Re Palazzolo, J. v Ex parte Discusso, J.
[1991] FCA 408
•19 JULY 1991
Re: JOHN PALAZZOLO
Ex parte: JOHN DISCUSSO; WILLIAM FRANCIS CHALK; NINA CHALK; GUISEPPE VAACA;
MARIA VAACA; WARREN GRAHAME SAGGIN and BEVERLEY KARIN SAGGIN trading as
Southern Cross Produce and NEWSTART 259 PTY LIMITED trading as Global Fruit
Supply
And: JOHN PALAZZOLO and DAVID WILLIAM SISTROM
No. A 28/90X
FED No. 408
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE AUSTRALIAN CAPITAL TERRITORY
GENERAL DIVISION
Neaves J.(1)
CATCHWORDS
Bankruptcy - Composition - Application to declare composition void - Doubt whether composition accepted by special resolution of creditors - Special resolution passed on vote of proxy for substantial creditor - Proxy instrument failing to specify manner of voting in respect of the kinds of resolution that might be put at the meeting - Facsimile copy of proxy instrument only lodged with the chairman of the meeting - Exercise of discretion to declare composition void - Whether summary sequestration order should be made.
Bankruptcy - Composition - Application to set aside composition - Composition accepted on votes of creditors intending not to prove or take any part in composition - Such creditors entering into private arrangements with company associated with debtor - Material placed before creditors unsatisfactory - Material omissions in statement of debtor's affairs - Some evidence of sale of business by debtor to company for substantial sum after signing authority under s.188 of Bankruptcy Act 1966 (Cth) - Whether sufficient reason shown to set aside composition.
Bankruptcy Act 1966 (Cth), ss. 200, 222, 239.
HEARING
CANBERRA
#DATE 19:7:1991
Counsel for the applicants : Mr J.K. Chippindall
Solicitors for the applicants : Thorntons
Counsel for the respondent Palazzolo : Mr P.J. Dwyer
Solicitors for the respondent Palazzolo : J.S. O'Connor, Harris and Co.
Counsel for the respondent Sistrom : Mr I.J. Nicol
Solicitors for the respondent Sistrom : Blake Dawson Waldron
ORDER
Declares, pursuant to s.222(2) of the Bankruptcy Act 1966 (Cth), that the composition the subject of a resolution put to the meeting of the creditors of JOHN PALAZZOLO ("the debtor") on 20 March 1991 is void.
Makes a sequestration order against the estate of the debtor.
Declares that Mr Robert William Morton, a registered trustee, is the trustee of the estate of the debtor.
Orders that the costs of the applicants of and incidental to the application be taxed and paid out of the estate of the debtor as if they were the costs of a petitioning creditor.
NOTE: Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules.
JUDGE1
John Discusso, William Francis Chalk, Nina Chalk, Giuseppe Vaaca, Maria Vaaca, Warren Grahame Saggin and Beverly Karin Saggin trading as Southern Cross Produce and Newstart 259 Pty Limited trading as Global Fruit Supply (the applicants") have applied to the Court for an order that a composition between John Palazzolo (the debtor") and his creditors be set aside or, alternatively, be declared void. The applicants also seek a summary sequestration order against the estate of the debtor.
The evidence establishes that, on 11 December 1990, the debtor, pursuant to s.188 of the Bankruptcy Act 1966 (Cth), signed an authority authorising David William Sistrom, a registered trustee, to call a meeting of his creditors for the purposes of Part X of the Act and to take over control of his property. On the same day Mr Sistrom consented, in writing, to exercise the powers conferred on him by that authority (s.188(2)(a)). The signature of the debtor to the authority and the signature of Mr Sistrom ("the controlling trustee") were each attested by a witness (s.188(2)(b)).
Section 188(2)(c) of the Bankruptcy Act provides that an authority signed by a debtor under s.188 is not effective for the purposes of Part X unless -
"(c) within 10 days before signing the authority, the debtor gave to the trustee ...:
(i) a statement of the debtor's affairs; and
(ii) a statement indicating how the debtor proposes that his or her affairs be dealt with under this Part."
The reference in s.188(2)(c)(i) to a statement of the debtor's affairs is a reference to a statement of those affairs that contains such information as is prescribed for the purposes of that provision and is verified by affidavit, affirmation or statutory declaration (s.6A and definition of "affidavit" in s.5(1)). Rule 78(1) of the Bankruptcy Rules provides that a statement under s.188(2)(c)(i) of the Act is to be in a form to be approved by the Inspector-General in Bankruptcy, and verified by an affidavit in accordance with Form 10 in Schedule 1 to the Rules. Rule 78(2) sets out matters which the form is to require the debtor to state.
On 29 November 1990 the debtor had approached William Balfour Rangott, a Chartered Accountant and a partner of Mr Sistrom, for advice in relation to his affairs. Mr Rangott prepared a statement of affairs for the debtor's signature and did so on the basis of information, including a list of creditors, provided to him by the debtor on 29 November 1990 and of a perusal of documents recording judgments that had been obtained against the debtor. The debtor signed the statement of affairs on 10 December 1990 and swore an affidavit on that day that the statement was to the best of his knowledge and belief a true and complete statement of his affairs as at that date. The statement of affairs, however, was not in the form approved by the Inspector-General in Bankruptcy; it was in the form, Form 11, which had, prior to the amendments effected by the Bankruptcy Amendment Act 1987 (Cth) (ss.6 and 62) and Statutory Rules 1989 No.183 (s.17), been prescribed under rule 78 of the Bankruptcy Rules for the purposes of sub-s.195(1) of the Bankruptcy Act. How this came to occur has not been explained.
The statement of affairs showed assets of $65,100 and liabilities of $1,216,743 resulting in a deficiency of $1,151,643. The assets disclosed consisted of cash in hand ($100), household furniture and effects situated at 17 Pieman Crescent, Kaleen, A.C.T. ($5,000) and a 20% share in a company, Borrorale Pty Limited ($60,000). The company was incorrectly named in the statement of affairs. Its correct name is Barroale Pty Limited. The asset schedule also disclosed a 25% share in a partnership trading as Freddy Frapples, the estimated value of which was shown as "Nil". In his oral evidence Mr Rangott said that he had attempted, without success, to obtain further information from the debtor concerning the partnership business carried on under the name "Freddy Frapples". He agreed, however, that, at the initial meeting with the debtor on 29 November 1990, the debtor had informed him that the partnership had liabilities in excess of $100,000. So far as appears, no information was given to the creditors as to the assets or liabilities of the partnership.
The schedule of unsecured creditors listed 8 creditors. Their names and the amounts of their respective debts were shown as follows:
"1. Iannelli's $350,000
2. Marconi Fruit Supply P/L 438,960
3. L.Y. Hook and Co. P/L 208,811
4. Mr Robert Piagno 83,000
5. R. E. and N. Yip T/A Yep Lum and Co. 72,955
6. Sunfresh Fruit and Vegetable Merchants 5,933
7. Southern Cross Produce 14,084
8. M.J. Deveney P/L 25,000 $1,198,743"
The reference to "Iannelli's" is a reference to a company known as Tungsten Investments Pty Limited.
Two secured creditors were disclosed - Gregbo Investments Pty Ltd in respect of a mortgage over the property 17 Pieman Crescent, Kaleen, A.C.T. (which was said to be jointly owned by the debtor and his wife) and the State Bank of New South Wales in respect of a security over certain leased motor vehicles.
The debtor also stated that he had during the previous five years carried on business in partnership as a fruiterer and had kept normal business records in connection with that business.
Appended to the statement was a schedule of 13 contingent creditors with contingent debts totalling $294,423. The names of the creditors and the amounts of their respective contingent debts were shown as follows:
" Name Amount $
1. Mr Eric Evans 10368
2. Exotic Fruit Traders unknown
3. Allcrops Pty Ltd 7179
4. Golden Fruit and Vegetable Supplies 16889
5. Gordon Fong Pty Ltd 4611
6. Zappia Bros 53082
7. Global Fruit Supply 18315
8. Tristate Produce Merchants 25306
9. Bill Patton Pty Ltd 30054
10. J.W. Kirkwood Pty Ltd 41843
11. A. Leedow 6820
12. C.J. Lewis Pty Ltd 20560
13. Manariti Bros P/L 59396 $294423"
The evidence also shows that at the time the debtor signed his statement of affairs he had an interest in a lease of certain premises at Mawson and an interest in a sub-lease of certain other premises at Belconnen, both in the Australian Capital Territory. The statement of affairs made no reference to those interests.
The statement under s.188(2)(c)(ii) given to the controlling trustee on 10 December 1990 recorded that the debtor proposed to enter into a composition pursuant to Part X of the Act the key elements of which were to be a payment of $50,000 on or before 28 February 1991 and 36 payments of $1,500, the first of such payments to be made on or before 31 March 1991.
Before proceeding further, it is desirable to refer to other provisions of the Bankruptcy Act. The expression "composition" is relevantly defined in s.187(1) to mean an arrangement by which the creditors of a debtor agree to accept, in full satisfaction of the debts due to them, less than the full amount of those debts, whether in the form of money or other property and whether by instalments or otherwise.
Having consented to exercise the powers conferred by an authority under s.188, the controlling trustee is empowered by s.190(2), inter alia, to make such inquiries and investigations in connexion with the debtor's property and examinable affairs as he considers necessary (s.190(2)(b)). The expression "examinable affairs" is defined in s.5(1) to mean, in relation to a person -
(a) the person's dealings, transactions, property and affairs; and
(b) the financial affairs of an associated entity of the person, in so far as they are, or appear to be, relevant to the person or to any of his or her conduct, dealings, transactions, property and affairs.
"Associated entity" is defined in s.5(1) to mean, in relation to a person -
"(a) an entity (other than a company) that is, or has been, associated with the person; or
(b) a company that is, or has been, associated with the person at a time when the company is, or was, as the case may be, a private company."
Sections 5B, 5C and 5D set out the circumstances in which, for the purposes of the Act, a company or a natural person or a partnership is to be regarded as associated with a person.
Section 189A of the Act provides:
"(1) Within 14 days after consenting to exercise the powers conferred by an authority under section 188, a registered trustee shall prepare, and file in the office of the Registrar, a report in writing that complies with this section.
(2) The report shall:
(a) summarise and comment on the debtor's affairs as disclosed in the statement given under subparagraph 188(2)(c)(i); and
(b) set out such other information relevant to those affairs as is available to the trustee and is necessary to give a true and fair view of those affairs.
(3) The report shall state whether or not, in the trustee's opinion, it would be in the interests of the debtor's creditors to deal under this Part with the debtor's affairs in the manner indicated in the statement given under subparagraph 188(2)(c)(ii)."
Where a controlling trustee consents to exercise the powers conferred by an authority under s.188, the trustee is to proceed to call a meeting of the debtor's creditors in accordance with Division 2 of Part X of the Act. Except in respect of an unliquidated or contingent debt or a debt the value of which is not ascertained, every creditor is, by virtue of s.198, entitled to vote at a meeting under Part X. The manner of voting is prescribed by s.200 which provides:
"(1) A creditor may vote either in person or by his attorney or by a proxy appointed in writing by the creditor or his attorney.
(2) Subject to subsection (3A), a proxy may be appointed to vote on all matters arising at the meeting or on particular matters specified in the instrument of appointment.
(3) A person claiming to be the proxy of a creditor is not entitled to vote as proxy (otherwise than in respect of the election of a chairman of the meeting) unless the instrument by which he is appointed has been lodged with the chairman.
(3A) A person is not entitled to vote as proxy of a creditor on a proposed resolution under section 204 unless the instrument by which the person is appointed authorises the person to vote in a specified manner on each of the following kinds of resolution under that section:
(a) a resolution that the debtor's property be no longer subject to control under this Division;
(b) a resolution requiring the debtor to execute a deed of assignment;
(c) a resolution requiring the debtor to execute a deed of arrangment;
(d) a resolution accepting a composition;
(e) a resolution requiring the debtor to present a debtor's petition within 7 days after the passing of the resolution; and the person votes on the proposed resolution in accordance with the instrument.
(3B) For the purposes of subsection (3A), an instrument authorising a person to abstain from voting on a particular kind of resolution shall be taken to authorise the person to vote in a specified manner on that kind of resolution.
(4) A person claiming to be the attorney of a creditor is not entitled to vote as attorney (otherwise than in respect of the election of a chairman of the meeting) unless -
(a) the instrument by which he is appointed has been produced to the chairman; or
(b) the chairman is otherwise satisfied that he is the duly authorised attorney of the creditor."
Section 204(1) provides:
"(1) The creditors may, at a meeting called in pursuance of an authority under section 188 by special resolution -
(a) where the debtor's property is subject to control under this Division, resolve that the debtor's property be no longer subject to control under this Division;
(b) require the debtor to execute a deed of assignment or a deed of arrangement under this Part;
(c) accept a composition; or
(d) require the debtor to present a debtor's petition within 7 days from the day on which the resolution was passed."
A special resolution accepting a composition is to specify the terms of the composition (s.204(3)). A special resolution is a resolution passed by a majority in number and at least three-fourths in value of the creditors present personally, by attorney or by proxy at a meeting of creditors and voting on the resolution (s.5(1)). An instrument of appointment of a proxy who is to vote on a special resolution under s.204 is to be in accordance with Form 44 in Schedule 1 to the Bankruptcy Rules (rule 100). Form 44 provides for the creditor appointing the proxy to specify the manner in which the proxy is to vote upon each of the kinds of resolution referred to in s.200(3A) of the Act.
The controlling trustee signed a report prepared pursuant to s.189A. The report is dated 4 January 1991. Mr Rangott's evidence was that he took no part in the preparation of the report. Under the heading "Background", the report stated:
"The debtor's insolvency arose as a consequence of his directorship of a company known as Damilway Pty Limited which was placed into Liquidation pursuant to an Order made in the Supreme Court of the Australian Capital Territory on 23 April 1990. (Damilway Pty Limited traded as 'Mitchell Fruit and Vegetable Wholesalers' from a premises located at 14-18 Essington Street, Mitchell in the ACT). In addition to his duties as a director of the company, the debtor acted as a buyer, purchasing fruit and vegetables for the company which were in turn sold to various fruit and vegetable retailers in the Canberra area. Although the debtor maintains that he held himself out to be representing Damilway Pty Limited when making purchases on behalf of the company, some suppliers have taken extensive collection action against him personally, due to the fact that they were under the impression that they were dealing with the debtor on a personal level without knowledge of the company's involvement. As collection action against the debtor by some creditors has proceeded almost to the point of bankruptcy, an arrangement pursuant to Part X of the Bankruptcy Act has been proposed by the debtor, the merits of which will be discussed later in this report."
After making some reference to the assets and liabilities shown in the statement of affairs, the controlling trustee set out certain comments which included the following:
"...
2. Stocks and Shares. ($60,000) this amount relates to a 20% shareholding in a company known as Borrorale (sic) Pty Limited which owns four fruit and vegetable shops trading in the Canberra area. At the time of writing this report it had not been possible to secure copies of financial statements from the company's accountants, Messrs Nura Capuano and Associates, due to their office being closed for the Christmas period. It is envisaged however that a copy of the 1990 financial statements will be made available to this office, so that the debtor's declared interest in Borrorale
(sic) Pty Limited can be verified prior to the meeting of creditors.
3. Unsecured Creditors. Creditors claims are subject to lodgment of forms of Proof of Debt.
A search of the debtor's file with the Credit Reference Association of Australia does not reveal any additional information that creditors should be aware of.
Creditors should however be aware of Contingent Creditors totalling $294,423 listed in the debtor's Statement of Affairs. Such amounts may be provable against the debtor if suppliers can satisfy the Trustee that they contracted debts with the debtor personally as distinct from Damilway Pty Limited.
4. Estimated Deficit arising from discharge of secured creditors ($18000 (sic)). This amount is comprised of: a). Residential Property - 17 Pieman Crescent, Kaleen, ACT Estimated value by debtor 280,000 Less 1st Mortgage Gregbo
Investments Pty Limited 290,000 ESTIMATED DEFICIT ($10000) ...
I am not aware of any additional information neccesary (sic) to give a true and fair view of the debtor's affairs as required by Section 189A (2)(b).
I consider the debtor's proposed course of action to be in the best interests of creditors because the contributions offered under the Composition would not be available to creditors under bankruptcy."
Pursuant to s.190(1) of the Act, the controlling trustee called a meeting of the debtor's creditors. That meeting was held on 21 January 1991. As will appear, the meeting continued on 18 February 1991 and on 1 and 20 March 1991. Minutes of what occurred on each of those days, signed by the Chairman, are in evidence.
Evidence was also given by affidavit as to what occurred at the meetings on those days. In an affidavit sworn on 14 June 1991, Ramona Christene Wilson, a solicitor in the employ of Mallesons Stephen Jaques, deposed that she attended the meetings on 21 January, 18 February and 1 March 1991 on behalf of Southern Cross Produce. She set out what occurred on those days and annexed copies of contemporaneous reports made by her to Thorntons, the solicitors who acted for Southern Cross Produce. In an affidavit sworn on 17 May 1991 Paul Austin Lewis, a solicitor in the employ of Thorntons, set out what occurred at the meeting on 20 March 1991 which he attended on behalf of Southern Cross Produce. William Francis Chalk, a member of the partnership of Southern Cross Products, deposed in an affidavit sworn on 20 May 1991 that he attended the meeting on 20 March 1991 as an observer. Giuseppe Sorbara, a director of Newstart 259 Pty Limited, deposed in an affidavit sworn on 17 May 1991 to what occurred at the meetings on 1 and 20 March 1991 which he attended on behalf of that company. None of the deponents to those affidavits other than Mr Chalk was cross-examined. Mr Chalk's cross-examination did not relate to what occurred at the meetings he attended.
Mr Rangott, in an affidavit sworn on 17 June 1991, also gave some evidence as to what occurred at the meetings. He was cross-examined by counsel for the applicants.
At the meeting on 21 January 1991, Mr Rangott represented the controlling trustee and was elected Chairman. The minutes of the meeting disclose that the debtor's statement of affairs, a letter from Gregbo Investments Pty Limited and a set of financial statements relating to Barroale Pty Limited as received from that company's accountant were tabled and that the Chairman gave a summary of the controlling trustee's report.
It appears that, in fact, two letters received by the controlling trustee from Gregbo Investments Pty Limited were tabled. Those letters were dated respectively 10 and 17 January 1991. The letter dated 17 January 1991, which was written following receipt by the company from the controlling trustee of material in the form of a circular to creditors, contained the following paragraph:
"I note on the schedule of Secured Creditors that Gregbo Investments Pty Limited is listed as holding a first mortgage over 17 Pieman Crescent, Kaleen A.C.T. with a debt of $290,000. This is incorrect. As advised in my letter of 10 January 1991, Mr Palazzolo is a joint guarantor for a mortgage loan in the name of Barroale Pty Limited (No. 2) Pty Limited in the amount of $688,000.00. His residential property at 17 Pieman Crescent, Kaleen, acts as part security for this mortgage loan and should the property be sold, the Mortgagee would insist on 100% of the sale proceeds as partial discharge of the mortgage loan."
There is nothing in the material before the Court to show that the attention of the creditors attending the meeting was specifically drawn to the substantial difference between the amount shown in the statement of affairs as owing to Gregbo Investments Pty Limited ($290,000) and the amount of the loan ($688,000) which the company claimed had been guaranteed by the debtor.
The minutes also show that one of the creditors, Mr Piagno, expressed dissatisfaction with the information available to the creditors and sought an adjournment of the meeting to enable the material before the creditors to be supplemented in a number of specified respects. Further details of the aspects of the debtor's affairs on which further information was sought from the debtor or in relation to which Mr Rangott was asked to make further enquiries appear in the affidavit of Ms Wilson. It is unnecessary to refer to those matters in any detail. It may be noted, however, that Mr Rangott undertook to endeavour to obtain copies of the leases of the shops with which the debtor was in any way concerned. In her contemporaneous report of the meeting, Ms Wilson says that doubt was expressed by one of the creditors whether leases on shops operated by Barroale Pty Limited were actually owned by that company, the inference being that they may have been assets of the debtor. The question was also raised whether Tungsten Investments Pty Limited had a bill of sale over equipment owned by the partnership carrying on business under the name Freddy Frapples. In the event, the meeting was adjourned until 18 February 1991.
The minutes of the adjourned meeting record that the Chairman, Mr Rangott, informed the meeting that the debtor had not provided the information requested at the meeting on 21 January 1991. Further detail as to what occurred at this meeting is contained in the affidavit of Ms Wilson but, again, it is unnecessary to refer to the detail except to note that information was given to the meeting by a creditor that the leases of the shops operated by Barroale Pty Limited were not in the name of the company but in personal names and that Mr Rangott undertook to investigate the matter. The meeting was further adjourned until 1 March 1991.
The minutes of the meeting held on 1 March 1991 record that the debtor tabled bank statements and documents relating to the sale of certain properties in Sydney and that the Chairman tabled copies of the lease agreements relating to certain shops, it being stated that the leases had been surrendered and that Barroale Pty Limited was negotiating new leases.
Ms Wilson, in her account of what occurred at the meeting on 1 March 1991, records that the Chairman, Mr Rangott, informed the meeting of the outcome of certain enquiries he had made, including a statement that -
"An Agreement for Sale of Business was signed on 31 December 1991 by the debtor as vendor and Barroale Pty Ltd as purchaser for a price of $205,000."
The date is obviously incorrect and should, it would seem, read 31 December 1990. No further details of the transaction appear to have been made available to the creditors. Nor has any further information in that regard been made available to the Court.
The minutes also record the following:
"The Chairman advised the meeting he had been informed by the debtor before the meeting the company, Barroale Pty Ltd had proposed a future buying arrangement with several of the debtors (sic) major creditors and as a consequence they would agree to an amended Composition pursuant to Part X of the Act and further would either withdraw or not lodge any claims in respect to the proposal. Consequently the estimated return to creditors claiming would increase to approximately 30 cents in the dollar. The debtor advised he wished to amend the proposed Composition to 36 monthly instalments of $3000 per month."
Ms Wilson gives the following account of what was said in relation to this aspect of the matter:
"William Rangott then said words to the following effect: 'Some creditors have a separate arrangement with Barroale. To date these include Zappia, Yep Lum, L.Y. Hook and Co and Marconi. Their combined debt is between $700,000 to $800,000. They have agreed to an amended proposal of the debtor. The amended proposal means that these creditors will not be lodging proofs of debt. Some of the proxies in the trustee's name are being faxed now from Sydney changing their votes to a resolution accepting a composition. Under the proposed composition, there are to be 36 payments of $3,000 per month starting on 31 March 1991. This amended proposal means that where previously creditors were to get 10 cents in the dollar, they may now get approximately 32 cents in the dollar as the creditors who have the separate arrangement will not be lodging proofs of debt. Does someone wish to move a resolution that the remaining creditors accept the composition.' I said: 'I will not put that resolution. I would want to be better informed about the separate arrangement that some creditors had come to with Barroale before opting for the composition. I would also need to take further instructions from my client.' Joe Sorbara said words to the following effect: 'We have only just been told about this separate arrangement and I need time to talk to people about it.'"
After further discussion, the meeting was adjourned until 20 March 1991.
The minutes of the meeting on 20 March 1991 record the names of the creditors present, the names of the persons representing those creditors and the amounts admitted for voting purposes as follows:
"PRESENT:
AMOUNT ADMITTED
NAME OF CREDITOR REPRESENTED BY FOR VOTING PURPOSES
$
Southern Cross Produce P. Lewis 14084 Exotic Fruit Traders C.L. Costa 25436 L.Y. Hook and Co Pty Ltd G. Blewitt 223273 Marconi Fruit Supply Pty Ltd G. Blewitt 362777 Yep Lum and Co G. Blewitt 78746 A. Leedow K. Beazley 6820 Golden Fruit Supply G. Sorbara 16889 Global Fruit Supply G. Sorbara 18315 Zappia Bros Pty Ltd W.B. Rangott 58698 Tungsten Investments Pty Ltd W.B. Rangott 294474"
The minutes also record the following under the heading "Proxies":
"The Chairman advised the meeting of details of creditors present and of proxies held by those present. The meeting was invited to inspect the forms of proxy. Mr Lewis inspected the proxies and objected to that of Tungsten Investments Pty Ltd in that it was undated. The Chairman sought separate advice and subsequently advised the meeting that he was exercising his discretion allowing the proxy to stand, such decision being based on the following grounds:
1. The proxy was validly exercised at previous meetings
2. The proxy had a facsimile date of 21 January 1991
3. Tungsten was a major creditor
4. That if the proxy was declared invalid, any special resolutions put to the meeting could not be carried or otherwise as there would not be a majority in number."
Mr Rangott, in his affidavit, has confirmed what appears in the minutes. For the representative of the controlling trustee to rely on the third and fourth reasons as grounds for determining that the proxy was valid cannot be regarded as other than extraordinary.
According to the minutes, a general discussion then took place in respect of the debtor's affairs and those of Barroale Pty Limited, including that company's proposed trading arrangements. I infer that the reference to proposed trading arrangements is a reference to the buying arrangement with several of the debtor's creditors to which Mr Rangott had referred at the meeting on 1 March 1991. Some of the general discussion is recorded in the minutes but the minutes contain no further enlightenment as to the company's proposed trading arrangements.
In his affidavit, Mr Lewis deposes to the following discussion as having occurred at the meeting:
"5. Early in the general business stage of the meeting I said: 'My instructions are to oppose the composition because it is not attractive enough. If creditors agree to the proposed composition they would be doing the debtor a favour and for this they should receive a better return. It's not unusual for debtors under a Part X to get assistance from their family or friends. My client wants a higher return backed by a guarantee or some other security, for example a mortgage over property. The debtor has a 20% interest in the company Barroale with his brothers. The accounts of that company which we have are not audited and creditors are being asked to place a lot of trust in this debtor. My client wants to know about the separate arrangement which some of the creditors have with the company Barroale. I cannot advise my client to seriously consider the composition until we know more about it.'
6. The Chairman then said: 'The separate arrangements don't matter because the debtor and the company are separate entities.' I said: 'The fact that they are separate legal entities does not decide whether the arrangements are proper here. If there is a relationship between the debtor and the company then it may be that the corporate veil could be lifted.'
7. ...
8. I then said to the Chairman: 'The information which has been provided to date is scant. We have been given the barest outline of the debtor's financial circumstances and have not seen much follow up from the earlier meetings...'"
In his oral evidence, Mr Rangott said that he had an interview with the debtor between 18 February and 1 March 1991 when the debtor informed him that the family company Barroale Pty Limited, was "looking to setting up some sort of buying arrangement with various creditors." He said that he recalled having a subsequent meeting with the debtor and a Mr Paul Lum concerning the proposed buying arrangement. His evidence continued:
"Q. And did Mr Palazzolo tell you who the particular creditors were who would be interested in such an arrangement? A. I believe they were Marconi, Yep Lum - there's the four creditors, Marconi, Yep Lum, Zappia and L.Y.Hook. Q. And did he tell you any details of what the arrangement was to be? A. The arrangement as it was put to me, was on the basis that - or the proposed arrangement - was on the basis of some sort of a buying arrangement between the company and these four creditors, whereby as I recall an example was actually put to me and that was that a case of bananas may cost say $12 at Flemington markets, that case would be purchased at say $14 at an excess profit.
Q. Was any reason given to you why the four creditors that you've mentioned were approached, rather than other creditors? A. No reason."
Mr Rangott also said that he attempted to obtain more information about the arrangement but was given no further details.
The minutes of 20 March 1991 further record that a resolution that the debtor be required to file a debtor's petition for bankruptcy within 7 days was proposed and seconded but not carried. Messrs P. Lewis, G. Sorbara and K. Beazley are recorded as having voted in favour of the resolution and Mrs Costa, Mr G. Blewitt and Mr W.B. Rangott as having voted against.
Mr Lewis also deposes in his affidavit to the meeting having then been adjourned for a short time. His affidavit then proceeds:
"12. When the meeting resumed I asked the debtor: 'How will you be able to meet the terms of this composition, is your brother Steven or the company Barroale supporting you?' John Palazzolo said: 'He is backing me up. They are backing me up.' I said: 'I have been instructed to put a motion for an adjournment in order that the trustee can give us information about the proofs of debt which have been lodged to date, details of the debtor's income and expenditure and any way in which the debtor could improve upon his proposed composition. There really isn't enough information for us to finalise this
today, we don't even have a final list of creditors and their debts.'" A resolution that the meeting be adjourned until 17 April 1991 was then put but not carried.34. It appears from the minutes that, after further discussion, the Chairman put to the meeting the following resolution which had been moved and seconded: "That the creditors accept a Composition with the debtor and the terms of the Composition shall be as follows: a) That the debtor pay to the Trustee for the benefit of creditors, the sum of $3000 per month for a period of 3 years, the first monthly payment to be made on or before 30 April 1991. b) The debtor may make a capital payment of one lump sum representing the number of instalments outstanding and the Composition will then be finalised.
c) The assets set out in Part V of the Statement of Affairs to be excluded from the Composition.
d) That the terms of the Composition shall be for a period of three (3) years or until prior satisfaction. e) That if in any period during the term of the Composition, the debtor is overdue in payments to the Trustee for one month and the default is not rectified within seven (7) days after receiving notice of the default from the Trustee then a meeting of creditors shall be called to propose a special resolution that the Composition be terminated pursuant to Section 241 of the Bankruptcy Act, 1966 and to consider any further special resolutions."
The assets set out in Part V of the Statement of Affairs were the whole of the assets disclosed by the debtor and which are identified earlier in these reasons. The minutes record that the resolution was carried, those voting in favour being Messrs G. Blewitt and W.B. Rangott and those voting against being Messrs P. Lewis, G. Sorbara and K. Beazley. Mrs Costa is recorded as having abstained.
After further resolutions were carried relating to the appointment of David William Sistrom as trustee of the composition and as to the trustee's remuneration, the meeting closed.
It thus appears that the following creditors voted in favour of the resolution accepting the compromise:
Creditor Amount Admitted for Voting Purposes L.Y. Hook and Co Pty Ltd $223,273 Marconi Fruit Supply Pty Ltd 362,777 Yep Lum and Co 78,746 Zappia Bros Pty Ltd 58,698 Tungsten Investments Pty Ltd 294,474 $1,017,968
It also appears that the following creditors voted against that resolution:
Creditor Amount Admitted for Voting Purposes Southern Cross Produce $14,084 A. Leedow 6,820 Golden Fruit Supply 16,889 Global Fruit Supply 18,315 $56,108
The application seeks an order that the composition be set aside or, alternatively, be declared void. The order that the composition be set aside is sought pursuant to s.239 of the Bankruptcy Act. That section provides, in sub-s.(1), that a creditor may, within 21 days from the date on which the special resolution accepting a composition under Part X is passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor. Sub-section (2) of that section provides:
"(2) If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought."
The order that the composition be declared void is sought pursuant to s.222 of the Act. Sub-section (1) of that section relevantly provides that, where there is a doubt, on a specific ground, whether a composition has been accepted by a special resolution of a meeting of creditors under s.204, a creditor of the debtor may apply to the Court for an order under sub-s.(2). That sub-section provides that, upon the hearing of an application made under sub-s.(1), the Court may, subject to s.222, make an order declaring that the composition is void, or that it is not void, on the ground specified in the application. Sub-section 222(4) provides, inter alia, that the Court may make an order declaring a composition to be void where the Court, on the application of a creditor, is satisfied that the debtor has omitted a material particular from the statement of the debtor's affairs given under sub-s.188(2). An order may not be made under s.222(4) unless the Court is satisfied that it would be in the interests of the creditors to do so. If the Court makes an order under s.222(2) or (4) declaring the composition to be void, it may, if it thinks fit, forthwith make a sequestration order against the estate of the debtor (sub-s.(7)).
Although the debtor gave notice of opposition to the application and was represented at the hearing by counsel, no evidence was presented to the Court on his behalf.
Counsel for the trustee submitted that the applicant Southern Cross Produce had no standing to bring the proceeding as it was not a creditor of the debtor. The basis of that submission was the statement in par.2 of Mr Chalk's affidavit that the business of the partnership had been transferred to Southern Cross Produce Pty Limited on 1 July 1990. In cross-examination, Mr Chalk confirmed that such transfer took place and gave the following further evidence:
"Q. Were the debtors and creditors transferred over to the company at the time the business was transferred? A. Yes.
Q. So the company is now responsible for the collection of the debtors and the payment of the creditors of Southern Cross? A. Correct, yes.
Q. And all the business and undertaking of the partnership known as Southern Cross was transferred to the company? A. Yes.
Q. Did the company ever lodge a proof of debt with the trustee? A. As Southern Cross Pty Limited?
Q. Yes?
A. I honestly can't remember. I would doubt it. We would have assumed that the original proof of debt was sufficient."
There is in evidence, however, a certificate stating that a judgment in the sum of $14,084.47 was obtained by the partnership against the debtor and Steven Palazzolo in the District Court of New South Wales on 20 February 1990. There is nothing before the Court to warrant it going behind that judgment to ascertain whether in truth the partnership is a creditor of the debtor. In any event, the other applicant, Newstart 259 Pty Limited, undoubtedly has standing to maintain the proceeding.
In opening, counsel for the applicants based the case for an order declaring the composition void upon sub-s.(4) of s.222. However, as the evidence unfolded, it became apparent that, in terms of sub-s.(1) of that section, there was a doubt, on a specific ground, whether the composition had been accepted by a special resolution of a meeting of creditors under s.204.
As already appears, the resolution accepting the composition was carried, so far as the majority in number of the creditors was concerned, by five votes to four. One of the majority was Tungsten Investments Pty Limited. As also already appears, that company's proxy was challenged on the ground that it was undated, a challenge which was not accepted by the chairman of the meeting. An examination of the form of proxy executed under the seal of that company, however, discloses other grounds upon which to challenge its efficacy.
The proxy in question is in the form (Form 44) prescribed in Schedule 1 to the Bankruptcy Rules and thus, sets out the five kinds of resolution to which s.200(3A) of the Bankruptcy Act refers. The word "for" has been written in the margin against the reference to a resolution accepting a composition but against none of the other kinds of resolution specified in the form do the words "for", "against" or "abstain" appear. Nor is any other manner of voting in respect of those kinds of resolution specified in the form. The proxy, therefore, fails to comply with s.200(3A) of the Act which requires that the instrument authorise the proxy to vote in a specified manner on each of the five kinds of resolution specified in that sub-section (see Re Loustas - Ryan J. - 9 April 1990 - unreported - pp 6-7). It follows that, at the meeting held on 20 March 1991, Mr Rangott was not entitled to vote as proxy of Tungsten Investments Pty Limited upon the proposed resolution under s.204 of the Act that the composition be accepted. In consequence, there was not a majority in number of the creditors voting upon that resolution and the resolution should not have been declared carried. There is a further reason why Mr Rangott was not entitled to vote on behalf of Tungsten Investments Pty Limited. He was not entitled to do so because the requirement of s.200(3) had not been fulfilled in that the instrument by which he was appointed as a proxy for that company had not been lodged with him. As appears from his affidavit, the only document he had in his possession was a facsimile copy of the proxy instrument and not the instrument itself.
The power to declare a composition void under s.222(2) is discretionary (see Musolino v Sidiropolous - Full Court - 13 June 1991 - unreported - pp 16-18). On the material before me, however, I am satisfied that the discretion should be exercised so as to declare the composition void.
What I have said is sufficient to dispose of the case but I should, I think, record the conclusion I have reached upon the application to set aside the composition under s.239 of the Act. In considering this part of the application I have assumed, contrary to the conclusion expressed above, that Mr Rangott was entitled to vote as proxy for Tungsten Investments Pty Limited at the meeting held on 20 March 1991.
In my opinion, there are compelling reasons why, on that assumption, the composition should be set aside. The principal reason is that the resolution accepting the composition was carried on the votes of five creditors of whom four intended not to prove or to take any other part in the composition. They intended not to do so because they were parties to a private arrangement with a company, Barroale Pty Limited, in which the debtor had a substantial interest, and under that arrangement, the precise details of which were not made known to the general body of creditors, they were to receive a benefit which was not to be available to other creditors. To have the wishes of the creditors (other than Tungsten Investments Pty Limited) who were present and voting at the meeting overborne in such circumstances cannot be countenanced and provides, in itself, ample justification for setting aside the composition.
But there are additional matters. The material placed before the creditors was in a number of respects unsatisfactory. It was certainly not such as to give the creditors full and timely information about the debtor's affairs so as to put them in a position to make an informed judgment as to the most appropriate course to follow and this notwithstanding the protestations of a number of the creditors and the adjournment of the meeting on more than one occasion to enable further information to be provided.
Further, the debtor omitted from the statement of his affairs any reference to the lease and sub-lease to which reference has been made earlier in these reasons and he did not disclose any details, including the assets and liabilities, of the partnership, in which he had a 20% share, carried on under the name "Freddy Frapples". Those omissions were of relevant matters - matters which would be likely to affect the making of a decision by the creditors : see Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 at p 533 and the cases there cited.
Again, apart from the somewhat vague statement made by the debtor at the meeting on 20 March 1991 in answer to a question put to him by Mr Lewis to the effect that his brother and Barroale Pty Limited were backing him up, there was no material before the creditors explaining how it was to be achieved that the debtor would make payments of $3,000 per month over a period of three years from 30 April 1991. Nor was any material placed before the Court in relation to the debtor's ability to make those payments. The only evidence as to debtor's income is that given by Mr Rangott in his oral evidence that the debtor was employed, as at 29 November 1990, by Barroale Pty Limited and receiving wages of some $400 per week. It would have been very material in this regard to have had further information concerning the statement made by Mr Rangott at the meeting on 1 March 1991 that an agreement for the sale of a business had been signed on 31 December 1990 by the debtor as vendor and Barroale Pty Limited as purchaser for a price of $205,000.
Having concluded that the composition should be declared void under s.222(2), the question then arises whether a summary sequestration order should be made against the estate of the debtor pursuant to s.222(7). There is ample material before the Court to justify the making of such an order and I propose to do so. The case for the making of a sequestration order is supported by the conclusion to which I have come that, in the light of the matters to which reference has been made earlier in these reasons, a full investigation of the debtor's affairs is warranted and this can only be done to any effect if a sequestration order is made. As Morling J. said in Stokes (Australasia) Ltd v Brennan (31 May 1988 - unreported - p 6):
"In a case where a debtor has incurred debts of such huge proportions relative to his assets, there is much to be said for the proposition that it is in the public interest that there be a public examination of the bankrupt (and possibly other persons) under s.81 of the Bankruptcy Act."
For the reasons set out above, I make an order pursuant to s.222(2) of the Act declaring that the composition the subject of a resolution put to the meeting of the debtor's creditors on 20 March 1991 is void. I make a sequestration order against the estate of the debtor. I further order that the costs of the applicants of and incidental to the application be taxed and paid out of the estate of the debtor as if they were the costs of a petitioning creditor.
Section 156A(3) of the Act provides, inter alia, that where, at the time when a debtor becomes a bankrupt, a registered trustee has, under s.156A(1), consented to act as the trustee of the estate of the debtor and the consent has not been revoked, the registered trustee becomes, at that time, by force of the provision, the trustee of the estate of the bankrupt. Mr Robert William Morton, a registered trustee, has, by instrument dated 19 June 1991 signed by him and filed with the Registrar pursuant to s.156A(1), consented to act as the trustee of the estate of the debtor in the event that he becomes a bankrupt. Section 156A(3) operates, according to its tenor, to make Mr Morton the trustee of the bankrupt estate of the debtor and I so declare.
9
2
0