Re McMahon, John Keith v Ex Parte News Ltd (T/as Newsnet)
[1996] FCA 1056
•29 NOVEMBER 1996
CATCHWORDS
BANKRUPTCY - Creditor's Petition - whether order dismissing petition should be set aside - whether deed of arrangement should be set aside
No. NP 2065 of 1995
JOHN KEITH McMAHON -v- EX PARTE NEWS LTD (T/as Newsnet)
MOORE J
SYDNEY
29 November 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No. NP 2065 of 1995
)
BANKRUPTCY DIVISION )
EX PARTE: NEWS LTD (T/as newsnet)
Petitioning Creditor
RE: JOHN KEITH MCMAHON
Debtor
JUDGE: Moore J
PLACE: Sydney
DATE: 29 November 1996
ORDER OF THE COURT
THE COURT ORDERS THAT:
The order of Registrar Sexton made on 20 March 1996 dismissing the petition of News Ltd in matter NP 2065 of 1995 is set aside.
The deed of arrangement executed by John Keith McMahon on 10 January 1996 is terminated.
The time at which the petition referred to in order 1 lapses is extended to 4 May 1997.
The costs of the application are reserved.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No. NP 2065 of 1995
)
BANKRUPTCY DIVISION )
EX PARTE: NEWS LTD (T/as Newsnet)
Petitioning Creditor
RE: JOHN KEITH McMAHON
Debtor
JUDGE: Moore J
PLACE: Sydney
DATE: 29 November 1996
REASONS FOR JUDGMENT
This is an application by News Ltd for an order terminating a deed of arrangement under Part X of the Bankruptcy Act 1966 ("the Act") between Mr John Keith McMahon and his creditors, an order rescinding an order dismissing a creditors petition presented by News Ltd and a sequestration order against McMahon's estate.
A bankruptcy notice dated 16 May 1995 was served on McMahon and, by order of the Court, it was to be served on 18 October 1995. It was founded on a judgment of $10,272.72 obtained by News Ltd in the Local Court of New South Wales on 23 March 1994. The notice required payment of the judgment debt and interest of $11,486.28 within 28 days after 18 October 1995. The demand was not met and, on 5 December 1995,
News Ltd presented a creditor's petition dated 30 November 1995 on 21 February 1996.
On 5 December 1995 McMahon signed an authority under s188(1) of the Act authorising a registered trustee, Mr Robert Molesworth Cole, to call a meeting of creditors and take control of his property. A letter dated 6 December 1995 was sent to News Ltd notifying it of a creditor's meeting scheduled for 20 December 1995. The letter enclosed a statement of affairs disclosing liabilities of $471,265 and assets of an estimated value of $14,000 constituted by household furniture and effects valued at $4,000 and artwork valued at $10,000. It also enclosed the debtor's proposal, dated 5 December 1995, involving the execution of a deed of arrangement which would include terms that "$10,000 (be) payable by 29 February 1995" and "the (a)ssignment of (his) divisible property". It also enclosed a report made pursuant to s189A by Cole, which I return to in due course. By letter dated 4 January 1996, Cole informed creditors of the acceptance at the creditor's meeting of the debtors proposal and repeated its essential terms. He requested that proofs of debt be returned to him. This News Ltd did on 24 January 1996.
When the creditor's petition came before the Court it was adjourned to 20 March 1996. A letter dated 23 February 1996 was sent to McMahon at Cole's office by Sally Nash & Co, solicitors for News Ltd, in the following terms:
"RE: NEWS LIMITED t/as NEWSNET
The Hearing of the Bankruptcy Petition issued against you has been adjourned until Wednesday 20th March 1996 at 9.15 a.m. before the Registrar in Federal Court, Level 18, Law Courts Building, Queens Square, Sydney.
On that day an application for costs will be made. If the Part X deed has been executed then the petition shall be dismissed and out client shall seek costs. If the Part X deed has not been executed we shall be proceeding."
A letter of the same date was sent to Cole in the following terms:
"We act for News Limited trading as Newsnet and note that proofs of debt were forwarded to you by letter of 24th January 1996.
Kindly let us have a copy of the executed deed. Our clients (sic) creditors (sic) petition has been adjourned to further hearing on Wednesday 20th March 1996 pending clarification of whether the deed was executed. We also note that pursuant to the terms of the proposed deed as detailed in your letter of 4th January 1996 Mr McMahon was to make a payment of $10,000.00 by 29th February 1996. Our client will, of course, be interested to know whether this payment was made. We look forward to hearing from you shortly."
A reply from Cole dated 8 March 1996 was in the following terms:
"I refer to your letter dated 23 February 1996.
Please find enclosed as requested a copy of the debtor's deed of arrangement. The deed has of course been lodged with the Federal Court.
I can confirm that I have received $10,000 in accordance with the terms of the deed.
It would be prudent of you to have your costs ordered as a priority at the adjourned hearing on 20 March 1996.
If you have any queries please contact Mr. Jack Juresko of my office."
It is to be noted that Cole asserts "he has received $10,000 in accordance with the terms of the deed."
The deed had been executed on 10 January 1996 and relevantly provided:
(a) The debtor shall pay to the Trustee the sum of $10,000.00 on or before 29 February 1996."
On 20 March 1996, a Registrar, on the application of News Ltd, ordered that the petition be dismissed and the costs of the petitioning creditor be paid out of the funds held by the trustee.
On 1 April 1996 Sally Nash & Co wrote to Cole enclosing a bill of costs and asking whether the costs were objected to and, if not, that Cole inform the Registrar of the Court. Cole responded with a letter of 23 April 1996 informing Sally Nash & Co that:
"Following my earlier advice to you that the funds have been received by me the debtor's cheque was dishonoured. The debtor has on a number of occasions undertaken to rectify the situation however on all occasions as recently as yesterday has failed.
In light of the costs involved to terminate his deed I am prepared to wait a further 14 days upon which action will be taken to have his deed terminated."
One matter that remains unexplained is what happened in the period between 8 March 1996, by which time Cole had received the cheque and presumably put in place a process of banking it, and 20 March 1996, when the petition was dismissed. Was, for instance, Cole aware before 20 March 1996 that the cheque had been dishonoured?
The application to which these proceedings relate was filed on 13 May 1996 and served on McMahon under cover of a letter dated 23 May 1996. The application was returnable on 18 June 1996. That resulted in a response from a firm of solicitors, Tisher, Liner & Co, which included:
We are now holding in trust cleared funds in the sum of $10,000.00 provided by third parties;
The third parties have provided the funds to us on the strict basis and instruction that the Deed proceeds and that no Sequestration Order is made against the estate of Mr McMahon. If such were to happen, we have specific instructions to return the moneys;
As we understand, Section 236(1) of the Bankruptcy Act essentially provides that the Court should not make an Order terminating a Deed unless it is satisfied that it would be in the interest of the Creditors to do so. In that regard, we have liaised with the Trustee, Robert Cole & Co., and we enclose copy of letter dated 7th of June 1996 from the Trustee which sets out that his recommendation has not changed and that therefore, it would not be in the interest of the Creditors for the Deed to be terminated."
Further correspondence passed between Cole, Tisher, Liner & Co and Sally Nash & Co. By letter dated 14 June 1996 Tisher, Liner & Co informed Sally Nash & Co that the $10,000 held in trust had been forwarded to Cole "in accordance with the same conditions applicable to the payment into (their) trust account". By letter dated 17 June 1996 Cole informed Sally Nash & Co that he held $10,000 in his trust account "to be applied to (McMahon's) Deed of Arrangement pending a resolution of your Application." The letter went on to state that "[A]s at today's date the debtor has complied with the terms of his Deed of Arrangement."
On the return date of the application, 18 June 1996, McMahon appeared in person. When it became apparent that News Ltd would persist with its application, McMahon successfully sought an adjournment to enable him to obtain legal representation. The matter was fixed for hearing at 10.15 on 21 August 1996. On that day there was no appearance for McMahon and the matter proceeded ex parte. A week later, McMahon appeared in court. He said he had mistakenly thought the matter was listed that day. Ultimately, I adjourned the matter to 11 November 1996 for further hearing to enable McMahon to appear with legal representation. This he did and submissions were made on his behalf.
At the conclusion of the hearing on 11 November 1996, I gave the solicitor appearing for McMahon leave to file written submissions to the question of whether the time in which the creditors petition of News Ltd would lapse, should be extended under s52(5) which was a matter I had raised with the parties. No leave was then sought or given to file further affidavits. Written submissions were made in due course on the issue of extension of time and they were accompanied by an affidavit of McMahon. I do not propose to treat that as evidence as an opportunity existed at the hearing on 11 November 1996 for McMahon to be called and cross examined. In any event, the affidavit adds nothing that, in my view, is material.
The application by News Ltd that the deed be terminated was based on several grounds. It is sufficient to refer only to the ground found in s236(1)(a), namely that McMahon has failed to carry out a provision of the deed of arrangement. He plainly failed to pay $10,000 to the trustee on or before 29 February 1996. He has still not made an unconditional payment of $10,000. The language of 236(1)(a) is unambiguous and I am satisfied that, by failing to pay the $10,000 by the time provided for in the deed, the ground in paragraph (a) is made out.
However, s236(2) authorises an order terminating a deed on that ground only if the Court is satisfied it would be in the interests of the creditors to do so. The failure to make a payment under a deed may lead to its termination: see Re Beard's Deed of Arrangement (1970) Qd R 129 but self- evidently, having regard to the structure of s236, such a failure does not lead to its termination unless that matter, or some other matter, satisfies the requirement concerning the interests of creditors.
In the present case the only matter of substance pointing to the maintenance of the deed is the potential distribution by the trustee of the $10,000 provided on behalf of McMahon, along with the proceeds of the sale of property to which the deed relates. The value of the property remains uncertain. The sum of $10,000 was ultimately made available to Cole, conditionally, to permit payment under the deed. If the deed is terminated it appears that sum will not form part of McMahon's estate if a sequestration order is made.
However against that consideration must be balanced a range of other considerations. The liabilities of McMahon were identified in the statement of affairs as $471,265 and, if that represents the total liabilities of McMahon, the most recent estimate by Cole of the dividend that would be payable to creditors identified in the statement of affairs would be 2 to 2.5 cents in the dollar. In a report dated 6 December 1995 made under s189A, Cole expressed the view that if McMahon is bankrupted then the combined effect of the additional costs of administering the estate and the loss of the $10,000 paid on behalf of McMahon, is that no dividend would be paid. Thus, on Cole's assessment, the creditors (save for two who the deed contemplated they would not prove or seek to prove their debts) would receive nothing if the deed was set aside and a sequestration order made, and a dividend of 2 to 2.5 cents in the dollar if it was not.
However, I do not view uncritically the report of Cole. First, he simply notes in his report that McMahon has not lodged a tax return for the last three years but provides no explanation as to why it is that no liability might arise under the Income Tax Assessment Act 1936 nor is allowance made for such a liability. Second, he states in the report that McMahon "estimates his income at between $20,000 and $30,000 per annum" but goes on to assert that based on information available to him McMahon would not be liable to make payments pursuant to s139K of the Act. The information upon which this conclusion is based is not set out even in summary form and, in particular, no indication is given as to what assumptions were made about the likely future income of McMahon during any period of bankruptcy. Moreover, it is of some significance, the conduct of Cole, evident in the letter of 8 March, evidences a lack of attention to detail that raises a real question about the manner in which he has gone about acting on the authority derived from s188 of the Act.
The prospect of the payment under a deed of a dividend that is negligible does not preclude satisfaction that it would be in the interest of creditors to set aside a deed: see Boral Resources (NSW) Pty Limited trading as Boral Concrete v Geoffrey Howard Smith and John Howard Mann (unreported, 28 October 1993, Federal Court of Australia NX 253 of 1992, Sweeney J and the cases dealing with the equivalent provision in s222(5) relating to compositions discussed by Branson J in Re Andrew Kenneth Eustice (unreported 15 July 1994, Federal Court of Australia SX 17 of 1994, Branson J).
There is evidence before me, in the form of four letters, that indicates four significant creditors, or persons allied to the interest of those creditors, desire that the substance of the deed be given effect to in the sense that the $10,000 be distributed and the other property to which the deed relates be realised. However, I place little weight on this material. The letters are in a standard form and are addressed to Cole who has not seen them. Plainly, they were solicited, and probably by McMahon. What each person knew or appreciated about the manner in which and the extent to which Cole investigated McMahon's affairs, and has sought to give effect to the terms of the deed, is not apparent from the letters, though each knows the payment due on 29 February 1996 was not made on time.
In my opinion, the affairs of McMahon warrant further investigation. That would occur if I were immediately to make a sequestration order under s236(2). I do not, however, propose to follow that course. Instead, I propose to terminate the deed. It is also appropriate that an order be made effectively rescinding the order of the Registrar dismissing the creditor's petition of New Ltd. Such an order is sought under s37 of the Act. The consent of the petitioning creditor, News Ltd, to the order dismissing the petition resulted from the false or, at best, misleading statement of Cole that he had received $10,000 in accordance with the terms of the deed. It may be accepted that News Ltd could not have proceeded with its petition because of the execution of the deed: see s233(2). However, had the true position been made known by Cole, News Ltd could have then moved to have the deed terminated before 20 March 1996. On 20 March 1996 it plainly acted on the statement by Cole in his letter of 8 March 1996.
There is early authority that suggests I cannot make an order under s37 rescinding the Registrar's order: see In Re Maugham; ex parte Maugham (1888) 21 QBD 21, though it would appear an order may be made under s14(3) directing the Registrar, if acting as a Registrar in Bankruptcy, to rescind it: Re Sparrow; ex parte Official Receiver (unreported) is cited in McDonald, Henry & Meek's Australian Bankruptcy Law & Practice to support that proposition, though the practice is singularly unilluminating as to which Court made that decision and when. However, for reasons similar to those given be Northrop J in Re Kwiatek; ex parte Big J Ltd v Pattison (1989) 21 FCR 374 at 378, the order made by the Registrar dismissing the petition appears to have been made by the Registrar exercising power arising under s31A of the Act. Thus the exercise of the power may be reviewed and exercised afresh. I propose to make an order setting aside the order dismissing the creditor's petition. I also propose to extend the time at which the petition of News Ltd lapses by a further six months: see s52(5). I follow this general course because I am not satisfied that McMahon should be deprived of a further opportunity of avoiding bankruptcy by coming to an arrangement, acceptable to creditors, that has that effect.
In the written submission filed after the hearing of 11 November 1996, McMahon's solicitor submitted that time should not be extended under s52(2) as News Ltd had not prosecuted its application filed on 13 May 1996 diligently. Having regard to the history of the matter, as I earlier recounted it, this submission is untenable. The delay in the finalisation of the application is a direct result of the conduct of McMahon. He, first, appeared without legal representation but then said he wanted it and, second, failed to appear on a day fixed for hearing in his presence, and appeared a week later, again without legal representation.
It would be open to McMahon to make another appointment under s188: see Re Saheed; Saheed v The Official Receiver (1993) 41 FCR 148. If so, another report would be created for the purposes of s189A, which would require further investigation of the affairs of McMahon. Alternatively, News Ltd may press for a sequestration order under s52 based on its petition of 5 December 1995 and, if made, further investigation would take place in that context.
I will hear the parties as to who should bear the costs of the application and the nature of the orders that should be made. I take this course, as the original application sought that Cole meet the costs of the application. If such an order is pressed I would need to be satisfied about the source of my power to make such an order and that Cole was aware it might be made. Written submissions should be filed within 21 days. If orders are sought by News Ltd against Cole, I would need to be satisfied that he had been served with a copy of this judgment and any written submissions, in sufficient time to file submissions himself.
I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Moore.
Associate: ........ ........ ......
Alexandra George
Dated: 29 November 1996
APPEARANCES
Solicitor for the Petitioning Creditor: Ms S Nash of
Sally Nash & Co
Solicitor for the Debtor: Mr A Goldstone of
Tisher, Liner & Co
Dates of Hearing: 21 August & 11 November 1996
Written Submissions Complete: 18 November 1996
Date of Judgment: 29 November 1996
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