Re Sidiropoulos, T. & Anor v Ex Parte Musolino, F.

Re: THEODORE SIDIROPOULOS and BLAZENKA MARJANOVIC
Ex parte: FRANK MUSOLINO ROCCO MUSOLINO and JAMES ALBERT HUPPATZ
Nos. 31 and 32 of 1989 Part X
FED No. 767
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Von Doussa J.(1)

CATCHWORDS

Bankruptcy - Part X Deeds of Arrangement - application to extend time to apply for review of trustee's decision to reject proofs of debt - final dividend declared and Deeds administered before application made - futility of reviewing decision - applicants' collateral purpose in seeking review - whether extension should be granted.

Bankruptcy Act, 1966, ss.102, 104, 235, 237

HEARING

ADELAIDE

#DATE 29:11:1991

Counsel for judgment debtors : Mr J. Oks

Solicitor for judgment debtors : Hume Taylor and Co.

Counsel for applicants : Mr P.A.R. Scragg

Solicitor for applicants : P. Scragg

Trustee appeared in person

COURT

The application by Frank Musolino and Rocco Musolino dated 27 August 1991 be dismissed.
The applicants pay the costs of the debtors and the trustee's remuneration in respect of the said application to be taxed and paid by the said Frank Musolino and Rocco Musolino.
NOTE: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

JUDGE1

By application dated 27 August 1991 Messrs Frank Musolino and Rocco Musolino ("the Musolinos") sought orders under sub.ss.104(2) and (3) of the Bankruptcy Act 1966 ("the Act") for review of the decisions of the respondent made under s.102 to reject proofs of debt, and for an extension of time within which to bring the application. The respondent is the trustee under Deeds of Arrangement under Part X executed by each of the debtors on 4 August 1989. The proofs of debt were rejected on 18 October 1990. Sections 102 and 104 are applied by sub.s.237(2) of the Act to Deeds of Arrangement.

This matter has a complicated history. The Deeds of Arrangement were entered into by the debtors following resolutions requiring them so to do at adjourned creditors' meetings held on 4 August 1989. The passing of the resolutions had been opposed by Mr Frank Musolino who at all times has been hostile towards the debtors.
The debtors are husband and wife. Each Deed called for the realisation of the debtors' "divisible property" and the contribution of such additional moneys in each case as would be necessary to ensure that each debtor paid his and her separate creditors 10 cents in the dollar and their joint creditors 5 cents in the dollar. The term "divisible property" was defined in the schedule to each Deed as having the same meaning as that contained in the Act save that the matrimonial home was specifically excluded.
Clause 8 of each deed provided for termination in the following terms:
"This deed of arrangement shall be terminated:-
(a) on the passing of a special resolution to that effect by a

meeting of creditors called for the purpose;

(b) in the event of an order of the Court to that effect made

under the provisions of s.236 of the Act;

(c) upon compliance in full by the debtor with his obligations

hereunder;

(d) on the 31st day of January 1990

whichever event shall first occur."

The effect of the proposed arrangements was to save the debtors' matrimonial home which had an equity estimated at $5,066, but required the debtors to provide the additional funds necessary to pay the creditors of their separate and joint estates a total of 10 cents in the dollar. These additional funds were to be raised by the debtors contributing moneys from the realisation of a motor vehicle which would otherwise not have been "property divisible amongst the creditors of the bankrupt" under s.116 had each of them become bankrupt, and borrowing further moneys from the male debtor's father.

On 15 January 1990 the trustee appointed by the Deeds sent to the creditors, including Mr Frank Musolino, a notice of intention to declare a first and final dividend, and that notice was advertised in the Gazette on 30 January 1990.
In response to that notice, on 18 January 1990 the trustee received from Mr Frank Musolino a proof of debt in respect of the estate of each debtor. The proof of debt claimed from the debtors jointly $46,000, being the amount due under a judgment entered in the District Court of Adelaide by Judge Stevens together with Court costs and interest. The judgment was said to have been entered on 6 July 1989.
The proofs of debt were lodged in the name of Frank Musolino alone. The role of Rocco Musolino in these proceedings is unclear, but no point at any stage has been taken about him being named as a party.
Before 31 January 1990 the debtors paid sufficient moneys to the trustee to cover the anticipated costs of the administration of their estates and the dividends to creditors anticipated by the terms of the Deeds, including a dividend to Mr Frank Musolino who the debtors had listed in their Statements of Affairs as a contingent creditor for $25,000.
The trustee then entered into correspondence with Mr Frank Musolino and his solicitor seeking evidence in support of the proofs of debt. It transpired that the alleged judgment in the District Court of Adelaide was entered on 2 October 1989. On that occasion, after the solicitor appearing for the debtors had withdrawn on the ground that the Deeds had been executed, the solicitor for the Musolinos (who were both plaintiffs in the District Court action) applied for judgment in default of appearance of the debtors at trial for $25,000, being the amount claimed, together with interest at 15 per cent from 25 February 1988 until the date of judgment. A counter-claim by the debtors was also struck out, and the debtors were ordered to pay costs. The default judgment was obtained in contravention of the terms of the Deeds and sub para 233(2)(b)(i) of the Act in that the leave of the Court had not been obtained to take any fresh step in the District Court proceedings after the execution of the Deeds. The "judgment" therefore provided no proof of the alleged debt nor could the claim for interest and costs be based on the judgment.
The District Court proceedings alleged that the sum of $25,000 was a loan by the Musolinos to the debtors. The alleged loan had always been disputed by the debtors. The debtors had carried on the business of a service station. It seems that they were in partnership with Mr and Mrs Tsanaktsidis and that the latter wished to quit the partnership. Apparently one or other of the Musolinos then paid $25,000 to Mr Tsanaktsidis. The Musolinos claim that it was a loan to the debtors to enable them to buy out their partners. The debtors say that it was part of $40,000 to enable the Musolinos to purchase the interest of the Tsanaktsidis in the partnership and that they (the debtors) lent the Musolinos, or one of them, a further $15,000 (which sum was the subject of the counter-claim in the District Court). It seems that the business thereafter failed or was disposed of at a loss and this led to the Musolinos suing the debtors in the District Court for the alleged loan.
On 22 August 1990, before the trustee had made a decision whether to accept or reject the proofs of debt from Mr Frank Musolino, the Musolinos applied to the Court for orders pursuant to ss.222 and 236 of the Act declaring the Deed void, and for sequestration orders to be made against each of the debtors. This application was based primarily on the ground that the resolutions passed at the creditors' meetings on 4 August 1989 requiring the debtors to execute the Deeds were not validly passed by at least three fourths in value of the creditors who voted at the meetings so as to constitute the resolutions special resolutions in accordance with s.204. That application was heard by O'Loughlin J., who dismissed it on 18 October 1990. Although his Honour found that the creditors' meetings did not pass special resolutions as required by the Act, he refused to set aside the deeds on discretionary grounds.
Immediately after the dismissal of the Musolinos' application, on 18 October 1990 the trustee rejected the proofs of debt on the grounds:
"That you have failed to prove a debt due by the debtor to you.
Further you have produced no evidence to show that the moneys you
allege paid (sic) were in fact paid to the debtor and the
circumstances in which they were paid and you have produced no
evidence to show that if the money was paid it was in fact an advance
to the debtor and hence liable to be repaid and when and how it was
to be repaid."
The rejections advised Mr Frank Musolino that if he were dissatisfied with the decisions he should apply to the Court to review them but, subject to the power of the Court to extend time, no application to review the decision would be heard by the Court unless application was made within 21 days from the date of rejection.
Instead of applying to the Court for review of the trustee's decisions, the Musolinos appealed from the decision of O'Loughlin J. to a Full Court, apparently taking the view that if the Deeds were wholly invalid as they contended, there was no practical need to challenge the trustee's decisions. The appeal was lodged on 7 November 1990, that is one day before the expiration of 21 days from the trustee's decision to reject the proof of debt.
A Full Court on 13 June 1991 dismissed the appeal: Musolino and Anor v Sidiropoulos and Ors (1991) 101 ALR 235. Although the Full Court differed from O'Loughlin J. on the construction of ss.222 and 236, it agreed with him that the Court, in the exercise of its discretion, should not interfere with the status quo by setting aside the Deeds. One of the considerations for the exercise of the discretion in this way was the delay by the Musolinos in bringing their application: at p 245.
During argument on the hearing of the appeal a question arose as to the status of the Musolinos to bring the appeal as they, or rather Mr Frank Musolino, had not sought to review the rejection of the proofs of debt. The Full Court noted at p 244 that the primary judge would have had jurisdiction to determine the question whether one or other or both of the Musolinos were creditors, but as that issue had not been agitated before the lower Court, and as the appeal was to be dismissed on other grounds, it was not necessary for the Full Court to express a view on that question. The question however remained a live one. The Musolinos continued to assert strongly that they were creditors. In retrospect it is unfortunate that they did not make the present application immediately after the matter was raised in argument before the Full Court. But they did not do so, presumably because they were awaiting the outcome of the appeal.
Whilst the proceedings were in train to have the Deeds declared void the original trustee retired, and James Albert Huppatz became the new trustee of each trust estate. According to affidavits filed on the present application, on 14 June 1991 (the day after the Full Court delivered judgment) and on 20 June 1991 Mr Huppatz had telephone conversations with a person who identified himself as Frank Musolino. According to Mr Huppatz in the first conversation Mr Musolino questioned his appointment as trustee and then said something to the effect that he "wished to take the matter further". In the context Mr Huppatz initially thought he was referring to the appointment of the new trustee, but later in the conversation gained the impression that he was referring to his application for an order to set aside the Deeds and the subsequent appeal. Mr Huppatz does not recall any mention during that conversation of the rejection of the proofs of debt or of any intention to challenge the rejection.
During the conversation on 20 June 1991 Mr Musolino asked questions about the receipts and disbursement of funds, and the rejection of the proofs of debt. Mr Huppatz says he gave quick answers and informed Mr Musolino that if he required in-depth explanations of those matters his solicitor should write to the trustee. Mr Musolino spoke of taking proceedings against the former trustee's firm and against the former trustee. Mr Musolino requested Mr Huppatz not to distribute the funds held by him. Mr Huppatz said that he presumed Mr Musolino wanted him to retain the funds until he was able to commence proceedings against the former trustee. Mr Huppatz says he informed Mr Musolino that he intended to distribute the funds within a day or two.
Mr Huppatz further deposes that:
"On 21st June 1991 (or soon thereafter) dividends in accordance
with the Deeds were distributed to those creditors whose proofs of
debt had been admitted. Attached hereto and marked JAH8 are
copies of the 'Trustee's Account of Receipts and Payments' for the
separate and joint estates. The surplus funds were refunded to
the debtors on or about 21st June 1991. The cheques were drawn on
17th June 1991 and signed by me on 21st June 1991. The
distribution of the funds on hand had been withheld by me pending
the hearing by the Full Court of the appeal filed by the
applicants in this matter."
Mr Huppatz also acknowledges in his affidavit that on 21 June 1991, at about 3.10 p.m., he received a letter from the Musolinos referring to the telephone conversation on 20 June 1991 and saying, among other things:
"1. Our intentions are to challenge the findings of (the former
trustee) in rejecting our initial claim on the grounds of 'lack of
proof of debt'. We wish to point out that an appeal was not
lodged beforehand as advice from the Attorney-General's
Department, at the time clearly indicated that deed of arrangement
was void as no resolution was in fact passed on voting rights.
Trustee was advised of this finding.
2. We request your firm to withhold any funds in Trustee's
Account not returning moneys to debtors."
As I understood the submissions made by Mr Huppatz on the hearing of this application he does not dispute that when he first saw the letter from the Musolinos on 21 June 1991 the distribution cheques were still within his office, although he had signed them and had directed that they be posted.
It is not disputed that the cheques were posted out on or shortly after 21 June 1991. The trustee's accounts were dated 21 June 1991. They were filed in this Court on 24 June 1991 thereby completing the administration of each estate. The accounts disclose that the amounts refunded to the debtors in respect of each of their joint and several estates totalled in all $2,866.97, being less than the additional moneys ($5,0000.00) borrowed from Mr Sidiropoulos senior to enable the debtors to comply with the requirement of the Deeds that they contribute funds sufficient to pay 10 cents in the dollar to all creditors. Although Mr Frank Musolino on 20 June 1991 said that he intended to challenge the rejection of the proof of debt, the present proceedings were not commenced until 27 August 1991.
Counsel for the debtors, and the trustee, both contend, on substantially the same grounds, that the application for an extension of time within which to seek an order reviewing the trustee's decisions should be refused. Their primary argument is that as the administration of the Deeds has been completed, the orders sought would be futile. Even if it were held that the trustee's decisions should be reversed, there is no money in the hands of the trustee to pay a further dividend. As the Deeds have been terminated there is no obligation on the debtors to make additional payments to the trustee. It is also submitted that as the debtors complied with their obligations under the Deeds as long ago as January 1990 it would be unfair to protract the matter further by allowing the Musolinos to reopen the question of whether they were creditors. The Musolinos have been guilty of many delays in the course of the administration of the estates, including a delay of ten months in bringing the present application. It is submitted that the Court's discretion should be exercised against them, particularly having regard to the fact that the amount involved, i.e. a dividend of 10 cents in the dollar on the alleged loan of $25,000, is out of proportion with the costs which would be involved in trying the issues which the Musolinos desire to agitate on a review of the trustee's decisions.
On the other hand, counsel for the Musolinos contends that an extension of time should be granted as the application to have the Deeds declared void was commenced before the trustee's decisions to reject the proofs of debt was made. Once the decisions were made, and within the time prescribed for seeking to have the rejections reviewed, the Musolinos had appealed against the decision of O'Loughlin J., and had that appeal been successful proceedings to challenge the trustee's decision would be rendered unnecessary. It is contended that the Musolinos acted reasonably in deferring any action to challenge the rejection of the proofs of debt until the Full Court decision was handed down. Within a few days of that decision the trustee had been requested by Mr Frank Musolino not to distribute the funds. It is contended that the trustee has acted precipitously and without due regard for the interests of the Musolinos in distributing the money as quickly as he did, and without regard to Mr Frank Musolino's intention to challenge the rejection of his proofs of debt. It is submitted that no prejudice would have existed either to the trustee or to the debtors on 21 June 1991 had the application been made on that day to extend time, and accordingly time should now be extended. The argument goes so far as to submit that the trustee acted improperly in distributing the funds when he did.
In response to the argument that to allow a review of the trustee's decision at this stage would be futile as the estates have been fully administered, counsel for the Musolinos says they now wish to take action against the "trustees" (I infer against the original trustee for negligently certifying that the resolutions at the meetings of creditors on 4 August 1989 were validly carried as special resolutions, and against the present trustee in respect of the distribution of the assets of the estates on 21 June 1991). Counsel says that unless the Musolinos are allowed in the present proceedings to establish their status as creditors, they will be unable to pursue the proposed claims against the trustees. Whilst not conceding in unequivocal terms that the debtors could not be required to pay further moneys to the estate to enable a dividend to be declared to the Musolinos if the trustee's decisions were reversed, counsel acknowledged that this is probably so.
The propriety of the conduct of the trustee in distributing the assets of the estate on 21 June 1991 was not raised as an issue on the face of the application presently before the Court. It was raised obliquely by the submissions of counsel for the Musolinos. It is neither possible nor desirable for the Court to express an opinion on this question on the present state of the evidence. There is a measure of disagreement as to what was said in the telephone conversations between Mr Frank Musolino and the trustee in June 1991, and neither person has been cross-examined. Furthermore, submissions have not been received from the trustee on the propriety of his conduct. For present purposes, whatever the merits of the situation, the undisputed fact is that the cheques distributing the moneys held on behalf of the estate were sent out on or about 21 June 1991, and the administration of the Deeds was completed on 24 June 1991 when the final accounts were filed at Court.
Clause 8 of each of the Deeds provided for its termination upon compliance in full by the debtor with his obligations, or on 31 January 1990, whichever event first occurred. Whilst each debtor provided funds estimated to be sufficient to pay 10 cents in the dollar to all creditors before 31 January 1990, that estimate could only be provisional. As events turned out, the trustee was put to considerable expense in litigation, and had proofs of debt been admitted from each of the creditors who originally claimed, the debtors would have been required to make further contribution. Although sub.s.235(d) of the Act provides that a Deed of Arrangement is terminated by :
"(d) The occurrence of any circumstances or event on the
occurrence of which the deed provides that it is to terminate."
clause 8 could not reasonably be construed as providing that the Deed terminated on 31 January 1990 regardless of the state of the administration. As O'Loughlin J. pointed out at p 18 of his reasons for judgment on the application to have the Deeds declared void, the proposition that the Deeds terminated not later than 31 January 1990 overlooks the importation into them of implied provisions such as the due payment of dividends to proved creditors. Although the Deeds did not terminate on 31 January 1990, once the final dividends were paid to proved creditors, and the final accounts filed at Court, the administration of each of the Deeds was complete. By the terms of each Deed, the debtors were thereby released from further claims against them. No further claim could be made against either of them for payment to the trustee of moneys to enable a further dividend to be paid.

In In re McMurdo, Penfield v McMurdo (1902) 2 Ch 684, Vaughan Williams L.J. said at 699 (emphasis added):
"Now, according to my experience of bankruptcy practice, there
never has been any doubt as to the right of a creditor, whether he
is a secured creditor or whether he is an unsecured creditor, to
come in and prove at any time during the administration, provided
only that he does not by his proof interfere with the prior
distribution of the estate amongst the creditors, and subject
always, in cases in which he has to come in and ask for leave to
prove, to any terms which the Court may think it just to impose;
and, of course, in every case in which there has been a time
limited for coming in to prove, although the lapse of that time
without proof does not prevent the creditor from proving
afterwards, subject to the conditions which I have mentioned, in
every such case he can only come in and prove with the leave of
the Court."
That same general rule would apply, in my view, in the case of proofs of debt received during the administration of a Deed of Arrangement. It is to be noted however that the principle applies "during the administration". Once the administration is complete it is too late for a creditor to come in and prove. To do so would be futile. There would remain nothing to be distributed to the creditor: see Re Waterhouse; Ex parte Commissioner of Transport (1975) 25 FLR 32 at 37 where Wallace J. observed:
"It is true that there is ample authority for the proposition that
lapse of time does not prevent a creditor from coming in and
proving so long as there is any estate to be distributed though he
cannot disturb the distribution of a past dividend."
In my opinion the fact that the administration of the Deeds was completed before the present application was made is fatal to it.
The submission that time should be extended so as to enable the Musolinos, on a review of the trustee's decision, to establish their status as creditors should be rejected. The proceedings contemplated by the Musolinos against the trustee (or trustees), whether under the general law or under ss.178 and 179 of the Act are collateral to the administration of the Deeds. If the rejection of the proofs of debt had been reviewed on applications made in due time, the trustee's costs would ordinarily have been treated as part of the costs of the administration, and borne by the debtors. The debtors would have been required by the terms of the Deeds to pay in such sum as was necessary to meet the trustee's costs and to provide the surplus necessary to meet the proposed dividend. It is difficult to see how, in light of the terms of the Deeds, they could be required at this stage to make further payments on account of the trustee's costs. It would be quite inappropriate to allow a review of the trustee's decision to go ahead after the completion of the administration. The debtors would have no interest in the outcome of the review. The proposed proceedings now mooted by the Musolinos would be against the trustees in their personal capacity alleging a liability for negligence or misfeasance. The debtors would not be necessary parties to those proceedings. Insofar as it is necessary for the purpose of the proceedings for the Musolinos to establish their status as creditors of the debtors, they should do so within those proceedings. It may be that the debtors would be required to give evidence in those proceedings, but that is a very different position for them than being parties to proceedings as they are in this matter.
In the course of argument it was asserted by counsel for the Musolinos that it would not be open to them to establish their status as creditors in other proceedings, and that unless they were permitted to establish their status in these proceedings, they would be barred from taking action against the trustees. No authority for this assertion was advanced and in my view it is not correct. Under s.178 an application may be made by "a creditor or any other person..." affected by any act or omission or decision of the trustee. Under s.179 an application may be made to the Court by the Registrar, the Inspector-General, a creditor or a bankrupt. In my view the rejection of the proofs of debt by the trustee does not prevent the Musolinos from making application under that section. It is fundamental to their case that they are creditors, and as part of the proof in support of the application, their status as creditors would be one of the facts to be established. The rejection of the proofs of debt would not foreclose that issue. If the proposed proceedings are to be taken under the general law, the case would be that the Musolinos were in fact creditors but through the negligence or other wrongful conduct of the trustees they were deprived of the opportunity of pursuing rights otherwise open to them. Again, as part of the proof in the ordinary course of the facts in issue, evidence could be led to establish their status as creditors. The rejection of the proofs of debt would have no presumptive operation against their case. Of course, if they failed in the proceedings to establish as a matter of fact that they were creditors of the debtors, and not purchasers of an interest in the partnership, the proceedings would inevitably fail.
In light of these conclusions it is unnecessary to consider the submission of the debtors and the trustee that in any event an application made as late as 27 August 1991 should be dismissed in the exercise of the Court's discretion on a ground of inordinate delay.
In my view the application by Messrs Frank Musolino and Rocco Musolino dated 27 August 1991 should be dismissed. The applicants must pay the costs of the debtors and the trustee's remuneration in respect of the application.

[1991] FCA 767

29 NOVEMBER 1991