FEDERAL COURT OF AUSTRALIA

Perovich v Whitton (No 2) [2016] FCAFC 152

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellants are to pay the costs of the first and second respondents.

3.    The first respondent is at liberty to resort to the bankrupt estates of the appellants in respect of the difference between his costs reasonably incurred and the costs paid by the appellants.

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

REASONS FOR JUDGMENT

THE COURT:

Introduction

1    This appeal is brought by two debtors for whom compositions were accepted pursuant to s 73 of the Bankruptcy Act 1966 (Cth). The debtors failed to make required payments under the compositions. The issue on this appeal is whether the primary judge was correct to conclude that the compositions terminated upon the debtors’ default in making the contributions that were payable.

2    This appeal involves essentially two issues. The first is the proper construction of s 222D of the Bankruptcy Act. The second is the proper construction of a clause in the compositions proposed by the appellants, Ms Perovich and Mr Spencer (the debtors) and accepted by their respective creditors (Compositions). The trustee of the bankrupt estates, Mr Whitton (the trustee), made submissions as an officer of the Court and to assist the Court. Mango Boulevard Pty Ltd (Mango Boulevard), an interested party who was joined as a respondent to the appeal, submitted that the appeal should be dismissed.

3    In short, the debtors’ first submission is that the words in s 222D of the Bankruptcy Act do not mean what they say. Those words provide that a personal insolvency agreement (and, by s 76B, a composition) “is terminated by the occurrence of any circumstance or event on the occurrence of which the agreement provides that it is to terminate” (emphasis added). The debtors say that the terms of s 222D only apply to circumstances or events which are beyond the control of the debtor. That construction is contrary to the plain meaning of s 222D. It is also contrary to the context and purpose of s 222D.

4    The debtors’ second submission is that the words of cl G(b) of the Compositions (set out in full at [54] below) do not mean what they say. The words of cl G(b) provide that each Composition will terminate “In circumstances where there is a default of the contributions payable”. The debtors initially submitted that this meant no more than that the trustee or the creditors had a power to terminate the Compositions under s 222A or s 222B. In argument, the debtors alternatively submitted that cl G(b) means that the Compositions will terminate when there is a default in the contributions payable and the trustee elects to terminate under other powers in the Bankruptcy Act. Both of these constructions are inconsistent with the plain meaning of the words of cl G(b) and are also inconsistent with their context. The debtors also relied on authorities which are concerned with ordinary contracts, divorced from the particular context, including the statutory context, of the Compositions in which the words are used. As to their alternative submission, the debtors paid insufficient attention to the importance of the nature of the Compositions, as proposals which required acceptance by the creditors rather than the trustee.

5    The appeal must be dismissed.

The background and the Compositions

6    The factual background to this appeal was set out in the judgment of the primary judge. As the appellants submitted, there was no issue taken with the primary judge’s statement of facts which were taken, generally, from the Statement of Agreed Facts. The facts of this appeal, borrowing heavily from the primary judge’s reasons, are as follows.

7    The two debtors, Ms Perovich and Mr Spencer, have been involved in substantial litigation over a number of years against two parties said to be creditors, Mango Boulevard and BMD Holdings Pty Ltd (BMD). The litigation has been concerned with a strategic battle for a valuable parcel of land owned by Kinsella Heights Developments Pty Ltd at Mango Hill in Queensland.

8    On 20 August 2007 and 24 August 2007, sequestration orders were made against the estates of Ms Perovich and Mr Spencer respectively. Mr Sweeney and Mr van der Velde (the former trustees) were appointed trustees of the bankrupt estates which, in the case of Ms Perovich, included 25 shares in Kinsella Heights.

9    The debtors proposed compositions with their creditors so that their bankruptcies would be annulled and so that Ms Perovich could regain ownership of the shares. The former trustees would not recommend acceptance of the proposed compositions. They 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.

10    The debtors persuaded their creditors to appoint Mr Whitton as trustee of their estates in place of the former trustees. Two days before the debtors were due to be automatically discharged from bankruptcy, Mr Whitton lodged objections to their discharge. One purpose for the objections was to allow the debtors 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.

11    Mango Boulevard and BMD commenced proceedings in the Court, which sought review of (i) Mr Whitton’s decision to object, and (ii) the creditors’ resolutions to appoint Mr Whitton as trustee in place of the former trustees.

12    The debtors lodged proposals for compositions under s 73 of the Bankruptcy Act with Mr Whitton as trustee, who then applied to the Court for directions. A meeting of the creditors to consider the proposals was restrained until the determination of the proceedings brought by Mango Boulevard and BMD. Those proceedings were dismissed on 2 November 2015.

13    Any creditors’ meetings had to be held before the bankruptcies ended on 14 November 2015. There were various delays in calling the meetings, including delays due to the failure of the debtors to make timely payment of the trustee’s costs of $55,000. An abridgement of the time prescribed under reg 4.18 of the Bankruptcy Regulations 1996 (Cth) was granted for the provision of the proposals for compositions and reports to the creditors.

14    On 13 November 2015, a concurrent meeting of creditors was held. The creditors, by special resolutions, accepted the proposals for Compositions by each of the debtors. The creditors appointed Mr Whitton as trustee of the Compositions.

15    On 23 November 2015, solicitors acting for the trustee wrote to the debtors stating that unless the contributions were paid by 12 noon on 24 November 2015, the trustee would file an application in this Court seeking to terminate the Compositions.

16    On 23 November 2015, solicitors acting for Mango Boulevard and BMD informed the trustee that they considered that the Compositions had been terminated upon the default of the debtors.

17    In contrast, on 24 November 2015, the solicitors for the debtors asserted that mere failure to make contributions in a timely way did not amount to a default under the terms of the Compositions. The solicitors for the debtors said that the initial contributions would be made shortly.

18    Faced with conflicting positions, the trustee sought directions from the Court and ancillary orders. The trustee did not, and has not, applied for the termination of the Compositions by the Court pursuant to s 222C of the Bankruptcy Act.

The issues before the primary judge and his conclusions

19    Before the primary judge, the trustee submitted that the Compositions had terminated and that the parties should be restored to the positions they were in before the Compositions were made. We note that there appears to have been no issue before the primary judge, and there was no issue in this appeal, that if the Compositions had terminated then it was appropriate for the primary judge to order that the parties be restored to the positions they were in before the Compositions were made (see, for instance, the broad powers in s 30(1)(b) of the Bankruptcy Act).

20    The debtors made several different submissions before the primary judge as to why the Compositions had not terminated.

21    First, the debtors submitted that there had merely been delay in paying the initial contributions, and that such a delay did not amount to default under the Compositions. The primary judge rejected that argument. The debtors, who still have not paid, did not seek to resurrect it on appeal.

22    Secondly, the debtors submitted that even if there had been a default, s 222D of the Bankruptcy Act did not apply to default. They said that termination for default is solely governed by ss 222A, 222B and 222C of the Bankruptcy Act. This submission was rejected by the primary judge and it is a ground of appeal.

23    Thirdly, the debtors argued that even if s 222D were capable of applying to default, it would not cause a termination in this case because, on their proper construction, the Compositions only created a power for the trustee or creditors to elect to terminate a composition pursuant to ss 222A or 222B, and the trustee or creditors had made no election to terminate. The primary judge also rejected this submission. His Honour concluded that the Compositions, on their proper construction, terminated automatically on default by the debtors.

The grounds of appeal

24    One ground, and one part of another ground of appeal, were abandoned during oral submissions. The remaining grounds of appeal were as follows:

1.    The learned primary Judge erred in finding that:

…

ii)    Section 222D of the Bankruptcy Act applied to effect the termination of the Compositions upon default in payment of the initial contributions under the Compositions;

iii)    In the absence of an election by the Trustee and/or the creditors to terminate the Compositions the Compositions had terminated by the operation of section 222D of the Bankruptcy Act;

2.    The learned primary Judge erred in failing to find that in the absence of a valid termination by the Trustee and/or the creditors the Compositions remained in full force and effect.

25    Ground 2 was treated by the parties to the appeal as consequential upon ground 1. In other words, if the debtors failed on ground 1, so that the Compositions were terminated, then the debtors must fail also on ground 2. It is convenient, therefore, to consider the two issues that arise in ground 1.

Ground of appeal 1(ii): Does s 222D of the Bankruptcy Act require an election by the trustee before termination occurs?

The operation of compositions under the Bankruptcy Act

26    Division 6 of Pt IV of the Bankruptcy Act is entitled “Composition or arrangement with creditors”. It relevantly provides in s 73(1) that where a bankrupt desires to make a proposal to his or her creditors for a composition in satisfaction of his or her debts then he or she may lodge with the trustee a signed proposal in writing setting out the terms of the proposed composition. Section 73(2) requires the trustee to call a meeting of creditors and, before the meeting, to send each creditor a copy of the proposal and a report on it. Section 73(4) permits the creditors, by special resolution, to accept the proposal.

27    Section 74(5) of the Bankruptcy Act provides that the effect of a special resolution at a meeting of creditors is to annul the bankruptcy from the date when the special resolution was passed. Under s 74(6), and subject to registration requirements, the bankrupt’s property which is still vested in the trustee will vest in a person appointed by the Court or, in default of appointment, reverts to the bankrupt subject to conditions imposed by the Court.

28    A composition is binding on all creditors of the bankrupt so far as it relates to provable debts due to them from the bankrupt (s 75(1)). And it may be enforced by the Court, with a breach of a Court order being a contempt of the Court (s 75(3)).

29    The term “composition” is not a defined term in the Bankruptcy Act. It was previously defined in the Bankruptcy Act in s 187(1) as follows:

(1)    In this Part, unless the contrary intention appears:

composition means an arrangement (not being an arrangement entered into for the purposes of a proclaimed law) by which the creditors of a debtor:

(a)    agree to accept payment of the debts due to them by instalments; or

(b)    agree to accept, in full satisfaction of the debts due to them, less than the full amount of those debts, whether in the form of money or other property and whether by instalments or otherwise.

30    The definition of “composition” was removed from Pt X when the Bankruptcy Legislation Amendment Act 2004 (Cth) abolished pre-bankruptcy compositions. Perhaps inadvertently, the definition was not re-enacted in Div 6 of Pt IV. It was common ground between the parties that a composition is an arrangement of the kind previously defined.

31    Section 76B of the Bankruptcy Act provides for the setting aside and termination of compositions:

Sections 222 to 222D, 224 and 224A apply, with such modifications (if any) as are prescribed by the regulations, in relation to a composition or scheme of arrangement under this Division as if:

(a)    the composition or scheme were a personal insolvency agreement executed by the debtor; and

(b)    the trustee of the composition or scheme were the trustee of the personal insolvency agreement.

32    No modifications have been prescribed by the Bankruptcy Regulations 1966 (Cth).

Termination of a composition

33    The Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2004 (Cth), which introduced ss 222A to 222D, provided that the objects of the Bill were to:

(a)    enhance the integrity of Part X arrangements by increasing the disclosure requirements imposed on those involved in such arrangements; and

(b)    streamline the operation of Part X by providing a single type of agreement which will replace the existing three types as well as simplify the processes for setting aside and terminating such agreements.

34    As applied to a composition by s 76B, ss 222 to 222D of the Bankruptcy Act provide for circumstances in which a composition may be set aside (s 222) or terminated (ss 222A to 222D).

35    Section 222A provides for termination of a composition by a trustee. There are preconditions to the exercise of this power by a trustee. The trustee must be satisfied that the debtor is in default. The trustee must propose the termination in writing. The trustee must give notice, with various requirements, to all creditors entitled to receive notice of a meeting of creditors. The notice of termination only takes effect on the specified date if the debtor is in default and no creditor lodges a written notice of objection with the trustee two or more days before the specified date.

36    Section 222B provides for termination of a composition by creditors. Creditors have power to terminate a composition in circumstances which include by resolution at a meeting called for the purpose of termination where (i) the debtor is in default, and (ii) before the passage of the resolution, the trustee of the composition tabled at the meeting a written declaration to the effect that the trustee is satisfied that the debtor is in default.

37    Section 222C provides for termination of a composition by the Court upon application by persons including the trustee or a creditor or the debtor, provided that various requirements are met including that the Court is satisfied that termination is in the interests of the creditors.

38    Section 222D then provides:

Termination of personal insolvency agreement by occurrence of terminating event

A personal insolvency agreement is terminated by the occurrence of any circumstance or event on the occurrence of which the agreement provides that it is to terminate.

39    The scheme of ss 222A to 222D follows an obvious pattern. It provides for the manner of termination: (i) by the trustee (s 222A); (ii) by the creditors (s 222B); (iii) by the Court (s 222C); and (iv) automatically, by the occurrence of any circumstance or event provided for in the personal insolvency agreement or composition (ss 222D and 76B).

40    The Explanatory Memorandum makes this pattern clear:

96    Proposed new section 222A would deal with the process for termination of a personal insolvency agreement by the trustee. This process would be the same as the existing process for terminating a deed or composition without the need to call a meeting of creditors. The proposed new section would be the single provision relating to the trustee’s ability to propose termination of a personal insolvency agreement.

97    Proposed new section 222B would deal with the process for termination of a personal insolvency agreement by creditors. It is envisaged that this process would be used where the trustee has proposed a termination under the new section 222A but this has not occurred following an objection from a creditor or creditors. Under proposed subsection 222B(1), the creditors could terminate an agreement by passing an ordinary resolution. A special resolution would be required only where property of the debtor is covered by a restraining order or forfeiture order under the proceeds of crime legislation or where a pecuniary penalty order under that Act is in force in relation to the debtor (unless that order had already been made or was in force when the personal insolvency agreement was made) – subsections 222B(2) and (3) which represent no change from the existing provisions relating to termination of deeds and compositions. Proposed subsection 222B(4) defines ‘default’ to be a failure by the debtor (or, where the debtor has dies, the person administering the debtor’s estate) to carry out or comply with a term of the personal insolvency agreement.

98    Proposed new section 222C would deal with termination of a personal insolvency agreement by the Court. The Court will be able to terminate an agreement where the debtor (or, where the debtor has died, the person administering the debtor’s estate) has failed to carry out or comply with a term of the agreement, or the agreement cannot be proceeded with without injustice or undue delay to the creditors, the debtor (or, where the debtor has died, the debtor’s estate), or where the Court is satisfied that, for any other reason, the agreement ought to be terminated. The Court will also be given the power to make other orders ancillary to the order terminating the agreement including orders for compensation where appropriate.

99    Proposed new section 222D will provide that a personal insolvency agreement is terminated by the occurrence of any circumstance or event on the occurrence of which the agreement provides that it is to terminate. Proposed new section 188A, which sets out the requirements of a personal insolvency agreement, allows the debtor and creditors to include provisions which set out the circumstances or events which will lead to the automatic termination of the agreement.

Consideration of ground of appeal 1(ii)

41    The plain terms of s 222D provide for (i) termination on the occurrence of any circumstance or event, without limitation upon the circumstances or events which will cause termination, and (ii) termination to be “automatic”, that is termination to occur “on the occurrence” of the circumstance or event.

42    Senior counsel for the debtors submitted that s 222D did not have this meaning. He submitted s 222D only applies to circumstances or events which are beyond the control of the debtor, although at times the submission was put in the negative so that “circumstances” or “events” were said not to include events of default by the debtor (ts 16).

43    The submission by the debtors would also require s 188A(2)(g) to be read in this restrictive way. Sections 188A(1) to 188A(3) are concerned with the requirements for a personal insolvency agreement. These include s 188A(2)(g) which requires the personal insolvency agreement to “specify the circumstances in which, or the events on which, the agreement terminates”.

44    As a submission concerning interpretation of the words “circumstance” or “event”, this cannot be accepted.

45    Before the primary judge, the debtors submitted that the relevant definition of “circumstance” was the definition in the Merriam-Webster Dictionary, being “an event or situation that you cannot control”. As the primary judge explained, the Merriam-Webster Dictionary gives a “simple definition” and a “full definition” of “circumstance”. In the “simple definition” the first meaning given is “a condition or fact that affects a situation”. The “simple definition” in the Merriam-Webster Dictionary then refers to “circumstances” as “the way something happens: the specific details of an event: an event or situation you cannot control”. But, as the primary judge concluded, these are examples of the use of “circumstances” (e.g. “circumstances beyond your control”), rather than definition of the word.

46    On appeal, senior counsel for the appellants did not attempt to resurrect this as the meaning of “circumstance”. Indeed, such a submission would not merely have been a misreading of the Merriam-Webster Dictionary but it would also have been contrary to the meaning of “circumstance” in the Macquarie Dictionary and the Oxford English Dictionary. The latter defines “circumstance” as follows:

1.    That which surrounds materially, morally, or logically.

a.    That which stands around or surrounds; the totality of surrounding things; surroundings; environment.

…

2a.    The logical surroundings or ‘adjuncts’ of an action; the time, place, manner, cause, occasion, etc., amid which it takes place; in sing. any one of these conditioning adjuncts.

…

4a.    The ‘condition or state of affairs’ (Johnson) surrounding and affecting an agent; esp. the external conditions prevailing at the time.

47    Even if it were possible to read “circumstance” in such a confined way, there would be a further obstacle. Section 222D refers to any circumstance or “event”. The Oxford English Dictionary defines “event” as follows:

1a.    The (actual or contemplated) fact of anything happening; the occurrence of.

…

2a.    Anything that happens, or is contemplated as happening; an incident, occurrence.

48    Senior counsel for the debtors accepted that it might be necessary to reach the restrictive result for which he contended by a process of implication rather than interpretation (ts 11-13). Textually, such an implication is extremely strained. The word “any” which precedes “circumstance or event” is contrary to an implication which would restrict the operation of s 222D to events which are beyond the control of the debtor, or exclude from s 222D events of default which were within the control of the debtor. As senior counsel for Mango Boulevard submitted, the word “any” is a word of very broad import: JTA Le Roux Pty Ltd as trustee for the FLR Family Trust v Lawson [2013] WASC 293 at [74].

49    Another difficulty with such an implication is that, at best, it seeks to add words to the legislation to fill a perceived gap in the legislation. In Taylor v Owners - Strata Plan No 11564 [2014] HCA 9; (2014) 253 CLR 531, French CJ, Crennan and Bell JJ said (at 548 [38], footnotes omitted):

The question whether the court is justified in reading a statutory provision as if it contained additional words or omitted words involves a judgment of matters of degree. That judgment is readily answered in favour of addition or omission in the case of simple, grammatical, drafting errors which if uncorrected would defeat the object of the provision. It is answered against a construction that fills “gaps disclosed in legislation” or makes an insertion which is “too big, or too much at variance with the language in fact used by the legislature”.

50    In any event, we do not accept that there is any “gap” in the legislation.

51    As we have explained, ss 222A to 222D provide for a regime for termination of personal insolvency agreements and, by s 76B, compositions. That regime sets out the conditions for termination by the trustee, the creditors, the Court, and then automatic termination by an event (“on the occurrence of”) as agreed by the creditors and the debtor.

52    As we have also explained, the amendments by the Bankruptcy Legislation Amendment Act 2004 (Cth) which introduced ss 222A to 222D were intended to operate together with ss 73 and 74 and Div 6 of Pt IV (the annulment of bankruptcy by the action of creditors). As the primary judge observed in relation to ss 73 and 74, in Labocus Precious Metals Pty Ltd v Thomas [2007] FCA 1154 [54], Allsop J explained that the “procedure is to be followed against the background of the need to inform creditors of relevant matters and to allow creditors to make up their own minds as to what they wish to do”. The scheme of the legislation is not one by which creditors are to be restricted from agreeing particular events of termination, particularly events which might be as crucially important to a creditor as the payment of contributions.

Ground of appeal 1(iii): Construction of the Compositions

53    The Compositions for the two debtors were in almost identical terms with differences, not material to this appeal, concerning only the amount of required payments. The parties made submissions in relation to the Composition for Mr Spencer.

54    The terms of the Composition for Mr Spencer include the following:

55    The focus was upon cl G(b). The debtors submitted that cl G(b) could not mean what it said: that the Composition terminates in circumstances where there is a default in contributions payable. They relied heavily on authorities concerning contracts subject to a condition subsequent. The debtors’ primary submission was that upon its proper construction, cl G(b) of the Compositions did no more than give the trustee or the creditors a power to terminate the Compositions under ss 222A, or 222B. In oral submissions, the debtors made an alternative argument. They submitted that cl G(b) empowered the trustee to terminate the Compositions using powers other than ss 222A, 222B, or 222C, namely powers under ss 161 and 190 of the Bankruptcy Act.

56    We do not accept either of these submissions. The text, context, and purpose of cl G(b) has the effect that a default in the contributions payable terminates the Compositions automatically. We reach this conclusion for four reasons.

57    First, the authorities relied upon by the debtors involved very different contexts, not involving statutory constructs like compositions under the Bankruptcy Act. Those authorities generally involved construction of conditions subsequent which would negate any contractual rights. They were not generally concerned with the termination of a contract which operates into the future (in futuro) not from the beginning (ab initio), although the parties in this case proceeded on the assumption (the correctness of which is not necessary to decide) that the reference to “termination” in the Bankruptcy Act was effectively a description of a condition subsequent rather than the use of “termination” in its ordinary legal sense.

58    The leading case relied upon by the debtors, which had a very different context, was Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418. The decision in Suttor concerned a contract for the sale of a pastoral property. The contract contained a provision that if consent of the Treasurer were not obtained within two months of the contract date, or such further period as the parties agreed, then the contract would be deemed to be cancelled. The High Court held that this clause made the contract voidable not void. The person who had the power to avoid the contract would depend upon the manner in which the event of a lack of consent occurred. In the passage relied upon by the debtors, at 440-442, Latham CJ, Williams and Fullagar JJ said (footnotes omitted):

In the second place, although cl. 12 in terms provides for an automatic avoidance of the contract on the occurrence of a specified event, that is (even if no agreement for an extension of time were made) by no means the end of the matter. The effect of contractual provisions of this character was discussed and explained in New Zealand Shipping Co. Ltd. v. Société des Ateliers et Chantiers de France. Lord Atkinson said:—“It is undoubtedly competent for the two parties to a contract to stipulate by a clause in it that the contract shall be void upon the happening of an event over which neither of the parties shall have any control, cannot bring about, prevent or retard. For instance, they may stipulate that if rain should fall on the thirtieth day after the date of the contract, the contract should be void. Then if rain did fall on that day the contract would be put to an end by this event, whether the parties so desire or not. Of course, they might during the currency of the contract rescind it and enter into a new one, or on its avoidance immediately enter into a new contract. But if the stipulation be that the contract shall be void on the happening of an event which one or either of them can by his own act or omission bring about, then the party, who by his own act or omission brings that event about, cannot be permitted either to insist upon the stipulation himself or to compel the other party, who is blameless, to insist upon it, because to permit the blameable party to do either would be to permit him to take advantage of his own wrong, in the one case directly, and in the other case indirectly in a roundabout way, but in either way putting an end to the contract.”

Where the event in question is one which cannot occur without default on the part of one party to the contract, the position is clear. The provision is then construed as making the contract not void but voidable: only the party who is not in default can avoid it, and he may please himself whether he does so or not. In the present case the happening of the event (not obtaining the Treasurer’s consent) may be brought about by failure on the part of either party to take certain necessary steps (provision of particulars by the vendor or making of application by the purchaser) to obtain the Treasurer’s consent, or it may be brought about without any default on the part of either party. In fact, although there was some argument to the contrary, it was, we think, brought about without any default on the part of either party. Such a case is perhaps not quite so clear as the simpler case where the event cannot occur without default on one side or the other. But we are of opinion that the New Zealand Shipping Case requires the same construction to be given to the contract in both classes of case. The provision in question is to be construed as making the contract not void but voidable. The question of who may avoid it depends on what happens. If one party has by his default brought about the happening of the event, the other party alone has the option of avoiding the contract. If the event has happened without default on either side, then either party may avoid the contract. But neither need do so, and, if one party having a right to avoid it does not clearly exercise that right the other party may enforce the contract against him. This is, we think, the view of Lord Shaw and Lord Wrenbury in the New Zealand Shipping Case, and it is consistent with what was said by Lord Finlay L.C. The language of Lord Atkinson may perhaps be regarded as expressing a different view, but we doubt whether his Lordship had in mind the precise point which arises here and which did not arise in the New Zealand Shipping Case. Although the effect of a provision in a contract may differ according to the events which happen, its construction cannot differ according to the events which happen. If “void” means “voidable,” it means “voidable” whatever happens. It cannot very well mean “voidable” if an event happens through the default of one party, and “void” if the event happens without default by either party.

59    Even applying this approach to a circumstance where one party might have a power to terminate a contract by his or her own wrongful act, there were large assumptions involved in the debtors’ submission that they could profit from their own wrong by defaulting in their contributions and causing the Compositions to terminate. One assumption was that the debtors would be entitled to restitution of all the contributions that they had made, perhaps because they had been paid on a basis which failed. It is not necessary to consider the correctness of that assumption. It suffices to note that there are statements to the contrary in the context where a termination occurs due to a plaintiff’s own unwillingness or refusal to perform: see Baltic Shipping v Dillon [1993] HCA 4; (1993) 176 CLR 344 at 352 (Mason CJ, Brennan and Toohey JJ agreeing).

60    In any event, the most basic point is that the context in which statements such as Suttor were made are very different from the context where the Compositions were formed against the statutory background of the Bankruptcy Act and their operation are substantially governed by the Bankruptcy Act.

61    In Gange v Sullivan [1966] HCA 55; (1966) 116 CLR 418 at 442, Taylor, Menzies and Owen JJ accepted that the authorities cited showed a disposition on the part of courts to treat non-fulfilment of a condition as rendering a contract voidable rather than void in order to forestall a party to a contract from gaining some advantage from his own conduct. However, their Honours also said that “the effect of a condition must in every case depend upon the language in which it is expressed and a decision upon the meaning of one condition cannot determine the meaning of a different condition”. To that we would also add that the effect must also depend on context.

62    In other words, the authorities relied upon by the debtors do not establish an incontrovertible rule of law which applies despite the words of the contract and despite the context in which those words appear. The underlying principle is naturally subject to clear and unambiguous words and context to the contrary. In Rudi’s Enterprises Pty Ltd v Jay (1987) 10 NSWLR 568 at 579, Samuels JA (Priestley and McHugh JJA agreeing) said:

I cannot think that the Court in Suttor intended to lay down the proposition that parties could not stipulate for automatic termination of a contract save upon the occurrence of an event which, objectively, lay beyond their control. Effect must be conceded to the parties’ intention.

63    Again, in MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39 at [44] Hodgson JA (Beazley and Ipp JJA agreeing) said that the passage in Suttor:

could be read as setting out a principle of law rather than a mere guide to construction, but to so read it would in my opinion be against very well-established principles concerning the construction of contracts, including the principle that, if words used in a contract are unambiguous, the Court must give effect to them: Australian Broadcasting Commission v. Australasian Performing Rights Association (1973) 129 CLR 99 at 109.

64    The debtors’ primary submission was not merely (at the least) a great strain on the language of cl G(b), but it also involved a very different construction of cl G(b) from that in the authorities. The debtors’ primary submission was not merely that the parties had provided the non-defaulting party with a power to terminate. It was a construction that the non-defaulting party had a power to terminate provided that various statutory preconditions were met. On this construction of cl G(b), the clause merely reiterates the existence of three different statutory powers (ss 222A to 222C). Yet, on the debtors’ submission, cl G(b) does not refer to the fourth section with which its language has a close affinity (s 222D).

65    In contrast with the approach of the debtors, which seeks to divorce the construction of cl G(b) from its statutory context, the approach of the primary judge gives the plain words of cl G(b) their meaning in proper context. That context is the close affinity of the words of cl G(b) (“the Composition terminates … [i]n circumstances where there is a default of the contributions payable”, emphasis added) with the words of s 222D, which have the effect that a composition “is terminated by the occurrence of any circumstance or event on the occurrence of which the agreement provides that it is to terminate”.

66    Secondly, each of the debtors’ submissions involved giving the words of cl G(b) a meaning that they could not bear. As to the primary submission, this requires the words to be read as though they provided, with the words in italics included, that the Compositions will terminate “in circumstances where there is a default of the contributions payable and the conditions of s 222A, s 222B, or s 222C are met”. The alternative argument by the debtors requires the words to be read as though they provided, with the words in italics included, “in circumstances where there is a default of the contributions payable and the trustee elects to terminate”.

67    In contrast, the approach of the primary judge gives the words of cl G(b) their ordinary and natural meaning: the Compositions terminate in circumstances where there is a default of the contributions payable.

68    Thirdly, the debtors’ submissions are contrary to other clauses of the Compositions. The debtors’ primary submission that cl G(b) merely reiterates the statutory powers in s 222A, s 222B or s 222C is contrary to the terms of cl F which provides that a default of contribution requires a fresh application to the Court to make the former bankrupt a bankrupt again. Clause F is expressed as being dependent upon a default of contribution. It is not expressed as being dependent upon a default of contribution and an election to terminate with the conditions in ss 222A, 222B or 222C being met. Clause F is also inconsistent with the debtors’ alternative submission: it does not require the trustee to elect to terminate before the fresh application may be made.

69    In contrast, cl F is entirely consistent with the trustee’s and Mango Boulevard’s construction of cl G(b) that causes the Compositions to terminate automatically upon default of contributions. The effect of a default in contributions would be automatic termination of the Compositions which would be an act of bankruptcy under s 40(1)(n)(ii) of the Bankruptcy Act, which would then require a fresh application to declare the debtor bankrupt.

70    Fourthly, as to the alternative submission by the debtors, it is difficult to reconcile the power being conferred upon the trustee when the Composition is formed by special resolution of the creditors and cls B, E, and J, which focus on the rights and powers of the creditors. Senior counsel for the debtors submitted that the power was conferred upon the trustee because the trustee will represent the interests of the creditors (ts 41). But even assuming that the trustee is a party to the Compositions, this would be a peculiar implication to make in circumstances where it is the creditors under cl J who have the power to vary the Compositions.

Conclusion and costs

71    Since grounds 1(ii) and 1(iii) must be dismissed it follows that ground 2 must also be dismissed. The other grounds of appeal were abandoned. The appeal must therefore be dismissed.

72    The debtors argued that the debtors’ and the trustee’s costs should be costs in the bankrupt estates, and that Mango Boulevard should bear its own costs. Mango Boulevard argued that the debtors should pay the costs of the trustee and Mango Boulevard.

73    The general rule is that costs should follow the event. However, where an application is made by a trustee-in-bankruptcy for directions, the Court has a discretion to order that the costs of some or all of the parties be paid out of the estate of the bankrupt. Of course, the consequence of such an order is that the extent of the bankrupt estate which will be available to meet the debts of the creditors is, thereby, diminished.

74    In our view, the circumstances of this appeal do not warrant a departure from the general rule that costs follow the event.

75    In this case, the parties had the benefit of a judgment at first instance, the costs of which was borne by the bankrupt estates. The debtors, however, disagreed with the first instance judgment and brought this appeal. In so doing, the debtors have put the trustee and Mango Boulevard to the costs of defending the appeal. The debtors raised, in essence, the same points as were raised before the primary judge, and the appeal has been dismissed on essentially the same grounds as relied on by the primary judge. The appeal was reasonably defended by the trustee and Mango Boulevard. The debtors should pay the costs of the trustee and Mango Boulevard.

76    Further, the trustee is at liberty to resort to the bankrupt estates in respect of the difference between the amount of his costs reasonably incurred and the amount of the party and party costs to be paid by the debtors.

Associate:    

Dated:    9 November 2016