FEDERAL COURT OF AUSTRALIA
BANKRUPTCY - Application seeking to void, or terminate the deed of arrangement - what effect, if any, does the signing of two s 188 authorities have - whether the adjournment of the meeting was irregular - substantiation of creditor’s vote - whether any of the debts were statute barred - consideration of a “creditor” if debt statute barred - effect, if any, on voting for special resolution - nature of loan repayable on demand - discretion of the Court in considering whether to declare the deed void - consideration of possible sequestration and the effect on the creditor’s position.
Bankruptcy Act 1966 (Cth) - ss 188, 196, 201, 222
Musolino v Sidiropolous (1991) 101 ALR 235 Foll
Re de Kantzow ex parte de Kantzow (1992) 35 FCR 74 Cited
Re Saheed; Saheed v The Official Receiver (1993) 41 FCR 148 Cited
Hooper v Ewins (1997) 79 FCR 389 Cited
Re Venetoulis; Ex parte Calsil Ltd (1976) 13 ALR 625 Cited
Re Palazzolo; ex parte Discusso v Palazzolo [1991] FCA 408 Cited
Re Segal; Lensworth Finance Ltd v Segal (1979) 9 ALR 154 Cited
Re McLean ex parte Friends Provident Life Office (1992) 36 FCR 502 Cited
Re Dingle; Westpac v Worrell (1993) 47 FCR 478 Cited
Loeskow v Avokoh Irrigation Pty Ltd [1996] FCA 274 Cited
Re Levy ex parte Scholefield Goodman & Sons Ltd (1980) 50 FLR 99 Cited
Ogilvie v Adams [1981] VR 1041 Foll
Young v Queensland Trustees Limited (1958) 99 CLR 560 Cited
Stage Club Ltd v Millers Hotels Pty Ltd (1981) 150 CLR 535 Refd
Motor Terms Co Pty Ltd v Liberty Insurance Ltd (In Liquidation) (1967) 116 CLR 177 Foll
Re Devy; Ex parte BBC Hardware Limited (1996) 67 FCR 355 Cited
Bridge v Great Western Portland Cement & Lime Ltd (1932) 48 CLR 522 Refd
Benzon, In re Bower v Chetwynd [1914] 2 Ch 68 Foll
Bowring-Hanbury’s Trustee v Bowring-Hanbury [1943] 1 Ch 104 Cited
Christensen v Davison [1971] QdR 208 Cited
Power v Kenny [1977] WAR 87 Cited
Cotterell v Price [1960] 1 WLR 1097 Cited
ISSAC ALEXANDER BROTT v MICHAEL JOHN GREY AND PAUL DESMOND SWEENEY
QG7286 OF 1998
COOPER J
BRISBANE
29 NOVEMBER 2000
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IN THE FEDERAL COURT OF AUSTRALIA |
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QG7286 OF 1998 |
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BETWEEN: |
ISSAC ALEXANDER BROTT APPLICANT
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AND: |
MICHAEL JOHN GREY FIRST RESPONDENT
PAUL DESMOND SWEENEY SECOND RESPONDENT
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DATE OF ORDER: |
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WHERE MADE: |
THE COURT ORDERS THAT:
1. The application be dismissed.
2. The applicant pay the respondents’ costs of and incidental to the application, including reserved costs, if any, to be taxed if not agreed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA |
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QG7286 OF 1998 |
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BETWEEN: |
APPLICANT
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AND: |
FIRST RESPONDENT
PAUL DESMOND SWEENEY SECOND RESPONDENT
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JUDGE: |
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DATE: |
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PLACE: |
REASONS FOR JUDGMENT
Background
1 On 14 May 1992, Michael John Grey (“the debtor”) executed a deed of arrangement (“the deed”) pursuant to a special resolution of his creditors under Part X of the Bankruptcy Act 1996 (Cth) (“the Act”). The applicant, Issac Alexander Brott, a creditor of the debtor filed an application in this Court on 20 July 1998 seeking a declaration pursuant to s 222 of the Act that the deed was void or alternatively for an order pursuant to s 236 of the Act that the deed be terminated. The applicant also sought that a sequestration order be made against the debtor’s estate. On 5 November 1999, the application was referred by the District Registrar to a judge of the Court. Final directions were made as to the hearing of the application on 11 February 2000 and the application was heard on 8, 9 and 10 March 2000. The date for lodging of final written submissions by the applicant expired on 29 June 2000.
2 Both the applicant and the debtor are solicitors.
The Issues
3 The applicant brings his application under s 222 of the Act. So far as is presently relevant, that section provides:
“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, a person authorised in writing by the Inspector-General, the Registrar, 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.
(3) The Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this Part if the deed complies substantially with those requirements.
(4) Where the Court, on the application of the Inspector-General, a person authorised in writing by 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 with respect to any of his conduct or examinable affairs at the meeting of creditors at which the resolution requiring him 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.
...
(7) The trustee or a creditor may include in an application under subsection (1) or (4) an application for a sequestration order against the estate of the debtor and if the Court, on the first-mentioned application, makes an order under subsection (2) or (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.”
4 The operation and requirements of ss 222(1) and 222(2) were explained by a Full Court of this Court (Beaumont, Burchett and von Doussa JJ) in Musolino v Sidiropolous (1991) 101 ALR 235. The Court in a joint judgment said (at p 243):
“In our opinion, by virtue of s 222(1), jurisdiction is conferred upon the court to hear or entertain an application for relief pursuant to s 222(2) where there is a doubt, on a specific ground, whether a deed was entered into in accordance with Pt X or complies with the requirements of this Part. Further in our view, having had jurisdiction vested in it to hear the application for the relief specified in s 222(2), upon hearing the matter, the court is empowered, by virtue of s 222(2), to resolve the doubt that has been raised by determining the question or questions which arise, and may, if appropriate, make orders of the kind specified in s 222(2). That is to say, if there are, relevantly, two aspects or stages involved in the jurisdiction conferred under this sub-section of s 222. In the first instance, where there is a doubt, that is where a question has been raised, whether Pt X has been complied with in material respects, the court is given the power, by s 222(1), to embark upon an examination of the question raised. Then, by s 222(2), the court is given the authority to adjudicate on the matter. In the exercise of the judicial power and discretion conferred by s 222(2), the court may make orders as there described or it may dismiss the application on the ground that the Act has been complied with or may dismiss it on other, including discretionary, grounds.
Put differently, in our opinion s 222(1) and (2) confers jurisdiction to hear and determine a matter in certain circumstances. The jurisdiction to hear the proceeding arises under s 222(1) where a relevant doubt has been raised. By s 222(2), the power to adjudicate on that question is conferred. It is true that, at the second stage, that is, by the process of adjudication, the doubt may be resolved. But it does not follow that the jurisdiction to entertain the application under s 222(1) is then, retrospectively, lost: cf Burgundy Royale Investments Pty Ltd v Westpac Banking Corp (1987) 76 ALR 173 at 181. Thus, in Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307, Fox J said (at 315):
‘... s 222(1) is predicated on “a doubt” and sub-s (2) provides for a declaration either way, to remove the doubt.’ ”
5 The applicant contends that there is doubt that the deed of arrangement was entered into in accordance with Part X of the Act or complies with the requirement of the Part because:
(a) The debtor signed an authority under the then s 188(1)(f) of the Act on 13 March 1992 in favour of his solicitor to call a meeting of creditors but failed within ten days as required by the then s 188(2)(c)(i) and (ii) to give to the solicitor a statement of the debtor’s affairs or a statement indicating how the debtor proposed that his affairs be dealt with under Part X.
(b) The debtor signed a second authority under s 188(1)(f) of the Act on 14 April 1992 which was the authority relied upon to call a meeting of creditors at 127 Creek Street, Brisbane on 11 May 1992.
(c) The meeting was adjourned by the chairman until 12 May 1992 when no provision of the Act allowed or provided for such an adjournment.
(d) Notice of the adjourned meeting was not given to all of the creditors of the debtor.
(e) The meeting in Brisbane was a sham designed to defeat the creditors of the debtor who were substantially all resident in Victoria.
6 The applicant contends that there is doubt that the deed has been accepted by a special resolution of a meeting of creditors under s 204 of the Act because:
(a) Those who voted as creditors of the debtor in favour of the special resolution were allowed to do so by the chairman of the meeting without proper substantiation of their claimed debts.
(b) The chairman allowed Wannon Holdings Pty Ltd (“Wannon”), Howick Investments Pty Ltd (“Howick”) and Howick Travel Pty Ltd (“Travel”) to vote the whole of the debt claimed by each, where those companies were controlled by members of the debtor’s family, and where part or all of the claimed debt was time barred under a relevant statute of limitations while refusing to allow other creditors to vote in respect of statute barred debts.
7 The applicant also contends that for the purposes of s 222(4)(a) of the Act the debtor gave false or misleading information in answer to a question put to him at the meeting of creditors at which the special resolution was passed. It is alleged that he falsely or misleadingly stated that he had not been a shareholder in any of the companies in the “Compass/Howick/Grey groups” when he had in fact purchased shares in Compass Holdings Ltd and registered the shares in his daughter’s name and had acquired options to acquire shares in Compass Holdings Ltd from a Mr and Mrs Jeffrey. The applicant also contends that the debtor mislead the meeting as to the worth of an alleged cause of action against Carew Counsel & Holmes, solicitors of Melbourne arising out of a sale of his practice to that firm in 1986/87.
8 The applicant also contends that for the purposes of s 222(4)(b) of the Act the debtor omitted a material particular from his statement of affairs given under s 188(2) of the Act by failing to disclose debts due to members of the Victorian Bar. The applicant also contends that the debtor included an incorrect and material particular in the statement of affairs when:
(a) He failed to spell the applicant’s name correctly;
(b) He stated that the applicant’s address and the address of Terry P Murphy were “unknown”;
(c) He inserted in column 5 of Part II of the statement under heading “Year when Contracted” in respect of debts of Howick, Wannon and Travel and that of the ANZ Bank the word “CURRENT” when the alleged debts were not contracted in 1992 but many years earlier.
The Evidence
9 The applicant read in support of his application the affidavits which he filed in the proceedings on 20 July 1998 and 30 November 1998, together with the exhibits to those affidavits, the affidavit of Tien Thuy Tran filed 18 March 1999 as to the conduct of the proceedings in the Supreme Court of Victoria between the debtor and Carew Counsel & Holmes, and the affidavit of the trustee under the deed, Paul Desmond Sweeney filed 24 December 1998. He also relied upon the oral evidence of Andrew Oliver Hewlett, a solicitor, including an affidavit of Mr Hewlett sworn in 1992 (Exhibit 1 in these proceedings), a bundle of documents bearing the name of Gordon and Jackson Barristers Clerks of Melbourne (Exhibit 2), a database search from the Information Division of the Australian Securities Commission in respect of the debtor generated 2 July 1998 (Exhibit 3) and an internal report of Mallesons Stephens Jacques, solicitors of Melbourne as to an inspection of some of the Carew, Counsel & Holmes files dated 14 June 1989 (Exhibit 4).
10 The debtor relies upon an affidavit he filed on 2 March 2000 in the proceedings and the oral evidence which he gave on the hearing. The second respondent, Mr Sweeney the trustee, relies on his affidavit filed 24 December 1998 and the affidavit of Mr Rodgers, his solicitor, filed on 30 December 1998.
11 The applicant produced two volumes of documents entitled “Court Book”. The volumes included the affidavits read on the hearing, other than the debtor’s affidavit, and other documents. The debtor was cross examined by reference to the contents of the volumes. However, they were not tendered and did not form part of the evidence before the Court.
Is there a doubt for the purposes of s 222(1) of the Act?
grounds (a) and (b)
12 The authority signed by the debtor on 13 March 1992 was not an effective authority for the purposes of Part X of the Act. This follows because the debtor failed to give the statements required by s 188(2)(c) within the specified time: s 188(2). Additionally, there is no evidence that the solicitor consented in writing to call a meeting which is a necessary requirement for there to be an effective authority: s 188(2)(a).
13 There being no effective authority in existence there was nothing to prevent the debtor signing another authority. Even if the first authority had been effective but simply had not been acted upon by the solicitor that would not prevent a second authority being given by the debtor and being acted upon as an effective authority for the purposes of Part X of the Act: Re de Kantzow ex parte de Kantzow (1992) 35 FCR 74 at 76; Re Saheed; Saheed v The Official Receiver (1993) 41 FCR 148 at 149 - 150; Hooper v Ewins (1997) 79 FCR 389 at 392.
14 There is no doubt raised for the purpose of s 222(1) on these grounds.
ground (c)
15 The adjournment of the meeting on 11 May 1992 occurred at the request of Mr Hewlett who appeared at the meeting as proxy for the applicant, I Dunlop, T Murphy and N Byrne. Each of these creditors had faxed a copy of a proxy form to the chairman as had the Australia and New Zealand Banking Group Limited. The chairman declared that the proxy forms of the bank, and of the persons whom Mr Hewlett represented, were invalid because they were not original documents. Mr Hewlett did not hold the original proxy forms and sought an adjournment to enable him to obtain the original proxies. This request was declined by the chairman. However, it was brought to the chairman’s attention that the notices calling the meeting stated that proxies could be submitted by facsimile. The minutes of the meeting record :
“The Chairman advised that in his view he was bound by the court decision that a facsimile proxy is deemed not to be lodged with the Chairman and is therefore invalid. However, having regard to the letter forwarded to creditors advising that they could lodge facsimile proxies, the Chairman ruled that in this particular instance it would be proper for him to adjourn the meeting in order to allow the original documents to be lodged with him.”
16 The applicant submits that there was no resolution passed by the creditors attending to allow an adjournment which would satisfy the then s 197 of the Act and that the circumstances do not fall within the then s 201 of the Act.
17 Section 201, in May 1992, provided :
“201. Any question as to the right of a person to vote at a meeting under this Division, or as to the amount of the debt in respect of which a person is entitled to vote at such a meeting, shall be determined by the chairman, who may, if he thinks it necessary to do so, adjourn the meeting for a period, not exceeding 14 days, to enable him to investigate the matter.”
18 Section 201 was concerned with “any question as to the right of a person to vote at a meeting ...” and was not limited to the right of a person to vote: Re Venetoulis; Ex parte Calsil Ltd (1976) 13 ALR 625 at 631. Any question which arose under s 201 was a matter to be determined by the chairman. When the chairman ruled that the proxies communicated by facsimile were invalid at law (presumably by reference to the decision in Re Palazzolo; ex parte Discusso v Palazzolo [1991] FCA 408), he was dealing with a question of the right of those creditors to vote at the meeting. In my view, it was open to the chairman to adjourn the meeting until the next day to see whether the original proxies were produced before finally determining the right of the person to vote at the meeting. The conduct of the chairman, in my view, fell within the power to investigate provided in the then s 201 of the Act.
19 There is no doubt raised for the purpose of s 222(1) on this ground.
ground (d)
20 The next ground which the applicant relies upon is that no notice of the adjourned meeting was given to each creditor. Such a requirement, the applicant submits, flowed from Rule 85A of the Bankruptcy Rules. Rule 85A was introduced into the Bankruptcy Rules by Statutory Rule 194 of 1992. The Statutory Rule was assented to on 23 June 1992 and did not come into effect until 1 July 1992. The adjournment of the creditor’s meeting from 11 May 1992 until 12 May 1992 was not subject to the operation of Rule 85A.
21 There is no doubt raised for the purposes of s 222(1) on this ground.
ground (e)
22 At the time that he signed both the first and the second authority, the debtor worked and resided in Brisbane and had done so for some time. He had sold his solicitor’s practice in Melbourne at the end of 1987 to Messrs Carew, Counsel & Holmes, solicitors, and had not since that time practised as a solicitor in Melbourne. Rather, he had been employed by Compass Airlines Pty Ltd.
23 There is no evidence from any creditor of the debtor that any creditor was unaware of the creditor’s meeting because it was held in Brisbane and was thereby denied a right to attend and vote, a right they would have exercised. There is contained in Exhibit “IAB6” to the applicant’s affidavit filed 20 July 1998 a copy of an article in the “Business Review Weekly” dated 8 May 1992 under the heading “HIGH-FLIER TRIES TO AVOID BANKRUPTCY”. The article, in the first two paragraphs, states :
“Michael Grey, the son of former Compass Airlines chief Bryan Grey and the failed domestic carrier’s vice-president for corporate and legal affairs, will be relying on the support of his family to avoid bankruptcy next week. Grey, 37, has offered his creditors $50,000 and a share of possible proceeds from a legal dispute against total debts of about $1.4 million. Most of the money is owed to Grey family companies and was lent to him this year.
But at least three Melbourne creditors are expected to vigorously challenge the offer, made under Part X of the Bankruptcy Act. The settlement will come to a vote at a creditors’ meeting Grey has called in Brisbane on Monday. The disgruntled Melbourne creditors, all lawyers owed money by Grey for several years, will attempt to block the meeting in the Federal Court this week and delve into the private finances of the Grey family.”
24 The article goes on to set out the contents of the debtor’s statement of affairs and interviews with the applicant, the solicitor for Ian Dunlop, and Mr Murphy.
25 The minutes of meeting of creditors held on 11 May 1992 record that the following persons were present by their proxy Mr Philp, solicitor, claiming to vote the debt set out against each name :
H A Burchill $527.00
J L Batten $150.00
M W Houlihan $170.00
P W McDermott $250.00
R L Berglund $160.00
S Marshall $200.00
G J Herbert $180.00
S Newnham $150.00
G Clarke $680.00
Each of these persons was then a member of the Victorian Bar.
26 Mr Hewlett attended as proxy for the applicant, Mr Dunlop, Mr Murphy and Mr N Byrne who claimed to be a creditor for $81,678.52. Each of these persons appears to be a resident of Victoria.
27 The question of whether the time and location of the meeting are convenient to the majority in number of the creditors was dealt with by s 196(2), which then provided :
“196(2) If the creditors so present determine, by resolution, that the time or place for which the meeting was called was not convenient to the majority in number of the creditors, the meeting shall be adjourned to a time and place determined, by resolution, by the creditors so present.”
28 The issue of the location of the meeting in Brisbane was raised by Mr Hewlett at the meeting on 11 May 1992. The minutes record :
“DECLARATION OF TIME AND PLACE:
Mr Hewlett representing Ian Dunlop advised that his client believed the meeting was not being held at a place convenient as the majority of creditors were in Victoria.
The Chairman noted that Mr Dunlop was in fact represented at the meeting.
Mr Jeffrey representing Wannon Holdings Pty Ltd advised that the meeting was being held at a time and place convenient to his client and the five other creditors he represents. He also noted that Mr Philp also held a number of proxies.
The Chairman asked Mr Philp whether he had any comments as to the venue having regard to the fact that the held a number of proxies. Mr Philp advised that the venue was satisfactory as far as he was aware.
The Chairman asked the meeting for a resolution in relation to the convenience of the meeting. The Chairman specifically asked Mr Hewlett whether or not he wanted to put a motion, but he declined to do so.
There being no resolution, the Chairman declared that the meeting of creditors was being held at a time and place convenient to the majority in number of creditors, and accordingly allowed the meeting to proceed.”
29 In my view, there is no evidence to support a finding that the meetings on 11 and 12 May 1992 were shams. The whole purpose of calling the meetings was that they were valid and effective in law and that the special resolution took effect so as to allow the debtor to avoid being made bankrupt in the proceedings brought against him by Mr Dunlop. As appears from the article in the Business Review Weekly, the applicant and Mr Dunlop were aware that that was the purpose of the meeting and that the meeting was to be held in Brisbane in the week following 5 May 1992.
30 Further, the applicant by his proxy declined to seek a resolution of the creditors present on 11 May 1992 under s 196(2) of the Act.
31 There is no doubt raised for the purposes of s 222(1) on this ground.
was the deed accepted by a special resolution of the creditors?
32 The first ground raised by the applicant that the chairman allowed creditors to vote in favour of the special resolution without proper substantiation of their debts may be dealt with shortly. There is no evidence that the chairman failed to require proper substantiation by those creditors of their claims. The onus of proof in an application under s 222(2) is no different, in my view, to the onus which is borne by an applicant under s 222(4) of the Act; the onus of proof under s 222(4) is borne by the applicant: Re Segal; Lensworth Finance Ltd v Segal (1979) 9 ALR 154 at 158; Musolino v Sidiropolous at 245. A creditor may make known to the person who is elected chairman of the meeting of creditors particulars of the debt sufficient for the purposes of s 198(4) of the Act either before or at the meeting: Re Venetoulis at 630. So too, in my view, could that person investigate the creditor’s right to vote and the quantum of the debt, either before or at the meeting, or upon any adjournment for that purpose under the then s 201 of the Act.
33 The only evidence which touches on the chairman’s requiring substantiation is contained in the minutes of meeting of 12 May 1992 and Mr Hewlett’s affidavit (Exhibit 1) which annexes and confirms those minutes. The minutes record :
“Mr Hewlett representing three creditors requested to inspect the Proofs of Debt lodged by Wannon Holdings Pty Ltd, Howick Investments Pty Ltd and Howick Travel Pty Ltd. Those proofs of debt were made available for inspection. The debtor was asked to clarify the details of the supporting documentation. He did so, explaining the entries made in the books of the companies.
The debtor was asked whether there are any other documents in relation to the loans such as loan agreements. He advised that there was no formal loan agreement. He supposed that they were loans payable on demand. He was asked whether demand had been made. He advise [sic] that no demand had been sent to him personally but that he believes that the lodgement of the Proof of Debt was sufficient demand. He was asked whether there was any security given for the loans. He advised that no security was given.
The representative of the Insolvency and Trustee Service Australia noted that some of the companies debts, if they were incurred prior to May 1986, may be statute bared [sic]. Mr Hewlett pointed out that some entries went back to 1984. The Chairman advised that he was satisfied that the debts were owed.”
34 The evidence does not, in my view, raise a doubt that the debts were not owed by the debtor to Howick, Travel, or Wannon. On the face of it, the minutes favour a finding, if any, is to be made, that the chairman at some time and by some means did satisfy himself as to the quantum of the debts and that they were due.
35 The second ground of complaint that the chairman allowed Wannon, Howick and Travel to vote the whole of the debts they claimed when all or part of the debt was statute barred, is a matter which raises a doubt as to whether the deed was accepted by a special resolution of creditors. The voting on the special resolution was nine creditors amounting to $1,144,473 of the debts, being 76.80 percent “for” and five creditors amounting to $345,725 being 23.20 percent “against”. Of the “for” vote, Wannon, Howick and Travel debts amounted to $1,075,186. If all or any significant part of that debt could not be voted, the special resolution would have failed.
36 The chairman refused to allow Mr Philp to vote as proxy on behalf of seven members of the Victorian Bar on the basis that their fees were rendered more than six years prior to the meeting and were therefore statute barred. No-one has contended before me that the chairman erred in that course. The proofs of debt of Wannon, Howick and Travel relied upon by each to vote at the meeting of creditors on 12 May 1992 in the amount shown in the proof were exhibited to Mr Hewlett’s affidavit and form part of Exhibit 1 in these proceedings.
37 The total debt claimed by Wannon of $541,810.68 is shown as having been incurred in particular amounts each year from 30 June 1987. The oldest portion of the debt was within a six year limitation period.
38 The total debt claimed by Howick is shown as having been incurred by 20 October 1985. That debt was claimed in an amount of $505,069.86 and was outside a six year limitation period.
39 The total debt claimed by Travel of $28,304.57 is shown as having been incurred within a six year limitation period.
40 Two questions therefore arise; whether the debt claimed by Howick was statute barred by a six year limitation period, and if so, whether a “creditor” with a statute barred debt was a creditor entitled to vote under the then s 198(1) of the Act on a special resolution and to have the statute barred debt included in the value for the purpose of satisfying the requirements of a special resolution. If the vote of Howick is excluded, the vote for the deed of arrangement would be eight creditors with debts to the value of $639,403 in favour, and five creditors with debts to the value of $345,725 against the resolution. On those figures, although a majority of creditors voted for the deed, they represented only 65 percent in value and the special resolution would have failed.
41 In my view the applicant has raised a sufficient doubt that the scheme of arrangement has been accepted by a special resolution of a meeting of creditors and I now turn to the resolution of that doubt.
42 To succeed, the applicant has the onus of proof to show that the deed was void because the statutory requirements have not been complied with in that the necessary statutory majority was not achieved. To do this, the applicant is required to prove that Howick was not a creditor in fact, or that there was no debt in the amount claimed: Re McLean ex parte Friends Provident Life Office (1992) 36 FCR 502 at 512; Re Dingle; Westpac v Worrell (1993) 47 FCR 478 at 486, 488; Loeskow v Avokoh Irrigation Pty Ltd [1996] FCA 274 at 19, 20.
43 The decision of the chairman of the meeting was not a final ruling on a debt, but only a ruling in a summary way for the purposes of the meeting: Re Levy ex parte Scholefield Goodman & Sons Ltd (1980) 50 FLR 99 at 112. The ruling gives rise to the case before this Court, but it is irrelevant to its resolution and the Court must itself decide the question on the basis of the material before it: Dingle at 488.
44 The applicant contends that Howick was not a creditor because the relevant statute of limitations period commenced to run from the date the loans from Howick to the debtor were made. At the date of the creditor’s meeting, a period of six years had expired since those loans were made.
45 The loans to the debtor, I find, were advances made repayable on demand. The loan arrangements were never reduced to a written loan agreement and the only evidence of them is the entries in the company records and the debtor’s evidence that the money was advanced to him. Importantly, the debtor did not suggest in his responses at the creditors’ meeting as recorded in the minutes and in Mr Hewlett’s affidavit, nor in his cross-examination in these proceedings, that the advances were subject to any special conditions as to the time from which the lender’s cause of action for debt should run.
46 The debtor, on the hearing of the application, submitted that as the loans were simple advances on demand, the six year limitation period did not commence to run until demand was made. In this case it was submitted that occurred when the proof of debt was executed and delivered to the chairman of the meeting. Neither of these submissions was supported by reference to authority at that time. Later, in written submissions, it was submitted that the cause of action accrued upon the money being lent and the decisions in Ogilvie v Adams [1981] VR 1041 and Young v Queensland Trustees Limited (1958) 99 CLR 560 were cited.
47 In Ogilvie v Adams, Fullagar J said (at 1043 - 1044):
“... Where there is a loan of money simpliciter (ie with nothing at all said as to repayment), the money is repayable instanter. Where there is a loan of money and the borrower contracts to repay on demand, again the money is repayable instanter. Where there is a loan of money which is recorded or acknowleged [sic] by the parties to be a loan repayable on demand, again the money is repayable instanter.
The common law has always regarded the fact of indebtedness as a continuing detention by the debtor of the creditor’s money, and this whether the creditor brought an action of debt or an action in indebitatis assumpsit. Therefore if A lends money to B, then instantly B is detaining A’s money. In order to prevent a cause of action for recovery arising in A instantaneously on paying the money, the parties must expressly contract out of that situation by words clearly inconsistent with that situation. The courts have long since settled it that a mere statement or agreement that the money is repayable on demand (or request or at call) is not sufficient to contract out of that situation where all else that is known of the terms of the contract is that A paid money to B by way of loan. The lender’s cause of action still arises instanter on the receipt of the money by the borrower, so that the lender’s cause of action becomes statute barred at the expiry of six years after the receipt of the money. See, for example, the early cases of Capp v Lancaster (1597), Cro Eliz 548; 78 ER 794; Ashenden v Clapham (1673), 1 Freeman 114; 89 ER 84 Norton v Ellam (1837), 2M & W 461; 150 ER 839; Jackson v Ogg (1859) Johnson’s Reports 397; 70 ER 476 and the recent case of Commercial Union Assurance Co Ltd v Revell [1969] NZLR 106. See also the unanimous dictum of the Full High Court in Young v Queensland Trustees Ltd (1956), 99 CLR 560 at p566; [1956] ALR 939, at p942, per Dixon, CJ and McTiernan and Taylor JJ: ‘A loan of money payable on request creates an immediate debt.’”
See also Stage Club Ltd v Millers Hotels Pty Ltd (1981) 150 CLR 535 at 569 per Brennan J.
48 In the present case the advances made by Howick to the debtor created an immediate debt and Howick’s cause of action became statute barred at the expiry of the six years.
49 The debtor makes no submission that the statement of affairs signed by him on 14 April 1992 listing Howick as a creditor in an amount of $496,508 was an acknowledgment of the debt sufficient for the purposes of either the Limitations of Actions Act 1974 (Qld) or the Limitations of Actions Act (Vic) 1958. Nor is it submitted that if it constituted an acknowledgment effective inter partes, it bound other creditors of the debtor for the purpose of having an entitlement to vote on the special resolution. Absent an effective acknowledgment which complied with the requirements of the operative limitation statute, the debt of Howick was statute barred on 12 May 1992. The debtor, however, makes the submission in his written submissions that if the deed was declared invalid and a sequestration order made, it would be open to him to acknowledge the debt in order that it could be voted on any composition under s 73 of the Act. It is unnecessary to rule on this submission.
50 Was Howick a “creditor” within the meaning of s 198(1) of the Act? In my view it was not. A creditor, for the purposes of s 198(1), is one to whom a debt is immediately due and payable at the time of the meeting and includes a person who, by reason of an existing liability of the debtor, would be entitled to prove in an “hypothetical bankruptcy at the date of the meeting. Such a definition is consistent with the definition of “provable debt” for the purposes of Part X found in the then s 187(2) of the Act. It excludes persons who hold statute barred debts which are not recoverable by suit. The reason statute barred debts are excluded is to be found in the nature of bankruptcy administration and the conversion of effective causes of action into rights to prove given by the Act. It was explained by Kitto J in Motor Terms Co Pty Ltd v Liberty Insurance Ltd (In Liquidation) (1967) 116 CLR 177. His Honour was speaking of the Companies Act 1961 (NSW). He said (at 180 - 181) :
“It is convenient to consider first the question of construction, whether s 221(1)(b), authorises the making of an order where the petitioning creditor’s debt, though not barred under the Statute when the petition was presented, is so barred by the time the petition comes on to be heard. It is a question as to whether the word ‘creditor’ in the section excludes a statute-barred creditor, and, if so, as at what date the court must be satisfied that a petition upon which it is invited to make a winding up order is the petition of a ‘creditor’ in the relevant sense of the word. The application of the word in its most general sense is not affected by the Statute of Limitations, for the operation of the Statute in respect of a debt is only to bar the remedy: it does not extinguish the debt. But in construing statutory provisions for the distribution of assets amongst creditors there is a natural presumption that the only creditors in contemplation are those who, by the operation of the relevant statute in the particular case, are denied a right they would otherwise have had to sue for their debts by action or suit under the general law and are given instead a right to participate in the distribution. ... Under the Bankruptcy Act 1924-1960 (Cth) a creditor’s right to recover his debt by ordinary legal proceedings is taken from him at sequestration (s 60, cf s 63) and the right of proof which he is given in its place is expressly limited to liabilities to which the bankrupt is subject at the date of the sequestration order (s 81). ...
The fundamental notion that special modes of administering assets are for the benefit of those creditors only whose ordinary rights of recovery are withdrawn from them upon the initiation of the special administration was applied by the Court of Chancery in relation not only to bankruptcies and insolvencies but to trusts for creditors and administration decrees in respect of deceased estates. It is a necessary corollary that a person is not a creditor in the relevant sense if, at the time when a right to come in to receive payments under an official administration of the debtor’s assets supersedes an existing right of action or suit, his right of enforcement by action or suit is barred by the Statute of Limitations (if the debt is legal), or would be denied by a Court of Equity on the analogy of the Statute (if the debt is equitable). This was held to be so in bankruptcy in Ex parte Ross; ...”
See also Re Devy; Ex parte BBC Hardware Limited (1996) 67 FCR 355 at 358 - 360.
51 In the case of a meeting of creditors voting on a special resolution, persons who do not hold enforceable debts will not have any effective cause of action taken away and substituted with a right to participate in a distribution under a deed of arrangement if a special resolution is passed. Accordingly, the scheme of the Act does not entitle those persons to vote so as to affect the rights of others who have enforceable debts. Further, a statute barred debt on the date of the meeting could not prove in a hypothetical bankruptcy which commenced on that date.
52 That the right to vote is limited to enforceable debts also appears as a matter of construction of s 198. The structure of s 198 was to exclude unliquidated or contingent debts or debts the value of which was not ascertained (s 198(2)) and to include debts which were certain but which were payable in the future by deeming those debts “to be payable at the time of the meeting”. All other debts to which s 198(1) applied likewise were by the statute required to be payable at the time of the meeting. “Payable” in this sense means, in my view, capable of being sued upon at the date of the meeting as a debt then due and payable.
53 Howick was not a creditor entitled to vote on the special resolution.
exercise of the discretion under s 222(2)
54 I turn now to the question of whether the Court ought, as a matter of discretion, make an order declaring that the deed is void.
55 The applicant submits that the following circumstances favour the making of an order declaring the deed void under s 222(2) and the making of a sequestration order under s 222(7) of the Act :
(a) the return to creditors under the deed will be small or non-existent;
(b) the debtor originally defaulted in complying with the terms of the deed by failing to pay to the trustee the sum of $50,000 as he was obliged to do under the deed;
(c) the litigation against Carew Counsel & Holmes did not, and will not, lead to any significant monies being available to the trustee for distribution under the deed;
(d) there is much unexplained or unclear about the debtor’s affairs which requires to be investigated by a trustee in bankruptcy with the coercive powers given to such a trustee under the Act;
(e) the deed was opposed by everyone other than family and friends of the debtor or by entities controlled by them;
(f) it is in the creditors’ interest and in the public interest that the deed not be allowed to stand.
56 The debtor submits that no order should be made declaring the deed void. It submits that no order should be made because the applicant has delayed too long in the bringing of the application, that it is not supported by any other creditor, that it would be unjust and against the interests of the creditors and the debtor to make the order, and, that there is no demonstrable benefit either to the creditors by declaring the deed void, or by releasing them from the effect of the deed at this time.
57 The delay in filing the application is a serious problem which was not addressed by the applicant in the submissions made on his behalf. The deed was signed on 14 May 1992. On 15 June 1992 Mr and Mrs Dunlop made application to the Court to have the deed declared void and for a sequestration order to be made. The application was Exhibit “E” to the affidavit of Mr Sweeney, the trustee. In its amended form (Exhibit “F”) it particularised each of the matters of complaint raised by the applicant on his present application. The application of Mr and Mrs Dunlop did not proceed and it was dismissed for want of prosecution on 14 November 1994. As appears from a letter from the applicant to the trustees dated 15 November 1993, the applicant was aware of the application.
58 In March 1994, the trustee filed an application in this Court seeking an order to terminate the deed because the debtor had not paid over the $50,000 required under the deed. The debtor took the position that until the application of Mr and Mrs Dunlop to have the deed declared void and a sequestration order made had been determined, he would not pay over the money which was coming from family sources and not from his own resources. The trustee’s application was returnable on 21 April 1994. On the return of the application the debtor paid over a bank cheque for $50,000 and the application was dismissed with costs fixed against the debtor in the sum of $1,500. These matters were advised to the creditors, including the applicant, by letter dated 17 May 1994.
59 On 22 January 1997, the applicant advised the trustee by letter that he had that day briefed counsel to draw proceedings to challenge the Part X deed and sought the trustee’s view on such an application.
60 On 28 January 1997 the trustee advised the applicant that it was not his intention to become involved in any proceedings commenced by the applicant, but that he would refrain from distributing funds in the administration until the application was heard, provided it proceeded without delay. Thereafter, the applicant sent various draft court documents to the trustee seeking comment.
61 On 3 June 1997 the applicant wrote to the trustee as follows :
“Dear Sir,
RE: I A BROTT v M J GREY
Please note that the above matter is currently being considered by the Inspector-General in Bankruptcy. Failing his taking positive action, we shall seek the assistance of the Administration Review Tribunal and Commonwealth Ombudsman.
It is now suggested that ratification of Grey’s application, failing your opposition, or minimally adverse recommendation be stayed until such time as the Inspector-General and Administrative Review Tribunal avenues are exhausted.
In the meantime we attach herewith our Affidavit and again ask your commentary.”
62 The trustee responded by letter dated 10 June 1997 as follows :
“Dear Sir
MICHAEL JOHN GREY (DEBTOR)
ESTATE NO X47 OF 1992
Your Reference: IAB:NM2:H:\04-06-97GREY9
I refer to your facsimile letter dated 3 June 1997 and have noted your comments.
I note that no application has been filed in the Federal Court of Australia for an order terminating the Deed of Arrangement. In previous correspondence I indicated that any application would need to be prosecuted promptly, failing which I would be required to proceed with the finalisation of this administration. I am of the opinion that a period of six months is more than ample time for you to have lodged and prosecuted an application to have the Deed of Arrangement terminated.
The Insolvency and Trustee Service Australia have requested that I refrain from taking any substantive steps towards finalising this administration until they have had the opportunity to review the present position. I have acceded to their request and have provided them with the information they have requested. However, I again point out that I cannot delay the completion of this administration for any length of time.
If any application to have the Deed of Arrangement terminated has not been filed in the Federal Court of Australia by 30 June 1997, I shall proceed with the steps necessary to finalise this administration.
With regards to your intention to bring this matter before the Administrative Appeals Tribunal and the Commonwealth Ombudsman, I fail to see what relevance these bodies have to an application to have the Deed of Arrangement terminated. Your rights as an aggrieved creditor are quite clear; you can make an application to the Federal Court for an order terminating the Deed of Arrangement.
As previously advised to you by both myself and my solicitor, it is not for me, as trustee of the debtor’s Deed of Arrangement, to comment on your draft affidavit. Accordingly I will offer no comment on that affidavit.
If you require any further information please contact Mr Darryl Hickey of this office on (07) 3233 3555.
Yours faithfully,”
63 The applicant responded by letter dated 20 June 1997 as follows :
“Dear Sir
RE: MICHAEL JOHN GREY
Per your kind reply of 10 June, 1997, you will note that it is inappropriate for any application to be made to the Court until the Inspector-General in Bankruptcy completes his investigations and obtains an opinion from Counsel, a process which is underway.
Your views, by return please?
Yours faithfully,”
64 On 3 July 1998 the trustee advised the applicant that he intended to declare a dividend and close his administration of the deed.
65 The applicant finally filed his application on 20 July 1998. At the time he filed the application for an order declaring the deed void and seeking a sequestration order, a period in excess of six years had expired since the meeting of creditors on 12 May 1992.
66 Other than debts which were judgment debts on 12 May 1992, all debts had become statute barred if a relevant statute of limitations continued to run against those debts. If that has occurred the creditors will be seriously prejudiced by an order declaring the deed void and the making of a sequestration order. The creditors would lose the rights which they presently hold under the deed and a sequestration order would operate on such property as the debtor presently has, including so much of the deed funds as would have to be reinstated to him, for the benefit of the debtor’s present creditors who hold debts which are not statute barred.
67 Unless the deed provides otherwise, a deed of arrangement does not operate as a release of the debtor from any of his debts: s 234(1); it merely has the effect that for so long as the deed remains in force, the creditor cannot take any step to obtain a remedy to enforce payment of the debt: s 233(2).
68 Until the deed is declared void by the Court under s 222(2) or s 222(4) of the Act, it remains in force: Bridge v Great Western Portland Cement & Lime Ltd (1932) 48 CLR 522. Once declared void, the deed is no longer binding upon creditors who were previously bound; the operation of s 233(2) ceases and the creditors are entitled to take such steps as are available to enforce payment of the debts, although losing access to the funds held by the trustee: Re Levy at 116.
69 Where a relevant statute of limitation period began to run before the date of the execution of the deed and that period has expired, the debt is statute barred and may not be recovered in proceedings against the debtor where the debtor pleads the limitation statute as a bar to recovery: Benzon, In re Bower v Chetwynd [1914] 2 Ch 68 at 75 - 77; Bowring-Hanbury’s Trustee v Bowring-Hanbury [1943] 1 Ch 104 at 110 - 111; Christensen v Davison [1971] QdR 208 at 211 - 212; Power v Kenny [1977] WAR 87 at 89.
70 Does the execution of the deed of arrangement alter the situation insofar as proof in a subsequent bankruptcy is concerned? In my view, it does not allow a debt which becomes statute barred before the debtor is made bankrupt to be proved in a later bankruptcy.
71 The execution of the deed binds all creditors who have debts falling within the definition of “provable debt” for the purposes of Part X of the Act: s 233(1). Debts are provable for the purposes of Part X if they would have been provable in a hypothetical bankruptcy of the debtor where the date of the bankruptcy is the date of execution of the deed: s 187(2). Only enforceable debts of the debtor at the date of the execution of the deed are caught by the operation of s 233(1).
72 Once a debt becomes subject to the operation of a deed of arrangement under Part X, the fact that it becomes statute barred under a statute of limitations is irrelevant. For the purposes of the administration of the deed time ceases to run; but not for other purposes: Re Benzon at 75; Cotterell v Price [1960] 1 WLR 1097 at 1104 - 1105; Motor Terms Co Pty Ltd v Liberty Insurance Ltd (In Liquidation) at 181. Thus, the fact that the limitation period has expired in respect of debts which were provable at the date of the execution of the deed does not prevent those creditors lodging a proof of debt and obtaining payment of a dividend by the trustee in the administration under the deed.
73 In the event of a subsequent bankruptcy, s 82(1) would determine which debts were provable in that bankruptcy. Section 82(1) provides :
“82(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he may become subject before his discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his bankruptcy.”
74 For the purposes of the present case, the commencement date would be the date the applicant filed his application, in the absence of there being any act of bankruptcy being committed in the six month period immediately preceding the date the application was made: s 115(1); s 222(9). The debts in the present case would not fall within s 82(1) of the Act.
75 Section 222(9) does not, in my view, give a new cause of action to the creditors, or to the creditor who brings the application; the cause of action remains the old debt. Rather, s 222(9) gives no more than a right to apply for a sequestration order: Christensen v Davison at 212. The section does not give any new rights to prove for a dividend in a new fund created by the property of the bankrupt which vests in a trustee on the commencement of the bankruptcy for division amongst the creditors.
76 In Re Benzon, the creditors of two prior bankruptcies of Mr Benzon sought to proceed against a fund brought into being by the exercise of Mr Benzon in his Will of a general power of appointment which he had under the Will of his father. The death of Mr Benzon brought into existence a fund which became available for the payment of his debts, but it was not a fund that passed to a trustee in bankruptcy: [1914] 2 Ch at 74. Their Lordships concluded in respect of the creditors of the two previous bankruptcies, that (at 77) :
“... We think the statute applies and is fatal to the appellants’ case. The fund is only assets for the payment of debts which are not barred, and in fact there are other creditors in this case whose debts were incurred after the bankruptcy but more than six years before the death whose claims have already been rejected. It would be curious if the effect of the bankruptcy were to make these much older claims maintainable.”
77 Section 82 of the Act, in my view, operates to make the observations of the English Court of Appeal apposite to the present case. There is nothing in the Act which expressly or by necessary implication makes the statute barred debts which were the subject of the deed of arrangement, and where they continue to exist, provable in a later bankruptcy, in circumstances where later statute barred debts would not be provable.
78 The circumstance that the creditors would be significantly disadvantaged by declaring the deed void, is in itself a sufficient reason for declining to make the declaration. However, there are other reasons which support such a conclusion. The delay in bringing the application is not reasonable and has caused the trustee to delay finalising administration under the deed. The delay is unexplained and the applicant was on notice not to delay. Delay caused by complaints on the part of the applicant as to the trustee’s conduct of the administration do not provide a reasonable excuse not to act when Mr and Mrs Dunlop did not proceed with their application to set aside the deed.
79 There is no evidence to suggest that there are circumstances to be investigated at this time as to the business and affairs of the debtor in and prior to 1992 or that there is any valuable property which would be available to creditors. The attempt to suggest that the acquisition of the home in which the debtor lives with his wife and child was a matter calling for investigation failed when it was revealed that the debtor’s wife is in employment and purchased the property with her own and borrowed funds from a commercial lender in the normal way. The cross-examination of the debtor as to his earnings as a solicitor seemed more intent on demonstrating that he was practising as a sole practitioner, rather than as an employed solicitor (which may well be the case), when he does not hold a practising certificate to do so, than establishing substantial financial resources from which to pay creditors.
80 It is worthy to note that no other creditor appeared to support the application, although it is clear from the applicant having original printouts for barrister’s fees in respect of fees previously written off, that the applicant has been in contact with persons who may be, or have been, creditors of the debtor.
81 Finally, the rejection of the proof of debt of Howick in the sum of $505,069.86 on the ground that it was statute barred at the date of the execution of the deed will significantly increase the dividend to the other creditors, although the payout will remain exceedingly small.
82 Being unwilling to act under s 222(2), it becomes unnecessary to deal further with the application under s 222(4). Even if the necessary circumstances were made out, I would be prevented from making the order declaring the deed void because of the operation of s 222(5). Where the Court forms the view that there has been a failure to comply with the requirements of the Part, the course is to act under s 222(2) or not at all. Section 236 should not be resorted to in those circumstances: Musolino v Sidiropolous at 246.
83 The application will be dismissed. I see no reason to depart from the position that costs should ordinarily follow the event. In those circumstances, the applicant shall pay the respondents’ costs, including reserved costs, if any, to be taxed, if not agreed.
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I certify that the preceding eighty-three (83) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cooper. |
Associate:
Dated: 29 November 2000
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Counsel for the Applicant: |
Mr A Sandbach |
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Solicitor for the Applicant: |
Issac Brott & Co |
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Counsel for the Respondent: |
Mr M Martin |
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Solicitor for the Respondent: |
Koutsantori & Associates |
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Solicitors for the Trustee: |
Gadens Lawyers |
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Date of Hearing: |
8, 9 10 March 2000 |
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Date of Judgment: |
29 November 2000 |
