FEDERAL COURT OF AUSTRALIA

Meinhardt (Hong Kong) Ltd v William Lindsay Meinhardt (Deceased) & Ors (No 2) [2006] FCA 1323

BANKRUPTCY – deceased estate – whether debt in liquidated sum due and payable – sum advanced by company to director without terms – insolvency of estate – whether estate should be administered in bankruptcy.

Bankruptcy Act 1966 (Cth): s 244(13), s 252A

Administration and Probate Act 1958 (Vic): s 15

Guardianship and Administration Act 1986 (Vic): Pt 5

Rules of the Supreme Court of Victoria:Pt 54

Ogilvie v Adams [1981] VR 1041

Cain v Whyte (1933) 48 CLR 639, 645-646

Rozenbes v Kronhill (1956) 95 CLR 407, 414 & 419

Ling v Enrobook (1997) 74 FCR 19, 24-25

Re Morris (1980) 48 FLR 341

Re Burlock (1994) 49 FCR 522, 531

Hancock Prospecting Pty Ltd v Estate of Hancock (1999) 17 ACLC 681, 693

MEINHARDT (HONG KONG) LTD v WILLIAM LINDSAY MEINHARDT (DECEASED), WILLIAM EDWARD MEINHARDT AND VICTORIA BARBARA TREYVAUD

VID838 OF 2006

JESSUP J

10 OCTOBER 2006

MELBOURNE

THE COURT ORDERS THAT:

1.                  The estate of William Lindsay Meinhardt (deceased) be administered under Part XI of the Bankruptcy Act 1966.

2.                  Each party have leave to file, at or before 4.00pm on 18 October 2006, a memorandum of its, his or her submission as to the costs of this proceeding.

REASONS FOR JUDGMENT

1                     Before the court is a petition pursuant to s 244 of the Bankruptcy Act 1996 (Cth) (‘the Bankruptcy Act’). The applicant seeks an order for the administration of the estate of William Lindsay Meinhardt under Pt XI of the Bankruptcy Act.

2                     As I said in my reasons on a preliminary point published on 22 August 2006 (Meinhardt (Hong Kong) Ltd v Meinhardt (Deceased) [2006] FCA 1106), Mr Meinhardt died on 23 November 2003. He was survived by two daughters from his first marriage, Victoria Treyvaud (the third respondent) and Sally Veall, and a son from his second marriage, William Edward Meinhardt (the second respondent). He left a will which named Timothy Jonathan Browne and Roderick Charles McKenzie as executors. The residuary beneficiaries were the second and third respondents and Ms Veall. No application for probate had been made when, on 23 November 2005, the second respondent commenced a proceeding in the Supreme Court of Victoria against the executors under s 15 of the Administration and Probate Act 1958 (Vic) (‘the Administration and Probate Act’) in which he sought orders that the executors show cause why they should not renounce probate of the will and why administration of the estate should not be granted to State Trustees Ltd. On 22 December 2005 the executors commenced their own proceeding in the Supreme Court in which they applied for probate of the will. On 16 March 2006 the Supreme Court ordered that the two proceedings be heard together. On 4 July 2006, the executors issued a summons in the proceeding which they had commenced under which they sought orders that they have leave to renounce their application for probate in favour of State Trustees Ltd or another nominated corporate trustee. That proceeding, and the proceeding commenced by the second respondent, remain pending in the list of the Supreme Court.

3                     The present proceeding was commenced in the Federal Magistrates Court on 1 May 2006. For reasons explained in my earlier reasons, the proceeding was transferred into this court. The applicant alleges that, at the time of Mr Meinhardt’s death, and at the present time, a debt of not less than $2,000 was and is owing by Mr Meinhardt, and by his estate, to the applicant, such as to give the applicant a cause of action under s 244(1) of the Bankruptcy Act. The applicant alleges that the debt was, and/or is, a liquidated sum payable immediately as required by par (a) of s 244(6). The applicant contends that, in the circumstances and in the exercise of the court’s discretion, an order under the section should be made.

4                     The executors named in Mr Meinhardt’s will originally represented the first respondent, which is the estate. They were, however, excused from further attendance at an earlier stage of the proceeding. Although, as I understand it, they have not yet been given leave to renounce their application for probate in favour of some other person or company, it appears to be common ground in the Supreme Court proceedings that they will not continue as executors.

5                     The application is resisted by the second respondent. His case is that, on the limited evidence before the court, I should not be satisfied that a debt of not less than $2,000 was owing by Mr Meinhardt, or is now owing by his estate; or at least, that I should not be satisfied that any such debt was due and payable immediately or at a certain time. He also contends that, in the court’s discretion, an order under s 244 should not be made.

6                     The third respondent, while not making a submission one way or the other on the question whether an order under s 244 should be made, adopted a position which appeared to be broadly in harmony with that taken by the applicant.

the facts

7                     The applicant - a Hong Kong company - is one of many companies within the Meinhardt group, and was controlled by Mr Meinhardt until shortly before he died. The position then was that 61% of the voting shares in WL Meinhardt Group Pty Ltd (an Australian company) were held by a company controlled by Mr Meinhardt. WL Meinhardt Group Pty Ltd held 100% of the voting shares in three other companies, one of which was Meinhardt International Pte Ltd, which in turn held 100% of the voting shares in three companies, one of which was Meinhardt Asia Pte Ltd, which in turn held 100% of the voting shares in eight companies, one of which was the applicant. Also until shortly before he died, Mr Meinhardt was a director of the applicant.

8                     It appears from the evidence that, over many years, the applicant maintained an account in the name of Mr Meinhardt. Transactions which might, in other circumstances, have resulted in money being paid by the applicant to Mr Meinhardt, or vice versa, were dealt with by way of entries in the ledger for this account, under which a running balance indicated the amount that was owing by the applicant to Mr Meinhardt, or by Mr Meinhardt to the applicant. A number of the transactions recorded in the ledger occurred specifically because Mr Meinhardt was a director of the applicant.

9                     The applicant’s case is that, at the time of his death, Mr Meinhardt’s account showed a debit balance of $HK9,325,904.00. It says that this amount was a debt owing to the applicant for the purposes of s 244 of the Bankruptcy Act, and that it remains owing to this day. As will appear, the sum claimed by the applicant is more than explained by a single transaction which occurred on 31 January 2001, in which an amount of $HK9,451,700.00 was transferred by the applicant to Mr Meinhardt. Whether that transfer was by way of loan, whether it gave rise to a debt and, if it did, upon what terms was the debt to be repaid, are matters which are central to the questions arising under s 244 of the Bankruptcy Act.

10                  The earliest of the ledgers for Mr Meinhardt’s account with the applicant which was in evidence showed that Mr Meinhardt was in debit in the sum of $HK140,332.00 on 30 April 1994. That remained the position two years later, on 30 April 1996. The applicant’s audited accounts for the years ended 30 April 1994 to 30 April 2005 were in evidence. The current liabilities shown on the balance sheet as at 30 April 1996 were greater by an amount of $HK12,117,343.00 than they had been on 30 April 1995. The notes to the accounts indicate that the sum of $HK12,100,000.00 was a current liability by way of ‘amount due to directors’ which had not previously existed. Although this note is endorsed with a reference to a further note, that further note contains only the details of ‘loans to directors’, said to be disclosed pursuant to s 161B(1) of the Companies Ordnance (HK). One of those loans is shown to be the sum of $HK140,332.00 due from Mr Meinhardt, which corresponds with sum by which he was in debit at 30 April 1996 as shown in the account ledger. There is no mention of the $HK12,100,000.00 said to be due to directors. Neither was there any other evidence about this sum. Mr Laurie Smith, the applicant’s Managing Director, who gave evidence by affidavit and viva voce, agreed under cross-examination that there ought to be journals and ledgers in the books and records of the applicant showing from whom the $HK12,100,000.00 was received, to whom it was credited and how it was dealt with subsequently. Mr Bigmore QC, who appeared with Mr Lyons for the second respondent, called for such documents, but they were not produced. I draw no inference from the latter circumstance, since I accept that, in the absence of a notice to produce, the applicant and its advisers had no particular reason to anticipate that such documents would be required. However that may be, the fact remains that a sum of $HK12,100,000.00 appeared for the first time as an amount due to directors in the balance sheet of the applicant on 30 April 1996. Mr Bigmore submitted that, in light of the circumstance that Mr Meinhardt was the director with a majority equity interest in the ultimate holding company of the applicant at the time, it was very strongly within the realms of the possible, if not the probable, that a significant part of this sum was owed by the applicant to him. There was, however, no note of such a transaction in Mr Meinhardt’s account ledger, either then or at any subsequent time.

11                  In the year ended 30 April 1997, in the ledger the sum of $HK140,332.00 was set off against an equivalent sum that, apparently, went back to May 1988, and a ‘profit share bonus’ of $HK3,477,600.00 was credited to Mr Meinhardt. The latter was in accordance with a practice by which the applicant made payments to staff and directors. When there was a profit, 45% of it was distributed as follows: 5% to local working staff in Hong Kong, 20% to local working directors in Hong Kong, and the remaining 20% to what Mr Smith described as the ‘equity shareholder’, WL Meinhardt Group Pty Ltd. However, this last share of the profit was not paid in the form of a dividend: it was paid to those of the directors of the applicant who controlled shares in WL Meinhardt Group Pty Ltd rateably according to that shareholding, but it was paid to them as directors of the applicant. As I have said, Mr Meinhardt’s proportion of the equity in WL Meinhardt Group Pty Ltd was 61%, so he received, as a director of the applicant, 61% of 20% of the applicant’s profit when the board resolved to distribute profit in this way.

12                  The applicant’s balance sheet as at 30 April 1997 showed a liability in the amount of $HK13,475,338.00 as ‘amounts due to directors’, but the relevant note to the accounts provided no explanation as to the make-up of that sum.

13                  In the year ended 30 April 1998, certain entries marked ‘Cons fee’ were debited to Mr Meinhardt’s account as shown in the ledger, and a profit share bonus of $HK2,061,178.00 was credited to him, leaving a credit balance on that date of $HK2,582,818.00. The balance sheet as at 30 April 1998 showed a current liability of $HK7,151,522.00 as ‘amounts due to directors’, but there was no explanation as to the make-up of that sum. Neither was there any explanation of how the amount due to directors had come to be reduced by the sum of $HK6,323,816.00 within the course of the year ending 30 April 1998. As noted above, Mr Meinhardt’s account ledger indicated a reduction in the credit balance in his favour in the sum of $HK894,782.00 over the course of that year.

14                  In the year to 30 April 1999, further sums were debited to Mr Meinhardt, and a sum of $HK2,433,873.00, by way of profit share bonus, was credited, leaving, in the result, exactly that sum as the balance standing to the credit of Mr Meinhardt as shown in the ledger at that date. In the year to 30 April 2000, various sums were again debited to Mr Meinhardt, and the amount of $HK1,987,517.00 was credited by way of profit share bonus. The balance as shown in the ledger at that date was $HK3,427,722.00 to the credit of Mr Meinhardt. In the balance sheet, the current liability item ‘amounts due to directors’ was about $HK7 million at 30 April 1999 and again at 30 April 2000. There remained no explanation as to the make-up of that sum.

15                  This brings me to the year ended 30 April 2001. I have referred to a significant transaction which occurred on 31 January 2001. It came about in the following circumstances.

16                  By letter dated 9 January 2001, Mr Meinhardt wrote to Mr Smith in the following terms:

“Further to your discussions with Rod McKenzie please be advised that it will be necessary to have $2 million Australian forward to my account by the first week in February.

Rod McKenzie has informed me that you made it clear to him during your discussions in Hong Kong that you were not happy about this matter.

I am aware that you are presently refurbishing the office in Hong Kong and have committed a considerable amount of money to this project.

It should be made clear that since founding the firm I have never called for money for personal matters and I am only doing so until I can divest myself of investment properties.

I am also of the belief that I have always made myself available to you as a friend and that should you have ever found yourself in need of support I would always listen.”

Mr Smith gave evidence that Mr Meinhardt required this money in connection with a matrimonial settlement.

17                  Mr Smith replied by letter dated 16 January 2001. He said that he was sorry to learn of Mr Meinhardt’s ‘personal situation’ and said that he wanted Mr Meinhardt to know that he would do all that he could do to help. His letter continued:

“As you will acknowledge, I have to involve the other senior Directors in Meinhardt (Hong Kong) Limited as we maintain a very transparent management style here and in any event two signatures are required on all cheques. Rest assured that your request for confidentiality will be maintained within this small group of people.

We are now looking closely at our available funds, our commitments and liabilities and the business environment and are discussing our capability to meet your requirements. We will respond to you shortly.

In the meantime, I would like you to consider and advise as soon as possible on the following two items.

(i)                 The amount. In our current situation in a very poor market environment, AUD2 million is very difficult for us to achieve without jeopardizing our financial plan. Bearing in mind that we have already given to you AUD1.5 million only 3-4 months ago in September 2000, could you please reconsider how much over and above this already substantial amount you now require.

(ii)               The letter dated 9 January 2001 is signed by Susan Fisher. Obviously we cannot pay out such a sum of money based on this letter alone. I am sure that you will agree that ultimately we will need formal procedures to be followed acceptable to our auditors including a loan agreement to be in place prior to the end of our financial year on 30 April 2001.

I am aware of the urgency of this in that the monies have to be in your account by the first week in February 2001 and I will do all I can to expedite the matter.

Bill, as you know, during all these years I have never questioned your requests. However for funds of this scale that significantly affect the operation of the company I do need justification for the other Directors.”

18                  There is in evidence a letter dated 19 January 2001 from Roderick C McKenzie, a partner in a firm called McKenzie and Partners, addressed to Mr Smith. Although this appears to be the same Mr McKenzie as is one of the named executors under Mr Meinhardt’s will, it was not proved that this letter was sent with the authority of Mr Meinhardt. However, with the consent of the second respondent (who objected to the admission of the letter absolutely) I admitted the letter for the purpose only of demonstrating that a letter in those terms was received by Mr Smith from Mr McKenzie. The letter read as follows:

“Re: Loan W L Meinhardt

Further to our discussions on this matter Bill will require a loan for $2 million. It is agreed that a formal agreement be drafted to document the loan. Perhaps the Loan Agreement could include the following.

1.                  Loan $2 million.

2.                  Interest 4% pa payable yearly.

3.                  Repayment of the loan 2004 or at an earlier date as agreed between the two parties.

Should you have any queries on this matter please contact me.”

19                  Next in time was a letter dated 22 January 2001 from Mr Meinhardt to Mr Smith. It read as follows:

“Thank you for your letter dated 16 January 2001.

I am writing to you to confirm the letter dated 9 January 2001 signed by Susan Fisher.

I am aware that the amount of AUD 2 million is a very large sum of money but as previously stated due to my personal situation I have been left with no choice but to obtain the funds from Meinhardt (Hong Kong) Ltd.

I have been in touch with Rod McKenzie who will put together the documents and loan agreement prior to the end of your financial year on 30 April 2001.

As you are aware of the urgency of this matter, please arrange to have AUD 2 million available to transfer into my account during the 1^st week of February 2001.

I look forward to catching up with you this year in what can only be a better year than 2000.”

20                  By facsimile dated 24 January 2001 addressed to Ms Doris Chung of the applicant, Ms Fisher informed the applicant of a correction to the sum of money which was required. She said that the amount required was $2.2 million. She said that this had to be deposited into Mr Meinhardt’s bank account in Melbourne no later than 5 February 2001. She specified a Bank of Melbourne account in the name of Mr Meinhardt himself as the desired destination for the funds.

21                  By letter dated 30 January 2001, Mr Smith replied to Mr McKenzie’s letter dated 19 January 2001. He said that he had prepared a draft of a loan agreement, which had to be in place before the end of the applicant’s financial year on 30 April 2001. He attached a copy of the draft agreement. The agreement was to be made between the applicant and Mr Meinhardt. In the recitals it was said that Mr Meinhardt had requested the applicant to make ‘an advance’, and that the applicant had agreed to do so. It was said that the sum of $HK9,451,700.00 ‘is advanced as a loan’ to Mr Meinhardt by the applicant. Clause 3 of the draft agreement provided:

“There is no fixed repayment schedule for this loan. However, [Mr Meinhardt] shall repay the loan principal plus interest thereon in full on or before 30 April 2004.”

Interest was to be at the rate of 4% per annum on the outstanding balance. Clause 5 of the draft agreement was as follows:

“[The applicant] shall have the full right to deduct from any money or payment that is payable or due to [Mr Meinhardt] by [the applicant], and by any of [the applicant’s] subsidiary or associated companies, including but not limited to [Mr Meinhardt’s] entitlement of Profit Share from the yearly profit of [the applicant] and its subsidiaries and associated companies. This right shall continue in full force until the loan principal plus interest thereon are fully repaid to [the applicant].”

This draft agreement was never signed by either of the parties. Mr Smith said that he had various telephone calls with Mr McKenzie, and that the latter said that he would do what he could, but the agreement was never signed.

22                  The sum of $HK9,451,700.00 was transferred from the applicant to Mr Meinhardt on 31 January 2001. At the time, this represented $2.2 million in Australian currency.

23                  Mr Meinhardt’s account ledger as at 30 April 2001 showed that there had been, during that year, a series of debits to that account, including the sum of $HK9,451,700.00 to which I have referred. These transactions, together with a profit share bonus of $HK126,536.00, left a debit balance of $HK9,325,164.00 on 30 April 2001. It may be noted that the amount paid to Mr Meinhardt pursuant to his request made in January 2001 was debited to his ledger account with the applicant in the same way as had been many other transactions over the years in which money was applied by the applicant for Mr Meinhardt, such as, for example, the payment of Mr Meinhardt’s Hong Kong tax obligations as they arose from time to time.

24                  In the balance sheet, the current liability item ‘amounts due to directors’ fell from $HK7,109,515.00 to $HK222,717.00 in the year to 30 April 2001. The note to the accounts throws no light on this item. I note that Mr Smith’s letter of 16 January 2001 mentioned that, in September 2000, the applicant had ‘given’ Mr Meinhardt $1.5 million; but the possibility of a connection between that event and the reduction in the amounts due to directors was not raised, and I draw no inference on the subject. The note to the accounts also gives details of the amounts due from directors. Those details reflect the payment which was made by the applicant to Mr Meinhardt on 31 January 2001 and show that, on 30 April 2001, the amount of $HK9,328,914.00 was owing from Mr Meinhardt to the applicant. That is the sum shown as ‘amounts due from directors’ as a current asset in the applicant’s balance sheet as at 30 April 2001.

25                  Also at about this time, Mr Meinhardt’s marriage to his second wife was dissolved. The divorce was finalised on 14 March 2001.

26                  In the year ended 30 April 2002, the only change in Mr Meinhardt’s account as shown in the ledger occurred by reason of the applicant paying a small amount of tax on his account, leaving a debit balance of $HK9,325,532.00 at the end of that year. The applicant’s balance sheet as 30 April 2002 shows the sum of $HK10,840,534.00 as ‘amounts due from directors’; and no amount is shown as due to directors. The notes to the account explain the make-up of the amounts due from directors. Of the sum to which I have referred, $HK9,325,534.00 was said to be due from Mr Meinhardt; and this sum corresponds approximately, although not exactly, with the year-end balance on Mr Meinhardt’s account ledger with the applicant.

27                  Before turning to the applicant’s financial records for the year-ended 30 April 2003, I should note that Mr Meinhardt was, it seems, becoming somewhat infirm by about that year. In late 2002, Ms Veall applied for a guardianship order in relation to Mr Meinhardt pursuant to the Guardianship and Administration Act 1986 (Vic). Subsequently, the second respondent applied for an administrator to be appointed in respect of the estate of Mr Meinhardt pursuant to Pt 5 of that Act. On or about 17 June 2003, State Trustees Ltd was appointed as administrator of Mr Meinhardt’s estate.

28                  In the ledger for Mr Meinhardt’s account with the applicant, as at 30 April 2003 there was a debit balance of $HK9,325,904.00. This was different from the figure 12 months previously by reason of the payment by the applicant of tax on behalf of Mr Meinhardt. The opening balance for the year ended 30 April 2004, however, does not record this sum by way of debit balance. It records the sum of $HK8,978,914.00, a difference of $HK346,990.00. As at 30 April 2003, the total amount shown on the balance sheet as due from directors was $HK10,270,257.00, of which, according to the note, $HK8,978,914.00 was due from Mr Meinhardt, which corresponds with the opening balance of Mr Meinhardt’s account ledger for the year ended 30 April 2004.

29                  How the difference between the sum recorded as the closing balance for the year ended 30 April 2003 and the sum recorded as the opening balance for the year ended 30 April 2004, as shown in the ledger, came about was the subject of some evidence, but, ultimately, remained a little obscure. In his affidavit sworn on 9 June 2006, Mr Smith explained the difference as follows:

“On 30 April 2003, a ‘profit sharing bonus’ of HK$346,990 for the Debtor was recorded by the applicant creditor. That entry was subsequently subject to a partial reversal as to HK$312,771.80 on 8 October 2003. A further adjustment or reversal of HK$34,218, representing the balance of the ‘profit sharing bonus’ recorded on 30 April 2003, was effected as part of year end adjustments for the financial year ended 30 April 2004. I do not specifically recall the reason for those adjustments but I believe it related to an agreement by the shareholders of WL Meinhardt Group Pty Ltd to apply the amounts that would otherwise have been payable towards off-setting loan accounts in relation to Meinhardt USA.”

In the account ledger itself, the following series of entries appears, with respect to the full year ended 30 April 2004:

For the purposes of this proceeding, Mr Smith had caused to be produced a reconciliation of Mr Meinhardt’s loan account with the applicant, of which the following is an extract:

It will be noted that the reconciliation shows the sum of $HK8,978,914.00 as the balance on 30 April 2003. That figure corresponds with the opening balance for the following year as shown in Mr Meinhardt’s account ledger, but not with the closing balance for the year in question. The difference is explained by the entry for 30 April 2003 in the reconciliation, being a profit share bonus for the year ended on that date in the amount of $HK346,990. In the account ledger, there is no reference to that figure, but the second respondent tendered a single page which appeared to be another version of the account ledger for the year ended 30 April 2003. It was headed, in hand writing, ‘audit adjustments’. It contained the following entries:

30                  It would seem that the profit share bonus for the year ended 30 April 2003 was not actually determined until some time after that date but, once determined, was treated as effective on that date and was included in that year. However, as appears from the reconciliation and from the account ledger, in October 2003 Mr Meinhardt’s account was debited with the sum of $HK312,771.80. In the reconciliation, this is said to be by way of ‘reversal of MHK 02/03 PSB’, while in the account ledger the transaction was said to be ‘PAY VICKI PSB02/03-PART & S/O W MAPL USD40098’. The ‘VICKI’ referred to was the third respondent. At that time she was not a director of the applicant; nor, on the evidence (such as it is), as yet the ultimate holder of the 61% equity in WL Meinhardt Group Pty Ltd.

31                  The nature of, and the reasons for, the transaction on 8 October 2003 were explained by Mr Smith in his viva voce evidence as follows:

“What the directors - what the shareholders of Meinhardt group decided to do with this profit share from 2003 was instead of taking that as a profit share, we had some offices in the US which needed some funding and it was decided and agreed by all shareholders, including myself, that the profit share bonus for that year would be - well, what actually happened is that holding company, Meinhardt Asia, provided some funding to our US companies and the shareholders, out of their profit share bonus for that year, refunded that money or actually paid that money as our investment into our US operation.”

What appears to have happened is that the directors of the applicant decided that they would forego a portion of the profit share bonus which they had previously determined for the year ended 30 April 2003. The funds made available by that decision were sent to Meinhardt Asia Pte Ltd, and that company in turn transferred the funds to an entity or entities constituting what Mr Smith described as the ‘US operation’.

32                  It is less clear exactly how the debit entry of $HK34,218.20 on 30 April 2004 came about, and why. The relevant notation in the account ledger reads ‘PSB 02/03 TO VICKI NOT WLM’, and the best I can gather from Mr Smith’s own recollection of these events was that, at some point in the calendar year 2003 at the latest, the applicant came to regard the third respondent as ‘representing’ the 61% equity interest which had been held by Mr Meinhardt. It appears that the unreversed balance of the profit share bonus for the year ended 30 April 2003 was debited to Mr Meinhardt’s account; it may have been credited elsewhere to an account in the name of the third respondent, but that does not appear.

33                  On 12 November 2003, Mr Meinhardt retired as a director of the applicant, and the third respondent and her husband Phillip Treyvaud were appointed as directors. Also in (or, possibly, about) November 2003, the 61% shareholding in WL Meinhardt Group Pty Ltd which had been held by a company controlled by Mr Meinhardt was transferred to a company controlled by the third respondent. There is no evidence as to the exact timing, or circumstances, of this transfer. As I have indicated above, at the time, Mr Meinhardt’s estate was under the administration of State Trustees Ltd.

34                  Returning to the ledger for Mr Meinhardt’s account with the applicant, as at 30 April 2004 the debit balance was the same as it had been 12 months previously, ie $HK9,325,904.00. However, the balance sheet as at 30 April 2004 shows the sum of $HK1,304,238.00 as being the amount due from directors, a reduction by the amount of $HK8,966,019.00 since the previous year-end. Almost the whole of this reduction was explicable by the removal of Mr Meinhardt’s account from the line dealing with amounts due from directors, since he was, by 30 April 2004, no longer a director of the applicant. Correspondingly, there had been an increase in the current asset ‘sundry debtors’.

35                  On 29 January 2004, the applicant’s auditors noted the death of Mr Meinhardt, and asked the applicant to provide an acknowledgment from Mr Meinhardt’s executor with respect to what was described as the loan due from Mr Meinhardt to the applicant in the sum of $HK9,451,700.00 as at 30 April 2003. Mr Smith, on behalf of the applicant, wrote to the executor of Mr Meinhardt’s estate, referring to what was said to be a loan made to Mr Meinhardt in the sum of $HK9,451,700.00 on 30 January 2001 ‘with a repayment date of 2004 or earlier’. He said that the loan was still outstanding. His letter continued:

“We are required to inform your goodself that the Company has a claim against Mr Meinhardt’s estate for a net amount of HK$9,325,904 due from Mr Meinhardt being:

·    Loan from the Company HK$9,451,700

·    LESS Amount due to Mr Meinhardt by the Company (125,796)

Net amount due to the Company as of 28 Jan 2004 HK$9,325,904”

This letter came to the attention of the third respondent, who replied to Mr Smith on 16 February 2004 in terms which could fairly be described as embodying a sense of affront that Mr Smith should act like a debt collector so soon after Mr Meinhardt’s passing. In the course of her letter, the third respondent said:

“At our last meeting in Australia, I assured you that the loan would be repaid to the company when my father passed away. At the time, I would never have believed that it would be so soon.”

Mr Smith replied to the third respondent by letter dated 17 February 2004, which contained the following passage:

“While the circumstances are difficult, the fact is that we have a duty to register our claim in a timely manner with the executors as part of normal business and accounting procedures. This loan has been an issue raised by our auditors every year which has now taken on a different aspect with the passing of Bill and my letter was written on their instigation. I have not asked for actual repayment and I am not a debt collector.”

36                  One of the named executors under Mr Meinhardt’s will, Mr Browne, swore an affidavit upon which the applicant relied. In that affidavit, Mr Browne said that, as he and his co-executor had not been granted probate, they did not have access to all of Mr Meinhardt’s records. However, they had, to the best of their abilities, identified the assets and liabilities of Mr Meinhardt’s estate. Mr Browne deposed that, according to the calculations of his solicitors, the assets of the estate were approximately $2,084,197.15 and the liabilities were approximately $2,421,360.25. The latter included what was described as ‘loan to deceased’ by the applicant in the sum of $1,596,268.36 (being, apparently, the Australian dollar equivalent of $HK9,325,904). Mr Browne also swore:

“As a result of our review of the financial position of the estate, Mr McKenzie and I remained of the opinion that, on its face, that the estate was insolvent at the time of the deceased’s death. We also formed the view that, unless sufficient creditors agreed to forgive sufficient debts to put the estate into solvency, there was no realistic prospect of the estate becoming solvent in the future.

We also realised that unless Mr McKenzie and I were able to secure an unconditional forgiveness of sufficient debts so that the estate could be administered as a solvent estate, we were potentially personally exposed for the costs and expenses of acting as Executors, as well as the costs and expenses of continuing with legal proceedings. This would be in circumstances where we were unsure that we would be able to call usefully on an indemnity from the estate assets, particularly if a creditor of the estate made an application for the estate to be administered as under Part XI of the Bankruptcy Act 1966.”

the debt owing to the applicant

37                  On any view, if the transaction of 31 January 2001 is not included, Mr Meinhardt’s account with the applicant was in credit at the time he ceased to be a director of the applicant in November 2003, and would have remained in credit thereafter, notwithstanding other transactions that may have occurred. Accordingly, the nature of the transaction on 31 January 2001 is critical to the question arising under s 244(1) of the Bankruptcy Act. Mr Bigmore accepted that there was a transfer of funds from the applicant to Mr Meinhardt in January 2001 in the amount indicated in the ledger for Mr Meinhardt’s account. He accepted also that the transfer was not by way of gift, and that it was proper for that amount to be debited to Mr Meinhardt. He submitted, however, that the applicant had failed to establish ‘that the advance was a loan upon any particular terms’. It followed, he submitted, that I should not be satisfied that there was, at the date of Mr Meinhardt’s death, or that there is now, a debt by way of a liquidated sum payable immediately, or at certain future time. He pointed to the note on the audited accounts for the year ended 30 April 2001 to the effect that loans to directors were in the nature of current accounts, and had no fixed repayment terms. Mr Bigmore submitted that the arrangement between the parties, properly understood, was that the applicant could never call for repayment of the whole sum; rather, repayment was to be effected by the periodical crediting to Mr Meinhardt’s account of sums allocated by way of profit share bonus from time to time. That being the case, there was never a debt payable immediately or at a certain future time as required by s 244(6) of the Bankruptcy Act.

38                  Mr Sifris QC, who appeared with Mr Fary for the applicant, submitted that, whatever label one attached to the transaction of 31 January 2001 (advance, loan, etc), manifestly the money was transferred other than by way of a gift. That meant that it had to be repaid at some stage, and the question then becomes – what were the agreed terms of repayment? Mr Sifris submitted that there could only be two possibilities: an implied agreement to repay in accordance with the draft agreement forwarded by Mr Smith to Mr McKenzie on 30 April 2001, or no agreement on the subject at all. If the former, the transfer was repayable, with interest, on 30 April 2004. There would then have been a debt within the terms of par (c) of s 244(1) of the Bankruptcy Act. If the latter, in accordance with common law principles, there would have been a debt repayable at every point in time since the money was advanced.

39                  I am not satisfied that the applicant and Mr Meinhardt ever agreed upon the terms contained in the draft agreement forwarded by Mr Smith on 30 January 2001. There is no evidence of Mr Meinhardt’s reaction to that draft; indeed, there is no evidence that the draft was ever brought to his attention. Although Mr Smith said that he mentioned the need for an agreement to Mr McKenzie on occasions, there is no evidence that Mr McKenzie had any authority from Mr Meinhardt which would be relevant to this transaction. Even if I had concluded that the letter of 30 January 2001 was brought to Mr Meinhardt’s attention, I would not be prepared to infer that, by his silence, he implicitly accepted the terms thereof. Neither would any principle of estoppel or preclusion operate against Mr Meinhardt or his estate by reason of the fact that, knowing the terms desired by the applicant, he accepted the transfer of $2.2 million without reservation. The copy of the letter from Mr Smith to Mr McKenzie dated 30 January 2001 which is in evidence is a file copy produced from the records of the applicant. Save for the date shown on that copy, there is no evidence as to when, or by what means, the letter was transmitted to Mr McKenzie. Since the funds were transferred into Mr Meinhardt’s bank account in Melbourne only one day after the date shown on the file copy of Mr Smith’s letter, even if I were prepared to infer that the letter came to Mr Meinhardt’s attention, I could not infer that it did so before the money was received by him. For all the court knows, if the letter did come to Mr Meinhardt’s attention, by the time it did, he may well have used the transferred funds for the personal purposes which he had in mind.

40                  Before turning to the alternative proposition advanced by Mr Sifris, I should consider Mr Bigmore’s submission as to the terms under which the money transferred on 31 January 2001 would be repaid by Mr Meinhardt to the applicant. As I have stated above, Mr Bigmore said that this could occur only by way of off-setting credits to Mr Meinhardt’s running account with the applicant when the board of the applicant allocated the appropriate share of a profit share bonus in favour of Mr Meinhardt. There is no evidence before the court that the parties agreed upon any such term, and I can think of no reason why it should be regarded as intrinsically more obvious than other possibilities. It is true that, on the evidence before the court, there was something in the nature of a running account which Mr Meinhardt held with the applicant, and that that account was credited and debited from time to time in accordance with transactions between the parties. This included some transactions which were set-off, to an extent, against the debit balance generated by the transaction of 31 January 2001. I can, however, think of no reason why I should treat these pragmatic arrangements as giving rise to terms which defined the parties’ rights and obligations in relation to the transaction in question. In particular, it is not at all obvious that the applicant would have placed a fetter upon its own right to recover the sum in question by reference to what, on the evidence, might well have proved to be a most uncertain future flow of credits to Mr Meinhardt. Although the matter was not argued before me in this context, the essence of Mr Bigmore’s submission is that there was a contract between Mr Meinhardt and the applicant which contained an implied term to the effect that repayment would be effected only by the crediting of profit share bonus allocations from time to time. The circumstances in evidence before the court are a very long way from satisfying the requirements for such a term to be implied.

41                  I hold that, in January 2001, Mr Meinhardt requested the applicant to advance him a sum of $2.2 million, that the transaction was not a gift, and that there were no specific terms as to repayment. The evidence shows a practice employed as between the applicant and its directors by which there were loans made to directors by the applicant, and to the applicant by directors, from time to time. These were recorded in the accounts as ‘amounts due from [or to] directors’. The transaction of 31 January 2001 gave rise to such an entry in the audited accounts. The note to that entry was that the accounts with directors were ‘in the nature of current accounts … unsecured, interest free and [having] no fixed terms of repayment.’ This language bespeaks a loan on current account such as would constitute a debt. It is true that these are the words of the applicant, not Mr Meinhardt, but they were to be found in the audited accounts of the applicant which, as Mr Sifris submitted and I accept, would have been perused by Mr Meinhardt: indeed, subject only to the possible onset of his infirmity, as representing the majority equity interest in the applicant, it is highly probable that Mr Meinhardt was conscious of the way in which the transaction of 31 January 2001 was represented in the applicant’s accounts. I hold also, therefore, that that transaction was by way of a loan, and it gave rise to a debt in the amount of $HK9,451,700.00.

42                  I turn then to Mr Sifris’ alternative submission as to repayment, namely, that Mr Meinhardt’s obligation with respect to repayment was of a kind identified by Fullagar J in Ogilvie v Adams [1981] VR 1041. His Honour held that, where there is a loan with no agreed terms of repayment, no demand was necessary to found a cause of action for repayment, the cause of action having commenced instanter upon the making of the loan. He continued ([1981] VR at 1043):

“Where there is a loan of money simpliciter (i.e. 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 acknowledged 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 has 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.”

I consider that Fullagar J’s judgment in Ogilvie v Adams is applicable to the circumstances of the present case. A debt was due and owing by Mr Meinhardt to the applicant at every point in time after the money was advanced on 31 January 2001. Subject to the possibility that the debt may have been repaid, in whole or in part (or, which is the same thing, that Mr Meinhardt’s account with the applicant may have been credited sufficiently to extinguish all or part of the debt), the debt was payable immediately at all times since then, including the date of Mr Meinhardt’s death, and every date since then. It remains outstanding and payable immediately.

43                  The qualifications to which I referred parenthetically in the previous paragraph are, however, important ones in the present context. Mr Bigmore made two submissions about the other transactions which occurred as between Mr Meinhardt and the applicant, and about the prospect of yet further transactions having occurred between them that were not fully disclosed in the evidence. He said that, in the light of those transactions and those possibilities, the court could not be satisfied that, at the date of his death or at any time thereafter, a proper and thorough reckoning of Mr Meinhardt’s account with the applicant would demonstrate that he owed the applicant not less than $2,000. There are two aspects of the account with the applicant that should be considered in this regard. The first is the ‘amount due to directors’ in 1996 in the sum of $HK12,100,000.00 to which I have referred in par 10 above. It is possible that a substantial part of that sum was due to Mr Meinhardt. It is equally possible that the unexplained reduction in this sum in the year ended 30 April 1998 was, to some extent at least, referrable to Mr Meinhardt’s account, and should have been recorded in the ledger. To say anything about the probabilities in this regard, however, would be pure speculation. On the existing state of the evidence I am not satisfied that transactions prior to 31 January 2001 as between Mr Meinhardt and the applicant were not properly recorded in the account ledger. Although I allow for the possibility that the account ledger may not have been accurate in every respect, I can but act on the evidence before the court. On that evidence, immediately after the transaction of 31 January 2001, Mr Meinhardt’s account was in debit in the sum of $HK9,325,164.00.

44                  Turning to the period subsequent to the transaction of 31 January 2001, Mr Bigmore submitted that the circumstances in which the board of the applicant declared a profit share bonus for the year ended 30 April 2003, and later reversed it, were ambiguous at best and, at worst, amounted to a diversion of at least a portion of that bonus from Mr Meinhardt to the third respondent. Although Mr Bigmore made it clear that he was not suggesting fraud or bad faith on the part of any person, if the result of those transactions was such a diversion, it would have the result that the account ledger did not accurately the state of Mr Meinhardt’s account with the applicant as at the date of his death. As to the reversal of the profit share bonus recorded in the ledger on 8 October 2003 ($HK312,771.80), I am satisfied on the evidence that this was a regular, and effective, transaction the result of a lawful resolution of the board. As to the transaction recorded at 30 April 2004 and marked ‘TO VICKI, NOT WLM’ ($HK34,218.20), I cannot make any finding that would assist the second respondent. I do accept that the position contended for by Mr Bigmore is within the range of possibilities. If that position is correct, however, because the amount involved is rather small, there would still be a very considerable sum owing by Mr Meinhardt’s estate to the applicant.

45                  Mr Bigmore also advanced an argument which, if correct, would mean that Mr Meinhardt ceased to be under any obligation to repay to the applicant the sum which was lent to him on 31 January 2001. He argued that, by giving Mr Smith the assurance to which she referred in her letter of 16 February 2004 (set out in par 35 above), the third respondent assumed liability for the repayment of the loan. I do not think there is any substance in is submission. The evidence is altogether too slender to justify a conclusion that the third respondent intended to assume the debt or, perhaps more importantly, that the applicant was content to surrender the rights which it had against Mr Meinhardt in favour of corresponding rights as against the third respondent. If this conversation did occur as suggested, the most probable construction to place on it was that the third respondent was doing no more than suggesting that Mr Smith not harass Mr Meinhardt for the repayment of the loan, but await the distribution of his estate.

46                  Mr Bigmore accepted that it was not necessary, under subs (1) and subs (6) of s 244 of the Bankruptcy Act, for the court to be able to specify a particular sum which constituted the debt which was owing. In the present case, I am satisfied that, at the time of his death, Mr Meinhardt owed the applicant a debt of not less than $2,000, the amount of which was calculable as a liquidated sum, and that the debt was then immediately payable to the applicant. I am also satisfied that a debt in a liquidated sum has remained due, and immediately payable at every time, since Mr Meinhardt’s death. Since it is common ground that Mr Meinhardt’s circumstances, at the time of his death, satisfied at least one of the conditions set out in par (b) of s 244(6), it follows that the factual elements necessary to enliven the discretion of the court under s 244 exist. It is to the discretionary considerations that I shall next turn.

the discretion under s 244

47                  Under Div 2 of Pt IV of the Bankruptcy Act, upon proof of the factual requirements set out in s 43 and s 44, and provided the debt remains owing, the creditor will be regarded as prima facie entitled to an order for sequestration: Cain v Whyte (1933) 48 CLR 639, 645-646; Rozenbes v Kronhill (1956) 95 CLR 407, 414 & 419; Ling v Enrobook (1997) 74 FCR 19, 24-25. The court has a discretion to dismiss the petition either if it appears that the debtor is able to pay his or her debts or if for some ‘other sufficient cause’ a sequestration order should not be made: s 52(2). Although, under par (b) of s 52(2), the discretion is a broad one, it is the debtor who will carry the onus of persuasion, as it were.

48                  The scheme of Pt XI is different in two respects. First, there is no requirement of an act of bankruptcy as there is under Div 2 of the Pt IV; and secondly, a demonstrated ability on the part of the estate to pay its debts is not, in terms at least, a basis upon which the court might dismiss the petition under s 244. These differences raise the question whether, subject only to sufficient cause being shown under subs (12) of s 244, the court should treat the creditor as prima facie entitled to an order upon proof of the factual matters required, as would be the case under Div 2 of Pt IV. In Re Morris (1980) 48 FLR 341, CA Sweeney J dealt with an application for a sequestration order consequent upon an order avoiding a debtor’s composition pursuant to the then provisions of s 222 of the Bankruptcy Act. The making of that order was to be treated as the presentation of a creditor’s petition, but it was provided that certain provisions, including subs (1) and subs (2) of s 52, would not apply in the proceedings which followed. His Honour said (48 FLR at 352):

“It is true that s. 222(9) provides that the provisions of sub-ss. (1) and (2) of s.52 do not apply in relation to an application made under sub-s. (9). However, the debtor committed an act of bankruptcy when he signed the authority under s. 188 and the applicant seeks an order of sequestration. IT seems to me that, by parity of reasoning, it is appropriate that, prima facie, the court should proceed to make an order of sequestration, unless some cause is shown to outweigh the considerations noted in the High Court. In my opinion, no such cause exists in the present case.”

49                  This passage, which was approved by the Full Court in Re Burlock (1994) 49 FCR 522, 531, shows that the statutory predisposition in favour of a debtor which is an accepted feature of Div 2 of Pt IV exists also under some analogous provisions of the Act, if for no other reason to avoid what the Full Court referred to as ‘serious anomalies’.

50                  However, a feature of s 222 upon which Sweeney J relied was the circumstance that, under Pt X of the Bankruptcy Act, the composition required the debtor to have signed, and the debtor had signed, an authority under s 188, which was itself an act of bankruptcy. Acts of bankruptcy are no part of the scheme of s 244, a distinction which affects the utility of Re Morris in the present circumstances.

51                  It seems unlikely that the legislature would have intended that the mere existence of a liquidated debt which is payable immediately should cast the onus on to the estate to demonstrate some ‘sufficient cause’ why an order under s 244 should not be made. That would give rise to an anomaly apropos the circumstances of living debtors. I prefer the view that the discretion under subs (11) and subs (12) of s 244 is open, and should not be guided by any predisposition to make an order unless the debtor demonstrates sufficient cause to the contrary. This appears to have been the view of Tamberlin J (and of the parties before him) in Hancock Prospecting Pty Ltd v Estate of Hancock (1999) 17 ACLC 681, 693, where his Honour referred to ‘a broad discretion … to make the order or dismiss the petition’.

52                  On the other hand I recognise that the discretion (like all broad statutory discretions) must be exercised in harmony with the scheme and objects of the Bankruptcy Act as a whole, and with those of Pt XI in particular. As to the latter, an apparent, albeit unstated, object is to provide for an efficacious procedure in bankruptcy in the case of a deceased estate which is, as far as may be, analogous to that available under the Act in the case of living debtors. In this regard, the solvency or insolvency of the estate will obviously be relevant: if the estate is clearly solvent, there would be no particular reason to doubt the efficacy of the usual procedures for the administration of a deceased estate under state law. If the estate is clearly insolvent, recourse to procedures under the Bankruptcy Act would more naturally be indicated.

53                  Mr Sifris accepted that the discretion under s 244 is a broad one, but the apparent insolvency of Mr Meinhardt’s estate was the single most important discretionary consideration on which he relied in pressing for an order. The applicant led evidence which demonstrated that, when the debt owing to itself was taken into account, the liabilities of the estate exceeded the assets by more than $400,000. Mr Sifris pointed out that, in Hancock Prospecting, Tamberlin J considered that insolvency ‘will often be a most important matter to take into account in an appropriate case’ arising under s 244 (17 ACLC at 693). He submitted that, once apparent insolvency was established, the rights of creditors became paramount, and the rights of beneficiaries under the will were properly to be regarded as subordinate. He submitted that Pt XI of the Bankruptcy Act contained the most appropriate statutory framework for this purpose.

54                  Mr Bigmore opposed the making of an order on several grounds. He submitted that, looked at broadly, the circumstances of the present case substantially reflected a dispute between half-siblings as to their respective entitlements arising under their late father’s estate. He did not submit as much in terms, but the majority interest of the third respondent in the applicant, and the fact that the applicant’s claim against the estate (if established) would have the effect of extinguishing the second respondent’s inheritance, were silent themes throughout the course of his submissions. He also submitted that, if no order were made, the matter of the administration of the estate would continue to be dealt with pursuant to the Supreme Court proceedings to which I have referred, where the interests of the beneficiaries under Mr Meinhardt’s will would be appropriately protected. He said that an administrator would necessarily be in possession of all documents and records which would be relevant not only to the rights of creditors as against the estate but also to the rights of the estate as against creditors and, of course, to the interests of the beneficiaries in the estate. He submitted that it should not be assumed that an administrator appointed under the Administration and Probate Act would be incapable of administering an insolvent estate, and he referred to s 39 of the Administration and Probate Act in this regard.

55                  I am not disposed to treat the proceeding as substantially a dispute between half-siblings. The applicant is a trading company in its own right, and cannot be regarded as merely part of the Meinhardt family, or as an extension of the third respondent. It would be wrong, I consider, for the court to depreciate the importance or legitimacy of the applicant’s claim merely by reference to the third respondent’s majority equity interest in the applicant. I recognize the position in which the second respondent finds himself, but the fact is that, in January 2001, his father was in circumstances in which he had insufficient money for his then needs and he was able, perhaps happily for him at the time, to call upon the applicant to help out. As the contemporaneous correspondence from Mr Smith indicates, the applicant took the transaction seriously, and appeared to do what it could, within reasonable bounds, to have the transaction duly documented as a loan. In these circumstances, I do not consider it appropriate to view the current dispute primarily through the prism of intra-family relationships, as it were.

56                  I agree that the Administration and Probate Act contemplates that an estate may be insolvent, and requires, in such a case, recourse to the same rules that would apply under the Bankruptcy Act (see s 39 of the former Act). But the suite of powers, and established procedures, that is available to the trustee in bankruptcy - modified specifically for the circumstances of an insolvent estate (see s 248) - is more extensive, more specifically focused upon circumstances of insolvency and, I believe, generally more likely to be efficacious in the result, than would be the powers correspondingly available under the Administration and Probate Act. If, under an administration pursuant to Pt XI of the Bankruptcy Act, the debts of the estate cannot be paid in full, there will be no assets for distribution amongst the beneficiaries under Mr Meinhardt’s will; it could hardly then be claimed that there was any particular advantage in an administration pursuant to the Administration and Probate Act. If, on the other hand, during a Pt XI administration, it transpires that all the debts of the estate can be paid in full, and those debts are paid in full, the order under s 244 would thereupon be annulled by the operation of s 252A of the Bankruptcy Act. The remaining assets in the estate would then be distributed according to the will of the testator and the requirements of the Administration and Probate Act. Although it may be thought that there is a certain inconvenience in such a possible two-stage process, it would at least be, in my view, a fair and appropriate one, in that the rights of creditors would first be protected under the Bankruptcy Act, and, if the situation arises, the rights of beneficiaries would then be advanced under the Administration and Probate Act.

57                  In the result, the most powerful consideration which I take into account is that, on the earlier findings I have made, it is apparent that Mr Meinhardt’s estate is insolvent. Were this not the case, or not so clearly the case, the balance of discretionary considerations may well have tilted the other way. However, in the circumstances which do obtain, protecting the rights of creditors is a most important consideration, being an objective which, after all, underlies Pt XI no less than other provisions of the Bankruptcy Act.

58                  In all the circumstances, I conclude that it is appropriate to grant the applicant the relief which it seeks, and I propose to make an order under s 244 of the Bankruptcy Act.

Associate:

Dated: 10 October 2006