Sidiropoulos, T. v Musolino, F

Re: THEODORE SIDIROPOULOS and BLAZENKA MARJANOVIC
Ex Parte: FRANK MUSOLINO and ROCCO MUSOLINO
Nos. 31 and 32 of 1989 Part X
FED No. 584
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
GENERAL DIVISION
O'Loughlin J.(1)

CATCHWORDS

Bankruptcy - Part X Deeds of Arrangement - failure to pass resolutions as special resolutions not identified for approximately 12 months - debtors having earlier complied with terms of Deeds within the time prescribed - doubts about the bona fides of certain creditors not substantiated by evidence - sub-ss. 222(1) and (2) not available to the applicants as there was no "doubt" present - sub-s. 222(4) not available to the applicants as no evidence of "false or misleading information" or omission of "a material particular" - unexplained delay in bringing application coupled with debtors' compliance with terms of Deeds coupled with payments made by and on behalf of the debtors that would not be payable in their Bankruptcies means that it would not be in the interest of creditors to terminate the deed under s.236.

HEARING

ADELAIDE

#DATE 18:10:1990

Counsel for the Judgment Creditor: Mr. P. Scragg

Solicitors for the Judgment Creditor: Peter Scragg

Counsel for the Judgment Debtors: Without Counsel (Mr. D.

Sidiropoulos represented both parties)

Counsel for Trustee in Bankruptcy: Mr. J. Taylor

Solicitors for Trustee: Messrs Randle and Taylor

ORDER

The application be dismissed.

Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

JUDGE1

Applications for declarations that Deeds of Arrangement be declared void.

On 30 May 1989, Theodore Sidiropoulos and his wife Blazenka Marjanovic separately authorised Mr. A.C. Matthews, a registered trustee in Bankruptcy, to call meetings of their creditors pursuant to the provisions of Part X of the Bankruptcy Act 1966 ("the Act") and to take control of their property. According to the information contained in their respective Statements of Affairs, neither Mr. Sidiropoulos nor Mrs. Marjanovic had any separate assets; Mr. Sidiropoulos had no separate liabilities but Mrs. Marjanovic had two creditors, Bare Fact Pty. Ltd. and Esanda Finance Corp. Ltd, whose debts totalled $17,700. Neither of those creditors attended at any meeting of creditors nor did either of them lodge a proof of debt. Hence, these reasons can be limited to a commentary on the acts and omissions of their joint creditors.
According to their joint Statement of Affairs, the debtors owned their matrimonial home; it was subject to two mortgages and the debtors assessed their equity at $5,066 after ascribing to the home their value of $70,000. The only other assets that were disclosed were:-

Cash in Mr. Matthews Trust Account $6,800.00 Motor Vehicle $3,500.00 Household Furniture $15,000.00

I next set out details of the joint creditors who attended the meetings of creditors, listing the amounts of their debts as accepted for the purposes of voting at the meetings:-

Bob Davison Tyres and Batteries $ 1,501.00 T.P.D. Distributors $ 2,862.33 T. Magee $38,000.00 D. Marjanovic $ 6,000.00 I. Marjanovic $ 2,000.00 J. Marjanovic $15,000.00 S. Marjanovic $ 2,000.00 F. Mussolino (sic) $25,000.00 $92,363.33

When a comparison is made with the contents of the Statement of Affairs it appears that only two small trade creditors whose debts totalled $600 did not attend the meetings. The only other matter that should be noted is that in the Statement of Affairs Mr. Musolino is shown as a contingent creditor for $25,000.
The meetings were convened for 23 June 1989; on that day, aspects of the debtors' business were substantially addressed but the meetings were adjourned to 7 July. On that date they were further adjourned to 4 August 1989. It is apparent from a perusal of the minutes of the three meetings that Mr. Musolino was, at all times, a hostile creditor pushing for bankruptcy. On each occasion, the affairs of the debtors were subjected to close scrutiny, but in the final analysis it is claimed that on 4 August the creditors resolved by special resolutions with respect to each debtor in the following terms:-

"That the debtor be required to execute a Deed of Arrangement pursuant to Part X of the Bankruptcy Act containing provisions the same as those contained in the draft Deed of Arrangement tabled at the meeting, a copy of which is annexed hereto and marked for identification with the letter 'A'."

Each Deed called for the realisation of the debtor's "divisible property" and the contribution of such additional moneys in each case as would be necessary to ensure that each debtor paid his and her separate creditors ten (10) cents in the dollar and their joint creditors five (5) cents in the dollar. The term "divisible property" was defined in the schedule to each deed as having the same meaning as that contained in the Act save that the matrimonial home was specifically excluded.
Clause 8 of each Deed provided for termination in these terms:-

"This Deed of Arrangement shall be terminated:-

(a) on the passing of a special resolution to that effect by a meeting of creditors called for the purpose;

(b) in the event of an order of the Court to that effect made under the provisions of section 236 of the Act;

(c) upon compliance in full by the debtor with his obligations hereunder;

(d) on the 31st day of January, 1990 whichever event shall first occur."

It is accepted that on or before 31 January 1990, the trustee had received from the debtors moneys that would be sufficient to meet their obligations under the respective Deeds. The amounts so received were sufficient to pay Mr. Musolino ten (10) cents in the dollar on $25,000 even though his proof of debt had not then, and has not yet, been accepted by the trustee. However it is necessary to return to a consideration of the events that occurred at the adjourned meetings.
The power of creditors to require a debtor to execute a Deed of Arrangement is found in sub-s. 204(1) of the Act but it is necessary that the creditors' decision be made by special resolution. A special resolution is defined by sub-s. 5(1) as meaning:- "... a resolution passed by a majority in number and at least three-fourths in value of the creditors present personally, by attorney or by proxy at a meeting of creditors and voting on the resolution."
The minutes for the adjourned meeting of 4 August 1990, having set out the claim that the relevant resolutions had been passed as special resolutions, then stated:-

"The number of creditors voting in favour of the resolution was two; the number of creditors voting against the resolution was one. The value of the creditors voting in favour of the resolution was $85,262 (sic); the value of creditors voting against the resolution was $25,000."

Mr. Matthews, who was the chairman of the meeting, and who held a proxy for Bob Davison Tyres and Batteries ($1,501) abstained from voting. It can be deduced that the two creditors who voted in favour of the resolution were Mr. Stevens, representing TPD Distributors, and Mr. McGee, representing himself and holding proxies for each of the four Marjanovics. It is also clear that Mr. Musolino was the creditor who voted against the resolution. In his affidavit in these proceedings, sworn 18 September 1990, Mr. Matthews has conceded what is now obvious: the figure of $85,262, as set out in the minutes is wrong. The value of the debts of those creditors voting in favour of the resolutions was only $65,862.33. As a consequence the resolutions were passed by the required majority of creditors in number but they did not command the necessary three-fourths in value. Mr. Matthews is unable to explain how such an error occurred other than to suggest that it was an error in arithmetic. At a directions hearing, the subject of deponents to affidavits being available for cross-examination was specifically addressed; there was no application that Mr. Matthews submit himself for cross-examination; I am therefore left with the uncontroverted statement in his affidavit:-

"I am unable to explain why there was an error in calculations and say that the only explanation I can offer is that it was as a result of an arithmetic (sic) error."

The applicants in these proceedings are said to be Frank Musolino and his son, Rocco. There is some doubt whether both or only Frank Musolino should be regarded as the claiming creditor(s). Both are named as plaintiffs in proceedings against the debtors in an action in the District Court of Adelaide (to which further reference will be made) but only Frank Musolino has lodged a proof of debt in the debtors' estates. However this issue was not addressed by counsel and I will take it no further.
The application presently before the Court seeks orders that the Deeds of Arrangement be declared void (s.222) or be terminated (s.236). In addition orders are sought for the summary sequestration of each estate.
Although the applicants relied strongly on the faulty resolutions in support of the orders sought, they were curiously silent on that subject in their separate affidavits that were filed in these proceedings. In fact, their attack, as contained in their affidavits, was directed to the genuineness of some of the other creditors' claims. The minutes of the meetings of 4 August 1989 contain information that suggests that the chairman explained to those present the meaning and effect of a special resolution; perhaps Mr. Frank Musolino failed to appreciate its significance (apparently Mr. Rocco Musolino did not attend those meetings). But the minutes record that Mr. Frank Musolino was accompanied by his solicitor at the first of the three meetings (that is, on 23 June 1989) and he and his son were at that stage, also embroiled with the debtors in the District Court proceedings (in respect of which the same firm of solicitors were acting). On balance, I lean to the view that Mr. Frank Musolino did not learn of the defect in the resolutions until recently. This is an important finding in his favour in view of the fact that this application was not filed until 22 August 1990. By that time, twelve months had elapsed since the passing of the resolutions and over six months had passed since the debtors paid to the trustee the moneys required to be paid under their deeds (that is, by 31 January 1990).
That is not to say that I put to one side the extreme delay in the presentation of this application. It merely means that I will evaluate the period of the delay upon the premise that the applicants were unaware, until recently, of the fact that the voting at the meetings failed to meet the statutory definition of a special resolution. I have come to this conclusion principally because the history of this matter discloses a strong degree of animosity towards the debtors and it is more than likely that Messrs. Musolino would have taken peremptory action if they had known of the flaw in the voting.
It is now necessary to review the information that is before the Court about these estates, bearing in mind that it has been gleaned only from the written material in the Part X proceedings and this application. Neither the applicants, the debtors nor the trustee gave oral evidence. In view of some of the arguments that were advanced on behalf of the applicants in support of the orders sought by them, and to which reference is made below, it is curious, to say the least, that there was no application to cross-examine Mr. Sidiropoulos on the contents of his affidavit.
The debtors had carried on the business of a service station. It seems that they were in partnership with Mr. and Mrs. Tsanaktis and that the latter wished to quit the partnership. Apparently the Musolinos provided or paid $25,000 to the Tsanaktis; they claim that it was a loan to the debtors to enable them to buy out their partners; the debtors say that it was part of $40,000 to enable the applicants to purchase the interests of the Tsanaktis in the partnership and that they (the debtors) lent the Musolinos the additional $15,000. Whatever might be the truth of the matter, the business either failed or was sold at a loss and this led to the Musolinos suing the debtors for $25,000. A copy of the counter-claim that the debtors filed, in which they claimed from the Musolinos $15,000 plus further moneys representing a half share of alleged partnership liabilities, was exhibited to Mr. Matthews affidavit.
Mr. Scragg, the solicitor for the Musolinos deposed that the District Court proceedings were instituted on 17 March 1988. He said that the matter was listed for hearing on 29 June 1989, some six days after the original date of the meetings, but was adjourned because of the debtors' intention to invoke the protection of Part X of the Act. In view of his acknowledgment of the existence of the Part X proceedings, it is surprising therefore to read that on 2 October 1989 the debtors' solicitor attended the District Court and sought and obtained leave to withdraw and that counsel for the Musolinos thereupon obtained judgment by default in $25,000 "with interest fixed at 15% per cent (sic) from 25 February 1988 until the date hereof". Mr.Scragg's affidavit further discloses that the debtors' counter-claim was struck out and that the debtors were ordered to pay the Musolinos' costs.
Having given to Messrs. Musolino the benefit of my finding that they would have assumed that the special resolutions were validly passed, it was not competent for them to "take any fresh step" in the District Court proceedings without the leave of the Court (sub-s. 233(2)). If I am wrong in extending this consideration to the Musolinos - if they knew that the deeds were not binding so that they were entitled to seek judgment - then they have failed dismally to explain their extreme delay in bringing this application before the Court. Either way, their conduct leaves much to be desired.
But what of the other creditors whose debts were admitted for voting at the meeting? Mr. Magee claimed in his proof of debt that he was owed money as a result of his "consignment of three complete cars". Despite letters dated 15 and 26 February and 26 March 1990 from the trustee seeking routine documentary evidence in support of this claim, no information has been forthcoming. On 3 May 1990 the trustee rejected Mr. Magee's proof of debt. No appeal against the rejection was lodged. Without some explanation, one is entitled to wonder why such a large creditor would be so disinterested. Wonderment is sharpened by noting that Mr. Magee held proxies for all four members of the Marjanovic family. The evidence does not reveal the exact relationship but they are all relatives of the debtor, Mrs. Marjanovic. Each of them lodged a proof of debt, each was called upon to supply documentary evidence in support of his or her claims and on 22 May 1990 the trustee received a document, ostensibly signed by the four creditors stating that they "hereby withdraw (our) claims on the basis that we have no proof of transactions of monies given..."
The remaining two creditors, Bob Davison Tyres and Batteries and T.P.D. Distributors have lodged proofs of debt in the sums of $1,550 and $2,862 and it would seem that everyone accepts them as routine trade creditors.
The applicants submitted that the failure of Mr. Magee to prove his debt and the withdrawal by the Marjanovics of their proofs of debt are matters of grave significance and should be viewed by the Court in a manner that is adverse to the debtors; in short, as I understand the argument advanced by Mr. Scragg, he was suggesting that there was evidence that would justify a finding that these people, or some of them, were never creditors and that some form of conspiracy was on foot at the meetings of creditors. But even if I was attracted to Mr. Scragg's interpretation, it could not, on the material before me, amount to more than a suspicion. To postulate that a person had attended a meeting of creditors and fraudulently held himself out to be a creditor would require cogent evidence before such a finding could be made. I am prepared to acknowledge that the circumstances are very unusual - but I do not believe that I could or should go any further.
Pausing at this stage, and reviewing the findings that I consider should be made, I come to the following conclusions:- the meetings did not pass special resolutions as required by the provisions of the Act; the Musolinos were and still remain, dissatisfied about Mr. Magee and the Marjanovics being acknowledged as creditors for the purposes of voting at the meetings. Notwithstanding this dissatisfaction, they did not exercise their undoubted rights to invite the Court to interfere for more than twelve months; the deeds called for contributions by the debtors by a certain date and they met and concluded those obligations some six months prior to the institution of the present application; although the arrangement saved the debtors' matrimonial home (as it was clearly intended to) the creditors under the Part X arrangements have benefited by Mr. Sidiropoulos' father making $5,000 available to the debtors so that they could meet their obligations; the debtors also contributed the whole of the proceeds of the sale of their motor vehicle which I was told was about $1,700 more than would have been available in their Bankruptcy (vide paras 116(2)(ca) and 116 (2A) (b) of the Act).
Based on these facts, what remedies were available to the applicants and what relief, if any, should they expect. I turn first to the provisions of sub-s. 222(1) and (2) of the Act. They provide:-

"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, the Inspector-General, a person authorised in writing by the Inspector-General, the Registrar, the trustee, a creditor or the debtor may apply to the Court for an order under subsection (2).

222(2) Upon the hearing of an application made under subsection

(1), the Court may, subject to this section, makean order -

(a) declaring that the deed or composition is void, or that it 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."

I believe that sub-s. 222(1) is not intended to cover a clear case of a failure to comply with the provisions of the Act when an error is apparent on the face of the documents (in this case the minutes of the meetings). There is, in the circumstances of this case, no room for uncertainty; clearly, special resolutions were not passed. Hence it is inappropriate to suggest that "there is a doubt, on a specific ground, whether... a deed of arrangement was entered into..." As Fox J. observed in Beard v Prestige Baking Industries Pty. Ltd. (1981) 36 A.L.R. 307 at 315, the sub-section "is predicated on 'a doubt'...". If there is no doubt there can be no room for the operation of the sub-section. This conclusion is not as incongruous as it may first seem for s.236 allows the Court to terminate a deed "for any other reason" if the Court is satisfied that the deed "ought to be terminated". There is one matter that should not be overlooked however. Where the Court is empowered to act under the provisions of sub-ss.222(1) and (2) its discretionary powers, as set out in the latter sub-section, are unfettered: that is not the case with respect to s.236. Sub-section (2) of that section states that the power of termination is not to be invoked unless the Court "is satisfied that it would be in the interests of the creditors to do so". I will consider this provision further when I address the applicants' further argument that the provisions of sub-ss. 222(4) and (5) can be called in aid to obtain declarations that the deeds are void.

It seems to me that sub-ss. 222(1) and (2) are designed to attract and resolve, as a matter of urgency, a complaint or an argument (and hence, a "doubt") about the due execution of a deed and the proper compliance with the requirements of Part X. The absence of any reference to the interests of the creditors suggests that any declaration that might be made under sub-s. 222(2) is to be made expeditiously so that if a deed is declared void, the error can be rectified or sequestration can follow without the rights of the creditors materially changing. There is another reason which supports the view that any application under sub-s. 222(1) must be made expeditiously; s.218 requires the trustee of a deed of arrangement to give notice of its execution to each creditor of the debtor, to advertise relevant information in the Gazette and to file a copy of the deed in the office of the Registrar and sub-s. 225(1) provides that:

"... a deed of arrangement that purports to have been executed by the debtor and by the trustee, and to have been attested in accordance with this Part, shall unless and until the contrary is proved, be deemed to have been duly executed and attested."

The deeds of arrangement, on their face, did not disclose any irregularity. Hence, unless and until a declaration that the deeds were void was made under sub-s. 222(2), creditors would regard themselves as ostensibly bound by the provisions of s.233 - the provision which prevents, inter alia, the presentation of a creditor's petition (c.f. Re Dawson; Ex parte Arthur Andersen and Co. (1985) 59 ALR 355 and Re Lawrence; Ex parte Burns (1985) 70 ALR 221).
In my opinion the provisions of sub-ss. 222(1) and (2) are not available to the applicants in these proceedings.
I turn therefore to consider whether, and to what extent, they can rely on sub-s. 222(4). That sub-section states:-

"Where the Court, on the application of the Inspector-General, a person authorised in writing by the Inspector-General, the trustee of 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."

The matters complained of by the applicants that, according to them, justify the intervention of the Court have already been referred to in part; they include the unexplained conduct of Mr. Magee in not pursuing his proof of debt and the actions of the Marjanovics in withdrawing their proofs of debt. But these and other matters to which Mr. Scragg referred, strange as some of them might be, cannot, without more, satisfy the burden that the applicants carry; the obligation is on the applicants to establish the presence of "false or misleading information" or the omission of "a material particular" before they can ask the Court for an order under sub-s. 222(4). The obligation is on them to satisfy the Court that it should intervene (Re Segal; Lensworth Finance Ltd v Segal and Ward (1976) 9 A.L.R. 154 at 158). My assessment of the situation is that the Musolinos were highly suspicious of the role played by Mr. Magee and the Marjanovics; but they did nothing to investigate or substantiate those or the other suspicions that Mr. Scragg referred to. It will be sufficient to refer to only one of the other matters. Mr. Scragg pointed to the ability of the debtors to raise substantial moneys (over and above the loan of $5,000 from Mr. Sidiropoulos senr and the proceeds of the sale of the car) for payment to the trustee and ultimate distribution to the creditors. He said that this pointed to an unexplained source of funds or a source of income - perhaps that source might give to the creditors a better dividend in the event of sequestration orders being made. But again, he is met with the answer that this is conjecture. Furthermore, it was clearly a matter that could have been raised and examined at the meetings of creditors. I have already made reference to the fact that Mr. Sidiropoulos, as a deponent to an affidavit in opposition to the application, was not cross-examined. He was present in Court throughout the hearing. No evidence was called by the applicants on this, or indeed on any subject which they identified as a source of complaint. I have concluded that the applicants have failed to establish that the debtors did or omitted to do any of the matters identified in sub-s. 222(4).
I therefore turn to the provisions of s.236. There is no doubt in my mind that, at an earlier stage, it would have been appropriate to terminate these deeds because of the failure to obtain the passing of special resolutions. Even then however, I would not have ordered sequestration because of the evidence that the debtors were disputing the Musolinos' debt. But so much time has past that it would, in my opinion be unfair to the debtors to terminate the deeds. I pass over the interesting argument that Mr. Taylor, counsel for the trustee, raised to the effect that the deeds had already terminated by the joint effect of clause 8 and the provisions of para.235(d) of the Act. Clause 8 of each deed stated that the deed terminated on 31 January 1990 and para.235(d) states that a deed of arrangement is terminated by -

"(d) the occurrence of any circumstances or event on the occurrence of which the deed provided that it is to terminate."

I feel that the initial appeal of this proposition overlooks the importation into the deed of implied provisions such as the due payment of dividends to proved creditors. In any event, I am content to rely on the factual circumstances of the case by emphasising the inordinate and unexplained delay on the part of the Musolinos in bringing this application. Money has been paid to the trustee by the debtors that did not have to be otherwise paid (the whole of the proceeds of their car): money has also been paid by Mr. Sidiropoulos senr. Even though the Court is only constrained to have regard to the interests of creditors when considering whether it ought to terminate the deed, I am fortified in my conclusions that the creditors would not be advantaged by an order of termination. If such an order was made, the trustee would be obliged to refund moneys paid and the litigation between the Musolinos and the debtors would revive without anyone knowing its likely outcome. In coming to this conclusion I have borne in mind the uncertainty surrounding the identity of the creditors who might be parties seeking to prove in the event of the ultimate bankruptcy of the debtors.
The circumstances of this matter cry out for a final resolution. That is best achieved by dismissing this application. There will be an order accordingly.

[1990] FCA 584

18 OCTOBER 1990