Re Messina, Sam; Ex Parte Westpac Banking Corp
[1998] FCA 379
•17 APRIL 1998
FEDERAL COURT OF AUSTRALIA
BANKRUPTCY - application by creditor for an order that a composition made by the debtor be declared void pursuant to Pt X Bankruptcy Act 1966 (Cth) on the ground that the composition had not been accepted by a special resolution of a meeting of creditors pursuant to s 204 of the Bankruptcy Act 1966 (Cth) - whether the creditor was actually a creditor for the purposes of voting at the meeting of creditors - determination of the extent of debtor’s indebtedness - whether moneys were advanced or loaned by the creditor to the debtor - differences in claimed debt provided to the trustee, recorded in statement of affairs, account books and tendered as evidence at hearing - s 222(4) of the Bankruptcy Act 1966 (Cth) - whether the debtor gave false or misleading information in answer to a question put to him with respect of his conduct or examinable affairs at the creditors’ meeting or failed to disclose material particulars from his statement of affairs or included an incorrect and material particular in the statement in relation to, inter alia, the amount of indebtedness and disclosure of shares in the creditor - extent of materiality required to satisfy s 222(4) - whether conduct of trustee as chairman of meeting of creditors in refusing to adjourn the meeting in order to make enquiries as to the creditor’s right to vote and investigate the debtor’s property was a failure to discharge his duty.
Bankruptcy Act 1966 (Cth): s 222, s 222(4)
Pt X
Wagner v International Health Promotions (1994) 15 ACSR 419 - considered
Re Horne; Ex parte Deputy Commissioner of Taxation v Horne and Pratt (unreported, 10 May 1996, Olney J) - considered and applied
Re Segal; Lensworth Finance Limited v Segal & Ward (1975) 9 ALR 154 - applied
RE: SAM MESSINA; EX PARTE WESTPAC BANKING CORPORATION
VX 33 of 1996
GOLDBERG J
MELBOURNE
17 APRIL 1998
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
VX 33 of 1996
RE:
SAM MESSINA
EX PARTE:
WESTPAC BANKING CORPORATION
(ARBN 007 457 141)
ApplicantSAM MESSINA
First RespondentDAVID SCOTT
Second RespondentJUDGE:
GOLDBERG J
DATE OF ORDER:
17 APRIL 1998
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
The composition made by the first respondent on 13 March 1996 be declared void pursuant to s 222(2) of the Bankruptcy Act 1966 (Cth) on the ground that the composition has not been accepted by a special resolution of a meeting of creditors of the first respondent under s 204 of the Act.
A sequestration order be made against the estate of the debtor.
Paul Anthony Pattison be appointed trustee of the bankrupt estate of the debtor.
The first respondent pay the applicant’s costs of the application.
The applicant pay the second respondent’s costs of the application.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
VX 33 of 1996
RE:
SAM MESSINA
EX PARTE:
WESTPAC BANKING CORPORATION
(ARBN 007 457 141)
ApplicantSAM MESSINA
First RespondentDAVID SCOTT
Second Respondent
JUDGE:
GOLDBERG J
DATE:
17 APRIL 1998
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
Introduction
Background of the application
The applicant is a creditor of the first respondent (“the debtor”) in the sum of $104,000 or thereabouts and seeks an order of the Court declaring void a composition made by the debtor on 13 March 1996 pursuant to Pt X of the Bankruptcy Act 1966 (Cth) (“the Act”). My consideration of the Act and the sections to which I refer in these reasons is based upon the form of the Act prior to the amendments made by the Bankruptcy Legislation Amendment Act, No 44 of 1996 which was assented to on 25 October 1996 and Schedules 1 and 2 of which came into operation on 16 December 1996.
On 15 June 1995 the applicant obtained a County Court judgment against the debtor and National Realty Pty Ltd (“National Realty”) for $95,102.38 inclusive of interest and costs. On 10 August 1995 a deputy registrar of the Federal Court issued a bankruptcy notice against the debtor on the application of the applicant claiming payment of $96,928.12. The bankruptcy notice was served on the debtor on 9 January 1996 and no application was made to set the notice aside. On 4 January 1996 the applicant’s solicitors served a statutory demand, pursuant to the provisions of the Corporations Law, upon National Realty in respect of the County Court judgment and no application was made to set aside that demand. On 29 February 1996 the applicant executed a creditor’s petition against the debtor, which was verified by a sworn affidavit. The act of bankruptcy relied upon was the failure of the debtor on or before 23 January 1996 to comply with the bankruptcy notice. On the same day, Paul Anthony Pattison, a registered trustee, consented to act as the trustee of the estate of the debtor in the event that he became a bankrupt. On 4 March 1996, the applicant received from the trustee documents relating to a Pt X proposal being made by the debtor. On 8 March 1996 the applicant filed an application in the Federal Court to wind‑up National Realty which was set down for hearing on 16 April 1996. National Realty was subsequently wound up.
On 13 February 1996 the debtor signed an authority pursuant to s 188 of the Act authorising the second respondent (“the trustee”) to call a meeting of his creditors for the purposes of Pt X of the Act and to take over control of his property in accordance with that Part. The trustee consented to exercise the powers conferred on him by the authority and, on the same day, the debtor, pursuant to s 188 of the Act, signed a proposal that his creditors agree to accept a composition in full settlement of all his debts and that $10,000 be paid to the trustee from an external source to be applied in making payment to his creditors after allowing for the remuneration and disbursements of the trustee. It was a term of the proposal that if the creditors agreed to the proposal National Realty, a creditor for $450,277 and National Realty (Vic) Pty Ltd (“National Realty (Vic)”), a creditor for $40,000 would not participate in any distribution, although they reserved the right to vote at the meeting of creditors.
In his statement of affairs verified on 13 February 1996, the debtor disclosed unsecured creditors totalling $609,977, property to the value of $20,000 and a net deficiency of $609,977. The applicant was shown as an unsecured creditor for $100,000, National Realty was shown as an unsecured creditor for $450,277 and National Realty (Vic) was shown as an unsecured creditor for $40,000.
Background of the debtor
The debtor had been working as a licensed sub‑agent in the real estate industry for a number of years.
In 1987 the debtor commenced business through National Realty whose principal business was the sale of house and land packages in various suburbs and which held an estate agent’s licence pursuant to the provisions of the Estate Agents Act 1980 (Vic). The debtor was a licensed sub‑agent and was prohibited by the Estate Agents Act 1980 (Vic) from acting as a director of National Realty and therefore arranged for an associate, Kevin Marmion and his wife Elsie Marmion to act as directors. They were appointed as directors in 1987 and ceased acting as directors on 18 September 1990. By this time the debtor had become a licensed agent and he and his wife, Brenda Messina, were appointed directors of the company. National Realty acted as the trustee of the National Realty Unit Trust which carried on the estate agency business and Seventy‑Seventh Shackle Pty Ltd was incorporated as the trustee of the S Messina Family Trust, which held units in the National Realty Unit Trust. The directors and shareholders of Seventy‑Seventh Shackle Pty Ltd were the debtor and his wife. At all relevant times, save for a short time, the debtor’s accountant was Raymond Harari & Partners Pty Ltd. A number of persons in that company carried out accounting and taxation work for the debtor, although he generally dealt with Phillip Same or David Sharpe. The debtor remained with that firm until some time in 1993 when it dissolved; he went to another firm for some time, but in or about 1994 returned to Phillip Same who had established his own firm. The debtor encountered matrimonial difficulties and at some time in 1994 he asked Phillip Same to give him advice as to the financial position of National Realty and himself. He discovered that taxation returns for himself and members of his family and for the companies had not been lodged and he instructed Phillip Same to contact the taxation department about the matter. He produced a letter from Phillip Same to himself dated 3 August 1994 referring to his instructions to complete and lodge tax returns for various members of his family and the trusts for various years between 1978 and 1994.
The debtor said that at various times he was advised by his accountant that profit earned by National Realty ought to be distributed to Seventy‑Seventh Shackle Pty Ltd and that that company in turn should distribute income to members of his family and himself. He said that draft accounts were prepared in accordance with the advice so received, but his wife refused to sign the accounts or participate in any meeting to adopt them and he was unable to proceed further in this respect. In 1994 the debtor’s wife refused to sign a number of company documents including a document to renew the estate agency licence held by National Realty. As a result, the debtor arranged for the incorporation of National Realty (Vic) which became a licensed estate agent and assumed the business of National Realty.
National Realty had banking arrangements with the applicant and, as security for those arrangements the debtor, mortgaged his home to the applicant which, having served a demand under the mortgage, sold the house to an investor with whom the debtor made arrangements to rent the property.
On 15 February 1996 the debtor resigned as a director of National Realty and on the same day his former wife was purportedly removed as a director.
The debtor says that draft accounts of National Realty and the National Realty Unit Trust produced by the applicant had been requested by the applicant even though they were only in draft form. The debtor says that notwithstanding that the draft accounts showed distributions of profits to unitholders in the National Realty Trust he withdrew funds from National Realty and that the cashbooks recorded such withdrawals which were not by way of distribution to unit holders in the National Realty Trust but were rather loans to him.
The debtor says that National Realty has not carried on business since it ceased to be an estate agent at the end of 1994 and that the shares in it had no value. He says that the small rent roll operated by it was personal to a licensed sub‑agent, Mr Genovese, who maintained one of the branch offices of National Realty.
Events leading to the Composition
The trustee provided a report to creditors pursuant to s 189A of the Act on 26 February 1996 which summarised the statement of affairs and the debtor’s proposal and then set out a history of the debtor’s current financial position. It noted that the trust business of National Realty was reasonably successful but the dissolution of the debtor’s marriage required a restructure when his wife resigned as a director. The report noted that there were no assets in National Realty apart from a debt of $450,277 owed by the debtor, resulting from drawings made over a period of seven years. The report showed that Seventy‑Seventh Shackle Pty Ltd was incorporated on 10 June 1987 as trustee of an investment business and it owned units in the trust of which National Realty was the trustee, but as the trust did not distribute any funds, Seventy‑Seventh Shackle Pty Ltd had no income and no assets. In the report the trustee noted the documentary evidence he had received to date relating to creditors listed on the statement of affairs and said he had been given an assurance that he would have the financial accounts of both National Realty and National Realty (Vic) “showing the debts owed by the debtor within the next 24 hours”. In the report the trustee estimated that the remuneration and costs of his staff and himself would not exceed $3,500 leaving at least $6,500 available for distribution. The effect of the debtor’s proposal was that there was a potential distribution of approximately 5.43 cents in the dollar to the creditors who would be participating in the distribution.
Although the authority, which was signed on 13 February 1996, enabled the trustee to take control of the debtor’s property, he did not do so. The trustee simply relied upon the statements of Mr Harari and the debtor that the debt owed to National Realty was around $450,000. The trustee accepted the statement of affairs of the debtor at the time of his report and understood that Mr Harari was working on the figures.
Prior to the date of the trustee’s report, the trustee had not interviewed the debtor personally (although he had attended a meeting with Mr Burridge, the debtor and Mr Harari on 8 February 1996) and he was rather relying on the information supplied by Mr Burridge, an insolvency manager employed in his office, who carried out the work and investigation for the creditors’ meeting. He had instructed Mr Burridge, on his behalf, to make enquiries in relation to the debtor. It was Mr Burridge who drafted the report but the trustee read it before it was finally engrossed. Although the trustee said he perused the various documents referred to in the report and discussed it with Mr Burridge prior to signing it, he had not looked at any documents relating to National Realty, National Realty (Vic) or Seventy‑Seventh Shackle Pty Ltd. The only document the trustee recalled seeing was the correspondence from the applicant in relation to its debt. What is important is that the trustee, prior to his report, had not seen any documents relating to, or verifying, the claims of National Realty and National Realty (Vic) to be creditors. He had simply relied upon the statement of affairs. On 12 March 1996 he was given proofs of debt for National Realty and National Realty (Vic) by Mr Harari and he sighted what he said were the accounts relating to the debt owing to National Realty by the debtor. This was a form of balance sheet as at 30 June 1995 for the S Messina Family Trust which showed as a current asset “Loan Account - Sam Messina 335,354”.
The meeting of creditors
On 13 March 1996 a meeting of the creditors of the debtor was held and was chaired by the trustee. The proposal put to the meeting was that the debtor make a composition with his creditors pursuant to Pt X of the Act. Issues arose at the meeting as to the right of National Realty to vote and the applicant’s representative and Mr Dean McVeigh, who had been nominated as liquidator of National Realty, questioned the right of National Realty to vote at the meeting. They asked the trustee to adjourn the meeting to investigate the matter but he refused to do so and the resolution that the debtor’s proposal for a composition in the form of the statement submitted to creditors be accepted was passed. The trustee says that he refused to adjourn the meeting because he was satisfied that sufficient enquiries had been carried out for the purpose of the meeting. He saw the investigation which had been sought as relating more to National Realty than to the activities of the debtor and he did not think that there were sufficient grounds to adjourn the meeting. He was satisfied with what had been provided by Mr Harari showing National Realty and National Realty (Vic) as creditors. The trustee believed that the sole purpose of the attempt to adjourn the meeting was to have National Realty placed in liquidation so that the liquidator might exercise the power to vote on behalf of that company and “rightly or wrongly”, as he put it, he did not regard that as a proper reason for the chairman to adjourn the meeting of creditors.
National Realty was admitted by the trustee, as chairman, to be a creditor for $335,654. Its claim to be a creditor for that amount is contested and the applicant claims that even if National Realty had voted in favour of the composition in respect of its true debt, the resolution would have been defeated. The resolution was a special resolution and was required to be passed by a majority in number and at least three‑fourths in value of the creditors present personally, by attorney or by proxy and voting on the resolution. The resolution was passed by five creditors voting in favour of it and the applicant voting against it. The five creditors totalled $396,452 being 77.99% in value and 83.33% in number and the applicant voted to the value of $104,293 being 22.01% in value and 16.67% in number.
The applicant seeks orders that the composition be declared void or alternatively set aside pursuant to s 222 of the Act. This claim is based on the submission that National Realty was either not a creditor of the debtor or, at most, a creditor for not more than $66,176.65.
The applicant is critical of the steps which the trustee had taken or, rather, had failed to take in relation to his investigation of the affairs of the debtor and raised these matters at the meeting of creditors. No explanation was given as to why National Realty was voting for debts of $335,654 rather than the $450,277 referred to in the statement of affairs although the former figure was said to be derived from National Realty’s cashbooks. The trustee acknowledged that he had been informed that a winding‑up application had been issued against National Realty and that although National Realty had minuted its agreement not to participate in the distribution under the proposal, as a winding‑up application had been issued, any liquidator appointed might not agree to be bound by National Realty’s minute. When the applicant’s solicitor asked the trustee what documents he had been provided with by National Realty to substantiate its entitlement to vote, the trustee said that National Realty had not prepared any annual returns or financial documents for approximately seven years. The trustee said that he was prepared to allow National Realty to vote after he had been provided with a balance sheet for the year ended 30 June 1995 and shown schedules which Mr Harari, the debtor’s accountant, had prepared by reviewing only National Realty’s cashbooks.
As it turned out, the trustee was incorrect when he said that National Realty had not prepared any financial documents for approximately seven years. The applicant was able to produce financial statements of National Realty for the years ended 30 June 1989 and 30 June 1990 and draft accounts for the period ended 31 January 1993 incorporating the accounts for the financial year ended 30 June 1992. These accounts had been prepared by Mr Harari’s firm.
At the meeting issues were raised as to the debtor’s estimated tax liability. The trustee’s report had indicated an estimated tax liability for the 1994/1995 financial year of $20,000 and although the trustee initially advised the meeting that he had notified the tax office of this potential liability, that statement was in error. In a subsequent conversation between the applicant’s solicitor and the trustee’s assistant, Mr Burridge, Mr Burridge said that the $20,000 figure was a mistake and was not a reference to taxation liability but should have been a reference to income received by the debtor.
The statement of affairs had placed a value of $5,000 on the debtor’s shares in National Realty (Vic) and the trustee told the meeting that, for that amount, he had relied solely upon the debtor who, in turn, had been provided with an estimate of $5,000 by Mr Harari who said that his valuation was essentially an “off the cuff guesstimate”. When the applicant’s solicitor asked the trustee what investigations he had made into the value of the ninety‑eight shares held in National Realty by the debtor, the trustee had no knowledge of these shares. An Australian Securities Commission search conducted by the applicant on 8 March 1996 had disclosed that the debtor held ninety‑eight of the one hundred issued shares in National Realty and that its directors were the debtor and Mrs Messina. The debtor told the meeting that he had disposed of the shares for no consideration in January or February 1996 and the applicant’s solicitor and Mr McVeigh said this issue required further investigation. A debt to Mr Dickenson an orthodontist of $1,100 was also raised and the debtor said he had not listed Mr Dickenson as a creditor because he had come to an arrangement with him.
The applicant’s solicitor proposed a resolution to the meeting that the meeting be adjourned until after the hearing of the winding‑up application of National Realty so that further investigations could be made into the debtor’s income, possible tax liabilities and the other matters raised at the meeting. Objection was taken to National Realty being permitted to vote on that resolution as it was not an independent creditor of the debtor. However, the trustee allowed it to vote on the resolution, which was lost.
Information supplied to the trustee
Mr Burridge first met the debtor and his accountant, Mr Harari, on 6 February 1996 at which time he was given an approximate statement of assets and liabilities which placed a nil value on the shares in National Realty and $5,000 on one share in National Realty (Vic). The liability to National Realty was expressed to be “in excess of $100,000”. Mr Burridge had further meetings with the debtor and Mr Harari and received the sworn statement of affairs on 13 February 1996. Mr Burridge gave the following explanations in relation to the issues which the applicant has disputed. He formed the view that, having regard to its indebtedness to the applicant, the shares in National Realty had no value. The estimate of $5,000 for one share in National Realty (Vic) had been obtained from the debtor and at the time of the preparation of the trustee’s report, he had not received, as promised, the financial accounts of that company. In relation to the debtor’s income tax position he said he mistakenly referred to a liability for tax of $20,000 rather than a liability for tax on $20,000. The debtor had advised him that the matter with the orthodontist had been resolved. He had discussed the debt to National Realty with the debtor. As at the date of the statement of affairs the debt was estimated at $450,277 but on 26 February 1996, he was informed that the debt was over‑stated by more than $100,000 and that the over‑statement would be calculated and advised to him.
In his affidavit, Mr Burridge said that National Realty was the trustee of the S Messina Family Trust and he produced a copy of a balance sheet of that trust as at 30 June 1995, which he said showed a debt owing by the debtor to National Realty as trustee in the sum of $335,354. However, National Realty was trustee of the National Realty Unit Trust, units in which were held by Seventy‑Seventh Shackle Pty Ltd as trustee of the S Messina Family Trust. There would appear to be a mistake in the balance sheet having regard to the reference to an unsecured liability of $46,515 in favour of its trustee, Seventy‑Seventh Shackle Pty Ltd.
Mr Burridge also obtained answers from the debtor to a questionnaire which asked questions in relation to the proposed Pt X administration. He thought it was the S Messina Family Trust and he could not explain why he thought that Seventy‑Seventh Shackle Pty Ltd would own units in that Family Trust. He was not shown any accounts by Mr Harari by the time he had prepared the report to creditors on 26 February 1996 and he said he was still waiting for the accounts at the time he left work as a result of an injury. Mr Burridge never saw any primary books of accounts or documentation to substantiate the claim that the debtor personally owed $450,000 to National Realty or any other amount. The trustee had not seen any primary books of account but only the schedules prepared by Mr Harari. The figure that was finally used for the purpose of voting was supplied to the trustee after Mr Burridge left work. As at 13 March 1996, the date of the meeting of creditors, the trustee was unaware of the fact that National Realty was trustee of the National Realty Unit Trust.
The applicant’s submissions
The applicant submits that National Realty was not a creditor of the debtor and should not have been allowed to vote. Alternatively it says that there was no valid resolution of National Realty or of its directors authorising it to vote at the meeting of creditors. In the alternative, it is contended by the applicant that the debtor failed to disclose material particulars prior to the meeting in relation to:
(a) the amount of his indebtedness to National Realty;
(b) the shares he held in National Realty;
(c) the debt due to the orthodontist Mr Dickenson;
(d) his true tax position.
Although the debtor says that National Realty ceased business in early January 1995, accounts tendered in evidence showed that commissions were received by National Realty thereafter up to May 1995 and during the same period a number of accounts were paid. It was contended by the applicant that this showed that the company was carrying on business until May 1995 but the evidence does not disclose whether the accounts that were paid between January 1995 and May 1995 were accounts in respect of debts incurred prior to January 1995. I make the same observation in relation to the commissions received in that it is not clear whether they were received in respect of transactions carried out prior to January 1995.
Was National Realty a creditor of the debtor?
The principal issue before the Court was whether National Realty was in fact a creditor of the debtor and the extent of his indebtedness to it. Draft accounts which had been prepared in respect of the years ended June 1988 through June 1995 showed that debts were owing to the S Messina Family Trust by the National Realty Unit Trust, not that debts were owed by the debtor to National Realty. The draft accounts were drawn up on the basis that there had been distributions of income to the S Messina Family Trust which had loaned the money back to National Realty. The debtor asserted that no distributions had ever been made to the family trust and that the accounts had been prepared without authority.
The issue that the draft accounts did not accurately record what had happened, namely that there had been advances to the debtor rather than distributions to the S Messina Trust, was only raised by the debtor at, or about, the time the applicant served a bankruptcy notice upon the debtor.
No explanation was given as to why the draft accounts were prepared on the basis of distributions to the trust rather than on the basis of there being no such distributions but rather advances or loans made to the debtor. However there was evidence that the draft financial statements and returns prepared by Mr Harari’s firm were prepared from clients’ books of account and financial records and information supplied by clients.
Prior to the meeting of creditors the amount of the debtor’s debt to National Realty varied from in excess of $100,000 to $450,000 to $335,354.
The accounts had been prepared by a firm of accountants with which Mr Harari was involved and it was Mr Harari, on the instructions of the debtor, who had determined in February 1996 that the debtor’s drawings from National Realty between the year ended 30 June 1988 and 30 June 1995 totalled $335,354.36. This figure was obtained by him from National Realty’s cashbooks and was made up as follows:
1987/88 $105,236.20 1988/89 $ 77,606.50
$ 7,449.08
1989/90 $ 73,848.68
$ 5,334.97
1990/91 $ 55,692.00
$ 12,679.08
1991/92 $ 41,192.65
$ 11,647.73
1992/93 $ 34,136.00
$ 7,826.23
1993/94 $ 41,948.00
$ 5,274.92
1994/95 $ 34,207.03
($ 45,018.00)
($223,769.66)$335,354.36
It is this amount which is challenged by the applicant on the basis, in substance, that a number of the items which make it up do not represent debts due by the debtor to National Realty, but rather debts due to the S Messina Family Trust by National Realty or to the National Realty Unit Trust. This was on the basis that the Trust had received distributions of income and had loaned the distributions back to National Realty or to the National Realty Unit Trust after the drawings of the debtor had been set‑off against these distributions.
In the affidavits which were filed prior to the hearing, the only evidence relating to these amounts was to be found in draft accounts not approved by National Realty or any of its directors. The debtor identified items of expenses which were either paid to him as loans or on his behalf such as car expenses which were in effect treated as loans to him. However, in the course of the hearing a number of books of account were obtained from the liquidator of National Realty and these included journals, a minute book and signed annual returns.
At the time National Realty commenced carrying on business as an estate agent through the activities of the debtor, its directors were Mr and Mrs Marmion. The debtor’s position taken in his affidavits and in cross‑examination was that although the draft accounts showed trust distributions, no distributions were in fact ever made to the S Messina Family Trust, nor were they authorised by any meeting of directors. However, when Mr Harari gave evidence the position changed. A number of documents which were prepared either by Mr Harari or by his firm, showed that there had in fact been trust distributions and that the amount of the trust distributions had been loaned back to National Realty by the S Messina Family Trust, the beneficiary of the trust distributions. The balance sheets for the National Realty Unit Trust which was the trust of which National Realty was trustee and under which the real estate business was carried on, did not show that the drawings of the debtor were charged against him in the sense that they represented debts due by him to the company. Rather, they were charged to the S Messina Family Trust which was only consistent with the distribution of income to the trust and the loan back to the National Realty Unit Trust for which National Realty was the trustee.
Mr Harari said that what he called a “fail‑safe minute” was prepared prior to the end of the financial year which authorised or resolved the distribution of profits for the financial year in appropriate portions to beneficiaries under the trust. He maintained that in fact the distribution did not occur and that tax returns were never lodged by National Realty or the National Realty Unit Trust. Mr Harari’s view however, cannot stand in the light of the documentary evidence and it is therefore important to identify what the relevant documents disclosed.
Year ended 30 June 1988
A tax return had been prepared by Mr Harari’s company for the year ended 30 June 1988 (although it does not appear that it was ever lodged) which showed that a distribution of $115,414 was made to the S Messina Family Trust. This comprised operating profit before tax of $99,899 and $15,515 in respect of items not allowable as deductions. The return also included a profit and loss account for the year ended 30 June 1988 which showed a distribution of net income of $99,899 to the beneficiary the S Messina Family Trust. Mr Harari said that he had seen no records that verified such a distribution. However, in the same tax return there was an unsigned minute of a meeting of directors held on 30 June 1988, the directors being Kevin Marmion and Elsie Marmion, which was what Mr Harari called the standard fail‑safe minute. In the course of cross‑examination, journals of National Realty were produced and the journal in respect of the year ended 30 June 1988 showed a distribution of net income of $99,899 to Seventy‑Seventh Shackle Pty Ltd and a loan by Seventy‑Seventh Shackle Pty Ltd of the same amount, the narration being “distribution of net income 30.6.88 as per resolution of directors”. Mr Harari identified the journals as the accountant’s journal kept by his firm and said that the journal entries formed the basis of the draft accounts. Mr Harari was then shown the National Realty minute book which included a minute of a meeting of directors held on 30 June 1988 at which Kevin and Elsie Marmion were present. This minute recorded a resolution in the following terms:
“RESOLVED that the net income of the trust for the year ended 30th June, 1988, calculated in accordance with Section 95 of the Income Tax Assessment Act, be distributed to or for the benefit of the unit holders in proportion to the number of ordinary units of which they are respectively registered as holders at 30th June, 1988.”
This minute was signed by Mr Marmion and Mr Harari agreed that it was a resolution to distribute the 1988 income to the S Messina Family Trust. This was consistent with the journal entries which recorded a loan back of the amount distributed of $99,899.28. Mr Harari maintained that the debt due to the beneficiary, namely the S Messina Family Trust, was reduced by advances made to the debtor but he accepted that whether the advances were made to the debtor or to the S Messina Family Trust was for the Court to decide. According to the journal, the advances or loans were made to Seventy‑Seventh Shackle Pty Ltd and not to the debtor. In essence, Mr Harari was saying that the advances to the debtor were either debts due to the debtor or alternatively were advances made to the S Messina Family Trust or a beneficiary of it, that the distribution of income picked up and allowed for these advances and that the whole of the distribution was loaned back to National Realty.
Mr Harari accepted that what the accounts showed was that the figure of some $105,000 which he had initially said was the total of advances or loans to the debtor was treated in the journal as payments for the benefit of the S Messina Family Trust. In fact the journal showed that $97,187.77 (as well as some other small amounts) had been journalised as a loan to Seventy‑Seventh Shackle Pty Ltd, the trustee of the S Messina Family Trust. Mr Harari said that it was shown as a loan to the beneficiary rather than to the person to whom the advance was made namely the debtor.
The minute book also contained a directors’ report attached to the 30 June 1988 accounts, signed by Mr and Mrs Marmion, in accordance with a directors’ resolution dated 8 December 1988. This showed that the directors had adopted the 30 June 1988 accounts of National Realty. Although the directors’ report related to the accounts of National Realty, the trustee, and not the accounts of the trust itself, the accounts reflected, as Mr Harari acknowledged, the distribution of income to Seventy‑Seventh Shackle Pty Ltd and the loan back to National Realty by it. In short, the accounts did not show that the debtor owed National Realty $105,000 or any other sum. According to those accounts the debtor did not owe National Realty any money at 30 June 1988.
Mr Harari did not accept that the directors had passed a resolution to the effect of the distribution but I am satisfied that the minute of the meeting on 30 June 1988 is a recognition and acceptance that there was a distribution of the net income of the trust to Seventy‑Seventh Shackle Pty Ltd. Mr Harari contended that Mr and Mrs Marmion would not have been aware of what they signed but there is no evidence to that effect and I can see no reason why I should not accept the minute as evidence of its contents.
It is significant that Mr Harari did not have the journals or the minute book available to him at the time he derived the figure of $335,354.36 as the debtor’s indebtedness to National Realty. In my opinion, the journals and the minute books make it clear that, to the extent to which any component of the $335,354.36 is represented by a figure in the journals showing a loan or advance to Seventy‑Seventh Shackle Pty Ltd set‑off against a distribution to Seventy‑Seventh Shackle Pty Ltd as trustee of the S Messina Family Trust, it reduces pro tanto the amount of the debtor’s indebtedness to National Realty. Mr Harari was not prepared to accept that proposition but it was implicit in Mr Harari’s evidence, to which I have referred, that he recognised or acknowledged this fact. The following questions and answers in the course of the cross‑examination of Mr Harari are illuminating:
“Q:Can I ask you this: had you seen those journals and those minute books at the time you got your figure of $335,354.36?
A:No, I had not seen them, but had I seen them I would then have quizzed Mr Messina a bit more to say, ‘Hey, this shows that there was a distribution.’ Now, whether we - whether he would have stuck by the fact that the payments were made to him and not to his Trust is another question, but that is - the way I’ve treated - the way I’ve come up with that figure of 335, irrespective of the distribution, that figure of 335 were drawings by Mr Messina. Now, whether these drawings were to be applied to the Trust is - - -
Q:But that is what the resolutions in the journals show?
A:No, no, with all due respect, the resolution only says to apply the profit - to credit 77 Shackle with a profit. The only change it would have made to the accounts prepared by me would have shown a liability to 77 Shackle of the profits and any further profits accumulated. If there had been no drawings against it it would have remained at that - what I am saying: National Realty would have shown a debt to 77 Shackle equivalent to the profits and it would have shown a debt by Mr Messina of his drawings, if this drawings were not applied against 77 Shackle.
Q:Yes, but in the journals you have taken me to, Mr Messina’s drawings have been applied to 77 Shackle, have they not?
A:Yes.
Mr Harari acknowledged that the tax return which had been prepared by his firm was consistent with the resolution in the minute book and the accounts of the company signed by Mr and Mrs Marmion.
What the accounts showed was that the payments shown in the cashbooks as payments to the debtor were treated as payments to, or on behalf of Seventy‑Seventh Shackle Pty Ltd, this being the effect of the journal entries. Ultimately, Mr Harari agreed that the effect of the resolution of the directors to make the distribution meant that there was an error in Mr Harari’s approach in respect of the year ended 30 June 1988 because he did not have the information available to him.
I am satisfied that in respect of the year ended 30 June 1988 National Realty did not advance or lend any money to the debtor. To the extent that it did make any loans or advances it made them to Seventy‑Seventh Shackle Pty Ltd and such loans or advances were off‑set against the distribution of income made to it, the net distribution being loaned back by it to National Realty. It follows from this finding that the amount of $105,236.20 used by Mr Harari to derive a total indebtedness of the debtor to National Realty of $335,354.36 should not have been included in that amount.
Year ended 30 June 1989
A similar situation applies to the accounts for the year ended 30 June 1989. The draft accounts showed an unsecured loan from the S Messina Family Trust of $149,147 (1988 was shown as $6,650) and the draft income tax return showed a distribution of income of $245,449 to the S Messina Family Trust. There was a minute of a meeting of directors dated 30 June 1989 in the same terms as the minute of 30 June 1988 save for the change of year, signed by the directors Mr and Mrs Marmion, as well as a signed copy of the accounts for National Realty for the year ended 30 June 1989. The journal showed that there was a distribution to the S Messina Family Trust of $227,354.42 and a loan back of that amount to National Realty, thereby creating a loan owing to the S Messina Family Trust for the same amount. An amount of $77,455.50 was shown in the journal as a loan to the S Messina Family Trust. This is significant because an amount approximating this amount namely, $77,605.50 together with car expenses of $7,449.08, were the figures used by Mr Harari in respect of the year ended 30 June 1989 as showing debts of that amount by the debtor in favour of National Realty. The journal also showed motor vehicle expenses of $7,141.89 as a loan to the S Messina Family Trust, the narration being “Transfer of M/V Exp”. When confronted with the journal entries, Mr Harari said that the journal entry showed that $77,455.50 was shown as loans or advances to the S Messina Family Trust to offset the profits and that the journal charged what had been said to be loans to the debtor to the S Messina Family Trust which were then set off against the distribution of income to it. In other words, there were no loans to the debtor; such loans as were made were made to the S Messina Family Trust. The journal did not show any loans to the debtor.
I am satisfied that in respect of the year ended 30 June 1989 National Realty did not advance or lend any money to the debtor. To the extent that it did make any loans or advances it made them to Seventy‑Seventh Shackle Pty Ltd and such loans or advances were off‑set against the distribution of income made to it, the net distribution being lent back by it to National Realty. It follows from this finding that the amounts of $77,606.50 and $7,449.08 used by Mr Harari to derive a total indebtedness of the debtor to National Realty of $335,654.36 should not have been included in that amount.
Year ended 30 June 1990
A similar situation also applies in relation to the accounts for the year ended 30 June 1990. Mr Harari had derived $73,848.68 as loans or advances to the debtor and $5,334.97 as car expenses paid on his behalf. The journal showed that $73,848.68 was charged as a loan to the S Messina Family Trust so that what had been said to be loans to the debtor had in fact been charged against the S Messina Family Trust loan account, in effect meaning that the loans were to that trust rather than to the debtor. The journal also showed that on 30 June 1990 there was a distribution to the S Messina Family Trust of $82,323.18 which was shown as a loan back to National Realty by the S Messina Family Trust. The amount of the distribution was lent back to National Realty. The draft income tax return showed a distribution of income of $92,102 to the S Messina Family Trust. There was also a minute of a meeting of directors on 30 June 1990 attended by Mr and Mrs Marmion at which a resolution was passed in relation to the distribution of income for the year ended 30 June 1990. It was in the same terms as the resolutions for the previous two years and was signed by Mr Marmion. There was also a resolution dated 21 December 1990 signed by Mr and Mrs Messina in which the accounts of National Realty were resolved to be adopted. In the minute book there is a signed copy of the 30 June 1990 accounts signed by the debtor and those accounts reflected a distribution of income from the National Realty Unit Trust to the S Messina Family Trust. Although there is an item in the journal for motor vehicle expenses of $5,334.97 they are not shown as advances or loans to, or otherwise debited to, the debtor. The journal does not show any loans to the debtor.
I am satisfied that in respect of the year ended 30 June 1990 National Realty did not advance or lend any money to the debtor. To the extent that it did make any loans or advances it made them to Seventy‑Seventh Shackle Pty Ltd and such loans or advances were off‑set against the distribution of income made to Seventy‑Seventh Shackle Pty Ltd, the net distribution being lent back by it to National Realty. It follows from this finding that the amounts of $73,848.68 and $5,334.97 used by Mr Harari to derive a total indebtedness of the debtor to National Realty of $335,654.36 should not have been included in that amount.
Year ended 30 June 1991
In respect of the financial year ended 30 June 1991, the journal showed that payments for, or on behalf of, the debtor were charged against the S Messina Family Trust. The total amount of $55,692 was shown as a loan to the S Messina Family Trust and, again, this was one of the component figures from which Mr Harari derived the debtor’s indebtedness to National Realty. No income, according to the journal, was distributed during, or in respect of, this year. Although there is an item in the journal for motor vehicle expenses of $12,679.80 they are not shown as advances or loans to, or otherwise debited to, the debtor. The journal does not show any loans to the debtor.
The 1991 annual return for National Realty was signed by the debtor and it was acknowledged by him that the key financial data was prepared on the same basis as the earlier accounts of National Realty.
I am satisfied that in respect of the year ended 30 June 1991 National Realty did not advance or lend any money, certainly not $55,692 or $12,679.08 to the debtor. To the extent that it did make any loans or advances it made them to Seventy‑Seventh Shackle Pty Ltd. It follows from this finding that the amounts of $55,692 and $12,679.08 used by Mr Harari to derive a total indebtedness of the debtor to National Realty of $335,654.36 should not have been included in that amount.
It can therefore be seen that the financial records and documentation produced during the hearing showed that the debtor was not indebted to National Realty in the sum of $335,354.36. The documentation produced in the course of the hearing showed that the debtor’s evidence was not in accordance with the financial records which had been kept. The debtor’s understanding of what he owed to National Realty had varied from time to time. When Mr Harari first spoke to the debtor about the matter on 6 February 1996 he was told that the amount owing to National Realty was $100,000. Mr Harari’s explanation for reaching the figure he had was that he had considered the cash books of National Realty which showed payments to the debtor. It is now apparent from the financial records and the journals produced during the hearing that the payments were treated, and dealt with, as payments to, or on account of, the S Messina Family Trust.
The draft accounts of National Realty for the year ended 30 June 1990 showed an unsecured loan from the S Messina Family Trust of $151,558 as at 30 June 1990 which loan, according to the draft accounts for the period ended 31 January 1993, had been reduced to $17,971 as at 31 January 1993. In re‑examination, Mr Harari said that the reason why the debt due from National Realty to the S Messina Family Trust had reduced from $152,000 (in fact it was $151,558) in 1990 to $17,000 (in fact it was $17,971) as at January 1993 was because the debtor’s drawings had been charged to the Family Trust account in the books of National Realty. In the first three years between 30 June 1988 to 30 June 1991, there were accumulated profits of $400,000 which were distributed to the S Messina Family Trust but there was debited against that amount the debtor’s personal drawings, leaving a balance of approximately $150,000 owing to the trust as at 1990.
Consequences of analysis of financial records
The overall result of this analysis of the financial records of National Realty between 1987 and 1993 is that National Realty was not a creditor of the debtor for $335,354.36 and should not have been allowed to vote at the meeting in respect of that amount. In those circumstances the resolution would not have been passed by at least three‑fourths in value of the creditors present personally, by attorney or by proxy. National Realty should not have been admitted as a creditor for $335,354.36. According to my calculations the indebtedness of the debtor to National Realty claimed by the debtor is eliminated as a result of the analysis to which I have referred. However there were no accounts signed by the directors tendered in evidence for the year ended 30 June 1991. Even if one relies only on the years in respect of which there were accounts signed by the directors, namely the years ended 30 June 1988, 1989 and 1990, the most that National Realty could have voted for in value was $71,213.90, namely $335,354.36 less the total claimed for the years ended 30 June 1988, 1989 and 1990, namely $264,140.46. Again, the special resolution would not have been passed by the requisite three‑fourths in value of the creditors present personally, by attorney or by proxy. There were $473,745 worth of votes cast. Of the $369,452 votes “for” at least $264,140.46 should not have been allowed. This would have left $105,311.54 “for” and $104,292 “against”.
In final submissions, Counsel for the debtor did not seek to challenge the consequences of the analysis which I have undertaken in respect of the claimed indebtedness of the debtor to National Realty arising during the years ended 30 June 1988, 1989 and 1990, but rather, concentrated on the subsequent years. He submitted that the books of account of National Realty, namely the cash books, showed drawings and expenses for the debtor for the years from 1990/1991 through to 1995/1996, totalling $290,053. This comprised:
Drawings Expenses 1990/1991 $ 55,692 $12,680 1991/1992 $ 41,193 $11,648 1992/1993 $ 34,136 $ 7,826 1993/1994 $ 41,948 $ 5,275 1994/1995 $ 34,207 $45,018 1995/1996 $ 400 $ 30 TOTAL: $207,576 $82,477
It was then submitted that the credit of $223,770 allowed by Mr Harari in respect of the sale of the two properties was in error because the debtor only owned half the interest in the Templestowe property with his wife and secondly, he was personally liable for these moneys under a guarantee, so these moneys should not have been credited as repayment of his loan account when he was paying the amount personally to the applicant pursuant to the guarantee. I do not need to resolve these issues in relation to these credits because the thrust of the submission was that when the $290,053 was taken into account as the value of the votes entitled to be cast by National Realty, together with the amount of $33,700 representing the value of the votes cast by the other creditors in favour of the proposal for the composition, there was a total of $323,053 in favour and $104,292 in value against the proposal, so that it was still carried by a three‑fourths majority of creditors voting personally, by attorney or by proxy. However, as I have identified earlier, the journal for the year ended 30 June 1991 showed the amount of $55,692 as a loan to the S Messina Family Trust and the motor vehicle expenses of $12,680 were not “journalised” as a loan or advance to the debtor. The journal for the year ended 30 June 1992 shows the amount of $41,192.65 as “loan ‑ SMF/T”. I take this to be a reference to a loan to the S Messina Family Trust. There are no motor vehicle expenses “journalised” as loans or advances to the debtor. The journal for the year ended 30 June 1993 is equivocal as there is an entry showing $34,136 simply as “Messina”. However, that entry has an account designation “859.01”, which is the same account designation as is shown for a loan account in respect of “77 Shackle” the name of the trustee of the S Messina Family Trust. Again, there are no motor vehicle expenses “journalised” as advances or loans to the debtor. At best, therefore, even on the debtor’s case, the amounts of $55,692 and $41,193 are to be deducted from the figure of $290,053 relied upon by the debtor as the value of the debt for which National Realty was entitled to vote. On this basis the resolution would not have been carried by the requisite three‑fourths majority in value of creditors voting personally, by attorney or by proxy.
This is sufficient to resolve the matter before the Court as I am satisfied on the evidence that, for the reasons to which I have referred, in the terms of s 222(1) of the Act, there is a doubt on a specific ground whether the composition “has been accepted by a special resolution of a meeting of creditors under section 204”. The doubt on the specific ground is that votes to the value of the order of $264,140.46 at the least, were accepted in favour of the resolution when they should not have been allowed to have been voted. The consequence is that the resolution was not passed as a special resolution, namely by a majority of three‑fourths in value of creditors voting personally, by attorney or by proxy.
As argument was addressed on a number of other matters, I should make findings in respect of them.
Was National Realty entitled to vote on the composition?
It was submitted by the applicant that National Realty was not entitled to vote at the meeting of creditors because there was no valid resolution of National Realty or of its directors authorising it to do so. Article 73 of National Realty’s Articles of Association provided:
“At a meeting of directors, the number of directors whose presence is necessary to constitute a quorum is such number as is determined by the directors and, unless so determined, is 2.”
On 21 September 1990 a meeting of directors of National Realty was held at which Kevin Joseph Marmion and Elsie Joyce Marmion resigned as directors and the debtor and his wife Brenda Messina, were appointed as directors. The minute book of National Realty shows a subsequent meeting on 7 March 1995 at which the debtor and his wife were present.
The minute book of National Realty also includes minutes of two meetings held on 15 February 1996. The minute of what would appear to be the first meeting, showed Salvatore Messina (the debtor), Mario Messina and Santino Genovese as present with the name “Brenda Eleanor Messina” ruled out. The minute shows that it was resolved to appoint Mario Messina and Santino Genovese as directors, to appoint Mario Messina as secretary and the resignation of Salvatore Messina and Brenda Eleanor Messina as directors was accepted to be effective as from the close of the meeting. At this meeting there was not a quorum of directors in accordance with Article 73. The debtor was the only director present. If in fact this was the first meeting then it was not conducted in accordance with the Articles. Even if it was the second meeting on that day, it was still not conducted in accordance with the Articles. There was no evidence that Brenda Messina had consented to the appointment of Mario Messina and Santino Genovese as directors. The minute of what would appear to be the first meeting showed Salvatore Messina, Mario Messina and Santino Genovese as present and recorded a resolution to approve a transfer of 97 shares in the company from the debtor to Mario Messina.
The next minute in the minute book is of a meeting of directors of National Realty held on 19 February 1996 at which the debtor and S Genovese were shown as present. According to the minute:
“It was resolved that at a meeting of creditors of Sam Messina to be held on 13th March 1996, or any other date, the Company agreed not to participate in distributions from a Part X proposal to be put to the meeting if the meeting agrees to Sam Messina’s proposal.
The Company reserves the right to vote at a meeting of creditors.
The Company is to appoint Mr Raymond Harari at any such meeting of creditors and is to give him a proxy to vote at such meetings on the appropriate forms to be received from the Controlling Trustee.”
It is submitted by the applicant that this resolution is invalid and ineffective as Mario Messina and Santino Genovese had not been properly appointed as directors.
However, s 226(1) of the Corporations Law provides that the acts of a director are valid notwithstanding any defect that may afterwards may be discovered in his appointment or qualification. In Wagner v International Health Promotions (1994) 15 ACSR 419 Santow J in an obiter dictum held that an appointment of directors by a board meeting where there was not a quorum constituted a “defect” in the appointment of those directors which was cured by s 226 of the Corporations Law. It is submitted by the applicant that s 226 does not assist the debtor as it only applies to acts of the putative directors until a defect in validity is “discovered”: Hedges v NSW Harness Racing Club Ltd (1991) 9 ACLC 1025, 1029. However, it is not clear from the evidence as to when this defect in the appointment of the directors was discovered. Mr Harari’s office had prepared the minute showing Mrs Messina as a director and although Mr Harari said he would have seen a copy of the minute before he went along to the meeting of creditors, it did not register with him that Mrs Messina had not attended the meeting as had been anticipated when his office had prepared the minute.
Having regard to the state of the evidence it seems to me that s 226 of the Corporations Law validates the appointment of Mr Harari to vote at the meeting, notwithstanding what appears to be a defect in the appointment of the directors to pass the relevant resolution.
It was also submitted that the decision purportedly by National Realty’s directors not to participate in the distribution was an “uncommercial transaction” as defined in s 588FB of the Corporations Law as there was no benefit to National Realty in entering into the transaction. In the absence of any evidence from the putative directors as to how they came to pass the resolution, I do not consider it appropriate to make a determination on this matter in the absence of submissions on behalf of those directors.
Were material particulars omitted from the statement of affairs or at the creditors’
meeting?
Failure to provide accurate information concerning National Realty
The Court is empowered under s 222(4) of the Act to make an order declaring a deed of arrangement or composition void if it 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 content of materiality in this context was considered in Re Segal; Lensworth Finance Limited v Segal & Ward (1975) 9 ALR 154 where at 157 Riley J said:
“The statement of affairs required by s 195 and the answers which the debtor is required by that section to give to questions put to him at the meeting provide the basic information on which the creditors decide which of the courses available to them under s 204(1) they should adopt. It is essential that that information should be full and correct: the creditors are entitled to all available information about the debtor’s ‘conduct, trade dealings, property (and) affairs’ before they make their decision: compare s 222(4)(a). Bearing in mind the purpose of the statement of affairs I am of opinion that a particular is material within the meaning of s 222(4)(b) if it is a particular which would be relevant to and might be likely to affect the making of the decision of the creditors under s 204(1).”
(See also Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307, 319, 336 and Re Cufari; Ex parte Deputy Commission of Taxation v Huppatz (1992) 34 FCR 544, 549). Although Olney J in Re Horne; Ex parte Deputy Commissioner of Taxation v Horne and Pratt (unreported, 10 May 1996) considered that this statement was no longer strictly correct having regard to changes in the legislative scheme and, in particular, the introduction of a trustee’s report and opinion (s 189A) the statement was cited with approval by a Full Court of the Federal Court in Policy Nominees Pty Ltd (Prov Liq appt) v McDougall (unreported, 16 October 1997, Ryan, Whitlam and Marshall JJ) at 18.
In his statement of affairs the debtor showed National Realty as an unsecured creditor in the amount of $450,277. On the debtor’s own evidence, that figure was incorrect and substantially overstated. The debt due to National Realty was a material particular in the statement of affairs as it accounted for almost 75% of the total of unsecured creditors. However it does not appear from the evidence that the debtor himself, at the meeting of creditors, propounded the amount of $335,354 as the debt owing to National Realty. Rather, it appears that that figure was the amount put forward by Mr Harari as the amount of the debt for which he was proposing to vote on behalf of National Realty. In this respect I am not satisfied that the debtor gave false or misleading information in answer to a question put to him with respect to his conduct or examinable affairs at the creditors’ meeting.
However, I am satisfied that he did include an incorrect and material particular in his statement of affairs in the manner to which I have referred. If the issue had arisen as to whether, pursuant to s 222(4), I should make an order declaring the deed void on this ground, I would have been satisfied that it was in the interest of the creditors to do so, having regard to the effect of the amount of the debt claimed to be owing to National Realty on the overall amount of unsecured creditors and on the consequences of the voting of unsecured creditors. Although the amount in respect of which National Realty voted at the meeting was substantially less than the $450,277 found in the statement of affairs, that amount itself was inaccurate for the reasons to which I have already referred. Thus, it cannot be said that the incorrect and material particular found in the statement of affairs was corrected at the meeting of creditors. In my opinion the incorrect statement of the debtor’s indebtedness to National Realty was a statement which was relevant to the making of the decision of the creditors under s 204(1) of the Act and might be likely to affect that decision.
Failure to disclose shares in National Realty
The statement of affairs disclosed shares in National Realty (Vic) but there was no reference to the shares in National Realty. The date of the statement of affairs was 13 February 1996 and as at that date, the 97 shares subsequently transferred by the debtor were still registered in his name. It was submitted by the applicant that a failure to disclose shares in a trust company constitutes an omission of a material particular from the statement of affairs for the purposes of s 222(4)(b) of the Act, relying on Chiragakis v Deputy Commission of Taxation (1986) 68 ALR 527, 537. However, according to the debtor, National Realty no longer held a licence under the Estate Agents Act 1980 (Vic) and had ceased carrying on business around January 1994. The debtor’s claim was that National Realty had, in some way, transferred its business to National Realty (Vic) and that the debtor’s shares in National Realty (Vic) were disclosed in the statement of affairs.
I consider that the failure of the debtor to disclose in his statement of affairs his holding of shares in the capital of National Realty was an omission of a material particular consistent with the approach to materiality adopted in Re Segal (supra). The debtor had carried on his commercial and income-earning activities through National Realty. The nature of the transfer of the estate agency business from National Realty to National Realty (Vic) was somewhat obscure and as National Realty was the vehicle for the debtor’s commercial activities it was relevant for creditors to know that as at the date of his statement of affairs the debtor owned all but two of the issued shares in National Realty. In my view, it was also likely to affect the making of a decision by a creditor as to which way to vote on the proposal as the ownership of those shares represented a potential (and I emphasise the word potential) source of available funds. In the events which occurred, National Realty was wound‑up but on the date of the statement of affairs that position had not been reached. There was also the question of what was the consideration for the transfer of its business to National Realty (Vic).
It was also submitted by the applicant that the financial records of National Realty disclosed that it had continued to trade until May 1995 because wages and motor vehicle expenses were paid and lease payments were made up to that point of time and that between January and May 1995 National Realty received income (by way of commissions) of $55,000. However, I am not satisfied on the evidence before me that National Realty was in fact trading during 1995. It did not hold a licence under the Estate Agents Act 1980 (Vic) during 1995 and the evidence did not disclose that the relevant expenses had been incurred during 1995 as distinct from being incurred earlier and being paid during 1995. The same position applies in relation to the commissions. Although those commissions were received during 1995, the evidence does not disclose that the relevant transactions which gave rise to the commissions occurred during 1995. The evidence is just as consistent with that amount being earned from transactions which occurred during 1994.
Accordingly, had it become relevant, I would have been prepared to exercise the powers given to the Court under s 222(4) in respect of the failure of the debtor to disclose the shares registered in his name in National Realty in the statement of affairs.
Failure to disclose the debt due to the orthodontist
An orthodontist, Mr Dickenson, had carried out orthodontic work for the debtor’s daughter and in an affidavit the debtor had sworn he was prepared to pay the orthodontist what he owed him once the orthodontist completed the orthodontic work. The debt due to the orthodontist was not disclosed in the statement of affairs and at the meeting of creditors the debtor said that there was an agreement with the orthodontist to finish the work. The amount of the debt was apparently $1,000 and in all the circumstances, I do not regard the omission of the debt due to the orthodontist as material in the sense in which that expression was considered in Re Segal (supra).
Failure to disclose accurately the debtor’s tax liability
In the statement of affairs the debtor disclosed a contingent liability of $20,000 as the estimate of income tax for the year 1994/1995. As noted earlier, this was a mistake made by Mr Burridge who had said in an affidavit that “there was according to the debtor liability to pay on the sum of $20,000. Through an error on my part I referred to that liability as tax of $20,000.” The effect of the mistake was to overstate the contingent liability but in all the circumstances of the debtor’s overall financial position, I do not regard this incorrect particular in the statement of affairs as being material. In any event, I am not satisfied that it would be in the interest of creditors to declare the deed of arrangement void on this ground alone.
The conduct of the trustee
The applicant sought the following relief against the trustee:
“(a)An inquiry pursuant to section 212B of the Bankruptcy Act be made into the conduct of the second respondent in that he:
(i)failed to discharge the duty imposed upon him by section 190(2)(b) of the Bankruptcy Act to make enquiries and investigations in connection with the debtor’s property and examinable affairs;
(ii)permitted National Realty Pty Ltd (ACN 006 0802 866) to vote at the meeting on 13 March 1996 and to vote as to the amount of $335,654.00 and refused to adjourn the meeting pursuant to section 201 of the Act;
(b)Alternatively, a declaration that the second respondent failed to discharge the duty imposed on him by section 190(2)(b) of the Bankruptcy Act to make enquiries and investigations in connection with the debtor’s property and examinable affairs.”
It was accepted by the applicant that if the composition was set aside, it was not seeking any further relief against the trustee, but it was seeking to use the conduct of the trustee on any issue as to costs.
The criticism of the trustee’s conduct falls into two general categories:
(a)He did not investigate sufficiently or adequately the affairs of National Realty and the debtor’s indebtedness to it:
(b)he did not adjourn the creditors’ meeting to enable further investigation of National Realty’s entitlement to vote.
It is useful in this context to summarise again the evidence as to what the trustee did and what was available to him.
The trustee instructed Mr Burridge, his insolvency manager, to make the relevant enquiries into the affairs of the debtor. Mr Burridge had 30 years experience in bankruptcy matters and the trustee had never had any reason to fault his conduct. Mr Burridge met the debtor and Mr Harari on 6 February 1996 when Mr Harari gave him a statement of approximate assets and liabilities which included a debt to National Realty in excess of $100,000.
Mr Burridge understood that the debtor owed $450,000 to National Realty as a result of drawing money out of the company. Mr Harari said he believed that the debtor’s debt was over $500,000, but the debtor did not believe it was that much and so they wrote down “in excess of $100,000”. Mr Burridge then asked who would be able to give him the right answer and Mr Harari said he had the books of the company, he was getting his staff to write them up to date and he would give Mr Burridge the figure as soon as possible. From then on Mr Burridge was waiting for the figure. Before the trustee’s report was finalised, Mr Harari gave him a figure of the order of $450,000 and said that was the figure according to the books at that time.
On 8 February 1996 the trustee attended a meeting with Mr Burridge, the debtor and Mr Harari, at which Mr Burridge asked for copies of the companies’ accounts. On 13 February 1996, Mr Burridge received the sworn statement of affairs showing a debt to National Realty of $450,277. Two days later he obtained company searches in relation to National Realty, National Realty (Vic) and Seventy‑Seventh Shackle Pty Ltd. On 15 February 1996 the trustee told Mr Burridge that he did not hold any accounts of National Realty or Seventy‑Seventh Shackle Pty Ltd and that Mr Burridge should obtain the latest financial accounts from Mr Harari.
The trustee’s report dated 26 February 1996 was drafted by Mr Burridge and discussed with the trustee before he signed it. It disclosed National Realty as a creditor for $450,277. In that report it was stated that:
“I have also been given an assurance that I will have the financial accounts of both National Realty Pty Ltd and National Realty (Vic) Pty Ltd showing the debts owed by the debtor, within the next 24 hours.”
After the trustee’s report was filed with the registrar, but before the notices of the creditors’ meeting were sent out on 27 February 1996, Mr Harari told Mr Burridge that the figure of $450,000 was probably overstated and it was probably as much as $100,000 less. Mr Harari said he would let Mr Burridge know the figure as soon as possible. Mr Burridge waited for the figure but he did not have it by 7 March 1996 when he stopped working due to illness.
Those financial accounts were not given to the trustee within 24 hours. The trustee says:
“On 12 March 1996, I interviewed the debtor’s Accountant Mr Harari when he delivered several proofs of debt including those of National Realty Pty Ltd and National Realty (Vic) Pty Ltd. On the same date I sighted the accounts relating to the debt owing to National Realty Pty Ltd by the debtor. The said accounts were in the name of the Sam Messina Family Trust being the Trust operated by the company. The amount owing is shown in the accounts as $335,354.00 but the amount shown in the proof of debt is $335,654.00. I accepted the proof of debt in the sum of $335,654.00. The $300.00 discrepancy did not in any way affect the question of whether the resolution would or would not be passed.”
The trustee was in error as to the identity of the trust operated by National Realty as was Mr Burridge; it was the National Realty Unit Trust. The trustee was given a balance sheet prepared by Mr Harari for what was said to be the S Messina Family Trust as at 30 June 1995 which showed as an asset “Loan Account - Sam Messina” - $335,354. If the balance sheet was intended to be for the business conducted by National Realty, as I find it was, it should have been headed “National Realty Unit Trust”, the Sam Messina Family Trust through its trustee Seventy‑Seventh Shackle Pty Ltd being the holder of units in the National Realty Unit Trust. The same balance sheet shows a current liability of $46,515 to 77th Shackle Pty Ltd which confirms that the balance sheet was for the National Realty Unit Trust. The accounts to which I have referred show that Seventy‑Seventh Shackle Pty Ltd was lending back to National Realty the distributions of income made to it as trustee for its beneficiary.
It is now clear that the amount accepted by the trustee as the debtors’ indebtedness to National Realty was incorrect, but the information and accounts which demonstrate that fact were not available to the trustee at the time he signed his report on 26 February 1996 or on the day of the creditors’ meeting. The trustee, at the time of his report, had not looked at any documents relating to National Realty or Seventy‑Seventh Shackle Pty Ltd but had relied on the statement of affairs and the information Mr Burridge had obtained from Mr Harari. He did not consider that he should enquire into the accounts of a creditor. The trustee did not question the debt shown in his report as $450,277 but Mr Burridge asked for an explanation of the difference between that amount and the initial amount of “in excess of $100,000”. Mr Burridge was to enquire into the matter and Mr Harari was to provide financial statements to support what the exact figure was.
The trustee saw the balance sheet showing the debtor’s debt of $335,354 on the day before the creditors’ meeting and Mr Harari showed the trustee financial schedules for a number of years showing the movement of the debtor’s loan account with National Realty.
The trustee had no real understanding of the trust structure which existed in relation to National Realty or Seventy‑Seventh Shackle Pty Ltd. Although Mr Harari had given him schedules supporting the debt of $335,354 he had not seen any published accounts or any resolutions or other documents adopting any accounts. However he had not been provided with any documents which cast doubt on the amount of the debtor’s debt to National Realty.
Although Mr Burridge was aware that National Realty had filed annual returns he did not obtain any copies of them, nor did he ask the debtor or Mr Harari who lodged the returns whether any accounting documents were prepared in relation to them. The trustee was aware of the existence of the trust structure but misunderstood the manner in which it was structured.
Although the trustee made a number of mistakes in relation to the work he undertook, I am satisfied that the information supplied to Mr Burridge and the trustee and the circumstances surrounding that information was such that the trustee did not act in breach of such duty as was imposed on him by s 190(2)(b) of the Act to make enquiries and investigations in connection with the debtor’s property and examinable affairs.
The applicant submits that not enough investigative work was carried out by Mr Burridge and the trustee. In particular, the trust structure and the indebtedness of the debtor had not been pursued. However, Mr Burridge had been told that the books of account would be made available; the fact that they were not supplied was not due to his default. Although the amount of the claimed indebtedness of the debtor had varied from in excess of $100,000 to some $450,000, it had been the subject of consideration by Mr Harari and although the trustee and Mr Burridge misunderstood the nature of the trust structure, the trustee was entitled, for the purposes of the creditors’ meeting, to act upon what he and Mr Burridge had been told and shown by Mr Harari. The matter had been considered on several occasions, was the subject of analysis by a qualified accountant and was ultimately said to be derived from books of account, those being the source of the figures in the schedules shown by Mr Harari to the trustee. The trustee had not been provided with any documents which cast doubt on the debt.
The relevant power and obligation found in s 190(2)(b) is to make “such inquiries ... as the trustee considers necessary”. It is not an obligation cast in absolute terms such as is found in s 19(1)(b) of the Act which imposes a duty on the trustee of a bankrupt estate “to ascertain the assets and liabilities of the bankrupt”. It must be remembered that the trustee has a limited time within which to make the enquiries and carry out the investigations as the creditors’ meeting must be held not later than 35 days after the authority is signed by the debtor: s 194(1)(a) of the Act.
The trustee does not have the time, and is not under an obligation, to undertake an audit of the debtor’s affairs. As Olney J said in Re Horne; Ex parte Deputy Commissioner of Taxation v Horne and Pratt (supra):
“What is clear is that the legislation does not require the controlling trustee to audit the debtor’s statement of affairs and to certify to the creditors the correctness or otherwise of the statement. His power to inquire and investigate is limited to matters he considers necessary. In every case it will be for the controlling trustee consistent with his duty to the creditors to determine what inquiries and investigations are necessary. The trustee’s ultimate function is to ensure that he can express the opinion required by s 189A(3) with such a degree of authority that the creditors can confidently act upon the opinion if they so desire.”
In my opinion the trustee acted consistently with this statement of principle. He was not faced with conflicting evidence of the debt; rather he was presented with an evolving situation which culminated in the receipt of a proof of debt prepared by a qualified accountant supported by reference to schedules said to have been derived from books of account. There were no documents produced to the contrary. Although the applicant filed an affidavit by one of its managers, Edward Cumper, in which draft financial statements and accounts of National Realty were exhibited, those documents were not made available to, or known by, the trustee prior to or at the creditors’ meeting. Although these financial statements and accounts were prepared by Mr Harari’s firm there is no evidence that their existence was made known to the trustee prior to or at the creditors’ meeting.
The trustee’s conduct is also criticised on the basis that he permitted National Realty to vote at the creditors’ meeting in respect of an amount of $335,654 and refused to adjourn the meeting pursuant to s 201 of the Act. Under s 201, as it existed at the time of the creditors’ meeting, any question as to the right of a person to vote at the meeting or as to the amount of the debt in respect of which a person was entitled to vote at the meeting was to be determined by the chairman who had the power, if he thought necessary to do so, to adjourn the meeting for a period not exceeding fourteen days to enable him to investigate the matter. The trustee had an obligation to determine the amount of any claim by a creditor.
The applicant says that the trustee was urged at the meeting by Mr McVeigh and the applicant’s solicitor to adjourn the meeting to investigate the claimed debt to National Realty, the value of National Realty’s rent roll, whether National Realty was entitled to vote where a winding‑up application had been presented against it, the debtor’s failure to lodge income tax returns and his disposal of the 97 shares he held in National Realty between the date he signed the statement of affairs and the date of the creditors’ meeting. The applicant also says that it is apparent from the trustee’s evidence that his understanding was that Mr Harari had the right to vote on any motion for adjournment using the $335,654 of National Realty votes.
Notwithstanding these matters, the trustee made his decision not to adjourn the meeting because he saw the reason of the adjournment as being to enquire into National Realty rather than the activities of the debtor and that such reason was insufficient to adjourn the meeting. Although there was a discussion that there should be an adjournment to enable an investigation into the debtor’s debt to National Realty, the trustee said he was satisfied that National Realty was a creditor on the basis of what Mr Harari had produced with respect to the debt. The trustee said:
“Having been appointed the chairman of the meeting I refused to adjourn same because I was satisfied that sufficient enquiries had been carried out for the purpose of the meeting. I believe and still believe that the sole purpose of the attempts to adjourn the meeting was to have National Realty Pty Ltd placed in liquidation so that the liquidator may exercise the power to vote on behalf of that company. Rightly or wrongly I did not regard and still do not regard that as a proper reason for the chairman to adjourn a meeting of creditors.”
The trustee submits that this complaint, as with the complaint relating to the acceptance of the amount for which National Realty could vote, is a complaint made against him as chairman of the meeting rather than in his capacity as trustee, so that it cannot be the subject of an enquiry into “the conduct of a trustee in relation to an authority under section 188” as contemplated by s 212B of the Act. However, I consider that an enquiry which was authorised under s 212B of the Act into the conduct of the trustee in relation to an authority under s 188 would include the conduct of a trustee in his capacity as chairman of the creditors’ meeting. The trustee’s conduct “in relation” to an authority under s 188 includes the trustee’s activities in relation to that meeting. Section 188(1)(e) contemplates that the authority to the trustee authorises him to call a meeting of creditors. That is what occurred in this case.
Power to adjourn meeting
It is said by the applicant that the trustee should have adjourned the meeting to investigate the extent of National Realty’s right to vote. The trustee had the power to adjourn the meeting independently and irrespective of any resolution of the creditors not to adjourn the meeting: s 201. The decision of the chairman of a creditor’s meeting as to a person’s right to vote at a meeting and as to the amount of the debt in respect of which a person is entitled to vote is subject to review by the Court: Re Levy; Ex parte Scholefield Goodman & Sons Ltd (1980) 50 FLR 99; Zantiotis v Andrew (1987) 80 ALR 23; Forshaw v Thompson (1992) 35 FCR 329; Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478. The procedure contemplated by the provisions relating to the calling of a creditors’ meeting to consider a debtor’s proposal is one intended to be implemented expeditiously: Forshaw v Thompson (supra) 342; Farrow Mortgage Services Pty Limited (In Liq) v Abeyratne (1993) 47 FCR 208, 215. In Farrow the Full Court of the Federal Court (Northrop, Sheppard and Wilcox JJ) noted that the power of adjournment conferred on the chairman of a creditors’ meeting by s 201 was “exceptional and should not be abused by repeated adjournments against the wishes of creditors”.
If I was considering a challenge to, or review of, the trustee/chairman’s decision pursuant to s 201 to allow National Realty to vote for the amount it claimed, I would look at all the evidence presented to the Court at the time of the application under s 222 and not just the evidence available to the chairman at the time he made his decision at the meeting: Re McLean; Ex parte Friends’ Provident Life Office (1992) 36 FCR 502, 510; Re Dingle; Ex parte Westpac Banking Corporation v Worrell (supra) 486. However the issue before me so far as the trustee’s conduct is concerned is whether he failed to discharge the obligation on him to make such enquiries and investigations in connection with the debtor’s property and examinable affairs as he considered necessary and whether he should have adjourned the meeting.
Those issues, insofar as they bear on whether there should be an enquiry into the trustee’s conduct and whether any orders declaratory or otherwise should be made against him, must be considered by reference to what was available and known to him on the day of the creditors’ meeting. When I consider those matters I do not consider that the trustee failed to discharge the duty imposed on him, nor do I consider that he should be the subject of criticism or censure for refusing to adjourn the creditors’ meeting to enable investigation of National Realty’s entitlement to vote. It is apparent that the trustee and Mr Burridge made a mistake and were labouring under a misunderstanding as to the nature of the trust structure. However that was, at least in part, brought about by the balance sheet which Mr Harari presented to the trustee headed “Sam Messina Family Trust”. That mistake and misunderstanding however, must be understood in the context of evolving information being supplied to the trustee by the debtor’s accountant. Although the amount of the claimed debt to National Realty had varied, by the time of the meeting it had crystallised into a figure which was supported by the schedules produced by Mr Harari. On the material available to the trustee on the day of the meeting he was entitled to accept what he had been given and what he was told and he should not be criticised retrospectively for what he did, albeit that further material now available shows he was incorrect.
Mr Burridge’s mistake in relation to the debtor’s potential tax liability was inadvertent, not deliberate and does not warrant criticism at this stage.
I have also reached the conclusion that the trustee should not be criticised for not adjourning the meeting. His reason for not adjourning the meeting was that he was satisfied on the basis of what Mr Harari had produced that National Realty was a creditor for the amount claimed and he believed that the purpose of the adjournment was to have National Realty placed in liquidation so that the liquidator could exercise the power to vote on behalf of the company. He did not regard that as a proper reason to adjourn the meeting and he was not challenged in cross‑examination on his holding of this belief.
I therefore conclude that no orders should be made against the trustee.
The application should be granted so far as relief against the debtor is concerned. The composition should be declared void. A sequestration order is sought by the applicant in its amended application in accordance with s 222(7). As an act of bankruptcy has been committed I consider that I should make a sequestration order unless the debtor shows some cause or reason which outweighs the public interest which arises when a person is unable to pay his debts: Rozenbes v Kronhill (1956) 95 CLR 407, 414; Re Morris; Ex parte Adams (1980) 48 FLR 341, 352; Re Burlock; Burlock v Deputy Commissioner of Taxation (1994) 49 FCR 522, 530 ‑ 531. The debtor submits that it would be grossly unfair and not in the public interest for a sequestration order to be made in the circumstances of this case where the debtor is 58 years old and he will lose his licence and his right to earn a livelihood if the order is made. However the fact an act of bankruptcy has occurred and the consequences which will follow for the debtor as a result of a sequestration order although unfortunate for him are not such as to persuade me that I should not make a sequestration order. If there is an effect on his livelihood it will be that he will not be able to be a licensed estate agent. Other employment will be open to him. A sequestration order should be made against the estate of the debtor, the act of bankruptcy having been established, namely his failure to comply with the bankruptcy notice and the declaration that the composition is void: s 40(1)(g) and (m). I will hear the parties on the form of orders which should be made as to costs.
I certify that this and the preceding thirty-six (36) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg
Associate:
Dated: 17 April 1998
Counsel for the Applicant: Mr J Delany Solicitor for the Applicant: Dunhill Madden Butler Counsel for the first Respondent: Mr G Rice Solicitor for the first Respondent: Cohen, Wooff & Weinberg Counsel for the Second Respondent: Mr T Irlicht Solicitor for the Second Respondent: Irlicht & Broberg Date of Hearing: 24, 25 February 1997 Date of Judgment: 17 April 1998
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