Solomons v Delmege - [2011] FMCA 723

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SOLOMONS & ANOR v DELMEGE

[2011] FMCA 723

BANKRUPTCY – Personal Insolvency Agreement – whether meeting of creditors resolved by special resolution that the debtor execute a personal insolvency agreement and resolved by resolution to nominate trustees of the agreement - power of court to grant declaratory relief where miscalculation of creditors voting on resolution – whether Official Receiver should be directed to reject a debtor’s petition.

Bankruptcy Act 1966 (Cth), ss.5, 27, 30, 31, 55, 64ZF, 128, 196, 204, 210, 215, 215A, 216, 220, 222

Ainsworth v Criminal Justice Commission (1992) 175 CLR 564; [1992] HCA 10
Jefferson v Official Trustee in Bankruptcy (2000) 175 ALR 671; [2000] FCA 990
Re Dingle; Westpac Banking Corporation v Worrell and Another (1993) 47 FCR 478; [1993] FCA 619
Re Rooke; Ex Parte Registrar (1951) 15 ABC 181
Re Smith; Ex Parte Hamilton v Muir (1986) 66 ALR 175
Re Stillman and Wilson (1950) 15 ABC 68
Re Van Twest; Ex Parte Tubemakers Australia Ltd (1986) 69 ALR 573; [1986] FCA 449
Skalkos v Nicols (2009) 175 FCR 547; [2009] FCA 346
Talacko & Ors v Talacko (2010) 183 FCR 311; [2010] FCAFC 54
Tyler v Thomas (2006) 150 FCR 357; [2006] FCAFC 6

First Applicant:

DAVID SOLOMONS

Second Applicant:

ANTONY DE VRIES

Respondent:

MAXWELL PHILLIP DELMEGE (AKA MAXWELL PHILIP DELMEGE)

File Number:

SYG 1991 of 2011

Judgment of:

Barnes FM

Hearing date:

9 September 2011

Delivered at:

Sydney

Delivered on:

16 September 2011

REPRESENTATION

Counsel for the Applicant:

S. Golledge

Solicitors for the Applicant:

Addisons Lawyers

Counsel for the Respondent:

B. Skinner

Solicitors for the Respondent:

Bridges Lawyers

ORDERS

It is declared that at a meeting held on 1 September 2011 pursuant to an authority under section 188 of the Bankruptcy Act the creditors of Maxwell Phillip Delmege (the Debtor) resolved by special resolution that the Debtor execute a Personal Insolvency Agreement in the form annexed to the controlling trustees’ report dated 19 August 2011 (the PIA).
It is declared that the creditors of the Debtor by resolution at the meeting of 1 September 2011 nominated David Solomons and Antony De Vries to be trustees of the PIA.
The court directs that the Official Receiver reject the Debtor’s petition presented by the Debtor on 1 September 2011.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 1991 of 2011

DAVID SOLOMONS

First Applicant

ANTONY DE VRIES

Second Applicant

And

MAXWELL PHILLIP DELMEGE (AKA MAXWELL PHILIP DELMEGE)

Respondent

REASONS FOR JUDGMENT

On 27 July 2011 the respondent debtor, Mr Delmege, authorised the applicants, Mr De Vries and Mr Solomons, to be controlling trustees of his property under Part X of the Bankruptcy Act 1966 (Cth) (the Act). In that capacity the applicants prepared and circulated a report to Mr Delmege’s known creditors and called a creditors’ meeting. It was proposed that the creditors should resolve by special resolution that a Personal Insolvency Agreement (PIA) proposed by Mr Delmege in the form annexed to the controlling trustees’ report be approved and accepted by the majority of creditors.
In their report to creditors the controlling trustees had expressed the opinion that it would be “in the best interests of the general body of creditors to accept” the proposed PIA a draft copy of which was annexed to the report to the creditors. The draft PIA was expressed as a Deed to be made between Mr Delmege as debtor, Mr Solomons and Mr De Vries as trustees, and a specified third party (Maxpower Bikes Pty Ltd) which was to pay an amount to the trustees to be available for distribution to the debtor’s creditors.
The draft PIA also provided in cl.5 that Mr Solomons and Mr De Vries be appointed “trustees of this Deed with all power, privileges and duties conferred by Part X of the Act and the relevant provisions of the Act applicable to personal insolvency agreements”.
Mr Solomons and Mr De Vries, who are registered trustees, gave written consent dated 16 August 2011 to act as trustees of the proposed PIA and made the written declaration required of nominated trustees. These were included in the report to creditors (see s.204(7) and s.215A of the Act).
In an affidavit of 5 September 2011 Mr Solomons, who was appointed president to chair the meeting of creditors, described what occurred at that meeting. It was originally convened on 31 August 2011 but was adjourned until 1 September 2011.
Relevantly for the purposes of these proceedings, one of the listed creditors, American Express, appointed the chairperson (Mr Solomons) as proxy in a statement of claim and proxy in the form required by the Bankruptcy Act which is in evidence before the court as an exhibit. Also in evidence before the court is an attendance record for the creditors’ meeting which includes an attendance on the part of Westpac Bank.
Mr Solomons accepted all claims of creditors in full for the purposes of the meeting, save for those that he listed in his affidavit which he allowed for specified limited amounts. Mr Graham of the controlling trustees’ office was appointed minute secretary.
Relevantly, when the motion that the draft PIA proposed by the debtor in the form annexed to the trustees’ report of 19 August 2011 be approved and accepted by the majority of creditors was moved, Mr Solomons asked the meeting if anyone abstained from voting on the motion. The representative from Westpac advised that Westpac abstained. In addition, Mr Solomons noted that he had been given a number of specific proxies, one of which one was on behalf of American Express which also abstained from the resolution in relation to the execution of the PIA in its appointment of proxy form.
Section 204 of the Bankruptcy Act is, relevantly, as follows:
(1) The creditors may, at a meeting called in pursuance of an authority under section 188, by special resolution:
(a) where the debtor's property is subject to control under this Division, resolve that the debtor's property be no longer subject to control under this Division;
(b) require the debtor to execute a personal insolvency agreement; or
(d) require the debtor to present a debtor's petition within 7 days from the day on which the resolution was passed.
(2) A special resolution requiring a debtor to execute a personal insolvency agreement must specify the provisions to be included in the agreement.
(3) If a special resolution requiring the debtor to execute a personal insolvency agreement has been passed, the creditors must, by resolution, nominate a trustee or trustees to be trustee or trustees of the agreement.
Under s.5 of the Act a special resolution is a “resolution passed by a majority in number and at least three-fourths in value of the creditors present personally, by telephone, by attorney or by proxy at a meeting of creditors and voting on the resolution”, while a resolution means “a resolution passed by a majority in value of the creditors present personally, by telephone, by attorney or by proxy at a meeting of creditors and voting on the resolution”.
According to Mr Solomons, during the meeting Mr Graham, who recorded the votes cast, calculated that the resolution in favour of the PIA had failed as a special resolution because 72.7 per cent of creditors by value voted for it and 27.2 per cent of creditors by value were against it. This may be intended to be a reference to 72.8 per cent and 27.2 per cent as suggested in the subsequent circular to creditors.
On the basis that the calculations recorded on the Poll Schedule prepared by Mr Graham under Mr Solomons’ supervision appeared to record that the PIA resolution had not passed as a special resolution Mr Solomons announced that the motion had failed. Subsequently, a motion was put to creditors to the effect that Mr Delmege be required to present a debtors petition within 7 days of the meeting on the basis of Mr Solomon’s belief that the PIA resolution had failed. Ninety seven per cent of creditors in value voted in favour of that resolution. Mr Delmege lodged a debtor’s petition on 1 September 2011.
Mr Solomons’ evidence is that early on the morning of 2 September 2011 he reviewed the Poll Schedule and votes cast at the meeting and realised that the claims that the two creditors who had abstained from the PIA motion (American Express and Westpac) had incorrectly been included by Mr Graham within the calculation of the total number and value of the creditors present and voting on the resolution, despite the fact that they had abstained from the PIA resolution. Their inclusion meant that the number and value of creditors in favour of the PIA resolution had been calculated as a proportion of a higher number and value of creditors than was correct.
A revised Poll Schedule was prepared in which it was calculated that, as explained in an urgent circular to creditors dated 2 September 2011, rather than there being 57 per cent in number of creditors and 72.7 per cent (or 72.8 per cent as suggested in the circular) in value of creditors present and voting on the PIA resolution, in fact 63 per cent in number and 75.02 per cent in value of creditors present and voting were in favour of the PIA resolution and hence that motion should have been declared as carried to reflect the fact that the creditors had by that special resolution resolved in favour of the PIA as proposed by the debtor.
Also in evidence before the court is a letter to Mr Solomons from Mr Findlay, a delegate of the Inspector General in Bankruptcy, who attended the creditors’ meeting as an observer. He was notified of the error by Mr Solomons on 2 September 2011. On the same day Mr Findlay advised that he had checked the spreadsheet and (assuming it was accurate) that it appeared that an “arithmetic mistake” had been made when calculating whether 75 per cent in value of creditors voting on the motion were in support, as the value of the claims of Westpac and American Express (who were abstaining) was included in the denominator amount when making the calculation and that it appeared therefore that the special resolution should have been declared as having passed.
As foreshadowed to creditors in the circular of 2 September 2011 Mr Solomons and Mr De Vries commenced these proceedings on 6 September 2011 to address the mistake in calculation of the results of the PIA motion, being of the view that the PIA would provide creditors with a better dividend and more certain return than under bankruptcy.
They seek a declaration to the effect that at the creditors’ meeting on 1 September 2011 it was resolved by special resolution that the debtor execute a PIA in the form annexed to the report to creditors dated 19 August 2011. They also seek a declaration that the meeting resolved that they be appointed trustees of the PIA or an order that they be appointed trustees of the PIA. The debtor was named as respondent and was represented by counsel. He supported the application and sought a direction to the Official Receiver to reject his debtor’s petition.
As indicated, on 2 September 2011 Mr Solomons advised the creditors by mail and where possible by email, of the mistake said to have been made at the meeting and of his intention to seek orders from the court. In evidence before the court are responses to the notification to creditors. The Inspector General in Bankruptcy and the Official Receiver in Bankruptcy advised that they did not oppose the application. Similar notifications were received from some of the other creditors.
Mr Solomons’ evidence is that Bank of Western Australia Ltd (Bankwest), whose claimed debt was only allowed in part for voting purposes at the creditors meeting had objected to Mr Solomons assessment at the meeting through Mr Elliot who appeared as its proxy. Bankwest had submitted a claim for what was described in an email from Mr Elliot to Mr Solomons as approximately $5.294 million.
In an email of 5 September 2011 Henry Davis York, solicitors for Bankwest, sought copies of documentation in relation to the asserted error and indicated that Bankwest reserved its rights in respect of the decision to allow only a limited part of the claim. They advised that Bankwest may bring an application to court to determine whether Mr Solomons was correct in that respect, on the basis that if their client’s claim had been admitted for the full amount, the PIA resolution would have failed, notwithstanding the claimed miscalculation (which, it was said Bankwest did not accept on its face).
These proceedings were commenced on 6 September 2011. On that day a Registrar of the court made orders for short service of the application and supporting affidavit on the Official Receiver and the debtor and also on all known creditors by express post or email and listed the matter for hearing before me on 9 September 2011.
Bankwest is clearly on notice of these proceedings. On 7 September 2011 Henry Davis York wrote to the solicitors for the applicants referring to the application and advising that Bankwest opposed the orders and intended to appear at the hearing on 9 September 2011. However on 8 September 2011 Henry Davis York advised the applicant’s solicitors that while it remained their client’s position to oppose the approval of the PIA as reflected under the orders in the application, they no longer intended to appear on 9 September 2011 on behalf of their client in opposition. However they also advised that if the application succeeded, Bankwest had instructed them to commence proceedings to have the PIA set aside. There was no appearance by or on behalf of Bankwest at the hearing on 9 September 2011.
I am told from the bar table that a creditor’s petition has been presented by Westpac in relation to Mr Delmege which was also before the Registrar on 6 September 2011 and that it has been adjourned until 20 September 2011. There was no appearance by or on behalf of Westpac on 9 September 2011. There is evidence before the court of service on Westpac of notification of the hearing and of relevant documentation as well as email correspondence between the solicitors for the applicants and the solicitors for Westpac.
In an affidavit sworn on 9 September 2011 Mr Solomons attested to service in accordance with the orders made by the Registrar on 6 September 2011. There was no appearance by or on behalf of any other creditor or the Official Receiver at the hearing on 9 September 2011.
Counsel for Mr Delmege sought to rely on part of an affidavit of Mr Benjamin Dibden, solicitor, relating to advice from Mr Findlay of ITSA that Mr Delmege’s debtor’s petition had been received by the Official Receiver but had not been processed, had not been recorded as presented and was available to be withdrawn. Mr Findlay confirmed that the Official Receiver had no objection to an order that the debtor’s petition be rejected, as it had been given to the Official Receiver “inadvertently”. Mr Delmege seeks an order directing that the Official Receiver reject his debtor’s petition. He otherwise supports the application before the court.
Mr Solomons and Mr De Vries seek orders from the court correcting the mathematical error and giving effect to the actual votes cast by the creditors at the meeting on 1 September 2011 in reliance on ss.27, 30 and 204 of the Bankruptcy Act.
Section 204 is set out above. Section 27(1) is the source of this court’s jurisdiction in bankruptcy. Section 30 provides for the general powers of courts in bankruptcy, including full power to decide all questions whether of law or of fact in any case of bankruptcy or of any matter under, relevantly, Part X of the Act coming within the cognizance of the court. The court may make such orders, including declaratory orders, as the court considers necessary for the purposes of carrying out or giving effect to the Bankruptcy Act in any such case or matter (s.30(1)(b)). This section does not limit the court’s jurisdiction but is facultative. The Full Court of the Federal Court stated in Talacko & Ors v Talacko (2010) 183 FCR 311; [2010] FCAFC 54 that the breadth of the language in s.30(1) “supports a conclusion that it should not be construed narrowly or in a confined or limited way” (at [18]). As the Full Court pointed out (at [19]), the power conferred by s.30 is intended to assist in the exercise of jurisdiction in bankruptcy provided that the exercise of such discretion is “necessary for the purposes of carrying out or giving effect to” the Bankruptcy Act. Their Honours were of the view (at [19]) that “The legislature is to be taken as having intended that the Court would adopt the same approach to making such orders as it adopts in the exercise of other broad discretionary powers in support of its jurisdiction”.
It was submitted for the applicants, and I accept, that the court has power to and should make a declaration that by special resolution on 1 September 2011 the creditors resolved that Mr Delmege execute the PIA in the form attached to the report of the controlling trustees to give effect to the provisions of Part X of the Act, in particular s.204.

The purpose of Part X of the Act is to enable a debtor to come to an arrangement with creditors in substitution for the formal process of bankruptcy. Such arrangements must be supported by what can be said to be a significant majority of the creditors concerned. To be effective, a resolution of creditors requiring a debtor to execute a PIA must be a “special resolution” which by s.5 of the Act means a “resolution passed by a majority in number and at least three-fourths in value of the creditors present personally, by telephone or attorney or proxy at a meeting of creditors and voting on the resolution”. Provided a special resolution is passed in support of a debtor’s proposal under Part X, such an arrangement will be binding on those who do not vote for the proposal, subject of course to a creditor’s right to appeal to the court against a trustee’s decision (see ss.210 and 178 of the Act) or to seek that a PIA be set aside (see s.222)). Part X operates primarily for the benefit of debtors, but may serve the interests of creditors who decide that they are better off under the proposed arrangement then under the alternative of a bankruptcy regime.
In this case I am satisfied on the material before the court that, as required for a special resolution, a majority in number and at least three fourths in value of the creditors present personally, by telephone, by attorney or by proxy at the meeting of creditors on 1 September 2011 and voting on the PIA resolution voted in favour of adopting, approving and accepting the debtor’s PIA in the form attached to the controlling trustees’ report to the creditors. I am satisfied that the result of this resolution was miscalculated by virtue of the inclusion of Westpac and American Express within the number and value of creditors voting on the PIA resolution, notwithstanding that they each abstained from that resolution. I note that although the solicitors for Bankwest initially suggested that they took issue with whether there was such a miscalculation, neither Bankwest nor any other creditor has appeared today to suggest any inaccuracy in the recalculated figures before the court. On Mr Solomons’ evidence, which I accept, these figures reveal that 75.02 per cent of the value of the claims of creditors present and voting had voted in favour of the PIA motion as had 63 per cent in number of creditors present and voting.
In these circumstances an order correcting the error would give effect to the provisions of the Bankruptcy Act, in particular s.204 of the Act which provides for the creditors by special resolution to require a debtor to execute a PIA (s.204(1)(b)). Such a special resolution must specify the provisions to be included in the agreement (s.204(2)). In this case the resolution that was put to the meeting made it clear that the PIA in question was to be in the form of the draft PIA annexed to the report to creditors. While not expressed in the same terms as s.204(1) it is clear that it was to that effect.

This is not a case in which there is an express provision of the Act which would be overridden by resort to s.30 of the Act to make a declaration to recognise and give effect to the intention of the requisite majority of creditors voting on the PIA special resolution at the meeting on 1 September 2011. (See Tyler v Thomas (2006) 150 FCR 357; [2006] FCAFC 6 at [13]). The jurisdiction of the court in this respect is not confined by or contrary to any particular provisions in Part X of the Act (see s.31). The debtor (who could seek review of the controlling trustees’ act, omission or decision under s.210 and s.178 of the Act) joins in and supports the application for a declaration (and see s.64ZF of the Act). In my view it is appropriate in the interests of justice having regard to the purposes of the Bankruptcy Act to make the declaration sought by the applicants. The controlling trustees (through Mr Solomons’ adoption of Mr Graham’s calculations) made an error in calculation which adversely determined the fate of the debtor’s PIA proposal (Re Dingle; Westpac Banking Corporation v Worrell and Another (1993) 47 FCR 478 at 485 – 488; [1993] FCA 619).
Nor is this a case in which a declaration would produce “no foreseeable consequences for the parties” (see Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 582; [1992] HCA 10). It is appropriate as a matter of discretion to make a declaration that the creditor’s meeting resolved by special resolution that the debtor execute a PIA in the form annexed to the controlling trustees’ report to creditors.
The applicants also seek an order that they either have their appointment as trustees of the PIA recognised by declaration to that effect or that they be so appointed. It was said that the special resolution that was in fact passed (that is the subject of the declaration sought in these proceedings) should also be construed as a resolution which nominated Mr De Vries and Mr Solomons to be trustees of the PIA as required by s.204(3) of the Act.
Section 204(3) provides “If a special resolution requiring the debtor to execute a PIA has been passed, the creditors must, by resolution, nominate a trustee or trustees to be trustee to be trustees of the agreement”.
It was submitted that the one resolution could meet the requirements of both s.204(1) and s.204(3) as a matter of construction. This was said to be so notwithstanding that ordinarily there would be two resolutions and that a proposed resolution appointing the applicants as trustees had been on the agenda of the meeting of the creditors on 1 September 2011 (but was not proceeded with as it was wrongly thought that the PIA special resolution had not passed).
I am satisfied that as a matter of construction there are no words in s.204(3) or elsewhere in the Act making it clear that there must be a separate resolution nominating trustees of a PIA. The effect of s.204(3) is to ensure that, in contrast to the position under the 1924 Bankruptcy Act, an arrangement such as a PIA cannot be entered into without the intervention of a trustee (cf Re Stillman and Wilson (1950) 15 ABC 68 and Re Rooke; Ex Parte Registrar (1951) 15 ABC 181). In circumstances where the provisions to be included in the PIA were specified to be those in the draft attached to the report to creditors which expressly provided for Mr De Vries and Mr Solomons to be trustees, the PIA resolution can be seen to have nominated trustees of the agreement as required by s.204(3) of the Act.
Section 204(3) applies where a special resolution requiring the debtor to execute a PIA “has been passed”. Its effect, however, is to ensure that there is no failure by creditors to nominate a trustee (which would render a PIA special resolution ineffective). The obligation on the creditors to nominate such a trustee or trustee is mandatory. Section 204(3) does not necessarily preclude nomination of a trustee or trustees in conjunction with approval of a PIA, albeit it must be clear that any such resolution is to that effect (and see s.64ZF which provides that substantial compliance with the requirements of Division 5 of Part IV (applicable by virtue of s.196) suffices). In this case it is clear that the PIA resolution of 1 September 2011 included nomination of the trustees named as trustees in the draft PIA annexed to the controlling trustees’ report as trustees of the agreement.
It is apparent from the evidence that is before the court that Mr De Vries and Mr Solomons gave written consent to act as trustees of the PIA and otherwise met s.215 and s.215A of the Act. They were named in the draft PIA (the form of which was approved by the creditors by special resolution). The nomination of trustees required only a resolution (not a special resolution). There was no proposed nomination of any other person as a potential trustee of the debtor’s PIA (see ss.215A and 204(5) of the Act).
In the course of these proceedings counsel for the debtor indicated that if the court was of the view that it did not have power under s.30 of the Act to make a declaration (or to appoint the applicants as trustees) then the debtor sought to make an oral application for an order under s.220 of the Act that the court appoint the applicants as trustees of the PIA.

I do not propose to proceed on the basis of the debtor’s application. Such application was made orally and has not been brought to the attention of any of the creditors (in contrast to the application brought by the applicants). It is also not clear to me that the court can “appoint” trustees to fill a vacancy under s.220 of the Act before a PIA has been executed. The resolution required under s.204(3) is for nomination (not appointment) of a trustee or trustees of the PIA.
I am of the view that the court also has the power to make a declaration in relation to the nomination of the trustees under s.30 of the Act.

The exercise of this power would not override or alter the impact of s.204(3) in the sense considered in Tyler v Thomas at [13]. Such a declaration would not bypass the need for compliance with s.204(3) (see Skalkos v Nicols (2009) 175 FCR 547; [2009] FCA 346 at [42]).

It is relevant to bear in mind that the object of s.30 is to give the court a wide power to do justice in a particular case (see Jefferson v Official Trustee in Bankruptcy (2000) 175 ALR 671; [2000] FCA 990 at [22] – [25] per Dowsett J and Re Smith; Ex Parte Hamilton v Muir (1986) 66 ALR 175 at 178 – 179).
I am satisfied that as a matter of discretion it is appropriate to make the declaration sought. It is clear that the majority of the creditors present and voting sufficient to pass a special resolution approved the draft PIA which named the two applicants, who had so consented to act, as trustees of the agreement. There is no evidence of anyone else having consented to or having been proposed as a possible trustee of the debtor’s PIA. Relevant to the court’s discretion, it is also clear that Mr De Vries and Mr Solomons still seek to act as trustees of the PIA. No issue arises of them declining to act at this stage. The creditors are on notice of the application to the court in relation to the applicants’ appointment as trustees of the PIA, but have not appeared. Such an order would give effect to the wishes of the creditors as reflected in the PIA resolution and would avoid any delay or additional costs that would be occasioned by the need to reconvene a meeting of creditors (and see s.216 of the Act).
Finally, an issue arises because the debtor lodged a debtor’s petition with the Official Receiver in accordance with the resolution put to the creditors’ meeting on the incorrect assumption that the PIA special resolution had failed. As set out above, the Official Receiver has no objection to a direction that the debtor’s petition be rejected.

The debtor seeks such a direction. In the circumstances described above it is not appropriate that the debtor’s petition be accepted.

As sought by the debtor a direction should be made under s.55(4) of the Act that the Official Receiver reject Mr Delmege’s debtor’s petition.

I certify that the preceding forty-two (42) paragraphs are a true copy of the reasons for judgment of Barnes FM

Date: 16 September 2011