Re Lewis, P.J. v Ex parte Pyramid Building Society (In Liquidation)
[1993] FCA 948
•17 DECEMBER 1993
Re: PETER JAMES LEWIS
Ex parte: PYRAMID BUILDING SOCIETY (IN LIQUIDATION)
PETER JAMES LEWIS and JOHN DAVID BRO0KE
No. VX376 of 1991
FED No. 948/93
Number of pages - 19
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
EXERCISING FEDERAL JURISDICTION IN BANKRUPTCY
NORTHROP J
CATCHWORDS
Bankruptcy - Deed of arrangement - creditor not named in Statement of Affairs and not notified of creditors' meeting - application to have deed declared void - whether debt was "unliquidated contingent or unascertained" - discretion of Court to declare deed void under s222 Bankruptcy Act 1966 - long delay by creditor with knowledge of true position.
HEARING
MELBOURNE, 1, 3 November 1993
#DATE 17:12:1993
Counsel for Applicant: Mr P.G. Cawthorn
Solicitors for Applicant: Molomby and Molomby
Counsel for John David Brooke: Mr A.W. Ellis
Solicitors for John David Brooke: Irlicht and Broberg
Peter James Lewis, Respondent: Appeared unrepresented
ORDER
THE COURT ORDERS THAT:
1. In relation to the application of Pyramid Building Society (in liquidation) dated 21 July 1993:
(a) the application be dismissed; and
(b) the applicant pay the taxed costs of Peter James Lewis and John David Brooke.
2. In relation to the application of Peter James Lewis dated 8 October 1993:
(a) the application be dismissed; and
(b) Pyramid Building Society (in liquidation) pay the taxed costs of the applicant and John David Brooke.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
NORTHROP J On 26 August 1991, Peter James Lewis ("the Debtor") signed an authority under s188 of the Bankruptcy Act 1966. By that authority, the Debtor authorized John David Brooke ("the Trustee"), a registered trustee under the Bankruptcy Act, to call a meeting of his creditors and to take over the control of his property. The Trustee consented in writing to exercise the powers conferred by the authority. As a result, the property of the Debtor became subject to the control of the Trustee in conformity with s189.
Under paragraph 188(2)(c) the Debtor gave to the Trustee a statement of his affairs and a statement indicating his proposal for his affairs to be dealt with under Part X of the Bankruptcy Act. This proposal was that he assign "to a Registered Trustee for the benefit of my creditors all of my divisible assets". In addition the Debtor undertook to pay the sum of $10,000 within 60 days of the meeting of creditors for the benefit of creditors. In substance, the proposal by the Debtor was that he enter into a deed of assignment by which he assigned all his divisible property for the benefit of his creditors. In addition he undertook to provide a further $10,000 for their benefit. In this respect, it is important to note the meaning to be given to the words "divisible property" by subsection 187(1) of the Bankruptcy Act namely:
"in relation to a deed of assignment executed by a debtor, means the property, other than property that was acquired by, or devolved on, the debtor on or after the day on which he executed the deed, that would be divisible amongst his creditors under Part VI if he had become a bankrupt on that day:"
The statement of affairs given by the Debtor disclosed an amount of $714,921.00 owing to unsecured creditors and a total deficiency of $667,521.00. The statement did not disclose Pyramid Building Society (In Liquidation) ("Pyramid") as a creditor. The statement did not disclose any contingent creditors.
On 18 September 1991, the Trustee filed in the office of the Registrar in Bankruptcy his report, dated 13 September 1991, given pursuant to s189A of the Bankruptcy Act. In that report, he expressed his opinion that as the proposal by the Debtor "offers a return to creditors which is greater than that which would be available in a bankruptcy, it is a proposal which may be deemed to be in the best interests of creditors".
The meeting of creditors was held on 27 September 1991. Pyramid did not attend the meeting. It had not been given notice of the meeting. The meeting, by special resolution, resolved, pursuant to s204, that the Debtor be required to execute a Deed of Arrangement pursuant to Part X of the Bankruptcy Act incorporating the provisions that the creditors release the debtor from the provable debts, that the Debtor assign to the Trustee all his divisible property within the meaning of Part X of the Bankruptcy Act, that the Debtor undertake to pay the Trustee the sum of $10,000 on or before 26 November 1991, that the Trustee realize the assets assigned as soon as reasonably practicable, that the Trustee apply the monies received in accordance with the priorities set out in Division 2 of Part VI of the Bankruptcy Act and that the Deed of Arrangement be made pursuant to Part X of the Bankruptcy Act. At the meeting the Debtor answered questions relating to Bakgamon Developments Pty Ltd ("Bakgamon"), a company which, for practical purposes, was controlled by the Debtor and performed the functions of a family trust in favour of the Debtor and members of his family. It became apparent that Bakgamon was in financial difficulties because of its money debt to Pyramid.
On 2 October 1991, the Debtor and the Trustee entered into a Deed described as a "Deed of Arrangement". Leaving out the formal parts, the deed was as follows:
"DEED OF ARRANGEMENT
This Deed made the 2 day of October, One Thousand Nine Hundred and Ninety One in pursuance of Section 204(1) of the Bankruptcy Act 1966, BETWEEN PETER JAMES LEWIS, Consultant, of 4 Hobson Street, Queenscliff, in the State of Victoria, (hereinafter called "the debtor") of the one part and JOHN DAVID BROOKE of 255 Whitehorse Road, Balwyn, in the State of Victoria, Registered Trustee, (hereinafter called "the Trustee") of the other part WITNESSETH:-
1. THAT the creditors hereby release the debtor from all provable debts.
2. THAT a Registered Trustee shall be Trustee of this Deed of Arrangement.
3. THAT the debtor assigns to the Trustee all of his divisible property within the meaning of Part X of the Bankruptcy Act 1966.
4. THAT the debtor undertakes to pay to the Trustee the sum of $10,000; such sum being due and payable on or before 26 November 1991.
5. THAT the Trustee shall realise the assets assigned as soon as reasonably practicable.
6. THAT the Trustee shall apply monies received by him pursuant to this Deed of Arrangement in accordance with the priorities set out in Division 2 of Part VI of the Bankruptcy Act 1966.
7. THAT the Deed of Arrangement is made pursuant to Part X of the Bankruptcy Act 1966."
There is no doubt that Pyramid became aware of the meeting of creditors and the Deed of Arrangement shortly after the Deed was executed. By letter dated 9 December from the Trustee to Pyramid, the Trustee made reference to a telephone conversation between a member of his office and Pyramid on 6 December 1991 and forwarded with the letter a copy of "Notice of Meeting of Creditors" dated 10 September 1991 and a copy of the circular to creditors advising the outcome of the meeting and dated 14 October 1991. The circular referred to the meeting of creditors, the special resolution that had been passed and the fact that the Deed had been executed. The circular contained the following paragraphs:
"Creditors should particularly note that as the Deed is now binding on all unsecured creditors of the above debtor, it is not competent for any unsecured creditor so long as the Deed remains in force and except with the leave of the Court and on such terms as the Court imposes:
1. to enforce any remedy against the property of the debtor in respect of a provable debt.
2. to enforce any legal action in respect of a provable debt or continue any proceedings commenced previously or to take any fresh step in such a proceeding.
Any creditor who has instituted proceedings for recovery of a debt owing by the debtor should discontinue such action to avoid incurring further legal costs.
Any debts incurred after the date of the execution of the Deed being 2 October 1991 must be satisfied by Peter James Lewis pursuant to normal trading terms.
As you appear as a creditor on the Statement of Affairs, I enclose herewith form of Proof of Debt which you are requested to complete and return to this office on or before 19 November 1991. Please note that dividends will not be paid to creditors who have not lodged their Proof of Debt."
Enclosed with the circular was a pro forma proof of debt filled out with respect to the Debtor and to be completed by Pyramid if it wished to lodge a proof of debt.
Pyramid did not lodge any proof of debt. As appears later in these reasons, Pyramid took no action with respect to the Deed of Arrangement for some 20 months. On 28 July 1993, Pyramid filed an application in this matter seeking a number of orders. In the events which happened at the trial, Pyramid sought orders which are summarized as follows:
1. An order declaring "the composition" in respect of which a resolution was passed on 27 September 1991 "void pursuant to Section 222 of the Act on the grounds that there is a doubt whether the composition or a Deed of Arrangement in respect thereof was entered into in accordance with Part X of the Act or complies with the requirements of Part X of the Act. The order sought was based on the fact that Pyramid was a creditor of the Debtor, it was not listed as a creditor in the Debtor's Statement of Affairs, it was not given notice of the meeting, it did not attend the meeting of creditors and that if it had attended it could, because of the amount it was owed, have prevented the special resolution be adopted.
2. An order declaring "the deed or composition" void pursuant to s222 on the ground that the Debtor omitted a material particular from his statement of affairs given under subsection 188(2) in that he did not list Pyramid as a creditor.
3. An order pursuant to s242 terminating the composition on the grounds that the debtor had contingent liabilities to Pyramid (emphasis added).
4. A sequestration order against the estate of the Debtor.
The application did not comply with the forms prescribed by the Bankruptcy Rules. As a result confusion arose. The heading to the application did not follow Form 1 in the Bankruptcy Rules as required by Rule 5. The application, although generally in conformity with Rule 102 and Form 45, did not name any respondent to the application. It named the Debtor, wrongly describing him as a "Judgment Debtor", and Pyramid as Applicant. The application was served on the Debtor and on the Trustee. Neither was named as a respondent. The Trustee did not give notice of opposition nor did he give grounds of opposition to the orders sought.
Pursuant to directions made by a Registrar of the Court exercising powers under s31A of the Bankruptcy Act, the Debtor filed what purported to be a notice of opposition and his grounds of opposition to the granting of the application. He filed an affidavit in support. At the hearing of the application, the Debtor appeared in person. For practical purposes, most of his evidence was inadmissible and, except when the facts referred to are not disputed, the Court does not rely upon facts contained in his affidavit.
Further, on 8 October 1993, the Debtor filed an application seeking an order that if the composition is set aside or a sequestration order is made, the Trustee repay the $10,000 received by him to the person who had lent that money to the Debtor to make the payment in conformity with the terms of the Deed of Arrangement. The Trustee gave notice of opposition to this application on stated grounds. This document continued the misleading nature of the title to the proceeding but was made worse by reference to the Debtor as "Judgment Debtor" and Pyramid as "Judgment Creditor".
At this stage it is helpful to set out subsections 222(1),(2),(3),(4) and (5) of the Bankruptcy Act:
"222(1) Where there is a doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204, the Inspector-General, a person authorised in writing by the Inspector-General, the Registrar, the trustee, a creditor or the debtor may apply to the Court for an order under subsection (2).
(2) Upon the hearing of an application made under subsection
(1), the Court may, subject to this section, make an order -
(a) declaring that the deed or composition is void, or that it is not void, on the ground specified in the application; or
(b) declaring that a provision of the deed is void, or is not void, on the ground specified in 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.
(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.
(5) The Court shall not make an order declaring a deed or composition, or a provision of a deed or composition to be void on a ground specified in subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so."
Pyramid claims to be entitled to bring the application on the ground that it is a creditor within the meaning of that word in subsection 222(1). Whether it is such a creditor is an issue raised in the application. On one view, Pyramid was not entitled to vote at the meeting of creditors held on 27 September 1991. This view depends upon the application of s198 and whether the debt claimed to be owed by the Debtor to Pyramid was an unliquidated or contingent debt or a debt the value of which was not ascertained. Pyramid was not a secured creditor of the Debtor but the whole of s198 is set out:
"198(1) Subject to this section, every creditor is entitled to vote at a meeting under this Division.
(2) A creditor is not entitled to vote in respect of an unliquidated or contingent debt or a debt the value of which is not ascertained.
(3) For the purpose of enabling a creditor to vote, a debt that is certain but is payable in the future shall be deemed to be payable at the time of the meeting.
(4) A creditor is not entitled to vote (otherwise than in respect of the election of a chairman of the meeting), unless he has made known to the chairman particulars of his debt.
(5) Except as provided by subsection (6), a secured creditor is not entitled to vote in respect of a secured debt unless he surrenders his security.
(6) A secured creditor may, if he has furnished to the chairman, in writing, particulars of the security and of the value at which he estimates it, vote in respect of the balance (if any) of the secured debt after deducting the value at which he has estimated the security.
(7) The spouse, or the de facto spouse, of the debtor is not entitled to vote at a meeting under this Division."
It is now necessary to turn to the facts by which Pyramid claims to be a creditor of the Debtor. Bakgamon was the owner of premises at 80 Hesse Street Queenscliff. It held the premises pursuant to a family trust. An icecream shop was conducted at the front of the premises. At the rear there was a garden indoor/outdoor restaurant. Above the restaurant was a manager's unit. The premises were leased. These premises will be described in these reasons as "the Hesse Street premises".
Scorpion Hotels Pty Ltd was the owner of 4 Hobson Street Queenscliff. Bakgamon controlled Scorpion and thus was held pursuant to the family trust. The premises comprised a two storied Victorian dwelling which was used as a guest house. The premises were leased to the Debtor's wife, Mary Jane Lewis, who conducted the guest house. These premises will be described as "the Hobson Street premises" or "the Scorpion premises".
For various reasons, the Debtor wanted to rearrange his finances and for this purpose he arranged loans from Pyramid to be secured by mortgages given by Bakgamon and Scorpion over the Hesse Street premises and the Hobson Street premises respectively. In addition, the Debtor gave guarantees with respect to each loan.
By an instrument of mortgage dated 13 November 1989, Bakgamon, as mortgagor, mortgaged the Hesse Street premises, which was general law land, to Pyramid, as mortgagee, as security for the loan of $200,000 advanced by Pyramid to Bakgamon. On the same day, the Debtor and a David Stanley Lewis, entered into a guarantee, in favour of Pyramid with respect to the moneys owing by Bakgamon under the mortgage. In the events which happened, before August 1991, the Debtor, pursuant to the guarantee, became liable to pay to Pyramid an amount in excess of $200,000.
By a mortgage dated 13 November 1989, Scorpion, as mortgagor, mortgaged the Hobson Street premises, which were registered under the Transfer of Land Act (Vic), to Pyramid, as mortgagee, as security for the loan of $310,000 advanced by Pyramid to Scorpion. On the same day, the Debtor and Mary Jane Lewis entered into a guarantee in favour of Pyramid with respect to the moneys owing by Scorpion to Pyramid under the mortgage. In the events which happened, before August 1991, the Debtor, pursuant to the guarantee, became liable to pay Pyramid an amount in excess of $310,000. In other words, by 26 August 1990, Pyramid was a creditor of the Debtor.
From this summary of facts, which are not disputed, it is clear that at the time the Debtor gave his statement of affairs on 26 August 1990, Pyramid was a creditor of the Debtor in a total sum of over $510,000. At the same time, it must be remembered that Pyramid was a creditor of the other two guarantors, Bakgamon and Scorpion. Further, Pyramid held mortgages as security for those debts over the Hesse Street premises and the Hobson Street premises.
From some time in 1990, and thereafter, the Debtor, on behalf of Bakgamon, negotiated with Pyramid to restructure the debt owed by Bakgamon to Pyramid in an attempt to achieve a release by Bakgamon from its mortgage to Pyramid. In evidence were two sets of file notes, taken by officers of Pyramid, of meetings between Bakgamon represented by the Debtor and Pyramid. Each is headed "Bakgamon Developments Pty Ltd" and it is clear that the negotiations were between Bakgamon and Pyramid. The first of the file notes relate to a meeting held on 27 November 1991. The notes record the fact that Pyramid knew by 15 November 1991 that the Debtor had entered into the Deed of Arrangement, and reference was made to lodging proofs of debt. Bakgamon referred to a rearrangement of the loan to it. Reference was made to the guarantee with respect to Scorpion but there were complications between Pyramid and another company as to which company had the benefit of the mortgage over the Hobson Street premises. This dispute will be referred to later. Pyramid said it would obtain valuations of the mortgaged properties and that Bakgamon should put its proposals in writing.
The second meeting took place on 10 December 1991. The file notes show that the Debtor put a proposal to Pyramid on behalf of Bakgamon. It was rejected. Pyramid told the Debtor that the valuation of the Hesse Street premises "came in at $320,000 with debt outstanding at $273,972.69". Pyramid told the Debtor that it could not release the mortgage without receiving the full amount of the debt.
It is fair to say that, for a long after December 1991, negotiations continued between the Debtor, on behalf of Bakgamon, and Pyramid with respect to the Hesse Street premises and mortgage.
Sometime in the year 1990, Pyramid entered into arrangements with Compass Building Society ("Compass") which involved delivering to Compass mortgages held by Pyramid. The mortgage held by Pyramid over the Hobson Street premises was one of the mortgages involved. Disputes arose between Pyramid, Compass and Bendigo Building Society with respect to the arrangement. The dispute involved legal proceedings in the Supreme Court of Victoria. The dispute was settled in October 1992.
There is no direct evidence on the issue, but an inference is drawn that, at 26 August 1991, the value of the Hobson Street premises exceeded the amount of the debt owed under the mortgage of those premises and that Pyramid knew of that fact. Because of the dispute, no negotiations took place between Scorpion and Pyramid similar to those that had occurred between Bakgamon and Pyramid. Further, the evidence discloses, and it is almost common knowledge, that the value of properties in Queenscliff fell sharply after November 1991 and that by mid 1993, the values of the Hesse Street and Hobson Street premises were less than the amounts owing under the mortgages held by Pyramid, or possibly, Compass in respect of the Hobson Street premises.
The main evidence given in support of the application was that given by Gary Stephen Fettes, an accountant employed by the liquidator of Pyramid. In November 1991 he knew of the options open to Pyramid with respect to the Deed of Arrangement. In evidence Mr Fettes gave evidence as follows:
"HIS HONOUR: Can you say whether when you received this notice in November 1991 you immediately instructed solicitors to contact the trustee to say you were putting in a proof of debt? --- We didn't do that, your Honour. We had course to believe at that time that there may have been other assets, and to have lodged a proof of debt at that time, our legal advice was such that we would not then be able to overturn the part X arrangement so we made the decision not to lodge the --- A deliberate decision not to lodge a proof of debt but what, to rely upon your security? --- We continued to rely on our security, your Honour, and negotiations took place between the societies and Mr Lewis for that time.
And so you were relying upon your security and not upon abandoning your security and proving in the Part X? --- That is correct, yes."
Later, in answer to a question from counsel for Pyramid, Mr Fettes said:
"Why was that decision taken, Mr Fettes? --- We believed that if we - well, our advice at the time, your Honour, was that if we had proceeded to lodge the proof of debt our rights in pursuing the overturning of the Part X arrangement would have been waived. At that time we believed there may have been other assets which we wanted to pursue and we may not have been able to do that had we lodged the proof of debt at that time.
HIS HONOUR: The proof of debt would have been what for, the full amount owing under the guarantee? --- Yes, your Honour, I believe so."
Later, the following questions and answers were given:
"HIS HONOUR: When you decided not to lodge a proof of debt did you consider the possibility of applying then to have the Part X arrangement set aside? --- Certainly, your Honour. The reason that was not done appears from the file that Mr Lewis was making genuine attempts to settle the debt in full. Yes. So you knew of your rights but decided, for various reasons, not to pursue them? --- That is correct, your Honour."
The story does not end there. By writ issued out of the Supreme Court of Victoria on 29 July 1992, that is the day after the application before this Court was issued, Pyramid claimed against Bakgamon, the Debtor and the other guarantor, David Stanley Lewis, the sum of $309,559.59 being the amount then owing under the mortgage and guarantee with respect to the Hesse Street premises. On 19 August 1992 judgment was entered in that action against Bakgamon for $309,559.59, interest in the sum of $13,713.91 and costs fixed at $900. There was no direct evidence that judgment had been entered against the Debtor, but counsel for Pyramid told the Court, and it is accepted, that judgment was entered against the Debtor also.
Subsequently to 19 August 1992, pursuant to the powers conferred on it by the mortgage, Pyramid sold the Hesse Street premises, with the result that at 5 May 1993 the sum of $129,521.52 was due and owing to Pyramid by Bakgamon.
There is no direct evidence before the Court relating to the Hobson Street mortgage but counsel for Pyramid told the Court, and it is accepted, that Pyramid has obtained judgment against Scorpion, the Debtor and Mary Jane Lewis for an amount owing under the mortgage of those premises and the guarantee with respect to that mortgage. The evidence does not disclose the amount of that judgment or whether the Hobson Street premises have been sold pursuant to the terms of the mortgage.
If the Deed of Arrangement is, in truth, a deed of arrangement, attention is drawn to subsection 233(1) and (2) of the Bankruptcy Act. Those subsections are set out:
"233(1) A deed of arrangement that is entered into in accordance with this Part and complies with the requirements of this Part is, upon being duly executed by the debtor and the trustee, binding on all the creditors of the debtor.
(2) Subject to subsections (3) and (4), where a deed of arrangement has become binding on the debtor's creditors, it is not competent for a creditor, so long as the deed remains in force:
(a) to present a creditor's petition against the debtor, or to proceed with such a petition presented before the deed become so binding, in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court imposes:
(i) to enforce any remedy against the property or person of the debtor in respect of a provable debt; or
(ii) to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding."
The Court did not give leave to Pyramid to commence the Supreme Court actions.
If the Deed of Arrangement is, in truth, a deed of assignment, attention is drawn to subsections 228(1) and (2). Those subsections are set out:
"228(1) A deed of assignment that is entered into in accordance with this Part and complies with the requirements of this Part is, upon being duly executed by te debtor and the trustee, binding on all the creditors of the debtor.
(2) Subject to subsections (3) and (4), where a deed of assignment has become binding on the creditors of the debtor, it is not competent for a creditor, so long as the deed remains valid -
(a) to present a creditor's petition against the debtor, or to proceed with such a petition presented before the deed became so binding, in respect of a provable debt;
(b) to enforce any remedy against the person or property of the debtor in respect of a provable debt; or
(c) to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding."
The judgments of the Supreme Court still stand. The Court expresses no opinion on the effect of either s233 or s228 on the validity of those judgments. The Court expresses no opinion on whether either or both of those judgments could found a valid bankruptcy notice under the Bankruptcy Act. The existence of those judgments may explain why in the application the Debtor is described as the Judgment Debtor.
The evidence relating to the administration by the Trustee of the estate of the Debtor under the Deed of Arrangement is very meagre. It appears that the assets of the Debtor received by the Trustee amount to $25,627.97 including the $10,000 agreed to be supplied by the Debtor and $15,000 from the sale of the property listed in the Statement of Affairs. The amounts expended by the Trustee total $18,156.57. Included in this amount is the sum $10,177.30 for the Trustee's remuneration. The evidence does not disclose when the final dividend should have been paid. On the facts, subsection 222(6) does not prevent an order being made under subsection 222(2) of the Bankruptcy Act.
The final matters of a factual kind to be referred to in these reasons are the contents of two letters tendered by counsel for Pyramid. By letter dated 28 October 1992, the Solicitors for Pyramid wrote to the Trustee as follows:
"Dear Sirs,
BAKGAMON DEVELOPMENTS PTY. LTD.
We note that you are trustee of the Deed of Arrangement under Part X of the Bankruptcy Act entered into between Peter James Lewis and yourself on 2 October 1991. We note that our client Pyramid Building Society advised you in December 1991 that Mr Lewis had not declared his liability to the Society in his Statement of Affairs.
Pursuant to 2 separate Contracts, Mr Lewis currently is contingently liable to our client for the sum of $520,000. We have instructions to issue a writ in relation to $440,000 and another Writ is out to be served seeking the sum of $309,559 (it is hoped that much of this latter amount will be recovered through the sale of the property).
We therefore request that you hold any moneys you may have received from Mr Lewis in relation to the Part X arrangement reached with his creditors as we advise we will be making application to the Court to set aside the Part X and bankrupt Mr Lewis. In particular, we understand that you are currently attempting to sell Mr Lewis' shares in Bakgamon Pty. Ltd. against which company we have recently entered judgment and which is in the throes of being wound up. A Notice pursuant to Section 460 of the Corporations Law has been served upon the Company at its registered office.
Kindly confirm that you will not distribute the assets of the estate of Mr Lewis until such time as our application is heard. We look forward to hearing from you as soon as possible."
Reference is made to the second paragraph of that letter where the writer refers to the fact that the Debtor "is contingently liable to" Pyramid. Reference is made also to the Supreme Court proceedings. If in fact the Debtor was "contingently liable" to Pyramid, then nothing prevented Pyramid pursuing its Supreme Court actions against the Debtor. Reference is made also to the fact that the Debtor "had contingent liabilities" to Pyramid as appears in the application.
In response to this letter, the Trustee replied by letter dated 20 November 1992 as follows:
"Dear Sirs
ESTATE OF P J LEWIS
I acknowledge receipt of your letter dated 28 October 1992 and note the comments therein. I advise that I will defer any distribution in the above estate until such time as your application is heard.
Please advise of the expected time frame of the hearing of the application."
The application was not issued until 28 July 1993. It is possible that since, November 1992, the creditors who lodged proofs of debt against the estate of the Debtor have been deprived of the payment of the final dividend and, possibly, the trustee has increased extra expenses as a result of the delay caused at the request of Pyramid.
The primary submission made by counsel for Pyramid was that at 26 August 1991, Pyramid was a creditor of the Debtor, that the Debtor had not included in his Statement of Affairs the existence of Pyramid as being a creditor or a contingent creditor, that Pyramid was not given notice of the creditors meeting, that it did not attend the meeting, that if it had it would have voted against the special resolution and that, as a result, because of the amount of its claim, the special resolution would not have been adopted. It followed, so it was said, that the Deed of Arrangement had not been entered into in accordance with Part X of the Bankruptcy Act or did not comply with a requirement of Part X under subsection 222(1) or that the Debtor had omitted a material particular from the statement of his affairs and that accordingly an order should be made under subsection 222(1) or 222(4).
Although there is some suggestion in the evidence that Pyramid believed that the Debtor had other assets not included in the assets described in the statement of affairs, there is no evidence to suggest the existence of any such assets. There is no evidence before the Court to suggest that if the Debtor had been made bankrupt in 1991, the property of the Debtor vesting in his trustee in bankruptcy would have exceeded the divisible property of the Debtor vesting in the trustee under the terms of the Deed of Arrangement. Further, there is no evidence before the Court to suggest the existence of any property that would be made the subject of claims under provisions such as sections 120 and 121 of the Bankruptcy Act. It was suggested that the Debtor may have been required to make contributions to the estate from his income.
It is proposed to consider the issues raised by this application under the following headings: 1. Whether, at 26 August 1991, Pyramid was a creditor of the Debtor. 2. If yes, whether the debts were unliquidated, contingent or unascertained. 3. If yes, whether the omission of Pyramid as a creditor in the statement of affairs resulted in the Deed of Arrangement not being entered into in accordance with Part X of the Bankruptcy Act in terms of subsection 222(1). 4. Whether the Deed of Arrangement complies with the requirements of Part X in terms of subsection 222(1). 5. Whether the omission of Pyramid as a creditor in the statement of affairs constituted an omission of a material particular from the statement of affairs given under subsection 188(2) in terms of subsection 222(4)(b). 6. If yes to 3, 4 or 5, whether the Court should, in the exercise of its discretion, make an order under subsection 222(2)(a) or 4(b). 7. Whether the Court should, in the exercise of its discretion, make an order under subsection 242. 8. Whether the Court should make a sequestration order against the estate of the debtor.
1. There seems little doubt that on 26 August 1991 when the Debtor signed the authority under s188 of the Bankruptcy Act, Pyramid was a creditor within the meaning of that word appearing in Part X. Irrespective of whether the obligation imposed upon the Debtor by the two instruments of mortgage was that of a guarantor in the true sense or whether it constituted an indemnity, the required notices under the instruments had been given. Thus in law, Pyramid was a creditor of the Debtor and has remained a creditor ever since. Thus, Pyramid is a creditor for the purposes of s222 of the Bankruptcy Act and is empowered to bring this application.
2. This issue relates to the wording of subsection 198(2) of the Bankruptcy Act. Normally every creditor is entitled to vote at the first meeting of creditors, see subsection 198(1). There are exceptions to this. Under subsection 198(2), a creditor is not entitled to vote "in respect of an unliquidated or contingent debt or a debt the value of which is not ascertained". Other exceptions are referred to in subsections 198(3), (4), (5) and (6). The words in subsection 198(2) are the same as appearing in subsection 16(3) of 32 and 33 Vict c71 (UK). In Ex parte Ruffle: In re Dummelow (1872-73) 8 LR Ch App 997 at 1001, Mellish LJ said:
"The fair construction of the clause seems to me this: "a contingent debt" refers to a case where there is a doubt if there will be any debt at all; "a debt, the value of which is not ascertained," means a debt the amount of which cannot be estimated until the happening of some future event; and "an unliquidated debt" includes not only all cases of damages to be ascertained by a jury, but beyond that, extends to any debt where the creditor fairly admits that he cannot state the amount."
This statement is to be considered in the light of the facts of this case. Pyramid holds security by way of mortgage for moneys lent to Bakgamon and Scorpion respectively. In addition, Pyramid is a creditor of each of those companies with respect to the moneys lent together with interest on them. Pyramid is a creditor of the Debtor for the same amounts. The provisions of subsections 198(5) and (6) of the Bankruptcy Act do not apply directly with respect to the debts owed by the Debtor. At the same time it would be unconscionable for Pyramid to keep any proceeds resulting from the proceeds of enforcing its security as well as the full amount of its claim against the Debtor. In this context, it has been argued that the debt of a guarantor, in cases similar to this, is "an unliquidated or contingent debt or a debt the value of which is not ascertained".
The dicta of Mellish LJ in ex parte Ruffle has been discussed in a number of authorities in Australia. Reference may be made to Re Venetoulis; Ex parte Calsil Ltd. (1976) 13 ALR 625 per Riley J at 629, Re Levy; Ex parte Scholefield Goodman and Sons Ltd (1980) 50 FLR 99 per Bowen J at 111, Forshaw v Thompson (1992) 35 FCR 329 per Lockhart J at 340 and Re McLean; Ex parte Friends' Provident Life Office (1992) 36 FCR 502 per Heerey J at 512.
On the facts of this case, having regard to the opinions expressed in the authorities just mentioned, the liability of the Debtor to Pyramid is not an unliquidated or contingent debt or a debt the value of which is not ascertained. The debt is payable immediately and is not contingent on any other fact. The value of the debt is capable of being ascertained. It is not unliquidated. These facts must be ascertained as at the date of the giving of the authority and the statement of affairs, and possibly, at the time of the first meeting; here 27 September 1991. Facts which occurred after that date, of themselves, cannot affect the issues to be determined on the facts then existing.
3. and 5. Since issues 1 and 2 have been answered in the affirmative, it is necessary to consider questions 3 and 5, which can be considered concurrently. The procedures provided by the provisions of Division 2 of Part X of the Bankruptcy Act are designed to enable creditors of a debtor invoking that procedure to direct the affairs of the debtor and to enable a debtor to be released from his legal debts. For this purpose, it is essential that all creditors be given notice of the first meeting. Section 194 contains detailed provisions concerning the giving of notices to each person who is stated by a debtor to be a creditor. In addition, notice of the calling of the meeting must be published not less than 7 days before the meeting; see subsection 194(3). I infer this notice was given. Although it could be expected that the liquidator of the Pyramid group of companies should have instituted a procedure to check newspapers for notices of the kind prescribed by subsection 194(3), there is no evidence that Pyramid had knowledge of the meeting before it was held on 27 September 1991. On the evidence, it is accepted that Pyramid did not know that the meeting was to be held.Subsection 194(4) illustrates the importance of compliance with the provisions of the giving of notices. If any of subsections 194(2), (2A) or (3) are contravened, the meeting is incompetent for the purpose of Part X unless the Court declares that the contravention is to be disregarded. It follows that the importance of the requirement that a debtor name all creditors in the statement of affairs given under subsection 188(2) cannot be over emphasised. The failure to name a creditor could form the foundation for a finding that the debtor has omitted a material particular from the statement of affairs and thus the basis for an order declaring the deed a composition void under subsection 222(4). Generally see Re Segal; Lensworth Finance Ltd v Segal and Warl (1975) 9 ALR 154 and Re Levy (above). Further, the failure to name a creditor could result in a creditor not attending or voting at the first meeting, with the result that any deed of assignment or deed of arrangement entered into or composition accepted by a special resolution of creditors at the first meeting or at an adjournment of that meeting could be declared void under subsections 222(1) and (2).
On the facts of this case, issues 3 and 5 are answered in the affirmative.
4. In the result, issue 4 is not crucial. The question is whether the Deed of Arrangement entered into by the Debtor complies with the requirements of Part X in terms of subsection 222(1). A Deed of Assignment is defined, for the purposes of Part X, in subsection 187(1) of the Bankruptcy Act as meaning a deed by which a debtor assigns all his divisible property for the benefit of his creditors. The meaning to be given to the words "divisible property" is set out earlier in these reasons.The meaning to be given to the words a "deed of arrangement" as contained in subsection 187(1) is:-
"a deed (not being a deed of assignment, a deed in respect of a composition or a deed executed for the purposes of a proclaimed law) providing for the arrangement of the affairs of a debtor with a view to the payment, in whole or in part, of his debts."
Under s.213 and subject to Part X, a deed of assignment or a deed or arrangement is void unless it is entered into in accordance with Part X and complies with the requirements of Part X. Under subsection 214(2), a deed of assignment must provide for the assignment of all the divisible property of the debtor for the benefit of his creditors and "shall be substantially in accordance with the prescribed form." The form is prescribed by Bankruptcy Rule 80A and Form 36A.
In the present case, the proposal of the Debtor was to enter into a deed of assignment. The special resolution passed required him to enter into a deed of arrangement. The Deed of Arrangement entered into by the Debtor did not comply strictly with the prescribed form for a deed of assignment but there was substantial compliance with that form. The additional essential feature was the obligation of the Debtor to pay the $10,000. The deed was described as a deed of arrangement, but it assigned the divisible property of the Debtor. In Gee v Schmutter (1970) 123 CLR 503 the High Court held that a deed of assignment and a deed of arrangement were not mutually exclusive, see Barwick CJ at 508 and following. On the facts of this case, in all probability, the deed is a deed of arrangement. In any event, this issue is of importance only because of the subsequent action by Pyramid in commencing legal proceedings against the Debtor with knowledge of the Deed of Arrangement.
As previously mentioned, under s.233 of the Bankruptcy Act, a deed of arrangement entered into in conformity with Part X is binding upon all creditors and thereafter it is not competent for a creditor, so long as the deed remains in force:-
"223(2) ... except with the leave of the Court and on such terms as the Court imposes:-
(i) to enforce any remedy against the property or person of the debtor in respect of a provable debt; or
(ii) to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding."
Similar restrictions apply with respect to a deed of assignment, see s.228.
6. It is necessary to consider issue 6, namely whether the Court should, in the exercise of its discretion, make an order under sub-section 222(2)(a) or (4)(b). It is noted that there is no evidence before the Court to show that it would not be in the interests of the creditors to make an order and thus subsection 222(5) does not prevent the Court from making the order sought under subsection 222(4)(b). I propose then to consider the exercise of discretion applicable with respect to subsections 222(2)(a) and (4)(b).The authorities make it clear that, apart from subsection 222(5), the Court has a discretion to refuse to make an order as sought by Pyramid; see for example Musolino v Sidiropolous (1991) 101 ALR 235 at 243. On the facts of this case, the Court proposes to exercise its discretion and refuse to make the orders sought. The jurisdiction is conferred upon the Court by s.27 of the Bankruptcy Act, the discretion by s.222; see Forshaw v Thompson (1992) 35 FCR 329 at 339. In coming to its conclusion, the Court expresses no view on whether the Supreme Court judgments obtained by Pyramid against the Debtor are valid. They are on the record. They have not been set aside. The Court expresses no view on whether these judgments are sufficient to found a bankruptcy notice under subsection 40(1)(g) of the Bankruptcy Act. The Court does have regard to the fact that Pyramid did commence those proceedings and obtained judgment at times it knew of the existence of the Deed of Arrangement. Whether it did this in ignorance of sections 223 or 228 is not known. If the debts were unliquidated or contingent or their value was not ascertained, those subsections would not have been a barrier to the Supreme Court actions.
The facts relating to what occurred after Pyramid had knowledge of the Deed of Arrangement have been set out in some detail earlier in these reasons. They disclose a considered decision by Pyramid not to challenge the validity of the Deed, not to prove in the Deed, but rather to rely upon its security against Bakgamon and Scorpion. This conduct, which amounts to wanting the best of all worlds, continued from November 1991 to 28 July 1993 when it filed this application. During this period, Pyramid showed it was relying upon its security over the Hesse Street premises. It enforced that security at a time when the value of the premises had decreased. Its dispute with Compass prevented it from enforcing its security against the Hobson Street premises. It commenced the Supreme Court actions. It caused delay in the distribution of the dividends to the other creditors of the Debtor. There is nothing to suggest that the amount of the estate of the Debtor will be increased if the orders sought are granted. In fact, the amount available for distribution will be adversely affected by the additional debt, being the $10,000 paid by the Debtor. Pyramid should not be permitted to have the Deed of Arrangement declared void.
7. The claim by Pyramid based upon s.242 of the Bankruptcy Act was not really pressed. That section empowers the Court to terminate a composition if it is satisfied, among other things, that there is any other reason why the composition ought to be terminated. This was the claim made by Pyramid. If relevant, the appropriate claim should have been made under s.263 which is the corresponding section applicable to deeds of arrangement. The evidence before the Court does not disclose any reasons why the Court should make an order under either of these sections. The Debtor has fulfilled all his obligations under the Deed of Arrangement. There is no material to suggest other property would be available for distribution among the creditors if the Deed was terminated. This ground has not been made out.
8. As a result of the failure by Pyramid to obtain the orders sought, a sequestration order will not be made.Accordingly, the application is dismissed. Pyramid must pay the taxed costs of the respondents to its application.
On this result, there is no need for the orders sought by the Debtor in his application against the Trustee. In all the circumstances, Pyramid should pay the taxed costs of the Debtor and of the Trustee of the application by the Debtor. The application was brought as a consequence of the application by Pyramid.
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