Strachan, A.W. v Official Receiver in Bankruptcy

[1982] FCA 95

Re: ALEXANDER WILLIAM STRACHAN
Ex parte: THE OFFICIAL RECEIVER IN BANKRUPTCY (1982) 63 FLR 30
S.Q. No. 324 of 1977
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND
Fitzgerald J.(1)

CATCHWORDS

Bankruptcy - application for approval of a proposed composition in satisfaction of bankrupt's debts - proposed composition subject to return of a substantial asset and annulment of bankruptcy - no certainty that the composition would bring about the finalization of the estate.

Bankruptcy Act 1966, s.74

Bankruptcy - Composition - Application for court's approval - Relevant considerations - Whether composition would finalize administration of estate - Bankruptcy Act 1966 (Cth), s. 74.

HEADNOTE

Held, that there are cogent reasons for the court not approving a composition in satisfaction of a bankrupt's debts where the administration of his estate cannot progress beyond the receipt by the bankrupt's trustee of the amount which is presently anticipated will be needed to pay the creditors who have claimed, leaving the finalization of the estate to the indefinite future.

In refusing the application it was relevant to consider any possible disadvantage to creditors, the possibility of third parties asserting title to the principal asset of the bankrupt's estate, that there may be other creditors and the possibility of other contingencies.

HEARING

Brisbane, 1982, April 28; May 28. #DATE 28:5:1982

APPLICATION.

The Official Trustee in Bankruptcy, as trustee of the estate of the bankrupt, applied to the court under s. 74 of the Bankruptcy Act 1966 for approval of a composition in satisfaction of the bankrupt's debts.

The facts appear in the judgment.

J. Byrne, for the applicant.

N. F. McLauchlan, for the bankrupt.

Cur. adv. vult.

Solicitors for the appellant: Crouch & Crouch.

Solicitors for the bankrupt: R. K. Hill & Taylor.

H. W. FRASER

ORDER

1. The Application is dismissed.

2. The applicant's costs of and incidental to the application be taxed and paid out of the bankrupt's estate.

Application dismissed.

Applicant's taxed costs to be paid out of the bankrupt's estate.

JUDGE1

The Official Trustee in Bankruptcy as trustee of the estate of Alexander William Strachan has applied to the Court for approval under s.74 of the Bankruptcy Act 1966 (Cwlth) of a composition in satisfaction of the bankrupt's debts.

The bankrupt is a married man, aged 71. He lives apart from his wife and is in receipt of a pension. He was previously made bankrupt on 10 September 1969. In that bankruptcy, unsecured creditors proved claims totalling $59,570.00 and a dividend of 2.374 cents in the dollar was paid. He was granted an unconditional discharge on 29 February 1972.

During 1972 the bankrupt and a partner purchased a Miner's Homestead Lease at Sapphire. There was a building on the lease from which the bankrupt and his partner conducted an unofficial Post Office and General Store. The bankrupt's daughter purchased his partner's interest in the lease and business during November 1975. In the same month they sold the lease and business for $50,000 payable over a period.

According to the bankrupt on his public examination, he purchased for $80,000, payable over a period, an uncut sapphire from persons named R.J. McKinney and G. Beck who had found it in 1975.

On 10 November 1977, the bankrupt presented his own petition upon which he was made bankrupt.

At the date of his bankruptcy, the bankrupt had paid only about $33,800 of the purchase price for the sapphire and McKinney and Beck are creditors in the bankruptcy for an amount of $46,200. In the opinion of his trustee, the cause of the bankruptcy was the bankrupt's failure to make use of available assets to acquire funds for payment of McKinney and Beck.

At present the bankrupt's estate consists of about $4,000 and the sapphire which has now been cut. There have been other realizations, including the balance of the bankrupt's share of the amount for which he and his daughter sold the Miner's Homestead Lease and the business conducted thereon, but most of the amounts received have been expended on insurance of the sapphire although other payments have been made, e.g. in relation to legal expenses.

The sapphire has loomed large in the affairs of the bankrupt.

On his public examination, which was held on 21 February 1978, the bankrupt stated that he gave the stone to an American named Les Danielson pursuant to an arrangement that Danielson would sell the sapphire in America and remit the proceeds, less commission, to the bankrupt, who took no security in respect of the transaction. He stated further that he had not heard from Danielson since giving him the sapphire. Searches conducted by the Australian Federal Police failed to reveal any trace of a person named Les Danielson entering or leaving Australia in the relevant period.

In February 1979 the bankrupt's trustee received information that the sapphire had been cut and that an agent of the bankrupt was leaving Australia to sell it. On 24 February 1979, the Australian Federal Police, executing a Warrant obtained by the bankrupt's trustee pursuant to an application under s.130 of the Bankruptcy Act, seized a sapphire from one R. Lakey. The sapphire has been valued at $397,500. Lakey has made no claim to the sapphire seized and an expert has expressed the opinion that it was cut from the sapphire purchased by the bankrupt from McKinney and Beck.

Subsequent to the seizure of the sapphire, a Mrs Sybil Harrison began an action in the Supreme Court of Queensland against the bankrupt's trustee seeking a declaration that the sapphire was hers and claiming damages and interest. The matter finally came before the Supreme Court of Queensland on 1 March 1982, when Mrs Harrison's application was dismissed after an adjournment was refused and Mrs Harrison's solicitors sought and were granted leave to withdraw. Mrs Harrison has sworn an affidavit in this application consenting to an order that the sapphire be returned to the bankrupt.

On 31 March 1982, the bankrupt lodged with his trustee the proposal which has given rise to the present application. That proposal was in the following terms:
"I, ALEXANDER WILLIAM STRACHAN of 2/38 Thackeray Street, Norman Park in the State of Queensland, wish to propose a composition in satisfaction of my debts pursuant to Section 73 of the Bankruptcy Act 1966.

Acquaintances are prepared to advance $63,000.00 in full settlement of claims outstanding against my estate. The moneys are to be used firstly to pay the costs, charges and expenses of the bankruptcy, any debts which have priority under the Bankruptcy Act, and then the balance will be available for ordinary creditors."

On 1 April 1982, the bankrupt's trustee forwarded a report to creditors recommending acceptance of the proposal, and informing them that, if they did so, application would be made to the Court for approval of the composition and that a further application would be made for an order that the trustee be empowered to hand the sapphire to the bankrupt. The creditors were also informed that, if the Court approved the composition, it might make an order annulling bankruptcy. The application before me seeks not only approval of the composition but the following:
"(b) An order or direction authorizing the Official Trustee in Bankruptcy to deliver to the bankrupt the sapphire presently in the possession of the Official Trustee in Bankruptcy upon payment to him of the sum of SIXTY THREE THOUSAND DOLLARS ($63,000.00).

(c) Such further or other order or direction as to the Court shall seem appropriate including an order with respect to the annulment of the bankruptcy of the bankrupt."

When the matter came on for hearing on 28 April 1982, the bankrupt's trustee was represented by Counsel, as was the bankrupt who supported the application. No creditor appeared, although the material indicates that notice of the hearing of the application for approval of the composition was posted to creditors on 20 April 1982. There is nothing to indicate that any other person presently claims the sapphire or any interest in it.

The report of the trustee submitted pursuant to s.74(3)(a) of the Act indicated the following matters additional to the above.

(i) the bankrupt's statement of affairs did not disclose two unsecured creditors who have lodged claims totalling $3119.40 or a motor vehicle which he claimed on his public examination to have received as a gift. Indeed, it seems to me that the bankrupt also failed to disclose the sapphire, an interest bearing deposit of something under $2000, and his interest in the balance payable in respect of the share of the Miner's Homestead Lease and business conducted thereon at Sapphire;

(ii) one of the two disclosed unsecured creditors, to whom a debt of $25,000 is owing, has indicated that he will not claim in the estate;

(iii) the only other major debt in the estate is that owed to McKinney and Beck, the amount being, as stated, $46,200;

(iv) that in the opinion of the bankrupt's trustee an amount of $63,000 together with the funds presently held in the estate will be sufficient to pay a dividend of 100 cents in the dollar to unsecured creditors, provided that no further claims are lodged in the estate and subject to any other contingencies which may arise.

(v) on 20 February 1982 a first and final dividend was advertised in the estate. No claims were subsequently lodged which would disturb the estimate that $63,000 is sufficient to pay creditors the dividend of 100 cents in the dollar.

(vi) (i) the bankrupt has not been convicted of any offence against the Bankruptcy Act.

(ii) no matters are reported pursuant to s.150(6) of the Bankruptcy Act; although the books of account of the partnership between the bankrupt and his daughter may not have been appropriate for the type of business in which they were engaged, failure to keep proper books of account was not reported as the bankrupt's trustee considered the conduct of the business had little bearing on the bankruptcy.

(iii) on 30 June 1981, the bankrupt's trustee made an objection to his discharge from bankruptcy under s.149 of the Bankruptcy Act on the following grounds:-
"THAT the discharge of the bankrupt by force of this Section would prejudice the administration of the estate.

THAT the conduct of the bankrupt in respect of the period after the date of bankruptcy has been unsatisfactory.

The bankrupt failed to disclose on a statement of affairs as an asset a motor vehicle which he stated on his public examination he received as a gift."

According to the bankrupt's trustee's report a general meeting of the creditors, held at his office on 14 April 1982 for the purpose of considering the bankrupt's proposal for a composition, accepted the bankrupt's proposal by special resolution. No details are given of who was present or how they voted. In the circumstances, the bald statement of the result of the creditors' meeting is somewhat puzzling. I was told from the Bar table in another context that if I make the orders sought the estate will not be able to be finalised as there is some outstanding problem concerning one of the creditors and/or his debt. As I understand the position, there is no prospect of paying out any of the creditors in the foreseeable future.

That factor seems to me to be of critical significance as does the real proposal of the bankrupt which appears from his affidavit. There he says that he has borrowed the bulk of the $63,000.00, and that it is in his solicitors' trust account and with instructions that such sum be paid to the Official Trustee in Bankruptcy upon the release of the sapphire presently held. It clearly emerged in argument that what is really in mind is quite different in substance from what was put to the creditors in the bankrupt's simple proposal.

In reality what is involved, as emerged during the submissions, is that the payment of the $63,000 to the bankrupt's trustee is available only in return for the delivery of the sapphire to the bankrupt and the annulment of his bankruptcy.

I am of opinion that I ought refuse the orders sought.

I am far from convinced that the scanty proposal made by the bankrupt really involves a composition in satisfaction of his debts within the meaning of s.73(1) of the Bankruptcy Act. Even if it does, what was put before the creditors as the proposed composition and what is really sought are two quite different things.

The substance of what I am asked to do is approve of a sale of the sapphire to the bankrupt at far less than its value and annul his bankruptcy. Whether or not it would be appropriate to make the orders asked if the bankrupt's creditors could be paid and the estate finalised it seems to me that there are cogent reasons for not doing so when the matter cannot progress beyond the receipt by the bankrupt's trustee of the amount which is presently anticipated will be needed to pay the creditors who have claimed, leaving the finalisation of the estate to the indefinite future.

The relevant considerations seem to me to include the following:
(1) There is no obvious disadvantage to the creditors in refusing the application at this point. Insurance premiums will continue to be incurred. However, there is nothing before me to indicate that the bankrupt's trustee would have any difficulty in selling the sapphire for far more than is needed to pay any future premiums and to satisfy the bankrupt's creditors.

(2) Although there is no present indication that any other person claims the sapphire, that cannot be excluded as a possibility, however remote. I cannot ignore the history of the sapphire to date, including the bankrupt's possible involvement in what has occurred.

(3) Although there is no present indication that there may be other creditors, once again that possibility must be recognised.

(4) The bankrupt's trustee, in his report, is unable to be certain that the $63,000 will, in fact, be sufficient. He refers to possible other contingencies. The matter was not elaborated on before me.

(5) There is some problem associated with one of the creditors in the estate for his claim.

(6) Difficulties might well arise if the bankruptcy is annulled although the estate cannot be finalised. The only suggestion made to me was that any such difficulties could be circumvented by the imposition of a trust - whether expressly or by implication of law I am not sure - upon the $63,000 to be received by the bankrupt's trustee in favour of the creditors ultimately found to be entitled to payment out of the estate. It seems to me obvious that there are significant objections, including practical disadvantages, in proceeding on any such basis.

My present refusal to grant the orders sought is not intended to create any permanent obstacle to a composition which will truly ensure payment of the bankrupt's creditors and permit the sapphire to be returned to the bankrupt if it is his. However, I am unpersuaded that such orders should be made at this point.

The application is dismissed.