CATCHWORDS Bankruptcy - public examination - application to set aside summons to attend for public examination - practice in relation to statements of reasons grounding the issue of summons under ss. 69 and 81 of the Bankruptcy Act 1966 - nature of the power conferred by s. 81 of the Act - costs. Bankruptcy Act 1966: ss. 69, 81. Companies (New South Wales) Code: s. 364. RE: STEPHEN ABRAHAMS EX PARTE: HUGH CHARLES THOMAS W290 of 1982 Lockhart J. 23 April 1985 Sydney ne es even mieteenectetetie ime ee ue teetene ' ee te ee oe ee , ew eee ~ ee IN THE FEDERAL COURT OF AUSTRALIA BANKRUPTCY DISTRICT OF THE STATE NO. W290 of 1982 OF NEW SOUTH WALES AND THE were we AUSTRALIAN CAPITAL TERRITORY RE: STEPHEN ABRAHAMS EX PARTE: HUGH CHARLES THOMAS MINUTE _OF ORDER Upon John Arthur Bush personally undertaking to the Court that neither he nor his firm, Messrs. Bush Burke and Co., will hereafter act for the trustee in the bankruptcy of Stephen Abrahams: THE COURT ORDERS THAT: - 1. The relief sought in paragraph (1) of the application, namely, that the summons under s. 81 of the Bankruptcy Act 1966 be set aside, be refused. 2. The said summons be otherwise stood over generally with liberty to any party to restore to the list on two days notice. 3. The trustee pay one-third of the costs of the applicant, George Ivan Fuzi, of this application. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA BANKRUPTCY DISTRICT OF THE STATE NO. W290 of 1982 OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: STEPHEN ABRAHAMS EX PARTE: HUGH CHARLES THOMAS 23 APRIL 1985 REASONS FOR JUDGMENT LOCKHART J. I propose to give judgment now as I have reached a firm view as to the result of this matter. I realise that in taking this course in a.rather complicated matter I may do less than justice to the final and careful arguments of counsel. This is an application by George Ivan Fuzi to set aside a summons directed to him to attend for public examination pursuant to s. 81 of the Bankruptcy Act 1966 ("the Act") in relation to the property and affairs of Stephen Abrahams, the bankrupt. A sequestration order was made against the estate of the bankrupt on 10 May 1982 upon the petition of APD Snack Foods Pty. Limited, a creditor claiming to be owed $95,751.23. Hugh Charles Thomas, a registered trustee, was appointed trustee of the bankrupt's 2. estate. Summonses were issued on behalf of the trustee for the public examination of the bankrupt pursuant to s. 69 of the Act and for the public examination of various persons including Mr. Fuzi pursuant to s. 81 of the Act. The public examination of the bankrupt commenced before a Deputy Registrar in Bankruptcy on 6 February 1985 when it was stood over generally. The examination of Mr. Fuzi was also stood over generally to abide the result of this application which was then foreshadowed by counsel for Mr. Fuzi. The relevant facts are rather complicated and do not emerge very clearly from the evidence at this stage, but the principal matters appear sufficiently clearly and may be stated briefly. The bankrupt was a confectionery wholesaler and the managing director of two companies, Quality Confections Pty. Limited ("Confections") and Quality Confections Imports (Australia) Pty. Limited ("Imports"). Confections manufactured and sold confectionery. It is not entirely clear what Imports did, but I assume its business had something to do with the manufacture, sale or importation of confectionery. In 1979 a company, Balfour Williamson (Australia) Pty. Limited ("Balfour") agreed to provide confirming finance facilities to Confections. By agreement dated 30 June 1979, Mr. Fuzi agreed with Balfour that, in consideration of Balfour acting and continuing to act as a confirming house for Confections, Mr. Fuzi would pay on demand all sums including interest, costs and expenses which may at any time become due by Confections to Balfour. In 1980 Balfour agreed to provide similar facilities to Imports. By agreement dated 28 April 1980 Mr. Fuzi agreed with Balfour to pay on demand all sums including interest, costs and expenses which may at any time become due by Imports to Balfour. In addition to Mr. Fuzi, other persons and companies guaranteed the payment of the same obligations of Confections and Imports. One of these was a company, Pronto Trading Co. Pty. Limited ("Pronto"), a company controlled by Mr. Fuzi. Balfour made confirming finance facilities available to Confections and Imports pursuant to the said arrangements. Both Confections and Imports experienced financial difficulties. On 3 June 1981 Balfour appointed a receiver and manager of Confections and Imports pursuant to Deeds of Charge taken by Balfour over the assets of those companies. On 17 June 1981 Balfour demanded payment from Mr. Fuzi as guarantor, of the sum of $569,101.51 which it claimed was due and payable to it following the failure by Confections to pay that debt. In 1983 Balfour commenced proceedings in the Supreme Court of ten wee en ee o- ee re et ee 4. New South Wales, Common Law Division, Commercial List, Number 15554 of 1983 seeking to recover payment from Mr. Fuzi of the sum of $569,101.51 together with interest. In November 1984 the solicitors for Balfour wrote to the solicitors for Mr. Fuzi stating that Balfour proposed to discontinue those proceedings. The solicitors for Mr. Fuzi replied early in 1985 suggesting that it would be more appropriate for judgment to be entered for Mr. Fuzi. There the matter stands. However, it seems plain from the evidence before me that Balfour does not intend to prosecute action 15554 of 1983 further; probably because 1t was held by the Supreme Court of New South Wales, in litigation to which I shall refer in a moment, that as the liability of the principal debtor had not arisen at the relevant times, the secondary liability of Mr. Fuzi as guarantor could not have arisen. A notice pursuant to s. 364 of the Companies (New South Wales) Code ("the Code") was served on Pronto on1l January 1984 requiring payment to Balfour of $569,101.51 and stating that 1f, at the expiration of 21 days from the date of service of the notice, Pronto failed to comply with the terms of the notice, Pronto would, pursuant to s. 364(2)(a) of the Code, be deemed to be unable to pay its debts as and when they fell due and that proceedings might thereafter be commenced to wind-up Pronto pursuant to the Code. Pronto then instituted proceedings in the Supreme Court of New South Wales Equity Division (No. 1167 of 1984) to restrain Balfour presenting a petition for the winding-up of Pronto. The proceedings were heard by Helsham J., Chief Judge in Equity, who, on 3 February 1984, found in favour of Pronto and restrained Balfour from presenting the threatened petition. I have already briefly summarised what seems to me to be the primary ground relied upon by His Honour for the making of that order, namely, that the liability of the principal debtor did not arise at the relevant time. There were, of course, other grounds. A further notice under s. 364 of the Code dated 16 February 1984 was served by Balfour on Pronto again requiring Pronto to pay $569,101.51 and alleging that Pronto was indebted to Balfour in that sum as guarantor of the obligations of Confections pursuant to the guarantee of 30 June 1979. Pronto then commenced fresh proceedings in the Supreme Court of New South Wales Equity Division against Balfour (No. 1449 of 1984) to restrain it from presenting the petition. The proceedings came before Powell J., who, on 8 March 1984, noted that Pronto had that day paid to Balfour th sum of $266,459.55 and ordered, amongst other things, that Balfour be restrained from presenting a petition to wind-up Pronto upon the notice of 16 February 1984 to which I have referred. His Honour noted that Balfour would commence proceedings against Pronto in the Commercial List of the Supreme Court of New rn ome - 4 og" a ne a | et on tnteem bamntaneeede e ee ~ -- -- South Wales for the balance of the amount of $569,101.51 unpaid, namely, $419,101.51, together with other sums. His Honour also noted that it was agreed between Balfour and Pronto that until those proceedings in the Commercial List to which I have referred were resolved by judgment or settlement Balfour would not serve on Pronto any further notice of demand pursuant to s.364(2)(a) of the Code or present any summons to wind it up. On 8 May 1984 notices dated 3 May 1984 were served by Balfour upon Mr. Fuzi and Pronto demanding payment of the sums of $419.101.51 and $309,900.80 being the amounts of the alleged indebtedness of Confections to Balfour and $61,860.02 interest due by Imports on an alleged principal debt of Imports to Balfour of $116,459.55. On 11 May 1984 the solicitors for Mr. Fuzi and Pronto wrote to Balfour disputing their indebtedness to it, but in 1980 Confections entered into a factoring agreement with AGC Factors Pty. Limited ("Factors") pursuant to which Confections assigned its debts to it. It appears, although the evidence is by no means clear or complete on the point, that by June 1981 Factors was concerned about the amount of the factored debts still outstanding and whether thev were collectable. The bankrupt had guaranteed Factors repayment of the assigned debts. Factors threatened to sue the bankrupt under his guarantee. The bankrupt lodged a statement of affairs dated 9 June 1983 in his bankruptcy in which he declared that he owed debts of $2,149,912 and that he had assets of $1,000 and therefore, had an excess of liabilities over assets of $2,148,912. He disclosed two unsecured creditors - namely Balfour, in the sum of $908,041, and the petitioning creditor, 1n the sum of $95,192. He also referred in his statement of affairs to three companies in the AGC group, including Factors, whose debts were said to be secured over two parcels of real estate in which the bankrupt apparently has an interest at Rose Bay and Fairfield; but after estimating the value of their securities, the bankrupt stated that there was an estimated deficiency to those secured creditors of $113,179. There is some internal inconsistency in the statement of affairs because elsewhere in that document the bankrupt showed the deficiency to the secured creditors as $143,179 - but nothing turns on this for the purposes of the matter before me. Factors has lodged a proof of debt in the bankruptcy claiming to be a creditor in the sum of $626,956.99; and Balfour claims to be a creditor in the sum of §908,041. Neither proof has yet been admitted by the trustee. The principal assets in the bankrupt's estate appear to be his interest in the two properties at Rose Bay and Fairfield; but they are subject to various mortgages. The bankrupt was the administrator of the estate of his late wife, Claire Abrahams. The late Mrs. Abrahams was formerly married to Alexander Fuzi. Mr. Fuziis a son of a former marriage of Mr. a Alexander Fuzi. It seems, therefore, that he was the stepson of the late Mrs. Claire Abrahams. The late Mrs. Claire Abrahams was the daughter of Ilona Vertes. The applicant appears to assert some claim of entitlement to an interest in the estate of the late Mrs. Clair Abrahams. The nature and extent of that interest is not known to me with any degree of clarity. On 2 June 1981 a deed of family arrangement was executed by the bankrupt as administrator of his late wife's estate. Mrs. Vertes was described as beneficiary and Mr. Fuziwas described as joint tenant. The deed purports to deal with certain assets of the late Mrs. Clair Abrahams in favour of Mr. Fuzi or his children. It is not necessary for me to refer in any detail to the contents of the deed. On the day following the execution of the deed a receiver and manager was appointed of both Confections and Imports. The trustee applied to the Registrar in Bankruptcy for the examination of various persons, including Mr. Fuzi, pursuant to s. 81 of the Act. I propose to state in brief the grounds given in that application by the trustee for seeking to examine Mr. Fuzi. Normally I would not take this course; but, in fact, the form of application made by the trustee under s. 81 to examine Mr. Fuzi and, indeed, other applications to examine other persons under s. Bl and the bankrupt under s. 69, appear in the file of the bankrupt openly, in the sense that they have not been placed in a sealed envelope and are open for inspection by any person who looks at the file. It is, I think, timely to comment that whether the document be called an application for the issue of a summons under s. 69 or s. 81 or a statement of reasons to ground the issue of such a summons or otherwise, it should be sealed in an envelope by the Registrar with a notation that it is not to be opened without the order of a Judge, the Registrar or a Deputy Registrar. This is the practice that has been followed in courts accustomed to deal with matters of insolvency for as long as I can remember, and it is a practice approved by authority: see, for example, Re Stirling Henry Ltd. (in Lig.) and The Companies Act (1972) 1 N.S.W.L.R. 497 per Street J. at p. 498. Although many of the reported cases that touched this question were dealing with what are generally called private examinations under the Companies Code or its predecessors, the Companies Acts of the various states of Australia and of the United Kingdom, it seems tome that the rationale which underlies the requirement of secrecy is as true now as it ever was; and whether it be a private examination under the Companies legislation or an examination of a bankrupt or other person under Bankruptcy legislation. There are various reasons supporting the wisdom of this practice, but it is sufficient to state one of them, namely, that prima facie those who are to be examined should not have access to the statement of the liquidator or the trustee given to the Court or the Registrar stating why 1t is that they are proposed to be examined or on what matters it is proposed to examine them. The grounds mentioned in the trustee's application for 10. examination of Mr. Fuzi under s. 81 in this case are, amongst others, (i) that it is said he entered into the deed of family arrangement of 2 dune 1981 to which I have referred affecting the bankrupt's entitlements in the intestate estate of his late wife Mrs. Clair Abrahams; (ii) that the bankrupt caused two caveats to be registered against the real estate, one parcel of which is the Rose Bay property aun which the bankrupt may have an interest; and (iii) that by virtue of Mr. Fuzi's relationship to the bankrupt he would be expected to have knowledge of the bankrupt's property and affairs. Reference is also made toa deed of facility and guarantee of 1 May 1980 between Pronto, Mr. Fuzi and others to which the bankrupt was also a party. The summons that was subsequently issued under s. 81 reflects those grounds. Counsel for Mr. Fuzi argued that the summons) should be set aside. I will briefly summarise counsel's arguments. 1. The solicitor who has at all relevant times acted for the trustee and Balfour in the bankruptcy of the bankrupt is a Mr. Bush and his firm Bush, Burke and Company. It was submitted that Mr. Bush and his firm have a conflict of interest; that they cannot act for the largest creditor in the estate, Balfour, whose debt 1s the subject of dispute, at least by Mr. Fuzi and Pronto, especially in a case like the present where the affairs of the bankrupt and various companies are inextricably interwoven. The conflict 1s said to be highlighted by the fact that Mr. Bush earlier this year was appointed to the board of directors of Balfour. 11. 2. The proceedings in the Commercial List of the Supreme Court between Pronto and Balfour are still on foot, hence any attempt to examine Mr. Fuzi or Pronto under s. 81 is a fishing expedition for an improper purpose. Section 81, it was said, may be resorted to for the purpose of obtaining information to enable the trustee to decide whether to sue or not, but it cannot be used where the trustees or the principal creditor in the bankruptcy who is underwriting the trustee's costs has already decided to sue and, therefore, proposes to use the public examination procedure for an impermissible purpose. 3. It is plain that Balfour proposes to enforce its guarantees against Mr. Fuzi and Pronto and that matters relevant to their liability as guarantors should not be the subject of examination under the compulsory processes of s. 81. The principles governing applications of this nature are well established, and I do not propose to refer to them in any detail. I considered this question in an earlier case of Re Cside1; ex parte Andrew (1980) 39 F.L.R. 387, and there reviewed the authorities bearing on the relevant questions. They establish, amongst other things, that the power prescribed by s. 81 of the Act is an extraordinary power, that it must be carefully exercised, that the power given to the Court ov a Registrar to issue a summons under s. 81 is a discretionary one, and that no rigid rules should be laid dow for the proper exercise of the discretion by the Court or the Registrar. but that it must be borne in mind at all times that in the exercise of that discretion the Court or the Registrar must not lend 1a 12. aid to an unfair or oppressive use of this compulsory process. It is clear that Balfour intends to sue Mr. Fuzi pursuant to the guarantees given by him in respect of the indebtedness of Confections and Imports. It 1s also clear that the affairs of the bankrupt, Mr. Fuzi, Pronto, Confections, Imports and Balfour are inextricably intertwined through various transactions including those mentioned by me earlier. As I said earlier, in all relevant matters Mr. Bush and his firm have acted as solicitors for both Balfour and the trustee. Also, Mr. Bush has been a director of Balfour since 25 February 1985. It seems likely that any examination of Mr. Fuzi under s. 81 will touch matters relating to the various inter-related company transactions, some of which I have mentioned, as well as the deed of family settlement. The principle that justice must not only be done but must appear to be done is still very much alive. I think that Mr. Fuzi and Pronto or any outside observer would at this stage be justified in thinking that the trustee could not conduct the examination of Mr. Fuzi or Pronto impartially if he retains the same solicitor who acts for the major creditor, Balfour, especially if that solicitor 1s, in addition, a member of its board of directors. On the other hand, I am conscious of the practical problems which concern the trustee in his administration of the estate of the 13. bankrupt. The only creditor interested in spending money to recover anything in the bankruptcy is Balfour, and it appears from the evidence that Balfour is funding the Trustee in this application and in the investigation of various persons, including Mr. Fuzi, under s. 81 of the Act, and of the bankrupt under s. 69 of the Act. Indeed, it seems there is no other source of funds available to the Trustee. In an estate where there is a very large deficiency, it is in the public interest as well as the interests of the creditors that persons are examined under the Act to ascertain available funds, whether settlements are void or voidable, whether preferences have been given, why such a large deficiency exists, and whether any offences have been committed. I think it would be regrettable if Balfour was to be dissuaded from pursuing the course on which 1t has already embarked. On balance, however, I have come to the conclusion that the summons should not be set aside provided Mr. Bush undertakes to the Court that he and his firm shall cease to act for the Trustee in the bankruptcy of the bankrupt, including the examination of Mr. Fuzi, the bankrupt, Pronto or other persons, whether under s. 69 or s. 81 or otherwise. This will enable the summons to stay on foot and obviate the necessity for applications by the trustee for the issue of fresh summonses with the necessary attendant delay and expense. If the undertaking is not forthcoming then I shall set aside the summons, but I have been informed by counsel for the trustee that Mr. Bush is prepared to give an undertaking along the lines to which I have 14. referred. I should add that nothing I have said is intended in any way as a criticism of Mr. Bush or his firm. I have the impression that the feeling on both sides in this application has been a little high, but that the solicitors for the trustee have acted in good faith throughout. If the trustee retains a different solicitor for the purpose of this bankruptcy I do not think that the trustee should be prevented by the Court from examining Mr. Fuzi or others under s. 81 in relation to the deed of family arrangement, or the guarantees to which I have referred, or the arrangements and dealings between the bankrupt Mr. Fuzi or any other guarantors or any other persons or companies whose affairs are interwoven in the matrix of facts which I have already summarised. It is not desirable that I seek to define with any particularity the matters which may be the subject of legitimate = examination by the trustee. To do so may be oppressive to the trustee and hamper him in the legitimate use of ss. 69 and 81. However, I Must sound a cautionary note. The guarantees given by Mr. Fuzi and others have been the subject of litigation in the Supreme Court in Equity, and they still are, though dormant, in the Commercial List of the Supreme Court. Those guarantees will be the subject of further demand and, no doubt, litigation. The Trustee must remember when interrogating any witness under s. 81 that: eet trnetintle UTE ie ee ton tee ee eres Ried rae ee tere eet ee mn elie a ee ae wee ee ee ee 15. - the power conferred by s. 811s "an extraordinary power of anguisitorial nature": see In re North Australian Territory Company (1890) 45 Ch. 87 per Bowen L.J. at p. 93 - the examinee is not a witness in the ordinary sense, - the ordinary rules or procedures do not govern the examination, and - that just as the Court or the Registrar must "be astute to prevent any oppressive, vexatious or unfair use of this extraordinary process", so must the Trustee and his advisers bear that cautionary note in mind when examining witnesses under s. 81: Re: Csidei (supra) at pp. 391 and 392. A fine line exists between legitimate and impermissible examination of persons under the compulsory process of s5. 81. It would be wrong for me to seek to specify the limits of that examination in this case, but it must be remembered that "the purpose of the section is to elicit information that may be relevant for the proper conduct of the bankruptcy and that may aid the process of finding and recovering assets available for distribution": Re Csidei (supra) 390. I certainly do not think that the subject of Mr. Fuzi''s guarantees or the guarantees given by Pronto and the circumstances surrounding their execution or the existence of liability with respect thereto or the liability of the principal debtor or debtors fall 16. outside the legitimate ambit of that inquiry. Much depends on the particular questions put to the witness at the time during the conduct of the examination. The trustee should remember that the legitimate areas of inquiry are not only Mr. Fuzi's liability to Balfour and the liability of others to Balfour but whether Balfour's proof of debt itself should be admitted in whole or in part. It would be regrettable, I think, if future examination of any witness under s. 81 or s. 69 in this matter were to be studded with the taking of constant objections which may have the effect of hampering or, indeed, rendering the examination nugatory, but of course 1f such a course should occur then it is always open for the Registrar to refer the matter to the Court for it to conduct the examination pursuant to the powers under s. 81(4). It was submitted by counsel for Mr. Fuzi that in this case the summons should be set aside; and that it was a proper case for matters to be first submitted by the trustee to Mr. Fuzi in the form of written interrogatories. I did refer to the possibility of this course being followed 1n certain cases (in Re Csidei (supra) at p. 394) but I emphasised there that each case must be determined on its merits. That, of course, was a special case involving, as the prospective witness, an official liquidator who had been duly appointed liquidator of the company in question by the Supreme Court of New South Wales. It is a very different case from the present one. As at present advised, I do not think that such a course would be desirable or necessary. ee ee ee te cp et ee eR Peer eS eee I Fn ee nn ee ete ace ce mene eee te ee oe wae _ 17. It was also submitted to the Court as a ground for setting aside the s. 81 summons that, in the light of what was put to the bankrupt in his s. 69 examination, this Court should hold that it would be impermissible to put questions of a like nature to Mr. Fuzi during his examination under s. 8l. Although I do not wish to be taken as approving or disapproving any particular question or the form which it took directed to the bankrupt, I see nothing in those questions that went beyond the field of permissible inquiry. It 1s essentially for the Registrar, when hearing the examination of Mr. Fuzi, to determine the questions to be allowed or rejected. On the assumption that the undertaking referred to by me and by counsel for the trustee will be given, I am of the opinion that the summons should not be set aside. However, I am also of the opinion that the summons to set aside the s. 81 summons' should not be dismissed but should stand over generally with leave to either party to restore it on two days notice. There remains the question of costs. Counsel for Mr. Fuzi submitted that in substance his client has succeeded and that in those circumstances the trustee should pay his costs. Counsel for the trustee submitted that in all the circumstances Mr. Fuzi should pay the trustee s costs of the application. Although the suggestion arose in the course of argument that it would be desirable for the trustee's solicitor to step down, the assertion of conflict was raised a considerable time ago by the solicitor for Mr. Fuzi in correspondence with the solicitors for the trustee so that the problem has been - a en ee Re - eee ee nee ee wee - 18. present in the trustee's mind for some time and, indeed, at all relevant times. I think the proper order for costs is that the trustee should pay one-third of the costs of Mr. Fuzi of this application.