a jes Bankruptcy - composition to pay amount for trustee's fees with no dividend to creditors approved at creditors' meeting ~ application to set aside, terminate or declare void - whether failure by debtor to particularize assets given nil-~-value in summary of statement of affairs an omission of a material particular - onus of proof - meaning of "in the interests of creditors" .- whether application made "before the final payment has been made under the composition" - alternatively whether in the circumstances court has power to extend time to apply to set aside composition - matters relevant to the exercise of any such power ~ whether provision in Bankruptcy Act for termination of composition in certain circumstances applicable Bankruptcy Act 1966 para. 33(1)(c), sub-s.187(1), 88.222, 239, 242 RE: EMMANUEL GEORGE DOUKIDIS - Debtor EX PARTE: CONSOLIDATED CONSTRUCTIONS PTY, LTD. ~- Applicant PETER MICHABL MELSOM as Trustee of the Estate of EMMANUEL GEORGE DOUKIDIS - Respondent No. 142 of 1984X TOOHEY J. PERTH 26 JUNE 1985 "AN THE FEDERAL COUFT OF AUSTRALIA BANKRUETC? GLSTRICT OF THE ' ! t STATE OF WESTERN ! AUSTRALIA , No. 142 of 19844 } GENERAL DIVISION BETWEEN: RE: EMMANUEL GEQRGE DOUKIDIS Debtor EX PARTE: CONSOLIDATED CONSTRUCTIONS PTY. LTD. Applicant and PETER MICHAEL MELSOM as Trustee of the Estate of EMMANUEL GEORGE DOUKIDIS Respondent MINUTE OF ORDER GUDGE MAKING ORDER : Toohey J. DATE OF ORDER H 26 June 1985 WHERE MADE : Perth THE COURT ORDERS THAT: 1. The time for making an application under sub-s.239(1) of the Bankruptcy Act 1966 to set aside the composition made by the debtor Emmanuel George Doukidis , on 17 September 1984 is extended until 28 December 1984. The composition made by the debtor Emmanual George Doukidis on 17 September 1984 is set aside pursuant to sub-s.239(1) of the Bankruptcy Act 1966. Liberty to the applicant Consolidated Constructions Pty. Ltd. to apply for the making of a sequestration order against the estate of the debtor. Liberty to the parties to apply as to the costs of the 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 OF WESTERN AUSTRALIA GENERAL DIVISION No. 142 of 1984X weer BETWEEN: RE: EMMANUEL GEORGE DOUKIDIS Debtor EX PARTE: CONSOLIDATED CONSTRUCTIONS PTY. LTD. Applicant and PETER MICHAEL MELSOM as Trustee of the Estate of EMMANUEL GEORGE DOUKIDIS Respondent CORAM: TOOHEY J. 26 JUNE 1985 REASONS FOR JUDGMENT This is an application by Consolidated Constructions Pty. Ltd. to set aside a composition made by Emmanuel George Doukidis on 17 September 1984. The application is opposed by Mr. Doukidis. On 28 August 1984 Mr. Doukidis authorised Stanley Frederic Robson to calla meeting of his creditors for the purposes of Part X of the Bankruptcy Act 1966. A first meeting of creditors was held on 17 September 1984 at the offices of P.M. Melsom & Co. Mr. Melsom was appointed chairman of the meeting. Mr. Doukidis was present at the meeting as were a number of te persons who were either creditors or who represented creditors. The minutes of meetina show that a representative was present on behalf of Consolidated Constructions. He was an employee in the firm of Kott Gunning, solicitors for Consolidated Constructions in this application. The minutes record the following: "All present had previously been furnished with an abbreviated set of the debtor's statement of affairs and were advised by the Chairman that whilst the firm of P.M. Melsom & Co. had assisted in the preparation of the statement, all the information contained therein was that provided by Mr. Doukidis, who had, just prior to the meeting, signed an affidavit to the effect that the information contained therein was accurate to the best of his knowledge and belief". Mr. Melsom reported to the meeting that the statement of affairs indicated unsecured liabilities in the sum of $376,544 against which there were no divisible assets other than a contingent asset of $3,000. This sum had been lodged by Mr. Doukidis with the Supreme Court of Western Australia as security for costs in an action in that court. Mr. Melsom then invited Mr. Doukidis to address' the meeting and, in this respect, the minutes record: "Mr. Doukidis began by advising that there was little he could say, the Statement of Affairs being self evident, however he advised those present that a number of claims were disputed by him including the debt to Consolidated Constructions and that to Mair & Co., however for the meeting, their claims were accepted for voting purposes. The Debtor concluded his brief address by indicating his inability to provide any further contribution to his estate other than a minor composition sum as token consideration in lieu of formal bankruptcv". Mr. Wheeler, representing Mair & Co., asked Mr. Doukidis questions concerning his interest in Lot 185 Bedfordale Hill Road, Armadale which Mr. Doukidis said had been vested in his wife pursuant to a Family Court order some 18 months earlier, and questions regarding the proprietorship of certain business names "Settlers Restaurant". "Pioneer Village Armadale" and "Ye Olde Narrogin Inne". Mr. Doukidis' reply was that those business names had previously been owned by Taku Pty. Ltd., a company now in liquidation, and that he had no knowledge of their present ownership, adding that it was possible that one or more of those business names had been owned by him personally in the past. The minutes further record that Mr. Melsom asked Consolidated Constructions' representative if he wished to put any questions to Mr. Doukidis, whereupon he "replied in the negative". Mr. Melsom explained to those present the various options available, adding that just before the meeting Mr. Doukidis had signed a composition proposal which had been distributed to those present. Omitting formal parts, the proposal was in these terms: "(1) The Trustees of this composition shall be the persons nominated by my creditors pursuant to Section 204(4) of the Bankruptcy Act. (2) I covenant to pay to my Trustees the sum of $1500, such sum currently held in credit inthe P.M. Melsom & Co. trust account in the name of RUTH GWENDOLYN DOUKIDIS with authority from RUTH GWENDOLYN DOUKIDIS for its release. (3) The Trustees of the composition shall apply the monies received by then pursuant to the composition in the manner prescribed per medium of Section 109 of the Bankruptcy Act." There was a motion to accept the proposed composition. The minutes record that Mr. Melsom expressed "personal concern for token value only attributed to the proposal". The matter was put to the vote. Those representing certain creditors voted for the proposal, the representative of Mair & Co. voted against it and the representative of Consolidated Constructions abstained. As the vote in favour of the proposal represented a majority in number and more than three-quarters in value, Mr. Melsom declared the motion passed by special resolution. Mr. Melsom was appointed trustee of the composition under Part X of the Bankruptcy Act. There was a further resolution that the controlling trustee's fees be fixed in the sum of $1500 and, together with out of pocket expenses, be approved for payment. This resolution removed the need for the trustee to call a final meeting in the matter. The meeting concluded. On 28 December 1984 Consolidated Constructions lodged an application to have the composition declared void and be set aside, a reference to s.222 of the Bankruptcy Act. Although the original application was in terms that the composition be declared void and be set aside, it was later amended to include orders under s.239 and 242 of the Act. It will be necessary to make some reference to each of those sections. On its face the composition was a curious. one. It offered nothing to the creditors since the only amount paid under the composition went to the trustee. It was said that a sequestration order would have gained the creditors nothing; on ' 5. the other hand it seems that Mr. Doukidis 1s a man with a range of business interests and questions asked at the meeting of creditors suggest that enquiries into his affairs may have proved fruitful. However Consolidated Constructions has to make out a case under the Act and must satisfy the Court that qrounds exist for granting the relief souqht. In regard to s.222, Consolidated Constructions alleged that Mr. Doukidis had omitted a material particular from his statement of affairs, hence that the matter came within para.222(4)(b) of the Act. The argument proceeded in this way. Rule 78 of the Bankruptcy Rules provides that, for the purposes of sub-s.195(1), a statement of affairs shall be in accordance with Form 11. Form 11 provides for a statement of affairs divided into Parts I~-VII - Summary, Unsecured Creditors, Secured Creditors, Hire-Purchase Agreements, Property, Debts Due to the Estate and General. Clearly the form contemplates that the statement of affairs will divulge with particularity the debtor's financial position. In support of the application to set aside the composition, there was filed an affidavit by the applicant's solicitor. The affidavit makes a number of assertions of which the solicitor cannot have first hand knowledge and it makes a number of other assertions on the basis of information and belief without disclosing the source of that information. I deprecate this practice, particularly where allegations are made concerning the conduct of another. Counsel for Mr. Doukidis rightly took exception to much or the affidavit and I received it in evidence on the clear understanding that I would attach no importance to matters of hearsay. Quite serious allegations were made of failure by Mr. Doukidis to disclose the full extent of his assets to the creditors' meeting. Those allegations should have been supported by atfidavits of persons in a position to speak to relevant matters or by the oral evidence of such persons or by a combination of both. However no exception was taken by counsel for Mr. Doukidis to a statement in the solicitor's affidavit annexing a copy of the statement of affairs presented by Mr. Doukidis to the meeting of creditors. The document in question contains only Parts I, II and VII. In particular there is no Part V which requires the property of a debtor to be itemised with particularity and for an estimated value to be placed against each item. The only clue to the assets of the debtor are to be found in Part I - Summary - which gives a value of nil for property specified in Part V. The statement of affairs filed in the bankruptcy registry contains Part V and against each item the word "nil" appears under estimated value. There is only one item which in any way purports to identify property and that is the item relating to stocks and shares. The words "In various family companies" appear without elaboration. Mention has already been made of the reference in the minutes of the creditors' meeting to "an abbreviated set of the debtor's statement of affairs" having been furnished to those present. In the circumstances, and there being no evidence to the contrary, I infer that the statement of affairs annexed to the solicitor's affidavit 1s indeed a copy of that furnished to the creditors before the meeting and that it differs, at least in the respect just mentioned, from the statement filed in the bankruptcy registry. I find it surprising ~I that those present at the meeting were content to allow such an unsatisfactory document to have been presented. Of course the question still remains - was a material particular omitted from the statement of affairs? In my view, to omit Part V was indeed to omit a material particular even if Part V was likely to have been uninformative. Furthermore, a reference to shares in "various family companies" was quite inadequate. It does not follow that the application, based on s.222, should automatically succeed. Sub-section 222(5) precludes the Court from declaring a composition void on a ground specified in sub-s.(4) "unless it is satisfied that it would be in the interests of the creditors to do so". See Re Williamson; Ex parte Wearne (1980) 43 FLR 305; also Re Beames; Ex parte Beneficial Finance Corporation Limited (unreported decision of Pincus J. delivered on 7 June 1985) decided since this hearing. It may be, for instance, that Mr. Doukidis in truth had no assets or no assets of any value at the time of the composition. In that event 1t would serve littie purpose to set aside the composition. That is not to say that the Court need be satisfied on this hearing that there were undisclosed assets. It is, I think, enough if the evidence justifies an inference that there are likely to have been assets and that the creditors may be better off if the composition is set aside. Re Beames at 30-31. Even then the Court must have regard to all relevant matters ancluding the interests of creditors and of the public. Re Dolman; Ex parte Elder Smith Goldsbrough Mort Ltd. (1967) 10 FLR 384. In my view this includes the conduct of the creditor who seeks to set aside the composition. In this regard it 1s relevant that at the meetina of creditors the chairman asked the representative of Consolidated Constructions whether he wished to ask Mr. Doukidis any questions and the representative replied that he did not. It 1s alsoa material consideration that Consolidated Constructions did not vote against approval of a composition but merely abstained from voting. But these matters are in no way conclusive. The solicitor's affidavit, to which reference has already been made, alleges that Mr. Doukidis omitted from his statement of affairs the fact that he was a director and holder of one governing director's share in Pelias Investments Pty. Ltd. and that the other director was his wife Ruth Gwendolyn Doukidis. The affidavit also lists as further omissions from the statement of affairs the fact that Mr. Doukidis is a director and holder of one subscriber''s share inG.D. & A. Holdings Pty. Ltd. and that the other director is his wife, and that Mr. Doukidis and his wife are the owners of a business G. Doukidis & Associates. These matters were substantiated by records of the Corporate Affairs Office. The solicitor's affidavit also refers to a partnership between Mr. Doukidis and one Peter Kay Lucas in the business of Spud King Family Restaurant. There was no admissible evidence in the affidavit to justify that assertion. The records of the Corporate Affairs Office show that Mr. Doukidis was a director of Spud King Family Restaurant Pty. Ltd. until 30 March 1984. The applicant called Gary John Anderson, an employee of the liquidator of that company. Much of Mr. Anderson's evidence was ruled inadmissible; what remained suggested a continuing but undefined association between Mr. Doukidis and the restaurant business. Counsel for Mr. Doukidis submitted that the failure to mention in the statement of affairs the debtor's interest in two companies and a business was not the omission of a material particular if those assets were of no value. And, he submitted, there was no evidence that they were of any value. But in my view, it there is evidence that a debtor has omitted from his statement of affairs reference to particular assets which might be expected to have some value, it is for the debtor to. show that those assets have no value if he wishes to contend that there has been no failure to comply with para.222(4)(b) of the Act. Mr. Doukidis called no evidence. Consolidated Constructions adopted a stance at the meeting of creditors that does not generate a great deal of sympathy for it on this application. The company should have insisted upon a fuller disclosure by the debtor. On the other hand it seems that the resolution approving the composition would have been passed in any event and this 1s not a case in which Consolidated Constructions should be estopped by reason of its conduct, if indeed the concept of estoppel has any place in these proceedings. The composition was an extraordinary one, made against the background of an inadequate disclosure by the debtor of his affairs. No explanation was offered by Mr. Doukidis for the non-disclosure nor did he seek to establish that the omitted assets were of no value. In this respect Re Williamson and Re Beames are distinguishable for in each the debtors gave evidence. In those circumstances I am satisfied that an order declaring the composition to be void would be in the interests of the creditors 10. and would otherwise be appropriate . However no such order can be made without regard to sub-s.222(6) which precludes the Court from making such an order unless the application 1s made, in relation to a composition, "before the final payment has been made under the composition" (para.222(6)(c)). The question is - what is meant bv the words "before the final payment has been made under the composition"? Counsel for Mr. Doukidis argued that there was oniy one payment, viz. the $1500 which was a final payment and which was made at the time the meeting of creditors authorised payment or, at the latest, when the money was transferred from Mr. Melsom's firm's trust account into the firm's general working account. This was done in two stages, fees being transferred on 28 September 1984 and the balance of sundry disbursements on 9 November 1984. The application to set aside the composition was not made until 28 December 1984. Counsel for Consolidated Constructions submitted that the "final payment" must be a payment to creditors. Counsel argued that the purpose of the provision was to prevent creditors receiving benefits they had agreed to accept under a composition and then seeking to undo the composition itself. He referred to the definition of "composition" in sub-s.187(1) which reads: 'composition' means an arrangement (not being an arrangement entered into for the purposes of a proclaimed law) by which the creditors of a debtor - {a) agree to accept payment of the debts due to them by instalments; or (b) agree to accept, in full satisfaction of 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 instalments or otherwise". ll. He further arqued that the provision is directed to the termination of a composition, suggesting that such an event occurred on the furnishing of a certificate by the trustee in accordance with s.243A of the Act. The submissions made on behalf of Consolidated Constructions have a certain attraction. But 1t seems to me that they ignore the plain meaning of the words in para. 222(6)(c). In the ordinary course it is hard to imagine a situation in which creditors accept a composition by virtue of which they receive nothing. But this is such a case and, in terms of the composition, the final payment, albeit the only payment and one made to the trustee, has been made. In those circumstances I am precluded from making an order under s.222. Sub-section 239(1) of the Act provides that a creditor may, within 21 days from the date on which the special resolution accepting a composition was passed, apply to the Court for an order setting aside the composition and may also apply for a sequestration order against the estate of the debtor. Sub-section (2) reads: "(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 for any other reason the composition ought tc be set aside, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought". la. Sub-section (4) provides that the making or an application for a sequestration order under s.239 shall be deemed to be equivalent to the presentation of a creditor's petition. The amended application seeks a sequestration order against the estate of Mr. Doukidis. The application was not made within 21 days of the special resolution; it was made just over 3 months later. Paragraph 33(1)(c) of the Act empowers the Court to extend before its expiration or, if the Act does not expressly provide to the contrary, after its expiration, "any time limited by this Act ... for doing an Act or thing or abridge any such time", The Act does not expressly provide to the contrary and counsel for Mr. Doukidis did not dispute that the Court might extend the time for bringing an application under s.239. However he argued that this was not a proper case in which to grant such an extension. The justification for an extension was said to lie in an affidavit of Vincent Yovich, a director of Consolidated Constructions, in which Mr. Yovich said in relation to the meeting of creditors "I did not receive proper notice of that meeting nor of its purpose. indeed the Notice of Meeting which is dated the 28th day of August 1984 was never received by me nor by my Solicitors". There 1s an affidavit by the trustee, Mr. Melson, deposing to the posting of a notice of meeting to all unsecured creditors including Consolidated Constructions. It is unnecessary to reach a firm conclusion as to whether or not Mr. Yovich received the notice of meeting. Certainly he was told of the meeting by his solicitors some 10 days beforehand; he instructed them to attend on his behalf; and they did attend. On the other hand the notice of meeting said no more than that Mr. Doukidis had ' 13. signed an authoritv authorizing Mr. Robson to call a meeting of creditors and that, in pursuance of s.194 of the Act, a meeting of creditors was to be held at the offices of P.M. Melsom & Co. at the address and on the date and at the time therein mentioned. There was no evidence that creditors were told of the proposal for a composition any earlier than at the meeting itself. Mr. Yovich has sworn an affidavit that, following the meeting of creditors, he instructed his solicitors to make enquiries into the procedures adopted by the debtor at the meeting and into his statement of affairs. He said that, although he considered the terms of the composition "wholly unreasonable and not calculated to benefit CONSOLIDATED CONSTRUCTIONS PTY. LTD. or creditors generally", he wished his solicitors to make further enquiries and "to determine whether applying to set aside the composition would be of material benefit to CONSOLIDATED CONSTRUCTIONS PTY. LTD. and to the creditors as a whole". The affidavit recites that early in December 1984 Mr. Yovich was told of Mr. Doukidis' connection with Pelias Investments Pty. Ltd. and G.D. & A. Holdings Pty. Ltd. and was concerned to learn that those companies had not filed returns for some years and at the time of their last returns appeared to have substantial assets. He was also told that Pelias Investments appeared as a substantial creditor of Mr. Doukidis yet there were no records filed at the Corporate Affairs Office to substantiate any debt. The affidavit continues with Mr. Yovich deposing that he was told that Mr. Doukidis appeared to have purchased an interest in Spudking Family Restaurant and also that he (Mr. Doukidis) appeared to have compounded or agreed to pay a substantial debt to Oakhill Pty. 4 14. Ltd. un preterence to all other creditors and that "1t was asa result of this compromise that representatives of that company voted in tavour of the composition". It is not the truth of those matters with which I am presently concerned. It 1s whether the communication of those matters to Mr. Yovich in December 1984 provides an explanation for his failure to make this application earlier than he did. In that regard Mr. Yovich has deposed: "6, It was only in December 1984 that enquiries of my solicitors were completed and the above information conveyed to me and it was only then that I was able to instruct my solicitors to apply to set aside the composition proposal". I accept that Mr. Yovich did not learn of the various matters relating to Mr. Doukidis' affairs until December 1984. It may be said that, had his solicitors pursued the matter diligently, he would have learnt of these matters earlier and would have been in a position to instruct his solicitors to make the application earlier than they did. The power conferred on the Court by para. 33(1)(c) of the Act to extend time is couched in broad terms. It is not dependent upon proof of special circumstances or the like though it is necessary for an applicant to satisfy the Court that, in all the circumstances, an extension of time is just. In my view this is a proper case for an extension of time. The delay in making the application was of the order of 2 months. While not insubstantial, it was not an unduly long delay and, at least on the applicant's part, is explained by the time at which he learned of matters prompting him to give his ' 15. solicitors instructions to make an application. The Court is entitled to have reqard to the circumstances surrounding the composition which a creditor seeks to have set aside. In that reqard I have already expressed misgivings about the terms of the composition and the circumstances in which it was presented to creditors. On its face it was not a reasonable composition nor one calculated to benefit creditors generally. A greater opportunity to enquire into Mr. Doukidis' affairs anda more comprehensive explanation by the debtor were called for. In Re Segal; Lensworth Finance Ltd. v. Seqal (1975) 45 FLR 85 at 95 Riley J. said, after a consideration of certain authorities: ",.. but I accept them as indicating that when considering the reasonableness of a composition in an application under s.239 of the Bankruptcy Act 1966-1973, which does so require, the court should be cautious in substituting its own judgment for that of the creditors. In my opinion, however, that principle presupposes that the creditors were properly iunformed before coming to their decision". In all the circumstances I am satisfied that an order extending the time for the filing of an application to set aside the composition pursuant to sub-s.239(1) of the Act is appropriate and I extend the time until 28 December 1984 when the original application was filed. It 1s true that in its original form the application did not include a reference to sub-s.239(1); but the amendments made subsequently constituted the application one for relief under that sub-section as well as under ss.222 and 242. 16. For the reasons already qiven in connection with the application under s.222 of the Act, I am satisfied that there should be an order under sub-s.239(1) setting aside the composition made on 17 September 1984. I am not prepared to make a sequestration order against the estate of Mr. Doukidis without giving counsel an opportunity to be heard on that matter. The point was not arqued before me. Section 242 empowers the Court, upon application by a creditor, to make an order terminating a composition if satisfied: "(ad oo... (b) that the composition cannot be proceeded with without injustice or undue delay to the creditors, the debtor or, if the debtor has died, the estate of the debtor; or (c) that for any other reason the composition ought to be terminated". Strictly speaking, it is unnecessary to deal with that section. But its application was fully argued and I. shall say something about the provision. On its face s.242 is concerned with a situation in which no objection is taken to the composition itself but it 1s said that for various reasons, including failure by the debtor to comply with a term of the composition, the composition should be terminated. The use of the expression "terminated" is not consistent with setting aside a composition; yather 1t suggests bringing to an end a composition hecause it cannot be carried into final effect. 7 1/. In my view 5.242 is quite inapplicable to the circumstances relied upon by Consclidated Constructions. I do not overlook that para. (c) speaks of "any other reason" but this has to be read conrormably with the apparent purpose of the section. It 1s not simply s.222 or s.239 in another quise. There will be an order pursuant to sub-s.239(1) of the Bankruptcy Act setting aside the composition made by Mr. Doukidis with his creditors on 17 September 1984. I shall hear from counsel as to the precise terms of an order to give effect to these reasons including any submissions regarding the making of a sequestration order pursuant to sub-s.239(1) of the Act. I certify that this and the sixteen preceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Toohey AsSociate Dated: 26 June 1984