Whitton v Perovich

Case [2016] FCA 595

FEDERAL COURT OF AUSTRALIA

Whitton v Perovich [2016] FCA 595

File number: QUD 1088 of 2015
Judge: RANGIAH J
Date of judgment: 30 May 2016
Catchwords: BANKRUPTCY AND INSOLVENCY – application from trustee for directions – termination of compositions – where debtors failed to pay contributions required by compositions – whether failure to pay contributions amounts to default – whether automatic termination of compositions upon default
Legislation:

Bankruptcy Act 1966 (Cth) ss 5, 30, 58, 73-76B, 134, 181, 187, 188A, 222, 222A, 222B, 222C, 222D, 224, 224A, Div 6 Pt IV, Pt X

Bankruptcy Amendment Act 1991 (Cth)

Bankruptcy Legislation Amendment Act 2004 (Cth)

Bankruptcy Regulations 1996 (Cth) reg 4.18
Cases cited:

Bendigo and Adelaide Bank Limited v Clout (No 2) [2016] FCA 561

Commonwealth Bank of Australia v Robson [2013] FCA 1430

Daevys v Official Trustee in Bankruptcy [2011] FCA 398

Gange v Sullivan (1966) 116 CLR 418

Havenbar Pty Ltd v Butterfield (1974) 133 CLR 449

Hingston v Westpac Banking Corporation (2012) 200 FCR 493

Labocus Precious Metals Pty Ltd v Thomas [2007] FCA 1154

Mango Boulevard Pty Ltd v Mio Art Pty Ltd [2013] QCA 271

Mango Boulevard Pty Ltd v Whitton [2015] FCA 1169

Mango Boulevard Pty Ltd v Whitton [2015] FCA 1295

MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39

Musolino v Sidiropolous (1991) 101 ALR 235

Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537

Quinn Villages Pty Ltd v Mulherin [2006] QCA 433

Raineri v Miles [1981] AC 1050

Re Doukidis Ex parte Consolidated Constructions v Melson (unreported, FCA, Toohey J, 26 June 1985)

Suttor v Gundowa Pty Ltd (1950) 81 CLR 418

United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904

Quirey M, “Part IV, Division 6 Compositions: Breathing New Life into Old Practices” (1995) 3 Insolvency Law Journal 93
Date of hearing: 5 February 2016
Date of last submissions: 11 March 2016
Registry: Queensland
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: General and Personal Insolvency
Category: Catchwords
Number of paragraphs: 127
Counsel for the Applicant: Mr PP McQuade QC
Solicitor for the Applicant: James Conomos Lawyers
Counsel for the First and Second Respondents: Mr FM Douglas QC
Solicitor for the First and Second Respondents: Delta Law
Counsel for Mango Boulevard Pty Ltd: Mr DA Kelly QC with Mr D Turner
Solicitor for Mango Boulevard Pty Ltd: Carter Newell
Solicitor for Terry Grant van der Velde: RBG Lawyers

ORDERS

QUD 1088 of 2015
BETWEEN:

ROBERT WILLIAM WHITTON

Applicant
AND:

SILVANA PEROVICH (and another named in the Schedule)

Respondent

JUDGE:

RANGIAH J

DATE OF ORDER:

30 MAY 2016

THE COURT ORDERS THAT:

1.The applicant is directed to give the Official Receiver written notice pursuant to s 224A(3) of the Bankruptcy Act 1966 (Cth) of the fact that compositions made between Silvana Perovich (“Perovich”) and her creditors on 13 November 2015 and made between Richard William Spencer (“Spencer”) and his creditors on 13 November 2015 have been terminated.

2.Perovich, her creditors and…

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AGLC
Whitton v Perovich [2016] FCA 595
Case
[2016] FCA 595
Decision Date

CaseChat Overview and Summary

In the Federal Court, Whitton, the trustee of the bankrupt estates of Perovich and Spencer, applied for directions in relation to compositions made with their creditors. The dispute centred around whether the compositions had been terminated due to the debtors' failure to make the required contributions. The court had to determine if this failure amounted to a default under the terms of the compositions and whether, as a result, the compositions had been automatically terminated.

The primary legal issues were whether the debtors' failure to pay on time constituted a default under clause G of the compositions and, if so, whether section 222D of the Bankruptcy Act applied to terminate the compositions upon default. The court also considered whether the trustee should be allowed to amend his application and whether Mango Boulevard, one of the creditors, had standing to be heard in the application.

The court found that the debtors' failure to pay on time did not constitute a "default of the contributions payable" as defined in clause G of the compositions. Instead, it was a default in the timely payment of contributions. The court held that clause G was not intended to make the timing of the payments strictly essential, as the parties had not expressly provided for strict compliance, and the nature of the subject matter did not indicate that time was intended to be of the essence. The court rejected the application of section 222D to terminate the compositions upon default, ruling that sections 222A, 222B, and 222C were the only mechanisms by which compositions could be terminated for default. Consequently, the court determined that the compositions had been terminated, and the parties were restored to their positions before the compositions were made.

The court ordered that the trustee must notify the Official Receiver of the termination of the compositions. Both Perovich and Spencer, along with their creditors and the trustee, were restored to their positions immediately before the compositions were made. The court also ordered that the trustee's costs of the application be paid from the bankrupt estates of Perovich and Spencer, and granted the parties liberty to apply further.

Orders

Orders of the court

1. The applicant is directed to give the Official Receiver written notice pursuant to s 224A(3) of the Bankruptcy Act 1966 (Cth) of the fact that compositions made between Silvana Perovich (“Perovich”) and her creditors on 13 November 2015 and made between Richard William Spencer (“Spencer”) and his creditors on 13 November 2015 have been terminated.

2. Perovich, her creditors and the applicant are restored to the positions they were in immediately before the making of the composition between Perovich and her creditors on 13 November 2015, such that:

(a) Perovich was bankrupt pursuant to a sequestration order made on 20 August 2007, but only until she was discharged from bankruptcy on 14 November 2015;

(b) the creditors of Perovich were and are creditors of the bankrupt estate of Perovich;

(c) the applicant was and is the trustee of the bankrupt estate of Perovich;

(d) subject to s 224 of the Bankruptcy Act, the property of Perovich which vested in the applicant as trustee of the bankrupt estate of Perovich pursuant to ss 58 and 181 of the Bankruptcy Act, again vests in the applicant.

3. Spencer, his creditors and the applicant are restored to the positions they were in immediately before the making of the composition between Spencer and his creditors on 13 November 2015, such that:

(a) Spencer was bankrupt pursuant to a sequestration order made on 24 August 2007, but only until he was discharged from bankruptcy on 14 November 2015;

(b) the creditors of Spencer were and are creditors of the bankrupt estate of Spencer;

(c) the applicant was and is the trustee of the bankrupt estate of Spencer;

(d) subject to s 224 of the Bankruptcy Act, the property of Spencer which vested in the applicant as trustee of the bankrupt estate of Spencer pursuant to ss 58 and 181 of the Bankruptcy Act, vests again in the applicant.

4. The applicant’s costs of the application be paid from the bankrupt estates of Perovich and Spencer.

5. The parties have liberty to apply.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

There is a substantial history of litigation underlying the present application. I will describe that history before considering the terms of the compositions and the statutory scheme. Background There has been a lengthy series of litigation between Perovich and Spencer, on one side, and two of their creditors, Mango Boulevard Pty Ltd (“Mango Boulevard”) and BMD Holdings Pty Ltd (“BMD”), on the other. That litigation is part of a strategic battle for a valuable parcel of land owned by Kinsella Heights Developments Pty Ltd (“Kinsella Heights”) at Mango Hill in Queensland. Some of the litigation is described in my judgments in Mango Boulevard Pty Ltd v Whitton [2015] FCA 1169 and Mango Boulevard Pty Ltd v Whitton [2015] FCA 1295. For present purposes, the following summary is sufficient. On 20 August 2007 and 24 August 2007, sequestration orders were made against the estates of Perovich and Spencer respectively. Paul Sweeney and Terry van der Velde (“the former trustees”) were appointed trustees of the bankrupt estates. Perovich’s assets which vested in the trustees included 25 shares in Kinsella Heights. Perovich and Spencer proposed compositions with their creditors so that their bankruptcies would be annulled and so that Perovich could regain ownership of the shares. It became clear that the former trustees would not recommend acceptance of the proposed compositions and were prepared to sell the shares to Mango Boulevard and BMD. Mango Boulevard and BMD opposed any compositions so that they could continue to negotiate the purchase of the shares from the former trustees. This part of the tactical battle was won by Perovich and Spencer. They persuaded their creditors to appoint Whitton as trustee of their estates in place of the former trustees. Two days before Perovich and Spencer were due to be automatically discharged from bankruptcy, Whitton lodged objections to their discharge. Whitton’s motivation for objecting was, in part, to allow Perovich and Spencer to propose compositions and have those proposals considered before their bankruptcies expired. The consequence of the objections was that the bankruptcies were extended by five years to 14 November 2015. Mango Boulevard and BMD commenced proceedings in the Court seeking review of Whitton’s decisions to object and the creditor’s resolutions to appoint Whitton trustee in place of Sweeney and van der Velde. Perovich and Spencer lodged proposals for compositions under s 73 of the Bankruptcy Act with Whitton, who then applied to the Court for directions. Logan J directed Whitton not to hold a meeting of the creditors to consider the proposals pending the determination of the proceedings brought by Mango Boulevard and BMD. On 2 November 2015, I dismissed those proceedings and set aside the order restraining Whitton from holding a meeting of creditors. Any creditors’ meeting had to be held before the bankruptcies ended on 14 November 2015. Otherwise, any resolutions accepting the proposals for compositions would not be valid. Whitton required Perovich and Spencer to pay $55,000 for his costs before he called a meeting, but they were tardy in paying the amount. Whitton eventually called a concurrent meeting of the creditors for 13 November 2015, but had to apply for abridgement of the time prescribed under reg 4.18 of the Bankruptcy Regulations 1996 (Cth) for the provision of the proposals for compositions and reports to the creditors. I granted that abridgement on 10 November 2015.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

The proper construction of s 222D is central to the determination of this proceeding.Consideration The principal issue is whether the compositions remain in force or whether they have been terminated. The significance of the dispute is that if the compositions remain in force, it may still be open to the debtors to pay their initial contributions. If the compositions have terminated, it is too late for them to pay; and the natural consequential order would then be to return the debtors and the creditors to the positions they were in before the compositions. The property of the bankrupts, including the shares in Kinsella Heights, would then vest in the trustee again. It is necessary to consider: (a)whether there has been “default” by the debtors within the meaning of cl G of the compositions;(b)what are the consequences of any such default and, in particular, whether s 222D of the Bankruptcy Act applied to effect the termination of the compositions upon default in payment of the initial contributions;(c)whether the trustee should be granted leave to read and file his proposed amended originating application;(d)whether Mango Boulevard has standing to be heard in the application. The second of these issues requires consideration of:(a)whether, on the proper construction of Part X, s 222D has any application to default; or whether, as the debtors submit, ss 222A, 222B and 222C are the only mechanisms by which compositions may be terminated for default;(b)in any event, whether there has occurred any “circumstance or event on the occurrence of which the [composition] provides that it is to terminate” within s 222D;(c)if the compositions have terminated, what orders should be made. I will proceed to consider each of these issues.Whether there has been “default” by the debtors Clause B of the composition for Perovich provides that:The bankrupt or her nominee will be required to make contributions to the fund…as follows…[w]ithin seven days of creditor approval of this proposed Composition, the sum of $1,000,000.00. Clause B of the composition for Spencer is the same except that the amount of the initial contribution is $100,000. Each clause of the compositions has a side-note which functions as a heading. For cl G the side-note is, “The circumstances in which the Composition terminates”. Clause G itself provides that “the composition will terminate…[i]n circumstances where there is a default of the contributions payable.” The debtors submit that the failure of the debtors to pay on time does not constitute a “default of the contributions payable” within cl G – it is merely a default in the timely payment of contributions. They submit that the failure to pay on time may constitute a default for the purpose of ss 222A or 222B of the Bankruptcy Act, but the definition of “default” in those sections is not incorporated into cl G. They submit that cl G is not to be construed as making time of the essence, as the parties have not expressly provided that the term must be strictly complied with, and the nature of the subject matter and the surrounding circumstances does not indicate that time was intended to be of the essence. In this respect they cited United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, Raineri v Miles [1981] AC 1050 at 1089, Mango Boulevard Pty Ltd v Mio Art Pty Ltd [2013] QCA 271 at [36]-[37], [71]-[85].