FEDERAL COURT OF AUSTRALIA

BANKRUPTCY – Part X arrangement entered with unsecured creditors – final dividend paid – declaration to have the composition varied – declaration to have the composition declared void or alternatively set aside – whether debtor gave false or misleading information to creditors – whether that failure was an omission of a material particular – preliminary objection to application under s 222 – whether s 222(6) constitutes a limitation period – whether time could be extended pursuant to s 33(1)(c) – unexplained delay – onus on party seeking to declare void or set aside a composition.

Bankruptcy Act 1966, ss 33, 222, 239, 242

Re Doukidis; ex parte Consolidated Constructions Pty Ltd (unreported, Federal Court 26 June 1985, Toohey J)

Re Taylor; ex parte Century 21 Real Estate v Taylor (unreported, Federal Court, 30 June 1997, Burchett J)

Musolino v Sidiropolous (1991) 101 ALR 235

Re Mills; ex parte Lloyd’s (1997) 73 FCR 551

Re Shephard; ex parte Berklee Limited (unreported, Federal Court, 14 May 1993, Beazley J)

Re Cufari; ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544

Re Caruana (1987) 17 FCR 223

Re Burns (1992) 39 FCR 477

Paton v Campbell Capital Ltd (1993) 46 FCR 30

Khera v National Australia Bank Ltd (1996) 71 FCR 133

RE: RONALD KUKLER: EX PARTE NATIONAL AUSTRALIA BANK LTD (ACN 004 044 937) v RONALD KUKLER

VG 7303 of 1997

WEINBERG J

MELBOURNE

18 SEPTEMBER 1998

THE COURT ORDERS THAT:

The application be dismissed with costs.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

Background

On 1 November 1995 the respondent, Ronald Kukler, entered into an arrangement with his unsecured creditors.  That arrangement took the form of a composition under Part X of the Bankruptcy Act 1966 (“the Act”).  The creditors agreed to accept a sum of $6,000.00 in full satisfaction of debts which amounted in total to $716,845.00.  The applicant, the National Australia Bank Ltd (“the NAB”) was a creditor in the sum of $144,157.00.  It opposed the composition.  It was however, accepted by the requisite majority of the creditors, namely a majority in number and three-fourths in value of the creditors present and voting on the results.  It followed that, pursuant to subs 238(1), all creditors, including the NAB,  were thereby bound. 

The majority in favour of accepting the composition included one particular unsecured creditor, Interlocking Buildings Pty Ltd (“Interlocking Buildings”).  The amount owed by the respondent to that company was said to have been $509,257.00.  In the letter which proposed the composition, and which was sent by the respondent’s accountants to all unsecured creditors, that amount was designated as “advances”.  Had it not been for the claim by Interlocking Buildings the composition would not have been accepted.  The amounts owing to other creditors, apart from Interlocking Buildings and the NAB, were relatively insignificant.

The sum of $6,000.00 was paid within weeks of the meeting of 1 November 1995.  The final payment appears to have been made by the Trustee on or about 29 December 1995.  The NAB on that date received a cheque for $1,220.23 from the Trustee as its first and final dividend.

Though the NAB was dissatisfied with the outcome of this composition, it was not until some months later, in or about mid-1996, that it began to look more closely into the financial affairs of the respondent.  It is likely that the bank’s interest was stimulated by an approach from the respondent’s former employer, David McNiff, which it received some time prior to July 1996.  He raised with the NAB a series of questions concerning the accuracy of the statement of affairs disclosed by the respondent to his creditors prior to the meeting of 1 November 1995 at which the composition had been accepted.  The NAB then commenced its own enquiries.  After a somewhat protracted investigation, it instituted an application on 8 May 1997 to have the composition declared void, set aside or terminated.  It is that application which is presently before the Court.

The NAB seeks pursuant to subs 222(1), (2), and (4) of the Act to have the composition declared void.  In the alternative, it seeks pursuant to s 239 to have the composition set aside. It also seeks to have a sequestration order made against the respondent.  When these proceedings were commenced it also sought pursuant to subs 242(1)(c) to have the composition terminated.  That application was not, however, pursued before me.  I need not, therefore, refer to it again, save in passing.

It is necessary to set out some parts of the relevant provisions:

“222. (1)   Where there is a doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204, the Inspector-General, the trustee, a creditor or the debtor may apply to the Court for an order under subsection (2).

(2)       Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order:

(a)               declaring that the deed or composition is void, or that it is not void, on the ground specified in the application; or

(b)               declaring that a provision of the deed is void, or is not void, on the ground specified in the application.

…

(4)       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 to 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.

(5)       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.

(6)       The Court shall not make an order under subsection (2) or (4) unless the application for the order is made:

(a)               in relation to a deed of assignment – before the final dividend has been paid under the deed;

(b)               in relation to a deed of arrangement – before the terms of the deed have been carried out; or

(c)                in relation to a composition – before the final payment has been made under the composition.

…

239. (1)   A  creditor may, within 21 days of the date on which the special resolution accepting a composition under this Part was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor.

(2)       If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought.

…

Reference should also be made to s 33(1) of the Act which is in the following terms:

“33. (1)   The Court may:

…

            (c)        extend before its expiration or, if this Act does not expressly provide to the contrary, after its expiration, any time limited by this Act, or any time fixed by the Court or the Registrar under this Act (other than the time fixed for compliance with the requirements of a bankruptcy notice), for doing an act or thing or abridge any such time.”

The basis of the applicant’s case

Mr Gillies of counsel who appeared on behalf of the NAB identified three matters which he contended justified the granting of the relief sought.  These were:

1.                  The respondent had failed to disclose to his creditors at the time the composition was accepted that he had an entitlement to certain patent rights in relation to an invention which he had developed.

2.                  The respondent had failed to disclose to his creditors that, in relation to legal proceedings which had been brought by Legal and General Life of Australia Ltd (“Legal and General”) against one of his companies, Twentieth Taljan Pty Ltd (“Twentieth Taljan”) and himself, as guarantor of its obligations, in which Legal and General claimed a sum of $176,000.00, he had pleaded a defence by way of counterclaim in which he contended that he was entitled to $1 million damages.

3.                  The debt claimed by Interlocking Buildings of $509,257.00 which had swamped all the other claims, including that of the NAB, was a sham.  The respondent had acknowledged it as a genuine debt or liability solely in order to ensure that the composition was accepted.

The basis of the respondent’s case

Mr Irlicht for the respondent raised a series of preliminary objections in answer to the NAB’s case.  I shall return to these objections later in this judgment.  When dealing with the merits of the case, however, he contended simply that:

1.                  The evidence would show that the patent rights were, at all material times, worthless.

2.                  The counterclaim was principally in favour of Twentieth Taljan.  There was, in reality, no independent claim available to the respondent.  In any event it was clear that the respondent would not, as a matter of practical reality, be able to pursue the counterclaim.

3.                  The respondent’s liability to Interlocking Buildings in the amount of $509,257 was both genuine, and enforceable.

The applicant’s evidence

As noted earlier, the NAB was a creditor of the respondent in the sum of $144,157.00.  This was the sum of a series of advances which the bank had made to the respondent over time.  During July and August 1995 a number of proposals were discussed between the NAB, and the respondent’s advisors, Grapsas Corporation Pty Ltd (“Grapsas”) about repayment of the monies due.  Negotiations broke down.  By letter dated 3 August 1995 Grapsas foreshadowed that an authority would be executed under s 188 of the Act with a view to convening a meeting of creditors for the purpose of considering a composition pursuant to Part X of the Act.  Annexed to the letter was a series of amounts said to be owing to unsecured creditors.  They were as follows:

(a)               Max Bakker Construction Services –

repairs                                                               $185.00

(b)               Grapsas Corporation Pty Ltd -

1991 professional fees                                 $32,800.00

(c)                Catharina Grapsas –

            rent                                                                 $4,875.00

(d)       DJM Harle -

            legal fees                                                      $24,500.00

(e)       Highton Automotive Services -

            fuel                                                                 $1,071.00

(f)                Interlocking Buildings –

advances                                                    $509,257.00

(g)       National Australia Bank -

            advances                                                  $144,157.00”

The respondent’s statement of affairs dated 23 August 1995 was exhibited to an affidavit sworn by Gregory Gill, Supervisor, Recoveries at the NAB.  The respondent, in that statement, swore that his assets totalled $2,810.00.  The assets were represented by $10.00 cash in hand, household furniture and effects situated at 18 Buangor Street, Corio to the value of $2,000.00, and a motor vehicle said to be valued at $800.00.

On 1 November 1995 a meeting of the respondent’s creditors passed a special resolution which provided that the affairs of the respondent should be dealt with pursuant to a composition.  The Trustee of the composition was to be Robert Molesworth Hobill Cole, as registered Trustee approved by the creditors.  The amount made available for creditors was, as indicated earlier, $6,000.00.

Gill stated that at some later stage he received advice that the respondent may not fully have disclosed his assets and liabilities.   As a result, on 1 August 1996 Gill wrote to the Trustee seeking a copy of the proof of debt lodged by Interlocking Buildings.  That copy was provided.  Gill observed that the document was singularly devoid of particularity.  Gill then searched the annual returns of Interlocking Buildings going back to 1986. Those returns did not disclose the existence of any debt owed by the respondent in the sum of $509,257.00, or any part thereof.  Indeed, Gill noted, the current assets of Interlocking Buildings had never exceeded $50,000.00.  Nor had its liabilities at any stage exceeded that amount.  The annual returns of Interlocking Buildings were tendered before me.  Gill proffered the opinion that the sum of $509,257.00 which had been accepted as a provable debt in the composition was not a genuine debt at all, but was a sham acknowledged by the respondent solely in order to ensure acceptance of the composition. 

Gill also exhibited documents which showed that, by notice of entitlement dated 28 March 1994, Interlocking Buildings had requested a patent to be granted for a fuel injecting apparatus.  The respondent was named as the inventor.  Gill observed that at no stage had the respondent, in his statement of affairs, referred to or disclosed any royalties or income which he might receive by way of benefit from his invention.

Solicitors for the NAB wrote to the Trustee on 19 August 1996 requesting further information. They wrote again on 20 September 1996 asking what steps had been taken by the Trustee to confirm the proof of debt in favour of Interlocking Buildings.  On 20 September 1996 they received from the Trustee a letter in which he stated that he had no reason to believe that Interlocking Buildings was not justly, legally and properly entitled to claim as a creditor.  The Trustee said that there was no evidence to suggest that there was doubt as to the validity of the claim.  He acknowledged, however, that he had admitted the claim in full without undertaking any investigation into its validity. 

There was further correspondence in September and October 1996.  Solicitors for the NAB wrote to John Martin, a director of Interlocking Buildings, seeking the books of the company which, they claimed, should have contained records of the debt of $509,257.00.  Those records were not forthcoming.  They were not obtained until shortly before the hearing of this matter, and then in response only to a subpoena.

Gill also stated that it was his understanding that the respondent had not disclosed in his statement of affairs the possible value to him of a counterclaim which he had instituted in certain proceedings in the County Court of Victoria.  Those proceedings had been commenced by Legal and General as plaintiff against Twentieth Taljan, the first defendant, and against the respondent personally, the second defendant.  The plaintiff sought from the defendants repayment of sums totalling approximately $176,000.00.  Judgment had apparently been entered in August 1992 against both Twentieth Taljan and the respondent. 

The respondent had, on 9 October 1992, sworn an affidavit in support of an application to set aside that judgment.  In that affidavit, after setting out a number of misrepresentations which he claimed to have been made by the plaintiff, he had deposed:

“9.       As a consequence of the breaches as aforesaid the First Defendant and myself are entitled to a counterclaim and/or set off including loss of earnings of in excess of $1,000,000.00.”

By further amended defence and counterclaim dated 9 September 1996, the respondent claimed damages to the limit of the jurisdiction of the County Court.  Moreover, in his amended defence, the respondent took the point that Legal and General was a creditor whose claim against him was a provable debt.  He claimed that the composition of 1 November 1995 was binding upon Legal and General, and afforded a complete defence to the action against himself.

In summary, Gill stated that he believed that there was no genuine debt owing by the respondent to Interlocking Buildings.  He complained of the fact that the respondent had failed in his statement of affairs to disclose his patent rights.  He complained also of the respondent’s failure to disclose to his creditors the value of his claim against Legal and General.

Gill was not cross-examined.  The objectively verifiable facts to which he deposed are not in issue.  His conclusions are, however, challenged.  I shall return to these conclusions at a later stage.

The applicant relied heavily upon evidence given by a former employer of the respondent, David McNiff.  Between December 1992 and approximately May 1995 McNiff had employed the respondent as a salesman in his roofing business.  He claimed that the respondent owed him $38,000.00, that being the total of various advances on commission provided to the respondent.  He stated that when asked to repay that sum, the respondent had claimed, falsely, that McNiff owed him approximately $145,000.00. 

As regards the respondent’s patent rights, McNiff said that the respondent had at all times maintained that Martin was his “partner” in developing the fuel injection system.  He said that in or about November 1995, at the time of the composition, the respondent told him that his invention had been patented in some thirty-five countries.  McNiff subsequently carried out enquiries into the patent with a view to seeing whether it might have some value, so that he could proceed against the respondent to recover the $38,000.00 owing. 

McNiff claimed that the respondent had made a number of false statements in his statement of affairs.  He said that the respondent had told him that he had a number of bank accounts though he had disclosed only one to his creditors.  He also stated that the respondent owned assets which were worth far in excess of the $2,810.00 which he had disclosed.  Those assets included several items of jewellery which the respondent had told McNiff were worth $30,000.00.  They also included sundry pieces of furniture.  He described how the respondent had spent money upon overseas holidays, and for the purchase of new stereo equipment, at about the time of the composition, or shortly thereafter.  He said that the respondent had told him that it was his intention to enter into the Part X arrangement “to get the NAB off his back”.

It was McNiff who, at some time prior to July 1996, approached the NAB to voice his concerns about the circumstances of the composition.  It was he who drew to the attention of the bank his view that the respondent had made false or misleading statements in his statement of affairs.

When cross-examined, McNiff denied that he was bitter towards the respondent for having refused to repay the $38,000.00 which McNiff was owed.  He also denied that he was bitter towards the respondent for having instituted what he described as a bogus County Court proceeding seeking $145,000.00 against him.  He denied having made a number of phone calls to the respondent in which he had threatened violence to the respondent and his family.  He claimed that the respondent had, in fact, made threatening phone calls to him.  He acknowledged that the police had visited him once in response to a complaint by the respondent that he had made such calls.  When it was suggested to him that the respondent would give evidence that the patent was now registered in only three countries, he was not in a position to dispute that contention.

McNiff’s evidence certainly casts the respondent in a poor light.  It is damaging to his credibility.  Save as to credibility, however, that evidence does not bear upon whether or not the patent was, in November 1995, of any value.  Nor does it bear upon whether the counterclaim against Legal and General is, or ever was, of any value.  Finally, it does not bear upon the question whether or not the amount claimed by Interlocking Buildings was a genuine debt owed by the respondent or whether it was, as the NAB contended, merely a sham.

The respondent’s evidence

The respondent stated that he had not disclosed the existence of the patent in his statement of affairs because he had concluded by August 1995 that the patent was worthless.  The invention was not commercially viable.  This was demonstrated, so he said, by the fact that the patent had been permitted to expire in all except three of the thirty-five countries in which it had originally been registered.  It had been maintained by Martin on behalf of Interlocking Buildings in those three countries for strategic reasons alone. 

The respondent also stated that the monies advanced by Interlocking Buildings were genuinely owed to that company.  He claimed that he had entered into an oral agreement with Martin to the effect that if the injector proved not to be viable all monies expended by Interlocking Buildings in developing it would be refunded to that company.  In other words, the respondent claimed, he had agreed to underwrite any monies advanced by Interlocking Buildings in developing his invention.  If the fuel injector had been successful, there would have been a sharing of profits.  Its ultimate failure meant, however, that Interlocking Buildings had to be reimbursed for its losses. 

This original written agreement which established the joint venture arrangement between the respondent and Interlocking Buildings came into existence in 1987.  The oral agreement between the respondent and Martin was supplemental to the written agreement, and evolved over time.  It was not reduced to writing because there was a good personal relationship between the two men.  The respondent had been confident that his invention would be a success.  It was for that reason that he had agreed that Interlocking Buildings would not, under any circumstances, suffer financial loss if it funded the development of the injector.

The respondent stated in relation to the counterclaim against Legal and General that he had not disclosed this in his statement of affairs because he regarded it as being of no value to him in August 1995.  The counterclaim belonged to Twentieth Taljan rather than to himself.  Insofar as it asserted personal rights against Legal and General, they had been of a speculative and problematic nature. 

The counterclaim contended that Legal and General had breached an obligation which it had assumed to take over a mortgage over the respondent’s private residence.  That mortgage had been held by the NAB.  The NAB had subsequently foreclosed when payments were not made.  It was plain, the respondent contended, before me, that there would be difficulties in proving that the breach of any such obligation had caused the loss which he sustained when, ultimately, the house was sold on a firesale basis.  In addition, the respondent claimed, he did not have the money to pursue his counterclaim.  It was being kept on foot, but just barely so.  It had no practical prospect of producing any return to him. 

The respondent called Martin in support of his case.  He confirmed that the sum of $509,257.00 was a debt genuinely owed by the respondent to Interlocking Buildings to repay advances made by the company to develop the injector.  He produced annual tax returns of the company.  These disclosed the amounts expended by the company upon the development of the injector.  He produced a letter dated 28 November 1995 which contained a written breakdown of the monies advanced by the company.  That breakdown is as follows:

Martin acknowledged that the amounts in question, though recorded in the company tax returns, were not otherwise recorded in the books of the company.  More specifically, they were not recorded as loans to the respondent in any accounting records.  Martin, however, swore that they were loans.  He confirmed the existence of an oral agreement with the respondent which, he said, was supplemental to the written agreement of 1987.  He stated that the respondent had agreed that in the event that the injector proved not to be viable,  Interlocking Buildings would be repaid all of the money which it had advanced to further its development.

Martin stated that he had concluded by 1995 that the patent was worthless.  He confirmed that its registration had been permitted to lapse in all except three countries.  He stated that the registration was being maintained in those three countries for strategic reasons.  He said that he was working upon a fuel injector of his own which had some similarities with the failed Kukler model.  He considered it worthwhile to endeavour to crowd out potential competitors by retaining the Kukler patent, at least for the moment.  There was little cost in maintaining the patent in those three countries. 

Martin denied that his version of the fuel injector was simply the Kukler model with minor variations.  He denied the suggestion, put to him in cross-examination, that he was party to a sham arrangement with the respondent whereby Kukler was seeking to retain the value of the patent rights by pretending that his own invention had failed when, in truth, it was planned that that invention would simply be re-patented by Martin.  Then the proceeds would be shared, thereby depriving creditors such as the NAB, of their entitlements.

Findings of fact

I should preface my findings of fact by saying that they depend to a considerable degree upon my assessment of the credibility of the three witnesses who gave viva voce evidence before me.  My assessment of those three witnesses is as follows:

McNiff

McNiff presented as a credible witness.  But for one matter, I would be prepared to say that he was wholly credible.  He denied emphatically that he harboured any feelings of bitterness towards the respondent.  That denial I find myself unable to accept.

McNiff had every reason to feel anger and resentment towards the respondent.  It is highly improbable that anyone falsely subjected to allegations of having made threatening phone calls would feel no resentment towards the person who made those allegations.  They did, after all, lead to a police investigation into the conduct of McNiff.  Moreover, McNiff himself contended that he and his family had been threatened.  He had been put to a great deal of cost and trouble by the respondent’s false claims against him.  These are not matters which, when taken together, would have been treated lightly.

McNiff also went to quite extraordinary lengths to investigate the patent position.  He appears to have expended a good deal of time and trouble to communicate to the NAB his thoughts concerning the respondent’s statement of affairs.  This conduct on his part suggests more than a hint of bitterness towards the respondent.

Despite my reservations as to his evidence on this one point I find McNiff to have been generally credible.  As is noted below, he was a significantly more impressive witness than was the respondent.  Where his evidence conflicts with that of the respondent on any matter of significance, I accept his evidence in preference to that of the respondent.

The respondent

The respondent was not an impressive witness.  He was, on occasion, somewhat evasive.  He was also, from time to time, somewhat flippant in his manner of dealing with questions which he found irksome.  He refused to make concessions which, in my view, he ought to have made.  He claimed that he had failed to disclose the existence of the patent in his statement of affairs because by the time he prepared that statement in August 1995, he had long regarded the patent as worthless.  In that regard, he was contradicted by Martin, who stated that he recalled that in November 1995 the respondent was still optimistic that the patent would prove to be valuable.  Martin, of course, disagreed with that assessment.  He had long before then already determined that the respondent’s invention was not commercially viable.

The respondent’s account of having entered into an oral supplemental agreement with Martin to refund to Interlocking Buildings any monies advanced by it in developing his invention in the event that it proved worthless is not one which I would be prepared to accept if that account stood alone. There are difficulties in accepting that an important agreement such as that would not have been reduced to writing.  This is particularly so given that the original 1987 joint venture agreement was carefully drawn.  It contained a comprehensive set of terms which were to govern the contractual arrangements between the parties.  Nonetheless, I have concluded, on balance, that I should accept the respondent’s evidence as to the supplemental agreement.  I do so only because it is, in substance, supported by Martin, and because it is not controverted directly by any other evidence before me.

As regards the counterclaim which the respondent personally has on foot against Legal and General, I find that there is little prospect that this claim has any value so far as he is concerned.  I am prepared to accept his evidence to the effect that he has little prospect of funding this counterclaim.  He maintains that he regards his personal claim as having some potential value if he ever acquired the means to pursue it.  The better view seems to be that this personal counterclaim was instituted for little more than tactical objectives.  It is possibly untenable in law, and unlikely in any event to be pursued. 

Martin

Though Martin was called on behalf of the respondent, and cross-examined upon the basis that he was privy with the respondent to a sham arrangement, he was prepared, where necessary, to contradict the evidence given by the respondent.  He displayed impatience and some irritability with the cross-examination.  I found him, however, on the whole to be a truthful and reliable witness.  It is for that reason that, where the respondent’s evidence is supported by Martin, I am prepared to act upon that evidence.  I am not otherwise prepared to do so.

The primary significance of Martin’s evidence is his confirmation of the existence of the oral supplemental agreement.  Despite my reservations concerning this matter I accept the evidence given by Martin that an agreement of this type was reached.  It follows that I find that the respondent had by November 1995, assumed a liability of $509,257.00 to Interlocking Buildings. 

That this amount had been expended by Interlocking Buildings in developing the respondent’s invention was not challenged before me.  Whether or not the amount so expended is to be characterised as being in any orthodox sense a “loan” is of no real consequence.  It is a debt or liability provable in bankruptcy under s 82 of the Act.  It was accepted as such by the Trustee, though admittedly without any real investigation.

I also accept the evidence given by Martin that by August 1995 the Kukler patent was worthless.  I find that the respondent did not, at that time, share that view.  His realisation that the patent was worthless came later.  As such, it is plainly arguable that he ought in his statement of affairs to have disclosed the existence of the patent.  His failure to do so might well constitute a breach of the requirements of the Act.  Whether that breach, if established, has the consequences for which the NAB contends, however, is a matter to which I shall return. 

As to the personal counterclaim against Legal and General, I find it at all times to have been worthless.  There is little likelihood that it will be pursued. 

The relevant legal principles

The application pursuant to s 222 to have the composition declared void.

A preliminary objection was taken to the application insofar as it relied upon the provisions of s 222 of the Act.  Subsection 222(6) provides that the Court “shall not make an order” under subss 222(2) or (4) unless the application for the order is made in relation to a composition “before the final payment has been made under the composition”.  The application in the present case was made on 9 May 1997.  The final payment under the composition had been made by 29 December 1995.  The respondent submitted that at least insofar as the application under s 222 was concerned, there was a complete bar to the making of the orders sought.  He relied upon several authorities in support of this contention. 

In Re Doukidis; ex parte Consolidated Constructions Pty Ltd (unreported, Federal Court 26 June 1985, per Toohey J) the Court was concerned primarily with an application to set aside a composition pursuant to subs 239(1) of the Act.  Paragraph 33(1)(c) of the Act was invoked in support of an application to extend time.  Toohey J held that this was a proper case for an extension of time. 

His Honour dealt also with s 222, however, and the power to declare a composition void.  The circumstances of the case were unusual because the creditors had accepted a composition by virtue of which they received nothing, and the only payment to be made was to the Trustee.  It was submitted that the expression “final payment” in subs 222(6) meant a payment to creditors.  That submission was rejected.  Toohey J stated at p 5:

“In the ordinary course it is hard to imagine a situation in which creditors accept a composition by virtue of which they receive nothing.  But this is such a case, and, in terms of the composition, the final payment, albeit the only payment and one made to the trustee, has been made.  In those circumstances I am precluded from making an order under s 222.” (emphasis added)

In Re Taylor; ex parte Century 21 Real Estate v Taylor (unreported, Federal Court, 30 June 1997) Burchett J dealt with an application pursuant to s 222 of the Act to have a deed of arrangement declared void and, in the alternative, to set aside that deed under s 236 of the Act.  Subsection 222(6)(b) provides that an application under s 222 must be made in relation to a deed of arrangement “before the terms of the deed have been carried out”.  His Honour found that the terms of the deed had been carried out before the application was made.  He therefore upheld the preliminary objection.  There was no suggestion that time could be extended to overcome this obstacle.  He went on to observe that counsel had recognised the answer could hardly be different under s 236 from what it should be under subs 222(6).  Moreover, his Honour went on to say that there was at the date of the proceeding “nothing to terminate under s 236”, an aspect of the judgment upon which Mr Irlicht relies when dealing with the NAB’s case under section 239, and to which I shall return.

Finally, the respondent relies upon Musolino v Sidiropolous (1991) 101 ALR 235.  There the Full Court of the Federal Court dealt with an application for orders setting aside or terminating various deeds of arrangement under Part X of the Act.  At 245 the Court noted that the trial judge had held that he had no jurisdiction under subs 222(1) of the Act.  The Court observed:

“His Honour referred to four main considerations.  First, although the application was not statute-barred by virtue of s 222(6), the judge relied on the “inordinate and unexplained” delay in bringing the application.” (emphasis added)

It was submitted that this passage demonstrated a recognition that subs 222(6) constitutes a limitation period which has the effect of barring an application under subs 222(2) or (4) once the events described in subs 222(6) have occurred.

Mr Gillies, for the NAB, submitted with some diffidence that notwithstanding these dicta, para 33(1)(c) could be utilised to extend the time within which an application for an order pursuant to s 222 of the Act must be made.  It will be recalled that para 33(1)(c) permits the Court, in its discretion, to extend after its expiration “any time limited by this Act … or any time fixed by the Court … under this Act” for “doing an act or thing”, “or abridge any such time”.

I think the better view is that para 33(1)(c) cannot be invoked to extend the time for making an application to have a deed of assignment, a deed of arrangement, or a composition declared void once the events designated in subs 222(6) have occurred.  A provision in the form of s 222(6) is not properly to be described as imposing a “time limited by this Act”.  No time limit as such is expressed.  The more natural meaning of the expression “any time limited” is a designated period of time within which an application must be made.  An example is provided in s 239 of the Act where there is stipulated as the time within which an application must be made under the section the period of twenty-one days from the date on which the special resolution was passed accepting a composition under Part X. 

This construction of the expression “time limited by this Act” is supported by the alternative power which is available under para 33(1)(c) of abridging “any such time”.  The events upon which subs 222(6) can operate cannot logically be abridged.  The word “time” should bear the same meaning throughout para 33(1)(c), ie a designated temporal period.

It goes without saying that the events upon which subs 222(6) can operate are not “a time fixed by the Court” under para 33(1)(c).

I am disposed therefore, to uphold the respondent’s preliminary objection to the application insofar as that application rests upon s 222 of the Act.  It may not be necessary finally to decide this point, however, because in my view the application must fail for other reasons.  These other reasons are set out below in dealing with the alternative application brought under s 239 of the Act.

The application pursuant to s 239 to have the composition set aside

Mr Gillies relied primarily upon s 239 as the basis for the relief sought in this proceeding.  He conceded frankly that the applicant was in some difficulty in overcoming subs 222(6), and the authorities relied upon by Mr Irlicht.  These were acknowledged to support the contention that the proceeding under s 222 was barred.

Mr Irlicht, for his part, conceded that when dealing with the application pursuant to s 239, there was ample authority for the proposition that para 33(1)(c) of the Act provided a basis upon which the Court could, if so minded, extend time.  Re Doukidis (supra) stands as clear authority for this proposition, as does Re Mills; ex parte Lloyd’s (1997) 73 FCR 551 at 562 per Merkel J. 

Mr Irlicht submitted, however, that s 239 is not available to the applicant because that section permits an order to be made setting aside a composition only where the composition can be said to be still on foot at the time of the application.  He relied upon Re Taylor (supra).  There Burchett J observed that an application to terminate a deed of arrangement brought pursuant to s 236 of the Act could not be proceed if there was nothing, at the date of the proceeding, to terminate under that section. 

The difficulty with Mr Irlicht’s argument is that s 236 empowers the Court to terminate a deed of arrangement, while s 239 confers power upon the Court to make an order setting aside a composition.  The true analogue to s 236 is s 242 which confers power upon the Court to terminate a composition.  The applicant has not, however, pursued its original application to terminate the composition.  This may be because Mr Gillies recognises that there is nothing left to terminate.  The composition was concluded, at the latest, it would seem, when the Trustee was satisfied that its terms had been carried out.   

Section 243A of the Act makes provision for the trustee, upon request in writing by the debtor, to furnish to the debtor a certificate signed by him to the effect that the composition has been concluded.  The final dividend was paid on 29 December 1995.  There is nothing before the Court in the present case to suggest that any such certificate was sought, or furnished by the Trustee.  It seems clear, however, that the composition no longer subsisted, in any practical sense, in May 1997, when the NAB instituted this application.

There is no reason in principle why a Court should not be able to set aside a composition merely because its terms have already been implemented.  The expression “set aside” does not, as a matter of logic, depend upon there being a composition which subsists in order to enable that course to be adopted.  Once a composition has been accepted, it operates as a continuing bar to sequestration in relation to the provable debts paid out thereunder – see s 238(1) of the Act.  If pursuant to s 239 of the Act the composition is set aside, that continuing bar is removed. 

It has also been stated that an order under s 239 operates retrospectively “to avoid or set aside the deed or composition from its inception, so that it was never valid” – Khera v National Australia Bank Ltd (1996) 71 FCR 133 at 144 per Lockhart and Hill JJ.  Their Honours noted the operation of s 224 of the Act, which validates everything done in good faith by the trustee under or for the purposes of the deed of assignment or deed of arrangement or composition before notice of the relevant order of the Court.  No such provision exists with respect to ss 236 or 242 under which the Court may terminate a deed of arrangement or composition.  The structure of the Act therefore supports the conclusion that a composition may be set aside under s 239 even though that composition is concluded before the application is made to set it aside.

It follows that the questions in relation to s 239 which must be considered are whether:

1.                  an extension of time should be granted to permit this application to be made; and

2.                  if such an extension of time is granted, the Court considers, within the terms of that section “that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside”. 

The application to extend time

The NAB was approached by McNiff with his concerns about the false or misleading nature of the respondent’s statement of affairs sometime prior to July 1996.  There appears then to have been a flurry of activity in August, September and October of 1996.  During that period the NAB sought to obtain information as to the respondent’s financial affairs from various sources, including Interlocking Buildings.  Thereafter, so far as the evidence discloses, nothing further happened until May 1997. 

The delay between 22 November 1995 (twenty-one days from the date on which the special resolution accepting the composition was passed), and the application to the Court for an order setting aside the composition in May 1997 was in excess of eighteen months.  While some part of that delay has, to some extent, been explained, ie the period prior to July 1996, when McNiff seems to have voiced his concerns, and perhaps the two to three months thereafter, no explanation has been provided as to the delay between September/October 1996 and May 1997. 

I regard the delay in this case as not only unexplained, but also as unacceptable.  The very short period of twenty-one days which is stipulated as the limitation period in s 239(1) indicates quite clearly just how seriously the Act views applications to set aside compositions.  There is a need to ensure that if such applications are to be made, they are made expeditiously. 

A composition is an arrangement which, pursuant to s 238 of the Act, affects the legal rights of creditors in important ways.  Entering into a composition provides a debtor with a release from all provable debts in the same manner as a bankrupt is released when discharged from bankruptcy.  The usual priorities specified in s 109 of the Act for the payment of creditors of bankrupts are not applicable to compositions under Part X – Re Jacobs; ex parte O’Connor (1984) 53 ALR 93 at 99 per Fisher J.  

It has been said that once a composition has been accepted the Court, when considering whether its terms are reasonable, or when considering the other matters set out in s 239, should be cautious in substituting its own judgment for that of the majority creditors – see Re Caruana (1987) 17 FCR 223; Re Burns (1992) 39 FCR 477 and Paton v Campbell Capital Ltd (1993) 46 FCR 30.  After all, those creditors found those terms to be, if  not reasonable, at least the best that were commercially available.  That note of caution presupposes, of course, that the creditors were properly informed before coming to their decision.  There must be some limits, however, upon the amount of time which can pass before a Court avoids a composition, or sets it aside.

In considering the present application to extend time, I note that such examples of applications to extend time as can be found in recent decisions of this Court do not reveal any instances where the delay between the conclusion of the composition and the application was anywhere near as great. 

In Re Mills; ex parte Lloyd’s (supra) the special resolution was passed on 29 March 1996, and the application was lodged on 24 June 1996, less than three months later.  In Re Doukidis (supra) a delay of two months was said to be “not insubstantial”. In Re Cufari; ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544von Doussa J granted an extension of time under s 33(1)(c) to permit an application to be made to set aside a composition under s 239 of the Act.  His Honour noted that the extension of time sought, some seven weeks, was not great.

In Re Taylor (supra) there was a two year delay in making an application to set aside a deed of arrangement.  The application was rejected.  In Re Shephard; ex parte Berklee Limited (unreported, Federal Court, 14 May 1993) Beazley J dealt with a delay of nearly twelve months in seeking to set aside a deed of arrangement.  Her Honour was persuaded that, in the unusual circumstances of that case, the orders sought should be made.  She cautioned, however, that an application of this type should normally be made without appreciable delay, or it risks failing.

In the circumstances of the present case, the unexplained delay is so great that it would require powerful reasons to justify extending time for the period required to enable this application to proceed.  No such reasons have been advanced on the part of the applicant.  I would refuse the application to extend time.  Had I not formed the view that par 33(1)(c) cannot be invoked to overcome the statutory bar contained within s 222(6) I would likewise have refused to extend time to pursue the application under s 222 of the Act.

The merits of the applications under s 222 and s 239

My decision to reject the application to extend time is sufficient to dispose of this matter.  I should indicate, however, that I am not persuaded that the material before me would justify the making of the orders sought even if I had not rejected that application.

The principles which govern the making of such applications are set out in a helpful manner by Merkel J in Re Mills; ex parte Lloyd’s (supra).  There an application to set aside a composition was allowed.  The grounds relied upon related primarily to defects and unfairness in the procedures which led to the acceptance by the creditors of the composition.  It also became apparent that there may have been serious inadequacies in the investigation of the debtor’s financial affairs.  His Honour identified a number of matters which, on the evidence before him, raised serious questions as to the nature of a series of financial transactions involving the debtor.  He found that the Trustee’s investigation of those matters had been unsatisfactory and, at best, perfunctory.  The suspicions generated as to the validity of certain loans said to have been made to the debtor made it appropriate to set aside the composition in order to enable a proper investigation to be conducted.

Merkel J referred to Re Cufari; ex parte Commissioner of Taxation v. Huppatz (supra) where von Doussa J at 549 provided a useful definition of materiality within the meaning of s 222(4)(b) of the Act.  Von Doussa J stated:

“A particular is ‘material’ within the meaning of s 222(4)(b) if it is a particular which would be relevant to and might be likely to affect the making of a decision by the creditors … The test is an objective one.  The subsection does not require that a misstatement be made ‘knowingly’.”

Merkel J was prepared to find that there was a serious issue as to whether the disclosure made by the debtor in his statement of affairs was relevantly false or misleading.  He also found that there was a serious issue as to whether the debtor had, in the sense described above, omitted a material particular from that statement. 

When he came to deal with s 239 of the Act, Merkel Jreferred to the judgement of the Full Court of the Federal Court in Khera v National Australia Bank Ltd (supra), and in particular to the joint judgment of Lockhart and Hill JJ at 146.  There their Honours expressed the view that the grounds on which the Court may set aside a composition under subs 239(2) were more narrow than might at first glance appear to the case.  The subsection was held to centre attention upon the terms of the composition itself.  The third ground within the subsection, “for any other reason the composition ought to be set aside”, was held to be confined to circumstances which relate to the terms of the composition itself, or the circumstances in which the composition came to be accepted by the special resolution of the creditors.  It was recognised that those grounds might overlap with the grounds on which the Court might declare a composition void under s 222.  I shall return to the principles laid down in Khera shortly.

The principles which govern the exercise of the power to declare a composition void under s 222, or to set it aside under s 239, were then stated by Merkel J at 559 to 561.  They are as follows:

“(a)     Whether, after considering all the circumstances of the case, a greater opportunity to inquire into the debtor's affairs and a more comprehensive explanation by the debtor were called for: see Re Doukidis Ex parte Consolidated Constructions Pty Ltd (unreported, , Federal Court, Toohey J, 26 June 1985 at p 15. In Mendelson v Lelleton (unreported, Federal Court, Lindgren J, 6 November 1996), Lindgren J observed at 38 that where there is cause for investigation of the debtor's dealings the interests of unsecured creditors and the public interest would be served by the investigation being conducted by a trustee in bankruptcy  armed with the coercive power provided by the Act.

Further, in Re Bendel Ex parte Lowe Lippman (A firm) (unreported, Federal Court, Merkel J, 19 April 1996) I concluded that where serious issues are raised about preferences to some creditors, dissipation of assets, the validity or  enforceability of "loans" from associated parties and, in particular, whether any "friendly" debts were intended to create legal relations, a sequestration order rather than  a composition is the more appropriate vehicle for  resolving such issues

.

(b)       If circumstances arise which "give cause for a suspicion" or to "arguable" causes of action which may benefit creditors then that can suffice to set aside the composition: see Mendelson at p 33. It is not necessary to establish that the  creditors will be, or even are more likely to be, advantaged by bankruptcy rather than the composition. It is sufficient if  bankruptcy will afford:

     “a prospect or possibility of economic advantage to  creditors sufficient to justify the conclusion that it is  in their interests to make the declaration. per Jenkinson J in Augustyn v Putnin (1988) 83 ALR 514 at 515.

     In Augustyn, French J (with whom Spender J agreed), in explaining why "a real possibility of a financial benefit" to creditors was sufficient, said (at 521-522):

“And although in Re Doukidis; Ex parte Consolidated Constructions (unreported, Federal Court, Toohey J, 26 June 1985), Toohey J said that "it is enough if the evidence justifies an inference that there are likely to have been assets and that the creditors may be better off if the composition is set aside" (a dictum repeated in Re Brown; Ex parte Humes Ltd (1987) 16 FCR 378 at 384 per Pincus J), it does not follow that the court must be satisfied on the balance of probabilities that there will be a financial benefit to creditors from an order  avoiding or setting aside a deed.”

…

In my opinion, his Honour the trial judge in the present case was entitled to form the view that the orders sought would provide the creditors with an opportunity to further investigate the appellant's position and that it was in their interests to do so.

     See also Re Cufari at 551-522.

(c)        If the amount offered under the composition is little or trivial there may be no harm of any consequence to creditors for the composition to be set aside if other factors warrant that course: see Re Richards; Ex parte Beneficial Finance Corporation Limited (unreported, Jackson J, 17 March 1986 at pp 3  and 6 and Mendelson at p 32.

(d)       A Court may be more disposed to set aside a composition if no  payments to creditors have been made pursuant to the  composition: see Raschilla v Gulluni (1987) 14 FCR 57 at 70.

(e)        A composition passed, inter alia, on the basis of a report to creditors as to the debtor's financial affairs which is misleading will also be a relevant factor: see Re Cufari at  549.”

A proper application of those principles to the facts of the present case leads, in my opinion, to the conclusion that the composition should be neither declared void, nor set aside.

Though serious issues have been raised as to whether the respondent gave false or misleading information to his creditors at the meeting of 1 November 1995, or whether he omitted a material particular from his statement of his affairs that is not necessarily sufficient to justify the making of such an order.  I have found that the patent was in 1995 of no commercial value, and is of no commercial value today.  I have also found that the respondent’s counterclaim against Legal and General was in 1995 worthless.  It remains worthless today.  Those findings make it difficult to conclude that the respondent omitted “a material particular” from his statement of affairs, though he may have believed that he was doing so. 

I have also found that the amount of $509,257.00 claimed by Interlocking Buildings was a debt or liability owing to that company.  It was, therefore, entitled to vote to accept the composition.  I cannot see how I can be satisfied that it is now in the interests of the creditors, pursuant to s 222(5) of the Act, to declare the composition void.

Nor do I consider that the terms of the composition are within the meaning of subs 239(2) “unreasonable”, or “not calculated to benefit the creditors generally”, or “that for any other reason the composition ought to be set aside”. 

I am mindful of the restricted meaning given to that seemingly very broad expression, (“or that for any other reason the composition ought to be set aside”) by the Full Court in Khera (supra).  There the trial judge, Kiefel J, had been asked, pursuant to s 222 of the Act to declare a deed of arrangement void.  Her Honour had declined to do so.  However, her Honour concluded that the circumstances justified an order terminating the deed under s 236(1)(c).  That section provided for situations where “for any other reason the deed of arrangement ought to be terminated”.  Her Honour expressed the view that this expression (and a like expression in s 242 dealing with the termination of compositions) was one which conferred wide powers upon the Court, enabling it to set aside a deed of arrangement in circumstances where the misconduct or misinformation required under s 222(4) had not been established, but there were sufficient doubts about the matter to make it appear that it was in the interests of creditors to terminate the arrangement.

In their joint judgment in the Full Court in Khera, Lockhart and Hill JJ at 142-144 traced the history of these provisions, both prior to the enactment of the Bankruptcy Act 1924 (Cth), and thereafter.  Their Honours observed that s 222 deals with matters which go to the validity of a deed of assignment or deed of arrangement or composition, or matters which relate to setting up or establishment of the deed or composition.  The relevant facts would have occurred at, or before, the passing of the special resolution, though they may not have come to light until later.

Their Honours observed that s 236 (which deals with termination of deeds of arrangement) generally concerns facts and circumstances that came into existence or arose after the execution of the deed of arrangement.  Notwithstanding the apparent width of para (c) of subs 236(1), that provision must be read down.  It does not include matters which fall within subs 236(1)(a) or (b).  Nor does it include matters which fall within s 222(4).

Finally their Honours turned to s 239, which deals with compositions.  That section was said to be restricted likewise to the terms of the composition, and circumstances which relate to those terms, or the circumstances in which those terms came to be accepted by the special resolution of the creditors.  It provides no general licence to explore all of the features of the composition, and to set it aside merely because the Court is left with some amorphous sense of disquiet about what has occurred.

Conclusion

The inferences of sham which the NAB submits should be drawn, together with the possible value of the patent rights, and the possible value of the counterclaim are altogether too speculative. 

There is some force in the applicant’s contention that a more thorough investigation by the Trustee of the debtor’s affairs might, in theory, uncover some value in the patent, or in the counterclaim, though I believe this to be unlikely.  It is also true that the amount of $6,000.00 paid to the creditors under the composition can be characterised as being almost derisory.  Moreover, there is cause for concern regarding the arguably misleading nature of the respondent’s statement of affairs. 

These factors do not, however, excuse the NAB’s inordinate and unexplained delay in challenging the composition.  Parties cannot with impunity simply sleep upon their rights.  This is as true when seeking to dismantle Part X arrangements as it is in other branches of the law.  Individuals are ordinarily entitled to assume that such arrangements, once concluded, are final.  A substantial onus must rest upon a creditor who seeks to have the Court declare void or set aside a composition eighteen months after that composition was concluded.  That onus has not, in my opinion, been discharged in this case. 

It follows that the application must be dismissed with costs.

Associate:

Dated: