CATCHW ORD S BANKRUPTCY - Composition - Application to declare void - whether $.109 priorities applicable to composition - whether credstors enlitled to agree to priorities. Bankruptey Act 1966 58.109, 187, 204, 213, 218, 322, 238, 239, 243. Ke! ERAULEY JOHN JACOBS Ex varte! REGINALL WILL TAM, O" CONNOR FISHER J. AUELA LDF 29 FERRUARY 1984. OF SOUTH AUETRALZIA ee re een "4 i! Ii THE COUFT OFDER ih No.21 of 1982 J. Hi) " ran ft js A. 1D tj ioe a c ft bl ud ia nd ul ci IN THE FEDERAL COURT OF AUSTRALIA ) EOUTH AUSTRALIA DISTRICT RECISTRY GEYEPAL DIVISION Wo.21 of 1983 BAURROUPTCY PIETRICT OF THE STaAtEe OF} SOUTH AUETRALIA Fe REASUNS FOR JUDGMENT FISHER oJ. The applicant ain this matter ais the Fegistrar in Bankruptcy for the Bankruptcy District oar South Australia. He makes application pursuant to 5.2272 of tne Bankruptcy Act 1966 ("the Act") For an order declaring void a composition of Bradley Jenn dacons ("the debtor"), Tis composition was accepted by the creditors of the debtor under Fart HX of the Act on 1 June 1982. The Gebtor''s proposal was in writing and was vlared hefore a culy convened meeting of creditors on that date. The provosal was hort and is as follows: % rit) IHrtianm ran be In Seaview Road, He State of SBoutn Australia, Ch 5 i 15 KEVIN MrCHarth PIPKIN co1 134 Greenhill ad, Unley ain the saia State, Chartered Accountant, to cail a meeting pursuant to Fection he Bankecuptcy Act 1966 (as amended), ne said BRADLEY JOHN JACuSe, DO HEPEBY KARE ing prcoposail an full and saticra teh toi IH rt no f] Bw u "3 Io cevaenant to Etee the sum of SEN 2 weelt, the Iiret oF v 7 2 seven (7) dave alter tne date on SB #pecial rescluction ay ea = for the accettance of this my Co a = OS0Mn passea until sach tine as ail my priority depts have been paid in full and the 1 a in the dollar nas Deen pa 2 omy mon-pricsity genre. shall arpiv any moneys rereivea hy zQ. 0 6this)§ Composition in making creditors an creer pr 4 5 of the card - i kad been ceptance of This Composition 15 mace the saic Act. DErINITLONS in Eections 5 and tO the terr= use bts of ir opriori-y 1400 Act hat Re Cate on 5 i @ accercting Cc at aing the t na tne 2. 5 mp he Cantr ung Trus he Cente rerterred At EeEcciogn (insotar Lat . NON-PRIORITY DEBPS: maans provable debts of the debtor owing as at the date of the passing of the resolution accepting this Composition other than the priority debts. DATED this 1 day of dune 19583. by the said BRADLEY ACORS in the presence Signed B. Jacobs asfh S concern 1s with clause the uw proposal, providing as it does for payment in full of debts which are entitisd to priority under 5.109. Stated in the terminology of 5.222 of the Act pursuant to which section his application 1s i] mache, ne has a acubt whether a proposal for a composition ba ps containing such a4 provision 1s capable cceptance hy s im] resolution under sub-s.204(1) of the Act. The matter was fully el and a Ww argued by three coun 1t 1s apparent that it raises questions concerning the essential nature of ai statutory composition, it = necessary at the outset to set out the H relevant provisions of the Act. 'art A of the Act preecrahes the manner in which debtors e ty may rake bhinding arrangements with their creditors without sequestration. Section 187 defines, inter alia, a composition as foellaws: "1L87(1). in this part, unless the contrary intention appears - "Composition" means an arrangement (not being r - an arrangement entered into for the purposes of a Proclaimed law) by which the creditors of a debtor - ta) agree to paynent of the debts due to them hy instalments; or (Bb) agree to accept, in full satisfaction cf the debts due to them, less than the full amount of those debts, whether in the form of money or other property and whether by ainstalments or otherwise;" Tne eesential difference between a composition on the Tt one hand and a deed of arrangement or a deed of assignment, heing the other forms of statutory arrangements outside bankruptcy, is made apparent by further definitions. 12 affairs of ny A deed of arrangement 15 appropriate if t the debtor are to be subject ta @ form or arrangement, and ait is defined as follows: "'deed of arrangement' a deed of ssignment, a dead in or a deed executed for the purposes of a proclaimed law) providing for the arrangement of the affairs of a debtor 1th a view to the payment, in whole or in part, of his debts." A deed of assignment contemplates the assignment of all of the assets of the debtor for the benefit of his creditors and m is defined in the following terms: assigns all of his divisible property for the bene his creditors." "'deed of assigment' means a deed by which a debtor f Fection 204 prescribes the manner in which a composition creditor Gl fu vd fay H i] to the extent presentiyv pe u ist n n 1D WwW a o ( ud rt rT 1D "204¢1)., The creditors may, at a Meeting called in pursuance of an authority under section 188, by special resolution - (a) aaa (b) require the debtor to execute a deed of in assignment or & aeed of arrangement under this Fart; (a) accept a composition; or (d) require the debtor to present a debtor's petition within 7 days from the day on which the resolution 15 passed. Z204(2) ane 204(3) A special resolution accepting a composition shall specify the terms of the composition." " The Act provides that arrangements hetween debtors and creditors which do not comply with the provisions of Part x of the Act are void. In respect of compositions, 3.21 ul specificaily "213(3). Subject to this Part, a composition made by a dgehtor after the commencement of this Act, mot being a composition accepted by a4 specia resolution of a meeting of creditors under section Section 219(2) provides - "Where a Special res pti 4a composition is passed under section 404, the trustee of the composition ehail - is} i) is cm BPi py n ny i] pe rr {a) forthwith - (1) give notice of that fact, im accordance with the rules, to each creditor of the debtor; and t t (12) cause notice of that fact to be pubiishec in the Garette and in such other manner (15 any) as is prescribed; and (bh) within 21 day = ng of the special resolution - f2 ir a Si le a copy of the statement of the s referred to in fection 19% in the e gistrar. Section 22%, pursuant toe which section this appiication " on im whether a deed of assignment cr a deed or arrangement was entered unto an accordance with this Fart ofr complies with the requirements of this Fart, or whether & composition has been accepted by a special resolution of a meeting of creditors under section 204, the Registrar, the trustee, a creditor or the debtor may apply to the Court for an order under sub-section (2), (2). Upon the hearing of an application made under sub-section (1), the Court may, subject to this section, Make an order - (a) declaring that the deed or composition is void, or that at is not void, on the ground specified in the application; or (b) declaring that aA provision of the or is not void, on the ground sp pRrlication, 2) i du The Court shall not make an order declering a to be void on the ground that it does not comply the requirements of tnis Part if the deed comnlies stantially with those requirements. 2f#2(4), Where the Court, on the appiication of 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 his conauct, trade dealings, property or affairs at the meeting of creditors at which the resolution requiring him to execute the deed or accepting the composition was passed; or (Dp) has omitted a materzal particular Irom the statement of his affairs under Section 195 or ancluded an uncorrect and materiai particular in that statement, ' & the Court may rake an or 2 ae composition to be void or declaring the deed or composition to be void. the deed or ny provision of d. The Court shall net make an order declaring d cr composition, of Aa provision of a deed or OSition to be vozd om a ground specified an sub- aon (4) unless 10 18 fatistiec that it would he in anterests of the credators to do so." it aS apparent that tne provisions of 5.222 ampovwer any one of a 7. number of persons to apply to the Court on limited and essentially technical grounds for the purpose of having the deed Or composition declared void because 1t had not been entered into an accordance with nor did it comply with he provisions of Fart #. Section 239, on the other hand empowers a creditor to apply to the Court to set aside a composition 1f at feels it ought on any ground to be set aside. The relevant portions of this latter section are as foilcws: "239 (1). A creditor may, within 421 days from the date on which the special resolution accepting a composition under this Part was passed, apply to tne Court for an crder setting aside the composition and ray alsa apply for the making of a sequestration orGer against the estates of the debtor, 235(2). If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the corposition ought to be set aside, it may make an order setting it aside and, if it thinks fit, may forthwith Make the sequestration order sought. The statutory consequences to creditors of a special resolution under 5.204 are set out in 5.238 which relevantly provides "a3a(l). A compos-tion that has been accepted bv a Epecial resolution of a meeting of creditors called in pursuance of an authority under section 158 (an this N Davision rererred to as a composition under thas Fart) is banding on all the creditors of the debtor. 238(2). Subject to eub-sections (3) and (4), ait ais not corpetent for a creditor, s90 long as a composition under this Part remains valid - (a) to present a creditor's petition against the eebtor, oar to proceed with such a petition presented hefore the composition was accepted, in respect of a provabie cebt; (6b) to enforce any remedy against the property or 8. person of the debtor in respect of a provable debt; or (c) to commence any legal proceeding in respect of a provable dent or take any fresh step in such a proceeding." As a special resolution is described as a resolution Passed by a majority in number and at least three-fourths in value of the creditors present and voting at a meeting, it is Clear that the majority of creditors may in this way impose its ' will on minority creditors. The latter's remedy 15 an application to Court under s.239 of the Act. f Tne present application is pursuant to s.222 of the Act. The applicanc's doudt which 15 required ta be raised on a specific ground is whether that which was accepted by the special resolution was a composition in accordance with the definition of that term. If 1t was, he is satisfied that it was "accepted by &@ special resolution of a meeting of creditors under section 204," The proposal fora composition purports te give priority Th fam i , mamely those wne Hh cre: or 0} in payment to a particular class o a Ft a would have been naid, under 5.109 Act, 1n priority if the te of th wuim Gebtor had become bankrupt on the a meeting. He has no concern with the propeasai to give priority to remuneration and disbursements ta the Trustee and the Controlling Trustee who called the meeting. iD #1 for the applicant contended that the voroporsal a a crwn for a composition couid not he accepted as a composition by the Teeting because ait provided for payment in full to a particular class of creditors who hac oatherwise no right to such oriority PAYMENt IN ths circumstances. The essence cf a composition under e,.l€/(2)(8), 1t was contended, was tnat sll creditors would be accoried e3ual treatment and that no creditor or class of cr could receive payment an tull of nis debt. Eecause certain creditors were entitled under the preposal to payment in full, albeit Sy anstaiments, of their cepts rather than participating in a pro rata Gistripution, the proposal, it was creditors as a composition and In two respects 1 find that I am in agreement with these SUDMIES10n=. In the first instance the proposal is drafted and Lo be in ruil. The validity of this assumption 215 in ny : view ouneqguivocabliy denied Evy the terms of 5.243 of the Act Gealing as it dees wath the application of the general rrovisicns or Act to compositions, "ALS section, set out hereunder, clearly has ths effect of excluding tne anplication of 5.108 ta ecorpositions. ft provides: "Bd3'1), Subject to tnis section, the Sections ta 107 (ainmcliusive) and sectio fancluci apply, subjecc te such modi: adaptat1 (2f anv) aS are prescribed hy lu. and in relation to 4 composition under this Part as if - (a) aA sequestration order had been made against the debror on the aay on which the special resolution Accepting the conposation was passed; and (Bb) the trustee of the composictian were the trustes in his bankruptcy. ef the provisions of this aon (1) te and in relation toa A provable dent shali he Brovable debt within the 243(3). tons 157:(6) and t7), = 2), sub-section 17G(2), ve}, sactzton 175 Catrer tiors 176 toa 1fé (inclus oaift2 Ss and adaptat by t es, to ana 2Hion unis: this Far O22t20n was made wer composition were the maa(4), if, atter hang into account the sears woaiticatrons and adaptat 5 lace by the rules and tne provisions of sub-section 2), &@ provision specified in sub-section (1) or (3) 15 Capaple of application to or in relatien to a compo ton, or the trustee of a COPFOEITION, as the case equires, Of ls inconsistent with this Part that Ovision does not so have aPpPLlication, 243(5). In this section, 'modification' inciudes the ageition of omiesion of a Frovision or the substitution of a Provision Tor ancther provicion." In my opinion tne anutners af MeDonalc Henry and Meek tealian Bankruptcy at ey al Part'. The argument to the contrary appears to be founded on the decision in Re Boyley (1954) 16 A.B.C. 233. However this @ecision relied upon the statutory priority which 5.221(b)(1) of the Income Tax Assessment Act 1956 gave to the Commissioner of Taxation. This particular provision was repented by Act No. 50 of 1966 and thus the reasoning can have no direct application in the presenc circumttances. Counsel for the applicant also contended that it is of the essence of a8 composition that ali creditors are to he accorded equal treatment. In my opinion this 215 without doubt the position as hetween the debtor and the general bedy of ee a era eae on - - . - - - = ; ° creagitors. It is quite wrong for the debtor, in making his Proposal, to prefer, openly or sub silentio, any creditor or class cf creditors. If priority toa a class is denied by the Act, Wa ct as I have found it is in this matter, then the debtor can nat Give and should not attempt to give pricrity to a creditor or particular ciass of crediters. This 12, 1f at all, a matter for equality of treatment (Ex parte Miimer (1285) 158 0.8.0. 605. As tne Master of the Rolls said on page 612 "In my opinion it is of the very composition of this nature that all the come in under at oblige therselves to 2 o the debtor obliges himself to every one of then, BO far as he is conceried, ail of them shail come in upon a footing of equality. This equality is implied by I=" tut law from the very nature of the transaction... I have added the emphasis. However neither in this case nor the earlier decision of ed . Daugiish & Others v Tennent (1866-1867) L.R. 2 @.8B.49 where, as was said ain Ex parte Milner, the grounds of the principle wer iti) Tully set out, was it suggested that it would be improper for the creditors to agree between themselves for something other than equality of treatrent. Sa long as the creditors act ain good faith towards each other and make no secret bargeins with any other or "- such an agreement. Secrecy and lack ' essence of any objection. As Meilor dad. said an Dauglish v Tennent supra at p.54 ue ae ee "To put the case om 4a broad ground, it is an agreement Between the debtor and each creditor that they are contracting on terms of equality as to each and all, and if by a secret bargain some creditors have an advantage over other creditors, it is €@ Traud upon those who must Be presumed to have siqned the deed upon the understanding that 411 the creditors should be placed on the same footing." The Master of the Polls, when approving this statement Ps in Fe Milner at page 613, adeéed the frollowing words in parenthesis after whe words of Melior Jd, "that they are contracting" set cut above, namely "(I will go further and say they are contracting with each other)". Bowen L.d.encorsed this approach wnen he said in Re Milner at page 615: 'But in an ordinary case what does a simple composition with creditors mean? it means that each of the ereditors agrees to rYoreqo 4 part of his deot, the consent of each creditor who comes into the arrangement being a consideration for the consent of the others. It rollows that it ais of the very essence of such a transaction that the creditors who take part ain the scheme act upon the 'faith and understanding that they are all coming in upon terms of equality, and 1f a deed is prepared to carry out this equal distribution, every - eraditor who -executes it does s0 on the faith that there is no private bargain with any of the other creditors which w2il deetroy this equality. If there is any Private agreement that one of the creditors is not to he Gealt with upon this equal footing, but is to receive a preference, that 15 a breach of faith, and, 1f the gdenptor 1s aware of it, it strakes at the root of the dead, and entitled any creditor who has Deen thus deceived to treat it as void." It 15 significant that sach Judge specificaily refers to the preferential treatment of a creditor as a private or secret Dargain or agreement. This emphasis sucgests that there 15 no abjection to sucn a bargain or agreement being made so long as it ee f o he flrt is mot private cr secret but Fully disciosed to and ii other creditors. This approach to equality of treatment i referred to by Lukin J. in Ke Aljlan'c Deed of Arrangement la hI AS o tol A (1 ler 31-19 98 at page 115-116, particularly the latter page, when he adopts what Lord Shaw of Dunfermline said in Farrers Mart Ltd. v Milne £19157 A.C. 106 at i117 when speaking of the general principle os: equality of treatment "Special preferences crested under special contrarts or by special circumstances thera may be, but that 1s the general rule" tat was of the essence of a4 in accepting lees than the fuil shoule be no inequality berween 14, creditors. ey Must participate strictly pro rata, it was said, an the amount distributed among them by the trustee. However in my opinion the definition of composition m@rely specities the g @ eral body of creditors and that body's arrangements with the debtor. Th makes no reference to each creditor and any arrangement among the creditors inter se. There if no €xpress embargo on the creditors openly agreeing amongst thenzelves, tie 4S a Means of obtaining acceptance of the debtor's o proposal, that one or more of them should receive priority in the time or amount of payment. Buch an arrangement 15 not contrary to any express provisien af the Act, and I see no justification for implyizng such an embargo. it was alsa submitted that hecause the priorities of 5.109 had expressly heen excluded from compositions, 1t was not permissible for creditors to agree to give priorities on the expressio unius est exclusico alterius" maxim. Io cannet accept t this argument. A similar argument was convincingly rejected by io hil Faine 3. in Re Beliis (1957-15964) 20 A,B.C. 86 at p.&5 where His « "Th Gistrar, oan this point, has cailed my attenticn tO 5.162(7). This provides that div. 6 of Pr. IV of the Act, of which ss.74 and 75 are parts, shail apply to a deed of assignment under Ft. MI. No samilar proviticen is contained in the Act with regard to a composition or stheme of arrangement under s.lé6l. Ido not think this 15 any reason for the application of the maxim, 'Expressio unius 8st exclusia alterius'. On the contrary I think this express provision with regard te a deed of assignment rether emphasizes the degree of fresdom open to those who adopt a course under 5.161. Tne comparative absence of restrictions contained in the iast-~mentioned section, when compared with those rw By prescribed for a deed of assignment, 1s undoubtedly notable. Nevertheless, 1t rather implies a wider scope of action. A deed of assignment obliges the assianor, the debtor, to part with his »roverty to the same extent as he would aif a sequestration order 15 mace against him. A composition ocr scheme of arrangement does not necessarily lead to that result, but frequently, if not generaily, calis for no such degree of deprivation. I think the answer to the registrar's firat Question is that as a general rule, it is competent to include the provisions sSimizlar to those of ss.74 and 75 1n a schene of arrangement under 5.1€1, e1lther wholiv or in part, so long as this inclusion causes no conflict with the general policy of the Act. To see no such conflict in the scheme under consideration. Tt 15 my opinion therefore that there 15 no abyjecrion to —_—- creditors agreeing amongst themselves for parments to be made to one or more of thezr cla ain priority to others, so lang ast each un In is aware and nothing 215 done secretly or by way of private bargain. It must frequently happen that it 15 of benefit to the general body of creditors that a particular creditor, whe vould Sawn 7 — - = be entatiled to priority a1f a sequestration order is made, should have this potential priority yvrecognised if the proposal is favourably viewed by the ather creditors. There would he many lake circumstances, such as an agreement by a creditor to Fh ¥ p coutinue to supply goods to a debtor, which cculd just: other side of the coin, the fact that a parent Pared to postpone his or her entitlement could well benefit other credzttors. Tt 15 hard to eee euch an . arrangement as Genying the proposal the characver oF 4 composition and particularly if the preferred creditor is to receive thi priority payment by insralnents. As Paine J. z2aid ag ty! Uy Ba n rt in ke Bei , the comparative absence of restrictions in when dealing with a composition implies 8 wider scope for action, and, so long as there is no conflict with the general policy of the Act, creditors are free to make such arrangements as they consider appropriate. The definition of deed of arrangement would alse appear to recognise that a composition may contain an obiigation on the debtor to execute a Geed. The Courts have not always required strict compliance with the lateral terms or the definitions. In ke the trustee should treat as a priority creditor the Commissioner of Taxation who was in fact not a creditor of the go. held that the peovision did not invalidate Mane : Soe ~ --.1,pecnuse, as he said at page 73, EOS st ee Sn Te awe we - - —— "The creditors have accepted this clause providing this Benefit and 1t seems fair and reasonable to assume that the creditors considered it to be for their benefit ta prove the composition, despite the unusual provision our of the Commissioner..." While a composition by its provisions ordinarily reguiates the iw can ee no it contains party whole th conporition us benef. dones anc wthers (1868-69) L F.R. & S.R. Lane of an withstanding the zact = that the debtors were not assigning all of their property as — contemplated hy the definition of "ceed of assignment". In the present case the debtor's proposal contained a ol provision granting priority to 5.109 creditors. n my opinion n this was not only as a matter cof law unnecessary but also generally undesirable unless it was known that there were priority creditors whe would not without the provision accept the rroposal., Even then, zt 15 essentially a matter for enprecs priority creditors hac no pricrity in law ard that any priority -they were ta receive must be the consequence of a conscious decision by the other creditors. It 25 doubtless desirable to provide in the Minutes recognition of these matters, though the QGistrar's primary task under s.2?72 is to ensure that the R resolution is accepted by the prescribed majorities. In the present matter much ct what © have saic may he of mere academic auntereast for I am told there are ain fact no creditors wno woulc be entaitied to a s.i09 priority. Ther iawever no record an the minutes of meeting that the creditors were alerted to the provision, to the eed aor justification ror Ha or to the fact that there were no known priori fore me as a ratter 1B creditors. The matter was primarily argued b gee & La, of "'rincipil and thet practical incipis and there practical CONSIGSFrations woulc re Sountiacse = ee te - oF Goubtiess of reater relevance 1m I were to reach the stage oi an Gebtar 7 nos ehtar's FOpDOSAL as accepted by the credgiters was met a cre ors SB omct t certify that this and the 17 preceding pages are a true copy of the Reasons for Judgment of Mr Justice Fisher. Por. Hrs anh 2 Associate Dated. 54 2| <4 ,