Re McDougall, Stuart Stanley; Ex Parte Policy Nominees Pty Ltd & Martin Alan Thomas v McDougall, Stuart Stanley
[1997] FCA 197
•27 MARCH 1997
CATCHWORDS
BANKRUPTCY - Deed of arrangement - compliance with Part X of Bankruptcy Act 1966 - whether report of Trustee stated whether or not arrangement in best interests of creditors - whether report of Trustee set out all relevant information - whether deed of arrangement complied with debtor's proposal - whether deed of arrangement in reality a composition - whether release contingent upon either an action of the Trustee or a resolution of a subsequent meeting of creditors - whether release repugnant to s 234 - severability - whether debtor omitted material particulars from statement of affairs - exercise of discretion - relevant considerations - relevance of fact that creditors had voted against their commercial interests.
Bankruptcy Act 1966 s 6B(2)(a), s 120 - 125, s 122,
s 133 - 139H, s 187, s 188, s 188(2)(c)(ii), s 189A, s 189A(2)(b), s 189A(3) s 190(2)(b), s 204, s 204(2), s 222(1) ‑ (5), s 222(7), s 231(2), s 234, s 234(1), s 236(1)(c), s 237A, s 237(2), s 240, s 249(3),
Part X
Bankruptcy rules r 78(2)(d)(vi)
In Re Burlock; Burlock v Deputy Commissioner of Taxation
(1994) 49 FCR 522
Gee v Schmutter (1971) 123 CLR 503
Re Marshall; Marshall v Marshall & Luckins (1973) 2 ALR 172
Re Clonan (1963) 20 ABC 245
In re Vizard's Trusts [1866] LR 1 Ch App 588
De Serre v Clarke [1874] LR 18 Eq 587
Sweetapple v Horlock [1879] 11 Ch D 745
Re Morris; Ex parte Adams (1980) 48 FLR 341
Khera v National Australia Bank Ltd (1996) 141 ALR 416
Augustyn v Putnin (1988) 83 ALR 514
No 250A OF 1995X
RE: STUART STANLEY McDOUGALL; EX PARTE POLICY NOMINEES PTY LTD AND MARTIN ALAN THOMAS
CORAM:GOLDBERG J
PLACE:MELBOURNE
DATE:27 MARCH 1997
FEDERAL COURT OF AUSTRALIA )
BANKRUPTCY DISTRICT REGISTRY )
OF THE STATE OF VICTORIA ) No 250A of 1995X
RE: STUART STANLEY McDOUGALL
Debtor
EX PARTE: POLICY NOMINEES PTY LTD (ACN 008 803 781)
(Provisional Liquidator Appointed)
and
MARTIN ALAN THOMAS
Applicants
AND: STUART STANLEY McDOUGALL
and
DAVID ANTHONY BRADSHAW
Respondents
CORAM:GOLDBERG J
PLACE:MELBOURNE
DATE:27 MARCH 1997
MINUTES OF ORDER
THE COURT ORDERS THAT:
The application by the applicants dated 31 July 1996 is dismissed.
The applicants pay to the respondents their costs of the application.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court rules
FEDERAL COURT OF AUSTRALIA )
BANKRUPTCY DISTRICT REGISTRY )
OF THE STATE OF VICTORIA ) No 250A of 1995X
RE: STUART STANLEY McDOUGALL
Debtor
EX PARTE: POLICY NOMINEES PTY LTD (ACN 008 803 781)
(Provisional Liquidator Appointed)
and
MARTIN ALAN THOMAS
Applicants
AND: STUART STANLEY McDOUGALL
and
DAVID ANTHONY BRADSHAW
Respondents
CORAM:GOLDBERG J
PLACE:MELBOURNE
DATE:27 MARCH 1997
JUDGMENT
Background
On 29 December 1995 Stuart Stanley McDougall ("the Debtor") pursuant to s 188 of the Bankruptcy Act 1966 ("the Act") signed an authority authorising David Anthony Bradshaw, a Registered Trustee, to call a meeting of his creditors for the purpose of Part X of the Act and to take over control of his property in accordance with Part X. On the same day Mr Bradshaw consented to exercise the powers conferred on him by that authority and the Debtor signed a statement of his proposal for his affairs to be dealt with under Part X of the Act. The proposal was in the following form:
"I, STUART STANLEY McDOUGALL of 89 Cathies Lane, Wantirna, propose that my affairs be dealt with pursuant to a Deed of Arrangement which will provide for inter alia:
The assignment of all my divisible assets as ascribed by section 187 of the Act.
The payment of the sum of $25,000.00 payable on Execution of the Deed of Arrangement which shall be provided by Peter O'Mara of Duranbah Road, Duranbah NSW."
On the same day the Debtor verified a statement of his affairs which showed liabilities of $3,617,815.00 and assets of $5,600.00 resulting in a total deficiency of $3,612,215.00.
On 18 January 1996 Mr Bradshaw signed a report which was filed pursuant to s 189A of the Act in which he summarised and commented on the Debtor's affairs as disclosed in the statement of affairs and set out other information in relation to the Debtor's financial activities. The last four paragraphs of the report were in the following terms:
"18.THAT the Debtor has no immediate prospects of being able to pay his debts and therefore has submitted a Proposal for consideration by his Creditors. The Proposal is for the Debtor to enter into a Deed of Arrangement to provide:
(a)the assignment of divisible assets as ascribed by Section 187 of the Act.
(b)the payment of the sum of $25,000.00 payable on Execution of the Deed of Arrangement which shall be provided by Peter O'Mara of Duranbah Road, Duranbah, New South Wales.
19.THAT based on the information furnished, and in the event of Bankruptcy of the Debtor, a Trustee would most likely have access to the assets of The Stuart McDougall Family Trust pursuant to the provisions of Section 139D of the Act. In addition, the Debtor would, subject to the maintenance of existing terms of employment, be required to pay contributions pursuant to the provisions of Section 192L(f) (sic) of the Act.
At this juncture, I have no means of estimating the likely return to Ordinary Unsecured Creditors in the event of Bankruptcy. The
continuation of employment would most likely be affected by the Debtor's inability to take an active part in the management of Corporations, pursuant to the provisions of Section 224(1)(c) of the Corporations Law. As raised in earlier paragraphs of this report, I am currently making further enquiries in relation to the income stream and assets of The Stuart McDougall Family Trust.
20.THAT in the event of acceptance of the proposal and based on the debts as disclosed in the Statement of Affairs of the Debtor, I estimate the rate of return to Ordinary Unsecured Creditors to be 0.55 cents in the dollar.
21.THAT in view of the rate of return to Creditors, I consider I cannot recommend acceptance of the Proposal to Creditors. Subject to no adverse matters arising from further enquiries and information furnished, creditors may give consideration to acceptance of the Proposal on compassionate grounds."
A meeting of the creditors of the Debtor, convened by notice dated 16 January 1996, was held on 2 February 1996 at which a number of creditors were present in person or by proxy. A number of matters were discussed at the meeting and issues arose as to the voting rights of certain persons claiming to be creditors. Mr Bradshaw who had been elected chairman of the meeting adjourned the meeting to 16 February 1996. At the adjourned meeting there was further discussion about the financial position and business activities of the Debtor. Mr Bradshaw informed the meeting that he had received legal advice to accept the proxy for Martin Alan Thomas to vote for the sum of $694,178.00 and not to allow Policy Nominees Pty Ltd to vote at the meeting. The meeting resolved by special resolution that the Debtor be required to enter into a deed of arrangement in the form of the draft deed tabled at the meeting and that Mr Bradshaw be appointed Trustee of the deed. The deed of arrangement was executed by the Debtor and the Trustee and dated 11 February 1996.
Policy Nominees Pty Ltd (Provisional Liquidator Appointed) and Martin Alan Thomas, the applicants before me, had been parties to a deed of acknowledgment of debt dated 5 December 1994 executed by them and the Debtor whereby he acknowledged a debt due to them of $600,000.00. Policy Nominees Pty Ltd had obtained a judgment in the Supreme Court of Western Australia for $601,408.25 against the Debtor on 14 September 1995 and had presented a creditor's petition seeking a sequestration order against the estate of the Debtor on 3 January 1996 which petition was dismissed by the Court on 22 February 1996.
Relief sought
On 31 July 1996 the applicants applied to the Court for the following declarations and orders:
a declaration pursuant to s 222(1) of the Act that the deed of arrangement was not entered into in accordance with the requirements of Part X of the Act or alternatively did not comply with the requirements of Part X. Four grounds were then set out;
(2)an order pursuant to s 222 of the Act declaring the deed void on any one or more of the grounds specified;
(3)a declaration pursuant to s 222(4) of the Act that the Debtor had omitted material particulars from his statement of affairs;
(4)an order pursuant to s 222(4) of the Act declaring the deed void;
(5)an order pursuant to s 222(7) of the Act that there be a sequestration order against the estate of the Debtor.
On 21 August 1996 the Court ordered that Richard Morrow be substituted for David Anthony Bradshaw as second respondent, Mr Morrow having been substituted for Mr Bradshaw as Trustee of the estate of the Debtor.
Mr Irlicht, who appeared for the applicants, submitted that the Court should declare the deed void pursuant to s 222(1) of the Act on the grounds that:
(a)the report of the Trustee did not comply with s 189A(3) of the Act as it did not state whether or not in the Trustee's opinion it would be in the best interests of the Debtor's creditors to deal under Part X with the Debtor's affairs in the manner indicated in the Debtor's proposal;
(b)the Debtor had not complied with s 188(2)(c)(ii) of the Act as the deed as executed was not in accordance with the Debtor's proposal but was vastly different from it;
(c)the deed of arrangement was in fact not an arrangement but rather a composition and was therefore void;
(d)clause 7 of the deed which provided for the Debtor to be released from provable debts was repugnant to s 234 of the Act;
(e)the Debtor had omitted two material particulars from his statement of affairs in relation to his interest, vested or contingent, in a family trust and in relation to a debt of $9,800.00 owed in respect of a charge card. Mr Irlicht abandoned the claim in the Application in respect of the Debtor's failure to disclose his interest in certain chattels.
Does the Trustee's report comply with s 189A(3)?
In support of his first ground that the report by the Trustee had not stated whether or not, in the Trustee's opinion, it would be in the best interests of the Debtor's creditors to deal under Part X with the Debtor's affairs in the manner indicated in his proposal Mr Irlicht relied upon In Re Burlock; Burlock v Deputy Commissioner of Taxation (1994) 49 FCR 522. In that case the relevant Trustee's report had concluded with the following paragraph:
"In the circumstances, Mr Burlock is attempting to provide creditors, a return which although quite small does represent a significant hardship upon him as he will be repaying the loan of $50,000 back to relatives over the next three years. Accordingly in the circumstances my recommendation or lack of same would carry no real weight and accordingly I invite creditors to carefully peruse the relevant material to assess the position which they wish to adopt. Certainly I do attach significance to the debtor's desire to attempt to resolve matters with his creditors to the best of his ability."
The Trial Judge had concluded that the Trustee had specifically avoided stating his opinion but the statute required him to state his opinion. He concluded that:
"The creditors were entitled to have it (the opinion) but they did not receive it. In my opinion
the Trustee's report was deficient in a most material particular."
The Full Court of the Federal Court upheld the Trial Judge's conclusion that the statement in the Trustee's report did not comply with s 189A(3).
Mr Irlicht submitted that the relevant statement in the Trustee's report was basically very similar to that in Burlock. Paragraph 21 of the report stated:
"That in view of the rate of return to Creditors, I consider I cannot recommend acceptance of the Proposal to Creditors. Subject to no adverse matters arising from further enquiries and information furnished, creditors may give consideration to acceptance of the Proposal on compassionate grounds.
Mr Irlicht submitted that this statement did not comply with s 189A(3) and that in order to do so the Trustee would have to state in effect that he recommended, or that he did not recommend, acceptance of the proposal or that in his opinion it was, or was not, in the best interests of the Debtor's creditors to enter into the proposal. He said that the statement "I cannot recommend acceptance of the Proposal to Creditors" was not the equivalent of saying "I do not recommend the Proposal". Mr Bornstein, who appeared for the Debtor, submitted that the Trustee had in substance indicated that he could not recommend acceptance of the proposal in view of the rate of return, identified as 0.55 cents in the dollar. He submitted that it was clear that the Trustee's recommendation was that the proposal was not in the best
commercial interests of the creditors and that paragraph 21 of the report was in substance an expression of an opinion.
In my opinion paragraph 21 does express an opinion, albeit an opinion couched in terms of a recommendation. In Burlock no recommendations were made at all and the Trustee left the matter completely up to the creditors. In considering this matter I must bear in mind the edict in s 222(3) of the Act that I should not declare a deed void on the grounds of non‑compliance with the requirements of Part X if the deed "complies substantially with those requirements". Although that sub-section does not refer, in terms, to the Trustee's report, it indicates a legislative intention that a deed is not to be declared void under s 222(1) on the grounds of non‑compliance with Part X if in fact there is substantial compliance. In my opinion, on a fair reading, paragraph 21 of the report does identify to a reasonable reader an opinion of the Trustee that the rate of return of 0.55 cents in the dollar to ordinary unsecured creditors is such that it is not in the creditors' best interests to accept. The language of "I cannot recommend" especially in the context of a rate of return of 0.55 cents in the dollar is, in my opinion, tantamount to the Trustee saying it is his opinion that it is not in the interests of creditors to accept the proposal. The last clause in paragraph 21 that the creditors "may give consideration" to acceptance of the proposal on compassionate grounds supports the proposition that the opening part of paragraph 21 is in fact the expression of an opinion that the rate of the return and the proposal is not in the best interests of creditors.
Does the Trustee's report set out all relevant information?
Mr Irlicht's next submission was that the Trustee's report did not comply with s 189A(2)(b) of the Act in that it did not set out all the information which was relevant to the affairs of the Debtor. He submitted that the report showed that the Trustee had not made enquiries in relation to the Debtor's family trust. He submitted that the report must not only set out the information available to the Trustee but it must also set out information which is necessary to give a true and fair view of the affairs of the Debtor otherwise the Trustee would not be carrying out his task. He said that the legislative intention demonstrated that the document to be sent to creditors was one which would provide the information which was necessary to enable them to determine how to vote.
However, this submission fails to take account of the conjunctive "and" in s 189A(2)(b) between the requirement to set out such information relevant to the Debtor's affairs as is available to the Trustee and the necessity to give a true and fair view of those affairs. Mr Irlicht was, in effect, submitting that there was an obligation to set out information which was necessary to give a true and fair view of the affairs of the Debtor even if that information was not available to the Trustee. I do not consider that Mr Irlicht's submission proceeds on a correct interpretation of s 189A(2)(b). In my opinion that sub-section only requires the report to set out such information which is available to the Trustee. If there is information which is necessary to give a true and fair view of the Debtor's affairs but it is not available to the Trustee, the report does not fail to comply with s 189A(2)(b) because it does not refer to that information. As Mr Bornstein pointed out s 190(2)(b) of the Act empowers the Trustee to make such enquiries and investigations in respect of the Debtor's affairs as a Trustee considers necessary. However, the requirement to prepare and file a report under s 189A within fourteen days of consenting to exercise the powers granted under s 188 gives the Trustee a limited time in which to make relevant enquiries.
It is apparent from the report that the Trustee had identified the existence of the family trust company and the report set out a number of its activities and affairs. Further, the Trustee made it clear in paragraph 19 of the report that in the event of bankruptcy of the Debtor, the Trustee "would most likely have access to the assets of The Stuart McDougall Family Trust pursuant to provisions of Section 139D of the Act". I therefore reject the submission that the report shows that the Trustee had not made all necessary enquiries in relation to the Trust within the time available to him. In any event, upon the proper construction of s 189A(2)(b) the Trustee was only obliged to set out such information relevant to the affairs of the Debtor as was available to him. His only obligation to set out such information as was necessary to give a true and fair view of the Debtor's affairs was if that information was, in fact, available to him.
Does the deed comply with the proposal?
Mr Irlicht's next submission was that the deed as executed was not in accordance with the statement given by the Debtor under s 188(2)(c)(ii) of the Act. He submitted that the proposal by the Debtor was that there would be an assignment "of all my divisible assets as ascribed by Section 187 of the Act" and that this description, by incorporating by reference the definition of "the divisible property" in s 187 of the Act, meant that the Debtor was proposing to make available, because a deed of assignment was proposed to be executed, such property as might become available as a result of the operation of ss 120 to 125 and ss 133 to 139H of the Act. He said that those provisions applied to a deed of assignment by virtue of s 231(2) of the Act. He noted that ss 120 to 125 incorporated provisions in relation to preferential and fraudulent dispositions and that ss 133 to 139H bring into operation sections such as s 139D which enables the Trustee of a bankrupt estate to obtain a vesting order in relation to property held by a bankrupt's family trust.
Mr Irlicht then said that after the deed of arrangement was executed s 237 of the Act identified those sections in the Act which were applicable to the deed but s 120 to 125 and s 139A to 139H were not so included. He therefore submitted that what had been proposed as being the divisible assets proposed to be assigned were not in fact the divisible assets which had in fact been assigned as those assets excluded such assets as might become available under ss 120 to 125 and ss 139A to 139H of the Act.
The relevant assignment made by the Debtor under the deed is found in clause 3 whereby there is an assignment of "all of the estate as defined in Clause 1 hereof". That "estate" is identified in clause 1(a) of the deed as "all the property of the Debtor specified" in the schedule to the deed excluding after acquired property and the property specified in the schedule is "All divisible assets as ascribed by Section 187 of the Act". I consider that Mr Irlicht's submission proceeds on a false assumption which is that the deed of arrangement does not assign what is proposed to be assigned in the s 188(2)(c)(ii) statement. In both paragraph 1 of that statement and the schedule to the deed the same definition of the property to be assigned appears, namely the assignment of "all divisible assets as ascribed by Section 187 of the Act". It seems to me therefore that there is congruity between what the statement proposed would be assigned and what in fact was assigned. I cannot discern in the deed an intention to assign anything other than what is proposed to be assigned in the Debtor's proposal.
Mr Bornstein submitted that clause 3 of the deed conveyed what paragraph 1 of the statement had proposed. He submitted that what was proposed was a deed of arrangement which, by definition, does not include any property which might be recovered as a result of proceedings taken pursuant to ss 120 to 125 of the Act. In short he submitted that a preferential payment was not property of the Debtor as such. Section 237(2) of the Act which applies certain sections of the Act to deeds of arrangement excludes, for example, s 122 relating to avoidance of preferences. Accordingly there is no foundation for the proposition that the Debtor did not assign what he proposed to assign.
It must also be remembered that after a debtor gives a statement of his proposal to the proposed trustee pursuant to s 188(2)(c)(ii) and signs an authority to the proposed trustee pursuant to s 188(1) it does not necessarily follow that the debtor will execute a deed of assignment or a deed of arrangement in terms which conform strictly to his proposal. The content of any deed to be executed by a debtor is dependent upon what the meeting of creditors resolves. Such a meeting can specify provisions to be included in the deed of assignment whether or not they are proposed by the debtor (s 204(3)). Indeed under s 204 a meeting of creditors can resolve that any one of a number of acts occur which might not bear any relationship to the debtor's proposal. It therefore follows that it is no ground to invalidate a deed of arrangement that its terms are not consistent with the debtor's proposal. Creditors might not want to accept all or any particular part of a debtor's proposal. Ultimately it is what the creditors resolve which determines what a debtor is obliged to do. There is no basis for the proposition that a debtor is bound to implement his proposal or that the creditors are required to do so.
Mr Irlicht also submitted that the statement pursuant to s 188(2)(c)(ii) contemplated "a very simple Deed of Arrangement" being the assignment of the Debtor's divisible property together with the payment of $25,000.00 and there was nothing in the statement which foreshadowed what he said were "conditions of this most complex Deed". However, Mr Bornstein submitted that the main or substantive parts of the deed and the core provisions were the assignment of the divisible property and the payment of the $25,000.00. He submitted that the balance of the deed comprised machinery provisions to implement the proposal. I leave for later consideration the issue of the releases provided for in the deed. In all other respects it seems to me that the provisions of the deed not explicitly spelt out in the proposal are machinery provisions designed to implement and carry into effect the proposed assignment and the payment of the $25,000.00. It is not necessary to analyse each clause of the deed in detail to make good this proposition. However, I draw attention, for example, to clause 4 which empowers the Trustee to postpone the realisation of the estate vested in him until such time as he in his discretion decides to realise it, to clause 6 which requires the Trustee to apply any monies received by him in accordance with the provisions of the Act and clause 9 which requires that all funds received shall be distributed pari passu amongst all creditors. Apart from the release provisions to which I shall refer Mr Irlicht did not rely specifically on the absence in the proposal of any specific provision found in the deed. In any event, as I have already concluded there is no reason why the creditors cannot resolve that the Debtor execute a deed of arrangement which includes terms and provisions not contained in his proposal. In my opinion s 204(2) specifically gives them that right.
Mr Irlicht did, however, rely upon the existence in clause 7 of a provision for the release of the Debtor because he said there was no provision in the s 188(2)(c)(ii) proposal for any release to be given. He drew attention to s 234(1) of the Act which provides that "except insofar as the deed provides for the release of the debtor the deed of arrangement does not operate to release the debtor from any of his debts". Thus he said that as the deed provided for the release of the Debtor, so should the proposal. Mr Bornstein submitted that creditors who received the Part X proposal would assume that the Debtor was obtaining a release and that the appropriate inference to be drawn from the proposal, in the absence of evidence to the contrary, was that the Debtor was to be released from his debts. I do not consider that this inference is necessarily to be drawn from the proposal. It does not follow, in my opinion, that any assumption as to any particular form of release or the lack of it would have followed necessarily from the proposal put forward by the Debtor. But, as I have already concluded, there is no reason why the creditors could not resolve pursuant to s 204 of the Act that any deed of arrangement to be executed by the Debtor include a release. The creditors were not obliged to require the Debtor to execute a deed of arrangement which contained only the provisions referred to in his statement pursuant to s 188(2)(c)(ii).
Even if the proposal should have made some reference to the nature of the release which the Debtor was proposing in relation to his debts, I do not consider that this failure should vitiate the deed. As Mr Bornstein submitted, prior to the creditors considering the proposal they would have received a package of documents including the proposal, the statement of affairs, the report from the Trustee and the form of the proposed deed which included the release. Mr Bornstein submitted that on a fair reading of those documents, in particular by reference to the small rate of return and the content of the Trustee's report, it was clear that a release was to be given. In all the circumstances I consider that even if there was not a substantial compliance with provisions of Part X as contended for by Mr Irlicht, I would not exercise my discretion adversely to the Debtor on this ground alone.
Was the deed of arrangement a composition?
Mr Irlicht submitted that although the deed was described as a deed of arrangement it was in truth and reality a composition and that the creditors had not accepted any proposal for a composition so that accordingly the deed was void. He submitted that the Debtor was inviting the creditors to agree to accept in full satisfaction of the debts due to them an amount less than the full amount of those debts, partly in the form of money ($25,000.00) and partly in the form of other property (his divisible property). He referred to the definition of "composition" in s 187 of the Act which he submitted described the situation which had been achieved by the Debtor. Mr Irlicht relied upon Gee v Schmutter (1971) 123 CLR 503 in which the High Court had to consider whether a deed of arrangement pursuant to Part X of the Act was valid as such a deed, notwithstanding that it contained a provision for the assignment of the debtor's assets although it was not in the form of a deed of assignment provided for by the Act. The Court held that the deed of arrangement was valid as such even though it contained an assignment of the debtor's divisible property. The Court rejected the view that simply because the deed contained an assignment to the Trustee of the debtor's divisible property it was a deed of an assignment as defined. The Court concluded that the deed of arrangement was not a deed of assignment within the meaning of the Act.
Mr Irlicht submitted that it followed from the reasoning of the High Court that if the only condition of the deed had been the assignment of all the Debtor's divisible property then the deed would have been held invalid as being a deed of assignment not a deed of arrangement and consequently void. He submitted that if one ignored all the additional clauses of the deed which were not referred to in the s 188(2)(c)(ii) statement what remained in the statement was a composition. Accordingly if one considered the deed consistently with this statement the deed was a composition. In support of this submission he relied upon the following passage in Gee v Schmutter (supra) at 511:
"The next question, it seems to me, is whether the deed was a deed of composition. Such a deed is an arrangement by which there is an agreement to accept payment of the debts by instalments or payment of a lesser sum than the full amount of the debts due. Section 234 provides that 'except in so far as the deed provides for the release of the debtor from his debts, the deed of arrangement does not operate to release the debtor from any of his debts'. Section 187(1) in defining 'deed of arrangement' contemplates that such a deed may be made with a view to the payment in whole or in part of the debtor's debts. There is no doubt therefore that a deed of arrangement within Pt X of the Act may contain a provision for the release of the debtor from his debts. It seems to me that a deed of arrangement which either provides for the release of the debtor or for the payment of only part of the amount due by him to his creditors as part of the arrangement it embodies is not for that reason a composition within the meaning of the Act. In my opinion, a deed of composition must itself contain an agreement to accept part payment of the debts due in satisfaction. In any case the deed in this case contemplated the payment in full of the debts and contained neither an agreement by the creditors to accept part only of the debts due to them nor a release of the debtor in any circumstances short of payment in full of the amount due. I therefore conclude that this deed was not a deed of composition."
It seems to me that this passage does not support Mr Irlicht's submission but rather supports the proposition that the deed of arrangement before me is not a "composition" as defined in s 187 of the Act. Certainly, the terms of the deed do not reflect or record the content of the definition of "composition". The deed does provide for the release of the Debtor and also for payment of only part of the amount due to the creditors but as the High Court pointed out those factors do not make the deed a composition within the meaning of s 187 of the Act.
Mr Irlicht acknowledged that this submission that the deed was a composition was an alternative argument to the earlier submission that the deed of arrangement should be construed, as to its terms, by reference to the proposal to which terms it was limited and not by reference to all its terms as a whole. He accepted that if the deed was to be considered by reference to all the clauses contained in it then his submission that it constituted a composition would fail. As I have earlier stated, I am of the opinion those provisions are machinery provisions and do not detract from, nor are they limited by, the proposal contained in the s 188(2)(c)(ii) statement. It therefore follows that the deed provides for more than just the composition for which Mr Irlicht contends because it provides in fact for the arrangement of the affairs of the Debtor in a manner not required or contemplated by a composition. As Mr Bornstein pointed out it provided for an assignment of the Debtor's divisible property and unlike the provision contained in s 240 of the Act in relation to a composition operating as a release of the Debtor from his provable debts, did not provide for immediate release of the Debtor.
Is the release of the Debtor repugnant to s 234?
Clause 7 of the deed which provides for the Debtor to be released from his provable debts in certain events was also the subject of an attack by the Applicants on the ground that it was repugnant to s 234 of the Act, as it made the Debtor's release contingent upon either an action of the Trustee or a resolution passed at a subsequent meeting of creditors. Clause 7 is in the following terms:
The Debtor shall be absolutely released and discharged from all the provable debts owed by the Debtor to each of the Creditors respectively and from all claims, actions, suits, demands and other proceedings by each of the Creditors of or on account of those debts in either of the following events only:
(a)if at any time after the payment of the total amount referred to in Clause 5 hereof, the Trustee shall certify in accordance with Section 237A of the Act; or
(b)if the Creditors have at a meeting held as provided by the Act by special resolution resolved that the Debtor shall be so released and discharged. The date of the release and discharge shall be either the date of the said certificate or the date of the passing of the Special Resolution as the case may be and the release and discharge shall be a complete defence to any claim, action, suit, demand or other proceeding in respect of or on account of any of those debts."
Mr Irlicht submitted that clause 7 was wholly invalid and could not be severed from the rest of the deed pursuant to the severance provision contained in clause 15 as it was fundamental to the operation of the deed as a whole (Re Marshall; Marshall v Marshall (1973) 2 ALR 172 at 188). Mr Irlicht's submission was that by virtue of s 234 a deed of arrangement does not operate to release the Debtor from any of his debts unless the deed itself provides for the release. He submitted that the deed itself did not provide for the release but placed the determination of whether the release was to occur in the hands of the Trustee or in the hands of a subsequent meeting of creditors. He submitted that consistently with the decision in Re Clonan (1963) 20 ABC 245 there could not be a subsequent meeting of creditors to determine whether or not the Debtor should be released from his debts as that involved, in the words of Re Clonan, "a second bite at the cherry" (page 258). However, the provision of the deed confronting the Court in Re Clonan was a provision which enabled the creditors at the subsequent meeting to alter any of the terms and conditions of the scheme of arrangement. The Court found that there was no warrant under relevant legislation for the calling of the second meeting to determine or resolve the content of the scheme of arrangement. In my opinion clause 7 provides for a quite different situation. In the terms of s 234 the deed does provide for the release of the Debtor because the relevant provision is that the release is a matter for either the Trustee or the general body of creditors to determine. Any such meeting does not vary the terms of the deed but rather implements it and may, depending upon the resolution, carry one of its provisions into effect. Unlike the termination provision considered in Re Marshall; Marshall v Marshall & Anor (supra) where the provision allowing the Trustee to terminate the deed was inconsistent with, and displaced, the terms of the Act, clause 7 contains a provision which is not inconsistent with s 234, because it
carries into effect a decision made by the general body of creditors.
In any event, even if I am wrong in my construction of s 234, clause 7 upon its proper construction does not contain the repugnancy for which Mr Irlicht contends. Clause 7 is inelegantly drafted. It seems plain, notwithstanding the structure and layout of the clause that the second sentence in sub-paragraph (b) should relate, and refer, to both sub‑paragraphs (a) and (b). Mr Bornstein also submitted that the first clause in sub-paragraph (a) should be read as forming part of the preamble of clause 7 before sub‑paragraphs (a) and (b). However, reading clause 7 that way would be to read it in a manner quite different from the manner in which it is drafted. I consider that I should read clause 7(b) as giving the creditors the power to resolve that the Debtor be released whether or not the whole of the sum of $25,000.00 has been paid. Mr Bornstein submitted that clause 7(a), if invalid, could not be severed from the rest of the deed as the payment of the total sum of $25,000.00 was integral to the operation of the deed but that clause 7(b) was in a different category as it was an added right given to creditors, not in its terms dependent upon the payment of the total amount of $25,000.00.
It seems to me that clause 7(a) is valid on the basis that the certificate required of the Trustee under s 237A of the Act is that he be satisfied that the provisions of the deed have been carried out. Thus, clause 7(a) provides that if the total amount is paid and the Trustee certifies that the provisions of the deed have been carried out then the Debtor is to be released. In my view such a provision is not repugnant to s 234(1). However, I consider that if, contrary to my earlier conclusion, clause 7(b) is repugnant to s 234(1) in that the deed does not provide for the release of the Debtor, such release being dependent rather on a subsequent meeting of creditors, then clause 7(b) is severable from the rest of the deed in accordance with clause 15 of the deed. Clause 15 provides:
Every provision or part of a provision of this Deed shall be read and construed subject to the Act and to the intent that were 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.
If clause 7(b) is in conflict with s 234 then the deed would not comply with the requirements of Part X of the Act, thereby enlivening s 222. Accordingly clause 15 has the effect of validating and giving effect to clause 7(a).
Did the Debtor omit material particulars from his Statement
of Affairs?
Mr Irlicht submitted that I should make a declaration pursuant to s 222(4) of the Act declaring the deed void on the grounds that the Debtor had omitted two material particulars from his statement of affairs. The two omissions were that he had failed to refer to any interest (vested or contingent) under a family trust or to a debt of $9,800.00 due with respect to a charge account. The existence of the family trust was identified in the Trustee's report and Mr Irlicht pointed out that in an affidavit filed by the Debtor he had sworn that:
"The only Trust of which I am a potential beneficiary is the Stuart McDougall Family Trust which I have openly disclosed to my Trustee, Mr Bradshaw".
The existence of that trust and its role in relation to the Debtor's affairs was identified in the Trustee's report but there was no mention of, or reference to, it in the Debtor's statement of affairs. Indeed Mr Irlicht pointed out that in the question which was asked in paragraph 11 of the schedule under "Property" whether the Debtor had an interest under a "will, deed of settlement etc" there had been no answer given at all whereas other questions on the same page had been answered "Nil". Mr Irlicht submitted that this was an omission of a material particular because the creditors would take it into account in determining whether or not to vote for the proposal. He submitted that the issue of the interest of the Debtor under the trust was not theoretical because in the Trustee's report it was disclosed that for the 1994/1995 year the trust had made a profit of $250,000.00 and that if the Debtor was made bankrupt the trustee in bankruptcy might have the opportunity to have vested in him the estate of the trust in certain property pursuant to s 139D of the Act. He submitted that as the combined operation of s 6B(2)(a) of the Act and r 78(2)(d)(vi) of the Bankruptcy Rules requires the Debtor to state any interest (vested or contingent) under a trust there was an omission of a material particular.
Mr Bornstein submitted that such interest as the Debtor had in the trust was not an interest in property but was rather a contingent interest which the Debtor was not obliged to disclose. He submitted that it was a mere expectancy in the sense that the Debtor was a potential object of a power of appointment which did not create any interest in property. In support of this submission he relied on In re Vizard's Trusts [1866] LR 1 Ch App 588, 592 and De Serre v Clarke [1874] LR 18 Eq 587. These cases support the submission and although they were the subject of criticism in Sweetapple v Harlock [1879] 9 Ch D 745, that criticism does not go to the proposition submitted by Mr Bornstein. In reply Mr Irlicht said he did not suggest that being an object of a power of appointment created an interest in property, rather he submitted that such interest as the Debtor had was a relevant matter for creditors to take into account in considering how to vote on the proposal.
Mr Bornstein submitted that in any event the existence of the trust was identified in the Trustee's report so that it was known to creditors. He said that notwithstanding the information given to creditors a possibility of receiving an appointment in one's favour is not property and does not become property until the appointment is made so that there is nothing which can pass to the Trustee.
There was a difficulty with all the submissions in relation to this claimed omission which was that the relevant trust deed was not produced or otherwise placed before the Court. Accordingly I have no idea as to the content or terms of the relevant provisions of the trust deed. The only evidence is that the Debtor said that he was "a potential beneficiary" under the trust. I cannot be satisfied, in the absence of knowing what that relevant beneficial interest is, that there was an omission of a material particular. I consider that the most I can infer from the Debtor's affidavit is that he has a potential interest, not vested or even contingent, but one which depends upon a power of appointment being exercised or some other determination being made which elevates him from a potential beneficiary to an actual beneficiary.
If I am wrong in any of these conclusions I take refuge in the burden of proof cast upon the applicants to satisfy me on the balance of probabilities that there was an omission of the material particular. In the absence of the relevant trust deed I cannot be so satisfied.
The second omission of a material particular can be shortly disposed of. It relates to a debt of $9,800.00 due with respect to a charge account. The Debtor has conceded that he omitted the reference to the sum of $9,800.00 due in respect of the charge account but said that the omission was inadvertent and immaterial. He says that he informed the Trustee who, as the evidence discloses, advised creditors of the debt in his report. However, as Mr Irlicht submitted, in reliance upon Re Morris; Ex parte Adams (1980) 48 FLR 341 at 344, a material particular does not lose its materiality by reason of subsequent events. However, it is still necessary to determine whether the omission was material. In my opinion it was not material. The total debts disclosed by the Debtor in his statement of affairs exceeded $3,600,000.00. The amount of the omitted charge account is insignificant compared to the total debt. In Re Morris (supra) at page 344 CA Sweeney J said:
"Bearing in mind the precarious financial position of the debtor, of which more anon, a prudent creditor would have regarded such a possible additional liability as material. It may well have been considered to be the last straw, which would prevent the debtor from being able to meet his obligations under the composition."
In my view such comments cannot be made in respect of the omission of $9,800.00 out of a total of $3,600,000.00. Mr Irlicht submitted that even now the creditors do not know the name of the omitted creditor and that if that creditor had gone to the meeting he could have swayed the meeting. However there is no material before me upon which I can conclude that the name of the omitted creditor is relevant to the materiality of the debt; nor is there any evidence as to how or why such a creditor might have swayed a meeting. In my view, the attendance of the creditor at the meeting is not relevant or material.
Exercise of Discretion
It follows from my conclusions that the jurisdiction to declare the deed void under s 222(2) of the Act does not arise nor does the jurisdiction under s 222(4) of the Act arise. However, if I am wrong in any of the conclusions which I have reached I do not consider that this is an appropriate case for me to exercise my discretion adversely to the Debtor. Mr Irlicht invited me, in considering whether or not to exercise the discretion committed to me, to take into account the following factors:
(a)there were creditors to the extent of $3,600,000.00;
(b)the Debtor was a director of thirteen companies and has been a director of a further six companies during the past six years;
(c)the Trustee did not recommend acceptance of the proposal;
(d)there has been no explanation as to how the deficiency arose;
(e)the Debtor's family trust has been paid $6,000.00 a month for the Debtor's services whilst he is only receiving $500.00 per week from the Trust;
(f)the Trust made a profit of $250,000.00 in the 1994/1995 year which raises the possibility of proceedings pursuant to s 139A of the Act;
(g)there is no logical explanation for the discrepancy between the amounts of the assets and the virtual non‑existence of assets at the present time;
(h)the lack of evidence as to the assets of The Stuart McDougall Family Trust.
Mr Irlicht relied upon the recent decision of the Full Court of the Federal Court in Khera v National Australia Bank Ltd (1996) 141 ALR 416 which he said was applicable to the present case. In that case the Court had terminated the deed pursuant to s 236(1)(c) of the Act. The Full Court upheld that termination and concluded that it would be in the interests of creditors to terminate the deed as the deed could not proceed without injustice to the creditors as:
(a)the deed provided no real benefit to creditors;
(b)the income contribution to be made by the debtor was minimal;
(c)the creditors would get less under the deed then they otherwise would on bankruptcy;
(d)potential voidable dispositions could not be pursued;
(e)the circumstances of various transactions could not be investigated.
Mr Irlicht submitted that each of these factors applied to the case before me. He also submitted that in determining whether I should be satisfied that it would be in the interests of creditors to declare the deed void (s 222(5)) I should not limit myself to a consideration of interests which relate to the economic advantage of creditors or the prospect of such an advantage (Augustyn v Putnin (1988) 83 ALR 514 at pp515, 521).
In response to these submissions Mr Bornstein submitted that it was clear that the creditors had decided to vote against their interests and that they had done so in the face of a report by the Trustee that he would not recommend the arrangement of 0.55 cents in the dollar. He submitted that an exercise of discretion against the Debtor would be unusual where the creditors had voted against their commercial interests. In short he submitted that all the discretionary matters raised by Mr Irlicht were placed before the creditors in one form or another at the time of their meeting. In particular they were aware that assets of the Trust might be recoverable in bankruptcy and that this matter could be investigated in bankruptcy. He submitted that there was no evidence that any of the creditors had been prejudiced and that no "true creditor" had voted against the arrangement. The reference to a true creditor was a reference to the fact that there was a dispute as to whether the firstnamed applicant Policy Nominees Pty Ltd had properly resolved to oppose the arrangement because one of its directors, the estranged wife of the secondnamed applicant, was not in favour of it voting against the arrangement. Although this issue of the standing of Policy Nominees Pty Ltd was raised before me, and in particular by counsel for the substituted Trustee, it is not necessary to make any decision in relation to that issue because it was the secondnamed applicant who was allowed to vote at the meeting.
Mr Irlicht also pointed out that in a number of cases where the majority had voted in favour of a deed of arrangement the Court nevertheless set the deed aside. He submitted, in my view correctly, that just because the majority voted in favour
of the deed that was not a matter to be taken into account in the exercise of discretion.
It is true that the amount offered by the Debtor under the arrangement is very small and it is also true that as a result of the deed of arrangement any application pursuant to s 139B of the Act in respect of the assets of the Family Trust will not become available. Nevertheless, these matters were affirmatively placed before the creditors in the report of the Trustee and in my opinion even if any of the defects or omissions relied upon Mr Irlicht had existed I would not have been disposed to exercise my discretion in favour of avoiding the deed because I am not satisfied that it would be in the interests of the creditors to do so. I say this, notwithstanding the existence of the family trust and the matters to which Mr Irlicht referred.
The order of the Court will be that the application by the applicants dated 31 July 1996 is dismissed with costs.
Counsel for the applicants: Mr T Irlicht
Solicitors for the applicants: Irlicht & Broberg
Counsel for the first respondent: Mr P Bornstein
Solicitors for the first respondent: D E Phillips
Counsel for the second respondent: Mr P Fary
Solicitors for the second respondent: J M Smith & Emmerton
Date of Hearing: 18 February 1997
Date of Judgment: 27 March 1997
I certify that this and the preceding thirty-one (31) pages are a true copy of the Judgment of His Honour Justice Goldberg
Associate:
Date:27 March 1997
0
0