the reasons necessary to warrant termination, other than that the Court be satisfied that it is in the interests of creditors to do so. It would also be necessary to show that a termination was necessary or desirable to have the discretion conferred by the section exercised in favour of the making of an order of termination. And, it would seem to me, that “terminated” in s 236, as in s 235, simply means bringing an arrangement to an end before it is carried out. One can think of instances where it may not only be necessary but desirable to do so but where grounds for avoidance under s 222, namely non-compliance or matters affecting the knowledge and belief of creditors voting at the meeting, could not be satisfied. There are likely to be many situations which fall between the grounds of avoidance in that section and impossibility of performance in s236.
Other decisions of the Full Court of this Court have assumed the existence of a wide power to terminate: See Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527
and Paton v Campbell Capital Limited (1990) 46 FCR 30. In the former case the factor which influenced both the primary Judge and the Full Court and led to an order being made to terminate the arrangement was the feeling of “disquiet” about disclosures, in the background of a substantial alteration in the debtors’ fortunes. In Paton’s case there were three factors which led to a similar conclusion: a return to creditors which could scarcely be of interest to them; some matters which called out for inquiry; and special arrangements that had been made with some creditors. In the present case there are, I consider, serious concerns about stated liabilities and assets, and with respect to the latter, a substantial asset is said to be effectively beyond the reach of the creditors. To this may be added as relevant in my view the fact that the resolution was carried by creditors not formerly disclosed and who either appear to have some connection with Mr Khera or are the creditor whose transaction is sought, an serious grounds, to be impugned. All of these matters highlight the need for proper inquiry. Whilst it is no doubt correct to say that the failure of a creditor to establish grounds under s 222 does not provide a reason for the grant of an order under s 236 and that more is needed here I consider sufficient is shown to provide good reasons for ending the arrangement and ordering sequestration.
The reason for the inclusion of s 239 as a special provision with respect to compositions was, according to the Clyne Committee (report of the Committee to review the Bankruptcy Law of the Commonwealth, 1962 para 338), because it was thought necessary to safeguard the interests of minority creditors since there was no provision made with respect to the order of priority of debts. But its inclusion and the width of its power to set aside a composition on the application of a creditor made within the limited period, twenty one days, not only because it
considers the terms are “unreasonable or are not calculated to benefit the creditors generally” but for “any other reason” raises the question whether it was intended to cover the same ground as s 242. Pincus J in Re Brown (RU) ex parte Humes Ltd & Anor (1987) 74 ALR 611, 614 was of the view that it was necessary to read s 242 as relating, generally to matters occurring after it was made. His Honour said:“Each section allows application on the ground of “any other reason” and if that is taken literally, the time limit might largely be ineffective. It appears to me that the way to reconcile the two provisions is to construe s 242(1) as relating generally, if not universally, to supervening events - ie to grounds of challenge other than those based upon the resolution itself and the facts as they were at that time. If an attack on the basis of deficiencies in the resolution itself is now permitted, the intention of s239(1) - that a composition shall be ordinarily treated as good if not challenged within 21 days - would be defeated”.
There is no provision which requires the same limitation to be placed on s 236 and to narrow the wide power as it is expressed in sub-section (1)(c). Whilst deficiencies of proof as to the status of a creditor or a debt will result in a refusal to negate the arrangement by order setting it aside on the grounds referred to in s 222(4) there is no prohibition expressed or, I consider, to be implied upon the Court considering the alternative course of bringing it to an early end and ordering sequestration when the circumstances surrounding those matters combined with those which brought about the special resolution are, at the least, shadowy and there is a real need shown for proper enquiry and, of course, that it is in the interests of creditors to do so.
CONSEQUENTIAL ORDERS FOR SEQUESTRATION
By signing the authority in December 1995 Mr Khera committed an act of bankruptcy: s40(1)(i). A petition has been filed by the applicant, but it is not necessary to have recourse to it.
By s 236(5) the application made by it under s 236(3), for a sequestration order, is deemed to be equivalent to the presentation of a creditor’s petition, although a number of matters are expressed to be unnecessary for the Court’s consideration. Section 52(3) however still applies and it pursuant to it that Mr Khera applies for a stay of proceedings under the sequestration order whilst he brings an appeal or whilst he seeks advice as to whether to lodge one. Whether a stay is granted until the hearing of an appeal is likely to depend upon matters such as the prospects of the appeal itself and whether the trustee ought be prevented from promptly undertaking enquiries. Any such application ought I consider be brought separately. There does not seem to me to be any practical reason to order a stay for a few days. No prejudice is likely to be suffered by Mr Khera in that time and none was pointed to by Counsel appearing for him .
I certify that this and the preceding fifteen pages are a true copy of the reasons for judgment herein of the Honourable Justice Kiefel
Associate:
Date:
Counsel for the applicant: Mr M Aldridge
Solicitors for the applicant: Shaw Lewis & Co
Counsel for the respondent: Mr A Bannon
Solicitors for the respondent: Dibbs Crowther & Osbourne
Date of Hearing: 17 May 1996
Place of Hearing: Sydney
Date of Judgment: 14 June 1996
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