Re Watt, Terry Brian;

[1998] FCA 213

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - authorisation of registered trustee to be controlling trustee - second notice - leave requirement - nature of discretion - interests of creditors - absence of collateral or improper purpose - leave granted.

Bankruptcy Act 1966 (Cth) s 188

Re de Kantzow; Ex parte de Kantzow (1992) 35 FCR 74 (cited)
Re Saheed; Saheed v Official Receiver (1993) 41 FCR 148 (cited)

Hooper v Ewins (Branson J, 21 November 1997, unreported) (discussed)

TERRY BRIAN WATT; EX PARTE TERRY BRIAN WATT
WAG 7022 OF 1998

FRENCH J
PERTH
13 MARCH 1998

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIAN DISTRICT REGISTRY	WAG 7022 of 1998

GENERAL DIVISION

IN THE MATTER OF TERRY BRIAN WATT, A DEBTOR

EX PARTE:             TERRY BRIAN WATT

APPLICANT

JUDGE:	FRENCH J
DATE OF ORDER:	13 MARCH 1998
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

1. The debtor has leave to give an authority under s 188(1) of the Bankruptcy Act 1966 (Cth) naming and authorising Graeme Trevor Lean to call a meeting of the debtor’s creditors and to take control of the debtor’s property.

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

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIAN DISTRICT REGISTRY	WAG 7022 of 1998

GENERAL DIVISION

IN THE MATTER OF TERRY BRIAN WATT, A DEBTOR

EX PARTE              TERRY BRIAN WATT

APPLICANT

JUDGE:	FRENCH J
DATE:	13 MARCH 1998
PLACE:	PERTH

REASONS FOR JUDGMENT

FRENCH J:
FACTUAL BACKGROUND
On 22 October 1997, Terry Watt signed an authority under s 188 of the Bankruptcy Act 1966 (Cth) authorising Graeme Trevor Lean, a Registered Trustee, to call a meeting of his creditors and take control of his property.

At the time he provided the Trustee with a statement of his affairs.  That statement disclosed unsecured debts of $191,345 and secured debts of $71,000 making a total of $262,345.  Assets amounted to $171,021.

One of the assets disclosed was a sum of $28,000 representing salary and holiday pay said to be owed to Mr Watt by Kangaroo Creek Gang Pty Ltd (KCG), a company of which he is a director and company secretary.  He is also a 50 per cent shareholder in that company.  Its main trading activities related to childrens’ educational publications, cartoons and connected products.

When he executed the authority Mr Watt intended to propose a composition to his creditors by which he would make sixty consecutive payments of $3,200 each month from 31 January 1998 thus paying a total of $192,000 to be distributed among his creditors in full and final satisfaction of his debts.

On 19 November 1997 an administrator was appointed to KCG under s 436A of the Corporations Law.  On the same day, a meeting of Mr Watt’s creditors called by the Trustee was held.  The Trustee told the creditors that Mr Watt’s capacity to meet his commitments under the proposed composition would depend upon what he could recover from KCG.  It was suggested by the Trustee that the creditors await the outcome of the KCG administration before voting on the proposed composition.  The creditors voted to adjourn the meeting.

On 12 February 1998 a meeting of KCG’s creditors, of which Mr Watt was one, was held.  The KCG creditors resolved that the meeting be adjourned for up to sixty days to enable a proposal to be put to them.

According to Mr Watt, he has been working with KCG’s administrator since his appointment in November 1997 to rationalise the company’s affairs and obtain contracts by which KCG would have ongoing arrangements with a major product licensing company and an animation house.  In the past three months he says there have been a number of positive developments which mean it is likely that there will be a positive outcome in the KCG administration.  There are licensing agreements in prospect and discussions with various investors which, in Mr Watt’s opinion, offers may be forthcoming.

On 17 February 1998 Mr Watt wrote to the Trustee setting out the prospects for KCG and advising him of his revised salary claim against the company for a figure of between $100,000 to $120,000.

At that time the Trustee’s control of Mr Watt’s property was to terminate by operation of the Act on 22 February 1998 (see s 189(1A)(d)).

The creditors resolved in the following terms:

“That in accordance with Subsection 188(4) of the Bankruptcy Act the Debtor make an application to the Court for leave to give an authority to Graeme Trevor Lean, registered trustee, within 6 months of him giving another authority.”

According to the minutes, ten creditors, representing a total of $189,301 in debts, voted in favour of the resolution and four creditors, representing $47,403, voted against.

Mr Lean’s control of Mr Watt’s estate ceased on 22 February 1998 pursuant to s 189(1A)(d) of the Act.  Mr Watt  now seeks leave to give another authority.

STATUTORY FRAMEWORK
Under s 188 of the Bankruptcy Act a debtor may sign an authority authorising a registered trustee (inter alia) to call a meeting of creditors and to take control of the debtor’s property. Subsection 188(4) was introduced into the Act by the Bankruptcy Legislation Amendment Act 1996 (Cth). It provides:

“Subject to subsection 192(1), a debtor cannot give an authority within 6 months of giving another authority, unless the Court grants leave to do so.”

Section 192 relates to circumstances in which a controlling trustee may be changed and an authority signed to appoint a substitute.  It is not material for present purposes.

Termination of control is governed by s 189(1A):

“1A  The control continues until one of the following events happens:

(a)the creditors resolve at a meeting called under this Part that the property cease to be subject to control;

(b)the debtor and a trustee make a deed of assignment or a deed of arrangement following a special resolution of creditors;

(c)the creditors accept a composition under this Division;

(d)4 months pass since the authority under section 188 became effective;

(e)the Court, under section 208, releases the property from control;

(f)the debtor becomes a bankrupt;

(g)the debtor dies.”

THE DISCRETION TO GRANT LEAVE
Prior to the introduction of s 188(4) it seems to have been the position that a second authority could be executed and presented to the Registrar - Re de Kantzow; Ex parte de Kantzow (1992) 35 FCR 74 at 77; Re Saheed; Saheed v Official Receiver (1993) 41 FCR 148 at 149.

In Hooper v Ewins (Branson J, 21 November 1997, unreported), Branson J could see no reason to conclude that subs 188(4) was intended to limit the ability of a debtor to sign an authority naming a solicitor or registered trustee as controlling trustee merely because within a period of six months from the signing of such authority, the debtor signed a similar authority which did not ever become effective. That was a case in which the debtors had signed a form of authority authorising the Official Trustee to take control of their property. However, the Official Trustee had not consented to act pursuant to that authority. Thus it was not effective.

The fact situation before Branson J differed from that before the Court on this application. In that case the necessary leave was granted in order to allow the provisions of Part X to be invoked in a common sense way unhampered by technicality.  And it is that approach which should  inform the disposition of this application.  The discretion conferred on the Court is a broad one to be exercised having regard to the practical and expeditious operation of Part X of the Act and the interests of creditors.  It will be for the debtor who seeks to take advantage of the provisions of Part X to satisfy the Court that it is appropriate that leave be given.  If, for example, it were to appear that the second notice was sought for some collateral or improper purpose unrelated to the legitimate objectives of the Act, it would be for the debtor to dispel that appearance.

In the present case, the giving of a second notice will allow the effective continuation of a process which has the support of a majority of creditors. It will also permit them to better assess any composition proposal without the need to resort to formal bankruptcy proceedings.

The case is an appropriate one for leave to be granted and I grant leave accordingly.

I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice French

Associate:

Dated:            13 March 1998

Counsel for the Applicant:     Mr J. Vaughan

Solicitors for the Applicant:    Deacons Graham & James

Date of Hearing:  10 March 1998

Date of Judgment:                 13 March 1998