Totterdell v D'Angelo
[2004] FMCA 645
•24 September 2004
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| TOTTERDELL v D’ANGELO | [2004] FMCA 645 |
| BANKRUPTCY – Application by Trustee to declare void or not void Part X Composition – discretion – interests of creditors. |
Bankruptcy Act 1966, ss.64ZC(6), 109(1)(e), 109(g), 188, 188A, 222, 222(1), 222(2), 222(4), 222(5), 222(6),
Musolino v Sidoropoulos (1991) 101 ALR 235
Re McLean Ex parte Trans Provident Life Office (1992) 36 FCR 502
Mutual Acceptance Ltd v May (1979) 4 ACLR 250
Re Turner Ex parte Official Receiver (1992) 39 FCR 528
Brott v Grey (2000) 181 ALR 617
Augustyn v Putnin (1988) 83 ALR 514
Raschilla v Gulluni (1987) 14 FCR 57
Tregonning; Ex parte Friends Provident Life Officer (1983) 74 FLR 327
Re Segal; Lensworth Financial Ltd v Segal & Ward (1975) 9 ALR 154
Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527
Walker & Sherman & Anor v Andrew & Ors (2002) NSWCA 214 (19 July 2002)
| Applicant: | GEOFFREY FRANK TOTTERDELL |
| Respondent: | JOHN NICHOLAS D’ANGELO |
| File No: | WZ 49 of 2004 |
| Delivered on: | 24 September 2004 |
| Delivered at: | Perth |
| Hearing Date: | 21 September 2004 |
| Judgment of: | McInnis FM |
REPRESENTATION
| Counsel for the Applicant: | Mr F Carles |
| Solicitors for the Applicant: | Carles Solicitors |
| Counsel for the Respondent: | Mr P Arns |
| Solicitors for the Respondent: | Arns & Associates |
| Counsel for the Creditors namely: Leonard David Goldstein | Mr N Dillon |
| Counsel for the National Australia Bank: | Mr J Atkinson |
| Solicitors for the National Australia Bank: | Minter Ellison |
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
WZ 49 of 2004
| GEOFFREY FRANK TOTTERDELL |
Applicant
And
| JOHN NICHOLAS D’ANGELO |
Respondent
REASONS FOR JUDGMENT
Introduction
This an application by Geoffrey Frank Totterdell (the Applicant) pursuant to s.222 of the Bankruptcy Act 1966 (the Act) in relation to a composition of John Nicholas D’Angelo (the Respondent).
As amended by Order of the Court on 6 May 2004 the application seeks the following orders:-
“1.The composition under Part X of the Act of John Nicholas D’Angelo be declared void pursuant to s.222(2) or alternative 222(4) of the Act, or alternatively not void.
2.The Applicants costs of this application be taxed or alternatively fixed and paid by the Respondent.
Mr Dillon appeared on behalf of what I would describe as a syndicate of creditors which in the present case shall simply be referred to as “the creditors”. Of significance are three creditors who are former employees.
It is noted from the Amended Application that essentially it is the desire of the Applicant to ensure that the validity of the Part X Composition be resolved one way or another.
The parties have relied upon numerous affidavits before the Court which may be usefully set out below:-
Applicant
1.Geoffrey Frank Totterdell sworn 7 April 2004;
2.Geoffrey Frank Totterdell sworn 26 May 2004 (verifying notice to creditors);
3.Geoffrey Frank Totterdell sworn 2 June 2004;
4.Alan Fancois Carles sworn 3 August 2004;
5.Geoffrey Frank Totterdell sworn 14 September 2004.
Respondent
6.John Nicholas D’Angelo sworn 12 July 2004;
7.John Nicholas D’Angelo sworn 20 August 2004;
8.Sharon Leslie George sworn 20 August 2004;
9.Paul Theodore Arns sworn 14 September 2004.
Creditors
10.Foo Jee Peng, Peter sworn 5 May 2004;
11.Julie Smeets sworn 22 June 2004;
12.Foo Jee Peng, Peter sworn 19 July 2004.
13.John Ian Cooke sworn 19 July 2004;
14.Deborah Maree Harrington sworn 23 July 2004;
15.Joel Joshua Sheldrick sworn 27 July 2004;
16.Foo Jee Peng, Peter sworn 29 July 2004;
17.Gerard Math sworn 29 July 2004;
18.Joel Joshua Sheldrick sworn 29 July 2004;
19.Steven John Robertson (National Australia Bank) sworn 29 July 2004;
20.John Ian Cooke sworn 11 August 2004;
21.Foo Jee Peng, Peter sworn 16 September 2004;
22.John Ian Cooke sworn 17 September 2004;
23.Gerard Math sworn 17 September 2004;
24.Deirdre Riley sworn 17 September 2004;
Pursuant to orders of the Court the Applicant, the Respondent and the syndicate of Creditors filed and served an Outline of submissions.
By way of background the Applicant at all material times is a registered trustee in bankruptcy under the provisions of the Act. On 28 November 2003 the Respondent signed a controlling trustee authority under s.188 of the Act appointing the Applicant as his controlling trustee. The Applicant signed that authority on the same date to consent to the appointment and the authority became effective on 28 November 2004. A Statement of Affairs dated 12 December 2003 was given to the Applicant pursuant to s.188A of the Act.
A first meeting of creditors of the Respondent was held on 24 December 2003 pursuant to Part X of the Act. That meeting was adjourned to 7 January 2004. The Applicant provided reports to the creditors dated 12 December 2003 and 30 December 2003. On
7 January 2004 the adjourned meeting of creditors of the Respondent was held. At that meeting the creditors accepted the Respondent’s proposal for a composition under Part X of the Act (the composition). The composition as amended provides as follows:-
“1.An amount of $60,000 payable to an appointed trustee for distribution pro rata in value to provide claims of each of the former employees of John D’Angelo & Partners for accrued entitlements pursuant to s.109 of the Act to the total of such proven claims for each category of priority, to be allocated from the realisation of work-in-progress for services rendered by John D’Angelo & Partners, to 28 November 2003 being monies otherwise secured by fixed and floating charge to the National Australia Bank after deduction of approved trustees fees and disbursements, statutory charges and bank charges. The employee creditors will not prove for the balance of their claims (the balance of either bonus payments or termination notices) in the dividend to be paid to the ordinary unsecured creditors.
2.Initial payments of $10,000 sourced from a third party, not later than seven days from the date the composition is accepted by creditors.
3.Contributions from the debtor from income anticipated over three years;
Year ended 31/12/2004 $10,000
Year ended 31/12/2005 $10,000
Year ended 21/12/2006 $10,000
These funds are to be paid to an appointed Trustee and distributed together with accrued interest pro rata as each creditor’s claim bears to be aggregate value of all ordinary unsecured creditors, excluding the National Australia Bank, after deduction of approved Trustee’s fees, statutory charges and bank fees by way of a first and final dividend,”
The Applicant presided at the meeting of creditors and confirmed the minutes of the meeting of 7 January 2004 which included a declaration that the motion for acceptance of the Respondent’s Amended Composition proposal passed as a special resolution on the basis that 15 creditors voted in favour and 13 creditors voted against with more than 75% in value being in favour. An adjustment was made to the proxy schedule and summary of the voting schedule for the creditors meeting held on 7 January 2004 to reflect an invalid vote of National Collections leaving 14 creditors voting for and 13 against the proposal. An affidavit sworn on 20 August 2004 by Sharon Leslie George asserts that an error was made in completing the proxy and that it was the intention of National Collections to vote in favour of the Composition at the creditors meeting held on 7 January 2004. The deponent claims that if another creditors meeting were held then National Collections would vote in favour of the Composition. It is noted that National Collections is recorded as having a debt owed to it of $393.39 out of a total debt of creditors of $2,586.356.13. At the meeting of 7 January 2004 of the total amount of creditors claim of $2,586.356.13 the total debt owed to creditors voting for the composition was $2,163,072.28 compared with $423,283.85 being the total amount of debt owed to creditors voting against the Composition.
After the creditors meeting of 7 January 2004 the Applicant received correspondence and communications from Deborah Maree Harrington, Peter Foo Jee Peng and Joel Joshua Sheldrick who were creditors and ex employees of the Respondent. The Respondent at the time of the Composition practised as a barrister and solicitor in the State of Western Australia trading as D’Angelo & Partners.
In their correspondence the three creditors and claimed ex employees of the Respondent queried the validity of proofs of debt and proxies of certain creditors who had voted in favour of the Composition at the creditors meeting held on 7 January 2004. As a result of that correspondence and communications the Applicant conducted a review of the proxies. As a result of that review he confirmed that the proxy of National Collections was invalid pursuant to s.64ZC(6) of the Act as it appointed the Respondent as proxy.
Further investigations by the Applicant caused him to reach a conclusion that Knight Frank who acted on behalf of the Respondent’s lessor, Success Venture Pty Ltd should not have been permitted to vote at the meeting. The Respondent had alleged that he had given a personal guarantee to the lessor by referring to “Knight Frank – personal guarantee” as a creditor in his Statement of Affairs. At the meeting of creditors on 7 January 2004 the Respondent, according to the Applicant had also confirmed orally that the lessor held a personal guarantee from the Respondent. Knight Frank on behalf of the lessor was unable to produce a personal guarantee from the Respondent and correspondence ultimately revealed that there was no personal guarantee. It is noted in the affidavit of the Applicant sworn 7 April 2004 that had Knight Frank and National Collections not been permitted to vote then the voting on the Amended Composition proposal at the meeting held on 7 January 2004 would have 13 for and 13 against so that a special resolution would not have been passed.
The first payment of $10,000 has been made under the Composition but subsequent payments have not been made as they are not yet due. It is noted a further $10,000 is to be paid for the year ended 31 December 2005 and another amount of $10,000 paid for the year ended 21 December 2006. It is noted in the report to creditors that there was an estimated deficiency of $2,314,615.00. In the supplementary report to creditors for the purpose of the adjourned meeting to be held on
7 January 2004 details of the revised offer from the Respondent were set out including payments by way of contribution from the Respondent referred to earlier in this judgment. In considering a comparison of alternative forms of Bankruptcy Act procedures the following is referred to in relation to the issue of bankruptcy:-
“If Mr D’Angelo were to become bankrupt the only known asset available to an appointed trustee for realisation would be the equity in the taxi plate (estimated gross value $10,000). In addition, future income contributions hypothetically $16,628.00 per annum over three years (total $49,884.00) may be payable if Mr D’Angelo was able to continue his employment as a solicitor on his current remuneration. As stated in the initial report the debtor’s continued employment should he be made a bankrupt is not certain. The total of these funds after deduction of the estimated trustees fees and disbursements and the ITSA 8% realisation charge would result in a distribution to priority employee creditors capped at $3,450.00 each extinguishing wages and superannuation entitlements and a dividend for annual leave of approximately nine cents in the dollar. There would be no dividend payable to ordinary unsecured creditors.”
There are other references to the options then available and the Applicant recommended the Composition proposal. It is perhaps useful to set out the following extract from the supplementary report which provides:-
“The continuation of the existing employment arrangement of Mr D’Angelo is important in optimising the completion of instructions given to him by clients of his previous legal practice and thereby the conversion of the work-in-progress to debtors for collection. If Mr D’Angelo were to become bankrupt his eligibility to remain involved in these matters is uncertain. The acceptance of the proposed composition is to the apparent benefit of the secured creditor, the priority creditors and to a lesser extent the ordinary unsecured creditors. It is important to reflect that a further creditor will emerge post composition, from the conversion of the work-in-progress and the composition proposal made indeed rationalise existing creditors so that the future financial issues that may confront Mr D’Angelo can be addressed in due course with greater certainty.”
It is further noted that an issue in this matter has arisen in relation to a number of the creditors who may be described as employee creditors of the Respondent. The Applicant had been advised by the Department of Employment & Workplace Relations that the General Employee Entitlements and Redundancy Scheme (GEERS) would not be available to former employees of the Respondent. The primary responsibility for employees entitlements according to correspondence from the Department remains with the insolvent employer.
It is significant to note that in the first meeting of creditors held on 24 December 2003 the issue of GEERS was raised in the following manner according to the minutes:-
“The President and the debtor provided responses in respect to a series of questions raised by the employees to clarify their position and issues arising form the Trustee’s report to creditors.
1.The President advised access to commonwealth GEERS was not automatic and did not usually apply unless s.109 of the Bankruptcy Act is adopted in terms of credit a priority.
…
12.Ms Deborah Harrington asked for further clarification of employee entitlements
The President advised that it was unlikely GEERS would advance funding as the offer did not give priority for employees. He advised creditors that GEERS assessed these matters on a case by case basis. If GEERS advanced money for employee entitlements they would have a right to subrogate their claim as if were employees (sic). If they are not given priority then they would be disadvantaged.
The President advised that on this basis the employees should not vote with the expectation that GEERS would pay the balance of employee entitlements.
It is perhaps interesting to note that ultimately at the meeting on
7 January 2004 two former employers who were creditors namely Ms Smeets and Mr Sheldrick voted for the composition though now seek to set it aside.
At the meeting of creditors on 7 January 2004 it is noted that the minutes record the following as Item 1:
“1.Mr L Goldstein, a former employee, questioned whether bankruptcy would result in a better return for employees.
The President advised the employee creditors of the estimated returns. The President advised that he had no knowledge of how GEERS would exercise its discretion in dealing with employee claims.”
The affidavit of Steven John Robertson (the Robertson affidavit) sworn 29 July 2004 and filed the same day in these proceedings sets out a history of dealings between the National Australia Bank (NAB) and the Respondent. Mr Robertson, a Manager of NAB, refers to the Respondent in his affidavit as the “defendant” when as I understand it he means to refer to him as “the respondent”. It is relevant to note and is not in dispute that the NAB had advanced significant amounts to the Respondent with the loans being secured inter alia on an assignment of business book debts and book goods mortgage given by the Respondent over the business known as D’Angelo Partners and dated 1 September 1998. It is also not in dispute that a significant part of the Respondent’s business is the work-in-progress as a firm of solicitors including both professional fees and disbursements. Mr Robertson deposes that as at 1 October 2003 the work-in-progress was valued at $4,649,252. The Assignment of Business Book Debts and Goods Mortgage (ABBD) operated to assign the Respondent’s interest in amongst other things the book debts of his legal practice and the book debts included work-in-progress (WIP). Reference was made to terms of the retainer of the Respondent with clients which involved an ability on the part of the Respondent to only render an account for professional fees and disbursements, that is work-in-progress, to a client upon either settlement or judgment being obtained in the matter. Mr Robertson makes the obvious point that this creates potentially significant cash flow implications for the Respondent’s legal practice where effectively the practice is required to finance litigation on behalf of clients. It is clear that from about October 2003 the Respondent did not have sufficient funds to meet his operating costs including most importantly wages and disbursements required to continue trading his legal practice and acting for his clients. Unless steps were taken the Respondent faced a prospect of having to cease acting for his clients. Those conclusions of Mr Robertson in my view on the material before me did not appear to be seriously disputed by any of the parties appearing before the Court on this application.
Mr Robertson was then involved in negotiations of a sale agreement between the Respondent and Friedman Lurie Singh which I note Mr Robertson refers to as being dated 27 November 2003 though appears to be actually dated 28 November 2003 (the sale agreement). The date of the sale agreement coincides with the date the Respondent appointed the Applicant as controlling trustee pursuant to s.188 of the Act.
Mr Robertson was aware of the authority signed by the Respondent to the Applicant pursuant to s.188 of the Act and the consequences including the following:
· A controlling trustee did not have the power under the Bankruptcy Act to sell or realise a debtor’s property. For that reason it was decided that the Respondent would be a party to the sales agreement.
· There was uncertainty as to whether the Respondent or NAB as beneficial owner under the ABBD could sell the Respondent’s work-in-progress which was in essence his right under the retainer agreements with his clients to be paid professional fees and disbursements.
· Rather the Respondent could agree to release of the files over which he held a solicitor’s lien subject to certain terms to protect that lien and to ensure the collection of his right to be paid professional fees and disbursements upon the conclusion of the matter.
· Following discussions between the Legal Practice Board and the lawyers for both the Respondent and the NAB it was decided that the best way to ensure that the Respondent could continue practising law and hence assist in the realisation of his work-in-progress was to try and avoid bankruptcy through the signing of an authority under s.188 of the Act.
· The alternative to the sale agreement was for the NAB to take possession of the files and refuse to release them to either the client or another solicitor. This may have led to the Legal Practice Board appointing a supervising solicitor under the Legal Practitioners Act for the purpose of protecting the Respondent’s clients interests. It also gave rise to a real risk that the Respondent’s files which totalled approximately 1,000 would have been distributed to a number of different solicitors with the result that the Respondent could no longer be involved in releasing his work-in-progress in the most cost effective manner. It would have been very difficult if not impossible to administer the recovery of the work-in-progress on a such large number of files if they were disbursed to a large number of legal practitioners.
· It was envisaged under the sale agreement and the subsequent appointment of the Applicant as controlling trustee that he would supervise the collection by Friedman Lurie Singh of the work-in-progress.
Having regard to those matters the NAB as beneficial owner and mortgagee under the ABBD agreed to the sale agreement according to Mr Robertson.
In relation to the involvement of the Applicant with the NAB negotiations and in particular the negotiations leading to the sale agreement, it is noted in the minutes of the first creditor’s meeting held on 24 December 2003 that the following appears:-
“3The President advised that he had three meetings with the debtor and the National and had made some suggestions as to format of the sale. However he advised he was not involved in negotiation of the sale terms including the collection of the WIP.
…
9.The employees had questioned details of the sale terms.
Mr Julian Atkinson of Minter Ellison on behalf of the National advised that the figures were subject to a confidentiality clause and that his clients preferred the details not to be disclosed.
10.The President advised that he had no agency at present with the National for the collection of the WIPs however if the composition proposal was accepted it was likely there would be no need for his involvement in the process of realising the WIP.
If the debtor became bankrupt then as bankruptcy trustees if appointed he would then make some arrangement with the National. The President advised creditors he did not see a conflict in doing this at present.
11.The President advised that the funds offered by the National ($60,000) for the composition proposal would not be made available if the debtor were to become a bankrupt.”
It is further useful to refer to the supplementary report to creditors from the applicant dated 30 December 2003 where the following appears under the heading “Availability of GEERS Fund for Former D’Angelo Employees”:
“As at the date of this report the administrators of GEERS have not advised whether the amended proposal would be acceptable to them. If acceptable funding would be advanced to a trustee for payment of accrued employee claims. Presently employee creditors need to be aware that there may be no entitlements to GEERS funding if the debtor’s proposal is accepted. Regardless, GEERS funding would be capped at a nominal salary of $85,400. Employees on wages above this figure would not receive the amount calculated for unpaid wages, annual leave and pay in lieu of notice (if payable) on that portion of their salaries over this amount. The debtor and relatives of the debtor would not be able to claim GEERS.”
Of the current creditors represented by Mr Dillon who have filed a Notice of Appearance, it is noteworthy that a number of them were in fact employed by the merged firm of Friedman Lurie Singh & D’Angelo after the sale agreement though it appears that they have since left the firm. The creditors who were employed by the merged firm and who subsequently left are Peter Foo, Gerard Math, John Cooke, Joel Sheldrick, Janelle Spargo, Mary Reynolds, Sherrill Richardson and Deborah Harrington. It is further interesting to note that another creditor Julie Smeets had assisted the merged firm for one day and then subsequently applied to join the firm and is still currently employed.
Relevant law
Section 222 provides as follows:-
“Power of the Court to declare deed or composition void
(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, the trustee, a creditor or the debtor may apply to the Court for an order under subsection (2).
(2)Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order:
(a)declaring that the deed or composition is void, or that it is not void, on the ground specified in the application; or
(b)declaring that a provision of the deed is void, or is not void, on the ground specified in the application.
(3)The Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this Part if the deed complies substantially with those requirements.
(4)Where the Court, on the application of the Inspector-General, the trustee or a creditor, is satisfied that the debtor:
(a)has given false or misleading information in answer to a question put to him or her with respect to any of his or her conduct or examinable affairs at the meeting of creditors at which the resolution requiring him or her to execute the deed or accepting the composition was passed; or
(b)(b) has omitted a material particular from the statement of the debtor's affairs given under section 188A or included an incorrect and material particular in that statement;
the Court may make an order declaring the deed or composition to be void or declaring any provision of the deed or composition to be void.
(5)The Court shall not make an order declaring a deed or composition, or a provision of a deed or composition, to be void on a ground specified in subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so.
(6)The Court shall not make an order under subsection (2) or (4) unless the application for the order is made:
(a)in relation to a deed of assignment—before the final dividend has been paid under the deed;
(b)in relation to a deed of arrangement—before the terms of the deed have been carried out; or
(c)in relation to a composition—before the final payment has been made under the composition.
(7)The trustee or a creditor may include in an application under subsection (1) or (4) an application for a sequestration order against the estate of the debtor and if the Court, on the first-mentioned application, makes an order under subsection (2) or (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.
(8) The Court may, if it thinks fit, dispense with service on the debtor of notice of an application by the trustee or a creditor under this section, either unconditionally or subject to conditions.
(9)The making of an application by the trustee or a creditor for a sequestration order under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.”
It is clear that the Applicant as Trustee of the Respondent has standing both pursuant to s.222(1) to apply for orders under s.222(2) as well as under s.222(4) of the Act.
In considering the principles to be applied and the discretion of the Court in a matter of this kind. I adopt and apply the Full Court of the Federal Court decision in Musolino v Sidoropoulos (1991) 101 ALR 235. In particular I set out the following passage of the joint judgment which appears at p.243:-
“In our opinion, by virtue of s 222(1), jurisdiction is conferred upon the court to hear or entertain an application for relief pursuant to s 222(2) where there is a doubt, on a specific ground, whether a deed was entered into in accordance with Pt X or complies with the requirements of this Part. Further in our view, having had jurisdiction vested in it to hear the application for the relief specified in s 222(2), upon hearing the matter, the court is empowered, by virtue of s 222(2), to resolve the doubt that has been raised by determining the question or questions which arise, and may, if appropriate, make orders of the kind specified in s 222(2). That is to say, there are relevantly two aspects or stages involved in the jurisdiction conferred under this sub-section of s 222. In the first instance, where there is a doubt, that is where a question has been raised, whether Pt X has been complied with in material respects, the court is given the power, by s 222(1), to embark upon an examination of the question raised. Then, by s 222(2), the court is given the authority to adjudicate on the matter. In the exercise of the judicial power and discretion conferred by s 222(2), the court may make orders as there described or it may dismiss the application on the ground that the Act has been complied with or may dismiss it on other, including discretionary grounds.
Put differently, in our opinion, s 222(1) and (2) confers jurisdiction to hear and determine a matter in certain circumstances. The jurisdiction to hear the proceeding arises under s 222(1) where a relevant doubt has been raised. By s 222(2), the power to adjudicate on that question is conferred. It is true that, at the second stage, that is, by the process of adjudication, the doubt may be resolved. But it does not follow that the jurisdiction to entertain the application under s 222(1) is then, retrospectively, lost.
I accept that under s.222(1) read with s.222(2) there is a two step process. First there must be “a doubt on a specific ground” as to whether the requirements of Part X have been complied with. If that is established then the Court has a discretion to declare the Part X Composition or a provision of the deed void or not void.
There is similarly a two step process under s.222(4). The Applicant must first show that the Respondent has given false or misleading information in answer to a question put to him at the meeting under (a) or has omitted a material particular from the Statement of Affairs or included an incorrect and material particular under (b). If (a) or (b) is satisfied then the Court again has a discretion to declare the Part X Composition or a provision of the deed void.
Applicant’s submissions
First step – Non compliance (s.222(1))
It was submitted that the words “a doubt on a specific ground” as to compliance with Part X in s.222(1) have been held to include a situation where Part X has clearly not been complied with. For example in Musolino where there was a clear error in adding the value of the votes.
It was submitted that when a challenge is made on the basis of the chairperson’s decision on voting rights or creditors then the Court should look at all the evidence at the time of the application and not just what was put before the chairperson (see Re McLean Ex parte Trans Provident Life Office (1992) 36 FCR 502).
In the present case the Applicant declared the Respondent’s amended Composition proposal pass as referred to earlier with 15 creditors in favour and 13 against and with more than 75% in value being in favour. The Trustee subsequently accepted the proxy from National Collections was invalid and that Knight Frank was wrongly allowed to vote as referred to earlier. Again, in submissions it was noted that had Knight Frank and National Collections not been permitted the vote then the voting on the Amended Composition proposal would have been 13 for and 13 against with the special resolution not having been passed. It was submitted therefore that there is clearly a doubt on a specific ground as to whether the Composition has been accepted by a special resolution of a meeting of creditors. Accordingly s.222(1) according to the Applicants’ submissions has been satisfied giving rise then to the discretion under s.222(2).
First step – False or misleading information or incorrect Statement of Affairs (s.222(4))
It was submitted by the Applicant that the Respondent has incorrectly stated in his Statement of Affairs that he liable to Knight Frank under a personal guarantee. This is accepted in the Respondent’s affidavit sworn 12 July 2004 albeit that he refers to it occurring under a mistaken and honest belief. The Applicant submitted that it is clear that an incorrect and material particular has been included in the Statement of Affairs within s.222(4)(b) and that the Respondent’s state of mind is not relevant under that provision. The Court therefore has a discretion under s.222(4) to declare the Composition void.
Second step – Court’s discretion
The Applicant submitted that he has satisfied both ss.222(1) and 222(4)(b) and the Court’s discretion then arises to declare the Composition void under s.222(2) and/or 222(4). Reference was made to the process in the exercise of the discretion as being a “balancing process” and in particular the Court was referred again to Musolino (at p.245). It was submitted by the Applicant and I accept that the balancing process would apply equally to the discretion under s.222(4). Factors relevant to the exercise of discretion referred to in Musolino include delay and it was submitted in the present there is no delay of a kind which would encourage the Court to weigh that against the setting aside of the deeds. A second discretionary factor identified in Musolino was that the trustee would be obliged to make restitution of the monies paid under the deeds. In the present case the Respondent has paid $10,000 under the Composition and accordingly restitution of those monies is a factor which is relevant in the present case. The third and fourth factors referred to in Musolino do not appear in the present case to be relevant namely a reference to litigation between the appellants in that case and the first respondents would be revived without uncertain outcome and it was not possible to predict in that case with any accuracy who would be the creditors to participate in the bankrupt estate of the first respondents.
The Applicant submitted that the primary consideration is the interests of creditors and this involves consideration of the benefits to creditors of a bankruptcy including the comparative dividend, any void transactions, income contributions and the need for investigation of the affairs of the Respondent.
It was submitted that the revised Composition which meant that $60,000 was made available to former employees of the Respondent from the realisation of work-in-progress over which the National Australia Bank held a fixed and floating charge. None of the funds would have been available to employees in a bankruptcy, according to the Applicant’s submissions. An initial payment of $10,000 sourced from a third party was also to be paid. Again, it was submitted this sum would not have been available in a bankruptcy. Third, it was submitted that three annual instalments of $10,000 from the Respondent’s income were payable to the Trustee to be distributed to unsecured creditors and these must be compared to the possibility of income contributions.
It was submitted that the comparative returns (leaving aside any GEERS issues) as set out in the minutes of the meeting were $55,000 under the Composition and an estimate of $35,016 under bankruptcy.
The Respondent is employed as a solicitor on a salary of $160,550.45 per annum plus superannuation according to the Respondent’s affidavit sworn 12 July 2004. In the supplementary report to creditors the trustees indicated a possible income contribution of $16,628.00 per annum over three years under a bankruptcy. It was submitted that even if the Respondent appears to have an income contribution liability under a bankruptcy the Legal Practice Board may revoke his practising certificate. It can only therefore be said that there will be a possibility of income contributions under a bankruptcy.
The dividend to ordinary unsecured creditors is estimated at between 1.85 and 2.45 cents in the dollar under the Composition, according to the affidavit of Mr Totterdell sworn 2 June 2004 at paragraph 7 while under a bankruptcy the return would appear to be nil. The prejudice to ordinary unsecured creditors if the Composition is set aside would not appear to be significant as they would miss out on a relatively small dividend being offered to them under the Composition. Ordinary unsecured creditors have not been given notice of the proceedings but chose not to participate apart from the affidavit of Sharon Leslie George of National Collections referred to earlier as sworn 20 August 2004.
It was otherwise noted in the Applicant’s submissions that the return to employee creditors is complicated by the GEERS. The affidavits of the employee Smeets (sworn 22 June 2004) and Sheldrick (sworn 27 July 2004 paragraph 27) indicate that those creditors would not have voted in favour of the Part X had they known that they would not receive GEERS assistance. It was submitted however that the Trustee’s report to creditors and minutes of meeting indicates that the Trustees left employee creditors under no misapprehension as to the prospects of obtaining GEERS assistance. This would appear to be evident from the extracts of minutes referred to earlier in this judgment.
It was submitted that pursuant to the terms of the Composition $60,000 is to be made available to employees to be firstly reduced by the approved trustees fees. The remaining balance will be applied firstly to employee entitlements due under s.109(1)(e) being a capped amount at $3,450.00 per employee. Employees would receive 100 cents in the dollar in relation to amounts payable under that section.
The balance available according to the Applicant’s submissions after the above payments will be applied in accordance with s.109(g) for accrued annual leave entitlements due to all former employees. Reliance is placed upon the Applicant’s affidavit of 2 June 2004 at paragraph 5 which indicated an estimated return to employees of 50 cents in the dollar. It was submitted that unfortunately the paragraph does not make it clear that the 50 cents represents the estimated return on annual leave entitlements only.
It was submitted that if the estate of the Respondent was placed into bankruptcy employees may then make application to GEERS for payment of their outstanding entitlements but would lose the benefit of the $60,000 under the Composition. As the payment by GEERS is a discretionary matter to be assessed on a case by case basis the Applicant quite properly indicated that he is not in position to comment specifically on the level of payment which would be made by GEERS in relation to individuals. Subsequent to the acceptance of the Composition GEERS advise that funding is not available in this instance. If in bankruptcy GEERS funds were available to discharge employee entitlements then GEERS would be a subrogated creditor in bankruptcy and repayment of GEERS would need to be considered in that context.
The Applicant submitted the evidence does clearly establish whether the employee creditors will or will not be better off under the GEERS claims made pursuant to a bankruptcy. Overall however it was noted on behalf of the Applicant that particularly when one considers the affidavit material of Sheldrick sworn 27 July 2004 the employees may be better off under a bankruptcy due to GEERS. Most creditors have not participated in the proceedings despite having been given notice.
It was noted that in the affidavit material of Messrs Foo, Math and Cooke the issue arose as to whether they were partners rather than employees. If partners there would be no GEERS entitlements.
Reference was made to the business name search for the legal practice of D’Angelo & Partners annexed to the affidavit of Carles sworn 3 August 2004 which shows that as from 13 September 1995 the Respondent, John Ian Cooke, Gerard Jude Math and Lee Peng Peter Foo all carried on business under that name. The search shows that the four persons carrying on business under the name until 30 June 2003 when Cooke, Math and Foo ceased and the Respondent continued.
The Court was referred to s.24 of the Business Names Act (WA) which provides that a certificate of registration of business name is prime facie evidence that the matter stays herein. However, it was submitted the certificate is not conclusive evidence and it is open to parties to adduce evidence to prove otherwise.
Counsel referred to the decision of Mutual Acceptance Ltd v May (1979) 4 ACLR 250 where three persons R, M & J had signed an application to register a business name. R gave evidence in Court that he had never in fact been a party to the business and had signed the application because he had a motor vehicle dealers licence and the other two did not. In that case the District Court rejected the evidence of R and found that he was in fact a partner at the relevant time and that decision was confirmed by the Full Court of the Supreme Court of Queensland. In that case the Court attached significance to the fact that R had subsequently signed a form to say that he had then ceased to carry on business with the other persons. It found the clear implication of that document was that prior to that time R had been carrying on business with the other persons.
In the present case the question is whether the affidavit evidence of Foo, Math and Cooke is sufficient to rebut the s.24 business name presumption. It was submitted that though the three persons worked in the legal practice under what might be described as a “salaried partner” arrangement which had elements of partnership and some elements of an employment relationship.
The Court was referred to s.7(1) of the Partnership Act (WA) which states that –
“A partnership is a relation which subsists between persons carrying on business together with a view of profit.”
It was submitted this does not appear to require the partners to share in profits and losses and would appear to leave open for partners to be remunerated by way of fixed “salaries” with bonuses as occurred in the present case. It was submitted that Foo, Math and Cooke were solicitors who signed a partnership deed and failed to take steps to have themselves removed from the business name register.
Reference was made to the schedule of employee entitlements annexed to the affidavit of the Applicant sworn 2 June 2004 which at page 6 shows the total claims of Foo, Math and Cooke totalled $250,000 out of a total s um of $330,000. It was submitted that if those persons were employees only from 1 July 2003 until 28 November 2003 then their employee claims are estimated at $59,000 instead of $250,000. The total employee claims would be substantially reduced to some $139,000 and the dividend returned to employees creditors would accordingly be substantially improved under the Part X Composition. It was submitted that leaving aside s.109(1)(e) and (g) priorities the return to employees would be approximately $52,500/$139,000 which equates to 37.8 cents in the dollar.
Reference was made to the affidavits of Foo and Math sworn 20 June and 9 July 2004 and the affidavit of Cooke sworn 11 August 2004 seeking to attribute blame to the Trustee for not properly investigating the partnership issue. It was submitted that the information before the Applicant as controlling trustee at the time was the Respondent said that he was a sole trader and Foo, Math and Cooke claimed to be employees for all of their claims. Based on that information it was submitted there would appear to have been no reason for the Trustee to conduct any investigation into the issue.
It was submitted that a relevant factor in the exercise of the discretion is the possible need for further investigation into the affairs of the Respondent under a bankruptcy. The possibility of money being owed to the Respondent from related trusts is one matter which may require further investigation in this case and reference was made in particular to the affidavit of J I Cooke sworn 19 July 2004 at paragraph 4 where concern was expressed about the level of disclosure by the Respondent in his Statement of Affairs regarding possible monies owed to him by several discretionary trusts. However, it was submitted by the Applicant that related entities are briefly discussed in the Trustee’s report and that there is currently no evidence to suggest that there is any money owing from such entity (see affidavit of Totterdell sworn 7 April 2004 page 70).
In the submissions on behalf of the Applicant it was noted the employees claim that the sale of Respondent’s legal practice requires further investigation. That sale however it was submitted was closely monitored by National Australia Bank as secured creditor. It was submitted there would be no reason why the National Australia Bank as a major arms length creditor would allow an uncommercial sale leaving itself with a shortfall of over $1,000,000. The agreement related to the sale of a legal practice annexed to the affidavit of Robertson sworn 29 July 2004 it was submitted it was properly explained in Robertson's affidavit.
The Applicant’s Trustee referred to some of the employees suggesting that they were misled into believing that the work-in-progress of the legal practice was being sold when this was not the case (see for example affidavit of Harrington sworn 23 July 2004 paragraph 18) where she deposes as follows:-
“As a result of the information provided to me by the Applicant in the report to creditors and his advice during the first creditors meeting I have been under the misapprehension that the Respondent sold his legal practice including all WIP and files to partners of FLS.”
It was conceded by the Applicant that the views of creditors is a relevant factor in the exercise of the Court’s discretion. Reference was made to Re Turner Ex parte Official Receiver (1992) 39 FCR 528 at 533 where one factor noted by the Court of refusing to set aside the deed was that “no creditor participated in these proceedings despite notice and none has claimed prejudice, undue pressure or concealment of relevant facts”.
During the course of submissions counsel for the Applicant referred the Court to ss.178 and 179 of the Act which provides a mechanism by which aggrieved creditors may apply to the Court in relation to the conduct of a trustee and seek appropriate orders which may be regarded as just and equitable. The Court was reminded that the current application should not involve a detailed analysis of the conduct of the trustee save and except where it is relevant to this particular application. Ultimately the main issue is the Composition and whether or not there is a proper basis upon which it should be declared void in the exercise of the Court’s discretion.
Limit on s.222 power
It was submitted that s.222(5) provides that a Part X shall not be declared void under s.222(4) unless this is in the interests of creditors. Although there is no similar provision in s.222(2) it was submitted the Court in exercising its discretion under that provision is likely to be reluctant to declare a Part X void if this is not in the interests of creditors.
Respondent’s submissions
It was submitted that any invalid appointment of the Respondent as the proxy for National Collections could be described as a “technical error” in the sense that there is no dispute that National Collections was a creditor and entitled to vote on the Composition. Whilst conceding that the nomination of the Respondent as a proxy renders the proxy invalid the voting intentions of the creditor were nevertheless clear, according to the Respondent’s submissions. There was no indication of any deliberate deceitful behaviour on the part of the Respondent and it was submitted that information provided to the Trustee by the Respondent to the effect that Frank Knight was a creditor was given in an honest belief that it was true.
It is not clear from the submissions to the Respondent as to whether the absence of an intent should otherwise provide a basis upon which the Court should conclude that there has been an invalid vote or that the grounds relied upon in support of either limb of s.222 have not been made out.
The Respondent’s submissions as I understood them effectively were directed to the exercise of the Court’s discretion. It was submitted that the creditors would be significantly disadvantaged by declaring the Composition void and that this is sufficient reason for declining to make the declaration (See Brott v Grey (2000) 181 ALR 617). It was claimed that the facts in Brott’s case have some resemblance to the facts in the present case. In that matter the issue before the Court was whether the special resolution in favour of a deed of arrangement had been validly passed because the Trustee permitted the creditors to vote on the resolution when the creditors’ debt was statute barred. The Respondent was a solicitor and Cooper J comments in that matter that the pay out to creditors pursuant to the deed of arrangement was “exceedingly small”. Nevertheless the Court declined to set aside the Deed of Arrangement.
It was submitted that when the Court is able to form a clear view that no financial benefit will accrue then that may be a basis upon which the Court will fail to be satisfied that avoidance is in the best interests of the creditors (see Augustyn v Putnin (1988) 83 ALR 514 at 520). It was submitted the Court may be more disposed to set aside a composition if no payment to creditors had been made pursuant to the Composition (see Raschilla v Gulluni (1987) 14 FCR 57 at 70).
Reference was made to the affidavit of the Applicant sworn 26 May 2004 and in particular annexure B which reveals a total of 103 known creditors. The creditors who have appeared in the present application are former employees, it was claimed, of the Respondent. They comprise a very small percentage of creditors. Those creditors who have actively opposed the orders sought in the proceedings by the filing of affidavits total 4 persons namely Peter Foo, John Cooke, Deborah Harrington and Julie Smeets. The primary basis advanced by those creditors supporting the application is that the Composition disentitles them to claim GEERS benefits.
It was submitted that the payments made by GEERS are discretionary and that employees are not entitled to the claim as of right. It was further submitted in reliance upon the Respondent’s affidavit sworn 26 July 2004 that employee creditors would not receive a greater return from GEERS than in the case under the Composition. Reference was made to the following paragraphs 5-7 of the Applicant’s affidavit sworn 2 June 2004 where the deponent states:-
“Paragraph 1 on the third page of Foo’s letter indicates that employee claims have increased so that the (sic) creditors would be less than the original estimate. Annexed as “A” (page 4-6) is a copy of my revised dividend calculation showing an estimated return to employee creditors of 50 cents in the dollar and schedule of employee entitlements. This has been revised from my estimate of 82 cents in the dollar to those priority creditors at the date of the adjourned meeting. If the estate of the debtor was placed into bankruptcy and GEERS funding provided my estimate is that employee creditors will only be eligible to claim for unpaid wages, payment in lieu and annual leave equating to return of approximately 21 cents in the dollar.
6. Based on discussions between my staff members, Claire Tonge and Belinda Hughes of the Department of Employment & Workplace Relations which administers GEERS I understand that employees would not be able to claim for bonus payments under the GEERS scheme. On the other hand employee bonus payments do have a priority under s.109 of the Bankruptcy Act which has been adopted in the Respondent’s Composition.
7. The return to ordinary unsecured creditors is estimated to be between 1.85 and 2.4 cents in the dollar and remains unchanged since the date of the creditors meeting”.
It was further submitted by the Respondent that the setting aside of the Composition would immediately deprive unsecured creditors of the benefit $70,000 comprising the initial $10,000 paid and the further contributions agreed by the National Australia Bank of $60,000.
The Court was referred to the decision of Lockhart J in Tregonning; Ex parte Friends Provident Life Officer (1983) 74 FLR 327 at 322 where His Honour declined to exercise a discretion not to set aside a void composition on the ground that “the debtor’s assets are minimal and no extra assets or funds will be available under the deed beyond those which would be available were the debtor made bankrupt”. The loss to the creditors, it was submitted in the present case is not insignificant.
It was further submitted that there is no credible evidence to suggest that the non disclosure of assets by the Respondent or the sale at an undervalue of the Respondent’s assets is such that would warrant the further expense to the creditors in conducting examinations or enquiries pursuant to the provisions of the Bankruptcy Act.
In relation to the price realised on the sale of the Respondent’s legal practice to the National Australia Bank, it was submitted that any concerns about that price were unfounded. It was further submitted there is no credible evidence to indicate anything other than that the sale was conducted on commercial terms and that every endeavour was made to ensure that the maximum possible value was received from the sale. Again reliance is placed upon affidavit material of the Applicant and specifically the affidavit of Steven Robertson for and on behalf of the National Australia Bank.
It was further submitted that there is no credible evidence that money is owed to the Respondent from related trusts.
Accordingly it was submitted that the Court’s discretion to declare the composition void should not be exercised to enable employee creditors to claim benefits from GEERS, a taxpayer funded scheme intended as a community “safety net”. This is especially so when those creditors are given priority in the composition and significant doubt exists as to whether the position of those creditors would be improved by transferring the burden of paying claimed employee benefits on to the GEERS scheme.
Creditors’ submissions
On behalf of the syndicate of employee creditors, an outline of submissions was filed on 29 July 2004, further submissions entitled “Syndicate of Employee Creditors Further Submissions” were filed by facsimile on 17 September 2004 and on 20 September 2004 additional submissions entitled “Syndicate of Employee Creditors Supplementary Submissions on Applicant’s Submissions on Respondent Partnership” were filed.
The creditors seek to support any application declaring void the composition purportedly approved at a meeting of creditors on
7 January 2004. The creditors further seek a sequestration order against the estate of the Respondent in the event that the Composition is set aside.
The creditors agree with the Applicant’s submissions that as the proposal of the Composition has not yet been fulfilled s.222(6) of the Act does not have effect and the creditors otherwise support the standing of the Applicant to bring the application.
The creditors otherwise support the basis upon which it is claimed that the composition was invalidly approved. Specifically it was submitted the composition denied the employee creditors and general creditors of the possibility that if it had been correctly rejected of potentially obtaining a more favourable composition proposal from the Respondent and/or his supporters. The result is that employee creditors are rendered ineligible for assistance under the GEERS and thus it was claimed denied the employee creditors the opportunity to recover unpaid employment benefits owed to them by the Respondent. Further, it was argued that the employee creditors and general creditors have been denied the possibility of alternatively pursuing the bankruptcy of the Respondent and enabling a full examination of the Respondent’s affairs including if necessary examination of the Respondent.
It is not necessary to repeat the arguments advanced for and on behalf of the creditors in relation to s.222(2) of the Act as essentially they appear to mirror those submissions made for and on behalf of the Applicant.
It was submitted therefore that the question arises as to whether the Court should exercise the power under s.222(2) to declare the composition void and it was claimed that the if the composition was not declared void then this would defeat the purpose of the Act which clearly relies upon approval of a Composition by way of special resolution of creditors. The denial to the employee creditors of their rights referred to earlier is a significant consequence which would compel the conclusion that the Composition should be declared void. It was further argued that on balance it is in the interests of employee creditors and general creditors for the Composition to be set aside.
In considering the exercise of discretion under s.222(2) it was submitted that there is misleading information or omission of material particulars which would support the Composition being declared void under s.222(4) and (5). The creditors submitted that the failure of the Respondent to adequately disclose the terms of the agreement that was entered into on 28 November 2003 (the sale agreement) with the National Australia Bank was entered into on the same day that the Respondent appointed the Applicant as controlling trustee under s.188 of the Bankruptcy Act by which it was submitted he divested his largest asset, his legal practice which meant that incomplete and potentially misleading information was submitted to the creditors.
The creditors submitted that full disclosure in relation to the sale agreement and all related documents and contracts was necessary to enable an informed decision to be made in relation to the Composition. The absence of specific details of the sale agreement and any related documents constitutes an omission of a material particular or particulars. A great deal of the criticism and concerns expressed by the creditors has now been addressed in the affidavit of Steven Robertson sworn 29 July 2004.
An attack was made upon the Robertson affidavit and it was submitted that for proper consideration of the Respondent’s composition a number of matters still need to be explored including the basis upon which NAB asserted any security or charge over assets and it was argued that at the time of the composition the sale agreement terms were unknown. Other issues as to whether the book of clients and receivables owed by the Respondent’s firm had been “sold”, “merged” or merely a contract for agency/management had been entered into. It was unclear who was to receive the balance of any receivables once (or if) the NAB is satisfied. It was submitted the terms of any collateral or “binder” contract entered into between the Respondent and the purchaser/agent/manager were unknown, that is was the Respondent after a period of time to receive equity in the purchaser/agent/manager in return for the transaction referred to in the sale agreement and if so has this been accounted for in the sale agreement or any collateral agreement. Other doubts were raised as to the arrangement between the NAB and the Applicant as to collection of fees for work-in-progress from the purchaser of the legal practice. Issues further arose from those documents annexed to the Robertson affidavit including whether the NAB had taken or asserted possession of the Respondent’s work-in-progress given the NAB had not enforced its security or alternatively appointed a receiver. Questions were raised as to whether or not the financial report of the Respondent’s firms auditors require further review. A major review was sought of the basis upon which the “sale agreement” was entered into.
Of crucial importance to the creditors was the Respondent is now described as “a partner” of the purchaser of the practice Friedman Lurie Singh & D’Angelo and is paid remuneration of $160,000 per year. The agreement pursuant to which the Respondent is engaged by the new firm has not been disclosed. It was argued that given the significant fees now earned by Friedman Lurie Singh & D’Angelo from the file and work-in-progress transferred under the sale agreement the creditors of the Respondent should have been entitled to know prior to being required to vote on the proposed composition the following:-
(i)the full terms of any agreement entered into between the Respondent’s new firm Friedman Lurie Singh & D’Angelo in respect of his engagement and more particularly his entitlement to participate in the profit and losses of that firm either now or at some subsequent date;
(i)all the other benefits (for example car parking, entertainment allowance and disbursements which may be claimed against the firm) to which the Respondent may now be entitled.
A further attack was made on the Applicant’s affidavit sworn 14 September 2004 and in particular the reference in that affidavit and submissions by the Applicant that Messrs Foo Math and Cooke were until 30 June 2003 partners of the Respondent in the firm D’Angelo & Partners. It was noted that the Applicant deposes that if Messrs Foo Math and Cooke were partners then the employee creditors would receive their full s.109(1)(e)(g) priority entitlements for wages, superannuation and annual leave under the present deed of composition. Reference was made to the matters raised earlier in this judgment for and on behalf of the Applicant. Issues were then raised as to the lack of clarity in the material before the Court as to what extent the Respondent’s present debt position has occurred between 30 June 2003 and the date upon which it is asserted Messrs Foo Math and Cooke ceased to be partners and 28 November 2003, the date of the sale agreement. Though only a five month period it was submitted that the vast majority of debts of the firm and/or the Respondent were incurred prior to 30 June 2003.
Reference was made to the legal principles in relation to the issue of whether or not the employees were partners and it was noted a right of contribution for partners is an asset of the Respondent. The omission of the entitlement to that contribution is material to consideration of the Respondent’s financial position. It was submitted that it is essential that the information contained in the Respondent’s Statement of Affairs be “full and correct. The creditors are entitled to all available information about the Respondent’s conduct, trade dealings, property and affairs before they make a decision” (see Re Segal; Lensworth Financial Ltd v Segal & Ward (1975) 9 ALR 154 at 157 referred to in Re Cufari (1992) 34 FCR 544).
Reliance was otherwise placed upon those provisions of the Bankruptcy Act empowering the Trustee to make investigations and the benefit to creditors of not having debts released if there is some prospect of a greater recovery than is proposed under a composition. Further investigation it was submitted is required as to whether Messrs Foo Math and Cooke were partners of the Respondent up to 30 June 2003. It was claimed that the failure of the Respondent to include in his Statement of Affairs that he was entitled to contribution from his fellow partners is itself an admission which should satisfy the Court that the Respondent has omitted a material particular from the Statement of the Respondent’s affairs is an omission of the type contemplated in s.222(4)(b). It would be in the interests of creditors for the present composition to be declared void where it is claimed that inclusion of contribution entitlement of former parties may dramatically impact on the return of all the Respondent’s creditors. It would be in the interests of creditors therefore to declare the composition void as contemplated by s.222(5) according to the submissions made on behalf of the creditors.
It was claimed the Applicant has failed in his duty to investigate the Respondent’s estate. Specifically it was claimed that failure to take into account investigators one of the Respondent’s assets is entitlement to a contribution by the partners is significant, the criteria in s.236(1)(b) and (c) of the Act are satisfied and accordingly the deed of composition should be declared void.
The creditors it was submitted have been denied the opportunity of being fully informed in respect to the composition to enable them to consider whether to vote in favour or to seek an adjournment or to vote against it. In general terms it was submitted that the circumstances of this matter indicate what are described as evidence of breaches in the process and potentially the spirit of the law in relation to Part X of the Bankruptcy Act. Public policy it was submitted dictates that in the circumstances the composition should be declared void.
Other material particulars omitted from the Respondent’s Statement of Affairs include the claimed failure by the creditors to disclose the amount of money owed to him by several discretionary trusts. Further criticism was made of the Respondent and the issue of whether or not he was indebted to Knight Frank by way of the personal guarantee which has already been dealt with in the Applicant’s submissions.
In general terms it was submitted that in exercising the discretion pursuant to s.222(4) and (5) the Court should consider the interests of creditors which include the opportunity for a full investigation of the Respondent’s affairs, further enquiries which could be made in relation to those affairs by the Applicant as I understand it as a result thereof creditors would have adequate information to properly assess the Composition proposal of 7 January 2004.
It was further argued that the Composition seeks to defeat statutory priority, that is the priority given under s.109 of the Act which in itself can be held to be unreasonable and a basis for rejecting Composition under s.161 of the former legislation (see Raschilla). The acceptance of the Composition and the exercise of the vote against the backdrop of the sale agreement to the National Australia Bank as the largest credit in the circumstances it was submitted is oppressive to the employee creditors.
It was further submitted that there is a public interest element to proceedings in bankruptcy or Part X as well as the financial interest of creditors (see Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 at 534). It was submitted that it is in the public interest to investigate the Respondent’s affairs and in particular the circumstances surrounding the Respondent entering into the sale agreement on the very day that the Applicant was appointed as controlling trustee.
As to the status of the employee creditors, it was submitted that reliance is placed solely on the fact that the Respondent failed to correct the business name details of the Respondent’s firm to correctly reflect the ownership of the firm merely referring to the employees as “salaried partners” in the present circumstances could not be regarded as a contract between two or more persons, the existence of some “business” and a view of profits. It was submitted the word “firm” describes the persons who constitute the partners and the name under which the partners carry on business in their firm name. The salaried employees of a partnership receiving a fixed remuneration do not share in the profits or losses of the business but are properly described as “salaried partners” though in truth not a partner at all. By accessing the books and records of the Respondent it was submitted that the “Deed of Sale Partnership Share in Partnership” made on 18 June 1999 (stamped 10 November 2000) sets out in recital A the fact that the Respondent and Messrs Foo, Math and Cooke were “previously” in partnership pursuant to the terms of a written agreement made on 5 June 1995. Clause 3.4 refers to the fact that Mr Foo agreed to continue to be “employed by the continuing partner (the Respondent) in the partnership business as a salaried (non equity) partner subject to the terms and conditions of a partnership agreement to be signed by the retiring partner contemporaneously with this deed”. Reference was made to clause 4 where Mr Foo agreed “The retiring partner (Mr Foo) retires as an equity partner of the partnership with effect as and from the assignment date. Clause 6.2.2 provides “Unless otherwise agreed, the profits and losses of the partnership (including profits and losses of a capital nature) will belong to and be borne by the continuing partner (the Respondent)”.
Reference was made to the “partnership deed” referred to in the Sale of Partnership Agreement and it is not necessary to reproduce the relevant clauses though in passing I note reliance was placed upon clause 3.2, 7, 10, 10.2 and 10.3 reproduced at pages 10-24 of the affidavit of Mr Foo sworn 29 July 2004. It was submitted that given the Applicants obligation to investigate the Respondent’s affairs for the benefit of all creditors it would be extraordinary that the Applicant should only now raise whether Messrs Foo, Cooke and Math were partners of the Respondent and accordingly jointly and severally liable for the debts of the Respondent’s firm.
In relation to the availability of GEERS assistance detailed submissions were made as to the possibility of non professional employees receiving GEERS assistance to the full extent of unpaid entitlements. It was claimed that whether or not “bonuses” claimed by three of the employee creditors (Messrs Foo Cooke and Math) are recognised by GEERS is not a matter for the Applicant or the Respondent to decide or indeed to seek to extinguish the opportunity for the parties to claim to be entitled to those bonuses as part of the assistance from GEERS. Arguments were advanced that a “bonus” may be regarded as wages if the circumstances of employment contract provides the payment is to be made based on clear performance criteria (see Walker & Sherman & Anor v Andrew & Ors (2002) NSWCA 214 (19 July 2002).
National Australia Bank submissions
Mr Atkinson for the NAB referred to the Robertson affidavit and particular extracts already referred to in this judgment. He submitted that the negotiations and agreements were entirely appropriate particularly in relation to the work-in-progress of the Respondent’s firm. It had been asserted by Counsel for the Creditors that the sale agreement provided for a sale of assets, unregistered logo and design of the web site for no consideration. It is clear and I accept the submission of Mr Atkinson that clause 2.2 provides consideration for the sale of assets namely acceptance of the appointment to act as agent for the collection of the work-in-progress. The critical elements of the sale agreement appear in clauses 3 and 4 according to Mr Atkinson’s submissions which I accept. Those clauses effectively achieve the two objectives. First they preserve the Respondent’s security interest in the files whilst allowing a mechanism for the firm Friedman Lurie Singh to collect the work-in-progress under those files and secondly, allow for a process for work-in-progress as submitted by Mr Atkinson to be written down and invoices rendered and accounting made to the Respondent.
I accept that in reality the NAB though not a party to the sale agreement had approved or given consent to the sale agreement in circumstances where it provided for the Respondent to give up his property namely his files in the practice. Mr Atkinson submitted that a proper assessment of the realisation of the work-in-progress is 70 cents in the dollar which rebuts effectively the analysis of the outcome suggested by counsel for and on behalf of the creditors. I accept the analysis by Mr Atkinson based upon the material before the Court annexed to the Robertson affidavit.
Mr Atkinson dealt with an issue raised by Counsel for the creditors as to the potential for confusion as to whether the Applicant would have a part to play in realising the work-in-prodgies. He specifically referred to the Applicant’s report to creditors where at page 9 he states,
“The Trustees fees and out of pocket expenses to the meeting of creditors are estimated at about $15,000 and will be subject to the approval of creditors. This figure could be higher should we be required to act on unforseen matters. The National Australia Bank have requested me to oversight (sic) the proceeds of realisation of the work in progress and have undertaken to indemnify me and my staff for a maximum of $20,000 for this service.”
Mr Atkinson submits that that passage reveals disclosure from the NAB’s point of view as to what was the role of the Applicant in progressing the sale agreement and realisation of the Respondent’s work-in-progress. I accept that submission as being an accurate reflection of the true situation as the passage to which reference has been made clearly sets out the true situation albeit that the role of the Applicant may have aroused suspicion in the minds of some creditors.
Mr Atkinson submitted that under the terms of the goods mortgage once the bank’s debt has been satisfied then under the equity redemption it would have to account to any further receipts to the Applicant.
Reasoning
In my view the real issue in the present case is the question of whether or not the Court should exercise its discretion in favour of either declaring the Composition void or that it is not void.
I am satisfied for the reasons advanced for and on behalf of the Applicant that applying the relevant authority and in particular the Full Court decision in Musolino referred to earlier in this judgment that there is a doubt on a specific ground as to the compliance with Part X and that the first step has been established for the reasons advanced for and on behalf of the Applicant. I accept that there is clearly a doubt as to whether or not the Composition had been accepted by a special resolution of the meeting of creditors in relation to those issues concerning the alleged guarantee allowing Knight Frank to be allowed to vote and the acceptance of the proxy from National Collections. Had Knight Frank and National Collections not been permitted to vote then clearly the voting on the proposal of the meeting on 7 January 2004 would have 13 for and 13 against and the special resolution would not have been passed.
I further accept that an incorrect material particular had been included in the Statement of Affairs within the meaning of s.222(4)(b) namely the liability of the Respondent under a personal guarantee to Knight Frank. It is not necessary for the Respondent to have intended to provide false or misleading information and accordingly I am satisfied that false or misleading information of the kind which would attract the operation of s.222(4) has been provided which means the Court has a discretion to then make an order declaring the Deed of Composition or any provision of the Deed to be void.
I accept that the requirements of ss.222(1) and 222(4)(b) have been met in the present application and that the Court therefore has a discretion to declare the Composition void under s.222(2) and/or s.222(4) or further, if the Court is not satisfied it is appropriate to exercise its discretion to declare the Composition void under either sub-section then it may further make a declaration that the Composition is not void pursuant to s.222(2)(a).
I accept in the present application that the exercise of the discretion involves what has been described as “balancing process” (see Musolino). In the present application I regard it as primary significance that I should take into account in the exercise of my discretion the interests of creditors. This applies in my view to be s.222(2) and (4). In taking into account the interests of creditors it is appropriate to consider not simply the number of creditors but the extent and nature of the indebtedness of those creditors who legitimately voted for the Composition compared with those creditors who otherwise voted against the Composition or who through their representation before this Court now seek to have the Composition declared void.
In making an assessment of the relative benefits which may accrue to creditors either under the Composition or in the event that the matter proceeds to a sequestration order, there is a limit in my view in relation to the extent to which the Court may take into account potential benefits to be gained by creditors as a result of the GEERS scheme. At best in my view the most that a Court may conclude is that there is greater probability of former employees now creditors of the Respondent’s firm being able to at least make application for benefits under the GEERS scheme in the event of bankruptcy which may not be possible at all under the Composition. Otherwise, it is difficult for the Court and indeed inappropriate to speculate as to the outcome of any application which may be made by the former employees/creditors to the Commonwealth Department administering the GEERS scheme. In any event I accept further submissions made during the course of the hearing that the individual circumstance of the creditors whether it be by way of entitlement to Government funded “safety net” type schemes or indeed personal insurance or otherwise is not a matter that can be fully explored by a Court considering an application of the kind currently before this Court.
A great deal of Court time was taken in analysing the role of the creditors who are claimed to be former salaried partners. At present I am not prepared to make a formal finding as to whether those former salaried partners were partners in truth or simply employees described as salaried partners. To do so would require further evidence and detailed analysis of documentary material and in any event I am satisfied it is not an appropriate role for the Court in its exercising its discretion in this application to make a final determination on that issue. I am prepared to find however that the statutory presumption of partnership, that is the prime facie requirements of the legislation has to some extent been displaced by subsequent affidavit evidence. There is no doubt that the former employee creditors were are not equity partners though again it is unnecessary for me to make a final determination about that matter. I am satisfied however that as indicated the prime facie statutory presumption has been displaced and at the very least I can find that they were not equity partners at the relevant time. I am prepared to treat the salaried partners as employees for the purpose of this application.
I have noted the assessment of the comparative benefits of bankruptcy and the Composition set out in the Applicant’s submissions. In my view that assessment at the very least provides in the balancing exercise a real prospect that bankruptcy would indeed not be in the interests of creditors. To put that another way, it is clear to me that the Composition could properly be regarded be as one that is in the interests of creditors including those appearing before this Court but more importantly in the interests of the majority of creditors both in number and amount who had expressed a vote in favour of acceptance of the Applicant’s recommendation regarding the Composition. Overall, there is a benefit to creditors in the Composition which for the reasons advanced by the Applicant in reports to creditors would permit the Respondent to continue to service the numerous files albeit pursuant to the sale agreement. I am otherwise satisfied that the arrangement between the NAB and the Respondent, whilst perhaps giving some cause for suspicion and concern by the creditors, could not be described as an inappropriate or improper arrangement. I am satisfied that it was an appropriate commercial arrangement and do not otherwise consider it is appropriate for this Court to analyse in detail what at best might be described as suspicions held by creditors as to the motives of both the Respondent and the NAB. I accept as more probable than not the chronology of events and explanation given by Mr Robertson in his affidavit to which I have referred to earlier in this judgment.
It is understandable in the present circumstances where confidentiality has been asserted at a meeting of creditors in relation to a sale agreement entered into on the same day as the appointment of the Applicant, that former employees now creditors would raise suspicions and concerns which may or may not be shared by other creditors. However, on a proper and fair analysis of the chronology of events having regard to the nature of the business conducted by the Respondent and the matters otherwise set out in the Robertson affidavit and other material before the Court including reports by the Trustee to creditors, I am satisfied that the sale agreement was an appropriate agreement and that the appointment of the Trustee an appropriate decision at the time.
The Composition in my view in the circumstances against the backdrop of the sale agreement and the negotiations between the Respondent and NAB on balance is in the interests of all creditors. It is inevitable that acceptance of a Composition by some creditors will not be acceptable or regarded as appropriate by other creditors. Hence, the balancing process of the Court in these circumstances will usually result in a conclusion that will not be welcomed by all creditors. However, that is the nature of the process and for reasons advanced for and on behalf of the Trustee and the Respondent set out earlier in this judgment, I am satisfied that overall the Composition is in the interests of creditors.
In relation to the exercise of my discretion as to whether or not I should declare the Composition void, it is clear in the present case that there has been no delay of a kind which would encourage the Court to set aside the Composition. The amount of $10,000 already advanced is otherwise not so significant that would persuade me not to declare the Composition void had it not been for my finding that indeed the Composition is in the interests of creditors and there has been no relevant delay.
Very detailed submissions were made for and on behalf of the creditors as to questions which may be asked of either the Respondent, NAB or indeed the Trustee concerning the negotiations leading up to the sale agreement and the decision to appoint the Trustee. Whilst that detailed analysis provides what might be described as a fertile field for further exploration, it would also provide a process which would involve considerable expense making more likely the prospect that at the end of that investigative process in my view the detriment to the creditors as a result of bankruptcy would be even greater than currently exists when compared with the outcome of the Composition. It is recognised that the Composition does not provide a particularly generous payment to the creditors as analysed by the Applicant. Nevertheless on balance it is preferable to the outcome that would be achieved under a bankruptcy compared to the Composition.
I do not regard the conduct of the NAB in the present circumstances as conduct which might be regarded as oppressive or against the interests of other creditors. It has indeed facilitated collection of WIP fees and ongoing orderly conduct of the current files of the Respondent at the time of sale of the practice. The fact that the Respondent has been engaged on a salary which may appear generous is not particularly relevant in the circumstances of this case where he is actively involved in a practice which clearly includes a high volume of files and is required to maintain a degree of continuity albeit without the benefit of being an equity partner or being entitled to other benefits which he would have enjoyed as owner of his own firm. I am further satisfied that at least potentially there is a risk that the Respondent is declared bankrupt would be deprived of the opportunity of acting as a principal of a legal firm which have a dramatic impact upon any income contribution liability under bankruptcy. This is another relevant factor to take into account in the exercise of the Court’s discretion in this matter.
I otherwise accept that despite the involvement of the Applicant in negotiations leading up to the sale agreement and otherwise in advising a major creditor such as NAB does not of itself give rise to a conflict of a kind which would taint or reflect poorly upon the Applicant’s recommendation to creditors to accept the Composition. The alleged failure of the Trustee to carry out the detailed analysis and investigations as suggested throughout submissions by counsel on behalf of the Creditors likewise does not in my view provide a basis for concern. The Applicant was entitled to have regard to the commercial reality of a major banking institution making an assessment of the commercial reality of the situation and entering into a sale agreement which as indicated I accept was undertaken for the reasons set out by Mr Robertson in his affidavit. It should be further noted that although there are a number of creditors now represented by what is described as the syndicate of creditors before this Court, there are a significant number who have not joined in seeking to declare void the Composition. It is noted that there are approximately 103 known creditors and those now appearing comprise a very small percentage of the total creditors. Their primary basis advanced would appear to that the Composition disentitles them to claim the GEERS benefits. I have already dealt with that issue and in my view it would be inappropriate in the balancing exercise of this Court to allow that issue to be determinative in the exercise of the Court’s discretion in deciding whether or not the Composition should be declared void or not void.
I do accept that the loss to those creditors seeking to set aside the Composition could not in all cases be described as insignificant. Nevertheless those losses need to be weighed up against the total losses of all creditors as referred to earlier in this judgment.
Whilst there may be some criticism as to the sale of the Respondent’s legal practice and upon reflection or retrospective analysis it may argued that a better outcome could have been achieved in the interests of creditors, it seems to me that that is an unrealistic option. Whilst providing some superficial attractiveness the reality is that the clients had a need to ensure continuity of files and in the circumstances the disposition of the practice to another firm with the Respondent actively involved and engaged in the management of those files was an appropriate outcome in the interests of all parties including creditors.
Whilst the Court has some sympathy for the plight of the creditors who are former employees in perhaps not being able to make a better informed decision as to the Composition, I am otherwise satisfied that they were at least alerted to the prospect in very clear terms that a GEERS payment would not be made available in the event of the Composition being accepted and otherwise were alerted to other issues which are now sought to be agitated including the nature and circumstances of the sale of the legal practice by the Respondent and indeed the suggestion, though vague, of there being other assets not disclosed. The information then available though not as complete or detailed as may have been desired was nevertheless sufficient to alert them to the prospect that perhaps the meeting should be further adjourned with other enquiries made or in the event of non compliance with reasonable requests made upon the Trustee, other proceedings commenced under the Bankruptcy Act which the creditors may have considered appropriate.
A further detailed analysis was undertaken by the representative of the creditors suggesting that an amount of $1.85 million appears not to have been investigated by the Trustee either properly or at all. Further, the current salary of approximately $160,000 of the Respondent again it was submitted required investigation. Whilst I appreciate that these are questions and issues which may have arisen upon an analysis of the material by the creditors, I prefer the analysis by the representative of the Applicant which ultimately demonstrates that in fact there would not be a surplus of a kind suggested by the creditors and rather there would be a shortfall in the amount recovered by the NAB. I further accept that on any analysis it is extremely unlikely that there would be any realisation of amounts outstanding which would be returned to the Respondent.
I can see nothing in the material before me which would suggest that the Composition in the present application could be regarded as against the public interest and nor would it fail to ensure public confidence in the system despite the reservations expressed for and on behalf of the creditors appearing before this Court.
Ultimately it is my conclusion in the exercise of my discretion in this matter that if the Composition were to be declared void then effectively that would be perhaps a real though very small benefit potentially to a small proportion of creditors rather than what could properly be described as an overall benefit in the interests of all creditors. Accordingly it is inappropriate to therefore declare void a Composition where the benefit albeit of marginal potential significance would only accrue to a small percentage of creditors as I am not satisfied on the analysis of the material before me that there is any other potential benefit which could properly be described as being in the interests of the majority of creditors. To make a finding that there is a potential benefit to the majority of creditors would be at best a speculative conclusion not supported by the current evidence even though I have no doubt that the creditors who have appeared before this Court harbour strong suspicions that further investigation may reveal more extensive funds as claimed in the detailed submissions made on their behalf.
It follows for the reasons given that the appropriate order should be:
(1)Pursuant to s.222(2) of the Bankruptcy Act 1966 the Composition is declared to be not void.
I shall hear counsel in relation to other orders which may be appropriate arising out of this declaration.
I certify that the preceding one hundred and twenty (120) paragraphs are a true copy of the reasons for judgment of McInnis FM
Associate:
Date: 24 September 2004
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