Weatherburn, Douglas Leonard v Bradley, David Geoffrey

[1981] FCA 131

Re: DOUGLAS LEONARD WEATHERBURN and ROBYN LORRAINE WEATHERBURN; ESANDA
LIMITED
And: DAVID GEOFFREY BRADLEY
Nos. 208-209/X/1979
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Lockhart J.

CATCHWORDS

Bankruptcy - application to expunge proofs of debt - Trustee of two compositions under Part X of the Bankruptcy Act 1966 admitted proofs of debt claiming, erroneously, no security for debt - whether relevant to enquire into circumstances surrounding lodgment of proofs of debt in exercise of discretion conferred by s. 99 (1) - position of secured creditor under Part X composition considered generally, with particular reference to ss. 90 and 240.

Bankruptcy Act, 1966 (Cth.) ss. 90, 99, 102, 207, 240

HEARING

SYDNEY

#DATE 12:8:1981

ORDER

1. The proofs of debt lodged in December 1979 by Esanda Limited with David Geoffrey Bradley as Trustee of the compositions concerning the debtors Douglas Leonard Weatherburn and Robyn Lorraine Weatherburn be expunged.

2. The further hearing of the application stand over to a date to be fixed to hear evidence and argument, if any, on the question of costs.

3. Each party be at liberty to apply on two (2) days' notice.

JUDGE1

This is a rather bizarre application. Esanda Limited ("Esanda") lodged two proofs of debt with David Geoffrey Bradley ("the Trustee"), the trustee of two compositions, one concerning Douglas Leonard Weatherburn ("the male debtor") and the other concerning Robyn Lorraine Weatherburn ("the female debtor"), they being husband and wife. The proof was the same in each case and was for the whole of Esanda's debt of $29,785.00 "ordinary claim" and $1,935.37 "deferred claim" (being interest). The deponent of the affidavits verifying the particulars of the debt swore:

"2. Security is not held by Esanda Limited or by any person on its behalf for the payment of the whole or any part of the sum specified in the last preceding paragraph" (being the two amounts mentioned above).

The Trustee admitted the proofs in the amount claimed.

The officer of Esanda who attended to the lodgment of the proof did not know that Esanda held a registered second mortgage over the house of the debtors in Seven Hills as security for its debt. When the error was discovered by Esanda, its solicitors wrote to the Trustee pointing out the error and stating that Esanda proposed to apply to this Court "with respect to the admission of its proof of debt".

Esanda now asserts that, by doing what it asked him to do namely, admitting the proofs, the Trustee wrongly admitted them and seeks an order expunging the proofs. The trustee opposes the application.

Esanda relies on s. 99 (1) of the Bankruptcy Act 1966 ("the Act") to found its claim for expungement of the proofs. That section provides:-

"99 (1) Where a creditor or the bankrupt considers that, by virtue of a decision of the trustee under sub-section 102(1), (3) or (4), a proof of debt has been wrongly admitted, he may apply to the Court for an order that the proof be expunged or that the amount of the admitted debt be reduced, and the Court may make an order accordingly."

The only part of s. 102 that is relied on by Esanda is s. 102 (1) (a) namely:-

"102 (1) The trustee shall examine each proof of debt and the grounds of the debt sought to be proved and . . . shall . .

(a) admit the proof of debt in whole . . . "

Esanda's application seeks other relief in the alternative; but I need not consider these alternative claims. Counsel for Esanda fairly described them as other ways of saying the same thing.

The facts are not in dispute. On 15 April 1977 Esanda leased to the debtors a used Kenworth 125 Prime Mover. On the same day the debtors executed a memorandum of mortgage over their home at Seven Hills securing to Esanda the payment of all moneys due under the lease together with certain other moneys. Clause 33 of the mortgage provides:-

"That this mortgage shall be security to the Mortgagee for the payment of all instalments of rent or hire and any other moneys payable under and the observance and performance of all the terms and provisions on the part of the Mortgagor or the Lessee(s) or Hirer(s) to be observed or performed under -

(a) the lease agreement(s) or hire purchase agreement(s) described in the Schedule hereto; and

(b) any lease agreement(s) or hire purchase agreement(s) entered into at any time hereafter between the Mortgagee on the one hand and the Mortgagor or any Lessee or Hirer named in any agreement described in the Schedule hereto on the other hand."

The lease described in the schedule is the lease to which I have referred.

On 5 August 1977 the lease was discharged and a further lease dated 5 August 1977 was executed whereby Esanda agreed to lease to the debtors the same Prime Mover.

On 23 January 1978 the debtors returned the Prime Mover to Esanda. In November 1978 Esanda arranged for the sale of the Prime Mover. There was a deficiency to Esanda of $27,625.40.

On 5 November 1979 each of the debtors executed an authority under s. 188 (1) of the Act authorising the Trustee to call separate meetings of their creditors and to take over control of their property. The Trustee convened separate meetings of creditors which were held on 27 November 1979. At the meeting of creditors relating to the male debtor the following special resolution was passed:-

"That Douglas Leonard Weatherburn enter into a Composition with his creditors whereby the creditors agree to accept 5 cents in the dollar in full settlement and discharge of all claims which creditors might otherwise have against Douglas Leonard Weatherburn which said amount will be paid by him to his Trustee by regular weekly instalments over a period of six months from the date of this resolution. Provided that this resolution shall have no force or effect unless the creditors of Robyn Lorraine Weatherburn shall resolve to accept a composition of her debts."

A special resolution in the same terms was passed at the meeting of creditors of the female debtor with the omission of the proviso.

Esanda received notice of the meetings of creditors, but did not attend them.

On 27 December 1979 the Trustee received two proofs of debt from Esanda, one in respect of each debtor. I have already set out paragraph 2 of the affidvit verifying the particulars of Esanda's debt. The affidavits were sworn by Michael Lee Hitchcock who, at all relevant times, was employed in Esanda's Loss Adjustment Department in Sydney, and was the acting manager of that department from 3 December 1979 to 4 January 1980.

On 8 January 1980 the Trustee wrote to Esanda admitting each proof of debt to rank for dividend in the sum of $29,785.00. The Trustee heard nothing further from Esanda until 16 October 1980 when he received two letters, each dated 14 October 1980, from Esanda's solicitors. In one of those letters the solicitors said that they acted for Esanda in proceedings in the Supreme Court of New South Wales brought by Esanda against the debtors in which Esanda was seeking an order for possession of the debtors' home at Seven Hills. They referred to the Trustee's letter of 8 January 1980 and asked him to provide full details of the progress of the two compositions. In the second letter, the solicitors referred to the two proofs of debt lodged by Esanda and, in particular, to the statement in paragraph 2:-

"Security is not held by Esanda Limited or by any person on its behalf for the payment of the whole or part of the sum specified in the last preceeding (sic) paragraph".

The solicitors said that the statement was incorrect as Esanda was registered second mortgagee of the home at Seven Hills. They then said:-

"We advise our client is making an application to the Federal Court of Australia with respect to the admission of its proof of debt in the respective compositions of Mr. and Mrs. Weatherburn and hereby give you notice not to dispose of the said property or do any other act prejudicial to our client's interest in the said property pending the outcome of our client's application to the Federal Court."

An application was filed on 28 October 1980 and is the one before me.

The notices of the meetings of creditors held on 27 November 1979 were accompanied by various documents including a circular to creditors from the Trustee dated 16 November 1979 which sets out details of the assets and liabilities of the debtors. It included Esanda as a secured creditor holding a second mortgage over the house at Seven Hills, the amount of its debt being stated as $27,625.40 and showing a deficiency to Esanda of $10,225.40, arrived at on the basis that the house was worth $25,000.00, and that the first mortgagee was owed $7,600.00, leaving $17,400.00 for Esanda. The letter contained a statement:-

"After the sale of the debtor's house property there will be a deficiency of $10,210 to Esanda Limited, which will of course be increased by the cost of sale etc., and the total owing to unsecured creditors will increase accordingly".

By notice dated 28 November 1979, received by Esanda on 30 November 1979, the Trustee informed creditors that the compositions had been accepted at the meetings of 27 November and included a copy of the statement of affairs of each debtor. The statement was verified in the usual way by each debtor and showed Esanda as a secured creditor in the sum of $27,625.40 by way of second mortgage, and an estimated deficiency after realisation of the house, having a value of $25,000.00, of $10,425.00.

The trustee has not yet declared or paid any dividend to creditors. He has $2,212.51 in hand. He has sworn that the debtors are contributing to their estates beyond the terms of the composition.

I will turn now to the circumstances in which Esanda's proof of debt came to be lodged.

Mr. McCristal, the officer of Esanda who was in charge of the relevant file concerning the debtors, prepared a draft form of proof of debt which was then checked for accuracy by Mr. Hitchcock. He approved it; whereupon certain details were typed on the form by an officer in the loss adjustment department. It was Mr. Hitchcock who swore the affidavit verifying the particulars of Esanda's debt. In December 1979 Mr. Hitchcock, as acting manager of the loss adjustment department, was responsible for and signed "all legal documents and most correspondence from the applicant to third parties emanating from the department". He attempted to become familiar with all the files with which he had to deal and was very busy. In December 1979, about 1400 files were being handled in the loss adjustment department. In December 1979 about four matters were being handled by that department where Esanda was a secured creditor. Prior to 1978 it was only on rare occasions that the recovery of debts involved Esanda as a secured creditor.

Mr. McCristal gave evidence that he was unable to remember if, at the time he prepared the proofs, he was aware that Esanda held a mortgage from the debtors; but he understood that, if Esanda held a security, it was necessary to state this fact together with details of the security on he proof of debt form.

Esanda contends that, in all the circumstances, the Court's discretion under s. 99 (1) should be exercised in its favour and the proofs of debt expunged, as they were lodged by mistake of Esanda.

I am satisfied that an error or mistake of this kind may be a good ground for relief under s. 99: see Grugeon v. Gerrard (1840) 4 Y. & C. Ex. 119 or 160 E.R. 945; Ex parte Whitton re Greaves (1880) 43 L.T.R. 480; Ex parte Bagshaw. In re Ker (1879) 13 Ch. Div. 304; Ex parte Clarke re Burr (1892) 67 L.T.R. 232; In re Henry Lister & Co., Limited. Ex parte Huddersfield Banking Co. (1892) 2 Ch. 417.

As to the history of s. 99, see Lee & Wace The Law and Practice of Bankruptcy and Imprisonment for Debt, Australian Edition 1884 p. 594; and Ex parte Usher (1871) 2 V.R. (I) 3 per Molesworth J. at pp. 6 and 7.

I am satisfied that when the proofs were lodged, a mistake was made by Esanda and that, if the true position had been known to the officers who dealt with the preparation and lodgment of the proofs on its behalf, they would have been in a different form to what they were.

Although the evidence of the value of the debtors' house is rather imprecise, it is probable that the house is worth not less than $25,000.00 and that Esanda would receive, upon realisation of its security, about $17,000.00 leaving a deficiency of about $12,000.00 on its ordinary claim of $29,785.00. It would then receive from the two compositions (at the rate of five cents in the dollar in each composition) a dividend of about $1,200.00. Thus, it would receive in all about $18,000.00. It is inconceivable to me that Esanda deliberately and consciously gave up its rights as a secured creditor, the necessary result of which would be that it would receive only about $3,000.00.

It was not suggested by counsel for the Trustee that the lodgment of the proofs of debt arose otherwise than by error on the part of officers in the Loss Adjustment Department of Esanda; but he contended that it is impermissible to enquire into the intent or state of mind of those officers. There was no authority cited to support this proposition. I reject it.

It seems plain to me that it must be relevant to enquire, in the exercise of the discretion conferred by s. 99 (1), into the circumstances surrounding the lodgment of the proof which is sought to be expunged. A large corporation like Esanda must act through its officers, as indeed must all corporations; and, if officers make a mistake or an error, that must be a relevant consideration. It would be equally relevant if Esanda deliberately lodged proofs of debt in the form in which it did with full knowledge, at the time of lodgment, by the relevant officers of the existence of the second mortgage as security for Esanda's debt. That would be a matter to be taken into account against exercising discretion in favour of Esanda. But it is not the case here.

In my opinion, Esanda would suffer a substantial prejudice if its proof of debt cannot be expunged or amended so as to allow it to rely on its security and prove for the deficiency. If it were otherwise, the proofs for the whole of its debt would remain and it is probable that Esanda would be unable to enforce its security at all, the debtors having been released from Esanda's debt: s. 240 of the Act.

If the case fell to be decided merely as a question of discretion, Esanda would succeed; but the Trustee sought to defeat Esanda's application by contending that Esanda must be treated, in all the circumstances, as having abandoned or released its security upon lodgment of the proofs of debt with the Trustee.

The next step in the argument was that, as the security was abandoned or released, it would be futile to expunge the proof because Esanda could not then realise its security and prove for the deficiency or estimate the value of its security and prove for the balance. This argument rests essentially upon ss. 240 and 90 of the Act. In order to fully understand and determine this question it is necessary to examine the position of a secured creditor under a Part X composition.

Section 90 is the starting point for considering a secured creditor's right to prove in bankruptcy or under compositions or deeds of assignment or arrangement with Part X. Section 243 specifies the general provisions of the Act which apply to compositions under Part X; and they include the provisions relating to proofs of debt. Section 90 is one such provision. The sections equivalent to s. 243 relating to deeds of assignment and deeds of arrangement under Part X are ss. 231 and 237 respectively.

A secured creditor is entitled, pursuant to s. 90, to prove for the whole or part of his secured debt in accordance with Division I of Part VI and not otherwise. (Section 90 (1)). A secured creditor who surrenders his security to the Trustee for the benefit of creditors generally may prove for the whole of his debt (s. 90 (2)). A secured creditor who realises his security may prove for any balance due to him after deducting the net amount realised unless the Trustee is not satisfied that the realisation has been effected in good faith and in a proper manner (s. 90 (3)). A secured creditor who has not realised or surrendered his security, may estimate its value and prove for the balance due to him after deducting the value so estimated (s. 90 (4)). A secured creditor to whom sub-section (4) applies shall state particulars of his security and the value at which he estimates it in his proof of debt.

The effect of a secured creditor surrendering his security is to put the Trustee in his place: Cracknall v. Janson (1877) 6 Ch. Div. 735.

Where a secured creditor has lodged a proof in respect of the balance due after deducting the estimated value of his security, the Trustee may redeem the security on payment to the creditor of the value at which it has been estimated by the creditor, (s. 91 (1)).

A secured creditor who has lodged a proof of debt for the balance due after deducting the estimated value of his security may apply to the Trustee or to the Court for permission to amend the proof by altering the estimated value (s. 92).

A creditor who has amended his proof of debt under s. 92, but received by way of dividend an amount in excess of the amount to which he would have been entitled under the amended proof, is required to forthwith repay the amount of the excess to the Trustee (s. 93). There is also an adjusting provision made by s. 93 (2) where a creditor who has amended his proof under s. 92 has received by way of dividend less than the amount to which he would have been entitled under the amended proof of debt.

A creditor may, with the consent of the Trustee, amend a proof of debt lodged by him, but not by altering the estimated value of his security (s. 98); doubtless because s. 92 provides for this.

I have already referred to s. 99 which entitles a creditor to apply to the Court for an order expunging his proof or reducing the amount of the admitted debt where he considers that by virtue of the Trustee's decision under s. 102 (1), (3) or (4) the proof has been wrongly admitted. In those circumstances, the Court may order expungment or reduction of the admitted debt, the creditor is obliged to forthwith repay to the Trustee any amount received by way of dividend in respect of the expunged proof of debt or any amount received by way of dividend in excess of the amount that he would have been entitled to receive if his debt had been originally admitted for the reduced amount; (s. 99 (4)).

The notion of a secured creditor surrendering his security to the Trustee for the benefit of creditors generally or of estimating the value of his security and proving for the balance due after deducting the value so estimated, with the correlative right of the Trustee to redeem the security on payment to the creditor of the value at which it has been estimated by the creditor, is readily understandable in bankruptcy and with respect to deeds of assignment where the divisible property of the bankrupt vests in the Trustee. The notion is not so easily reconciled with a composition, which, by definition (s. 187 (1)), is an arrangement by which the creditors of the debtor agree to accept payment of their debts by instalments or agree to accept in full satisfaction of their debts less than the full amount thereof. Divisible property of the debtor does not pass to the trustee of a composition. Similarly, in the case of deeds of arrangement.

But there are clear indications to be found in the Act itself that the provisions of the Act as to surrendering securities and estimating their value apply to compositions under Part X.

A secured creditor is entitled to attend and vote at a meeting of creditors called pursuant to an authority signed under s. 188 provided he either surrenders his security (s. 198 (5) - in which case he may vote for the full amount of his debt); or furnishes to the Chairman of the meeting in writing particulars of his security and of his estimate of its value - in which case he may vote in respect of the balance, if any, of the secured debt after deducting the value at which he has estimated the security (s. 198 (6)). It is as well to bear in mind that creditors may, at a meeting called pursuant to such an authority, by special resolution require the debtor to execute a deed of assignment or a deed of arrangement or accept a composition under Part X; (s. 204 (1) (b) and (c)).

Where a secured creditor estimates the value of his security for the purpose of voting at a meeting of creditors at which a special resolution requiring the debtor to execute a deed of assignment or a deed of arrangement or to accept a composition was passed, he is not entitled to prove under the deed or composition for any other amount than the balance due after deducting the value so estimated except with the approval of the Court; and he must, upon request in writing by the Trustee of the deed or of the composition, surrender the security upon payment of the amount at which he has estimated the value of his security for the purpose of voting; or, if the Court has approved his estimating the value of his security at another amount, upon payment of that other amount (s. 207 (1)).

Where a secured creditor has voted at a meeting of creditors, at which the requisite special resolution was passed, in respect of the whole of his debt without having surrendered his security, he shall be deemed to have estimated his security as having no value and he shall, upon request in writing by the Trustee of the deed executed pursuant to the special resolution or the Trustee of the composition surrender the security (s. 207 (3)).

The Court has power, upon application by a secured creditor to whom sub-section (3) applies, if it is satisfied that his failure to estimate the value of his security was due to inadvertence, upon such terms as the Court considers just and equitable, relieve him from the obligation to surrender the security and permit him to estimate its value for the purposes of proving part of his debt under the deed or composition (s. 207 (4)).

If a creditor fails to comply with the Trustee's request in writing under sub-sections (1) or (3) the Trustee may apply to the Court for an order requiring the creditor to surrender the security (s. 207 (5)).

Section 207 (6) provides that the right conferred on a secured creditor under s. 90, as applied in relation to deeds of assignment, deeds of arrangement and compositions under Part X, to realise his security and prove for the balance due to him is not exercisable where the Trustee has requested the surrender of the security under s. 207.

I have said sufficient to demonstrate that there is no substance in the argument that the provisions of s. 90 as to surrendering securities or estimating their value are inapplicable to compositions under Part X (s. 243 (3)).

Section 230 is the equivalent provisions to s. 240 for deeds of assignment under Part X. There is no equivalent provisions for deeds of arrangement under Part X, no doubt because such a provision would be unnecessary as deeds of arrangement do not operate to release the debtor from any of his debts except in so far as the deed otherwise provides (s. 234).

It is inconceivable to my mind that, at the very moment a secured creditor lodges a proof of debt for the full amount of his secured debt, whether in the circumstances of this case or otherwise, s. 240 operates to release the security or results in the security being abandoned. Plainly, the provisions to which I have referred, in particular those relating to amendment or expungement of proofs and refund of excess dividends received, militate against the construction of s. 240 contended for by the trustee. Nor does the language of s. 240 favour the trustee's construction.

I am satisfied that Esanda has not abandoned or released its security.

The form of the proofs of debt in the present case raises the interesting question whether Esanda has surrendered its security to the Trustee for the benefit of creditors generally or has estimated its value at nil and proved "for the balance due to 'it' after deducting the value so estimated" (that is, the full amount of its debt (s. 90 (4)).

I have already set out the relevant provisions of the proofs of debt. In my opinion, they cannot be construed, whether read alone or in the light of all the circumstances, as the surrender by Esanda of its security. All that Esanda has done is to say that it does not hold any security for the payment of the whole or any part of its debt. That seems to me to be necessarily inconsistent with the notion of surrender which assumes the existence of a security and giving it up to the Trustee. Nor do I regard the proofs as constituting an estimate by Esanda of the value of its security as nil and proving for the balance due after deducting the value so estimated namely, the full amount of its debt. The statement that no security is held by Esanda for the whole or any part of its debt seems to me to be inconsistent with the notion of estimating the value of the security.

What this means is that Esanda has not complied with the requirements of s. 90 through inadvertence on its part and seeks to be relieved of the consequences. Its application should be granted.

I should add that it was not contended by any party that the composition is no longer operative by reason of the fact that more than six months have elapsed from the date of the special resolutions namely, 27 November 1979, without dividends being paid to proved creditors.

I make the following orders:-

1. That the proofs of debt lodged in December 1979 by Esanda Limited with David Geoffrey Bradley as Trustee of the compositions concerning the debtors Douglas Leonard Weatherburn and Robyn Lorraine Weatherburn be expunged;

2. That the further hearing of the application stand over to a date to be fixed to hear evidence and argument, if any, on the question of costs.

3. That each party be at liberty to apply on two (2) days' notice.