Trust Company of Australia Ltd v Zion
[2003] FMCA 445
•9 October 2003
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| TRUST COMPANY OF AUSTRALIA LTD & ORS v ZION & ANOR | [2003] FMCA 445 |
| BANKRUPTCY LAW – Application to set aside composition – composition set aside. |
| First Applicant: | TRUST COMPANY OF AUSTRALIA LTD |
| Second Applicants: | RONALD GEORGE ELLIOTT & PATRICIA OLIVE ELLIOTT |
| First Respondent: | ALFRED ZION |
| Second Respondent: | NICK COMBIS |
| File No: | BZ 535 of 2001 |
| Delivered on: | 9 October 2003 |
| Delivered at: | Brisbane |
| Hearing date: | 12 February 2002 |
| Judgment of: | Baumann FM |
REPRESENTATION
| Counsel for the Applicants: | Mr Sullivan |
| Solicitors for the Applicants: | Shand Taylor Lawyers |
| First Respondent: | Self-represented |
| Second Respondent: | No appearance |
ORDERS
That the composition accepted 3 October 2001 be set aside pursuant to section 239 of the Bankruptcy Act 1966.
That the First Respondent shall pay the First and Second Applicant’s costs of and incidental to these proceedings (including reserved costs, if any) as agreed or taxed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BZ 535 of 2001
| TRUST COMPANY OF AUSTRALIA LTD |
First Applicant
| RONALD GEORGE ELLIOTT & PATRICIA OLIVE ELLIOTT |
Second Applicants
And
| ALFRED ZION |
First Respondent
| NICK COMBIS |
Second Respondent
REASONS FOR JUDGMENT
Introduction
By an application filed 23 October 2001 the Applicants, TRUST COMPANY OF AUSTRALIA LTD (“Trust Co”) and RONALD and PATRICIA ELLIOTT (“Elliott”) applied for orders:
(a)declaring void a composition accepted by creditors of ALFRED ZION (“the debtor”) on 3 October 2001 pursuant to section 222 of the Bankruptcy Act1966 (Cth) (“the Act”);
(b)setting aside the composition pursuant to section 239 of the Act;
(c)sequestrating the estate of the debtor.
The debtor, who is sued as a Respondent, opposes the orders sought and represented himself at the hearing. He is a 69-year-old consultant who, whilst having a law degree, has not practiced for many years.
The Second Respondent, NICK COMBIS, is the debtor’s controlling trustee.
I am satisfied the application was lodged within the time limits imposed by section 239(1) and that Order 77 Rule 55 has been complied with as required.
The Applicants, represented by Mr Sullivan of Counsel, rely principally upon the following allegations:
(a)that the debtor offered inducements to unsecured creditors for the purposes of securing their votes in support of the composition;
(b)a trivial amount is offered in the composition;
(c)there is a prospect of economic advantage to creditors;
(d)the report to creditors as to the debtor’s financial position was misleading, or alternatively, there were misleading statements or omissions in material particulars in the debtors statement of affairs;
(e)otherwise unconscionable conduct of the debtor.
History
The broad history is not in dispute. In 1999 Primrose Textiles Pty Ltd (of which the debtor was a director) sold its Brisbane business of curtain manufacturing to Cranfield. The purchase by Cranfield was financed by Nelson Jay Pty Ltd (“Nelson Jay”), secured by a Bill of Sale. Nelson Jay is a company controlled and effectively owned by the debtor.
In June 2000 Cranfield were in serious financial difficulties despite Nelson Jay, both in its own right and as trustee of the ALFRED and BARBARA ZION SUPERANNUATION FUND, having provided significant funds for expansion of the business. The initial advance of $748,257.00 had increased to over $1.3 million.
Nelson Jay appointed Quality Lifestyle Products Pty Ltd (“QLP”) as its agent under the security to manage the business. QLP was a company without significant assets, of which the debtor was the sole director and shareholder.
As manager QLP entered into business property lease arrangements with the Applicants. For the purpose of this summary of the history it is sufficient to record that QLP (as leasee) and the debtor (as the guarantor of QLP), were indebted to the Applicant’s at the time of voluntary administration of QLP in July 2001 as follows:
– Trust Co $79,300
– Elliott $20,138
The debtor appointed William Sullivan of Bentleys MRI (Chartered Accountants) as the Administrator of QLP on 9 July 2001. The history of the complex negotiations, meetings and arrangements from 9 July 2001 to 3 October 2001 (being the date of the meeting of creditors of the debtor) is fully set out at paragraphs 13 to 33 of the affidavit of Roderick Ernest O’Sullivan, the solicitor for the Trust Co. Although Mr O’Sullivan was cross-examined by the debtor before me, I am satisfied the chronological history given in the affidavit is basically accurate. So much of the history from 16 July 2001 as is relevant to the determination made by me is set out hereafter and any dispute of facts is identified.
Deed of Company Arrangement for QLP
An initial meeting of creditors of QLP was convened and held on
16 July 2001. I am satisfied there were a number of common creditors of QLP and the debtor. Nathan Mills, an employee supervised by the Administrator deposes in his affidavit sworn 4 February 2002 that the total creditors at 23 January 2002 were $2,337,235. The most significant creditors recorded were:
Nelson Jay – $1,335,375
Barbara Zion – $402,108
Alfred Zion – $293,243
The Applicants were common creditors of QLP and the debtor.
The minutes of the meeting on 16 July 2001 record that:
(a)the director (the debtor) was considering a proposal for a Deed of Company Arrangement requiring the stock to be sold over a period of time;
(b)Nelson Jay and the debtor would not make a claim against QLP until all other creditors were paid in full;
(c)Barbara Zion would not make a claim against the company if the Bank of Melbourne was paid in full (the bank holding security over the home of the debtor and his wife);
(d)the debtor (as director) made a statement to the creditors which was summarised as follows (as much as is relevant):
·“He advised that the business venture had cost him approximately $2,000,000.
·He advised he had never drawn any funds from the company by way of wages or any other form.”
The minutes further record that the creditors discussed:
·the enforcement of personal guarantees signed by the debtor;
·the claim by the director/debtor that he had little in the way of personal assets.
I accept the evidence of Mr O’Sullivan that at the meeting (but not recorded in the minutes) the debtor:
“advised that his personal creditors were basically the same as the company’s creditors as he had signed personal guarantees and that he would proceed with a Part X arrangement if the first applicant (Trust Co) proceeded with its action against him. He said that as far as a Part X was concerned he ‘had the numbers’ to ensure any proposal he put forward would succeed.”
The solicitor for Trust Co. obtained a list of the alleged creditors of the company who held a personal guarantee from the debtor (see Exhibit REO 9), on 26 July 2001. Subsequently a report by the Administrator was circulated dated 27 July 2001. In that report the Administrator:
(a)estimated a deficiency of liabilities over assets of $1,662,369;
(b)estimated the amount owed under a valid Bill of Sale to Nelson Jay was $1,335,375 and that
“means that should it wish to do so, all funds from the sale of the assets would be payable to Nelson Jay Pty Ltd”;
(c)gave details of the proposed Deed of Company Arrangement the effect of which was that Nelson Jay and the debtor would stand aside to increase the return to unsecured creditors;
(d)gave a statement of opinion under section 439A(4)(b) of Corporations Law that:
·he recommended the deed be accepted as it would result in a better return to unsecured creditors.
·noted that:
“a number of creditors have been provided with personal guarantees by the director. The director advises that if the deed proposed is not accepted he will enter into an arrangement pursuant to Part X of the Bankruptcy Act 1966. This arrangement would result in only a nominal dividend to those creditors. The director is confident that he has sufficient votes to ensure that such a Part X agreement would be accepted.”
At a meeting on 6 August 2001 the creditors resolved to adjourn the consideration of the Deed of Company Arrangement. What is apparent is that from that date at least the negotiations between the debtor and the applicants began to break down. Mr O’Sullivan says threats were made because the debtor did not know where “the client was coming from”. Subsequently Trust Co. proceeded with its legal proceedings against the debtor and obtained summary judgment against the debtor for $80,417.80 on 30 August 2001.
Mr Elliott, in his affidavit sworn 22 October 2001, says that:
(a)the debtor agreed on 17 July 2001 to pay the sum of $47,000;
(b)he became annoyed when he received a note from the Administrator that proposed a Deed of Company Arrangement which did not guarantee he would be paid in full;
(c)he decided he would not support the Deed of Company Arrangement thereby accepting the 30 cents in the dollar offer, conditional upon supporting the Part X proposal. As a result he formally voted against both deeds at the respective meetings held on 3 October 2003;
(d)at paragraph 18 that:
“I believe the respondent has unfairly and improperly used the Part X process to avoid paying debts he does not wish to pay. This is particularly frustrating given the respondent has verbally assured me he would personally see to it that we were paid in full as recently as July 2001.”
In a circular to creditors received 25 September 2001, the Administrator reported that:
(a)a meeting of creditors was to be held on 3 October 2001;
(b)the amount to be received for stock was expected to be lower;
(c)the director had signed a section 188 authority;
(d)as a result of these matters, the original proposal had been withdrawn and an alternate proposal is to be placed before the creditors, in essence providing that:
i.Nelson Jay will relinquish it Bill of Sale rights and after administration expenses and employee entitlements, any balance would be distributed to all creditors;
ii.“Nelson Jay Pty Ltd will pay to the deed administrator funds sufficient to pay accepted creditors 30 cents in the dollar plus, over a 12 month period. This is subject to the director’s Part X proposal being accepted by creditors.”
This circular was clarified by a further circular dated 26 September 2001 which advised as follows:
“1. Nelson Jay Pty Ltd will be claiming for a dividend from the funds received from the realisation of the stock, plant and equipment.
2. Nelson Jay Pty Ltd has advised that the funds that it will provide under the proposal will only be paid to those creditors listed in my previous correspondence (accepted creditors) who vote for the director’s Part X arrangement and for the Deed of Company Arrangement, or how Nelson Jay Pty Ltd further directs. Not all accepted creditors listed in that correspondence will automatically receive payment.
3. All creditors will receive what they would otherwise receive if the company were to be placed into liquidation, but accepted creditors may receive more.”
The meeting of creditors of QLP on 3 October voted in support of the amended proposal of a Deed of Company Arrangement.
Deed of Composition
On 12 September 2001 the debtor signed an authority under section 188 of the Act, appointing Nick Combis as controlling Trustee.
Consistent with the arrangement identified earlier in the reasons, a deed of composition was proposed after the execution by the debtor of a statement of affairs and the preparation of a report by the Trustee (see Exhibit REO 17).
The report speaks for itself. The controlling trustee recommended that the proposed composition be accepted. The unsecured creditors were estimated to be $1,048,836.41 and the composition sum of $5,000 (reduced by $1,900 for fees) resulted in a return to unsecured creditors of .003 cents in the dollar. The composition was accepted by creditors at a meeting held on 3 October 2001 before the creditor’s meeting for QLP.
In his report the controlling trustee said:
“I understand that a proposal for a Deed of Company Arrangement has been proposed whereby funds will be advanced by a third party and related parties will subordinate their claims with respect to any dividends which might become payable.”
Principles
Section 239 of the Act provides as follows:
“239. (1) A creditor may, within 21 days from the date on which the special resolution accepting a composition under this Part was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor.
(2) If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be seta side, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought.
(3) The Court may, if it thinks fit, dispense with service on the debtor of notice of an application under this section, either unconditionally or subject to conditions.
(4) The making of an application for a sequestration order against the estate of a debtor 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 has been observed that the Court is required to consider:
“whether the composition ought to be set aside on the grounds that its terms are unreasonable or are not calculated to benefit creditors generally or by reason of other circumstances which relate to the terms of the composition itself or the circumstances in which the composition came to be accepted by special resolution (my emphasis). (See Merkel J in Re: Mills: Exp. Lloyd’s (1997) 73 FCR 551 at 559).
Alleged inducements
It is the circumstances in which the composition came to be accepted that lies at the forefront of the submissions of the Applicants. Mr Sullivan says that the conduct of the debtor amounts to a lack of good faith and that the “inducement” amounts to a “bribe”.
The debtor says that it was an offer available to all creditors and that Elliott “just wanted more”.
I was directed to the decision of the Full Court in Paton v Campbell Capital Limited (1993) FCR 30, where the Court at 37 said that:
“In our view, secrecy of itself is not an essential ingredient in treating an arrangement or composition as being void where an inducement is give to ta particular creditor to secure his vote, that inducement being over and above the other benefits which accrue to all creditors under the arrangement or composition. No doubt if all creditors agreed there would be no difficulty about an arrangement openly disclosed which provided benefits to some creditors greater than others and in circumstances where the greater benefits acted as an inducement to the creditors preferred to vote for the arrangement. But where there is not such unanimity, the giving of an inducement to a creditor, or in the more colourful language of Lush J in Dauglish “a bribe” operates to render void a deed entered into on that basis. In such a case the necessary good faith between the debtor and the whole of the creditors would be missing.”
There is no doubt in this case that secrecy was not an ingredient. The debtor could not have been more frank about the arrangement as a whole. Both the Administrator of QLP and his controlling trustee gave, it seems at the debtor’s express direction, full details of the “total package” offered.
The existence of the valid Bill of Sale in favour of Nelson Jay meant that there was no real likelihood of the unsecured creditors of QLP getting any dividend at all unless Nelson Jay (and to a lesser extent the debtor personally and his wife) were prepared to waive in some way their rights as creditors.
The debtor having informed creditors that he had no personal assets left of any significance created, when seen as a whole, an arrangement which provided the best solution available to creditors. He made it clear he wished to avoid personal bankruptcy.
Because Mr Zion chose not to file an affidavit and thereby submit himself to the rigours of cross-examination, I can only infer that his reasons for wishing to escape the stigma of bankruptcy relate to his age and the effect on his personal credibility – he described it in his correspondence at one point as his “bankability”.
Had the offer been made equally to all the creditors who were common in his personal estate and QLP, then I would have found it difficult to accede to the submissions of the Applicants. If that had been the case, the creditors in the composition would have been treated equally, even if they chose not to accept the proposal. This could not have amounted in my view, to an act of bad faith by the debtor. It could not be a “bribe” or “inducement” if all the creditors are offered the same total package and some, for their own reasons (commercial or otherwise) chose to reject it. Elliott fell into that category. In my view, he had no cause for complaint.
My concern in this case, within the principle enunciated by the Full Court in Paton (which of course binds me), is that Trust Co. does not appear on the evidence to have been treated equally by the debtor. Trust Co. was never offered the opportunity to be an “accepted creditor” in the administration of QLP. In the absence of any evidence from the debtor personally as to why that was the case, I infer from the history and in particular from the terms and tenor of his letter to the Administrator of 18 September 2001 (see Exhibit RGE 5) that this creditor was being treated differently because it had chosen to pursue its rights to litigate and commence bankruptcy proceedings. This is explained in the letter, in these terms:
“Mr O’Sullivan, on behalf of his client, has adopted attrition tactics in the Courts and in the bankruptcy petition against me in the vain hope that he will obtain a priority payment for Trust Company of Australia. This will not happen. It has caused the following damage to creditors:
(a)the cost of appointing an Administrator which will be in the vicinity of $35,000;
(b)legal costs to me which is in excess of $20,000 of which $10,000 remains owing to Nicholas O’Donohue;
(c)substantial decrease in the value of stock.”
As a result Trust Co. was not made the offer contained in the letter of direction to the Administrator of 18 September which was the basis for the “total package” which proceeded.
It is no answer to the suggestion of “bad faith” for the debtor to say:
(a) the arrangement was a reasonable and fair one. In my view, on the evidence, I would agree. It is just that the debtor chose not to offer the “fair” deal to all the creditors equally; or that
(b) he had the numbers for the composition without the support of the Applicants and that the Applicants should not be able to frustrate the sensible commercial arrangement which is supported by the required majority (for a special resolution) both as to number and value.
I have some sympathy for the debtor in this matter. He has worked out an arrangement which seemed fair and the best result for the unsecured creditors. I take into account that sequestration would have an adverse effect on him.
I have however formed the view that the principle in Paton applies to the facts of this case and cannot be distinguished as asserted by the debtor in his submissions. I am, with a hint of disquiet on the facts before me, bound and obliged to set aside the Deed. I will so order.
Having formed this view, I am not required to consider the other points of contention. I can say however that if they were the only points then I would not have exercised my discretion to set aside the composition. The minuscule amount of the return to debtors was not determinative (when the total package and circumstances were considered); I was not satisfied that the creditors had been misled; and I was not satisfied there was any real prospect of an economic advantage to creditors.
I think this is one of those exceptional cases where forthwith sequestration should not be ordered. It may be possible for a sensible commercial arrangement to be reached. Certainly, if it is not, it is likely that all creditors will be disadvantaged and the only remedy the Applicants will have achieved is to see a 69-year-old man bankrupted when, whilst slightly flawed in its approach, he was attempting to reach a fair solution.
Costs will follow the event.
I certify that the preceding forty (40) paragraphs are a true copy of the reasons for judgment of Baumann FM
Associate:
Date:
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