Sweeney v Lind
[2000] FMCA 11
•8 December 2000
FEDERAL MAGISTRATES COURT OF AUSTRALIA
Paul Desmond Sweeney v Garry Thomas Lind [2000] FMC 11
Paul Desmond Sweeney v Susanne Rose Lind
BANKRUPTCY – application for annulment of scheme of arrangement and sequestration orders – whether debtors in default under schemes of arrangement – whether debtors entitlement to benefit of trade debts recovered by or on behalf of trustee – consideration of conduct of trustee – trustee’s obligation to account to debtors – consideration of enforcement of scheme as alternative to annulment - Bankruptcy Act 1966 (Cth) s.30(1), s75(3) and s75(4)
Applicant: Paul Desmond Sweeney
Respondents: Garry Thomas Lind
Susanne Rose Lind
File No: BZ067/00
BZ068/00
Delivered on: 8 December 2000
Delivered at: Brisbane
Hearing Dates: 6 and 8 December 2000
Judgment of: Driver FM
REPRESENTATION:
Counsel for the Applicant: Mr Harding
Solicitors for the Applicant: Bells Solicitors
Counsel for the Respondent: Mr Russell
Solicitors for the Respondent: Russell & Co
ORDERS:
BZ067/00
That the applicant account to the respondent within 30 days for any amounts received by or from Scales Collections or otherwise on account of trade debts due to Tyrequip Services Pty Limited that have been recovered since the commencement of the scheme.
That the indebtedness of the respondent be reassessed by the applicant and reduced by any such sum or sums received.
That the respondent pay to the applicant any amount remaining within 60 days of receipt by the respondent of notification from the applicant of the state of the respondent’s indebtedness following the provision of the account and reassessment ordered under Orders 1 and 2.
BZ068/00
That the applicant account to the respondent within 30 days for any amounts received by or from Scales Collections or otherwise on account trade debts due to Tyrequip Services Pty Limited that have been recovered since the commencement of the scheme.
That the indebtedness of the respondent be reassessed by the applicant and reduced by any such sum or sums received.
That within 30 days of notification by the applicant of the state of the respondent’s indebtedness at that time, following provision of the account and reassessment required under Orders 1 and 2, the respondent recommence payments to the applicant of $125 per week until the debt as reassessed is discharged.
That the applicant forthwith instruct Scales Collections to cooperate and deal with the respondent concerning the collection of outstanding trade debts due to Tyrequip Services Pty Limited.
IN THE FEDERAL MAGISTRATES COURT OF AUSTRALIA
BRISBANE REGISTRY
No BZ67 of 2000
BZ68 of 2000
BETWEEN:
PAUL DESMOND SWEENEY
Applicant
And
GARRY THOMAS LIND
Respondent
SUSANNE ROSE LIND
Respondent
REASONS FOR JUDGMENT
INTRODUCTION
Both of these matters are applications by a trustee to annul a scheme of arrangement pursuant to s.75(4)(a) of the Bankruptcy Act 1966 (“the Bankruptcy Act”). In both applications sequestration orders are sought. In addition, the applicant seeks costs to be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act and such further or other orders as the Court may see just, including orders as to costs. Both applications were filed on 19 April 2000 in the Federal Court and transferred to the Federal Magistrates Court by order of Kiefel J on 21 August 2000. The terms of each scheme of arrangement were identical. For convenience, I refer in these reasons to “the scheme” as encompassing both schemes.
BACKGROUND
The following facts I find are not disputed. On 10 July 1996 the respondents were declared bankrupt on their own petition. On 5 September 1997 a meeting of creditors was held to consider a proposal pursuant to s.73 of the Bankruptcy Act. The meeting was adjourned until 12 September 1997. On 12 September 1997, by special resolution, the creditors agreed to accept a scheme of arrangement under s.73. A certificate of annulment of the bankruptcies was executed. The terms of the scheme were initially incorrectly described by Mr Sweeney in his affidavit filed on 19 April 2000 but his affidavit filed in Court on 6 December 2000 corrected that error.
The terms of the scheme were that the debtors would contribute to their estate an amount of $12,500 by regular instalments. The debtors have not completed the schedule of payments required pursuant to the Scheme. The last payment made by the debtors was the sum of $25 paid on 11 September 1998.
Mr and Mrs Lind were represented by Russell and Company, solicitors, of 10 Market Street, Brisbane who were appointed under the pro bono scheme in place in the Federal Court. This Court commends the commitment by Russell and Company to the Federal Court’s pro bono scheme and thanks the firm for its assistance in this matter.
The respondents oppose the making of the orders sought by the applicant on the following bases: first, that there has been substantial compliance, or alternatively such compliance with the scheme of arrangement so that the Court would neither set aside the scheme nor make a sequestration order. Secondly, that the trustee has not accounted for receipts from the debtors of the firm “Tyrequip”, after the scheme was approved by creditors, and each debtor is entitled to a credit in the administration of the scheme for one half of such receipts. Thirdly, that the trustee has acquiesced in the debtors’ defaults and has delayed in bringing the present application. Fourthly, that the orders sought are not shown to be in the interests of creditors; and, fifthly, that a sequestration order should not be made since there was no provision to that effect in the deed. The facts in each matter are essentially the same and the issues arising are identical. The parties have agreed that the matters should be heard together and the matter has proceeded on that basis.
THE EVIDENCE
The applicant relied upon his affidavits filed on 19 April 2000, and 1 September 2000, and filed in Court on 6 December 2000. Mr Sweeney was cross-examined at some length on these affidavits. In addition, a further affidavit in each matter was filed in Court on 8 December 2000. The respondents rely upon the affidavits of Susanne Rose Lind filed on 15 June 2000 and the affidavits of Garry Thomas Lind filed on 15 June 2000 and in Court on 6 December 2000. Mr and Mrs Lind were also cross-examined on their affidavits. Documentary evidence was also tendered by both parties.
THE LEGISLATION
Section 75 of the Bankruptcy Act deals with the effect of composition or a scheme of arrangement on bankruptcies. Section 75(3) provides that the provisions of a composition or scheme of arrangement that has been accepted in accordance with the relevant Division of the Act may be enforced by the Court on the application of a person interested, and that disobedience of an order of the Court made on the application is a contempt of the Court and is punishable accordingly. Sub section 75(4) provides that:
“If :
(a) default is made in any respect under such a composition or scheme of arrangement; or
(b) it is made to appear to the court that:
(i)the composition or scheme of arrangement cannot be proceeded with without injustice or undue delay to the creditors or to the bankrupt; or
(ii)the approval of the creditors was obtained by a misrepresentation by the former bankrupt; or
(iii)it is desirable that the affairs of the former bankrupt be investigated and administered under the provisions of this Act relating to bankruptcy; or
(iv)it is likely that the creditors will receive a greater dividend if the former bankrupt is again made a bankrupt,
the court may if it thinks fit on application by the trustee or a creditor, annul the composition or scheme of arrangement.”
THE APPLICANT’S CASE
The applicant’s case is essentially quite simple. The applicant says that the respondent debtors are in default of their obligations under the scheme of arrangement and hence that s.75(4)(a) is thereby enlivened. The applicant says that the default by the respondents is significant in dollar terms and that the default has continued for in excess of two years. I accept the following further contentions by the applicant: first, this Court has jurisdiction under s.75(4) to annul the scheme of arrangement; secondly, under s.75(4) one of the threshold requirements for an order annulling the arrangement is that the debtor has defaulted in his or her obligations under the scheme; thirdly, there is no dispute that the respondents have each been, prima facie at least, in default under their respective schemes since August, or more correctly, September 1998 when they ceased making payments, noting my conclusion that the last payment was in September 1998; and, fourthly, once the threshold test is satisfied, the Court has an unfettered discretion to make the orders sought.
The applicant makes a number of submissions relevant to the exercise of the Court’s discretion. The applicant invites the Court to consider the purpose and objects of the s.73 procedure. The scheme of arrangement is a compromise of the creditor’s rights. In the present case the compromise was made on the basis that the debtors would perform the promise. The creditors should only be held to their compromise if the other parties to the bargain do likewise. This is unremarkable.
10. The applicant contends that there are a number of possible advantages to creditors in a sequestration order being made, namely, until discharge after acquired assets will be available to creditors – in particular the respondents’ residential property at 56 Pownall Crescent, Margate; secondly, the respondents may be examined as to their assets under s.81 of the Bankruptcy Act; and, thirdly, the possibility of income earned by the respondents being available to creditors under Division 4B of Part VI of the Act.
11. The applicant says that it is not necessary to establish that the creditors will be, or even are more likely to be, advantaged by bankruptcy than composition. The applicant says that it is sufficient if bankruptcy will afford a prospect or possibility of economic advantage to creditors. The applicant also asks the Court to take into account the conduct of the debtors, in particular the delay on the debtors’ part in making payments.
THE RESPONDENTS’ CASE
12. The respondents make a number of submissions in opposition to the applications. The respondents deny that they are indebted to the degree claimed by the applicant at least. The respondents say that they are entitled to a credit on account of money received by the trustee in addition to the payments made by the debtors. The respondents say that the trustee has acted improperly in failing to account for moneys received in his capacity as trustee. While the respondents do not contest that they are on paper in default in that they have ceased making the schedule of payments required under the scheme, they deny that they are indebted, at least to the degree claimed by the applicant.
13. The respondents say that, in any event, the application should be refused because of the behaviour of the trustee and his agent, Scales Collections Limited. They say that the behaviour of the trustee and Scales Collections has rendered it impossible for the debtors to collect trade debts that would have reduced their indebtedness.
14. The respondents also refer to acquiescence and delay on the part of the applicant and further say that the orders sought would not be in the interests of creditors for the following reasons:
(a)There is unlikely to be any dividend to creditors in a new bankruptcy;
(b)It was always open to the applicant to examine the respondent under s.81 of the Bankruptcy Act, and s.237 of the Act was correctly referred to.
(c)The sale of the respondents’ home would be unlikely to realise any money for creditors in a bankruptcy.
(d)There is no suggestion that an income contribution could be required.
15. Further, the respondents note that the scheme of arrangement deed contains no express provision for sequestration and say that there are other discretionary factors that the Court should take into account. These are said to be that Mr and Mrs Lind present as hard working wage earners in difficult economic and domestic circumstances. Secondly, there is nothing apart from the arrears in payments due under the scheme that would justify a sequestration order. Thirdly, the respondents have been making unnecessary payments to a motor vehicle financier and lastly, the application for termination and a sequestration order is an excessive reaction by a trustee who has acted inappropriately.
16. The respondents ask for the application to be refused with costs.
FINDINGS OF FACT AND CONCLUSIONS
17. Upon my reading of the affidavit material and documents tendered and upon hearing answers to questions put at cross-examination I find as follows: following the respondents’ bankruptcy the trustee appointed agents to collect book debts of $31,924.72. The agents were able to collect $21,123.97 of those debts. The trustee treated the remainder as being uncollectable.
18. After allowing for external costs in dealing with the assets subject to a charge in favour of the National Australia Bank, the trustee received the sum of $9,854.97 and it is apparent from what transpired in Court on 8 December 2000 that an additional sum may well have been received. That money was to be applied towards the costs of the trustee in dealing with the assets of the two estates. An issue of a preference payment to one creditor in the bankruptcy was raised at the time of the bankruptcy but the bankrupts believed that the payment was not a preference. The matter was not pursued by the trustee and it is now too late to do so.
19. Under the scheme entered into by the bankrupts following the meeting on 12 September 1997, the respondents became obliged to each contribute an amount of $12,500 by way of instalment payments. The respondents each got into arrears in their payments and ceased making any payments after 11 September 1998. The respondents are prima facie each in arrears on the required payments in the sum of $6,650.
20. The trustee has a statutory obligation to account to creditors and bankrupts for his administration of the bankrupts’ estates. To the extent that the trustee was obliged to account to the respondents for moneys received from trade debtors of the bankrupts’ estate during the bankruptcy, then I am satisfied that he has done so. The trustee has not, however, accounted to the respondents for any money received from trade debtors since the section 73 scheme was entered into.
21. It is clear from the terms of the proposal for the scheme adopted by creditors that funds realised by the trustee in the administration of the estate during the bankruptcy were not to reduce the liability of the respondent debtors under the scheme. They were required to pay $12,500 each by instalments notwithstanding that funds had previously been recovered in the administration of the bankruptcy. Mr Russell argued strenuously for an interpretation of the proposal document more beneficial to his clients, but I am unable to accept his contentions.
22. However, it is also clear from paragraph 1.2 of that proposal that $12,500 once received from the debtors was to be accepted in full and final satisfaction of all their provable debts. Further, it is apparent to me that it was accepted by the trustee and creditors that trade debts not recovered at the time of entry into the scheme would revest in the debtors and that any funds recovered by them would be available to them to use as they chose, including in providing funds for payment of the regular instalments required.
23. This aspect is complicated by the fact that the National Australia Bank held a charge over the Tyrequip business assets. I am not able to make a conclusion whether or not the National Australia Bank waived its charge over trade debts, but it is apparent to me that the debtors and probably the trustee and other creditors proceeded on the basis that those funds would thereafter be available for use by the debtors to offset their liabilities under the scheme. Accordingly, notwithstanding what the legal position may be concerning ownership of and beneficial entitlement to the trade debts, it is open to this Court, as a court of equity, to hold the parties to these proceedings to that position. It is unlikely that much, if any, money would have been recovered from trade debtors following the entry into the scheme. However, the respondents have been effectively prevented from pursuing such recoveries by inaction on the part of the trustee and the attitude of Scales Collections.
24. The respondents impressed me as honest and hardworking people who have made a serious effort to meet their obligations under the scheme. The cessation of payments under the scheme in 1998 was probably unwise and they may have been able to arrange their affairs more effectively at the time to discharge their obligations. It is possible, albeit unlikely, that they may have been able to recover additional funds from trade debtors if they had received more cooperation from the trustee and Scales Collections. It is also possible that Scales Collections might actually hold funds received from such trade debtors and that some funds may have been paid by Scales Collections to the trustee which should be credited against the respondents’ liabilities.
25. I do not accept that the trustee has behaved improperly. The trustee may have forgotten what the status of the trade debts was following the adoption of the scheme. It may be that there was a misunderstanding generated by the report to the creditors. The trustee appears to have regarded the matter as unimportant, given his assessment that the trade debts remaining following entry into the scheme were not recoverable anyway. Nevertheless, I conclude that the trustee could and should have done more to assist the respondents in their efforts to meet their obligations through recovery of trade debts.
26. I do not consider that the creditors would be advantaged by the annulment of the scheme and the making of a fresh sequestration order. I accept, in this regard, the contentions of the respondents that there would be unlikely to be a dividend to creditors. I also accept the contentions that there is currently no impediment to the trustee examining the respondents under s.81 should he wish to do so. I also consider that the circumstances of the debtors render it in their interests, and probably also in the public interest, that they should not have their home sold and be required to move out, because of the possible impact that would have upon their handicapped son.
27. As against that, it is in my view, important that having entered into a scheme to compromise the creditors’ positions the debtors should meet their obligations under the scheme. The applicant has submitted that if the Court is not disposed to annul the scheme and order sequestration then it can order enforcement of the terms of the scheme. Disobedience of such an order is punishable for contempt. The applicant seeks such an order if the principal relief sought by the applicant is not granted.
28. It is not possible literally to enforce the terms of the scheme because the dates for required payments under the scheme have passed. However, it is open to the Court to make orders enforcing the substance of the scheme and that is what I propose to do. I accept that each respondent prima facie owes the applicant $6,650 under the scheme. I also accept that that amount would be reduced by any trade debts received by the trustee after the scheme was entered into. There is evidence that both Mr and Mrs Lind have attempted to obtain funds from their superannuation trustees in order to meet their debts. These efforts have been generally unsuccessful except that the Australian Prudential Regulation Authority has decided that the sum of up to $5,406.45, net of tax and charges, should be released to Mr Lind from his superannuation policy in order to protect his home. I conclude that it is possible that that sum may be available to Mr Lind in order to meet his indebtedness under the scheme applicable to him.
ORDERS
29. The applicant also seeks orders for payment of interest pursuant to s.30(1) of the Bankruptcy Act. I do not consider that an order to pay interest is appropriate in the circumstances of this case, given that there is a possibility (albeit small) that better cooperation from the trustee and Scales Collections might have seen more funds realised from trade debtors following the entry into the scheme. In all the circumstances I have decided to make the following orders. In the matter of Sweeney v Garry Thomas Lind BZ67 of 2000 I order:
1.That the applicant account to the respondent within 30 days for any amounts received by or from Scales Collections or otherwise on account of trade debts due to Tyrequip Services Pty Limited that have been recovered since the commencement of the scheme.
2.That the indebtedness of the respondent be reassessed by the applicant and reduced by any such sum or sums received.
3.That the respondent pay to the applicant any amount remaining within 60 days of receipt by the respondent of notification from the applicant of the state of the respondent’s indebtedness following the provision of the account and reassessment ordered under Orders 1 and 2.
In matter BZ 68 of 2000, Sweeney v Susanne Rose Lind, I make the following orders.
1. That the applicant account to the respondent within 30 days for any amounts received by or from Scales Collections or otherwise on account trade debts due to Tyrequip Services Pty Limited that have been recovered since the commencement of the scheme.
2. That the indebtedness of the respondent be reassessed by the applicant and reduced by any such sum or sums received.
3. That within 30 days of notification by the applicant of the state of the respondent’s indebtedness at that time, following provision of the account and reassessment required under Orders 1 and 2, the respondent recommence payments to the applicant of $125 per week until the debt as reassessed is discharged.
4. That the applicant forthwith instruct Scales Collections to cooperate and deal with the respondent concerning the collection of outstanding trade debts due to Tyrequip Services Pty Limited.
COSTS
30. I have considered what, if any, costs order should be made. I have decided to make no order as to costs, bearing in mind that both parties have been partially successful. The applicant has not received the principal relief sought but has received other orders of value. The respondents have avoided the annulment and sequestration that they principally opposed, but must meet the substance of their obligations under the scheme.
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