Re: Smiles, James John & Ex Parte: Inspector General in Bankruptcy

[1997] FCA 605

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - entitlement of persons to vote at creditors’ meetings - procedure at meetings - meaning of “announcement” in relation to proxies.

Bankruptcy Act 1966 (Cth), ss 64K, 64L, 64M, 64N, 64P, 64ZA, 64ZB, 64ZF, 188, 198(1), 200, 201, Part IV Division 5, Part X Division 2
Federal Court Rules O29 r 2(a)
Bankruptcy Rules r 85A

Zantiotis v Andrews (No 2) (1988) 80 ALR 299

RE:  JAMES JOHN SMILES
EX PARTE:             INSPECTOR GENERAL IN BANKRUPTCY

NX 33 OF 1996

CORAM:                  BRANSON J
PLACE:  SYDNEY
DATE:  9 JULY 1997

IN THE FEDERAL COURT OF AUSTRALIA  )
  )
GENERAL DIVISION  )          NX 33 of 1996
  )          
BANKRUPTCY DISTRICT  )
  )
OF THE STATE OF NEW SOUTH WALES      )

RE:  JAMES JOHN SMILES

EX PARTE:  INSPECTOR GENERAL
  IN BANKRUPTCY
  Applicant

JAMES JOHN SMILES
  First Respondent

GEOFFREY DAVID McDONALD
  Second Respondent

GILES GEOFFREY WOODGATE
  Third Respondent

CORAM:      BRANSON J
PLACE:        SYDNEY
DATE:          9 JULY 1997

MINUTES OF ORDER

THE COURT ORDERS THAT THE QUESTION:

“Whether the third respondent was entitled to exclude the following persons:

National Mutual Trustees Limited
           Trigamist Holdings Pty Limited
           Ironaid Pty Limited
           John Nicolo Cosco

from voting at the adjourned meeting of creditors of the first respondent (assuming those persons were creditors), such meeting having been held on 1 May 1996, on the basis that the proxies were not received by the third respondent before the announcement by the third respondent of:

(a)the names of the creditors also were not participating in person or by telephone but whose proxies or attorneys were participating in person or by telephone; and

(b)the names of the proxies and attorneys.”

BE ANSWERED “NO”.

Note: Settlement and entry of orders will be dealt with by Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA  )
  )
GENERAL DIVISION  )          NX 33 of 1996
  )
BANKRUPTCY DISTRICT  )
  )
OF THE STATE OF NEW SOUTH WALES      )

RE:  JAMES JOHN SMILES

EX PARTE:  INSPECTOR GENERAL
  IN BANKRUPTCY
  Applicant

JAMES JOHN SMILES
  First Respondent

GEOFFREY DAVID McDONALD
  Second Respondent

GILES GEOFFREY WOODGATE
  Third Respondent

CORAM:      BRANSON J
PLACE:        SYDNEY
DATE:          9 JULY 1997

REASONS FOR JUDGMENT

QUESTION TO BE DECIDED

Pursuant to an order of a judge of this Court, the following question is to be decided separately from any other question in the proceeding (Federal Court Rules O 29 r 2(a)):

“Whether the third respondent was entitled to exclude the following persons:

National Mutual Trustees Limited
           Trigamist Holdings Pty Limited
           Ironaid Pty Limited
           John Nicolo Cosco

from voting at the adjourned meeting of creditors of the first respondent (assuming those persons were creditors), such meeting having been held on 1 May 1996, on the basis that the proxies were not received by the third respondent before the announcement by the third respondent of:

(a)the names of the creditors also were not participating in person or by telephone but whose proxies or attorneys were participating in person or by telephone; and

(b)the names of the proxies and attorneys.”

FACTUAL BACKGROUND

On 27 February 1996 James John Smiles, the debtor, signed an authority under s 188 of the Bankruptcy Act 1966 (Cth) (“the Act”). The authority authorised a registered trustee, Giles Geoffrey Woodgate, the third respondent, to call a meeting of the debtor’s creditors for the purpose of Part X of the Act and to take over the control of the debtor’s property in accordance with Part X. The debtor had signed a statement indicating how the debtor proposed that his affairs be dealt with under Part X of the Act. This statement provided for the payment of $50,000 to the controlling trustee to meet the costs of the Part X proposal and for the payment of dividends to creditors. The statement of affairs of the debtor, which was annexed to the debtor’s statement of proposal, indicated a deficiency of assets over liabilities of $13,216,466.58. The largest unsecured creditor identified in the statement of affairs was Ironaid Pty Ltd with a debt of $9,120,000.00.

The third respondent convened a meeting of the creditors of the respondent in accordance with Division 2 of Part X of the Act. Such meeting was called for 1 April 1996. The minutes of the meeting on 1 April 1996 are in evidence. They reveal that the third respondent was appointed to chair the meeting and that, after certain formalities were attended to, the third respondent “tabled” certain proxies.  Proxies for the four parties identified in the question to be answered by the Court are not shown by the minutes to have been so tabled.  The minutes reveal that the third respondent then advised the meeting that additional time was required to allow him and the debtor an opportunity to address certain issues.  The creditors subsequently resolved to adjourn the meeting until 1 May 1996.

By a notice dated 15 April 1996, the third respondent gave notice to creditors that the meeting of 1 April 1996 had been adjourned to 1 May 1996 at 11.30 am.  The notice contained the following advice:

“I confirm that because the reconvened meeting to be held on 1 May 1996 is a continuation of the same meeting held on 1 April 1996, no further forms of proxy will be accepted.”

By the time of the commencement of the reconvened meeting on 1 May 1996, which the third respondent also chaired, there had been lodged with the third respondent by or on behalf of Trigamist Holdings Pty Limited, Ironaid Pty Limited, John Cosco and National Mutual Trustees Limited, instruments of appointment of proxies.

The minutes of the meeting of 1 May 1996 are in evidence.  They record that early in the meeting the third respondent “determined proxies’ entitlement to vote”.  The third respondent gave evidence that this process involved his advising the meeting of the names of the creditors as identified in the proxies, the amounts of the proofs of debt of such creditors, and his determination of whether or not the proxies were admitted for voting purposes.  The minutes record the third respondent as having -

“advised that the proxies for Trigamist Holdings Pty [L]imited, Ironaid Pty Limited, John Cosco and National Mutual Trustees Limited, were rejected because they were invalid”.

The minutes further record the following exchange:

“Mr McDonald requested that the Chairman explain for the benefit of the meeting why he had rejected proxies that were received after 1 April 1996, the date when the current meeting was first convened. The Chairman advised that pursuant to the Act, and in particular Rule 85A, the provisions governing meetings in bankruptcy under Part IV were to be applied as far as possible to meetings convened under Part X. Accordingly, Subsection 64ZB(3) and Section 64M applied to proxies. The Chairman explained the effect of Subsection 64ZB(3) and confirmed that the announcement about the appointment of proxies had been made on 1 April 1996. Accordingly, proxies received after 1 April 1996 could not be admitted for voting purposes.”

Shortly after the above exchange, the debtor’s proposal for a composition pursuant to Part X of the Act was put to the meeting of creditors as a special resolution. The special resolution was carried by those creditors permitted to vote either personally or by proxy.

STATUTORY BACKGROUND

The relevant statutory provisions are those in force prior to December 1996. The entitlement of a creditor to vote at a meeting under Division 2 of Part X of the Act is governed by s 198 of the Act. Section 198(1) provides as follows:

“Subject to this section, every creditor is entitled to vote at a meeting under this Division.”

The subsequent subsections of s 198 do not restrict its operation in the circumstances of this case. As Beaumont J observed in Zantiotis v Andrews (No 2) (1988) 80 ALR 299 at 302:

“The evident object of s198 is to establish a simple, practical procedure to enable the chairman to determine who can vote and, if so, for what amount.”

The manner of voting at such a meeting is governed by s 200 of the Act which provides, so far as is here relevant, as follows:

“(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)...

(3)A person claiming to be the proxy of a creditor is not entitled to vote as a proxy (otherwise than in respect of the election of a chairman of the meeting) unless the instrument by which he was appointed has been lodged with the chairman.”

Section 201 of the Act authorises the chairman to determine questions as to the right of a person to vote. The full terms of the section are:

“Any question as to the right of a person to vote at a meeting under this Division, or as to the amount of the debt in respect of which a person is entitled to vote at such a meeting, shall be determined by the chairman, who may, if he thinks it necessary to do so, adjourn the meeting for a period, not exceeding 14 days, to enable him to investigate the matter.”

Division 5 of Part IV of the Act is concerned with meetings of creditors of bankrupts convened under s 64 of the Act; it is not directly concerned with meetings of creditors of a debtor who has signed an authority pursuant to s 188 of the Act because the debtor wishes his or her affairs to be dealt with under Part X of the Act. However, r 85A of the Bankruptcy Rules provides as follows:

“The provisions of Division 5 of Part IV of the Act with respect to the holding and conduct of a meeting held under section 64 of the Act apply, so far as they are capable of being applied, to the holding or conduct of a meeting held under Division 2 or Division 3 of Part X of the Act.”

Subdivision D of Division 5 of Part IV of the Act prescribes a procedure for meetings. It is necessary to set out significant portions of Subdivision D:

“64K (1) The trustee is to preside at the meeting until a person is appointed to preside under section 64P.

(2)The trustee must open the meeting and introduce himself or herself and, if the bankrupt is present, introduce the bankrupt.

(3)If the bankrupt is not present, the trustee must announce that fact and, if the trustee is aware of any reason why the bankrupt is not present, must state that reason.

(4)The trustee must circulate the attendance record prepared in accordance with section 64J among the creditors, and creditors’ proxies and attorneys, participating in person and must ask them to enter in that record the relevant particulars, as required by the attendance record, of:

(a)the creditors who, or whose proxies and attorneys, are so participating in person; and

(b)those proxies and attorneys; and

(c)the debts of those creditors.

(5)...

(6)...

64L(1)       The trustee must then:

(a)invite the creditors and their representatives to propose a motion appointing a person to record the minutes of the meeting; or

(b)if no such motion is passed - appoint a person to record those minutes.

(2)...

(3)...

64M(1)       The trustee must then announce:

(a)the names of the creditors who are not participating in person or by telephone but whose proxies or attorneys are participating in person or by telephone; and

(b)the names of the proxies and attorneys.

(2)The trustee must then circulate the instruments appointing proxies, and the powers of attorney or copies of the powers of attorney, for inspection by persons present at the meeting.

64N(1)       The trustee must then determine whether a quorum is present.

(2)...

(3)...

(4)...  

(5)       ...

(6)...

(7)...

64P(1)       The trustee must:

(a)invite the creditors and their representatives to nominate a person for election to preside at the meeting; or

(b)if no person is so nominated - nominate a person for election to preside at the meeting.

(2)...

(3)...

(4)...

(5)Subject to subsection (6), voting at the election is to be on the voices.

(6)...

(7)...

(8)A person elected under this section to preside at the meeting is to preside at all times after he or she is elected.

(9)...

64ZB(1)        A creditor who participates in a meeting in person or by telephone may cast the creditor’s vote personally and not otherwise.

(2)Subject to subsections (3) and (5), the vote of a creditor who is not participating in a meeting in person or by telephone may be cast by a proxy duly appointed by the creditor, or by an attorney duly authorised by the creditor under a power of attorney, being a proxy or attorney participating in the meeting in person or by telephone, and the casting of a creditor’s vote by such proxy or attorney is taken to constitute the casting of a vote by the creditor.

(3)A creditor’s proxy or attorney is not entitled to cast the creditor’s vote at a meeting unless the instrument appointing the proxy was received by, or the power of attorney was produced to, the trustee before the announcement about the appointment of proxies and attorneys is made at the meeting under section 64M.

(4)...

(5)...

(6)...

(7)...

64ZFA meeting, or anything done at a meeting, is not invalid because a requirement of this Subdivision has not been strictly complied with if the requirement has been substantially complied with.”

CONTENTIONS

On behalf of the Inspector-General it was contended that the Act clearly distinguishes between the act of recording each creditor and creditor’s proxy (s 64K(4)) and an announcement about those creditors who in the opinion of the trustee are eligible to vote (s 64M(1)). Counsel for the Inspector-General formulated the issues for determination for the purpose of deciding the question before me as follows:

“(i)      Whether an announcement was made on 1 April 1996 in accordance with s64M?

(ii)Whether compliance with s200 was sufficient to entitle the proxies to vote on 1 May 1996 notwithstanding the provisions of s64ZB(3)?”

On behalf of the third respondent it was contended that the act of announcement required by s 64M of the Act took place, as the minutes of the meeting record, at the creditors’ meeting on 1 April 1996 and that no creditor’s proxy whose instrument of appointment was received by the trustee thereafter was entitled to cast that creditor’s vote (s 64ZB(3)).

CONSIDERATION AND CONCLUSIONS

The principal submissions of each party involved the contention that s 64ZB(3) of the Act, which makes reference to s 64M of the Act, has application to a creditors’ meeting under Part X of the Act. As my reasons below reveal, I do not accept this contention.

The Inspector-General argued that an “announcement” within the meaning of s 64M(1) of the Act must include a statement as to whether each proxy is accepted or rejected. On this basis it was contended that no “announcement” within the meaning of s 64M was made at the meeting on 1 April 1996, with the consequence that, the instruments of appointment of the proxies with which the question before me is concerned having been received by the trustee before the announcement required by s 64M of the Act, s 64ZB(3) imposed no impediment in the way of the proxies casting their respective creditor’s votes at the resumed creditors’ meeting on 1 May 1996.

I do not accept the submission that an “announcement” within the meaning of s 64M(1) of the Act must include a statement as to whether each proxy is accepted or rejected. It seems to me that such submission is inconsistent with the structure of Subdivision D of Division 5 of Part IV of the Act.

Section 64K of the Act provides for the trustee, after observing certain limited formalities, to circulate an attendance record among the creditors and creditors’ proxies and attorneys participating in person at the meeting. The trustee is required to ask them to record on that record the particulars required by it. The particulars to be required by the record are -

(a)the creditors who, or whose proxies or attorneys, are participating in the meeting in person;

(b)the identity of those proxies or attorneys; and

(c)the debts of those creditors.

The next step that the Act requires to take place at the meeting is the appointment of a person as minutes secretary. Section 64M requires that “then” (i.e. immediately after such appointment) the trustee must make the announcement required by s 64M(1), and “then” the trustee must circulate the instruments appointing the proxies, and the powers of attorney or copies of the powers of attorney, for inspection by persons present at the meeting.

In my view, it may be presumed that the purpose of the announcement of the names of the creditors who are participating in the meeting and of the names of the proxies and attorneys, followed by the circulation of the instruments authorising the participation of the proxies and attorneys for inspection, is to allow persons present at the meeting to raise with the trustee any issues of concern as to whether any person or corporation claiming to be a creditor is in fact a creditor and any questions about the validity of any instrument of appointment of an alleged proxy or attorney. It would be antagonistic to this purpose to interpret s 64M as requiring the trustee to state whether each proxy is accepted or rejected before the relevant instruments of appointment are circulated.

Moreover, s 64ZA provides that the trustee may determine any question that arises as to the entitlement of a person to vote, and should the trustee need a period in which to determine such question, the meeting is to be adjourned for not more than fourteen days for the purpose of this being done. The structure of Subdivision D of Division 5 of Part IV does not, as it seems to me, allow for any such adjournment until at least the step has been taken of the trustee embarking on the exercise of determining whether a quorum is present at the meeting. Once the trustee has opened the meeting as required by s 64K, the Act requires that certain steps be taken in strict sequence. This is, in my view, to be concluded from the opening words of each of ss 64L, 64M and 64N. Each of these sections opens with the words “The trustee must then ...”.

I add, however, although the question does not arise in the circumstances of this case, that should a trustee, for the purpose of determining whether a quorum is constituted, need time to consider whether a particular creditor is entitled to vote, the trustee would be entitled, in reliance on s 64ZA, to cause the meeting to be adjourned for a period of not more than fourteen days.

I conclude that the “announcement” required by s 64M of the Act is not in any way determinative of a person’s entitlement to vote at the meeting whether as a creditor or as a proxy or attorney of a creditor. In reality such “announcement” is likely, in most cases, to amount to no more than the trustee reading to the meeting the names which have been entered on the attendance record, circulated as required by s 64K(4); i.e. the names of creditors and, where applicable, the names of proxies or attorneys present at the meeting as representatives of creditors.

Having regard to my above conclusion, if it be accepted that ss 64M(1) and 64ZB(3) of the Act have application in respect of a creditors’ meeting under Part X of the Act, the announcement required by s 64M of the Act was made on 1 April 1996, and thus any creditor’s proxy whose instrument of appointment was not received by the trustee before that announcement was not entitled to cast that creditor’s vote at the meeting. On this basis the question before me for determination would be answered “Yes”. However, as is mentioned above, I do not accept that s 64ZB(3) has application in respect of a meeting held under Division 2 of Part X of the Act.

An alternative submission, put on behalf of the Inspector-General as a “fall back position”, was that r 85A of the Bankruptcy Rules does not import into the procedure for the conduct of creditors’ meetings under Part X of the Act, the provisions of s 64M(1) or s 64ZB(3). Having regard to the terms of r 85A, which are set out above, this alternative submission requires consideration of whether such provisions “are capable of being applied” to the holding and conduct of a Part X meeting.

I am unable to identify any reason why s 64M(1) should be regarded as incapable of being applied to the conduct of a Part X meeting. It seems to me that not only is s 64M(1) capable of being applied, but that it is a sensible provision to apply to a Part X meeting.

I take a different view, however, of s 64ZB(3). Section 64ZB(3) is concerned to limit the circumstances in which a creditor’s proxy or attorney is entitled to cast the creditor’s vote. Part X of the Act contains its own provisions as to entitlements to vote at meetings under that Part and as to the manner of such voting (see ss 198 - 201). In particular, s 200(1) provides that a creditor may vote by “a proxy appointed in writing by the creditor or his attorney”. The terms of s 200(3) are, in my view, of particular importance to the present question. It is convenient to set them out again:

“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.”

It may first be noticed that the above subsection assumes an entitlement in a person claiming to be a proxy of a creditor to vote in respect of the election of a chairman of the meeting notwithstanding that the instrument by which he or she was appointed has not been lodged with the chairman. Such assumption is incompatible with the terms of s 64ZB(3).

Secondly, it may be noted that while s 200(3) requires, as a condition of a proxy’s entitlement to vote, that the instrument by which a proxy has been appointed is lodged with the chairman, it does not set any time limit within which this step must be taken.

Section 198(1) of the Act provides that, subject to that section, every creditor is entitled to vote at a meeting under Part X of the Act. The manner by which each such creditor may vote at such a meeting is prescribed by s 200 of the Act. Section 200 does not by its terms import a requirement of the kind contained in s 64ZB(3). Moreover, I consider that the requirement imposed by s 64ZB(3) is incompatible with the lesser requirement of s 200(3). In my view, the two provisions are not capable of being applied together. To apply s 64ZB(3) to a meeting under Part X of the Act is, I conclude, to interfere with the manner of voting for such meeting expressly provided for by s 200.

In my view, the question which I am required to decide should be answered “No”.

I certify that this and the preceding nine (9)
pages are a true copy of the reasons for
judgment of the Honourable Justice Branson.

Associate:

Date:

Counsel for the applicant:  Mr B. Skinner

Solicitor for the applicant:  Australian Government Solicitor

Counsel for the first respondent:                   Mr M. Aldridge

Solicitor for the first respondent:                   Dibbs Crowther & Osborne

Counsel for the third respondent:                  Mr S. Gregory

Solicitor for the third respondent:                 P.W. Turk & Associates

Date of hearing:  4 June 1997