Richard Waldie Williamson & Jennifer Anne Williamson v Graham Boyd Wearne,William John Boyd Wearne & Isabelle Napier

[1980] FCA 110

Re: RICHARD WALDIE WILLIAMSON and JENNIFER ANNE WILLIAMSON
Ex parte: GRAHAM BOYD WEARNE, WILLIAM JOHN BOYDE WEARNE and ISABELLA NAPIER
McPHERSON WEARNE (1980) 43 FLR 305
Nos. 63/78/X, 64/78/X
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Lockhart J.

CATCHWORDS

Bankruptcy application to set aside deed of assignment - statement of affairs inaccurate - Court will only set aside deed of assignment if it is in the interest of creditors to do so (s. 222 (5) ) - discretion to be exercised with regard to all the circumstances especially benefit to creditors and the public - discussion of s. 222.

Bankruptcy Act 1966, s. 222

Bankruptcy - Deed of assignment - Statement of affairs - Omission of material particulars - Invalidity of deed - Principles to be applied in declaring deed void - Discretion - Interest of creditors - Bankruptcy Act 1966 (Cth), s. 222.

HEADNOTE

On 14th April, 1978, Mr. and Mrs. Williamson ("the debtors") each executed a deed of assignment under Pt X of the Bankruptcy Act 1966 ("the Act"). On that day they had each signed a statement of affairs and verified the same by statutory declaration. The statement of affairs showed estimated assets of $71,000 and estimated liabilities of $22,051, the liabilities being incurred to twenty-five unsecured creditors. In fact there were sixty-four unsecured creditors owed either $72,000 or $79,000. Some inaccuracies were noted in the statement of affairs prior to the meeting of creditors, and were orally notified to those creditors present. There were nevertheless substantial inaccuracies which were not corrected at the meeting.

The trustees realized the assets of the debtors and held just under $20,000 at the date of the hearing. After paying a priority creditor and meeting the trusteeship expenses, and subject to the failure of certain other litigation brought against the estate, a dividend of about eight cents in the dollar was likely to be distributed to creditors. Since the execution of the deeds of assignment the debtors, not without difficulty, had started a new life for themselves.

In an application brought by the applicants to set aside the deeds of assignment pursuant to ss. 222 (2) or (4) of the Act.

Held: (1) Notwithstanding that material particulars were omitted from the statement of affairs and remained uncorrected at the meeting of creditors, the court: (a) could not make an order declaring the deeds void unless it was satisfied that it would be in the interests of the creditors to do so, by reason of s. 222 (5), and (b) had to have regard to all relevant matters including the interests of creditors, the debtors and the public. Re Dolman; Ex parte Elder Smith Goldsborough Mort Ltd. (1967), 10 FLR 384, referred to. Here, although on a sequestration examinations could take place of the debtors pursuant to s. 69 of the Act, and although there might be a possibility of income earned since the date of the execution of the deeds being available for the benefit of their creditors, on the evidence the court was satisfied that it would not be in the interests of such creditors for the deeds of assignment to be set aside.

(2) Notwithstanding that there was a doubt as to whether the deeds of assignment were entered into in accordance with Pt X or complied with the requirements thereof in all the circumstances the discretion of the court should not be exercised in declaring them void pursuant to s. 222 (2).

(3) Application dismissed.

B. H. K. Donovan, for the applicants.

P. D. Urquhart, for the debtors.

D. L. Jacobs (solicitor), for the trustees.

HEARING

Sydney, 1980, July 30; August 13. #DATE 13:8:1980

APPLICATION.

Application by the applicants pursuant to s. 222 of the Act to set aside two deeds of assignment executed pursuant to Pt X of the Act on 14th April, 1978.

Cur. adv. vult.

Solicitors for the applicants: Hones & Ledingham.

Solicitors for the debtors: Marquis, Jackson Cahill & Associates.

Solicitors for the trustees: Hardings.

D. LEVIN

ORDER

1. The application be dismissed

2. There be no order as to costs

Application dismissed.

JUDGE1

This is an application by Graham Boyd Wearne, William John Boyd Wearne and Isabella Napier McPherson Wearne ("the applicants") under s. 222 of the Bankruptcy Act 1966 ("the Act") to set aside two deeds of assignment executed, pursuant to Part X of the Act, on 14 April 1978.

The parties to one of the deeds are Richard Waldie Williamson ("the male debtor") of the one part and Roy Leslie Pegler and John William O'Brien ("the trustees") of the other part. The parties to the other deed are Jennifer Anne Williamson ("the female debtor") and the trustees.

The applicants also seek summary sequestration orders against the estates of the debtors pursuant to s. 222 (7).

The debtors carried on the business of restaurateurs in partnership from 1973 to April 1977 at Balmain, Sydney under the name of "The Balmain Volunteer". In about April 1977 the business was acquired by a company, Midrena Pty. Limited ("Midrena"). Midrena was a trustee for the debtors' family and another family. Midrena carried on the business for about nine months.

The debtors were the owners of the freehold of the premises in which the restaurant business was carried on. They terminated the tenancy of Midrena due to its failure to pay rent. Thereafter the debtors resumed the conduct of the business and carried it on in partnership until about February or March 1978, when they sold both the business and the freehold of the premises to a partnership comprising the debtors, the applicants and the parents of the female debtor.

Only a month later the debtors executed the deeds of assignment in favour of the trustees.

During the period from about October 1977 to March 1978 default judgments were signed against the debtors by a number of creditors in respect of partnership debts, and at least one bankruptcy notice was issued and served on them. Indeed, on the very day the partnership of the debtors, the applicants, and the parents of the female debtor commenced trading, a bankruptcy notice was served on the debtors by one of their creditors, Glenmore Meat Co. Pty. Limited, a creditor in the sum of $3,639.27.

On 14 April 1978 the debtors signed a statement of affairs relating to their joint assets and joint liabilities. The statement of affairs was annexed to the usual statutory declaration made by them verifying its contents.

The statement of affairs showed assets with an estimated value of $71,000.00 and liabilities of $22,051.00, resulting in a surplus of assets over liabilities of $48,949.00.

It is common ground that the statement of affairs was incorrect in that it showed $22,051.00 due to twenty-five unsecured creditors whereas in fact there were sixty-four unsecured creditors owed either $72,000.00 or $79,000.00. The evidence does not enable a conclusion to be drawn as to whether the correct figure was $72,000.00 or $79,000.00.

A meeting of creditors was held at the offices of Messrs. Pegler Ellis & Co., Chartered Accountants, on 14 April 1978. Soon after the meeting had commenced the debtors arrived, whereupon Mr. Pegler excused himself from the meeting and went with the debtors to his own office for the purpose of having the debtors execute the statement of affairs. Mr. Pegler said that the male debtor informed him that the sums which the statement of affairs showed as being due to some of the creditors in the statement of affairs were not correct. Mr. Pegler said:
"I am not retyping the statement. You can sign it as it is or you can go bankrupt. You can advise the meeting of creditors of the additional debts but in any event the amounts that you are talking about are not of material consequence."

The debtors said in evidence that the male debtor said to Mr. Pegler:
"There are some additional creditors which should be listed. Hood's debt should be $7,000.00 not $3,000.00. Glenmore Meats are owed $3,500.00. There is money owing to the Commissioner of Taxation but I do not know how much."
Mr. Pegler did not admit or deny that these words were said by the male debtor.

The debtors asserted that the minutes of the meeting of creditors do not record all the discussion that took place, that there was a lot more discussion than is recorded in the minutes and that some debts not included in the statement of affairs were discussed. Mr. Pegler admitted that there was more discussion at the meeting than is recorded in the minutes; but he said that it was his practice to record only the resolutions at such meetings.

There was a lot of evidence as to which creditors were mentioned by the debtors at the meeting as being their creditors, but who were not included in the statement of affairs; or who were included there, though in smaller amounts than were subsequently claimed by those creditors. Also some creditors were represented at the meeting but were not disclosed in the statement of affairs. I see no good purpose in setting out the differing versions as to these matters because in the result, there is not a great deal of conflict between the witnesses; and what emerged, clearly enough, was that the statement of affairs was inaccurate in the particulars to which I have already referred, although the inaccuracy is perhaps tempered by the fact that a more accurate picture was given to the creditors present at the meeting. However on any view of the matter there were substantial inaccuracies in the statement of affairs; and the financial position of the debtors disclosed to the meeting of 14 April 1978 was inaccurate in various respects.

The debtors gave evidence that at the time they executed the deeds of assignment they owned, subject to encumbrances, their own home in Balmain, 5/13ths shares as tenants in common in the freehold of the premises in which the restaurant business was conducted, and 5/13th shares in the partnership business.

Although the evidence is rather imprecise as to the administration of the assets of the debtors under the deeds of assignment, it appears that those assets have been realised by the trustees. The sum of $19,630.80 is presently held by or on behalf of the trustees representing the net proceeds of realisation of the assets of the debtors. No further assets of the Commissioner of Taxation, who is a priority creditor, and the trustee's fees, expenses and remuneration, there will be about $6,000.00 left for distribution among unsecured creditors enabling a dividend of about eight cents in the dollar to be paid to them. This is subject to a qualification namely, the applicants assert that they have the benefit of a lien over the net proceeds of realisation of the debtors' property arising out of a deed of 24 February 1978 between the debtors and the applicants. If their claim is well founded, there will be virtually no dividend payable to unsecured creditors. I say nothing, of course as to the validity of this claim by the applicants as it was not an issue in the proceedings before this Court.

After they executed the deeds of assignment, the debtors sought to make a fresh life for themselves. The male debtor is an architect or draughtsman by training, the evidence being unclear as to which. One has the impression from the evidence that he has not found it easy to obtain jobs in the field of his expertise. He has a contract for three months working as a draughtsman in Darwin, which expires on 26 August 1980, where he is employed at the rate of $14.00 per hour. Most of the money he earns he sends to his wife in Sydney. The debtors have a son who goes to school in Sydney but requires special care. The female debtor is presently unemployed.

The debtors wanted to own their own home but could not afford to buy one. On 12 December 1978 they entered into a contract to buy a block of vacant land on Scotland Island for $9,500.00. The purchase was completed in March 1979. The deposit of $950.00 was provided from savings which the female debtor had accumulated since the execution of the deeds of assignment. Part of the moneys required to complete the purchase were provided by a bank against security provided by the male debtor's parents who also lent the debtor $1,000.00. The debtors obtained an additional $600.00 from their bank by way of overdraft. The balance represented accumulated savings from the wages of the debtors earned since the execution of the deeds.

The debtors pursued a variety of occupations after the deeds were executed. For some three months they lived separately, the female debtor living with her parents in their home, rent free; whilst the male debtor lived with friends, also rent free. This enabled them to save.

The debtors chose to buy the block of land on Scotland Island because it was much cheaper than land elsewhere in Sydney; but, as it is confined to access by water from the mainland, they bought an open boat made of aluminium fitted with an outboard engine. This was their only private means of access from Scotland Island to the mainland. They financed the purchase of the boat and motor by a personal loan.

The debtors have possession of a Suzuki motor vehicle and a land rover. One is leased from a finance company and the other is under a hire purchase agreement from another finance company.

The Suzuki vehicle is used for transport on the mainland, and the land rover is used mainly for the purpose of transport on Scotland Island. The debtors wish to build a house on Scotland Island; but their block of land is in a high position and vehicular access is difficult other than by the four wheel drive vehicle, which is used to carry both people and building materials. There are building materials on the block of land at Scotland Island worth about $2,000.00.

The female debtor lives at present with her parents at Pennant Hills.

There is evidence as to the present financial position of the debtors which I will not refer to in detail. It is sufficient to say that their liabilities slightly exceed their assets, although the key to their financial security is the land on Scotland Island. There is some evidence that its value at 24 June 1980 was $16,000.00. Bearing in mind that it was purchased in December 1978 for $9,500.00 it is not unreasonable to assume that it is likely that the land will increase in value beyond the figure of $16,000.00.

The female debtor gave evidence that the debtors did not retain any assets for themselves at the time they executed the deeds of assignment, and that all their assets were taken thereunder for the benefit of their creditors. I believe her.

The applicants based their attack on the deeds principally on s. 222 (4) and (5). They relied, though less strongly, on s. 222 (1) and (2).

Section 222 provides: -
"222. (1) Where there is a 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 of this Act, the Registrar, the trustee, a creditor or the debtor may apply to the Court for an order under the next succeeding sub-section.

(2) Upon the hearing of an application made under sub-section (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.

(4) Where the Court, on the application of the trustee or a creditor, is satisfied that the debtor - -

(a) has given false or misleading information in answer to a question put to him with respect to his conduct, trade dealings, property or affairs at the meeting of creditors at which the resolution requiring him to execute the deed or accepting the composition was passed; or

(b) has omitted a material particular from the statement of his affairs under section 195 of this Act or included an incorrect and material particular in that statement,

the Court may make an order declaring the deed or composition to be void or declaring any provision of the deed or composition to be void.

(5) The Court shall not make an order declaring a deed or composition, or a provision of a deed or composition, to be void on a ground specified in the last preceding sub-section unless it is satisfied that it would be in the interests of the creditors to do so.

(6) The Court shall not make an order under sub-section (2) or (4) of this section unless the application for the order is made - -

(a) in relation to a deed of assignment - before the final dividend has been paid under the deed;

(b) in relation to a deed of arrangement - before the terms of the deed have been carried out; or

(c) in relation to a composition - before the final payment has been made under the composition.

(7) The trustee or a creditor may include in an application under sub-section (1) or (4) of this section an application for a sequestration order against the estate of the debtor and if the Court, on the firstmentioned application, makes an order under sub-section (2) or (4) of this section declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.

(8) The Court may, if it thinks fit, dispense with service on the debtor of notice of an application by the trustee or a creditor under this section, either unconditionally or subject to conditions.

(9) The making of an application by the trustee or a creditor for a sequestration order under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of sub-section (1) of section 43, sections 44 and 47, sub-sections (1) and (2) of section 52 and Part XIA of this Act do not apply in relation to such an application.

(10) Where in the course of proceedings before the Court (other than proceedings by way of an application under sub-section (1) ), the Court becomes of the opinion that there is a doubt, on a particular 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, and that it is desirable that the doubt be resolved, the Court may direct the Registrar to apply to the Court under sub-section (1) for an order under sub-section (2) in relation to the matter."

As to sub-ss. (4) and (5), the applicants contended that the debtors omitted material particulars from the statement of affairs or included incorrect and material particulars therein (s. 222 (4) (b) ). Counsel for the debtors did not contend to the contrary. Counsel for the applicants submitted that in all the circumstances an order should be made declaring the deeds to be void. It was not disputed that the power conferred upon the Court by sub-s. (4), of declaring a deed or composition to be void or declaring any provision of a deed or composition to be void, is facultative or permissive and not mandatory.

Counsel for the debtors submitted that an order cannot be made under sub-s. (4) declaring a deed to be void, on the ground relied on by the debtors, unless the Court is satisfied that it would be in the interests of the creditors to do so: (section 222 (5) ). Plainly, this submission is correct.

In exercising the power conferred by sub-s. (4) the Court is to have regard to all relevant matters including the interests of creditors of the debtors and of the public: see Re Dolman; Ex parte Elder Smith Goldsbrough Mort Limited (1967) 10 F.L.R. 384.

Counsel for the applicants submitted that the discrepancy between the number and value of creditors disclosed in the statement of affairs compared with the true position was so great that the intervention of the Court was called for by declaring the deeds to be void. Plainly the discrepancy was substantial: a disclosure in the statement of affairs of twenty-five creditors owed $22,051.00 when in fact there were sixty-four creditors owed $72,000.00 or $79,000.00. If these were the only relevant facts, the applicants' case would be formidable.

Counsel for the applicants submitted that in all the circumstances the deeds should be avoided and sequestration orders made because this was a case calling for the examination of the debtors under s. 69, as within a very short time after entering into partnership with the applicants and others, the debtors executed the deeds of assignment. Also, not long after that, they acquired other assets and other liabilities.

Although the availability of the compulsory inquisitorial power conferred by s. 69 is a matter to be weighed in the scales in favour of the case for the applicants, I am satisfied on the material before me that the explanations given by the debtors as to the circumstances in which they acquired their assets after the execution of the deeds is truthful; although the wisdom of their actions in some respects is questionable.

It was submitted by counsel for the applicants that, if the debtors are made bankrupt, there is a possibility that their income, or the income of either of them, may be made available for the benefit of their creditors under s. 131 of the Act. This is theoretically possible; but the evidence before me as to the income and expenses of the debtors is such that they do not appear to have any money remaining after paying their living expenses. It is well established that, in exercising its power under s. 131, the Court must consider, amongst other things, the financial obligations of the bankrupt to his wife and family who are dependant upon him: see Re Potter; Ex parte The Official Assignee(1893)3 B.C. (N.S.W.) 85; Re McLachlan (1975) 8 A.L.R. 162.

Finally, it was submitted by counsel for the applicants that, having regard to the public interest, there may be further creditors of the debtors unknown to the trustees and that compulsory examination of the debtors, if they became bankrupt, would assist in revealing their identity. There is no substance in this contention. The inaccuracy of the statement of affairs certainly makes one approach the document with a degree of hesitation and care; but the affairs of the debtors are in the hands of the trustees who appear to have carried out the usual duties of trustees in relation to Part X deeds of assignment. There is nothing in the evidence before me to suggest that there may be other creditors of the debtors additional to those presently known to the trustees.

The property of the debtors has been dealt with by the trustees since 14 April 1978, over two years ago. They have completed the task of realising the assets. All that remains to be done, after determining the claim of the applicants to a lien over the property of the debtors, is to distribute whatever is available to the unsecured creditors.

The evidence suggests that the debtors were foolish, rather than dishonest, in the way they handled their financial affairs, culminating in the execution of the deeds of assignment.

If I were to accede to the submissions of counsel for the applicants and avoid the deeds and then either make summary sequestration orders or leave it to the creditors to decide whether fresh deeds should be executed, I have the firm view that, at the end of the day, what little there may be available now for unsecured creditors will be spent in more legal and administration costs, whittling away even further what remains for unsecured creditors, without any benefit to them or the public. I must take a practical view and not indulge in speculation as to theoretical possibilities of other assets emerging or other creditors possibly coming to light if the debtors are made bankrupt. There is nothing to suggest that either possibility would become a reality.

The present position is understandably unwelcome to the applicants; but in my opinion the correct course to take is to allow things to remain as they are and for the deeds to continue in existence. The administration of the property of the debtors under the deeds of assignment is in the hands of two experienced trustees who were represented at the hearing before me. They played a neutral role in the hearing and brought nothing to my attention supportive of the case for the applicants that, by the deeds being avoided, benefit would accrue to the creditors or the public.

The Deputy Commissioner of Taxation was represented at the hearing of the application and supported the applicants; but called no evidence and made no submissions. The Commissioner is a priority creditor and will be paid out in full whatever the fate of this application. In all the circumstances his support of the applicants carries little weight.

An affidavit was sworn by the managing director of a creditor of the debtors who is owed $1,189.72 by the debtors, plus legal costs of $116.00. The deponent said that the creditor supports the applicants. Although I place some weight on the fact of this support for the applicants, the creditor concerned did not have the benefit of hearing the evidence in the case and assessing its significance. Also Messrs. Pegler Ellis & Co., as agents for the trustees, informed all creditors by letter of the making of the application and of the date of hearing. The only creditor who appeared was the Deputy Commissioner of Taxation.

Another matter relied on by counsel for the applicants as to why, in the exercise of the Court's discretion, the deeds should be avoided was that, after the debtors executed the deeds of assignment, the creditors present at the meeting of 14 April 1978 resolved: " . . . the trustees be and are hereby authorised to defer selling all the assets of the debtors provided: -

(i) that the debtors contribute the sum of $250.00 per week; . . . "

These payments were made only for a short time after the deeds were executed. It appears that nine such weekly payments were made; but there is some conflict of evidence as to why they ceased, the debtors alleging they did not draw any wages from the business after the execution of the deeds. The evidence on this aspect of the matter was left in a vague state. I place no weight upon it; but even if I were to place some weight upon it, it would not affect the conclusion to which I have come.

Sub-section (5) requires the Court not to make an order declaring deeds to be void, on a ground specified in sub-s. (4), unless it is satisfied that it would be in the interest of the creditors to do so. Not only am I not satisfied that it would be in the interest of the creditors of the debtors to avoid the deeds; but I am satisfied that it would not be in their interests to do so.

Counsel for the applicants submitted, alternatively, that an order should be made declaring the deeds void under s. 222 (1) and (2). This proposition was but faintly argued.

The same matters were relied on by the applicants as they relied on in support of their argument as to sub-s. (4). If a case were made out under sub-ss. (1) and (2) then the applicants would not be fettered by the provisions of sub-s. (5), assuming that the requisite ground relied on for avoiding the deeds was not a ground specified in sub-s. (4). In particular, counsel for the applicants relied on the fact that many of the creditors were not given notice of the meeting of 14 April 1978; and that in those circumstances there is a doubt as to whether the deeds of assignment were entered into in accordance with Part X or complied with the requirements thereof. It was not disputed that this ground was established. In all the circumstances, for the reasons already given, the Court's discretion should not be exercised by making an order declaring the deeds to be void. I mention, in passing, that sub-s. (2) of s. 222 empowers the Court to declare the deeds of assignment void "on the grounds specified in the application". No ground is specified in the application.

As to costs, although the applicants have failed, it is understandable why they saw fit to bring this application. Within a month after the partnership agreement was entered into between the applicants, the debtors and the parents of the female debtor, the debtors executed the deeds of assignment. Not long after that they commenced to acquire other assets. It was not until evidence was given by affidavit, and orally by the female debtor in the course of the hearing before me, that the true facts emerged. It is not surprising that the applicants viewed the debtors with some suspicion, although in the result no foundation for the suspicion has been established. The inquisitorial powers of s. 69 of the Act were not available under the deeds of assignment. In my opinion, the applicants should not be required to pay the costs of any parties. It is in the interests of the creditors and the public that the evidence emerged.

As they have failed, plainly no party should be obliged to pay the costs of the applicants. The trustees will be entitled, in the usual course of administration, to their costs out of the assets of the debtors. There should be no order as to the costs of the Deputy Commissioner of Taxation.

I order that the application be dismissed with no order as to costs.