Zoureff, Pearl v Apel, Isaac
[1998] FCA 258
•11 MARCH 1998
FEDERAL COURT OF AUSTRALIA
BANKRUPTCY - Deed of arrangement - whether statement of affairs to creditors omitted a material particular - whether deed of arrangement entered into to defeat the interests of a particular creditor - where omission of trust distribution alleged - whether appropriate to view one trust in a network of trusts in isolation - alleged omission of entitlement to partnership drawings where such drawings limited by covenant with creditor - whether omission of right of contribution from partners material.
BANKRUPTCY - Deed of arrangement - principles governing exercise of jurisdiction to set aside or terminate - meaning of “in the interests of creditors to do so” where distinct classes of creditors with divergent interests - whether partnership creditors were entitled to consider the consequences of the debtor’s bankruptcy upon their continuing ability to recover from the debtor’s co-partners - whether differential impact of the Deed so unfair and unreasonable in its effect as between the classes as to warrant it being declared void.
Bankruptcy Act 1966 (Cth) s 64ZE, s 141, s 222, s 236(1)(b) and (c), s 222, s 223A, s 237(2),
Re Bendel; ex parte Low Lippmann (Federal Court of Australia, April 19, 1996 Merkel J)
Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544 at 549
Re Doukidis; Ex parte Consolidated Constructions Pty Ltd v Melson (Federal Court, 26 June 1985, Toohey J)
Re Burns; Ex parte National Mutual Life Association of Australasia Ltd (1992) 39 FCR 477 (applied)
Chiragakis v Deputy Commissioner of Taxation, (1986) 68 ALR 527 (applied)
Augustyn v Putnin (1988) 83 ALR 514 (applied)
Ex parte Russell; In Re Robins (1883) 22 ChD 778 (referred)
Paton v Campbell Capital Ltd (1993) 46 FCR 30 (referred)
NZI Capital Corporation v Lancaster (1991) 30 FCR 441 (referred)
Re Nassar; Advance Bank Australia Ltd v Nassar (Federal Court, 21 December 1994, von Doussa J) (applied)
Khera v National Australia Bank Ltd (1996) 141 ALR 416 (applied)
Re Gye and Perkes; Ex parte McIntyre (1989) 89 ALR 460 (considered)
Ex parte Russell; In Re Robins (1883) 22 ChD 778 (referred)
Vatcher v Paull [1915] AC 372 (referred)
Paton v Campbell Capital Ltd (1993) 46 FCR 30 (referred)
NZI Capital Corporation v Lancaster (1991) 30 FCR 441 (referred)
PEARL ZOUREFF (Applicant) v ISAAC APEL (First Respondent), JAMES PATRICK DOWNEY (Second Respondent)
VG 7522 of 1997
FINN J
CANBERRA (HEARD IN MELBOURNE)
11 MARCH 1998
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 7522 OF 1997
BETWEEN:
PEARL ZOUREFF
APPLICANTAND:
ISAAC APEL
FIRST RESPONDENTJAMES PATRICK DOWNEY
SECOND RESPONDENTJUDGE:
FINN J
DATE OF ORDER:
11 MARCH 1998
WHERE MADE:
CANBERRA (HEARD IN MELBOURNE)
THE COURT ORDERS THAT:
The application be dismissed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 7522 OF 1997
BETWEEN:
PEARL ZOUREFF
APPLICANTAND:
ISAAC APEL
FIRST RESPONDENTJAMES PATRICK DOWNEY
SECOND RESPONDENT
JUDGE:
FINN J
DATE:
11 MARCH 1998
PLACE:
CANBERRA (HEARD IN MELBOURNE)
REASONS FOR JUDGMENT
This is an unfortunate proceeding. It continues in the bankruptcy jurisdiction of this court, a proceeding in relation to matrimonial property that resulted in two orders of the Family Court, the one of 14 April 1994, the other of 1 July 1997. The present applicant, Pearl Zoureff, served a bankruptcy notice on the first respondent, Isaac Apel her former husband, in February 1996 in respect of outstanding sums owing under the first of the two Family Court orders. The second of the Family Court orders related to outstanding indebtedness and to costs and interest. It was made by consent, Mrs Zoureff undertaking not to pursue any bankruptcy proceedings until after 28 July 1997. On 22 July 1997 Mr Apel executed a Deed of Arrangement under Part X of the Bankruptcy Act 1966 (Cth) (“the Act”). The second respondent, Mr Downey, was the trustee. Mrs Zoureff’s present application is to have the Deed declared void (the Act, s 222(4)) or else set aside (the Act, s 236(1)(b) and (c)), and for a sequestration order to be made against Mr Apel’s estate (the Act, s 222(7)).
Mr Apel is a partner with three others in the firm of solicitors, Meerkin and Apel. A number of unit trusts with corporate trustees provide administrative and other services for, or in parallel with, the partnership. The units of these in turn are owned by further trusts in which, in a variety of ways, the partners and or their families have interests. I need not comment here on the contrivance in this. It is tax driven. I will, though, need to comment later on practical effects of these arrangements. There are, predictably, significant financial ties between these various entities and the partnership.
When Mr Apel entered into the Deed, the creditors to be bound by it were not only his personal creditors, as I will for convenience call them, but also his partnership creditors. The Act contemplates this contingency: see s 237(2); and makes consequential provision for (inter alia) dividends as between partnership and non-partnership creditors. The participation of these differing classes of creditors is one of the two complicating matters in this case. The other, as I have foreshadowed, is the contrived structures through which Mr Apel has conducted his business and financial affairs.
The Statutory Setting
Insofar as presently relevant s 222 of the Act provides:
“222(4) [Grounds for order declaring deed void] 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 of 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)has omitted a material particular from the statement of the debtor’s affairs given under subsection 188(2) 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.
222(5) [Order must be in interest of creditors] 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.
...
222(7) [Application for sequestration order] 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.”
For its part s 236 relevantly provides:
“236(1) [Reasons] The Court may, upon application by the trustee, a creditor or the debtor, or, if the debtor has died, the person administering the estate of the debtor, if it is satisfied:
...
(b)that the deed of arrangement cannot be proceeded with without injustice or undue delay to the creditors, the debtor or, if the debtor has died, the estate of the debtor; or
(c)that for any other reason the deed of arrangement ought to be terminated;
make an order terminating the deed.
236(2) [In interests of creditors] The Court shall not make an order terminating a deed on the ground specified in paragraph (1)(a) or (c) unless it is satisfied that it would be in the interests of the creditors to do so.”
Additionally, it will be necessary below to refer to several provisions of the Act dealing with dividends and with the creditors’ meeting where, as here, a debtor’s creditors include both partnership and non-partnership creditors.
The Grounds of the Application
These have gone through some number of iterations. I note at the outset that, save for a new ground sought to be raised after the hearing and in supplementary submissions, the complaints made of Mr Downey’s conduct in the matter were abandoned at the trial and the applicant agreed to pay a sum towards his costs.
The grounds of the s 224 claim can for convenience be grouped under the six discrete headings:
(i)that Mr Apel falsely stated that his purpose in signing the s 188 authority was not to avoid his liability to his wife;
(ii)that he omitted to disclose dispositions of assets in the order of $240,000 in his Statement of Debtor’s Affairs;
(iii)that he omitted to disclose receipts or estimates of receipts of income from a trust of which he was a beneficiary;
(iv)that his actual and expected income was understated in the Statement of Debtor’s Affairs;
(v) that a debt of $27,000 alleged to be owing to his mother was not so owed; and
(vi) that Mr Apel’s right of contribution from his co-partners was not disclosed.
I will defer reference here as to why it is alleged it would be in the interests of the creditors to declare the Deed void.
The s 236 claim traverses essentially similar grounds to those under s 224. It raises additionally the grounds:
(vii)that many of the creditors who voted for the Deed were entities closely associated with Mr Apel;
(viii)that the partnership creditors are likely to recover 100 cents in the dollar from the partnership, the deed notwithstanding;
(ix)that there is the prospect of recovery of assets as preferential dispositions in the event of bankruptcy;
(x)that the complexity of Mr Apel’s business arrangements creates the need for further investigation such as a trustee in bankruptcy is able to undertake;
(xi) that the dividend paid under the Deed was derisory; and
(xii)that Mr Apel had a collateral understanding with his largest creditor, the Australia and New Zealand Banking Group Ltd (“the ANZ bank”), that procured its support for the Deed.
The Circumstances leading to the Part X Arrangement
As I noted at the outset, this proceeding had its genesis in Mr Apel’s inability fully to satisfy an indebtedness to his wife arising under an order of the Family Court of 14 April 1994 in respect of the settlement of their financial relationship consequent upon the termination of their marriage.
Mr Apel’s explanation of how his default under that order arose - which I accept - was that a sum was attributed to a Surfer Paradise property in the “pool of assets” to be divided. On realisation of that property a lesser sum was actually obtained. This resulted in a shortfall for which Mr Apel remained liable of over $190,000. Mrs Zoureff served her bankruptcy notice in respect of the resulting indebtedness.
Mr Apel had, apparently, already made payments to Mrs Zoureff in the order of $470,000. His evidence was that he did not have the resources further to meet his wife’s claims on him; that bankruptcy would have had serious adverse consequences both for the Meerkin and Apel partnership and for his unsecured creditors; and that in consequence he availed of Part X of the Act.
The manner in which the Part X arrangement was formulated is revealed sufficiently for present purposes in diary notes prepared by officers of the ANZ bank in June 1997 and put in evidence. These -
(a)related Mr Apel’s exploration of such an arrangement to his indebtedness to Mrs Zoureff in consequence of the Family Court orders in her favour - Mr Apel’s own evidence was that Mrs Zoureff was the only creditor “putting pressure” on him;
(b)indicated that he sought temporary assistance of up to $50,000 for three months, that assistance to be used to put into effect one or other of two “Options”:
“Option 1:
Meet with Pearl and her solicitor and advise them of the proposed Part X.
Isaac would then offer Pearl a sum ($30k) that he believes would be sufficient enticement for her to accept rather than proceeding with the Part X (which would indicate a potential dividend to her of only $1k).
Isaac does not have the $30k to offer and would need the Bank’s support in this regard. Given the proposed Part X, Isaac cannot raise the funds in his own name and it is proposed to use Caroline Properties Pty Ltd for this (refer further discussion later at ‘Strengths and Weaknesses’).
...
Option 2:
If Option 1 failed and Isaac was forced to proceed with the Part X, he would need to raise $50k in order to provide a meaningful divided to creditors. Again, he does not have the $50k to offer and would need the Bank’s support in the same manner as mentioned above. It should be noted that as the major creditor, 60% of the $50k would come back to ANZ under the Part X. A residual debt of approximately $20k (max) would remain;” and
(c) ventured the view that:
“If Isaac Apel is forced into bankruptcy by his former wife, there are significant ramifications to ANZ in terms of the viability of Meerkin & Apel and its ability to service credit facilities, and its commitment in respect to the remaining Wise Sormann debt.
It is clearly in ANZ’s interests that Isaac Apel continue in his current capacity with Meerkin & Apel.”
Option 1 was never put to Mrs Zoureff, it being Option 2 that was effectuated. I should note in passing, though I do not consider it to be of particular moment, that Mr Apel’s negotiations with the ANZ bank occurred shortly prior to his agreeing to the second of the set of orders of the Family Court of 1 July 1997 that fixed his liability to his wife as of that date in a sum in excess of $338,000.
The Part X Arrangement
On 10 July 1997 Mr Apel executed an authority under s 188 of the Act and Mr Downey consented to act as Controlling Trustee. Mr Downey’s s 189A report to the creditors for their meeting of 22 July 1997 (at which the Deed was approved) indicated that:
(i)Mr Apel’s unsecured creditors had claims in aggregate of $4,305,065 while his assets were $121,173;
(ii)“The Debtor states that the main causes of his insolvency arise from demands made by his former wife pursuant to a Family Court order in April 1994. He states that he began having difficulties meeting his debts in February 1996, when a Bankruptcy Notice was issued by his former wife”; and
(iii)comparing the amounts available to creditors under the Deed as against bankruptcy (on best and worst case outcomes) after deduction of trustee costs, $25,000 - this should have been $21,000 - would be available under the Deed, whereas $16,665 or $0 respectively would be available in the event of bankruptcy.
To put the matter inexactly, the creditors who voted on the Deed fell into three broad categories. These were, first partnership creditors, secondly non-partnership creditors generally some number of whom were entities or persons related to, or else “friendly” to, Mr Apel and, thirdly Mrs Zoureff and her sister who were also nonpartnership creditors and who alone opposed the Deed. Their provable debts were $334,007 and $2,300 respectively. The respective value of the debts of the unsecured partnership and non-partnership creditors would, so I was informed in submissions, seem to be $1,946,950 and $2,358,115.
As I noted earlier, the Act allows for the participation of both partnership and nonpartnership creditors in the approval of a Deed of Arrangement although it contrives both the manner and sources from which dividends are to be paid to the respective classes of creditors: see the Act s 237(2) and s 141; and the obligation of the trustee at the creditors’ meeting to explain this; the Act, s 223A and s 64ZE. I would add that it seems reasonably clear that the procedures so ordained by the Act were not followed by the trustee either at the meeting or in making the distribution of the moneys available under the Deed. This irregularity founds the new ground raised in support of the application to which I will later refer.
Finally I would note that the minutes of the meeting that approved the Deed record that:
“Mr Downey invited the debtor to make a statement. Mr Fleiter, for the debtor Mr Apel, said that the debtor was here in an attempt to convince creditors that the proposal would be better than bankruptcy. He said that the purpose of the signing of the Section 188 authority was not to avoid the debtor’s liability to his ex-wife but to avail himself of his rights under Part X, so all creditors rather than one could decide the debtor’s fate. He said the Part X procedure had been brought on by the debtor’s ex-wife issuing bankruptcy proceedings.”
It should be said that the dividend distributed by Mr Downey represented a return of about 0.4 cents in the dollar. The sum Mrs Zoureff received in respect of her debt of $334,007 was roughly $1500.
Mr Apel’s Statement of Affairs (the Act, s 188A)
Here I need note only the following matters. (a) Mr Apel valued his assets at $121,173 the principal components of which being a superannuation policy with the Meerkin and Apel Superannuation fund having a surrender value of $75,296, a piano and artworks valued at $35,000 and furniture and effects of $10,100. (b) In item 30 of the Statement he stated his income for the preceding twelve months and that to be expected in the next twelve, as being $103,220 and $103,200, these sums being made up respectively of partnership drawings of $95,940 and $96,000 and of assistance from his mother of $7,280 and $7,200. No entry was made of income from trusts. (c) Under item 40 he provided the details of the various trusts with which he and his family were related. (d) A blank return was made to Item 46 which required the debtor to -
“List all assets worth more than $1,000 sold, transferred, given away or otherwise disposed of by you in the last 2 years.”
Before turning to the various grounds advanced by the applicant I should indicate that, rather than provide further narrative of facts and of findings thereon, I will deal with additional factual matter in the context of each of the grounds advanced.
THE GROUNDS OF THE APPLICATION
The Purpose of the Deed
I am asked to infer that, when Mr Fleiter spoke on Mr Apel’s behalf indicating that Mr Apel’s purpose in signing the s 188 authority was not to avoid his liability to his wife, a false or misleading statement was made. Mr Apel’s “real” purpose, so it is alleged, was to “frustrate payment to Mrs Zoureff, or else was his own convenience”: cf Re Bendel; ex parte Low Lippmann (unreported, Federal Court of Australia, April 19, 1996 per Merkel J).
Reliance in this was placed (a) on Mr Apel attributing his actions to the divorce proceedings; (b) a significant proportion (said to be half in value of the creditors) were closely associated with Mr Apel; (c) the partnership creditors can, notwithstanding the deed, seek satisfaction from the other partners of Meerkin and Apel; and (d) the only creditors really affected by the Deed were Mrs Zoureff and her sister.
There is, in my view, no evidentiary foundation at all for the allegation. As I will later indicate, the evidence (which I accept) is that Mr Apel’s bankruptcy probably not only would have ended the Meerkin and Apel partnership as such but also would have led to the ending of that firm’s business and the collapse of the trusts and companies - the “house of cards” - built around the partnership. The prospect of Mr Apel’s bankruptcy carried very real consequences to his creditors whether or not they were partnership creditors, whether or not they were “friendly” creditors. The ANZ bank clearly was alert to this, as the diary note of its bank officers quoted above reveals. So also was Mr Apel. He no less than his creditors was entitled to take steps to avert them. The need to take such steps arose because of the bankruptcy notice served by Mrs Zoureff and because of his inability to satisfy his indebtedness to her. In that sense attempting to thwart his vulnerability to bankruptcy at her hands, was integral to his signing the s 188 authority. The actual terms of the Deed little benefited Mrs Zoureff or, for that matter, any of the creditors (partnership and non-partnership). But again, as I will indicate, Mr Apel’s circumstances seem such that Mrs Zoureff could expect little more (if at all) from bankruptcy. Being relieved from paying his debt to Mrs Zoureff was a consequence of Mr Apel’s action. The Act in Part X countenances this very contingency. But in this instance that clear consequence was not the cause. I earlier referred to Mr Apel’s evidence as to why he availed of the Part X facility. I accept that evidence and it is reflected in the statement made by Mr Fleiter. I should add I do not regard his failure to pursue Option 1 with Mrs Zoureff as of significance in the context of this indebtedness and of the purpose which, I find, he was seeking to achieve. I reject this ground.
Undisclosed Property Dispositions (Item 46)
Mr Apel did not disclose any property dispositions in answer to Item 46 of his Statement of Affairs. I am prepared to accept, although there is some incompleteness in the relevant financial records - an incompleteness counsel for Mr Apel has relied on - that at some date between June 30, 1995 and December 20, 1995 two debts owed to Mr Apel by Isaac Apel Family Trust No 3 (“the No 3 Trust”) were assigned by way of book entry to Isaac Apel Family Trust (“the Family Trust”). These were in the sums of $103,574.08 and $135,000 respectively. I find in consequence there was formally at least the omission of a particular from Mr Apel’s Statement of Affairs although I should indicate as well immediately that I acquit Mr Apel of any deliberate concealment in this and I accept his explanation that he was unaware of the assignments when they were made. Whether the omission was of a “material particular” (cf the Act, s 222(4)(b)) is altogether another matter and I emphasise this notwithstanding the apparently significant nominal value of the debts.
To understand the trust arrangements and the significance of the values attributed to their assets, I need to refer in a necessarily incomplete way to how the affairs of the partnership and of its associated entities were related.
The four-partner firm of Meerkin and Apel specialises in the provision of legal services to radio and television celebrities. Paralleling the operations of the firm are those of the Isaac Apel Management Unit Trust (“the Management Trust”), the unit holders of which are various family trusts of the partners. That trust provides entertainment management services. Mr Apel is the pivotal person in that business. It is, apparently, one source of income of the family trusts to which I will refer.
While the firm itself is income generating, its business relations with Caroline Systems Unit Trusts (the unit holders again being the partners’ family trusts) (“the Caroline Trust”), as also Wordprocessing Consultants Unit Trusts, both of which provide paid services to the firm, have the effect of generating annual losses for the partnership. The service fees paid to the two unit trusts I have mentioned - there may be others as well - are then channelled through the Caroline Trust to the various family unit trusts, in Mr Apel’s case this being the No 3 Unit Trust. There appear to be some number of other trusts associated with Mr Apel’s family that are financially linked to, or are dependent upon, the trusts I have mentioned.
All of this, as I noted at the outset, is a tax-driven contrivance. Individual trusts considered in isolation may seem asset rich but all have to be evaluated under the umbrella of the firm. Its debts are the assets or sustain the assets of the trusts. Its liabilities are the de facto liabilities of the trusts whether because of securities given over assets, guarantees given to partnership creditors, etc. To ascertain the true financial position of the partners and of the partnership in respect of their business and financial relations requires that the legal forms that differentiate the partnership, the trusts and the companies are seen through, at least insofar as these entities are clearly financially interdependent in fact. Individual rights and obligations created and sustained by a process of book entries - and such is the hallmark of those under consideration - doubtless have their separate existence as a matter of legal form. My concern here is with their substance (albeit with the No 3 Trust particularly in mind) and this is altogether a different matter given the ultimate source in the partnership and/or the partners of the liabilities that sustain or else put in jeopardy those rights.
I emphasise form and substance for this reason. I have found that, as a matter of law, Mr Apel made two property dispositions of apparently significant sums of money. It is his evidence, which I accept, that he did not regard dispositions made to him by the No 3 Trust as “having any benefit” for him; they were made retrospectively so to speak in “an endeavour to show the money that I received” - by which I understood he had previously received ultimately from the partnership; and with the partnership running at a loss, they were, for tax minimisation purposes, made to the partners who so suffered that loss.
In this world of retrospective book entries, Mr Apel was indifferent to the formal indebtedness the No 3 Trust had to him. His evidence, as I have noted, is that he was unaware that the two dispositions had been made though he accepted responsibility for authorising them in the sense that he authorised his accountant, Mr Metz, sometime in 1995 “to carry out those transactions that he thought appropriate” as part of the process of replacing the Pearl Apel Family Trust with the No 3 Trust as the unit holder in the Caroline Trust. I accept that the two dispositions occurred in consequence of this authorisation and without Mr Apel’s knowledge.
Before turning to the question whether, for the purposes of the Act, it ought be said that the omission of reference in Mr Apel’s Statement of Affairs to these two dispositions was of a “material particular”, I should note that the existence and the assets of both the No 3 Trust and the Family Trust were referred to in the annexure to Item 40 of the Statement of Affairs but no entry was there made under the heading “Description of Assets Transferred to Trust”.
This court has accepted on some number of occasions that for the purposes of s 224(4)(b) of the Act, a particular is material if it is one which would be relevant to and might be likely to affect the making of a decision by the creditors: see eg Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544 at 549 and the cases referred to therein. This test is an objective one and it does not require that the omission be made knowingly. Furthermore where the omitted particular is an asset or assets which might be expected to have some value, “it is for the debtor to show that those assets have no value if he wishes to contend that there has been no failure to comply with para 222(4)(b) of the Act”: Re Doukidis; Ex parte Consolidated Constructions Pty Ltd v Melson, Federal Court, 26 June 1985, p 9 per Toohey J unreported.
The applicant’s case is that (a) the assignments would be likely to be recoverable on bankruptcy under ss 120 and 121 of the Act; (b) the No 3 Trust has substantial assets and income streams (including the apartment in which Mr Apel resides though this is mortgaged to the ANZ bank); and (c) if a claim was made on the No 3 Trust in respect of the assignments Mr Apel would be likely to negotiate with the claimant to compromise to claim as the claimant would be in a position to threaten the validity of the partnership. It is said, additionally that the non-disclosure of these dispositions suggest that other assets may exist within the group of companies and trusts that have not been disclosed.
Mr Apel’s case is that (a) the ANZ bank, Mr Apel’s major creditor, does not consider the dispositions to be “material”; (b) Mr Gaddie, an accountant called on Mr Apel’s behalf, gave evidence that “the chances of getting any money [from the No 3 Trust] were fairly small”; and (c) the evidence of Mr Hawke, Mrs Zoureff’s accountant, was not reliable in this.
Notwithstanding the view I take on the question of the “interests of the creditors” (s 222(5)) in this matter, it is necessary that I express a concluded view on the material particular issue.
The first matter I should note is that the one tangible asset possessed by the No 3 Trust is mortgaged to the ANZ bank and is linked to an unlimited guarantee of Mr Apel’s obligations to the bank.
Secondly, the applicant’s claim presupposes that a sequestration order has been made against Mr Apel and that his trustee has begun or threatened proceedings against the trustee of the No 3 Trust under s 120 or s 121 of the Act: cf the Act s 237(2) which does not apply these particular provisions to deeds of arrangement. This presupposition necessarily invites consideration of the likely consequence for Mr Apel, for the partnership and for its associated trusts in the event of such an order being made.
(i) Mr Apel and the partnership. Mr Apel’s bankruptcy would itself result in the dissolution of the partnership with consequential income implications for him. It is the evidence of Mr Czarny, one of Mr Apel’s partners, that the business the firm conducted could not then continue primarily, in his view, because of the likely lack of continuing support from the bank and because of the loss of client base. He noted that insofar as clients were concerned the firm already had had to go into “significant damage control” over the Part X arrangement and the publicity given it. I accept Mr Czarny’s pessimistic prediction largely because I consider that the evidence supports his view of the likely action of the ANZ bank.
A bank officer, Ms Torley, has indicated that the bank already has restrictions in place covering partners’ drawings. Of the ANZ bank’s roughly $3 million debt only $1.265 million is secured. Nonetheless Ms Torley’s evidence was that in the event of Mr Apel’s bankruptcy the bank would issue notices of demand in respect of its securities. The consequence of this would appear to be that the real property held by the trustee of the No 3 Trust would be realised in favour of the bank and of Mr Apel’s mother, both having mortgages over the property to secure several debts of around $400,000. In any event that trustee had given an unlimited guarantee of all of Mr Apel’s obligations to the ANZ bank. While Ms Torley accepted that, having served notices of demand, the bank would consider a proposal satisfactory to it to allow the business the opportunity to continue to trade, she did not see (and I here precis her evidence) the preconditions for this in the financial circumstances of the firm. This evidence is consistent with the view expressed by the bank officers in the diary notes earlier quoted as to the apprehended consequences to the firm of Mr Apel’s bankruptcy.
(ii) The Trusts. The income stream to the No 3 Trust is via the Caroline Trust and in some degree the Management Trust in which the No 3 Trust holds units. The evidence both of Mr Gaddie and of Mr Hawke, Mrs Zoureff’s accountant, is that, without the partnership, the present income through the Caroline Trust would cease. Mr Apel, I would add, would no longer be able to act as a director of the company that is trustee of the Management Trust. In these circumstances I accept as realistic the view expressed by Mr Gaddie that the chances of getting any money if the two dispositions were set aside is “fairly small”. It was Mr Gaddie who described the interrelationship of the partnership and the various entities to which it was attached as being “almost like a pack of cards”. This seems not an unfair description of the situation. In saying this I prefer Mr Gaddie’s evidence to that of Mr Hawke to the extent they differ on this matter of the dispositions.
The applicant has sought to rely upon the prospect of an as yet to be determined 1997 distribution to the No 3 Trust as in some way improving its asset position. It may, in my view, formally appear to do so. It will not add to the substance of the Trust in the event of bankruptcy for the reason I have given. I make further comment on this distribution later in these reasons.
In the very distinctive circumstances of this case, then, I am prepared to conclude that the particulars omitted by Mr Apel from Item 46 of his Statement of Affairs were not material in that the assets in question, while having significant formal value, did not then, and will not now, represent assets of substance (or of actual value). They would not be relevant to or might be likely to affect the making of a decision by the creditors.
Even if I am incorrect in this conclusion, I would not in any event be prepared to declare the Deed void on the basis of this nondisclosure. This is because of the view I take of where the interests of the creditors lie for the purposes of s 222(5) of the Act.
(iii) Nondisclosure of Trust Income (Item 30). The complaint here is that in Item 30 of his Statement of Affairs Mr Apel, while disclosing his drawings on the partnership, did not disclose the receipts he had for the past, and would have for the next, twelve months by way of income distribution from the No 3 Trust.
As I earlier noted, such distributions are made retrospectively in the sense that the distributions made to, and then by, the family trusts to partners were designed to reflect (and to allow to be “soaked up” for tax purposes) the losses made by the partnership. In the 1996 financial year Mr Apel’s share of the partnership loss was $80,156 and this in turn was “soaked up” by a distribution of $135,000 from the No 3 Trust. This sum was not referred to in Item 30. Neither was such receipt as might be anticipated in respect of the 1997 partnership loss of which Mr Apel’s share was about $247,000. I should add both that Mr Apel seems not to have any actual entitlement to a distribution (the trust I am informed being a discretionary one) and that I have no evidence that a resolution for a 1997 distribution has been made by the trustees.
For my own part, I would have to say the tax-driven, byzantine process of book entries not only makes easy representation of Mr Apel’s affairs a formidable task, it suggests a life and reality in the book entries beyond their form that belies the real state of affairs. As I understand the matter, apart from creating a tax link between “receipts” and “losses”, trust distributions did not in fact create a new (or real) benefit, they merely reflected what had transpired - hence Mr Apel’s understanding that they were an endeavour to show the money he had already received.
Given my earlier observations on the substance of the two dispositions omitted from Item 46, I would have to say that I regard these omissions in a similar light. Significant they may appear to be. I do not regard them as material in fact.
(iv) Past and Projected Income (Item 30). The complaint here is that the income stated in Item 30 of income for the past and next twelve months of $103,220 and $103,200 respectively was an understatement. Those sums were made up of actual or anticipated drawings from the partnership and annual sums Mr Apel received from his mother by way of income supplementation.
Here as in other matters the issue is one of form and substance insofar as partnership income is concerned. Mr Apel’s disclosed figure is under the heading “Drawings from business, if self-employed”; it gives his actual and projected actual drawings for the periods in question; and there is no misrepresentation in this as such.
The applicant’s case is, though, that his actual and projected income entitlement is greater - the applicant’s proposed figure for 1997 is $115,545,03 - and that this should have been disclosed.
It is the case that, whatever the partners’ formal entitlements, the ANZ bank has by covenant placed limits on partners’ drawings, which in Mr Apel’s case are in the order of $90,000. Ms Torley’s evidence was that, having regard to the current positions of the firms and associated accounts, she did not anticipate any relaxation of that covenant in the near future. For his part, Mr Apel gave evidence that whatever his entitlements he knew what the overdraft was and “there was no more ability to draw than what we were drawing irrespective of what we may have been entitled to draw”.
If failure to disclose an actual entitlement is relevantly an omission for the purposes of the Act - and I express no concluded view on this - that particular was not in the context described above, a material one.
(v) The Debt of Mr Apel’s Mother. The trustee admitted Mrs Apelowicz proof of debt of $21,000 for the purposes of the Part X arrangement. For present purposes it is unnecessary to determine whether this is the actual figure of the debt - the figure placed on it by the applicant is $27,000. What is clear is that the debt itself is said to be the aggregate of the approximately $600 per month that Mrs Apelowicz has been providing her son by way of income supplementation for several years. That supplementation (though not the figure) was referred to in Mr Apel’s affidavit in the Family Court proceedings but it was not described as giving rise to a liability. The fact that Mr Apel in that affidavit referred to his mother “giving to me money”; and that this dealing was not documented (though that giving rise to the mortgage over the property of the No 3 Trust was) has founded the applicant’s claim that this mother-son dealing was not intended to create legal relations.
Mr Apel in evidence has indicated that he regarded himself as “morally and ethically bound to regard it as a debt” and that his mother regarded it as an acceptable arrangement between them that it was a debt.
The informality of the matter I would attribute to the family arrangement. I am prepared, though, to accept that this was a debt and that the trustee properly admitted it as such. I merely note that the laxity in its treatment by the parties to it does not deny it the character claimed for it.
(vi) The Right of Contribution. It is not disputed that the Statement of Affairs does not list as an asset such right of contribution as Mr Apel had from his partners in Meerkin & Apel. Though counsel for Mr Apel has submitted that this right exists only by virtue of, and in accordance with the provisions of, the Supreme Court Act, s 52 (Vic) and hence has not yet arisen in this matter, the contrary is clearly the case. The right is a long-standing incident of the relation of partners: see Lindley and Banks, Partnership, para 20 - 04ff (17th Ed). It equally is the case that it is an asset that ought to have been disclosed by Mr Apel in his Statement of Affairs: see Re Burns; Ex parte National Mutual Life Association of Australasia Ltd (1992) 39 FCR 477.
I am unprepared to conclude that this omission was not that of a material particular. In the context of this arrangement it is a matter of which the creditors ought to have been made aware. Mr Czarny has given evidence that he could not, and he did not believe his co-partners could, discharge the debts of the partnership. While this may affect the value of the right it does not for that reason render it valueless.
In a case where one partner alone is concerned in bankruptcy proceedings: cf Burns, supra, at 484-485; but where there are both partnership and personal creditors, the Statement ought, in my view, properly reflect the assets available for the satisfaction of both classes of creditors: cf the Act s 141; whatever the arrangement put to them. If this does not occur, then irrespective of whether the omission is one which might affect the creditors’ decision on that arrangement, the omission itself should nonetheless be regarded as being of a material particular: cf Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 at 533 - 534.
Conclusion: s 222(4)
Save in one matter, I have found or have been prepared to assume without deciding that some particulars were omitted from Mr Apel’s Statement of Affairs. I have not concluded that any of those were material as required by subsection (4)(b).
The circumstances must indeed be rare when such apparently significant omissions could properly be found not to be material. The explanation for that in this instance is that the artificiality of the business and financial arrangements adopted by Mr Apel gives a quite misleading impression of the component parts of the scheme considered in isolation. The book entries only reveal their secrets when held up to mirrors.
In relation to the omission of the right of contribution it is otherwise. This was a material particular and, subject to s 222(5), provides a ground for declaring the Deed void.
“The Interests of the Creditors”: s 222(5)
Notwithstanding my finding that a s 222(4) ground has been made out, I am precluded from declaring Mr Apel’s Deed void unless I am “satisfied that it is in the interests of the creditors to do so”: s 222(5). There is a body of case law dealing generally with the import of the term “in the interests of the creditors”, and I have been referred by the applicant’s counsel to no little part of it: see eg Augustyn v Putnin (1988) 83 ALR 514 and the cases referred to therein.
Here I have a quite distinct problem in applying the statutory formula. Mr Apel’s Deed was voted upon by two quite distinct classes of creditors - partnership and non-partnership - and as between the two (as well as within the latter) there were creditors with clearly divergent interests. In such circumstances the formula can be a somewhat inapposite one for somewhat similar reasons to those that make the “interests of the company” formula less than helpful where issues arise as to the reconciliation of conflicting interests where a proposal impacts differently on different classes of shareholders: cf Mills v Mills (1938) 60 CLR 150 at 164. (I do not suggest in referring to this decision that there is anything fiduciary in the relationship of creditors as such.)
I use the corporate analogy for this reason. The scheme of the Act assumes in a case such as this that both the partnership and non-partnership creditors of Mr Apel will attend the same meeting and vote on the same resolutions. All will be creditors, but by virtue of being creditors in “different right” (if I can so describe them) they can be expected to have different interests to be served by agreeing to, or opposing, the Deed and different interests to be affected by its being upheld or declared void. Importantly partnership creditors, for whom Mr Apel is only one of four joint debtors (his co-partners being the others), will necessarily be sensitive to the impact of the Deed on their capacity to secure recovery of their debts from the other partners.
In my view that sensitivity is a consideration to which they legitimately can have regard in voting for the Deed and they do not for that reason act improperly even if theirs is the vote that prevails. I do not consider that such a “motive” would of itself render the resolution otherwise than “bona fide in the interests of the creditors”: cf Ex parte Russell; In Re Robins (1883) 22 ChD 778 at 781. To use an old formula there would here be “no fraud on the power”: cf Vatcher v Paull [1915] AC 372 at 378. Having said this, I am prepared to accept that the relative impact of a vote on the classes of creditors may be so imbalanced that it should be stigmatised as fundamentally unfair and unreasonable and should be set aside if challenged for that reason.
What is an appropriate consideration of which a partnership creditor can take proper account in voting for a Deed, is likewise a proper matter of which the court should take account in considering the “interests of creditors” for s 222(5) purposes. In the distinctive circumstances that prevail in a case of the present type, the “commercial judgment” - cf Paton v Campbell Capital Ltd (1993) 46 FCR 30 at 32 - of the partnership creditors can properly extend to a consideration of how both the Deed and a bankruptcy respectively would affect their prospects of having their debts paid in whole or in part. Because they are creditors in a different right from the non-partnership creditors, to have regard to the consequences to their own commercial interests of their vote on the deed - albeit consequences of no necessary concern to the non-partnership creditors - is not to seek an improper or extraneous advantage. And when the court seeks to balance the competing and/or conflicting interests of classes of shareholders, it likewise can properly, and should where relevant, have regard to those consequences.
I have dealt with this matter at a little length because a central plank in the applicant’s case is that the partnership creditors were not entitled to have regard at all to the consequences Mr Apel’s bankruptcy would have upon their continuing ability to recover from his co-partners.
The argument put is that the voting of creditors is governed by the principle that:
“the majority of creditors must exercise their power bona fide in the interests of creditors; they are not entitled to take into account extraneous concerns which are no part of the debtor-creditor relationship.
The common arena of interest which all creditors have in relation to a proposed deed of arrangement is to maximise the return to creditors. Where all creditors have been actuated by this consideration, then the vote of the majority binds the dissentient minority. But once it appears that the majority has been motivated by extraneous concerns, the vote must be set aside upon application by a member of the minority.”
While I can accept the premise of this - though I would emphasise that there is nothing fiduciary implied by the “bona fide” formula - I do not consider, as I have indicated, that where there are classes of creditor it is at all helpful to speak of the creditors as if they had, and were limited by, a “common interest”. Neither do I consider the legitimate interests of one class of creditor to be “extraneous” because they are not an interest shared by another class.
For the above reasons, I do not accept the applicant’s submission challenging the Deed on the basis that the creditors of the firm who voted on the Deed were not entitled to have regard to the effect Mr Apel’s bankruptcy could have on their ability to recover their debts in whole or in part from the remaining partners. In this I would note that some number of the legal practitioner creditors have decided to “write-off” their debts in any event.
The same conclusion applies, in my view, to the creditors of the partners in respect of non-partnership joint debts. Though seemingly unaffected by the provisions of s 140 of the Act in relation to dividends, they clearly have a legitimate interest in the continuing capacity of the persons who are the remaining partners to discharge their non-partnership joint debts.
The third group of creditors who voted on the Deed were Mr Apel’s separate personal creditors. The evidence does not enable me to ascertain accurately who of the proving creditors fell into this category. The applicant’s proposal is that these constitute about $500,000 in value of which Mrs Zoureff and her sister represent about $336,000. It is claimed that the balance of the creditors of this group should be characterised as “friendly” to Mr Apel and that their vote should, for that reason be discounted if not discountenanced.
This claim might have assumed some significance if the matter was one concerning the personal creditors alone: cf Re Bendel; Ex parte Low Lippmann, above. Even if I were to conclude that, considered in isolation, the Deed was not in the interests of this class of creditors (and I make no such finding) that of itself would not answer the question posed by s 222(5) in this case. Account has to be taken of the other classes of creditor.
Turning now to the various specific matters raised by the applicant for s 222(5) purposes (other than the composition of the voting majority) these can be dealt with relatively briefly.
(i) The relative returns under the Deed and in Bankruptcy
I need preface my observations here by noting that even if bankruptcy could well result in a higher return to personal creditors, that of itself would not necessarily justify setting aside the Deed notwithstanding the approach usually taken in cases where there is only one “class” of creditor: cf Augustyn v Putnin, above, at 521. I have, here, necessarily to balance the effects of the Deed and of bankruptcy on the various classes of creditor.
(a) The “derisory” dividend
It will be necessary later in these reasons to refer further to the dividend paid. Here I merely note that the net sum made available for dividend from the $50,000 after expenses was $21,000. This probably would have represented a return of under one cent in the dollar even if properly applied: see below. On any view this can only be characterised as a nominal return and the cases have often enough indicated that this is a factor (amongst others) of which account should be taken for s 222(5) purposes: see NZI Capital Corporation v Lancaster (1991) 30 FCR 441 at 445.
But to be weighed against it are some number of factors distinctive to this case. First, it is often the case that the circumstances suggest the need for such investigation of the debtor’s affairs as bankruptcy would allow and for this reason the deed should be declared void. Here, in contrast, Mr Apel’s financial circumstances have been the subject of examination and evaluation - and openly so - throughout the course of the Family Court proceedings. I am far from satisfied that any demonstrated need exists here for further investigation of his affairs by a trustee in bankruptcy.
Secondly, all of Mr Apel’s creditors other than Mrs Zoureff and her sister have voted for the deed. Subject to the issue of fairness to which I will return below, this expression of the creditors’ wishes notwithstanding the thinness of the dividend is a countervailing factor to which regard should be had: see Re Nassar; Advance Bank Australia Ltd v Nassar, unreported, Federal Court, 21 December 1994, at 5 per von Doussa J.
(b) Other assets?
I have already indicated that I do not consider that, in the event of bankruptcy, assets of value could be recovered from the No 3 Trust in proceedings under s 120 and s 121 of the Act. I equally do not consider that uncertainty in the income likely to be earned by Mr Apel in the event of bankruptcy - the trustee estimated it in his Report at $55,000-$60,000, the applicants at a possibly higher figure because, though no longer able to be a director of Isaac Apel Management Pty Ltd (the trustee of the Management Trust), he could still provide services for the Trust as also act as an employed solicitor - is of significant moment in the contest here between the effects of the Deed and the possible effects of bankruptcy on the classes of creditors.
I would reiterate that, because of the Family Court proceedings, this is not a case in which Mr Apel’s circumstances have not been subjected to protracted scrutiny. The contrary is the case and Mr Apel has cooperated in that scrutiny. Further, whatever might otherwise be the case where a court is faced with a web of trusts and companies on an application to declare a deed void, that web in this case is no longer notable for what it might conceal. It does not warrant further examination.
(c) A secret arrangement?
The evidence has established that a condition of the ANZ bank’s approval of the Deed was that Mr Apel undertake to reexecute security documentation in its favour relating to all future debts incurred to the bank after the Part X arrangement was approved. Such reexecution in fact took place.
This arrangement, it is claimed, was a private bargain that ought be condemned as an improper inducement to the bank’s participation in the Deed: see Paton v Campbell, above, 35 ff. I do not consider that it should be seen in this light. It did not affect in any way the advantages derived by the bank or by any other creditor from the Deed. It demonstrated no lack of good faith by the bank towards the other creditors. Rather it acknowledged that an effect of the Deed would be to continue Mr Apel’s business dealings with the bank as a partner of Meerkin & Apel and otherwise after the Part X arrangement had been approved and it addressed that situation.
I can see no impropriety, no deceptive conduct, in this arrangement.
(d) The relative returns
The Trustee’s Report comparing the likely sum available for distribution to creditors under the Deed was $25,000 (in fact $21,000); in bankruptcy on an optimistic view was $16,665; and on a pessimistic view was $0. The difference between the Deed and the optimistic view is not great. I am not satisfied that there is any real likelihood of that optimistic view being found in the event of bankruptcy to be significantly inaccurate. But even if some somewhat better return could be achieved from bankruptcy - and I do not believe this to be so - that of itself would not in this case warrant declaring the Deed void. Again I have to consider the interests of all creditors.
Conclusion
The fundamental issue this particular case raises for s 222(5) purposes is, in my view, whether having regard to the differential impact of the Deed on the various classes of creditor (partnership, and nonpartnership) it is so unfair and unreasonable in its effect as between the classes as to warrant it being declared void.
It is not open to dispute that it bears comparatively harshly on Mr Apel’s personal creditors. His partnership creditors and creditors of non-partnership joint debtors retain the prospect of their debt being satisfied in whole or in part if bankruptcy does not occur, though the former of these, as I will later indicate, are not entitled to participate in the dividend under the Deed: s 141 of Act. I have no evidence, though, as to the level of their likely recovery on those debts in the event of bankruptcy though as I have found that event is likely to cause “the pack of cards” to collapse.
The choice facing all of the creditors was the stark one of a Deed or of probable bankruptcy. It was not for them to negotiate inter se for the purpose of some agreement which they considered would be fair as between them having regard to the varying consequences that the Deed would, and bankruptcy would be likely to, have for them. Rather it was Mr Apel’s circumstances that ordained those actual or likely consequences. The actual choice was not one of their making.
Given that I am concerned with a question of fairness I consider this to be a consideration of some importance. All were put in the position of having to decide on Mr Apel’s likely future status and on its implication for the debts he owed them whether jointly or alone. I have already concluded that in the case of both partnership creditors and of creditors of non-partnership joint debtors, it was proper for them to have regard to the possible effect of bankruptcy on their later recovery of the joint debts from the other joint debtors.
If there was evidence that the creditors other than the personal creditors had connived in having a Part X arrangement made so as to eliminate personal creditors to their own advantage, or that the arrangement put did not reflect what the debtor was reasonably capable, in the circumstances, of putting forward then grounds would exist, in my view, for declaring the Deed void on the ground of unfairness (or partiality) as between the various classes of creditor.
Such was not the case here. It was Mrs Zoureff who issued the bankruptcy notice and the Part X arrangement was Mr Apel’s response in the circumstances. Though the ANZ bank provided the funding (by way of loan) for the Part X proposal and did so because it favoured a Deed over bankruptcy, I do not see its involvement in the matter as in anyway conniving in the fashion I referred to above. Further while the option of $50,000 put to the creditors was in a sense arbitrary (at least within a small range), there is no basis on the evidence before me to suggest it was an unreasonable one given Mr Apel’s circumstances. The trustee’s estimates of the amount available for distribution in the event of bankruptcy seem to confirm this as do the bank diary notes to which I have made reference.
While in this case the actual burden of the Part X arrangement is not equally shared, equality of treatment is not the matter with which I am concerned (even the Act, s 141 acknowledges this). Rather it is with basic fairness. Though the effect of the Deed on Mr Apel’s personal creditors is hard, given the choices available and Mr Apel’s circumstances I am not satisfied that it is so unfair and unreasonable either of itself or as between the class of creditors that it should be set aside in the interests of the creditors.
I appreciate that in reaching this conclusion I have not related my observations specifically to the significance of the actual material particular I found not to be disclosed in the Statement of Affairs. I would add that neither was I addressed on that matter. I would, nonetheless, say this much. The right to contribution against his partners probably is of no particular moment to any of Mr Apel’s creditors in the present matter. Its value is contingent upon the continuing existence of Mr Apel’s liability to the partnership creditors - a liability that the Deed extinguished. In any event, I do not regard it as providing reason in the circumstances that satisfies me it would be in the interests of the creditors to declare the deed void. I have said sufficient on this more generally above.
The s 236 Grounds
The s 236(1)(b) and (c) grounds are particularised in terms identical to those relied upon as discretionary factors in favour of a declaration that the Deed be void under s 222(4). Here, though, they are elevated into several grounds in their own right indicating why the deed should be terminated. In sum their burden would seem to be that the effectuation of the deed would be unjust to Mrs Zoureff and her sister.
I do not consider it necessary either to disentangle the s 236 from the s 222 claims in this case: cf Khera v National Australia Bank Ltd (1996) 141 ALR 416; or to deal yet again with the matters so particularised. Having previously reached the conclusion that the Deed is not unfair and unreasonable in the circumstances, and having in substance already dealt with the matters raised here by the applicant, it is unnecessary to do more than say that I do not consider any separate case has been made for s 236 purposes that would justify my terminating the Deed.
This conclusion relieves me of the need to address the argument advanced by counsel for Mr Apel that, as the Deed has already come to an end according to its terms, there is nothing left to terminate.
The New Ground Sought to be Relied Upon
I should preface what I have to say by noting the provisions of s 141 and s 64ZE(2). By virtue of s 237 and s 223A of the Act respectively both apply to deeds of arrangement. I should add that there have been no “prescribed modifications” to the above provisions: see s 237(2) and s 223A.
Section 141 is a dividend provision. It requires that:
“141 Where one partner of a firm becomes bankrupt, a creditor to whom the bankrupt is indebted jointly with the other partners of the firm or any of them shall not receive a dividend out of the separate property of the bankrupt until all the separate creditors have received the full amount of their respective debts.”
For its part s 64ZE(2) provides:
“64ZE(2) [Meeting to which sec 141 applies - must explain] At a meeting of the creditors in a bankruptcy to which section 141 applies, the trustee must explain to the creditors and their representatives the likely effect of section 141 with respect to the distribution of dividends.”
It manifestly is the case that (i) these provisions applied to Mr Apel’s Part X arrangement; (ii) they necessitated that there would not in dividend distribution be equality between the two classes of creditors to which s 141 refers; (iii) the creditors were to be made aware of this; and (iv) the trustee in all likelihood failed to act as both s 64ZE(2) and s 141 required. As to s 141, the evidence would appear to support the inference that the $21,000 available for distribution was simply distributed rateably to all of the creditors, nonpartnership and partnership alike. If such occurred the consequence would be that Mrs Zoureff was entitled to a somewhat more enhanced dividend than she in fact received. It seems to be conceded by Mr Apel that no express reference was made to s 141 at the creditor’s meeting.
When the possible significance of these provisions was raised with the parties after the close of submissions, counsel for the applicant sought in supplementary submissions to amend the grounds relied upon in the s 236(1)(b) claim by adding the following:
“(m) At the meeting of creditors held on July 22, 1997 the trustee failed to explain to the creditors and their representatives the likely effect of Section 141 of the Bankruptcy Act with respect to the distribution of dividends in contravention of Section 64ZE(2) of the Bankruptcy Act.”
It was not contended, though, that the Deed itself contravened the Act and application was not made for orders under s 222(2).
The basis of the case to be put if the amendment is permitted, is that a misleading statement or omission by a trustee at a meeting of creditors can be a proper ground for terminating the deed under s 236 of the Act. Reference in this was made to a dictum of Hill J in Re Gye and Perkes; Ex parte McIntyre (1989) 89 ALR 460 at 478 that:
“It would be strange indeed if the court did not have jurisdiction either to set aside or declare void a settlement which had been induced by some false and misleading statement of the debtor or for that matter the trustee albeit that the false and misleading statement was not of the kind referred to in s 222(4).” Emphasis added.
For my own part I would have to say that I share Hill J’s view, though for reasons which I will give, it is unnecessary for me to express any concluded view on whether, in an appropriate case, the proper path to take in dealing with a trustee’s failure to comply with a statutorily prescribed step in the processes leading to the creditors’ resolution at a Part X meeting should be via s 222(1) of the Act rather than through s 236: see Re Gye and Perkes, above, at 478; see also Khera v National Australia Bank Ltd, above, 428-429.
It is important to preface what I have to say be observing that I raised the possible significance of s 141 and s 64ZE(2) after the hearing of this matter and, having invited further submissions on them, the applicant for whatever reason has disclaimed reliance upon s 222 of the Act seeking only to rely upon s 236. This issue, accordingly, needs to be considered solely in that light.
Given the terms of the Deed, it seems clear that the $50,000 transferred to the trustee constituted part of Mr Apel’s separate property. Partnership creditors were not in the circumstances entitled to any dividend from it because of s 141. For s 64ZE(2) purposes this had to be explained to the creditors and, seemingly, was not. The sum available for distribution ($21,000) was apparently distributed among all of the creditors ($4,195,055 in value) rather than among the nonpartnership creditors only ($2,358,115 in value on Mr Apel’s figures). The practical consequence of the trustee’s omission was, any question of effect on the resultant vote apart, that the rate of the actual dividend was somewhat smaller than it should have been. This said it would still have been less than one cent in the dollar without error.
While there is no direct evidence before me as to the effect (if any) that the trustee’s omission had on any of the creditors who voted on the resolution, I consider it improbable, given the dimensions of the dividend paid to them, that any of the partnership creditors voted for the Deed with such dividend in mind. Given my earlier findings, they were in all likelihood motivated by a desire to avert the apprehended consequences of the possible bankruptcy of Mr Apel.
The applicant, in the amendment sought, relies as I have noted upon s 236(1)(b) and claims that the Deed cannot be proceeded with without injustice to the creditors. It is not suggested that the terms of the Deed are themselves the product of, or will produce, injustice. As best I understand the applicant’s case it is that the Deed’s formation having been affected by the trustee’s s 64ZE(2) omission, to allow the Deed to “proceed” would result in injustice to the creditors.
For my own part, I rather doubt whether such a contingency is one naturally contemplated by the sub-section: see Khera v National Australia Bank Ltd, above, 429. Be this as it may, if injustice has resulted to the nonpartnership creditors from the manner in which the trustee proceeded with the deed, it would have been because the trustee did not distribute the $21,000 in the way prescribed by the Act. The vice insofar as they were concerned was, in other words, not with the Deed but with the trustee’s administration. If there is to be complaint on this score, it should be against the trustee and for his alleged misfeasance.
Insofar as the partnership creditors were concerned, I consider it improbable that the trustee’s omission resulted in any actual injustice being done to them in entering into, or by, the Deed. I have given my reasons above for this view.
In conclusion, given the distinctive circumstances of this case, I do not consider that even if the amendment was permitted, it would assist the applicant. Despite the first respondent’s objection of grounds of untimeliness, I will nonetheless allow the amendment. The issue on which it was premissed was not one that could be ignored.
I should add that my conclusion should not be regarded as in any way condoning the trustee’s omission. Even though a s 64ZE(2) explanation probably would have had no effect at all on the creditor’s vote, its omission had the potential to put the entire arrangement in jeopardy.
Conclusion
I stated at the outset that this is an unfortunate proceeding. It has raised a significant number of issues that, in the end, were of no avail to the applicant. I hesitate to say that the position in which she now finds herself is a product of her resort to the Act. Mr Apel was entitled in the circumstances to avail of the provisions of Part X. And his creditors generally approved of that course. No ground for interfering with the Deed having been made out, I dismiss the application.
I certify that this and the preceding thirty (30) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn
Associate:
Dated: 10 March 1998
Counsel for the Applicant: P Collinson Solicitor for the Applicant: Jerrard and Stuk Counsel for the Respondent: J Delany Solicitor for the Respondent: Darner Muir Fleiter Date of Hearing: 13-16 October, 28 November 1997 Date of Judgment: 11 March 1998
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