Schierholter v Montague - [2005] FMCA 1199

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SCHIERHOLTER v MONTAGUE & ANOR

[2005] FMCA 1199

BANKRUPTCY – Application to set aside composition accepted by creditors.

Bankruptcy Act1966, ss.82, 222, 239, 242 and 245

Re McLean and Another; Ex parte Friends' Provident Life Office (1992) 36 FCR 502

Applicant:

PETER SCHIERHOLTER

First Respondent:

THE ESTATE OF THE LATE DELWYN REX MONTAGUE

Second Respondent:

JOHN DAVID ADAMS

File Number:

MLG 901 of 2003

Judgment of:

Riethmuller FM

Hearing date:

23 June 2005

Date of Last Submission:

23 June 2005

Delivered at:

Melbourne

Delivered on:

23 June 2005

REPRESENTATION

Counsel for the Applicant:

Mr Irlicht

Solicitors for the Applicant:

Irlicht and Broberg

Counsel for the First Respondent:

No appearance

Solicitors for the First Respondent:

No appearance

Counsel for the Second Respondent:

No appearance

Solicitors for the Second Respondent:

No appearance

ORDERS

The deed of arrangement entered into is void as between the applicant and the deceased.
The estate of the deceased be sequestrated.
The application be otherwise dismissed.
No order as to costs with respect to the trustee or the first respondent.
The costs of the applicant of and incidental to the application including all reserved costs be taxed and paid out of the estate of the late Delwyn Rex Montague in accordance with statute as if they were the costs of a petitioning creditor.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 901 of 2003

PETER SCHIERHOLTER

Applicant

And

THE ESTATE OF THE LATE DELWYN REX MONTAGUE

First Respondent

And

JOHN DAVID ADAMS

Second Respondent

REASONS FOR JUDGMENT

(Revised from Transcript)

This is an application pursuant to sections 222, 239, 242 and 245 of the Bankruptcy Act 1966 to set aside a composition accepted by creditors of Delwyn Rex Montague on 17 June 2003.
The application was made on 20 August 2003 and has taken some considerable time to come to hearing. At the time that the application was made appearances were entered by the debtor, Delwyn Rex Montague, as first respondent, and the trustee appointed for the purposes of the composition, John David Adams.
In the intervening period Delwyn Rex Montague passed away and application was brought with respect to the further conduct of the proceedings. It became apparent that his solicitors were aware of the proceedings and did not wish to continue to act nor did his personal representative as appointed under his will seek to participate in the proceedings. As a result, I have made an order that the proceedings continue in the absence of representative of the estate, as to do otherwise would have incurred needless expenses given that the estate did not wish to participate in the proceedings.
Mr Adams also was given liberty to withdraw, as he was of the view that he would abide the order of the court and appeared to be participating in the proceedings to protect his position with respect to costs. After arrangements were entered into between him and the applicant he no longer continued in the proceedings and no costs orders are sought against him with respect to the matter, nor is it sought to impugn him personally with respect to his conduct in the matter.
The applicant relies upon four affidavits, three by himself and one by Mr Adams which, as I understand it, was part of this arrangement with Mr Adams. Those are the affidavits of the applicant filed 17 September 2003, 29 October 2003 and 20 August 2003 and the affidavit of Mr Adams filed 8 October 2003. During the course of argument counsel for the applicant also referred to the affidavit of the deceased, Mr Montague, filed 10 October 2003 and in particular the points of claim that were annexed thereto from proceedings in the Victorian Civil and Administrative Tribunal.
The proceedings arise out of a transaction that was entered into between the applicant and the first respondent some years ago. The applicant and the first respondent entered into an agreement for the purpose of allowing the applicant to become a 50 per cent owner of a business. The precise terms of that agreement are in dispute, or at least were in dispute as between the applicant and the late Mr Montague. However, some parts of the agreement must be considered relatively clear, given that there was a brief memorandum of the agreement in writing signed by both Mr Montague and the applicant. That memorandum provides as follows:

AGREEMENT

BUSINESS – Doyles 212 BAY STREET, BRIGHTON 3186
Agreement between Delwyn Rex Montague of 76 Wilson Street, Brighton 3186 and Peter Scheirholter of 7 St Austell Court, Croydon Hills 3136.
50% Partnership in business for $100,000 for all equipment and business.
Trial for 1 month from date of reopening approximately April 2001.
Peter will put $30,000 non-refundable into the business to refurbish front part of restaurant and part of rea, and to stock up bar and help pay expenses. If business is not performing to Peter’s expectation (profit), he will walk away after 1 month, if $20,000 extra needed Del to fund and paid first before Peter $30,000.
When Del sells the business over $160,000, Del will pay all or part of Peter’s $30,000.
Rent $5,000 per month plus outgoings for area up to Giggle Palace.
Each week Peter and Del to check accounts and discuss improvements.

There is, it seems, no doubt that various sums of money totalling $137,701 were paid, apparently in furtherance of that agreement. The cheques for those sums were provided by the applicant, drawn upon a company in which he had an involvement with, Meng Developments Pty Ltd. They were paid to various other entities as a result of different endorsements and deposits which included: a company, Flintvale Pty Ltd, that the deceased had an interest in and a company, Pirita Lodge Pty Ltd in which the deceased also had an interest.
When the deceased decided to enter into a composition of arrangements with his creditors a trustee was duly appointed for that purpose, a meeting called and at that meeting a question arose as to whether or not the applicant would be able to vote at the meeting as a creditor of the deceased. This occurred after the applicant had brought proceedings in the Victorian Civil and Administrative Tribunal seeking to recover the moneys that he had paid pursuant to the agreement.
Those proceedings were based upon the points of claim (Annexure DRM1) to the affidavit of Mr Montague. The substance of the proceedings was the applicant had agreed to purchase a 50 per cent share in a business known as ‘The Deck Bar’, or ‘Doyle's’, at Brighton in Melbourne. Various sums of money had been paid and the respondent had failed to transfer the registrations and property of the business 50 per cent to the applicant. Those proceedings were not continued as a result of the composition of creditors.
At the meeting the controlling trustee made a determination as to whether or not the applicant ought to be allowed to vote at the meeting as a creditor. That determination appears on the third page of the minutes and is in the following terms:
The Controlling Trustee made the following comments on the claim lodged by Mr Schierholter:
·     the claim by Mr Schierholter included GST, which the Controlling Trustee stated was not applicable to the funds advanced, which were not a taxable supply, thereby reducing the claim from $151,470 to $137,701.
·     The Controlling Trustee stated that the agreement entered into appeared to reflect the intentions of the parties and based upon this and the lack of any documentation to the contrary, it was apparent that Mr Schierholter had provided working capital and bought a share of the business.
·     The Debtor was not running the business, rather it was being run by Pirita, this was supported by the fact that the Liquidator of Pirita was proceeding to realise the business as a going concern.
The Controlling Trustee determined from the above that Mr Schierholter was not a creditor of the Debtor and therefore was not entitled to vote at the meeting of creditors.
Viewed in isolation it is difficult to understand precisely how these reasons flow from the transaction described above. However, some insight into those findings can be obtained from a review of the affidavit of Mr Montague that was referred to in argument.
It seems that Mr Montague's position was that in early 2001 he held the lease of the premises at Bay Street, Brighton, where the business was operating. He was short of capital and decided to seek out a business partner or joint venturer (the terms "joint venture" were not used in any of the material but are used here in view of the legal distinction between a formal partnership and a joint venture arrangement). He swore that he entered into an agreement for the applicant to purchase 50 per cent of his interest in the business conducted at the premises. There is some narrative as to issues between the parties about refurbishing premises and so forth which does not appear to have great relevance here other than to show that there was clearly a view by the applicant that he had an interest in the business, not strictly from a financial perspective but also in the running of the business.
It is then said that the applicant never entered into an agreement with the entity that conducted the particular business nor entered into an agreement to form a new business with the deceased. The deceased says that at all material times he was the sole shareholder of Pirita Lodge Pty Ltd which conducted the business and that he sold to the applicant 50 per cent of his interest in Pirita. Another company, Flintvale Pty Ltd, occupied another part of the premises which was the company that at least some of the moneys were deposited to when provided by the applicant.
The deceased, in his affidavit, then sets out his argument that he does not dispute that he received moneys from the applicant but says that this was part of a reimbursement transaction as a result of him agreeing to transfer to the applicant one half of the shares in Pirita Lodge Pty Ltd.
Viewed in light of these allegations one can understand what must have been the reasoning behind the trustee's decision as briefly set out in the minutes. However, a review of the material concerning the transaction provides a different view.
Firstly, it is quite clear from the written document signed by both parties, as set out above, that there was no reference at that stage to the involvement of a company, nor that either party would hold shares in Pirita Lodge Pty Ltd nor that the concept of the transaction to the parties at that time ever involved a transfer of shares from Mr Montague to Mr Schierholter in Pirita Lodge Pty Ltd.
It does not appear that cheques were drawn in favour of Pirita Lodge Pty Ltd, although that would not normally be the case if it was a purchase of shares. There is no suggestion that a share transfer had been effected or even drawn up and signed by the various parties. There was certainly no suggestion that there has ever been a share transfer at a time prior to Pirita Lodge Pty Ltd going into liquidation. To the extent that some of the money being provided were meant to be working capital, one would have expected that it would have been accounted for quite clearly in books of account that would be available, and none seem to be available to me today on the material. Even the affidavit of Mr Montague does not annex such documents.
It appears to me, having regard to the material as set out, that this was not a transaction between the applicant and Mr Montague for the purpose of the sale of a share in Pirita Lodge Pty Ltd, but rather for the purpose of a sale of the business. However, even if it were for the sale of a share in Pirita Lodge, no share appears to have been transferred and therefore the consideration for that transaction has wholly failed.
I also note that it appears that Pirita Lodge Pty Ltd did not become the registered proprietor under the lease until some time after this transaction. This gives rise to further reasons for rejecting the suggestion that the transfer was meant to be of shares in Pirita Lodge Pty Ltd in that it was said in the agreement that it was expected that there would be transfers of interests in leases and the like to the applicant.
On the material before me I am satisfied that the applicant and Mr Montague had entered into a contractual arrangement which involved the transfer of a 50 per cent share of the business. A transfer of a 50 per cent share in the business was not effected and therefore Mr Schierholter had a proper contractual claim as against Mr Montague.
A contractual claim is a type of debt or liability that can be proved in bankruptcy pursuant to section 82 of the Bankruptcy Act. Whilst once it was the case that only liquidated demands or debts (in the pre-Judicature Act sense) were provable, section 82 is now far broader and includes demands in the nature of unliquidated damages that arise pursuant to a contract or promise. In this case it appears clear that the sum sought, $137,701, would be a debt within the meaning of section 82 of the Act and therefore the applicant ought to have been allowed to participate in the meeting and to vote.
The failure to allow the applicant to so participate in the meeting and vote gives rise to the right on the part of the applicant to apply pursuant to section 222 of the Bankruptcy Act for orders setting aside the composition and for orders for sequestration.
An example of the process in such an application, together with clarification of the appropriate tests to be applied, can be found in Re McLean and Another; Ex parte Friends' Provident Life Office (1992) 36 FCR 502 by Heerey J. Similar difficulties arose in that case and his Honour considered whether or not the court should exercise its discretion under the relevant sections of the Act. His Honour concluded that it was appropriate for a court to determine whether the chairman's decision was correct, having regard to the facts and evidence before the court rather than simply on the basis of the material before the chairperson (see pages 509 to 510). His Honour also decided that it was more appropriate for the court to make a determination whether or not there was a claim rather than whether or not there was an arguable case (see pages 510 to 512).
In this case I find that the applicant ought to have been allowed to participate in the meeting, he being a creditor of the debtor at the relevant times within the meaning of section 82. I therefore must consider whether or not it is appropriate to make orders granting relief in the terms sought by the applicant. In this case the applicant has brought an application pursuant to section 222 within the time provided by section 222(6), as is confirmed by the factual statements of the trustee in his affidavit at paragraph 8, that is, that no dividends have been paid to date.
On the evidence before me, had the applicant been entitled to vote, his votes along with those of the Commonwealth Bank (as described in the minutes of the meeting) would have been sufficient to ensure that a composition was not accepted by the creditors. It therefore seems likely that a properly constituted meeting would not have accepted the composition and that a sequestration order would have ultimately followed, given that it is clear that the debtor was insolvent.
I note from the balance of the material that there are considerable allegations with respect to the nature of other debts that were accepted at the meeting and as to whether or not sham arrangements or transactions were entered into for the purpose of defeating the rights of creditors. For the purposes of the application today it is not necessary for me to make findings with respect to those issues. These factors, however, are matters that weigh in favour of making a sequestration order.
It seems that there is little or nothing left to pay to the creditors under the composition, having regard to the comments by the trustee's solicitors in the proceedings. It is difficult to see that there is any detriment that may be suffered by the creditors as a result of a sequestration order. If, as is alleged by the applicant, there were inappropriate transactions or conduct, there is the possibility that a trustee in bankruptcy may be able to obtain funds or property for the benefit of the creditors. There appears to be no detriment to the debtor in this case in that he has now passed away. As such, the only impact could possibly be to recover money or property that has been inappropriately distributed. This would not be a basis for declining to set aside the composition and ordering a sequestration order but a factor in favour of doing so.
In all of the circumstances I am satisfied that in this case it is appropriate to make the orders sought.

I certify that the preceding twenty-eight (28) paragraphs are a true copy of the reasons for judgment of Riethmuller FM

Associate:

Date: