Shepherd, R.K. Ex parte Berklee Limited v Rodgers, P.D

RUSSELL KENNETH SHEPHERD
Ex parte: BERKLEE LIMITED
BERKLEE LIMITED v. PETER D. RODGERS
No. X204 of 1991
FED No. 335
Number of pages - 19
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Beazley J(1)

CATCHWORDS

Bankruptcy - Part X arrangement with creditors without sequestration - declaration that arrangement is void pusuant to s.222(2) Bankruptcy Act - power to adjourn creditors' meeting - whether further proposal can be put at adjourned meeting when initial proposal rejected - determination of existence of debt by Court - validity of assignment of debt from debtor's de facto wife to creditor entitled to vote at meeting - whether assignment a 'sham' - whether failure to disclose debt an omission of a material particular from statement of affairs under s.222(4)

Bankruptcy Act 1966 s.5, s.188, s.189, s.197, s.198, s.204, s.207, s.213, s.216, s.222.

Acts Interpretation Act s.36(1)

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

Re Appleton; Ex parte ARC Engineering Pty. Limited (1985) 6 FCR 328.

Re Henry Ratcliffe; Ex parte Till (1875) LR 10 Ch App 631

Re Ringuet; Ex parte Knight (1986) 11 FCR 45

Forshaw v. Thompson and Anor. (1992) 35 FCR 329

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

Re Tregonning; Ex parte Friends' Provident Life Office (1983) 74 FLR 327

Zantiotis v. Andrew and Anor (No. 2) (1988) 80 ALR 299

Re McLean and Anor; Ex parte Friends' Provident Life Office at p 510.

Apollo Shower Screens Pty. Limited and Anor. v. Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561

Ex parte Milner (1885) 15 QBD 605

Sharrment Pty. Ltd. and Ors. v. Official Trustee in Bankruptcy (1988) 18 FCR 449

Miles v. Bull (1969) 1 QB 258

Scott v. Commissioner of Taxation of the Commonwealth (No. 2) (1966) 40 ALJR 265

Re Segal; Lensworth Finance Limited v. Segal and Anor 45 FLR 85

HEARING

SYDNEY, 17 March 1993

#DATE 14:5:1993

Counsel for the Applicant: C.R. Newlinds

Solicitors for the Applicant: Moray and Agnew

Counsel for the Respondent: B. Skinner

Solicitors for the Respondent: Kemp Strang and Chippindall

Commissioner of Taxation: K. Connor

JUDGE1

BEAZLEY J This is an application by Berklee Limited ("Berklee") for a declaration that any resolutions purportedly passed at a meeting of creditors of the debtor, Russell Kenneth Shepherd, ("the debtor"), held on 25 November 1991 are of no force and effect. Alternatively, Berklee seeks a declaration that the deed of arrangement entered into between the debtor and the respondent trustee, Peter D. Rodgers, ("the trustee"), dated 17 December 1991 is void pursuant to s.222(2) of the Bankruptcy Act 1966 ("the Act") or an order that the deed of arrangement be terminated.

At the commencement of the hearing, the Commissioner of Taxation made an application to file in Court a Notice of Intention to Appear pursuant to rule 106 of the Bankruptcy Rules. The Notice was clearly out of time. However, there was no objection to his appearance and I granted him leave to do so. The Commissioner also sought to adduce affidavit evidence on its application. Again, there was no objection and I granted leave to the Commissioner to do so pursuant to rule 113 of the Bankruptcy Rules.
The circumstances leading up to the execution of the deed of arrangement were as follows. On 18 June 1991, Berklee obtained default judgment in proceedings in the Victorian Supreme Court against the debtor, Russell Shepherd and Associates Pty. Limited, and Naomi Francis Broinowski in the sum of $107,502.84. It appears that Ms. Broinowski was, at least at times material to the events relevant to this application, the de facto spouse of the debtor. On 22 July 1991, a bankruptcy notice was issued against the debtor and Ms. Broinowski. It was served on the debtor on 15 August 1991 and on Ms. Broinowski on 21 August 1991. The notice was not complied with and a creditors' petition was issued against each. However, on 25 October 1991, prior to service of the petition on either the debtor or Ms. Broinowski, the debtor signed an authority under s.188 of the Act authorising his solicitor, Richard A. Licardy, to call a meeting of creditors.
In his statement of affairs, verified by affidavit dated 25 October 1991, the debtor disclosed the existence of ten unsecured creditors, including Berklee, who were owed a total sum of $206,627. Berklee was owed $130,000. A Ms. Myers was listed as being owed $8,000. This apparently was for unpaid accountancy fees. The statement of affairs also revealed a number of secured creditors in a total sum of $680,835, secured against property in a total value of $600,000. The secured creditors included the debtor's mother, Mrs. A.E. Shepherd with a debt of $130,000, secured by a "caveat over property". It is apparent from the statement of affairs that the same property or properties were used to secure all of the secured loans. The Australian Taxation Office was disclosed as a contingent creditor in an unspecified amount. In an affidavit filed in the proceedings, the debtor deposed that he had told the creditors at the meeting on 11 November 1991 that the company with which he had been involved, Russell Shepherd and Associates Pty. Limited, owed a substantial sum to the Commissioner of Taxation. Ms. Andrew, a clerk employed in the Australian Taxation Office, gave affidavit evidence that the debtor had been prosecuted under s.8Y of the Taxation Administration Act 1953. She deposed that on 12 November 1991 the debtor pleaded guilty to offences under that section and the matter had been adjourned to 26 November 1991 for further hearing before the St. James Local Court. Prior to that date, the Commissioner of Taxation had advised the debtor that should the offences be proved, the Commissioner intended to seek a reparation order under s.21B of the Crimes Act 1914 (Commonwealth). On 26 November 1991, two reparation orders were made against the debtor in the sums of $259,129.75 and $87,633.90.
The proposal made to the creditors was that the debtor would enter into a deed of arrangement pursuant to Part X of the Bankruptcy Act, wherein he would assign all his divisible property for the benefit of his creditors and pay to the trustee the sum of $23,428 over three years by quarterly instalments, to be distributed annually to his creditors. This would result in an anticipated distribution to creditors of approximately 10x40 in the dollar.
Although the notice to creditors specified a meeting to be held on 4 November, 1991, the meeting was in fact held on 11 November 1991. However, there was no dispute as to the valid convening of the meeting.
The meeting of 11 November 1991 was attended by a number of the unsecured creditors. Proxies were held in respect of others. Mr. P. Leroy, an accountant with Love and Rodgers, chaired the meeting. Ms. S. Myers, Mrs. A. Shepherd, Mr. A. McAlpine, the State Manager for New South Wales of Berklee and Mr. Licardy attended personally. The statement of affairs was tabled. The debtor explained the circumstances giving rise to his financial situation. His proposal, which I have set out earlier, was put informally to the meeting, and an informal vote taken which indicated that a majority of creditors in number agreed, but that they did not comprise 75% of the value of the debts of those present.
The Chairman outlined the provisions of s.204 of the Bankruptcy Act and gave an explanation to the creditors of the options provided by that section. A motion was moved and seconded that the meeting pass a special resolution that

"creditors accept a deed of arrangement pursuant to Part X of the Bankruptcy Act, in full satisfaction of the debts whereby the debtor:

. assign all his divisible property for the benefit of his creditors,

. pay to the trustee the sum of $23,428 payable over 3 years by quarterly instalments of $1,952.33 and that such funds be distributed annually."

The motion was defeated as Berklee, which held 52% of the value of the debts of the unsecured creditors present and entitled to vote, voted against the resolution. Those voting in favour of the resolution included Ms. Myers and Mrs. A.E. Shepherd. A motion that the meeting be adjourned was then moved, seconded and passed, Berklee voting against the resolution. The meeting was adjourned until 25 November 1991.
At the adjourned meeting, Mr. P. Rodgers was appointed Chairman. The first significant matter at the adjourned meeting occurred when Mr. Licardy advised that Ms. S. Myers now held an assignment of debt from the debtor's de facto wife, Ms. Broinowski, in the sum of $300,000. Mr. McAlpine questioned why this had not appeared in the statement of affairs. The debtor explained that he had misunderstood the section of the Act which prevented his de facto from voting at the meeting, believing that his de facto was not able to participate in any way in his Part X arrangement. Ms. Myers advised the meeting that notwithstanding the assignment she would only participate in any dividend to the amount of her own debt and would "stand out of any dividend for the $300,000". The Chairman determined to accept the validity of Ms. Myers' vote in the total amount of the debt initially specified in the statement of affairs and the assigned debt "as it seemed that everyone would benefit from the arrangement being passed". He stated that Berklee had the right to seek legal advice as to whether the additional debt was acceptable.
A motion was then moved by Ms. Myers and seconded by Mr. Licardy that a special resolution be passed

"that creditors accept a deed of arrangement pursuant to Part X of the Bankruptcy Act, in full satisfaction of their debts whereby the debtor:

. Assigns all his divisible property for the benefit of his creditors.

. Pay to the Trustee the sum of $25,000 payable over 3 years by quarterly instalments of $2,083.33 and that such funds be distributed annually".

That special resolution was passed. The minutes of meeting record the voting as follows:

"For:

Mr. W. Hadenham $3,000.00 Mr. J. Sherman $1,050.00 Mr. C. Ward $1,700.00 Ms. S. Myers $358,000.00 Mrs. S. Shepherd $130,000.00 Mr. R. Licardy $1,300.00 $495,050.00 Against:

Mr. A. McAlpine (Berklee) $130,000.00"

The voting represented a majority of 79% in value in favour of the resolution. It is to be noted that the amount recorded in the minutes of meeting against the name of Ms. S. Myers is $358,000. There is no doubt that this includes the $300,000 allegedly assigned to her by Ms. Broinowski and the $8,000 disclosed in the statement of affairs. There is no indication or explanation in the minutes as to where the additional $50,000 derives from. No evidence was given in respect of it. It may be a clerical error. I shall return to that matter later. On 17 December 1991, the debtor entered into a deed of arrangement which reflected the provisions of the special resolution.
The first issue which arises is whether the resolution passed at the meeting of creditors held on 25 November 1991 was valid. Counsel for Berklee submitted that there was no power in the meeting held on 11 November 1991 to adjourn the meeting to a later date, in circumstances where the proposal pursuant to Part X had been put to that meeting and rejected. It was submitted, therefore, that any resolution passed at the meeting on 25 November 1991 was of no force and effect and should be declared void pursuant to s.222(1) and (2) of the Act. Counsel for the Commissioner of Taxation supported this submission, but said the matter was properly looked at on the basis that the adjourned meeting did not have the power to resolve that the debtor execute a deed of arrangement and therefore the purported resolution to that effect was void.
Counsel for the debtor initially submitted that once an authority was signed under s.188, the provisions of s.189 operated and continued to do so until such time as a special resolution in accordance with one or other of the powers therein specified, was passed. Although this submission was not withdrawn, the subsequent written submissions of counsel for the debtor, must, I think, be taken as having withdrawn this initial submission, as s.189 only applies in circumstances where a debtor has given an authority to a registered trustee, which did not happen in this case. In the written submissions, counsel for the debtor contended that there is no legislative warrant for the proposition that a defeated special resolution effectively puts an end to a meeting called under s.188. It was submitted that the Act envisages that creditors will either adjourn a meeting or pass a resolution under s.204. If they choose to do neither, the meeting is completed and it is not competent for any party to take any further step in relation to the s.188 authority. However, a failure to pass a special resolution that, for example, an arrangement be entered into, does not put an end to a meeting called under s.188. Leaving aside its correctness, this submission, to be relevant to the circumstances here, must be to the effect that the defeat of a special resolution does not put an end to the meeting called under s.188, nor deprive the meeting of the right to vote on the same resolution.
Section 188 provides:

(1) "A debtor who desires that his affairs be dealt with under this Part without his estate being sequestrated and -

(a) is personally present or ordinarily resident in Australia; ...

may sign an authority ...

(f) authorising a solicitor to call a meeting of his creditors".

In this case the debtor satisfied sub-paragraph (a) and signed an authority under sub-paragraph (f). The formal requirements of s.188(2) were complied with.
Section 197 provides:

"(1) A meeting may, by resolution, be adjourned from time to time".

Section 204 provides for the resolutions which may be passed at a meeting called pursuant to s.188, as follows:

"204(1) The creditors may, at a meeting called in pursuance of an authority under section 188, by special resolution -

(a) ...

(b) require the debtor to execute a deed of assignment or a deed of arrangement under this Part;

(c) accept a composition; or

(d) require the debtor to present a debtor's petition within 7 days from the day on which the resolution was passed".

Section 222 relevantly provides:

"(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, the Inspector-General, a person authorised in writing by the Inspector-General, the Registrar, a 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.

(4) Where the Court, on the application of the Inspector-General, a person authorised in writing by the Inspector-General, 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 any of his conduct or examinable 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 the debtor's affairs given under subsection 188(2) 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 subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so."

In support of their submission that there was no power to adjourn the meeting or that the resolution passed at the second meeting was void, Counsel for the Applicant and for the Commissioner of Taxation relied upon the decisions of Pretorius v. Daltons Carpet Tiles Pty. Limited (1984) 1 FCR 346 and Re Appleton; Ex parte ARC Engineering Pty. Limited (1985) 6 FCR 328. In Pretorius the Full Court of the Federal Court held at p 352:

"... the scheme provided by ... the Act contemplates that only one meeting of creditors may be called pursuant to an authority under s.188 for the purpose of considering a composition proposed by their debtor, subject, of course, to the possibility that such a meeting may be adjourned pursuant to s.197".

Pretorius was applied in Re Appleton. In that case, the debtor signed a s.188 authority pursuant to which a meeting of creditors was held. That meeting was adjourned. At the adjourned meeting, a motion for a composition was put and lost. The debtor signed a further authority under s.188 pursuant to which a meeting was held which considered the same composition as had been considered at the earlier meeting. The motion was put and again was lost. At the request of some of the creditors the motion was put again and this time was passed. Pincus J held that once the motion that a composition be accepted was put to the meeting and not passed, it could not be put again. His Honour relied on Re Henry Ratcliffe; Ex parte Till (1875) LR 10 Ch App 631 where it was held that a power of adjournment was not properly exercised when it had been ascertained informally that a resolution for a composition would not be passed. As Sir W.M. James LJ said at p 634: "When the sense of the meeting has been ascertained the meeting is over and the power of adjournment is gone ...". Pincus J also held that the principle in Pretorius, although directed to the question of whether a second meeting could be held, was similar and supported his conclusion.
In Re Ringuet; Ex parte Knight (1986) 11 FCR 45 at p 49, Spender J also applied Pretorius, accepting that:

"if a resolution on any of the options given to a meeting of creditors under s.204 of the Act is determined either favourably or unfavourably, it is not competent to put that resolution again, either at that meeting or any adjournment of that meeting".

(See also Re Tsangaris and Ors; Ex parte Gaymark Investments Pty. Limited (1986) 39 NTR 15; Re William Frederick John Denning; Ex parte The Official Trustee in Bankruptcy unreported Sheppard J 3 December 1985). In the present case, the business of the meeting held on 11 November had concluded. There was no purpose in adjourning the meeting even though, strictly, it might be said that the right to adjourn remained. Whether or not this is correct, I am of the opinion that Re Appleton and Re Ringuet are correct. The motion put at the meeting on 11 November 1991 having been defeated, could not be put again during the course of that meeting, including at any adjournment of that meeting. However, the real question here is whether, at the adjourned meeting a motion proposing a different arrangement could be moved and a resolution passed. In my opinion the answer to that question is no. However, I do not have to decide the matter on the question put put baldly in that way. In this case there are circumstances which require a conclusion that the motion could not be put at the adjourned meeting. At the time that the notice to creditors was served, they were advised of a specific proposal. That proposal was dealt with at the meeting on the 11 November 1991. Not all unsecured creditors attended that meeting. There is no evidence of any notice being given to all unsecured creditors of the adjournment, or of what was to be done at the adjourned meeting. The further proposal which was put to the meeting on 25th November 1991 had not been notified to creditors prior to the meeting. Nor had the existence of the debt owed to Ms. Broinowski, and its assignment. The result is that the deed of arrangement was not entered into in accordance with Part X as notice had not been given to creditors of the proposal which was put to the meeting on 25 November 1991: (s188(2)).

It was submitted on behalf of the debtor that even if I found in favour of Berklee, I should not make an order under s222(2) because of the delay in bringing the application. Section 222(2) gives to the Court a discretion whether to make an order, notwithstanding that a deed of arrangement did not comply with the provisions of Part X. I have found that the deed was entered into pursuant to an invalid resolution, contrary to the requirements of s204. Berklee did not file its application until 19 October 1992, nearly 12 months after the meeting at which the invalid resolution was passed. The debtor has made payments to the trustee, and the trustee has paid dividents to the creditors. These factors militate against making an order declaring the deed void. It is also relevant that but for matters to which I shall refer in a moment, it is in the interests of creditors that there be an arrangement. On the other hand, it became apparent during the course of the hearing that there are problems relating to the administatration of the arrangement, with dividends being paid to Mrs. Shepherd and Ms. Myers, when it seems that they should not have been. There is also the circumstance that some creditors did not have notice of the adjournment, the new proposal and the change in the number of creditors and a substantial change in the amount of indebtedness. Had it not been for those matters I would have considered that in the exercise of my discretion I should not make any order. However, it seems to me that when there are such problems, including problems with the administration which would otherwise involve work and expense to resolve, it is appropriate to make an order, and I propose to do so.
My conclusion in this regard concludes the matter. However, as there were a number of other grounds relied upon, it is appropriate to deal with them.
Counsel for the applicant submitted that the Chairman had wrongfully allowed Ms. Myers to vote at the second meeting in respect of a debt which included the $300,000 assignment of the debt allegedly owing to Ms. Broinowski by the debtor and Mrs. Audrey Shepherd to vote at both meetings. The power to admit or reject claims to vote at a meeting of creditors resides in the Chairman pursuant to s.201. However, that section does not deprive the Court of jurisdiction to determine whether a debt exists or the amount of that debt for the purposes of determining whether a person was entitled to vote and in what amount: (Forshaw v. Thompson and Anor. (1992) 35 FCR 329; Re McLean and Anor; Ex parte Friends' Provident Life Office (1992) 36 FCR 502). When the Court exercises such jurisdiction it does so by way of a rehearing, as opposed to a review of the Chairman's decision, and acts upon the evidence presented to it at the time of the application. (Re Tregonning; Ex parte Friends' Provident Life Office (1983) 74 FLR 327; Zantiotis v. Andrew and Anor (No. 2) (1988) 80 ALR 299; Re McLean and Anor; Ex parte Friends' Provident Life Office at p 510). Before dealing with the factual circumstances however, it is necessary to consider who has the onus of proving that a debt does or does not exist.
In Re McLean, Heerey J was of the opinion that the onus was on the party who challenged the Chairman's decision. Counsel for the creditor submitted, however, that as a matter of principle the evidentiary onus must lie upon the party who asserts the existence of the debt. I do not agree with this submission. Berklee seeks a declaration that the Chairman was in error in admitting the debt of $300,000 for the purposes of calculating the extent of Ms. Myers' entitlement to vote, and the existence of Mrs. Shepherd's debt. The applicant bears the onus of proving this case. However, as was pointed out in Apollo Shower Screens Pty. Limited and Anor. v. Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561, where an onus lies upon a party to prove a negative proposition, the burden of proof required to satisfy such an onus was not usually difficult to discharge. This is particularly so where the other party has the greater means to adduce evidence to contradict the negative proposition for which the other party contended. As Hunt J said at p 565:

"... provided that the plaintiffs have established sufficient evidence from which the negative proposition may be inferred, the defendant carries what has been called an evidential burden to advance in evidence any particular matters with which (if relevant) the plaintiffs would have to deal in the discharge of their overall burden of proof".

The onus is not discharged by adducing a scintilla of evidence (see Parker v. Paton (1941) 41 SR (NSW) 237 at 243; Hampton Court Limited v. Crooks (1957) 97 CLR 367 at 371). In so far as the debt allegedly owing to Ms. Broinowski is concerned, Berklee relied upon the absence of any reference to it in the verified statement of affairs or at the meeting on 11 November. In so far as the debt of Mrs. Shepherd was concerned, although the existence of the debt was challenged, there was no real vigour in that attack. The essential attack was on her entitlement to vote as an unsecured creditor.
As part of the submission that the onus lay on the debtor to prove the existence of the debt, it was submitted that it was in the power of the debtor to call Ms. Broinowski to give evidence. Further, it was submitted, no party had tendered documents or called "any of a number of available witnesses to prove the existence of the debt". It was submitted, therefore, that I should draw the inference that no documents existed which would establish the debt nor could Ms. Broinowski, Ms. Myers or Mr. Licardy say anything to support the existence of the debt. It was said that these persons were within the debtor's "camp" and it would be expected that if their evidence would assist the debtor's case he would have called them: (Jones v. Dunkel and Anor. (1959-60) 101 CLR 298).
Although I have rejected the submission that the onus lay on the debtor, it is still necessary to examine all of the evidence. The failure to disclose the debt owed to Ms. Broinowski in the statement of affairs was relied upon by counsel for Berklee as an admission that no such debt existed. He also submitted that the debtor failed to give evidence at all about the alleged debt to Ms. Broinowski and this failure was of paramount significance. This submission does not accurately reflect the debtor's evidence. He said he forgot to include her as a creditor. He said however that there were documents in existence in respect of the loan and that it was totally incorrect that he did not owe Ms. Broinowski $300,000 or any amount at all. Further, although he had not received any notice in writing from either Ms. Broinowski or Ms. Myers that the alleged debt had been assigned, he had "seen a sheet of paper which was assigning the debt" and thought that he received a copy of the deed of assignment at the second meeting of creditors on 25 November 1991 but that he "certainly got one in due course".
Berklee had caused a summons to be issued to Ms. Broinowski to give evidence and produce documents, returnable on the morning of the hearing. The documents sought related to the advance of $300,000 to the debtor. Ms. Broinowski attended in response to the summons. She did not produce any documents, advising the Court that she did not have any, having sent them to the debtor's solicitors "18 months ago or ... quite some time ago". A summons was also issued to Mr. Licardy to produce documents relating to the debt. He produced his file but it contained no documents answering this description.
The other matters relied upon by the creditor in support of his contention that the debt was non-existent or no assignment had taken place revolved around the "very suspicious circumstances of the debt ... and its purported assignment". In particular, the following additional matters were relied upon: the assignment purportedly took place the day before the second meeting; there appeared to be no documents supporting the debt nor any direct evidence from the parties to the assignment; the fact that the debtor was in a desperate position having regard to the proceedings of the Commissioner of Taxation which were listed for the day after the second meeting; there was no evidence before the trustee of the debt apart from that which appeared in the recital to the deed of assignment, and the evidence before the Court remained "very sparse indeed"; the fact that the deed of assignment was not stamped; the fact that no notice of the assignment pursuant to s.12 of the Conveyancing Act had been given to Mr. Shepherd; and the fact that if it were not for the assignment, Ms. Broinowski had no right to vote (see s.198(7)).
The sudden disclosure of the debt owed to Ms. Broinowski might raise suspicion. However, the minutes of the second meeting reveal that the debtor explained to the meeting of creditors that the debt owed to Ms. Broinowski was not included in his statement of affairs as he had misunderstood the Act and had thought that his de facto was not able to participate in any way in his Part X arrangement. The debtor was not cross-examined about this evidence by counsel for the creditor or counsel for the Commissioner of Taxation.
The evidence therefore amounts to this: the debt to Ms. Broinowski was not included in the debtor's statement of affairs. There is subsequent evidence of the existence of that debt contained in the deed of assignment. The circumstances of that deed of assignment coming into existence were, to say the least, "convenient" from the debtor's point of view. That does not mean that the debt did not exist. The debtor gave an explanation for the omission of the debt from his statement of affairs. That explanation was recorded in the minutes. The debtor gave evidence before me as to the existence of the debt and as to the existence of documentation in support of it. He was not cross-examined about this nor about the explanation he gave to the meeting of creditors.
Having regard to the whole of the evidence I do not consider that Berklee has discharged the onus, which I have found falls on it, to establish that there was no debt in existence. Even if I am wrong as to where the onus lay in this matter, I am satisfied that the debt to Ms. Broinowski existed, and that she assigned the debt to Ms. Myers. Accordingly, Ms. Myers was entitled to vote in respect of a debt of $300,000.
As to Mrs. Shepherd, the debtor, in cross-examination, said that his mother had lent him money but he could not remember when. He could not give any reason as to why his mother was not included as an unsecured creditor in his statement of affairs. He also gave evidence that his memory was not very good because of certain health problems. Whilst the evidence in relation to the debt is not extensive, I had no cause to disbelieve the debtor's evidence. I am satisfied that there was a debt owing to Mrs. Shepherd.
The trustee gave evidence that Mr. Licardy held Mrs. Shepherd's proxy for the second meeting and that during the course thereof Mr. Licardy indicated "(a) that she wouldn't be participating in any distribution; (b) she believed herself to be unsecured; and (c) that she was willing to put up $50,000 for Berklee and she wouldn't be voting on that either" and he recollected clearly that she was presenting herself as an unsecured creditor. The trustee conceded that had the meeting been advised that Mrs. Shepherd did not propose to rely upon her status as a secured creditor, it would be expected that that matter would be recorded in the minutes. There was no such record. Likewise, he considered that the question of Mrs. Shepherd not participating in the distribution was of such significance that it would be expected to be recorded in the minutes, and there was no record of that either. However, he said that the meeting was a very long and confusing one and it was possible that his staff member who was taking the notes of the meeting made a slip in the reporting. Notwithstanding his recollection that the meeting was advised Mrs. Shepherd did not intend to participate in the proposed distribution to creditors, dividends have been paid to her. I should add at this juncture that the debtor and Mr. McAlpine both gave evidence that the minutes correctly recorded the matters which occurred at the meeting.
Rodgers' recollection of the meeting is, on his own admission, hazy. This is not a criticism of him. The meeting was held over 18 months ago, and, as he said, the meeting was lengthy and confused. However, I am satisfied that his recollection is sufficiently accurate in respect of Mrs. Shepherd's position. The question then is whether, in these circumstances, Mrs. Shepherd was entitled to vote as an unsecured creditor, having been disclosed as a secured creditor in the statement of affairs.
A "secured creditor" is defined in s.5 of the Act to mean

"a person holding a mortgage, charge or lien on property of the debtor as a security for a debt due to him from the debtor".

The "security" specified as held by Mrs. Shepherd was a caveat. No details of the caveat were provided in the statement of affairs and the interest protected by the caveat was not tendered in evidence by any party in the application before me.
Section 198 provides for the entitlement of creditors to vote at a meeting called pursuant to s.188. Section 198(5) provides:

"Except as provided by subsection (6), a secured creditor is not entitled to vote in respect of a secured debt unless he surrenders his security".

Sub-section (6) then provides:

"A secured creditor may, if he has furnished to the chairman, in writing, particulars of the security and of the value at which he estimates it, vote in respect of the balance (if any) of the secured debt after deducting the value at which he has estimated the security".

Mrs. Shepherd had not provided any particulars to the Chairman in writing. Section 207 makes provision for the surrender of security where a secured creditor has voted. Section 207 (3) provides:

"... where a secured creditor has voted at a meeting of creditors at which a special resolution referred to in sub-section (1) was passed in respect of the whole of his debt without having surrendered his security as required by section 198 -

(a) he shall be deemed to have estimated his security as having no value; and

(b) he shall, upon request in writing by the trustee of a deed executed in pursuance of the special resolution or the trustee of the composition, as the case may be, surrender the security."

No request has been made by the trustee for Mrs. Shepherd to surrender the security (s.209(3)(ii)).
In my opinion, the effect of sections 198 and 207 is that Mrs. Shepherd was entitled to vote at the meeting as an unsecured creditor, and having done so, although she did not and has not formally surrendered her security, the value of her security is deemed to be nil. Having voted as an unsecured creditor, she cannot subsequently claim as a secured creditor.
In a separate submission, Counsel for the Commissioner of Taxation submitted that the deed of assignment was void as it amounted to giving a collateral advantage to the creditor. This proposition was derived from a passage in Assignments, Arrangements and Compositions by Debtors T. Irlicht (Second Edition) at paragraph 315 where the author states:

"Section 198(7) is quite specific and provides in terms that a spouse shall not be entitled to vote at the meeting of creditors. An attempt has been made to circumvent the provisions of this section by the device of assigning the spouse's debts to a third person for the purpose of enabling that person to vote at the meeting. This procedure appears to be of doubtful validity, even if the assignment is for value, but the position has not yet been tested in court. Such a scheme would probably amount to giving collateral advantage to the creditor who is assigning a debt and is consequently void: cf Ex parte Milner (1885) 15 QBD 605.

In Ex parte Milner (1885) 15 QBD 605 it was held:

"The essence of a composition arrangement between a debtor and his creditor is equality between the creditors, and consequently a creditor who has executed a composition deed is entitled to repudiate it, if he afterwards discovers that other creditors have been induced to execute the deed by means of a secret bargain for a payment to them in excess of the composition, even if the bargain was made after his own execution of the deed."

In my opinion, even if this doctrine applies, it cannot be said that Ms. Myers obtained a collateral advantage as a result of the deed of assignment. At the meeting of creditors Ms. Myers stated that she did not propose to seek any distribution in respect of the $300,000. There was evidence that in fact she had received a distribution in respect of this portion of the debt, however there was no evidence as to how this had occurred. In particular, there was no evidence that this had occurred because of any conduct on behalf of either the debtor, Ms. Myers or Ms. Broinowski. When the payment of the dividend was brought to the attention of the trustee during the course of his evidence, he stated that he would have to check up on that matter.
Counsel for the Commissioner of Taxation also submitted that the assignment was a sham as it was not intended to have effect as an assignment. It was submitted that the only reason for the purported assignment was to attempt to remove the limitation on voting attached to the debt. Reference was made to Sharrment Pty. Ltd. and Ors. v. Official Trustee in Bankruptcy (1988) 18 FCR 449. In that case Lockhart J pointed out that the meaning of the word "sham" had been considered in many cases. His Honour reviewed those decisions and at pp 454 to 455 specified certain elements of a sham transaction. In so far as those elements are relevant to this case, his Honour stated at p 454-455:

"... the artificiality of the transaction does not give rise to its characterisation as a sham ... so long as each document "had the effect that it purported to have", and so long as none of the documents purported "to do something different from what the parties had agreed to do:" Inland Revenue Commissioners v. Littlewoods Mail Order Stores Limited (1963) AC 135 at 155 per Lord Reid.

... a purported disposal of property ... may be a sham where donor and donee ... do not intend to give effect to the transaction, it being agreed between them that there will be no change in the legal and beneficial ownership of the property".

In this case, there is no evidence that the assignment did not have the effect that it was purported to have. In other words, there was nothing in the evidence which would lead to an inference that Ms. Broinowski had not assigned her debt. Ms. Broinowski has not claimed a share in the dividends payable under the deed of arrangement. The trustee has accepted the validity of the deed of assignment and acted upon it (notwithstanding that it appears he ought not to have paid the dividend to Ms. Myers).
The mere fact that a transaction is intended to achieve an unacceptable purpose does not mean it should thereby be characterised as a sham. As Megarry J said in Miles v. Bull (1969) 1 QB 258 at 264

"... a transaction is no sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it".

Megarry J further observed at p 264:

"Mere circumstances of suspicion do not by themselves establish a transaction as a sham; it must be shown that the outward and visible form does not coincide with the inward and substantial truth".

See also Scott v. Commissioner of Taxation of the Commonwealth (No. 2) (1966) 40 ALJR 265 where Windeyer J said at p 279:

"... did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front ... concealing their real transaction".

Here, even though the assignment was entered into for the express purpose of overcoming the prohibition on Ms. Broinowski voting, I do not consider it can be characterised as a sham. Therefore I reject the submission that it was a sham.
Counsel for the Commissioner of Taxation further submitted that the right to vote at the creditors' meeting pursuant to Part X was an aspect of the property right created by the transaction between the debtor and Ms. Broinowski. The legal chose in action which Ms. Broinowski obtained did not carry with it the right to vote at creditors' meetings. It was submitted that this was an aspect of the property in whosoever's hands the property was. I do not agree with this submission. The debt existed prior to the debtor signing the s.188 authority. A consequence which flowed from the signing of that authority was that a meeting of creditors was called at which creditors were entitled to vote. However, Ms. Broinowski, although a creditor, was denied that right by operation of s.198(7). Assuming a valid assignment, I do not see that the statutory prohibition on the entitlement to vote affects the assignee.
Counsel for Berklee next submitted that the failure of the debtor to disclose the debt due to Ms. Broinowski and at least part of the debt due to Ms. Myers in his statement of affairs, together with the failure to disclose the true position in relation to the Deputy Commissioner of Taxation each amounts to the omission of a material particular from the statement of affairs pursuant to s.222(4)(b). In Re Segal; Lensworth Finance Limited v. Segal and Anor 45 FLR 85 Riley J held that it is essential that the information in a statement of affairs be full and correct, the creditors being entitled to all information about the debtor's "conduct, trade dealings, property (and) affairs" before they make their decision. His Honour said at p 88:

"Bearing in mind the purpose of the statement of affairs I am of

(the) opinion that a particular is material within the meaning of s.222(4)(b) if it is a particular which would be relevant to and might be likely to affect the making of the decision of the creditors under s.204(1)".

Dealing first with the debt owed to Ms. Broinowski, the failure to include it in the statement of affairs would have a significant effect on the amount of the distribution which creditors would be likely to receive under the proposed arrangement. To that extent it is quite possible that it would have an effect on how the creditors might view their position. On the other hand, the creditors were in a situation where, unless the deed of arrangement was entered into, they were not likely to receive any payment in respect of the debts owing to them, as the secured creditors would almost certainly take the entirety of or almost the entirety of the debtor's assets. The attraction of this particular deed of arrangement was the debtor's income earning power during the operation of the deed. In those circumstances, and in the absence of any evidence being called on this aspect, it is not possible to find that the failure to disclose the sum of $300,000 constituted the omission of a material particular.
Even if the omission was material, s.222(5) enjoins the Court from making an order or declaring a deed void on a ground specified in s.222(4) "unless it is satisfied that it would be in the interests of the creditors to do so". I cannot be so satisfied in this case. Mr. Rodgers gave evidence that in his opinion the deed of arrangement was in the interests of creditors because the alternative, namely bankruptcy, would result more likely than not in the creditors receiving nothing. This is obvious from the evidence, and for this reason I do not consider that it would have been in the interests of creditors to declare the deed void.
There is no evidence as to the additional $50,000 which was recorded as part of Ms. Myers' entitlement to vote. As I have said it may be no more than a clerical error. Whatever be the position, for the reasons already stated, I would not have considered it to be in the interest of creditors to declare the deed void because of this matter.
That leaves the question of the "true position relating to the Commissioner of Taxation". Section 198(2) provides that a creditor is not entitled to vote in respect of a contingent debt or a debt the value of which is not ascertained. The debtor had revealed the existence of the Commissioner of Taxation as a contingent debt in his statement of affairs, but did not specify any likely amount that might be owing to the Commissioner. The minutes of the meeting held on 11 November 1991 record the debtor as advising the meeting

"I am here today for the purpose of attempting to resolve the financial difficulties that I am faced with, which have by and large been brought about by the dramatic downturn in the muffler business due to the recession.

I have suffered substantial losses both in business and my private affairs ...

...

As a result of lower turnover, it has been difficult to meet wages every week with the result that there is a substantial sum due to the Australian Tax Office in respect of sales and group tax".

The amount payable to the Commissioner of Taxation was not quantified until reparations orders were made against the debtor on 26 November 1991 in the amounts of $259,129.75 and $87,633.90. These indeed are substantial sums. That is what the debtor informed the meeting. There is no evidence before me that the debtor was aware of the amounts of money which were owing or which were likely to be ordered in the Local Court prosecution proceedings brought by the Commissioner of Taxation. In those circumstances, I do not think it can be said that there was the omission of a material particular under s.222(4) in respect of the moneys owing to the Commissioner of Taxation. However, even if the failure to provide some detail of the possible amounts which were likely to be owing to the Commissioner did constitute a material omission, for the same reasons to which I have referred above, I would have been constrained by the provisions of s.222(5) from making any order declaring the deed of arrangement void.
The final basis upon which the applicant attacks the validity of the deed is that it was executed out of time and is thereby void. This submission is based upon the provisions of ss.213 and 216 which provide as follows:

Section 213 provides:

"(1) Subject to this Part ... a deed of arrangement executed by a debtor after the commencement of this Act is void unless -

(a) it is entered into in accordance with this Part; and

(b) it complies with the requirements of this Part". s.216(1) "A deed of assignment or a deed of arrangement shall be executed by the debtor and the trustee within 21 days from the day on which the special resolution requiring the debtor to execute the deed was passed".

Section 36 of the Acts Interpretation Act 1901 provides:

"36(1) Where in an Act any period of time, dating from a given day, act, or event, is prescribed or allowed for any purpose, the time shall, unless the contrary intention appears, be reckoned exclusive of such day or of the day of such act or event".

Counsel for the debtor concedes that if the day of the meeting is not included then the Deed was executed 22 days after the special resolution was passed. Accordingly, in its written submissions counsel for the debtor sought leave to file an application retrospectively extending the time for compliance. It was submitted that such an application could be granted under s.33(1)(c). That section provides:

"The court may

(c) extend before its expiration or, if this Act does not expressly provide to the contrary, after its expiration, any time limited by this Act ... for doing an act or thing or abridge any such time."

Section 216 does not provide to the contrary. In circumstances where the deed was executed only one day out of time, where it has been in existence for a period of almost 18 months, which comprises about half the time during which the deed is to operate and where the deed has been acted upon by the debtor and the trustee and distributions have been made pursuant to its provisions, I would have considered it appropriate to extend the time for compliance had I not come to the conclusion that the resolution that the deed be entered into was void.

[1993] FCA 335

14 MAY 1993