FEDERAL COURT OF AUSTRALIA

Bankruptcy – composition – application to set aside – real value of executory components of composition – benefits to creditors illusory – whether creditors informed sufficiently by controlling trustee’s report – whether composition unreasonable and not calculated to benefit creditors generally – sequestration

Bankruptcy Act 1966 (Cth), ss 64ZA, 189A, 190(2)(b), 239, Part X

Addstead Pty Ltd & Others v Simionato Holdings Pty Ltd & Others (1997) 190 LSJS 412 referred

Addstead Pty Ltd (In Liquidation) & Others v Liddan Pty Ltd & Others (1997) 70 SASR 21 referred

Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 cited

Re Burlock; Burlock v Deputy Commissioner of Taxation and Another (1994) 121 ALR 168 discussed

Australian Workers’ Union & Others v Bowen (1946) 72 CLR 575 cited

Re Thompson; Ex parte Thompson v Grimley Pty Ltd & Another (1995) 135 ALR 700 cited

Matter No. SG 7044 of 1998

FARROW MORTGAGE SERVICES PTY LTD (IN LIQUIDATION) v GIUSEPPE EMANUELE

VON DOUSSA J

30 SEPTEMBER 1998

ADELAIDE

THE COURT ORDERS THAT:

1.         The composition accepted by a meeting of creditors held on 30 January 1998 be set aside pursuant to s 239(2) of the Bankruptcy Act 1966 (Cth).

2.         There be an order of sequestration against the estate of the respondent debtor, Giuseppe Emanuele pursuant to s 239(4) of the Bankruptcy Act 1966 (Cth).

3.         I will hear the parties as to consequential orders.

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

REASONS FOR JUDGMENT

On 30 January 1998 at a meeting of creditors of the respondent Giuseppe Emanuele (“the debtor”) called pursuant to an authority given by the debtor under s 188 of the Bankruptcy Act 1966 (Cth) (“the Act”) creditors purported to approve a composition proposed by the debtor.  The application now before the Court is by Farrow Mortgage Services Pty Ltd (In Liquidation) ACN 006 125 757 (“Farrow”) for an order pursuant to s 222 of the Act declaring the purported composition void, alternatively for an order pursuant to s 239 of the Act setting aside the composition, or in the further alternative an order pursuant to s 242 terminating the purported composition.

The debtor is and was at all material times indebted to Farrow in the sum of $15,229,710.12.  This sum comprises in part a judgment debt and in part a liability as guarantor in respect of a loan to a company within a group of companies known as the Emanuel Group.

On the hearing of the application Mr P A McNamara with Mr M G Evans appeared for Farrow.  Mr G B Hevey appeared for the debtor.  The liquidator of companies in the Emanuel Group, Mr P I Macks appeared in person to support the application by Farrow.  Mr D G Howard appeared for the controlling trustee of the composition, Mr A C Matthews.

By way of background, orders were made by the Federal Court of Australia on various dates in 1995 and 1996 for the winding up in insolvency of each of the 64 companies which comprise the Emanuel Group, and Mr Macks was appointed liquidator of each of those companies.  The full extent of the liabilities of those companies is not formally proved in these proceedings, although, in general terms, the extent of the liabilities can be inferred from the fact that the debtor disclosed liabilities in his statement of affairs dated 23 December 1997 totalling $261,618,243.46, the majority of which was said to relate to guarantees of the debts of the Emanuel Group.  One of the debts disclosed in the statement of affairs is $188,000,000 described as “loan” due to Elders Finance Group (“EFG”).  Other information before the Court reveals that on 27 February 1995 in the Supreme Court of Queensland EFG obtained a judgment against 27 companies in the Emanuel Group and the debtor in the sum of $186.6 million.

The Emanuel Group had been involved in building and property developments, particularly in South Australia.  It ran into difficulties in 1989 when the Australian economy went into decline and EFG began to exert pressure on the Group to recover moneys which had been lent to it.  The debtor was the chairman of directors and chief executive officer of the Emanuel Group.

On 23 December 1997 Mr Matthews consented to act in accordance with an authority signed by the debtor under s 188(1) of the Act, and thereafter took steps to call a meeting of creditors on 30 January 1998.  The meeting of creditors took place that day. 

The notice of meeting sent to the creditors, dated 15 January 1998,  informed them that the debtor was proposing a deed of arrangement pursuant to Part X of the Act whereby his joint and several creditors would accept in full and final settlement of their claims:

“…the following sums:

$10,000.00 payable immediately upon the acceptance of this deed of arrangement and the proceeds from the sale of the debtor’s Rolex watch and rural land located in Molinara, Italy, payable following the acceptance of this deed of arrangement; and

should one or other or all of the following events occur:

The sum of $100,000.00 payable within six months from the date of the approval by the Federal Court of Australia of the Schemes of Arrangement and Compromise (with or without amendments) proposed to be entered between the 64 companies which comprise the Emanuel Group (listed in the Schedule following) and their respective creditors and shareholders; and/or

10% of the net proceeds (after deducting all reasonable costs, expenses and disbursements) of a settlement sum for the successful claim by the debtor against Anthony Robert Hedley & Ors (Federal Court of Australia ACT Action No. 23 and 24 of 1997) representing compensation for wrongful and malicious prosecution.  This percentage of the settlement sum referred to above will be made payable to creditors within 14 days of receipt of that sum from the defendants.”

The sums offered were to be distributed, first, in payment of the costs, charges and expenses of the controlling trustee, and then pro rata amongst the joint and several creditors, except creditors who chose not to rank in competition with other creditors.

The controlling trustee’s report made pursuant to s 189A of the Act informed creditors that:

“The proposal provides, in summary –

·        payment to the trustee of $10,000 on acceptance

·        payment to the trustee of the proceeds of the debtor’s Rolex watch and of the proceeds of certain real estate in Italy

·        payment to the trustee of $100,000 within 6 months of the approval of the schemes proposed by the Emanuel Group

·        payment to the trustee of 10% of the net proceeds of the ‘Canberra Compensation’ claim

·        certain creditors will not claim for dividend if the proposal is accepted.”

This brief summary fails to state the contingent nature of the last two payments proposed, or the value of the second of the payments offered.  However, further information was given on these topics later in the report.

The report advised that the debtor in his statement of affairs listed his assets as follows:

“Assets

Liabilities

77 unsecured creditors                                                     $ 261,618,143.45 (sic)

Deficiency                                                                         $ 261,591,043.45”

The report then set out the controlling trustee’s comments and observations in relation to the assets listed in the statement of affairs.  About the land in Italy the creditors were informed that the debtor stated that he had paid for the land “and may be the registered proprietor of a vacant block of land in a rural village in Italy.  He states that attempts to sell the property have been unsuccessful.  The debtor now suggests that the value may be only $10,000…”.

The report then concentrated on two matters.  The first is referred to as the “Canberra Compensation” claim.  This was the action by the debtor against Anthony Robert Hedley and Others referred to in the formal proposal.  The report records “The debtor’s claim has been dismissed but he has instituted an appeal…It is not possible to determine at this stage the merits of the claim nor to quantify the likely success (if any)”.  The controlling trustee notes that s 116 of the Act exempts damages or compensation for personal injury or wrong done to the bankrupt, and suggests that the proceeds of the Canberra Compensation claim might be property that is not divisible property in a bankruptcy.  The second matter is referred to as the Mission Beach claim, which the debtor valued as “nil” in his statement of affairs.  At the time  the report was written the debtor was claiming that he had an interest in land at Mission Beach, which had come about following a settlement entered into between the Emanuel Group, its financier, the debtor and others in early 1995 when certain funds were paid to or for the benefit of Simionato Holdings Pty Ltd (as trustee for a new Emanuele Family Trust).  By the time of the creditors’ meeting the debtor’s claim to the Mission Beach land had been dismissed by the Supreme Court.  The creditors’ meeting seems to have proceeded on the assumption that the debtor had no interest of value in “the Mission Beach claim”.  The information before this Court does not suggest otherwise.

The report discussed a number of “Other Related Transactions” and the debtor’s “Liabilities”.  It referred to various legal proceedings.  The report noted that the controlling trustee had sighted a deed the terms of which provided that the debt to EFG listed in the debtor’s statement of affairs, subject to certain conditions, would be discharged on 1 July 1998 and that EFG would vote in favour of the debtor’s proposal and would not participate in any dividend.  Although the report does not say so, that deed concerns the “settlement” entered into between the Emanuel Group and its financier, which was EFG, referred to in relation to the Mission Beach claim.

The report then discussed “The Proposal v Bankruptcy”.  The controlling trustee said:

“8.1     It is impossible to even estimate what return there may be to creditors in the event that the proposal is accepted.  I estimate that the debts which would rank for dividend in a Part X administration could be between $6m and $7m whereas in a bankruptcy the debts may be up to $67m higher (assuming the majority in value of those creditors who it has been stated will not claim in a Part X arrangement do in fact undertake not to do so).  (This is on the basis that EFG Finance Ltd is not entitled to claim in a Part X but also would not be entitled to dividends in a bankruptcy).

8.2       It is not possible to estimate the amount of realisation that is likely to be made in either a Part X or a bankruptcy.  Realisation in a Part X is principally dependent upon the ultimate success of the ‘Canberra Compensation’ claim (referred to earlier).”

The controlling trustee noted that if the proposal were accepted, the sum of $100,000, proposed to be paid to the trustee within six months of the approval of a scheme proposed in relation to the Emanuel Group, was contingent upon approval of the scheme, and it was not known whether that would occur.  The report concluded with the following observations by the controlling trustee:

“8.5     I conclude that for creditors there may not be any economic difference between the proposal and a bankruptcy.

            Creditors may need to decide on whether or not to accept the proposal other than on a monetary consideration.

            I suggest that the proposed Part X Deed of Arrangement has the potential to be in the best interests of creditors for the following reasons –

(i)                  In the proposed arrangement the total of creditors participating in any distribution would be approximately $7m whereas in a bankruptcy the possible debt may be $73m.

(ii)        The proposal includes 10% of the net proceeds of the ‘Canberra Compensation’ claim whereas in a bankruptcy that claim may well be exempt or if not would only provide realisation if the creditors funded the proceedings.

(iii)       the proposal includes the proceeds of the real estate in Italy.

(iv)       The administration of a bankruptcy which would entail in depth investigation and involvement in a number of legal actions would involve very considerable costs.

On the other hand:-

(i)         The ‘Mission Beach’ claim could be an asset in a bankruptcy but may only be realised if the creditors funded proceedings and such proceedings were ultimately successful.  This matter may be resolved before the meeting.

(ii)        Similarly the ‘costs order’ would be an asset of a bankruptcy but realisation would only result if the creditors funded proceedings which were successful.

8.6       I can not estimate the likely return to creditors.

8.7       If the proposal is accepted or if the debtor becomes a bankrupt the Controlling Trustee would be entitled to be a priority creditor in the administration for the costs of the Controlling Trustee.  Such costs could be $10,000 to $15,000.”

The figures stated in paragraph 8.1 of the report were not explained.  Presumably the figure of $67m is arrived at on the basis that many creditors included in the total liabilities of about $261m shown in the debtor’s statement of affairs, in addition to EFG, would not prove in an arrangement under Part X, but would prove in a bankruptcy.  The basis for reporting that debts of only $6-7m would rank for dividend under an arrangement is not disclosed.  (This estimate is to be contrasted with the value of the debts of creditors who voted against the proposal put to the meeting of creditors on 30 January 1998, namely $18,537,838.)

Shortly before the appointed date for the meeting of creditors, the controlling trustee sent to the creditors a supplementary report which included a letter from the debtor dated 23 January 1998 and another proposal to his creditors.  Whereas the original proposal was for a deed of arrangement, the new proposal was for a composition which would have the effect of giving the debtor a full release from provable debts immediately on acceptance.  Further, the conditions attaching to the payments proposed differed in material respects from the original proposal.  Under the new proposal, the debtor would be immediately released from all debts upon payment of the sum of $10,000 and the receipt of the net proceeds of the sale of his Rolex watch.  The new proposal went on to provide that without in any way affecting the release and the discharge arising from the payment of the sum of $10,000 and the proceeds of the watch, (1) if within 24 calendar months (from the date of acceptance) it was ascertained that the debtor had an interest in the land in Italy, he would cause it to be sold and pay to the trustee the net proceeds of sale within three months of settlement;  (2) if within 24 months the Federal Court approved a scheme of arrangement and compromise between the 64 companies in the Emanuel Group the debtor would pay to the trustee the sum of $100,000 within eight months of the date of the approval; and (3) if within 24 months the debtor achieved either judgment or composition of the Canberra Compensation claim which exceeded the sum of $6m he would pay $1m within six months of settlement.

The meeting of creditors on 30 January 1998 extended over some six hours.  Many questions were asked by creditors of the debtor, his “adviser” Mr Jackson, and the controlling trustee.  No creditor objected then, nor does any creditor now object, to the shortness of notice given to the creditors of the new proposal or of variations to it suggested during the meeting.

Towards the end of the meeting, the debtor again revised his proposal.  The revised proposal was put to the meeting.  There was disagreement between a number of people claiming to be entitled to vote as creditors at the meeting and the controlling trustee.  In particular, Mr Macks objected to the controlling trustee’s decision to admit him to one vote for a debt of $31,425.63 being costs awarded in proceedings that had occurred in the Supreme Court of South Australia between the debtor and others on the one side, and Mr Macks and companies in the Emanuel Group on the other side.  Mr Macks claimed that he was entitled to exercise 65 votes each in respect of 1/65^th of the total costs order.

Among the creditors whose proofs of debt were accepted for the purposes of voting at the meeting was EFG whose debt was admitted in the sum of $198,188,824.

Thirty-one creditors to the value of $234,139,507 voted in favour of the amended composition proposal.  Eight creditors to the value of $18,537,838 voted against it.  The president of the meeting declared the proposal for the composition carried by special resolution, as required by the Act.

Had EFG not voted in favour of the composition, the special resolution would have failed as it would not have been carried by three-fourths in value of the creditors voting on the resolution.  If the proofs of debt lodged by Mr Macks on his own behalf and on behalf of the 64 companies in the Emanuel Group had each been admitted so as to give him 65 votes, his votes against the composition would have defeated it because it would not have been carried by a majority in number of creditors.

The composition approved by the special resolution provided that the debtor would receive a full release and discharge from all claims by his creditors upon payment of the sum of $10,000 and the net proceeds of the Rolex watch.  The minutes of the creditors’ meeting record that immediately after the special resolution was declared carried, Mr Jackson on behalf of the debtor handed over a cheque for $10,000 and the watch.

Central to the outcome of the present application are the additional terms of the amended composition approved by the creditors.  I set them out exactly as they were advised to the creditors by the controlling trustee immediately after the meeting:

“Without in any way affecting the release and discharge effected by the payment of those amounts [$10,000 plus the net proceeds of the watch] if within the 24 calendar months next following the date of the acceptance of this composition by the creditors:-

1.         it is ascertained that I have an interest in the rural land in Molinara Italy I will cause it to be sold and

·          I will pay to the Trustee the net proceeds (being the gross proceeds of sale less all direct and indirect marketing and selling expenses and the costs of converting the proceeds to Australia currency and transferring the proceeds to Australia) of the sale within 3 months of the settlement of any such sale.

2.         the Federal Court of Australia approves the Schemes of Arrangement and Compromise, with or without amendments, proposed to be entered between the 64 companies which comprise the Emanuele (sic) Group of Companies which are listed in the Schedule following and their respective creditors and shareholders.

            ·          I will pay to the Trustee the sum of $100,000 within eight months from the date of the approval.

3.         I achieve either by judgement or compromise a settlement of the claim by the Giuseppe Emanuele against Anthony Robert Hedley and others (in the Federal Court of Australia Action Number 23) for compensation for wrongful and malicious compensation and provided that the net proceeds (being the gross proceeds of the claim less all direct and indirect costs charges and expenses reasonably incurred in prosecuting the claim) of the claim which I have against Anthony Robert Hedley and all other defendants exceeds the sum of $6,000,000.

·          I will pay the sum of $1,000,000 within six months of the settlement of the claim.

4.         I will pay to the trustee 50% of the net proceeds (being the gross proceeds less all direct and indirect costs) received from the appeal costs order after meeting any valid claims to the proceeds so received, within one month of receipt.”

The composition provided that the moneys received by the controlling trustee would be distributed first in payment of the fees and expenses of the controlling trustee of the controlled estate of the debtor, second in payment of the fees and expenses incurred by the controlling trustee of the composition, and thirdly in a pro rata distribution amongst creditors except those who chose not to rank in competition with other creditors.

It is common ground that the Rolex watch is worth approximately $5,000.  At the conclusion of the creditors’ meeting, the meeting voted the sum of $16,816 to the controlling trustee for remuneration.  Unless one or more of the executory components of the composition led to an additional payment, the composition would result in an immediate release to the debtor, and no payment to the unsecured creditors.

Farrow, in its application, initially sought to have the deed declared void under s 222 on the grounds that inadequate notice of the debtor’s proposal for a composition had been given, that parties were permitted to vote who should not have voted, and that parties were prevented from voting who should have been permitted to vote.  These would be grounds for the exercise of the Court’s power under s 222(2) of the Act.  However, when the matter came on for trial these grounds were not pressed by Farrow.  Farrow concentrated its attack under s 239, and urged the Court to set aside the composition on the ground that the terms of the composition were unreasonable, not calculated to benefit the creditors generally, and for “other reason” which Farrow contended should lead the Court, in its discretion, to set the composition aside.  Farrow contended that the Court should, upon setting aside the composition, make a sequestration order against the debtor.  Farrow advanced, as fall back positions in the event that the primary attack under s 239 failed, claims for termination of the composition under s 242, or for avoidance under s 222 .  Under s 242(1)(c) the Court has power to make an order terminating a composition where “for any other reason a composition ought to be terminated”.  The “other reason” relied on involved substantially the same reasons advanced in support of the relief sought under s 239.  The fall back position advanced under s 222 was confined to the grounds stated in s 222(4)(b), namely, that the debtor omitted a material particular from the statement of the debtor’s affairs or included an incorrect and material particular in that statement.

Whilst Farrow did not maintain its claim for relief under s 222(1) Mr Macks at trial argued that the proofs of debt lodged by him on behalf of each of the 64 companies in the Emanuel Group for a proportion of the costs awarded in their favour in the Supreme Court proceedings should have been admitted.  Had Mr Macks been permitted to exercise 65 votes the special resolution would not have been carried and on this ground he sought to have the deed declared void as it was not entered into in accordance with Part X of the Act.

It is convenient to deal first with Farrow’s claim for relief under s 239 of the Act.  Farrow contended that the composition was unreasonable, or not calculated to benefit the creditors generally for seven reasons.  Farrow contended that the first of these reasons was in itself sufficient to require the composition to be set aside, but if that submission were rejected, Farrow argued that the other matters taken in combination required that course.  I take each of the matters advanced in turn.

1.         The composition lacked mutuality and proportionality.

Farrow contended that on the one hand the benefits to the creditors were illusory whilst on the other hand the benefits to the debtor were great.  He would gain an immediate release from his debts.  His affairs would not be subject to investigation by a trustee under the provisions of the Bankruptcy Act, and he would remain in effective control of choses in action and putative assets with potential value.

I have already observed that the actual payments made in consideration for the release and discharge of the debtor’s liability to his creditors would result in no distribution to them.  The funds received would be expended entirely on the costs and fees of the controlling trustee.  Counsel for the debtor seeks to uphold the reasonableness of the composition on the ground that the executory components have real value, and place the creditors in a better position than they would be in if the debtor were to become bankrupt.

At the outset it will be noticed that the executory components depend upon the happening of events within 24 calendar months from the date of acceptance of the composition.  The composition does not place any responsibility on the controlling trustee, or any other person apart from the debtor to ensure that the subject matter of the contingencies is expeditiously and conscientiously pursued so that if the event is ever to occur, it happens within 24 months.  As the happening of the contingencies is not subject to any control regime, it lies in the power of the debtor to control whether and when, if at all, the contingencies occur.

The only information given to creditors about the land in Italy comes from the debtor. In addition to the vague information contained in the controlling trustee’s report, the minutes of the creditors’ meeting record that a creditor who asked about the land:

“…was informed that Mr Emanuele was not sure but he believed it was purchased about ten to fifteen years ago by his brother in law, Caruso.  He said he didn’t sign anything but he believed that it was bought on his behalf and held in trust for him.  He said it is a vacant block of land of approximately 200 square feet in a small village.  He spoke to Caruso about two years ago about selling it but no-one seems interested in buying it.  Mr Jackson said that he has looked at the matter and he cannot find any record of Emanuele having paid for it and there is no trust deed so he doubts that Emanuele has any interest in it.  Mr Emanuele said that Caruso acknowledges that Emanuele has an interest in it and that he has been trying to sell it for him.”

Whereas the land was shown in the statement of affairs as having a value of $20,000, the debtor had reduced this estimate to $10,000 by the time of the controlling trustee’s report.  Further, whereas the initial proposal asserted that the land was the debtor’s property, by the time the amended composition was propounded, the debtor’s interest was acknowledged to be uncertain.  There is nothing in the information that was supplied to the creditors, or to this Court, which suggests that there is any real prospect of the contingency occurring within 24 months, or that the debtor has any interest of value which can be realised in the land.

No information has been given to the creditors as to what “direct and indirect marketing and selling expenses” may be incurred upon the realisation of the land even if it is ascertained (by some undisclosed person and means) that the debtor has an interest in it.  Nor is any explanation advanced for why the debtor would withhold the net proceeds from the trustee for up to three months from settlement.

The next executory component is the offer of a payment of $100,000 within eight months from the approval of a scheme of arrangement and compromise involving the companies in the Emanuel Group.  On the information before the Court this offer appears to be no more than window dressing to give an appearance of value to the composition.  At the date of the creditors’ meeting no scheme of arrangement had been propounded by anyone.  The liquidator of the companies was unaware of any proposal.  In his affidavit filed in these proceedings the controlling trustee says that he had been informed that a third party proposed to pay the sum of $4m to be shared among the creditors of the companies, and that a great deal of work was required to put the scheme together including the preparation of reports as to the affairs of the 64 companies, and to gain the approval of the Australian Securities Commission. This information was not revealed to the creditors in the report of the controlling trustee or at the meeting of creditors.  Mr Macks, says that this information was not given to him at any stage before the creditors’ meeting.  The controlling trustee however, says that the information was passed to Mr Macks.  It is unnecessary to resolve this conflict because, importantly, Mr Macks says that an amount of $4m would be insufficient to pay the outstanding costs of the liquidations and to compensate creditors of the companies for the value of the loss of legal claims being considered and pursued by the liquidator.

In any event the creditors were not given sufficient information to enable them to form an opinion about the value and wisdom of agreeing to this component of the composition.  The creditors were given no information in the controlling trustee’s report about the identity of the third party who proposed to finance the scheme of arrangement, nor were they given any information which would enable a view to be formed about the chance that a scheme of arrangement would be approved by the Australian Securities Commission and then by the Court.  Further, the creditors were given no information as to how a scheme of arrangement could enable the debtor within six or eight months to pay $100,000 to his trustee.  At the creditors’ meeting Mr Macks enquired how the scheme of arrangement could produce $100,000 for the debtor to pay to the composition.  Mr Jackson replied that that was the debtor’s personal business.  Mr Macks persisted, and he said that full disclosure was warranted.  Mr Jackson then said that at that stage they (presumably the debtor and Mr Jackson) did not know who would provide the funds.

Presumably the creditors were intended to infer that the resources of the companies, when they were taken out of liquidation, would enable the sum of $100,000 to be raised and provided to the debtor for the purpose of enabling him to make a payment to his personal creditors through the controlling trustee.  How this might be done without there being a breach of the law or directors’ duties to the companies was not disclosed.

In short, the information before the Court indicates that there is no realistic prospect of there being a scheme of arrangement or any payment under this component of the composition.

The next executory component, the offer to pay $1m within six months of settlement of the Canberra Compensation claim, is, in my opinion, as unrealistic as the offer contingent upon the approval of the scheme of arrangement.  The information before the Court again suggests that it has no realistic value, and was put forward merely to give the composition a colour of value.

The creditors were informed by the controlling trustee’s report that the Canberra Compensation claim had been struck out, but that an appeal was pending.

Questions were asked at the meeting of creditors about the claim and who was paying the costs.  The creditors were informed that the majority of the costs “are being funded by the respective legal advisers”.  On the prospects of success, the controlling trustee said that his advice was that the claim was a high risk action covering new ground, that the costs could be as much as $1m, and the action could take five to ten years.  On the other hand, a former solicitor for the debtor who was present at the meeting as a creditor said that his advice was that the action had reasonable prospects of success.  Mr Jackson indicated that the debtor had no firm arrangements regarding financial assistance for the claim.  The debtor said that his only chance of pursuing the matter was if he successfully entered into a Part X arrangement because no one would fund the proceedings if he were bankrupt.

The information before this Court indicates that summary judgment was entered in the Supreme Court of the ACT against the defendants on 7 March 1997.  There is no information about an appeal other than the report to the creditors that an appeal had been lodged.  There was no information before the creditors to suggest that the claim had any prospect of success.  Further, a verdict or settlement in excess of $6m would be exceptional, and there is no information which could support a view that $6m was a realistic assessment.  The possibility of a result in this magnitude, within 24 months of the acceptance of the composition, at best was extremely remote.  Counsel for Farrow points out the lack of incentive in the proposal for the debtor to strive for a figure exceeding $6m as he would receive a greater personal return if he were to settle for marginally less.

In my opinion the first three of the executory components have no real value, and any appearance of value to the creditors which they may present is illusory.

The final executory component offers 50 per cent of the net proceeds received from the “appeal costs order” after meeting any claims to the proceeds.  Identification of the “appeal costs order” in the papers and oral information given to the creditors at the meeting is not easy. A number of costs orders were made relating to the dismissal of criminal proceedings instituted by the Commonwealth in Canberra against the debtor.  After a trial at which the debtor was convicted of giving a bribe to an officer of the Commonwealth, the conviction was set aside on appeal. An order for costs of the trial was made in favour of the debtor which resulted in the payment of approximately $600,000.  The disposal of this sum is dealt with in the controlling trustee’s report.  The executory component, as I construe the minutes of the creditors’ meeting, does not relate to this costs order, but to further costs orders made in favour of the debtor in respect of his successful appeal to the Supreme Court and an unsuccessful appeal by the Commonwealth against the quashing of the conviction.

The controlling trustee informed the meeting that he had been advised that negotiations were close to agreeing the appeal costs at a figure of $200,000 but the Commonwealth would set off other costs awards of $32,000.  On the basis of this information, the “appeal costs order” had a potential value of about $168,000.  However when a creditor suggested that the debtor should make an offer in respect of these costs, Mr Jackson at first opposed that saying that the debtor, being now 61 years of age, needed the money to recommence his life.  The creditors pressed for an offer. 

Mr Macks in his affidavit filed in these proceedings says that he informed the controlling trustee at the meeting that as liquidator of the companies in the Emanuel Group he laid claim to the appeal costs as he contended the debtor’s costs of the proceedings had been met by companies in the Emanuel Group, and that the creditors should not assume that there was any value in the proposal that 50 per cent of the costs fall into the composition.

The information about the “appeal costs order” given to the creditors was vague, and remains so.  There seem to be two possibilities.  Either the debtor has an entitlement to the appeal costs of up to approximately $168,000, or he has no entitlement at all because of the liquidator’s asserted claim to the benefit of the costs orders.  In the latter situation, the executory components offer no benefit to the creditors.  In the former situation, the creditors are being offered only one half of the asset.  And that asset, if it exists, is the only disclosed asset of value available to creditors apart from the watch.

In my opinion in either situation this component of the composition is not calculated to benefit the creditors generally.  If the costs order represents a realisable asset of substantial value it is unreasonable that one half of this sum should be diverted from the creditors.

I agree with the submissions of Farrow that on the grounds advanced by it under the heading of lack of mutuality and proportionality, the composition is unreasonable and not calculated to benefit the creditors generally.

2.         The executory components are uncertain to an excessive degree. 

This complaint has already been canvassed.  The executory components of the composition are expressed in terms so uncertain that they bestow nothing of real value on the creditors.  Even if the debtor has an asset of value in the costs orders, the terms of the composition impose no obligation on him to get in the costs within 24 months, or to provide a mechanism for extending the time in the event that preventable delay occurs.

3.         EFG should not have been permitted to vote.

In my opinion this ground of complaint goes rather to whether the discretion to set aside the deed should be exercised in the event that the Court thinks that the composition is unreasonable or not calculated to benefit the creditors generally, rather than providing such a ground in itself.  Moreover, the complaint rests on the fact that the terms and effect of the deeds entered into between EFG, companies in the Emanuel Group and others on 17 March 1995 were not sufficiently disclosed to the creditors either in the controlling trustee’s report or at the meeting.  In that respect the complaint concerns a failure to disclose material particulars of the debtor’s affairs to the creditors, rather than being one about the unreasonableness of the terms of the composition. 

The deeds, and the transactions effected by them were the subject of proceedings in the Supreme Court of South Australia in Addstead Pty Ltd & Others v Simionato Holdings Pty Ltd & Others (1997) 190 LSJS 412.  Judgment at first instance was given by Lander J on 18 April 1997 and an appeal from that judgment was dismissed by the Full Court of South Australia on 7 October 1997; Addstead Pty Ltd (In Liquidation) & Others v Liddan Pty Ltd & Others (1997) 70 SASR 21. Under the transactions the subject of those proceedings, a payment of $4.6m was made by EFG to Simionato Holdings Pty Ltd.  Simionato Holdings Pty Ltd was one of the trustees of family trusts in favour of members of the debtor’s family.  The principal beneficiaries were the debtor’s children, although Lander J at first instance, noted in passing that the terms of the trusts were wide enough possibly to include the debtor as a beneficiary.  The judgments in the Addstead case held that the debtor and other directors of companies in the Emanuel Group had acted in breach of fiduciary duty in connection with the payment to Simionato Holdings Pty Ltd, and that as Simionato Holdings Pty Ltd had knowledge of the breaches of fiduciary duty, the funds and the assets acquired with them were held in trust for companies in the Emanuel Group.

In one of the deeds the debtor agreed to provide assistance, co-operation and information to the EFG group in its enforcement of its rights under securities held over the assets of the Emanuel Group.  In return for the debtor’s covenant in this regard EFG agreed to release him in relation to all causes of action against him except for the judgment debt entered in the Supreme Court of Queensland on 27 February 1995.  EFG also agreed, provided there was compliance with the deed, that in relation to any meeting of creditors called for purposes of Part X of the Act to vote in support of any resolution proposed by or on behalf of the debtor and not to participate in any dividend which may be payable to his creditors in the event that the creditors resolved to accept a deed of assignment, or a deed of arrangement or composition.  In respect of these deeds Lander J observed in his judgment (at p466):

“No doubt this deed was drawn in the way that it was so as to not only advantage Mr Joe Emanuele by releasing him from his personal guarantees to EFG which had given rise to his personal indebtedness for the judgment debt, but also to advantage him in the event that he called a Part X meeting.  The deed had not released him from the judgment debt and did not release him unconditionally from the judgment debt until 30 June 1998.  That would allow EFG to vote at a meeting of creditors pursuant to Part X and overwhelm any other creditors in relation to any resolution relating to a Part X arrangement.

All of the deeds were drafted in such a way as to not bring to the attention of any creditor of either Mr Joe Emanuele or the Emanuel Group, the existence of the Simionato Holdings Pty Ltd deed.  Any person not privy to the arrangements and negotiations between EFG and Mr Joe Emanuele and the Emanuel Group of companies could not know of the Simionato Holdings Pty Ltd deed nor indeed would they have any reason to suspect its existence.

That is so because unless one was privy to the particular commercial arrangements, which were kept secret, between Mr Joe Emanuele and EFG a creditor would not suspect that Elders would be paying a large sum of money to a company independent of the Emanuel Group.  That necessarily meant that the creditors of Mr Joe Emanuele and the Emanuel Group could not have known that a sum of $4,600,000 was paid to Simionato Holdings and that a further sum of $400,000 was paid to the Emanuel Group’s former solicitors, Thomsons.

There is no doubt in my mind that the transaction was constructed and the deeds drawn so as to avoid bringing to the attention of any of the creditors of Mr Joe Emanuele or the Emanuel Group of companies the fact that Elders had paid to Simionato Holdings Pty Ltd $4.6 million.  The transaction was intended to defeat the claims of creditors of both Mr Joe Emanuele and of the Emanuel Group of companies.”

The findings of Lander J in respect of the transactions were upheld by the Full Court.  Perry J (with whose reasons Cox J generally agreed) described the transactions as “nothing but a transparent fraud on the creditors of the Emanuel Group” (70 SASR at 43-44).

The judgment of Lander J was brought to the attention of the controlling trustee by Mr Macks before the meeting of creditors.  The transaction relating to Simionato Holdings Pty Ltd, and the Judge’s assessment of the debtor’s involvement in the transaction was not brought to the attention of the creditors by the controlling trustee.  In my opinion these matters should have been brought to their attention.  The information had the potential to influence the creditors in deciding whether the terms of the proposed composition, and in particular the executory components, were likely to be of material benefit to them.  Further, I consider they were entitled to know that the major creditor at the meeting had entered into an agreement with the debtor to exercise its voting power in favour of a composition in consideration of agreements intended to further its own position as a creditor of companies in the Emanuel Group.

In my opinion the fact of the covenant by EFG to vote in favour of the composition did not provide a ground for the controlling trustee to prevent EFG from exercising its voting rights as a creditor pursuant to ss 64ZA(4) and 196 of the Act.  However, on the present application I consider the fact of the covenant to be a relevant matter when considering whether the discretion should be exercised to set aside the deed.  In the ordinary case, the Court will be influenced by the wishes of the creditors expressed by their vote at the meeting of creditors, and have regard to the value of the debts admitted for voting purposes by the president of the meeting.  The Court will not lightly set aside the wishes of the creditors so expressed. However, in the present case the requirement that there be at least three-fourths in value of the creditors present voting in favour of the resolution was met only because of the vote of EFG.  In so voting EFG was not acting as a creditor at arms’ length from the debtor or giving effect to an opinion based upon the merits of the proposal.  Rather it was acting pursuant to a prior commitment entered into to achieve a personal advantage.

4.         The affairs of the debtor were not subject to proper investigation.

In the controlling trustee’s report under s 189A, he said that “Due to time constraints, the complexity of the affairs of the debtor and his associated entities and due to the economic constraints, the controlling trustee has carried out what in the circumstances are only cursory investigations”.  Notwithstanding the controlling trustee’s subsequent affidavit which, at para 51, sought to qualify this observation, the totality of the evidence before the Court confirms that the investigations conducted by the controlling trustee prior to the creditors’ meeting were only cursory, and the questioning of the debtor at the meeting indicated that many transactions involving the debtor had occurred in respect of which there remained many unanswered questions.  If the affairs of the debtor were to be administered in bankruptcy these questions could be pursued.  Moreover, the trustee in bankruptcy would then have control of any steps necessary to realise assets that might come to light.  The trustee could investigate whether there was divisible property of the debtor involved in the subject matter of an alleged joint venture with H Jury and H & M Pty Ltd, in dealings in property in Tasmania by Molinara Pastoral Co Pty Ltd, in the Emanuel Property Trust of Victoria, in the Emanuel Property Trust of South Australia, and in a property at Maslins Beach – transactions referred to in the controlling trustee’s report.  Having regard to the miniscule amount offered by the debtor in his composition on the one hand, and the extent of his liabilities on the other, in the public interest these matters require investigation: see Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 at 535.  Terms of a composition which put these matters entirely to one side, without any possibility of revisiting them in the event that new information identifies an asset of value, is unreasonable and not calculated to benefit the creditors generally.  On the contrary, the terms of the composition in this respect appear calculated to benefit only the debtor.

5.         The composition was not positively recommended by the controlling trustee.

The controlling trustee’s comments upon the originally proposed deed of arrangement are set out earlier in these reasons.  When the composition was proposed, the controlling trustee in his supplementary report made no recommendation one way or the other in relation to it.  By implication, the controlling trustee’s opinion on “The Proposal v Bankruptcy” in his original report continued to apply.

At the meeting of creditors the controlling trustee (who acted as president) was pressed to make a recommendation to the creditors.  The minutes record:

“Mr Macks enquired as to what was now the president’s recommendation in view of the amended proposal and in view of the number of undertakings actually received.  Mr Matthews responded by saying that he believed there was scope for the creditors to negotiate an improved offer and he said that the result could vary from anything from being not enough to pay the costs to payment of a dividend far in excess of what a bankruptcy would provide.  A question was asked as to where the $10,000 payable on acceptance was to come from and Mr Jackson said that the money is in his trust account but that he could not divulge the source.  Mr Martin enquired as to whether in view of the fact that the number of undertakings actually received was far short of the amount referred to in the report would the Controlling Trustee exercise proxies differently from that which were provided on the basis of the report.  Mr Matthews said he would wait and see as to whether or not the offer was amended.

Mr Evans suggested that the amount offered which was tangible, that is $15,000 or thereabouts, was not enough to pay the costs but in a bankruptcy the proceeds of the appeal costs could provide a dividend and asked as to whether in view of this the Controlling Trustee still recommends the proposal.  Mr Matthews says the report says that the creditors need to judge for themselves and that their judgement might not be purely on economic grounds and that he does not vary from that recommendation.  He reiterated that the offer needs fine tuning and that there are too many unknowns to be able to calculate the difference between Part X and a bankruptcy or to make any strong recommendation.

Mr Macks pointed out that there are possibly people who are inexperienced in this type of matter who would be relying on Mr Matthew’s recommendation and said that Mr Matthews cannot sit on the fence.  Mr Matthews said that the offer has potential but he was not as optimistic about the eventual outcome as some might be.  He again said it depends on what the creditors might be able to negotiate now and he pointed out that it is up to the creditors to make up their own minds.  Mr Byrne referred to section 189A and as to the duty of the Controlling Trustee to express an opinion….”

It was after this discussion that the debtor amended his proposed composition to include an offer in respect of the “appeal costs order”.  The controlling trustee made no recommendation to the meeting when that occurred.  At no stage did he advise the meeting as to his belief whether the creditors’ interests would be better served by accepting the debtor’s proposal or by bankruptcy of the debtor.

Section 189A(1) of the Act provides that:

“The controlling trustee must prepare a report:

(a)       summarising and commenting on the information about the debtor’s affairs that is available to the controlling trustee; and

(b)       if the debtor has given the controlling trustee a proposal for dealing with the debtor’s affairs under this Part – stating whether the controlling trustee believes that creditors’ interests would be better served by accepting the proposal or by the bankruptcy of the debtor.”

The provisions of s 189A(1)(b) are in terms substantially similar to (although not identical with) s 189A(3) of the Act prior to its amendment by the Bankruptcy Legislation Amendment Act, No.44 of 1996 assented to on 25 October 1996 and Schedules 1 and 2 which came into operation on 16 December 1996.  The former s 189A(3) was considered by a Full Court of this Court in Re Burlock; Burlock v Deputy Commissioner of Taxation and Another (1994) 121 ALR 168.  In that case the controlling trustee had not stated in his report his opinion as required by s 189A(3).  The Full Court said at 174:

“It is well established that s 222(2) confers a discretion on the court to declare void a deed on the ground that it was not entered into in accordance with Pt X or to refrain from doing so: see Musolino v Sidiropoulos (1991) 101 ALR 235 at 243, 244; Re Williamson; Ex parte Wearne (1980) 31 ALR 598 at 601.  It is material to the exercise of that discretion to consider, as his Honour did, the nature and extent of the departure from the prescribed method of entry into the deed.  It is clear from the tenor of the judgment that his Honour regarded the absence from the report of any expression of the trustee’s opinion as a very serious departure from the requirements of Pt X, so that it was not entered into in accordance with that Part.

In our opinion, he was clearly justified in coming to this conclusion.  A controlling trustee has marked advantages over the general body of creditors…”.

Whilst the Full Court was considering the relevance of the failure of the controlling trustee to express his opinion to the exercise of a discretion to declare void a deed under s 222(2), in my opinion the failure of the trustee to express an opinion or to state his belief is also relevant to the exercise of the discretion to set aside a composition under s 239.  Again, the submission on this topic by Farrow is in my opinion relevant to the question of discretion and is not in itself a ground for characterising the terms of the composition as unreasonable or as not calculated to benefit the creditors generally.

In a case of this kind, where the affairs of the debtor are complex, and there is a background of numerous transactions, the report and belief of the controlling trustee assume particular importance to the creditors who are asked to vote on a proposal.  The creditors themselves have no realistic prospect of becoming familiar with all of the information necessary to make an informed judgment.  They are dependent in large measure upon the expertise of the registered trustee who undertakes the task of acting as controlling trustee.  If the controlling trustee is unable to form an opinion one way or the other because the available information about the affairs of the debtor is inadequate or uncertain, the controlling trustee should exercise the power given in s 190(2)(b) to make further enquiries and investigations.  If that is not done, or if the further enquiries and investigations do not clarify the position to the extent that the controlling trustee can express a positive opinion, it is likely that the public interest will be best served by allowing the debtor’s affairs to be administered in bankruptcy where the trustee will have the full range of powers given under the Act.

6.         Greenhill Road property.

This topic concerns the terms on which the debtor resides in a house at Greenhill Road.  At the creditors’ meeting, in answer to questions concerning his residential address, the debtor said, according to the minutes, “he lives in a friend’s house but has no firm arrangement with him for the payment of rent and he confirmed that it is the address at which he previously lived”.  However, a report in the Sunday Mail published in Adelaide on 1 February 1998 states that the owner of the property was Mr Iuliano who, according to the newspaper report, said he had known the debtor for a number of years, and that he had recently bought the property at auction as an investment.  The debtor approached him after the auction asking to rent the house.  Mr Iuliano said he did not know who was paying the rent. 

The information given to the creditors both in the controlling trustee’s report, and at the meeting, did not reveal that the debtor had any source of current income.  Farrow contended that whether the debtor was paying rent, and if so how, for a luxury home was a further matter that required investigation.  That is so, although in the totality of the debtor’s affairs this is not the most important item.  Again, it is not a matter which establishes that the terms of the composition were unreasonable or not calculated to benefit the creditors generally.  Rather, it is a further particular coming under the umbrella of item 4 above.

7.         The composition was not the best the debtor could offer.

Farrow’s submissions under this heading, in substance, repeated matters already discussed under topic 1 above, and in particular that no satisfactory reason was advanced by the debtor why the creditors should not have the benefit of the whole of the appeal costs orders.

Summary of conclusions under s 239 of the Act

In my opinion Farrow has established circumstances which show the terms of the composition to be unreasonable and not calculated to benefit the creditors generally.  Further, I am satisfied that the Court should exercise its discretion to set aside the composition.  In so exercising the discretion I take into account the desirability in the public interest that the uncertainties regarding the assets and affairs of the debtor be properly investigated, that the special resolution in favour of the composition was passed on the vote of EFG which was motivated by a private agreement under which it received a personal benefit, and the fact that the composition was not recommended by the controlling trustee.

As I consider it is appropriate to set aside the deed under s 239, it is not necessary to consider the alternative claims under ss 222(4) and 242. 

Further, it is not strictly necessary to consider the additional argument advanced by Mr Macks that in respect of the order for costs in the Supreme Court proceedings, the proofs of debt of each of the 64 companies should have been admitted so that he had 64 votes in respect of those companies in addition to his own personal vote.  However, in deference to his argument, I briefly give my reasons for considering that his submissions should not be accepted.

Mr Macks has exhibited to his affidavit in these proceedings copies of the orders made by the trial judge and by the Full Court in action no. 308 of 1996 in the Supreme Court of South Australia.  The heading on these documents merely describes the respondents in whose favour the costs orders were made as “Emanuele Investments Pty Ltd (In Liquidation) ACN 007 743 400 and Ors” and Peter Ivan Macks.  The submissions of Mr Macks proceeded on the basis that the other parties in whose favour the orders were made were the other 63 companies in the Emanuel Group.  That assumption has not been disputed by counsel for the debtor, and I take it to be correct.

On that footing, the orders for costs were made in favour of Mr Macks and the 64 companies jointly.  The liability is not owed to them jointly and severally: Australian Workers’ Union & Others v Bowen (1946) 72 CLR 575 at 583 and Re Thompson; Ex parte Thompson v Grimley Pty Ltd & Another (1995) 135 ALR 700 at 708-710.  There is, therefore, one debt owed to 64 companies and one person jointly.  There cannot be two or more proofs in respect of one debt: Halsbury’s Laws of England, 4^th ed., reissue vol 3(2), para 483. 

Mr Macks rests his argument that proofs of debt should have been accepted by the controlling trustee from himself and the 64 companies on s 64ZA(4) of the Act.  That subsection applies to voting at the meeting of creditors by virtue of s 196 of the Act.  Section 64ZA(4) provides that:

“Subject to subsections (5) and (6), each creditor is entitled to vote and has one vote.”

Section 64ZA(6) provides that a creditor who has failed to give to the trustee a statement in accordance with s 64D is not entitled to vote.  That section requires that each creditor give to the trustee, at or before the meeting, a written statement setting out specified particulars including the amount in respect of which the creditor claims that the bankrupt is indebted to the creditor.

As there is only one debt, notices which seek to subdivide the one debt into 65 separate debts do not comply with s 64D.  Under the orders for costs, the debtor is indebted in respect of a single amount owed jointly to all the creditors.  A valid notice under s 64D will be a single notice in relation to the single debt, and will name the parties to whom the liability is owed, that is the 65 parties in whose favour the costs orders were made.

Mr Macks sought to comply with s 64D by filing proofs of debt on behalf of each company and himself wherein each claimed 1/65^th of the amount of the costs.  This had the effect of asserting 65 separate debts whereas, in truth, there was only one.  In my opinion the controlling trustee rightly rejected them, and was correct in his decision to allow Mr Macks, as one of the joint creditors, to exercise one vote in respect of the total amount of the costs.

In my opinion the reasons which lead to the conclusion that in this case the composition should be set aside also lead to the conclusion that this is a proper case to forthwith make a sequestration order against the debtor.

The orders of the Court will be that the composition accepted by a meeting of creditors held on 30 January 1998 be set aside, and that a sequestration order be made.  I will hear the parties as to consequential orders.

Associate:

Dated:              30 September 1998