Re Turner, P.J. Ex Parte Official Receiver in and for the State of Western Australia

[1992] FCA 988

Re: PETER JAMES TURNER
Ex parte: OFFICIAL RECEIVER IN AND FOR THE BANKRUPTCY DISTRICT OF THE STATE OF
WESTERN AUSTRALIA
No. 51 of 1991 Part X
FED No. 988
Number of pages - 13
Bankruptcy
(1992) 39 FCR 528

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
Einfeld J.(1)

CATCHWORDS

Bankruptcy - application to declare deed of assignment void - resolution in favour of deed made at sixth meeting of creditors after two resolutions opposing both deed of arrangement and debtor's petition - whether final resolution in favour of deed accorded with requirements of Part X - discretionary considerations for invalidating deed

Bankruptcy Act 1966 Part X s.188, 197, 204, 204(1)(a), 222

Pretorius v Daltons Carpet Tiles Pty Limited (1984) 1 FCR 346

Re Appleton ex parte ARC Engineering Pty Limited (1985) 6 FCR 328

Re Ringuet ex parte Knight (1986) 71 ALR 295

Musolino v Sidiropoulos (1991) 101 ALR 235

Re Ratcliffe ex parte Till (1875) LR 10 Ch App 631

HEARING

PERTH

#DATE 24:12:1992, SYDNEY

Counsel and solicitor for the applicant: Mr M. McCusker QC and Mr P.

Hannan instructed by Thomas Styles Solicitor

Solicitor for the respondent: Mr F. Carles for the Australian

Government Solicitor

ORDER

1. Application dismissed.

2. Costs reserved.

3. Liberty to apply in writing in relation to costs prior to 4pm on

Friday 29 January 1993.

Note: Settlement and entry of orders are dealt with in Order 36 of the Federal Court Rules.

JUDGE1

EINFELD J. By an amended application dated 8 July 1992 the Official Receiver for Western Australia with the authority of the Inspector-General seeks orders that the Deed of Assignment entered into by the debtor on 16 September 1991 be declared void and that the debtor's property be released from control under Part X of the Bankruptcy Act 1966. The grounds are that the deed did not comply with the statutory requirements. The application, which is resisted by the trustee of the deed, is made under section 222 of the Act which relevantly states:

(1) Where there is doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204 the Inspector-General, a person authorised in writing by the Inspector-General, the Registrar, the trustee, a creditor or the debtor may apply to the Court for an order under subsection (2).

(2) Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order -

(a) declaring that the deed or composition is void, or that it is not void, on the ground specified in the application; or

(b) declaring that a provision of the deed is void, or is not void, on the ground specified in the application.

(3) The Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this Part if the deed complies substantially with those requirements. ........

1. It is common ground that by subsection (1) the applicant must first raise a sufficient doubt as to compliance with the Part. If the Court is satisfied of a sufficient doubt, the applicant must establish a factual basis for the Court to exercise its discretion in favour of invalidating the deed. The applicant says that subsection (2) will normally require the discretion to be exercised so as to remove the doubt.

2. On 23 May 1991, the debtor signed an authority under section 188 of the Act to David Ashley Norman Hurt to call a meeting of his creditors and take control of his property. The first meeting of creditors was held on 24 June 1991. Mr Hurt was appointed chairman and a deed of assignment was proposed. The minutes show that the motion that the debtor execute the deed was opposed by some major creditors and the meeting was adjourned for seven days. It resumed on 1 July 1991 and the deed was put to the vote. The voting was:
   

For: 66.7% in number; 48.7% in value Against: 33.3% in number; 51.3% in value

1. The motion was therefore declared lost. The opposition was significantly influenced by a view that assignments should generally be rejected in favour of bankruptcy petitions. However, a motion was then put to the meeting that the debtor's property be released from control and that he be required to file a debtor's position within seven days. The voting on this resolution was:
   

For: 33.3% in number, 51.3% in value Against: 66.7% in number; 48.7% in value

1. This resolution was therefore also declared lost and the meeting was by unanimous vote adjourned for seven days. When creditors met again on 8 July, the debtor's wife offered an additional sum as an inducement to approval of the deed, but when a resolution for acceptance of the deed was put, it was again lost, the voting being:
   

For: 66.67% in number; 55.976% in value Against: 33.33% in number; 44.024% in value

1. Again a resolution was put to release the debtor's property from control and calling upon the debtor to file a petition. It was lost on the same vote. A motion to adjourn the meeting was carried unanimously.

2. The next meeting took place on 15 July and agreed unanimously to adjourn for two months with liberty to the chairman to reconvene on seven days' notice. The creditors reconvened on 9 September but did little business and adjourned for one week. When they met again on 16 September, a resolution in favour of the deed was carried as follows:
   

For: 87.5% in number; 82.3% in value Against: 12.5% in number; 17.7% in value

1. The meeting unanimously appointed Mr Hurt as trustee and fixed his remuneration. The deed was entered into on the same day.

2. The applicant says that once a resolution has been put and rejected, it cannot be put again: Pretorius v Daltons Carpet Tiles Pty Limited (1984) 1 FCR 346 at 352; Re Appleton ex parte ARC Engineering Pty Ltd (1985) 6 FCR 328 at 329. The vote recorded in the minutes is the determination of the resolution: Re Ringuet ex parte Knight (1986) 71 ALR 295 at 300. Although section 197 permits a meeting to be adjourned, once a decision is made, the meeting is over and there is nothing left to be adjourned regardless of the unanimous resolution to do so: Re Ratcliffe ex parte Till (1875) LR 10 Ch App 631.

3. The first question therefore is whether in the presence of two apparently inconsistent resolutions - to reject both the deed and the debtor's petition - it can truly be said that the deed had been definitively rejected. As this is a question of fact: Ringuet at 299, the facts in the cases apparently standing in the way of the deed need to be considered for possible distinguishing.

4. In Pretorius the facts were that at the first meeting held to consider the proposed composition, the creditors rejected the proposal. They also passed a resolution that the debtor be requested to file his own petition in bankruptcy. No resolution to that effect was passed by the creditors in this case. In fact each such motion was rejected. Furthermore, there was no resolution by the creditors in Pretorius to adjourn the meeting. The meeting concluded, after resolving that the debtor file his own petition. In the present case, the creditors on each occasion unanimously resolved to adjourn the meeting. Finally, after the Pretorius meeting, the debtor sent a circular to his creditors saying that, contrary to the resolution of creditors, he was not prepared to petition for his own bankruptcy. Subsequently the trustee sent a notice to the creditors of a second meeting, not an adjourned meeting, to reconsider the debtor's proposals for a composition. At this further meeting it was resolved to rescind the earlier resolution that the debtor lodge his own petition, and to accept the debtor's proposal for composition.

5. A Full Court of this Court (Smithers, Northrop, Beaumont JJ.) observed at 352 that section 188 of the Act only authorised the trustee to convene one meeting. That meeting having been held, and the creditors having rejected the proposed deed of composition and resolved that the debtor lodge his own petition, that was the end of the matter. There was no authority to convene a new meeting. The Court said:
   

This is not to say that the matter of the proposed composition need be immediately resolved: as has been said, the meeting may be adjourned under s.197. Further, even if the meeting of creditors were to reject the composition proferred by the debtor, a sequestration order is by no means inevitable: the court has a discretion to refuse such an order in a proper case...

The Full Court said that the intention behind the provisions of Part X includes a prohibition on a debtor calling

... meeting after meeting even ad infinitum in the hope that, by a process of attrition, inconvenience, or added expense, he will eventually achieve acceptance of his proposal.

This type of oppression applies even when the creditors, as here, are or predominantly are major corporations.

1. The relevant facts in Appleton were as follows:
   

(a) When the meeting was first held, no motion was put and, as in the present case, the meeting was adjourned.

(b) When the meeting reconvened seven days later, a motion for a composition was put and lost. A motion was then passed that the property of the debtor be no longer subject to control under Division 2 of Part X of the Act.

(c) On the same day, the debtor signed a further authority in favour of the same trustee under section 188 to call a further meeting to consider the composition previously rejected.

(d) At the further meeting, the motion to approve the composition was put but not passed. Argument then followed that the motion should have been declared passed because of a wrong value ascribed to the debt of one of the creditors. When the alternative value was agreed to, the motion was then put again and passed.

1. Relying on Ratcliffe, Justice Pincus held that the motion having been put to the further meeting convened pursuant to the second authority, and not having been passed, it could not be put again at that meeting. It is not entirely clear why his Honour came to that conclusion. In view of the apparent position that the motion would have been passed if what were ultimately accepted as proper values had earlier been ascribed to the debt of one of the creditors, I would respectfully question the conclusion. There seems to be nothing in the Bankruptcy Act to prevent the resubmission or recount of a resolution which may have been the subject of a chairman's or even the meeting's erroneous assessment of permitted voting strength. I would certainly agree that once the creditors had clearly resolved at one meeting to reject a proposed composition, and to release the property of the debtor from control, the debtor was obliged to file his petition and it was not open to have a second meeting convened for creditors to consider again exactly the same composition. However, as I read his Honour's judgment, it seems that the decision was not based on this consideration.

2. Ratcliffe again involved a meeting of creditors to consider a composition. The motion for the composition was not put because it had been informally ascertained that the majority in favour of it was insufficient for its acceptance. The meeting was adjourned by the insufficient majority, presumably to enable its members to rally support on another occasion, and at the adjourned meeting the motion was passed. On appeal by a dissenting creditor, the court upheld an argument that, since the "consensus" of the first meeting had been against a composition, the meeting should not have been adjourned. The votes of all creditors had been taken, albeit informally, and "the Chairman ought to have recorded what took place...".

3. Although there was no express provision in England for adjournment, in contrast to section 197 of the Australian Act, James L.J. at 634 agreed that a power of adjournment was essential to a meeting. He said:
   

I agree with that proposition, supposing the resolution to be bona fide. But it is not bona fide for a majority which is not sufficient to pass a resolution for composition to pass a resolution for adjournment, when it has been ascertained that a resolution for a composition which has been proposed cannot be passed. When the sense of the meeting has been ascertained the meeting is over, and the power of adjournment is gone.

Those observations appear to have no relevance to an adjournment unanimously agreed to by the creditors. There seems to be no question of bona fides or possible oppression by a majority in this case.

1. In Ringuet, Justice Spender actually found that the composition was valid so that his Honour's observations concerning what would have been the case in other circumstances were obiter. However, they are strong and cogent views which demand careful attention and powerful respect. The question is whether they may be extended to cover a case where the creditors' signals of their intention are as confused as here - two rejections of the deed, the second in a different more attractive form to the first, both because bankruptcy was in principle preferable to assignment, two simultaneous refusals to release the debtor's property and to require that he bring in a petition, five unanimous decisions to adjourn, and a final acceptance of the deed.

2. The acceptance or rejection of a Part X deed is peculiarly a decision for creditors. Whilst what is recorded in the minutes is obviously critical in determining what their decision is, the minutes must be read in their totality. Creditors can be confused about what they are voting on and what the effects of their resolutions are. Although, as the minutes show, these creditors understood that the deadlock between them had to be resolved, a determined minority can be as tyrannical and obstructive as a ruthless majority. The test of bona fides and possible oppression must be applied both ways, but the voting here was too close and too unclear to label one side or the other with either description. In any event dogmatic positions that bankruptcy is always to be preferred to Part X arrangements can also be inimical to good decision-making.

3. The confusion here is emphasised by the creditors' unanimity about the adjournments. The power to adjourn Part X meetings "from time to time" in section 197(1) is not qualified and must be given a full meaning. There is nothing in the Act or the cases to prevent creditors from voting to reject a deed of assignment for the time being and voluntarily adjourning to consider other possibilities or options, including the acceptance of the same or a modified deed at a later meeting if nothing better emerges. That may well be what was done here. A Court should be hesitant to read into the Act terms which would impose a permanent result on creditors who did not once vote for bankruptcy, always voted unanimously for adjournments, and eventually voted strongly for a deed.

4. However, what is involved here is whether there is a doubt as to statutory compliance. For the reasons I have given, I conclude that there is such a doubt. The saga itself raises doubts. The second question, then, is whether the deed should be invalidated.

5. In Musolino v Sidiropoulos (1991) 101 ALR 235 at 245, a Full Court of this Court (Beaumont, Burchett, von Doussa JJ.) said that this exercise involved a judicial discretion based on "a balancing process", presumably between the interests of creditors, the public and the debtor. No creditor participated in these proceedings despite notice, and none has claimed prejudice, undue pressure or concealment of relevant facts. The respondent says that because the creditors are predominantly sophisticated corporations, they can be assumed to know their rights. They were advised in writing, prior to the initial meeting, of the existence of relief and options under section 204, including a resolution under subsection (1)(a) that the debtor's property be no longer subject to Part X control. The respondent also submits that there is no useful purpose in shackling the creditors' power to adjourn and no benefit to them in setting aside the deed.

6. A suggestion has been raised that recent amendments to the Act may subject the debtor to the obligation to contribute part of his earnings to the estate if he is made bankrupt. However, the debtor's own evidence is that he has lost his recent employment and that his future income level is doubtful. Even if they were available in this case, these benefits are therefore likely to advantage creditors no more than the deed. The respondent says in any event that a deed approved by creditors without evidence of impropriety or lack of good faith should not be set aside because of subsequent statutory change.

7. It is also worth noting the trustee's evidence that the debtor's interest in the principal property has already been realised pursuant to the deed. In other words, although the proceeds are being held by the trustee pending determination of this application, there has already been a part performance of the deed. Moreover if, as the applicant seeks, the debtor's property were released from control, the proceeds would go back to the debtor. The debtor would not be obliged to bring in a petition and although it must be acknowledged that any creditor would be free to petition for bankruptcy, there is no sign that any has any present interest in doing so.

8. On the other hand, there is a clear public interest in ensuring the regular conduct of creditors' meetings and that the fullest and most authoritative advice as to their options is available to creditors. In this respect the applicant criticises the trustee for not knowing the state of the authorities on multiple meetings and resolutions, and on adjournments. This criticism is in part well made but the process adopted and the apparent inconsistency of the resolutions have led me to a doubt as to validity. I do not think that these matters are so heinous or substantial that they should again figure strongly on the discretionary question.

9. It is most important that creditors not be "worn down" by repeated meetings so that they either lose interest altogether or cede a genuinely held position for extraneous reasons. I agree with a submission of the applicant that the character of the creditors and their likely knowledge should generally be ignored but an ideological view in favour of bankruptcy in every case, as the evidence concerning one significant opponent to the deed establishes here, is to my mind not an unimportant factor on the discretionary issue. Moreover, it is not correct for the applicant to assert that in the absence of a new proposal by the debtor, there was no other reason to adjourn the meeting than to wear the creditors down. The meeting was not adjourned by the chairman or other authoritarian intervention. The adjournments were brought about by the creditors' realisation that their inconsistent resolutions had produced a paralysis in the debtor's and their own positions to which thought and effort had to be applied to find a solution.

10. The applicant also alleges that the creditors were misled by not having their attention specifically directed at the meeting to the possibility of a resolution under section 204(1)(a). Certainly the trustee agreed in cross examination that the resolutions for release from control and a debtors' petition amalgamated two separate options under section 204 into one, but I think it is doubtful that this was confusing or deceptive. Despite a slightly emotive submission by the applicant to the contrary, viz:
    

It is thus of critical importance that at no stage during 5 hours of meeting on 6 different occasions spread over a period of 12 weeks were the creditors asked to vote on a resolution simply removing the debtor from the protection of Part X of the Act.

it is inconceivable to me that these creditors laboured for so long under the misapprehension that such a resolution was not possible or available.

1. In Musolino the Full Court expressed at 245 an appropriate set of conclusions for the balancing exercise involved here in terms that it was "better not now to disturb the status quo". That is the view I have formed here. I dismiss the application.

2. The applicant has made submissions as to the costs consequences of my conclusions but the trustee has not. I will reserve liberty to apply for costs in writing prior to 4pm on Friday 29 January 1993.